Stavros Gadinis is professor of law and Amelia Miazad is founding Director and Senior Research Fellow of the Business in Society Institute at Berkeley Law School. This post is based on their recent paper, and is part of the Delaware law series; links to other posts in the series are available here.
Although corporate wrongdoing can reach an immense scale with disastrous ramifications, holding boards accountable has long been perceived as elusive. Under both state fiduciary duty law and federal securities doctrine, directors and officers are liable only if they were aware of corporate failures or reckless in ignoring them. Since providing evidence of awareness or recklessness is exceedingly hard, corporate law scholars have long seen these requirements as raising an almost impenetrable shield over the board.
Instead, we demonstrate that the evidentiary path to boards’ state of mind is nowadays more open than it has ever been before, due to the revolutionary growth of compliance departments in recent years. Corporate law literature has largely dismissed compliance as ineffective, fearing that in-house monitors would be too weak or too loyal to constrain corporate wrongdoing. Contrary to this conventional wisdom, we argue that legal and compliance experts’ reports and recommendations, especially if ignored at the time they were made, often expose the board to liability once misconduct is revealed.
