Prior to joining the academy and just after leaving
Big Law, I had the privilege of serving as associate general counsel at
JPMorgan supporting the alternative investments division in the worldwide
securities services group. At JPM, I became intrigued by (obsessed
with, some might say) risk management as an element of corporate governance. In
divining the origins and genesis of the recent financial crisis, it seems that
one critical question that we must address is who was managing the risk
managers? Did we, for example, expected boards of directors to do more to
monitor internally enterprise risk levels or product risk exposure? May
shareholders bring claims alleging that boards were asleep at the switch and
breached their obligation to act in good faith or fiduciary duties of care and
loyalty?
While The Glom
was teeming with rich discussion regarding Jones v. Harris (thanks so much to all of the interesting
contributions), I had the opportunity to sit among giants at a recent
conference at New York Law School (thanks Peter Kostant for the invitation) discussing directors’ fiduciary duties post Disney,
Stone v. Ritter and Lyondell. I joined a panel with Renee
Jones and Kent Greenfield. In a précis to my forthcoming paper, I suggested
that the Delaware Supreme Court’s recent decisions and the state’s adoption of
Section 102(b)(7) may be inconsistent with external constituencies' expectations of the
board’s duty to monitor. As a result, I
argued, we may soon see federal preemption in the area of directors’ fiduciary
duties.
There is strong national sentiment arising out of
the financial crisis demanding that directors be held accountable for
bailed-out companies who exported their negative externalities onto broader
constituencies, i.e. the taxpayer funded bail-out. Section 102(b)(7) of DGCL
allows corporations to enact exculpation clauses limiting directors exposure to
damages liability in claims alleging breaches of their fiduciary duty of care.
The exculpatory provision coupled with recent precedent create a high hurdle
for plaintiffs who seek to allege directors’ failed to act in good faith in executing their
risk monitoring responsibilities.
As Renee Jones and Joan Heminway (here and here) indicated
in their posts, we may see federal action on the contents and meaning of fiduciary
duty as early as the decision in Jones v.
Harris. But, even if Jones v. Harris illuminates,
I doubt that it will deliver the TKO blow to state governance of the questions surrounding oversight duties or monitoring for excessive risk taking. I believe that we may see Congressional action on
this issue.
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