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 relax some of the 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 performed by journalists appears to have detected illegal corporate actions before the inside 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 having to reveal information about the performance of their compliance programs. The changes in law 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 live up to 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, the Delaware courts will, over time, have more information to help them in assessing whether their approach to the duty to monitor needs a more thorough overhaul.