Home » Articles » Toward a Public Enforcement Model for Directors’ Duty of Oversight

Toward a Public Enforcement Model for Directors’ Duty of Oversight

PDF · Renee M. Jones & Michelle Welsh · Jun-8-2012 · 45 VAND. J. TRANSNAT'L L. 343 (2012)

This Article proposes a public enforcement model for the fiduciary duties of corporate directors. Under the dominant model of corporate governance, the principal function of the board of directors is to oversee the conduct of senior corporate officials. When directors fail to provide proper oversight, the consequences can be severe for shareholders, creditors, employees, and society at large.

Despite general agreement on the importance of director oversight, courts have yet to develop a coherent doctrine governing director liability for the breach of oversight duties. In Delaware, the dominant state for U.S. corporate law, the courts tout the importance of board oversight in dicta, yet emphasize in holdings that directors cannot be personally liable for oversight failures, absent evidence that they intentionally violated their duties.

We argue that some form of external enforcement mechanism is necessary to ensure optimal conduct from corporate leaders. Unfortunately, the disciplinary force of shareholder litigation has been vitiated by procedural rules and doctrines that make it exceedingly difficult for  plaintiffs to prevail in derivative litigation. Because private shareholder litigation no longer fulfills its traditional role, the need exists for alternative mechanisms for director accountability.

We look to Australian corporate law for solutions to the problem of enforcing the duty of oversight. Australian corporate law encompasses a range of enforcement mechanisms for directors’ duties. The Australian Securities and Investments Commission (ASIC) has power to sue to enforce directors’ statutory duties. ASIC can seek a range of penalties for breach of duty, including pecuniary penalties and officer and director bars. ASIC has prevailed in a number of high-profile actions against directors of public companies in recent years. Despite the relative rigor of enforcement in Australia, capable directors continue to serve and its economy has thrived.

The Article explores several possibilities for incorporating public enforcement into the U.S. corporate governance system. We consider SEC enforcement of fiduciary duties and enforcement by states’ attorneys general. We also consider empowering state judges to impose bars on future service, as an alternative to tort-based damages awards. Regardless of the exact model of public enforcement, the reforms advanced here would help provide for greater director accountability and thus better motivate directors to perform their duties responsibly.




Leave a Reply

ExpressO Top 10 Law Review

ANNOUNCEMENTS

We are pleased to announce the 2014-2015 Board of Editors and the 2013-2014 Annual Award Winners.

Coming up:

The Vanderbilt Journal of Transnational Law invites you to its 2015 Symposium, This is Not a Drill: Confronting Legal Issues in the Wake of International Disasters.

Recent and dire international disasters, both environmental and humanitarian, have left legacies not only of destruction and destitution, but also of an uncertain legal landscape. The Symposium will address current and pressing international-disaster-response topics. These will include environmental effects, disaster assistance, humanitarian assistance, and criminal processes and sanctions in the wake of various types of international disasters. Symposium participants will include leading scholars from across the country.

The 2015 Symposium will take place on Friday, February 13, 2015 at Vanderbilt Law School, 131 21st Avenue South, Nashville, TN 37203. A detailed schedule will be available soon.

For information on the 2015 Symposium, as well as past symposia hosted by the Journal, please visit the Symposium page.

Explore Other Vanderbilt Law Resources