Liability concerns have become a major issue for directors of U.S. company boards.
Board members today must meet higher standards of conduct under Delaware law. They also face the possibility that they may have to make personal payments to resolve investor lawsuits, as former WorldCom directors had to do. Meanwhile, shareholders have filed dozens of derivative lawsuits this year against directors over the alleged backdating of executive stock options. These issues were among those discussed by panelists at the National Association of Corporate Director'' annual conference in Washington on Oct. 16-17.
At a panel on "Director Liability and Legal Responsibilities," former Delaware Supreme Court Chief Justice E. Norman Veasey discussed the gradual evolution of the standards of conduct required of directors under Delaware law. According to Veasey, the Delaware courts originally took the position, as shown in the Allis-Chalmers case in 1963, that liability would only be found in cases where directors ignored "red flags" waved in their faces. In 1986, the Delaware Court of Chancery ruled in Caremark that directors were subject to new duties. As Veasey noted, the court in Caremark mentioned in a footnote that directors are expected to put into place a compliance program to prevent corporate legal violations and that failure to do so could indicate a violation of directors' fiduciary duty of good faith. Veasey noted that the court, in announcing this legal standard, made reference to the advent of the Federal Sentencing Guidelines, which, in connection with sentencing for criminal offenses by a company, provide credit to corporations that have a compliance program in place.
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