The Meaning of a Director's Obligation to Act in Good Faith

Abstract:     
The last decade has witnessed a disconcerting trend in the corporate world: Corporations have imploded as a result of various acts of corporate mismanagement, and corporate directors have ably avoided liability for not having prevented these disasters. To the law school student in a basic Corporate Law class, this disconnect between corporate disaster and director liability might seem odd, given that a tenet of corporate law is that directors are responsible for running corporations. But to the corporate law scholar who has watched the evolution of "good faith" jurisprudence over the past two decades, the gaping responsibility gorge between directors and their mismanagement (or lack of management) is unsurprising. Over the past twenty years, corporate law theorists, jurists, and legislators have carved so many exceptions to a director's liability for mismanagement that little, if any, punitive weight remains behind a director's obligation to act in good faith.

Indeed, recent judicial attempts to enforce a director's obligation to act in good faith amount to nothing more than what I consider to be the bastardization of the phrase "not in good faith" - the judiciary merely admonishes directors not to act in bad faith. At the same time, most scholarship in this area is oblivious to (if not acceding to) this mangling of the English language. No scholar has yet taken exception to the current state of a director's obligation to act "in good faith." What has been lacking is a thoughtful discussion of where director liability fits into today's corporate governance scheme, how the phrase "good faith" fits into that scheme, and what "good faith" and its arguably more important sister phrase "not in good faith" should and can mean. The haphazard, unprincipled, "come as you are" method of defining good faith that appears to be meekly accepted by many corporate law experts and jurists has dubious validity and cannot continue to be met with academic complicity. This Article offers an exacting review of the phrase "good faith" as it is relevant to the director liability context. While not professing to definitively end the "good faith" definitional process, this Article ultimately offers a considered, principled first draft definition of good faith, to at least open further discussion among academics and jurists.

Keywords: corporate governance, director liability, fiduciary duties, good faith

Working Paper Series