Director Compliance with Elusive Fiduciary Duties in a Climate of Corporate Governance Reform

I. INTRODUCTION In the wake of accounting abuses at Enron, WorldCom, Adelphia, Qwest, Global Crossing and Tyco, to name a few, "corporate governance" has become a household phrase. These massive corporate scandals cast a bright, public spotlight on the failures of directors to act as the eyes and ears of stockholders who elected them. ' Yet the very role of a board of directors in the system of corporate governance is to oversee a corporation's business and affairs, including its management, because numerous dispersed stockholders cannot effectively perform that function on their own.2 Thus when management fraud and misconduct burgeon, it is presumed that the public is justified in pointing a finger at directors for having inadequately supervised management. But if directors incurred liability for every misstep they took, or bad decision they made, it would indeed be rare to find a person willing to serve as a director.3 The balance between holding directors accountable for their failures, yet encouraging them to serve and make risky and potentially value-creating business decisions, is delicate.4 Corporate governance, the framework that defines the relationship between a corporation and its officers, directors and stockholders,5 determines this balance by setting standards for director conduct and liability. The framework for corporate governance is derived primarily from state law.6 Under the internal affairs doctrine, the laws of the state of incorporation govern the internal affairs of corporations incorporated therein.7 To maintain board accountability in the corporate governance framework, directors owe fiduciary duties to the stockholders who elect them.8 In Delaware, where the majority of U.S. corporations are incorporated,9 the hallmark fiduciary duties are the duties of care and loyalty.10 These two also involve a duty of candor to the corporation's stockholders.11 These duties are discussed in Part II. Part II also explores a Delaware corporation's director's duty to act in good faith, explaining the intersection between the duty to act in good faith and the hallmark fiduciary duties of care and loyalty. Procedural mechanisms also play an important role in this analysis and can effectively determine the outcome of a fiduciary duty derivative suit. These mechanisms, as they relate to the Delaware fiduciary duty analysis, are presented in Part II. The discussion in Part II focuses on Delaware law not only because Delaware is the state of incorporation for most U.S. corporations,12 but also because Delaware law often serves as a guide to courts in other jurisdictions in establishing their own fiduciary duty case law.13 For that reason, Delaware law is often thought of as supplying the national corporate law.14 But if Delaware corporate law is considered the national corporate law, the Sarbanes-Oxley Act of 200215 is perhaps best described as its smash sequel. Congress enacted The Sarbanes-Oxley Act (SOX), in July of 2002, largely in response to Enron and other major accounting scandals that had shaken public confidence in the integrity of management's financial and accounting practices and the ability of gatekeepers16 to detect and prevent those wrongful practices.17 In a departure from the historic, limited role of federal securities laws in corporate governance, SOX codifies a host of responsibilities for directors of public companies and specifies various qualifications for board and committee service.18 Part III begins by reviewing the historic role of federal securities laws in corporate governance. Part III then turns to SOX and assesses those provisions of SOX that seem to fall squarely under the umbrella of corporate governance. In conjunction with the passage of SOX, and largely at the behest of the securities and Exchange Commission (the Commission), national securities exchanges and associations, which are self-regulatory associations (SROs), imposed new corporate governance standards on companies with securities listed on those exchanges. …