Governing Boards Can't Ignore the Red Flags

By Paul McGreal, J.D.

In re Caremark International Incorporated Derivative Litigation is one of the few court cases that ethics and compliance professionals know by name. And for good reason. The 1996 decision was a dramatic departure from a century of Delaware corporate law that sent shock waves through corporate board rooms. Before Caremark, directors had no legal duty to prevent legal wrongdoing by managers or other employees, or to foster an ethical corporate culture. They only needed to respond appropriately to corporate misdeeds or scandals by firing the culpable employees and taking steps to avoid a repeat offense. In short, corporate directors were allowed one bite of the apple.

Not so after Caremark. In that case, a Delaware court was the first to recognize a corporate director’s legal duty to initiate and oversee a corporation’s ethics and compliance program. The specter of a director’s personal financial liability instantly raised the visibility and urgency of ethics and compliance in the boardroom. And so, a topic that had long been neglected was suddenly on the agenda of every corporate board.

In the twenty-two years since Caremark, companies have evolved best practices around the board’s responsibility for ethics and compliance. An effective ethics and compliance program must be built on a commitment from the top demonstrated by periodic board training on the organization’s ethical and legal risks. Board members should also understand the broad outlines of how the ethics and compliance program works, and receive regular reports about how well the program is functioning. In the end, though, nothing can substitute for a board that is attentive to red flags and empowered to raise concerns in a forthright and constructive manner.

Read my full analysis of this historic ruling.

To keep ethics front of mind, companies should periodically engage their directors about cutting edge ethics topics. The Business Ethics Alliance offers a series of modules designed for use with regular board meetings. These short sessions highlight key areas of board governance and the ethical issues that can arise, and help facilitate an open dialogue in a group setting. Participants will feel empowered to discuss areas of conflict, understand their board’s formal and informal culture, and develop their skills in ethical leadership and open communication.

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