January 15, 2009
Board of Director Bull***t
Posted by Benjamin Means

In his essay, “On Bull***t,” the philosopher Harry G. Frankfurt defines b.s. as a use of language distinct from truth telling or lying in that it is “unconnected to a concern with the truth.”  Whereas the truthful and the deceitful are both oriented by truth (the one to advance it, the other to subvert it) the bulls**ter is serenely unconcerned with what the truth might be.  To b.s., then, is to act with a conscious disregard for truth.

In the spirit of fun, if not bull***t, I’d like to consider the possibility of borrowing Frankfurt’s theory and using it to define good faith as a third type of fiduciary duty owed by directors.  The problem, for those who believe Delaware courts should recognize good faith as an independent fiduciary duty, has been to identify what would violate a duty of good faith that would not also violate the duty of loyalty or the duty of care.  Frankfurt faced a similar difficulty trying to explain how b.s. differs from other uses of language.

To set up the comparison, let’s equate “truth” with “maximization of shareholder value.”  Self-dealing conduct that violates the duty of loyalty is problematic because it places a director’s private profit motivation in conflict with the obligation to increase shareholder value.  Just as the liar’s aim is to deceive, we worry that an interested director may intend to reduce shareholder value for personal gain. In that sense, self-dealing is akin to lying.

By contrast, there is no implication that grossly negligent conduct that violates a director’s duty of care is deceptive.  In Van Gorkom, the directors failed to review important documents in connection with a merger transaction, but, according to the court, that only meant they did an insufficiently careful job of maximizing shareholder value.  Falling short of the duty of care does not make a director untruthful.  (To sustain the comparison, I will assume that Frankfurt would consider negligent misstatements of fact to fall within the rubric of truth telling, since the speaker remains oriented toward truth).

A violation of the duty of good faith occurs, according to Delaware courts, when directors proceed with “conscious disregard” for “a known duty to act.”  Frankfurt’s theory suggests the significance of that definition: the board is not lying, it’s simply no longer interested in the truth.  Just as the b.s. artist ignores the obligation to be truthful, the board ignores its duty to maximize value for the shareholders.  Who knows, perhaps board members value relationships with others in the CEO club or want more leisure time.

Since we can’t read minds, we might distinguish this kind of failure from ordinary violations of the duty of care by looking for evidence of pervasive neglect.  For example, a board’s failure to establish any systems of oversight would indicate that the board has abandoned its responsibilities.  Under those circumstances, a court could find that a board’s presence in corporate governance has become phony, the appearance of monitoring without the reality. In other words, utter b.s.

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