Caremark's Behavioral Legacy

Abstract

Caremark is undoubtedly one of the most important decisions in corporate governance and compliance. The opinion’s articulation of the standards for holding board members liable for failing to properly monitor the corporation is said to have transformed Delaware law. Exactly why that is, however, carries some mystery. The opinion, composed largely of dicta, held very little from a legal standpoint. Moreover, by coupling lofty prescriptions with a standard of review that ensured no director would actually be found liable, the opinion was destined to fall short of its goal to remake board oversight of compliance. Yet, when the opinion is analyzed through a behavioral lens, which this Symposium Article undertakes on the twenty-first anniversary of the opinion’s drafting, the mystery of Caremark becomes clearer—everything from its outsized impact to its underwhelming legacy. This analysis also highlights the opportunities that behavioral compliance strategies hold for creating truly effective efforts to lessen unethical and illegal acts in business. In the end, this may be Caremark’s true legacy, one that allows its lofty aspirations to take effect in a meaningful and lasting way.

Keywords: Caremark, corporations, corporate governance, corporate compliance, compliance, behavioral science, behavioral compliance, behavioral risk, behavioral ethics, behavioral economics, loss aversion, prospect theory, dual system thinking, Delaware law