Caremark and caring about carelessness

Samuel Johnson once said: “It is more from carelessness about truth than from intentionally lying that there is so much falsehood in the world.” And carelessness is obviously at the root of many other types of wrongdoing too.  But what does this have to do with the liability of boards of directors in connection with ESG failures?

In a recent posting in the Harvard Law School Forum on Corporate Governance the Wachtell Lipton law firm argues: “the Caremark doctrine—which requires directors to monitor enterprise-level risk and is newly invigorated by recent Delaware court rulings—is the likely tool of choice for plaintiffs complaining about board inaction in the face of climate-related exposure.”

How should companies and boards mitigate the risk of Caremark liability? Per the Wachtell memo: “Firms throughout the economy—anyone who manufactures, sells, or finances products that are implicated in environmental harm—should be preparing today for governance, regulatory, and litigation challenges. Thus, among other steps: Companies should focus on robust disclosure of climate-related economic and business risks. Management and boards should consider new playbooks and strategiesfor engaging with institutional shareholders, asset owners, and even activist investors focused on climate and other ESG-related issues. Boards should ensure regular consideration of climate-related risk, oversight structures, and robust documentation of risk-management and monitoring efforts. Companies that take these steps, and then tailor bespoke responses to any remaining climate-related risks, will earn goodwill with regulators and investors and be better prepared to weather the climate-litigation and climate-activism storm.”

This is sound advice from the perspective of companies, officers and directors. But is the underlying legal regime – particularly the Caremark doctrine – up to the gravely important task of protecting society as a whole from the ravages of climate change?

In A Simple Model of Corporate Fiduciary Duties: With an Application to Corporate Compliance WC Bunting of Temple’s business school  notes that compliance failures  by boards are currently  cognizable under Delaware law based on  the duty of loyalty, not the duty of care — – even though the latter would make more sense.  He writes: “the optimal judicial approach would define the duty to monitor as a subset of due care–and not loyalty.”

The reason he suggests this is that “that compliance is fundamentally about inducing effort” by managers more than it is about honesty. Lack of effort seems more a matter of failure of care than it is failure to be loyal.

Does this matter? To draw again from the Samuel Johnson treasure trove of memorable sayings, the change of law proposed by Bunting, could help focus the minds of directors on a subject that is truly life or death.

 

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