Anne Tucker Nees
This article explores the competing interests between director authority and accountability within the doctrinal developments underpinning the arguments for and against director oversight liability.
The historic losses suffered by companies entangled in the web of subprime mortgages, collateralized debt holdings, and the ensuing credit crisis have brought the role of corporate directors as risk managers under renewed public scrutiny. Directors’ authority and their accountability to shareholders are two critical pieces to striking the appropriate balance among the roles, rights, and responsibilities of directors, officers, shareholders, and other corporate constituencies who operate within the corporate power puzzle. Numerous shareholder derivative suits brought in the wake of such losses allege, among other claims, that directors breached their fiduciary duties by failing to provide adequate oversight of their companies’ high-risk investments. Despite being a frequently pled claim, director oversight liability is somewhat of a legal myth be-cause previous court language hinging liability on the presence of ignored “red flags” remains largely unexamined, undefined, and inapplicable to such cases. This article proposes an alternative judicial approach to analyzing director oversight liability by articulating a five-pronged, process-oriented test to define “red flags” and, thus, director oversight liability. By articulating a test for oversight liability that avoids the substantive review and secondguessing of board decisions disfavored in corporate law, this article advocates that an appropriate balance between director authority and accountability be struck.