Oversight failures and independent director liability

Oversight failures and independent director liability | Daily Tribune

An independent director is now required on the board of directors of a publicly listed corporation. Such a director is independent, operating with impartiality and autonomy, and does not owe any loyalty to the controlling shareholders or management.

The Revised Corporation Code mandates that corporations vested with public interest and public companies must ensure that at least 20 percent of their board members are independent directors.

In the landmark case, In re The Boeing Company Derivative Litigation, the Delaware Court of Chancery was faced with a shareholder derivative suit filed against Boeing’s board of directors for alleged oversight failures that contributed to two devastating crashes involving the 737 MAX aircraft in 2018 and 2019.

The tragic incidents claimed the lives of hundreds and prompted intense scrutiny of Boeing’s corporate governance. At the time, Boeing’s board was composed largely of political insiders and financial executives.

The directors moved to dismiss the case, arguing that the plaintiffs failed to show that making a demand on the board would have been futile.

The court, however, denied the motion to dismiss, holding that the plaintiffs had sufficiently maintained that the directors could be held personally liable for their failure to exercise proper oversight.

The court’s findings set a precedent. First, it noted that Boeing’s board lacked a committee with direct responsibility for overseeing aircraft safety.

While the audit committee was nominally responsible for risk management, its charter made no mention of safety, focusing solely on financial risks.

Second, the board failed to regularly allocate time to monitor or even discuss airplane safety.

Notably, the first board meeting after the initial crash was merely optional, and its agenda centered on boosting profitability rather than addressing safety concerns.

Third, the board had no structured reporting system in place to ensure that critical safety information was communicated to them. Although employees warned management about serious issues with the MCAS (Maneuvering Characteristics Augmentation System), these warnings never reached the board’s attention and discussion.

Although this decision was rendered in the United States, rulings of US courts, particularly in the field of commercial law, carry strong persuasive value in the Philippines and are frequently cited with approval in our jurisprudence. They serve as influential references in shaping the interpretation and application of the law, especially in Philippine commercial law.

This decision highlights the importance of active, informed, and engaged board oversight, particularly by independent directors, in managing risks that could materially impact both the company and the public.

Independent directors serve as a check-and-balance within the board, ensuring that decisions are made objectively and that no single group of directors dominates the corporation’s decision-making process and overall governance.

Although independent directors are elected by the shareholders, they have the duty to independently assess corporate performance, executive actions, and major transactions without bias.

Independence does not excuse inaction. While independent directors are not expected to know everything, they are duty-bound to know enough, and to demand more.

Mere compliance with minimum regulatory requirements, or passive attendance at meetings, does not satisfy their obligation.

They must be alert, informed, and courageous enough to ask tough questions, challenge ideas, and ensure that systems of control and oversight are in place; otherwise, they may be held personally liable for corporate acts, especially if these result in substantial injury to the corporation or the public.

[The views and opinions expressed in this article are solely those of the author. This article is for general information and educational purposes, and not offered as, and does not constitute, legal advice or legal opinion.]