Shot Across the Bow: The Critical Litigation Pathway for Holding Boardrooms Accountable will introduce an insightful new approach for litigating against Boards that chronically underperform their fiduciary duties. Historically, the plaintiff’s bar has been ineffectual in winning fiduciary suits brought against corporate boards. This document exposes three reasons that account for this litigation management deficiency.


The development of the ad hoc Decision Audit has been referenced as the first methodical, analytic effort to measure and manage the quality of the decision making process specific to boardroom deliberation.  It is by the introduction of the ad hoc Decision Audit that Fiduciary Guaranty has provided a singular and compelling pathway to remediate and elevate the quality of corporate governance in the American corporation.

Shareholders, especially institutional investors, have, for several decades, tried an alternative tactic 1) to provide a remedy for damaged stakeholders and, 2) to stimulate directors to a higher level of fiduciary performance. Litigation. When a board is perceived as underperforming – often because of financial outcomes that are less than congenial to shareholder interests or because a board decision reported in the business press seems egregiously dumb – those shareholders will file a legal complaint alleging that the board underperformed its fiduciary duties to the company.

Because  Plaintiffs sometimes demonstrate in a court of law that they have been damaged by the neglect or the willful harm inflicted by the directors (who thereby incur a personal liability)  – it seems  reasonable to assume that that the threat of future D & O litigation might have a forward deterrent effect. There is anecdotal evidence that such an effect may have been only modestly achieved – if at all.

In fact, some of the courtroom wins by Plaintiffs have produced gigantic penalties against the directors and officers. Though the largest D & O suit settlements were often class action securities suits – the settlement amounts were often staggering. (See Tables below.)

Granted, much of these settlements were often covered by D & O liability insurance. But in the years since Enron, judges have sometimes required Defendants to pay a portion of the adjudicated settlement from their individual pockets, notwithstanding the availability of handsome director and officer liability cover. Surely it must be the case that even the tiniest likelihood of being nailed with a gigantic settlement amount – a portion of which might be extracted from your personal assets – would be a sobering and motivating factor in one’s approach to the discharge of fiduciary duty in the boardroom.

                                               Years 2000 - 2004

             Rank                   Corporation                       Settlement Amount

               1.                   Cendant Corporation                 $3.5 billion

               2.                   Citi Bank                                    $2.65 billion

               3.                   Lucent                                       $517 million

               4.                   Bank of America                        $490 million

               5.                   Waste Management                  $457 million

               6.                   Daimler/Chrysler                        $300 million

               7.                   Oxford Health                            $300 million


                Top Seven Law Firms – Settlement Totals for 2003

             Rank                   Law Firm                                    Settlement Amount

                1.         Milberg Weiss Bershad Hynes & Lerach            $2.1 billion

                2.         Bernstein Litowitz Berger & Grossman              $950 million

                3.         Grant & Eisenhofer                                            $611 million

                4.         Goodkind Labaton Rudoff & Sucharow             $551 million

                5.         Barrack Rodos & Bacine                                   $390 million

                6.         Entwistle & Cappucci                                        $311 million

                7.         Chitwood & Harley                                            $303 million


However, the quality of performance is not always primarily about motivation. A highly motivated person may address a novel task in which the criteria for successful performance of the task are unknown.  And even if the task requirements for success are known – the person may not have the skill set or the tools to prosecute the task properly.

It is not necessary to assign a failure of intent to boards that make mediocre or poor decisions.  It is sufficient to acknowledge that the particular type of decisions with which boards are routinely confronted is “impossibly complex” (Harvard Business Review, 1989). Consider the representative decision task for the modern board. Generically expressed, the board is asked to assign human and capital assets to a portfolio of tasks today … in order to address the contemplated needs of a rapidly changing marketplace … at some specified time in the future.  This is, inherently, a crystal ball-gazing exercise.  Within the confederated disciplines referred to as decision science – the technical definition of this task is labeled as a “complex futurity decision characterized by risk and uncertainty.”

 After all, what does a manager, an attorney, an engineer or an accountant know about complex decision making? When the question is raised in a pedestrian context, the answer will often be, “Everything, of course. These accomplished professionals are fastidious and responsible in making complex decisions. They do it all the time.” In contrast, however, if the question is raised from the decision science perspective, it is translated into something like this, “What does the accomplished professional business player, trained in management, law, finance or accounting … know about avoiding stochastic intransitivities or establishing a Pareto–optimal efficient frontier in constructing an array of decision alternatives?”

Nothing, of course. The referenced accomplished professionals have not been trained in behavioral decision theory (the descriptive branch of decision science) or decision analysis (the normative branch of the science).” An attorney will not understand any more about stochastic intransitivity and its importance than an accountant will know about filing a motion in limine.

Without a seat at the table for a decision making professional – the board members – despite their exceptional abilities in their respective professions – have a tough assignment in attempting to establish and comply with a proper decision making process.  This difficulty leaves them vulnerable to fiduciary litigation.

Curiously, however, the task of successfully suing a board for alleged violation of its fiduciary duties is not so easy either. The magnitude of the challenge facing the Plaintiffs’ Bar in a D & O liability complaint emerges from a jurisprudential source. The bench, in an effort to avoid making life in the boardroom too toxic for directors, has promulgated some ground rules that help to protect directors from personal liability except in the most egregious cases of neglect  or  intentional misbehavior.


The primary mechanism of jurisprudential restraint has been the Business Judgment Rule - which is a judicial presumption, in the absence of evidence of fraud or self-dealing, that the bench will assume that the directors acted in good faith and used good business judgement.  Defense counsel must also rebut any evidence that the target decision lacked a rational business purpose or was interpretable as an instance of gross negligence. These exceptions are significant because they imply that – despite the absence of fraud or self-dealing - there is still an articulated jurisprudential standard of acceptable decision making quality. Granted, the standard seems low and is ill-defined – but it is a benchmark for comparison purposes.  The somewhat slippery task for the plaintiffs’ bar is to operationally define those concepts – rational purpose and gross negligence – in ways that keep faith with the spirit of the jurisprudential exceptions.

The invocation of the Business Judgement Rule, arguably, protects directors for some decisions that are irrefutably bad. This willingness to let directors get away with poor performance is the compensatory trade-off that the bench has been willing to make to enhance the likelihood of directors staying on the job and not evacuating boardrooms en masse. It is the type of judgement that jurisprudential bodies are called upon to make.

For some, this threshold is set way too low. For example, University of Connecticut Law Professor Steven Davidoff  recently wrote, “Directors have about the same chance of being held liable for the poor management of a public firm as they have of being struck by lightning.”

He suggests that the courts, especially Delaware, have set “an extraordinarily high standard for finding directors liable for a company’s mismanagement.”  He further notes that “a Delaware court is not going to find them liable no matter how stupid their decisions are,” but will only find them liable “if they intentionally acted wrongfully or were so oblivious that it was essentially the same thing.”

Whether Davidoff is guilty of hyperbole or simply an astute observer of American corporate governance is a distinction we will not investigate here. Regardless, Davidoff’s perceptions of the Bench’s bias in favor of directors is the first reason why winning D & O lawsuits is very difficult.

The second reason for the low success rate of these fiduciary suits against directors is that the plaintiff attack on the formidable elements of the Business Judgement Rule never includes operationally defined terms for rational business purpose or gross negligence.  In some sense, this is an understandable and forgivable error – given the business community’s general lack of awareness of the entire discipline of decision science. With our reference to operational definitions of these gate-keeper terms and without the demonstration of sub-threshold performance cast in the behavioral terms of judgmental and decision making elements – how can the attack be designed and executed?

The third failure of most fiduciary litigation against the Ds & Os has been the practice of framing the suits as duty of care violations rather than loyalty regime violations. As early as 1989, legal scholars were pointing out the conceptual gradient that connects the care and loyalty concepts. Roughly described – if care is generally thought of as a vigilance idea and loyalty is generally thought of as a singular devotion to a party, group or institution – then it is easy to imagine than wholesale violations of vigilance turn chameleon-like into vestiges of loyalty issues. In concrete terms, the chronic failure of a director to show up for board meetings or to prepare for board meeting by reading the agenda materials becomes evidence of misplaced loyalties. To whom or to what is the director allocating his attention when it should be focused on the board duties? By this rendering, extreme cases of low-vigilance may be re-conceptualized as instances of displaced loyalty and, hence - interpretable as loyalty regime violations.


When traditional care regime cases can be recast as loyalty violations – the battle lines can be redrawn heavily in favor of the plaintiff. Consider: with loyalty violations the Defense cannot invoke the formidable Business Judgement Rule. Neither is D & O liability insurance applicable. Two major sources of comfort for the director-defendants have been eviscerated by recasting the suit into loyalty violation terms. 

The question becomes: is the advantage of not having to penetrate the business judgement rule compromised by some feature of the requirements for making a loyalty case? The answer is a firm “maybe.”

The board room decision making and corporate governance experts at FIG have designed a critical pathway to unambiguously identify the magnitude of non-compliance with operationally defined concepts of loyalty.

If you represent a plaintiffs bar firm that is serious about non-frivolous litigation against directors and officers – in service of offering damaged stakeholders a remedy at law – Fiduciary Guaranty may be a helpful resource for your examination.

It is not FIG’s purpose to seek punishment for directors or to petition for damaged shareholders’ recompense. The FIG mission is to facilitate the migration of the corporate governance culture to adoption of a standard of fiduciary decision making that is …

  • congenial with the reengineering of  the corporate governance ecosystem so that the interests of all stakeholders are optimized in a non-zero sum style, 

  • appropriate to the capabilities and tools modern fiduciaries can access and apply, 

  • achievable in methodical, practical ways,  and

  • stimulative of the corporation’s most dynamic value creation capabilities.

  • One way to expedite achievement of the FIG mission is to proliferate the adoption of the ad hoc Decision Audit in board rooms across America. Another way to expedite the mission is for plaintiffs bar firms to more effectively litigate against boards whose fiduciary performance is clearly sub-threshold.