Board Dysfunction: Dealing with the Threat of Corporate Criminal Liability
34 Pages Posted: 23 Feb 2009 Last revised: 17 Mar 2009
Date Written: February 23, 2009
How a board responds to the threat of criminal prosecution and civil enforcement proceedings says much about whether it will acquire the label "dysfunctional" and what effect the case will have on the company's future operations and reputation. A dysfunctional board is not simply one that creates problems, as in the Hewlett-Packard identity theft scenario, and a board can also act just as dysfunctionally when it fails to address serious questions about its corporate culture and the need to implement significant organizational changes. When a government investigation poses a significant threat of corporate criminal and civil liability due to the actions of the company's agents, the company's response must be more than simply resolving the case as quickly as possible by appeasing the government, regulators, and private plaintiffs. The corporation has to look at itself critically, not just throw money at the issue to make it disappear. In this Article, I recommend that a board that learns about serious misconduct in the organization should follow the procedures outlined by the Delaware Supreme Court in Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981), for recommending dismissal of a derivative suit that has moved beyond the demand refusal stage. Under this approach, a company should appoint directors to conduct an investigation and empower them to effect real change in the company. Much like in Zapata, the function board must give authority to a truly independent group of directors who are, to the extent possible, immune from the pressure of their peers on the board who want a decision accommodating their interests.
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