Of Outside Monitors and Inside Monitors: The Role of Journalists in Caremark Litigation

In this article I argue for a change in Delaware corporate law that would allow for competitive forces to improve the quality of corporate compliance programs, thus reducing harm to society from corporate illegality and improving shareholder welfare. Specifically, courts should remove some obstacles that prevent plaintiffs in shareholder derivative actions from forcing defendant directors to demonstrate the efficacy of their compliance programs in cases where outside monitoring by journalists appears to have detected illegal corporate actions before those actions have been detected by the internal monitoring of the compliance department. Currently, the rigorous demand requirement and the deferential good faith standard in duty to monitor cases cause most Caremark claims to be dismissed at the demand phase, thus shielding defendant directors from revealing information about the performance of their compliance programs. The changes I suggest will force corporate defendants to reveal information that will allow courts to compare the monitoring performed by journalists with that done by compliance programs. Where the outside monitors are outperforming the inside monitors, directors may be responsible for failing to perform their duty to monitor, which requires them to establish systems to detect and report illegal behavior by employees. By implementing the modest changes I suggest, Delaware courts will, over time, have more information to help them assess whether their approach to the duty to monitor needs a more thorough overhaul.