Document Type

Article

Publication Date

Fall 2012

Abstract

This article grapples with whether we are expecting too much from the duty of oversight. The directors’ oversight duty refers to directors’ responsibility to actively monitor corporate officers, employees, and corporate affairs. Directors breach their oversight duty when officers and employees engage in wrongdoing that causes harm to the corporation and that wrongdoing can be attributed to directors’ failure to monitor. In other words, oversight liability holds directors liable for their failure to act under circumstances where it can be proven that directors should have acted and their actions could have prevented corporate harm.

The significance of directors’ oversight duty has grown at least in part because it better captures the role directors play in the modern corporation. While it is true that directors can have both a managerial role and a monitoring role over corporate affairs, most directors of today’s public corporations are not primarily responsible for managing the day-to-day affairs of the corporation. Instead, directors entrust officers and employees with managing the corporate enterprise, and thus are primarily tasked with monitoring officers and employees to ensure that they manage in the corporation’s best interests. The responsibilities directors undertake when carrying out this monitoring role often implicate the oversight duty.

While this article agrees that directors must take their monitoring role more seriously, it nevertheless questions whether reliance on oversight offers false hope for those seeking to enhance corporate governance and prevent corporate misconduct for several reasons. First, the oversight doctrine may be too immature and incoherent, undermining the extent to which it can provide meaningful guidance for directors seeking to comply with the oversight duty. Second, the nearly insurmountable standard for imposing liability for oversight breaches at best may render the doctrine irrelevant for purposes of encouraging appropriate director behavior, and at worst may undermine the extent to which directors feel compelled to take their oversight role seriously. Third, even if such a compulsion exists, the size and complexity of the modern corporation may make it impractical for directors to successfully engage in oversight. Finally, the nature of directors’ role in the public corporation, as outsiders serving part-time, may make it unreasonable to expect that directors have the expertise, knowledge, or capacity to effectively monitor the business affairs of large, and increasingly complex corporations. In this respect, efforts at enhancing oversight may be doomed to failure, suggesting that it may be ill-advised to fixate on invigorating oversight as a means for enhancing corporate governance, or otherwise preventing the next corporate crisis.

Keywords

corporations, corporate governance, directors and officers, fiduciary duties, duty of oversight, oversight doctine, director behavior

Publication Citation

10 U. St. Thomas L.J. 416 (2012).

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