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A Board's Duty to Monitor

24 Pages Posted: 13 Dec 2009 Last revised: 22 Apr 2010

Eric J. Pan

US Commodity Futures Trading Commission

Date Written: December 10, 2009

Abstract

One of most difficult questions in corporate law is what is the board’s duty to prevent harm to the corporation? Delaware courts currently excuse boards from responsibility for harmful outcomes not involving wrongful or illegal acts. By doing so, however, Delaware courts have encouraged boards either to be ignorant or unquestioning of aggressive risk-taking by officers. The Delaware conception of the duty to monitor is in notable contrast to calls by regulators, shareholder groups and, most recently, Congress for boards to play a more active and participatory role in the management of risks affecting the corporation. As part of a larger study of the board’s duty to monitor, this particular paper examines in detail Delaware case law defining the scope and application of the duty to monitor and considers why Delaware courts have decided that boards should not be held responsible for monitoring business risks, even if the taking of such risks results in catastrophic losses. As will be more fully argued in a separate article (38 Fla. St. U. L. Rev. (forthcoming 2011)), the current Delaware position is inconsistent with the optimal role of the board in the modern corporation. Consequently, Delaware courts should expand the scope and application of the duty to monitor.

Keywords: corporations, business associations, corporate governance, duty to monitor, duty of oversight, board of directors, Caremark, Stone v. Ritter, duty of good faith, risk management, enterprise risk management

Suggested Citation

Pan, Eric J., A Board's Duty to Monitor (December 10, 2009). Cardozo Legal Studies Research Paper No. 281; New York Law School Law Review, Vol. 54, 2010. Available at SSRN: https://ssrn.com/abstract=1521488 or http://dx.doi.org/10.2139/ssrn.1521488

Eric J. Pan (Contact Author)

US Commodity Futures Trading Commission ( email )

1155 21st Street NW
Washington, DC 20581
United States

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