Last week, Delaware’s influential Court of Chancery issued an important decision clarifying that the duty of oversight applies to both officers (executive level employees) and directors (members of the board of directors). The decision is significant because it is the first time a Delaware court has applied the duty to officers. In this eAlert, we briefly overview the duty and some ramifications of the court’s decision.
Delaware’s duty of oversight is aimed at ensuring that information and reporting systems are in place to facilitate informed decision making. It imposes two requirements on directors and now officers as well. First, those individuals must make a good faith effort to ensure that the appropriate information and reporting systems are in place. Second, they must make a good faith effort to address any red flags generated by those systems.
The duty is context specific and will change based on the responsibilities of the officer involved. For example, this case involved the chief people officer of McDonald’s. As the head of human resources, the duty of oversight required this individual to establish information systems necessary to manage human resources and to address red flags generated by those systems. The court held that the factual allegations in this case — which included red flags of sexual harassment within the corporation and incidences of sexual harassment by the executive himself — were sufficient to sustain a claim that he ignored red flags in bad faith.
Because the decision clarifies that officers owe oversight duties, officers of Delaware corporations should ensure that they have set up information systems within their field of responsibility and that they are monitoring those systems for red flags. Delaware employers and officers should also consider how this decision may impact employment agreements involving officers. Moreover, although it is too early to say whether this decision will influence other jurisdictions, officers of non-Delaware corporations should monitor the legal requirements of their jurisdictions.
