US: Delaware Court Recognizes Duty of Oversight for Corporate Officers, Including in Respect of ESG Issues

On January 26, 2023, the Delaware Chancery Court issued a landmark decision in In re McDonald’s Corporation Stockholder Derivative Litigation, recognizing a fiduciary duty of oversight for corporate officers which could extend to oversight over ESG issues.  In this case, shareholders filed a derivative suit against the company’s former head of human resources, alleging that he breached his fiduciary duty of oversight by ignoring a culture of sexual harassment and misconduct within the company and by failing to appropriately address sexual harassment claims during his tenure.  

Expanding on Caremark

The opinion expands on the previous Delaware decision in In re Caremark International Inc. Derivative Litigation, which held that corporate directors owe a duty of oversight to: (1) make a good faith effort to develop an information system that manages and tracks reports within the company; and (2) address “red flags” within the established information system.  The McDonald's Court clarified that the Caremark duty also applies, “if not to a greater degree,” to corporate officers given that they are responsible for managing day-to-day operations and are often in a better position to monitor red flags as required by Caremark.  

The Court clarified that the scope of the duty of oversight is context-specific and different for each executive.  For example, a CEO’s position encompasses company-wide responsibilities covering a variety of fields and thus, the duty of oversight could be applied more expansively.  In contrast, another executive’s authority and responsibility may cover only a specific area; thus, their oversight duty would apply only within that area. The Court additionally highlighted that while an officer’s oversight duty to address and report red flags is typically area-specific, there may be circumstances that require an officer to report an “egregious red flag” even outside the officer’s area of responsibility (without specifying what those circumstances may be).  And the Court also flagged that the defendant’s own sexual harassment in the instant case could trigger a breach of his fiduciary duty of loyalty. 

ESG Implications: A New Frontier in Liability?

The McDonald’s decision potentially signals the increasing receptiveness of Delaware courts to Caremark-style shareholder suits premised on ESG issues, against both companies and individual directors or officers.  

Companies should monitor these developments closely and should consider: (1) bolstering their systems for reporting, monitoring, and addressing red flags relating to ESG issues; and (2) reviewing current employment agreements and D&O insurance coverage for both directors and officers.