Current literature is full of warnings about individual liability of directors when corporations violate governmental laws or regulations. I suggest that the practical risk for directors is minimal.
The United States Attorney General’s Office is out to emphasize that individuals can be criminally liable, not just corporations. Sharper focus results from a September 9th memorandum sent by Deputy Attorney General Sally Yates to all US attorneys, outlining key steps to “strengthen our pursuit of individual corporate wrong doing.” Among other things, prosecutors will no longer soften corporate punishment unless disclosed information concerning the wrong doing includes names of individuals involved. The corporate governance community is just waking up to the facial import of this memorandum.
It is easy to see how active management, failing to follow compliance programs or willfully violating them, can incur criminal prosecution. It is much harder to picture a director, serving only a director’s function, incurring individual liability. The role of the board is to establish a robust compliance program. There is a lot of guidance for how to do that: from counsel, from the government, and indeed from the National Association of Corporate Directors (which has robust materials in this regard). But once the directors adopt a compliance program, and then periodically ask for management to report on violations and efficacy, the directors step back and do not have an active role.
Commentators also now are making reference to the Delaware Chancery Court decision in the Caremark case, which broadly charges directors with a duty to attempt in good faith to assure corporate compliance, and suggests that “in theory at least, [failure could] render a director liable for losses caused by non-compliance with applicable legal standards.”
It is interesting to observe that numerous cases litigated in reliance on the Caremark decision have, to date, not resulted in a single determination of director liability even on a civil level. Further, since criminal prosecution requires intent, or such gross disregard and recklessness as to constitute intent, it is difficult to imagine that a director could be found guilty even under the expanded ambit of the Department of Justice pronouncements. Rather, I would anticipate greater liability on the part of management.
Nonetheless, it is conceivable that the Department of Justice or the SEC will pursue cases against directors in order to force greater attention and, the weight of Federal government prosecution being what it is, it may be that some director someday is going to have to take a plea. But under current law, notwithstanding the mild hysteria today prevalent, I think it most unlikely that individual directors can end up with enough culpability to be found criminally liable.