Boards’ Duty of Oversight: From Caremark to the Continuing Travails of Boeing

In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996) was a landmark decision from the Delaware Court of Chancery holding that a corporate board’s failure to assure a reasonable information and reporting system is an act of bad faith and in breach of the board members’ duty of loyalty.

Caremark articulated a two-prong standard for board member liability as follows:

1. The board must have utterly failed to implement any reporting information protocols over key corporate actions; and
2. even where such restrictions or controls are implemented, liability could nevertheless attach if the board failed to monitor or oversee relevant corporate operations.

These Caremark duties remain good law in Delaware and continue to provide shareholders with a powerful remedy in bringing derivative actions against a board, albeit one that many commentators and jurists have asserted is possibly the most difficult theory in corporate law upon which such plaintiffs might hope to win a judgment. That being said, there have been a few recent examples where plaintiffs have survived a motion to dismiss and a large derivative settlement followed.

Perhaps the most notorious of these instances resulted from In re The Boeing Company Deriv. Litig., No. 2019-0907-MTZ, 2021 WL 4059934 (Del. Ch. Sept. 7, 2021). The derivative litigation there flowed from two fatal crashes involving Boeing 737 Max aircraft. In denying the motion to dismiss, the court held that aircraft safety was a “mission critical” board oversight responsibility and that the Boeing board failed to satisfy the Caremark standards. Ultimately, the litigation settled for $237.5 million, one of the largest derivative settlements in history.

Boeing’s product safety issues remain the subject of almost daily commentary in the legal and business press. Indeed, Boeing and certain of its executives were sued earlier this year in a putative class action involving a different version of the 737 aircraft and issues apparently not related to the earlier 737 Max litigation. Without being privy to the scope of the releases the Boeing board may have obtained when the 2021 shareholder litigation was settled, it remains an open question to what extent Boeing’s current issues with 737 and other aircraft may become the subject of a new Caremark suit. To date there has been no such derivative suit.

Nonetheless, the Boeing derivative suit and a few others where board defendants were unable to prevail upon a motion to dismiss give support to the notion that Caremark theories may not be as difficult for plaintiffs as they once were. Although the success rate is still well below 50 percent, the authors estimate it is at about 30 percent. To use a baseball analogy, a .300 hitter is not considered to be a shabby foe.

It behooves a board to take cognizance of what may be the mission-critical activities of the corporation and take steps to implement and enforce protocols to ensure that those activities are properly monitored through use of executive committees or other mechanisms.

The authors, along with two other co-authors, have written in greater detail on these corporate governance issues in Corporate Governance: Understanding the Board-Management Relationship, recently published by the Business Law Section of the American Bar Association. The book provides an analysis of corporate management and the legal liability of directors and officers, and it examines how the corporate board has evolved and changed. It provides expansive discussion of shareholder derivative litigation against officers and board members at Boeing and McDonald’s Corporation, as well as other recent high-profile litigation in Delaware.

The preface of the book by Dave Gilfillan, chief claims officer at CRC Group, states, “The authors have provided a unique and focused lens in which to evaluate and understand the actions of directors and officers and their implications for corporate executives, legal counsel, business managers, stockholders, and consumers. Corporate Governance offers a textural perspective of a complicated subject that is often misunderstood by both professionals and the public.”

Following Gilfillan’s comments, the book takes the reader into the fundamental issues of governance, oversight, and management. Chapter by chapter, it addresses economic fundamentals underlying organization governance; stress testing your organization governance structure; the evolution from tone at the top to checks and balances; why a company should consider using an executive committee of its board of directors; organization governance and information gaps: importance of internal reporting and internal information for board oversight; monitoring cash flows: the board, the CLO, and the CFO; the board, management, and the organization’s intellectual capital; and board member selection and board interaction.