CHANGES TO THE CORPORATE GOVERNANCE FRAMEWORK: NEW OVERSIGHT DUTIES FOR CORPORATE OFFICERS
Corporate executives have been facing mounting challenges in recent months as US courts and government prosecutors continue to scrutinise how companies respond to red flags in the operation of their businesses. Recently, in a shareholder derivative action brought in the Delaware Chancery Court, J. Travis Laster, presiding judge and vice chancellor of the court, issued an opinion finding that corporate officers owe the same fiduciary duties, including the duty of oversight, as corporate directors. Although the reasoning in this opinion has not been adopted by the Delaware Supreme Court, the opinion was significant in that it extended the duty of oversight from directors to corporate officers, and accordingly allowed shareholder litigation to proceed against a human resources executive for failing to monitor, and respond to, significant red flags indicating alleged systemic sexual harassment at headquarters and the company’s franchises.
In expanding officer liability, the court recognised that even though Delaware law had not yet extended the duty of oversight to non-directors, such a duty arguably applied to an even greater degree to officers. Unlike directors who often act in part-time roles at a high level overseeing a corporation’s affairs, Mr Laster found that officers are directly in charge of day-to-day operations and are in the best position to obtain the underlying facts and present them in a complete and timely fashion to the board. The officer is on the ground to see red flags in a way that directors are not and, as an agent of the board, an officer fails in his duties if he knew, had reason to know, or should have known, of misconduct that should have been addressed.
Apr-Jun 2023 Issue
Thompson Hine LLP