Clifford Chance

The Delaware Chancery Court has held that officers of a corporation have the same fiduciary duties as directors. This means that corporate officers owe a duty to oversee "mission critical" risks including by implementing effective compliance programs.

On January 26, 2023, in In re McDonald's Corporation Stockholder Derivative Litigation, the Delaware Chancery Court denied a corporate officer defendant's motion to dismiss a derivative lawsuit alleging that he breached his duty of oversight, which the complaint alleged he owed as a result of his position as an officer of a Delaware corporation. The decision made clear that officers of Delaware corporations are subject to the same fiduciary duties as directors of Delaware corporations, and accordingly held—albeit for the first time—that the related duty of oversight, first articulated in In re Caremark International Inc. Derivative Litigation (1996), applies to officers as well.

In extending the holding of Caremark, the court in McDonald's looked at the three "foundational premises" for finding that directors are subject to a duty of oversight, and used those same premises to support its conclusion that officers are subject to the same duty:

• First, corporate law views the role of directors, which is to manage and supervise the business and affairs of the corporation (albeit indirectly), with seriousness, and that this seriousness extends to the role of officers, who are charged with directly managing the business.
• Second, the Caremark court reasoned that "relevant and timely information is an essential predicate for satisfaction of the board's supervisory and monitoring role . . . ," and the information used by the board to satisfy its role inherently is and must be received from the officers.
• Third, the federal Organizational Sentencing Guidelines extend beyond the board and explicitly call for executive officers to undertake compliance and oversight obligations.

The McDonald's court also relied on Gantler v. Stephens (2009) in which the Delaware Supreme Court held that directors and officers of Delaware corporations have the same fiduciary duties and concluded that there is no reason to exclude the duty of oversight.

The McDonald's court did note that the scope of the duty of oversight as applied to directors and officers is different, based on the unique roles of directors and officers. Most notably, directors are charged with plenary authority over the business and affairs of the corporation. Officers, by contrast, generally have a more constrained area of authority, and accordingly an officer's duty of oversight will coincide with the officer's area of responsibility (although in some situations a red flag that is sufficiently prominent might invoke an oversight duty outside an officer's area of responsibility).

The decision in McDonald's thus makes clear what Delaware courts have signaled in the years since Caremark, that the duty of oversight – like other fiduciary duties – extends beyond the confines of the boardroom to the desks of corporate officers. And while this outcome may seem preordained, it has important implications for the liability of officers in their oversight of the corporate compliance function, particularly when viewed in light of recent cases arguably expanding potential liability for compliance failures under Caremark.

In 2019, the Delaware Supreme Court weighed in on a ruling from the Court of Chancery dismissing a shareholder claim against directors of Blue Bell Creameries, an ice cream manufacturer. Following an outbreak of listeria resulting in at least 10 customer illnesses and, in three of those cases, death, in Marchand v. Barnhill, shareholders alleged that the directors had breached their fiduciary duty of loyalty for failing to establish and oversee food safety operations. While the Chancery Court dismissed the complaint under the demanding standard in Caremark, the Supreme Court reversed, holding that food safety was an "essential and mission critical" compliance issue for ice cream manufacturers and that the plaintiff's complaint supported an inference that no board-level program existed for the monitoring of food safety issues. One clear takeaway from the ruling, now applicable in light of McDonald's to both directors and officers, is that compliance programs on "mission critical" issues – issues sitting at the foundation of company operations – require concerted oversight efforts and potentially create heightened exposure to Caremark claims.

Similarly, in 2021, the Court of Chancery ruled in In re The Boeing Company Deriv. Litigation that shareholders could proceed against directors at Boeing with a claim of liability for compliance oversight failures related to two crashes of its 737 MAX airplanes in October 2018 and March 2019, both of which resulted in the deaths of everyone onboard. In so doing, the court held that plaintiffs had successfully pled two sources of liability: (i) a complete failure on the part of directors to establish a reporting system for airplane safety; and (ii) "turning a blind eye to a red flag representing airplane safety problems." Relying on Marchand, the court emphasized that the board has a mandate to "rigorously exercise its oversight function with respect to mission critical aspects of the company's business," in this case the safety of its airplanes.

When it comes to foundational compliance issues, the McDonald's case is no different. In McDonald's, the "Executive Vice President and Global Chief People Officer" – charged with "ensuring that one of the largest employers in the world provided its employees with a safe and respective workplace" – was himself facing allegations of sexual harassment and misconduct, and was alleged to have consciously ignored red flags about similar behavior by others and presided over a culture in which employees feared retaliation for speaking out. While the duty to create a safe workplace should be universal among officers, it falls squarely within the remit of human resources and, therefore, was "mission critical" for the chief human resources officer at McDonald's.

This last point – that what is "mission critical" can vary depending on the responsibilities of individual officers – is uniquely important given the proliferation of areas that could fall within that definition. Increasingly, companies are expected to include within their core missions acting as good corporate citizens that embed governance principles into everyday decision-making – the "G" in ESG. This means cultivating compliance cultures that champion diversity and inclusion, consumer and employee safety, respect for human rights and the environment, and harmony with local communities. While the courts in both Marchand and Boeing were careful to note that the Caremark standard remains difficult for plaintiffs to meet, and that directors have “great discretion to design context- and industry-specific approaches tailored to their companies' business and resources,” looking forward, McDonald's makes clear that officers need to play an active role in the establishment and oversight of compliance systems and controls.