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Spare the Rod, Spoil the Director? Revitalizing Directors' Fiduciary Duty Through Legal Liability


Lisa M. Fairfax


George Washington University - Law School


Houston Law Review, Vol. 42, pp. 393-456, 2005
U of Maryland Legal Studies Paper No. 2004-21

Abstract:     
It appears that our society has tacitly agreed to spare corporate directors any significant legal liability - which includes both financial and incarceration - for failing to perform their duties as board members. Thus, over the last twenty years, there has been a virtual elimination of legal liability - particularly in the form of financial penalties - for directors who breach their fiduciary duty of care. This is true despite the fact that we entrust directors with the awesome responsibility of monitoring all of America's corporations as well as the officers and agents within those corporations. More surprisingly, this tacit agreement against legal liability for directors has persisted even reform efforts designed to prevent corporate governance failures. Thus, while Sarbanes-Oxley imposes increased responsibilities on directors, that Act fails to impose any direct legal penalties on directors when they breach those responsibilities.

Most corporate scholars appear to support this failure, not only insisting that other extra-legal measures sufficiently ensure directors' compliance with their fiduciary duties, but also arguing that legal remedies are both costly and ineffective. This Article disagrees. Instead, this Article uses Sarbanes-Oxley and events which led to its enactment to demonstrate that most arguments rejecting director liability inappropriately assess the costs and benefits of legal penalties, while failing to appreciate the degree to which extra-legal market or reputational sanctions depend upon legal measures for their effectiveness. Thus, this Article concludes that legal sanctions represent a vital aspect of any system seeking to regulate director misconduct. As a consequence, this Article also concludes that many of our corporate governance reforms may be defective because they impose new and significant obligations on directors, but make no specific provisions for sanctioning directors' failure to fulfill such obligations.

Number of Pages in PDF File: 65

Keywords: directors, liability

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Date posted: October 7, 2004  

Suggested Citation

Fairfax, Lisa M., Spare the Rod, Spoil the Director? Revitalizing Directors' Fiduciary Duty Through Legal Liability. Houston Law Review, Vol. 42, pp. 393-456, 2005; U of Maryland Legal Studies Paper No. 2004-21. Available at SSRN: http://ssrn.com/abstract=601970 or http://dx.doi.org/10.2139/ssrn.601970

Contact Information

Lisa M. Fairfax (Contact Author)
George Washington University - Law School ( email )
2000 H Street, N.W.
Washington, DC 20052
United States
202-994-4630 (Phone)
HOME PAGE: http://www.law.gwu.edu/Faculty/profile.aspx?id=16144
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