December 02, 2009
THERE WILL BE BLOOD . . . or Will There? A Fiduciary Duty to Manage Risk
Posted by Kristin Johnson

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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