June 11, 2006
Disney on Due Care vs. Best Practices
Posted by Lisa Fairfax

Like the Chancery Court, the Supreme Court in Disney distinguished between conduct that violated the duty of care--for which directors were not liable--and conduct that fell below corporate best practices.  And both courts agreed that Disney directors engaged in actions that failed to meet the courts' formulations of corporate best practices.  I intuitively understand the distinction between conduct that satisfies due care and conduct consistent with corporate best practices--after all, when imposing liability we cannot expect directors' and officers' conduct to be the "best" or perfect.  Given this distinction, I wonder what the point is in pinpointing these best practices.  Both courts suggest that all directors and officers should use the best practices identified in the opinions as a guide for their own behavior.  But why should anyone expect that directors and officers will follow that guide when there are apparently no sanctions for their failure to do so?  Indeed, if due care is judged according to a "we don't expect perfection/nobody's perfect" standard, then not only does breaching the standard seem virtually impossible, but also it seems that engaging in behavior that satisfies "best practices" is an option that most corporate actors are free to ignore.  Thus, I find myself asking, what is the point in pinpointing aspirational standards that have no connection to the conduct in which we realistically expect directors and officers to engage?  Or to put it differently, how do best practices standards help us determine conduct that violates the duty of care?  In this regard, I find the distinction frustrating and unhelpful, except to the extent that it suggests that all corporate conduct will satisfy the duty of care because that duty does not require directors and officers to be on their "best" behavior. 

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