Accountability (or Lack Thereof) of Corporate Officers and Directors

Accountability (or Lack Thereof) of Corporate Officers and Directors

The following piece is a part of NULR of Note’s “Bring Back The ‘90s” initiative, aimed at exploring the evolution of legal thinking over the past three decades. For more, click here.

In assessing the liability of corporate actors, courts have fairly consistently resolved contests of doctrine in favor of corporate law principles as opposed to tort law principles.  Corporate law traditionally protects officers and directors from personal liability for tortious acts committed in their corporate roles unless they actively participated in or consented to the wrongful behavior—underscoring the separate legal identity of the corporate entity.  Tort law reflects strong notions of accountability and personal responsibility; finding, in the words of Robert J. Rhee, “fault, where corporate[e] law excuses it.”

Similarly, statutory law, such as the Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA), is unequivocal in its insistence that those responsible for environmental contamination bear the costs of cleanup. Yet, when courts consider the culpability of directors and officers, even in tort and statutory contexts, they largely rely on an analysis of the defendant’s control or authority, linked with personal participation in the violation—a standard that is quite generous to directors and officers.  Such insulation is understood to encourage free enterprise, divorcing personal risk from business judgments. 

In 1992, Lynda Oswald and I found that fears that CERCLA eroded corporate law by overexposing corporate actors to liability were unfounded. Upon recent examination, and in more broader contexts, Shannon O’Byrne and I found that over time, courts have crafted a jurisprudence that continues to weigh heavily in favor of corporate law principles.  Furthermore, this jurisprudence tends to underexpose defendants to liability, even when that result subverts the letter of the law or common law precedent as it applies to an ordinary individual. 

Professor O’Byrne’s and my recent analysis of case law in the context of torts committed by officers and directors harming non-shareholders shows that the corporate law doctrine is alive and well. Delaware broadly shields directors and officers in cases of negligence resulting in personal injury and property loss, premising liability on a showing of direct and active participation by the individual defendants in the wrongful conduct.  Whereas an ordinary defendant may be held liable in negligence for failing to take steps to protect a foreseeable plaintiff from harm, courts tend to exonerate a director or officer by virtue of their position, requiring not only personal participation in the wrongdoing, but active misfeasance as opposed to malfeasance.  This reading of the personal participation doctrine fails to consider whether a duty was owed to the third party.  Especially where the harm is purely economic loss, courts have found that the officer’s or director’s duty runs to their corporate entity, rather than to the third party who bears the loss.  Thus, courts tend to subvert tort law principles to corporate law, and exempt the officer or director from liability. 

Scandal after scandal—of financial fraud, pyramid schemes, international bribery, and sexual harassment—compel critical evaluation of the ways in which courts assess the behavior of high-powered officers and directors and the grounds upon which accountability and fault are assessed or set aside. Heavy application of the corporate law doctrine, which at its core aims to bolster the integrity of the corporate form, may look past, or worse, facilitate, the erosion of corporate culture.  

Cindy A. Schipani is the Merwin H. Waterman Collegiate Professor of Business Administration and Professor of Business Law at the University of Michigan Ross School of Business.  Professor Schipani received her J.D. from the University of Chicago School of Law.  Professor Schipani’s primary research interests are in corporate governance, with a focus on the relationship among directors, officers, shareholders and other stakeholders and pathways for women to obtain positions of organizational leadership.

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