Karen Woody on Officers Duty of Oversight

FCPA Compliance Report

Welcome to the award-winning FCPA Compliance Report, the longest-running podcast in compliance. In this episode, Tom Fox welcomes Professor Karen Woody and they take a deep dive into the Segway case from Delaware.

The bottom line is that proving bad faith and breaching the duty of oversight remains a challenging task. The conversation delved into the fiduciary duties of directors and officers, specifically the duty of care and the duty of loyalty. The duty of care requires fiduciaries to be well-informed about material information and exercise prudence in decision-making. On the other hand, the duty of loyalty necessitates undivided interests towards the corporation, with no conflicts of interest or self-dealing.

The duty of oversight, derived from the landmark Caremark case in 1996, is an extension of the duty of loyalty. It requires the establishment of information reporting systems and compliance programs to inform senior management and the board about potential issues. There are two prongs to bring a duty of oversight claim: the systems or information prong and the red flag prong. The former focuses on the absence or ineffectiveness of systems, while the latter deals with the conscious disregard of red flags.

However, proving bad faith and breaching the duty of oversight is a high bar to clear. The Caremark standard is challenging to meet, and most cases are dismissed on a motion to dismiss. The recent Segway case, following the McDonald's case, indicated a pushback against lowering the bar for officers compared to directors. The interpretation of the duty of oversight remains stringent, emphasizing the need for strong evidence of bad faith.

The conversation concluded by acknowledging the importance of context and the specific facts of each case. While there has been a slow march of weakening the Caremark standard in some cases, the facts in those instances were particularly egregious. The recent cases discussed in the episode did not exhibit the same level of egregiousness, leading to a retraction and a reaffirmation of the high bar set by the Caremark standard.

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