The Duty to Think Strategically

Abstract:     
Delaware corporate law requires that directors and officers exercise their duty of care to limit firm losses from risk. Corporate law does not, however, require directors or officers to oversee their firm’s management of strategy to create gains. Yet managing both risk and strategy are essential to a firm in creating value. In fact, as I argue in the paper, the current focus by courts and commentators only on risk management to prevent losses could actually undermine a firm’s management of its strategy for gains. I therefore propose in this paper a model for how Delaware corporate law can drive firms to manage their strategies for gains, in addition to their risk of loss, all to create value.

This proposal is especially needful in light of the fact that companies like General Motors collapsed not because of excessive risk-taking, but because they failed to sufficiently formulate and implement innovative strategies for gains. This proposal also opens a new avenue for courts to combat the significant problem of short-termism, or the drive by firms to create short-term profits regardless of whether that creates true value. It combats short-termism by creating an expectation on officers and directors to oversee their firm’s strategic management system to achieve long-term value-creating objectives. Those objectives, rather than next quarter’s earnings targets, would then guide firm decisions.

Number of Pages in PDF File: 52

Keywords: directors, risk, Delaware, strategic management, short-termism

Accepted Paper Series