Director Review of Risk

Lots of advisers at this time of year circulate publications relative to the upcoming proxy season, and the obligations of boards of directors.  This is the year of “rethinking risk.”

Boards are advised to “assess risk” in the following areas:  does the board have expertise to evaluate the full range of risks?; does the board treat corporate culture as an enterprise asset which must be assessed for risk?; does management integrate risk into its strategy (this really ought to be an implicit no-brainer)?; is the board assessing the risk of not being either a leader or an “agile follower” with respect to the digital revolution and the expanding role of AI?; given the labor market, is the board deeply enough involved in assessing workforce risk?

There also is renewed interest in a series of Delaware litigations described as “Caremark cases.”  Almost twenty-five years ago, the Court of Chancery established a standard, requiring that directors be not only loyal and non-corrupt, but also that they had an obligation to conduct “oversight.”  Thereafter many cases were brought alleging directors were neglectful, and that injury to the corporation was actionable against them. 

Making a “Caremark case” was a very tough hill to climb, but recent litigation (involving claims against Blue Bell Creamery’s directors in connection with product contamination) did find a lack of oversight that created director liability.

Although analysis suggests that the Court considered this particular case a slam dunk (the company manufactures food and it is not a far step to say that directors ought to be aware of the risk of contamination), the Court noted not one specific failure but, rather, the categorical lack of board oversight of food safety.

Boards should not only identify risks, but also must allow specific identifiable time on board agendas in risk review.


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