67 Pages Posted: 8 Aug 2006
Date Written: August 1, 2006
The last decade has witnessed the evolution of a surprising and disconcerting trend: Corporations have imploded due to various acts of corporate mismanagement, and corporate directors have ably avoided liability for not having prevented these disasters. This trend is surprising because directors are responsible for running corporations, and directors are obligated to do so in good faith. Therefore, one would not intuit that directors should be free from liability for their failings. But they are. To the second year law student in a basic Corporate Law class, this disconnect between disaster and liability seems odd. To the corporate scholar, this gaping responsibility gorge is unsurprising. However, this trend is disconcerting because it jeopardizes the very foundation of corporate law. If directors are not going to be responsible for corporate disasters, then who?
Judicial attempts to enforce a director's obligation to act in good faith fall away as merely restrictions on directors acting affirmatively in bad faith. Attempts of other scholars to propound on good faith seem focused on understanding what the courts are doing, as opposed to guiding the judiciary. Moreover, the recent judicial emphasis on the phrase "good faith" and its sister phrase "not in good faith" appears not to have been preceded by thoughtful discussion on what those phrases can and should mean. The haphazard, unprincipled invocation and application of these two phrases threaten the implicit agreement that directors will manage corporations in the best interests of the shareholders.
This Article examines the phrase "good faith" and its sister phrase "not in good faith," ultimately concluding that the judiciary's and scholar's attempts to manhandle the phrase "not in good faith" into meaning "bad faith" bode ill for the future of corporate governance.
Keywords: good faith, corporate governance, director liability, fiduciary duties
Suggested Citation: Suggested Citation
Nowicki, Elizabeth, The Unimportance of Being Earnest: Reflections on Director Liability and Good Faith (August 1, 2006). Available at SSRN: https://ssrn.com/abstract=921668 or http://dx.doi.org/10.2139/ssrn.921668