A Landmark Case Shaping The Corporate Sector: Navigating Corporate Governance

1. Introduction

Corporate governance is a combination of rules, processes, and laws. These guidelines control businesses. It encompasses the legal framework and practises that govern the relationships between a company’s management, board of directors, shareholders, and other stakeholders. The board of directors, or corporate executive board, is responsible for creating a framework for corporate governance that best aligns business conduct with corporate objectives. Good corporate governance involves establishing principles of security, transparency, equity, compliance, reliance, and accountability.

In this article, we will explore the evolution of corporate governance and highlight a landmark case that has significantly impacted the corporate sector.

2. Structure of corporate governance

There are three key players in the corporate governance framework given below:

• Board of Directors: The Board of Directors takes crucial decisions to attain long-term business objectives. They are also referred to as “Those Charged With Governance” (TCWG).
• Management: The management is a subset of the BOD led by the Chief Executive Officer (CEO) of the company. The CEO is responsible for business operations, the formulation of strategies, and the evaluation of associated risks.
• Shareholders: The stockholders are investors who put their hard-earned money into the company, anticipating positive returns. They cannot track corporate affairs on a daily basis and therefore rely on the directors. Further, shareholders appoint auditors to dig into the business’s financial affairs and provide an audit report.

3. Principles of corporate governance

The following principles guide firms in developing a good corporate governance framework:

• Accountability: Organisations should define a code of conduct for board members, board committees, such as the audit committee and compensation committee, and senior executives. New individuals joining those ranks must meet those established standards. The board of directors and the CEO are accountable to the shareholders for their actions and their style of governance. At the same time, the management is answerable to the BOD.
• Diversity: The board of directors must maintain a commitment to ensure diversity within corporate governance and the company overall.
• Transparency: The management should disclose complete financial information about the company. All corporate governance policies and procedures should be disclosed to relevant stakeholders. This includes regularly and consistently communicating pertinent information to employees, customers, investors, vendors, and members of the community.
• Fair and equitable treatment: All stakeholders should be treated equally.

Oversight and management : Board members must also possess the skills necessary to review management practices.

• Risk Management: There should be a robust risk management mechanism for handling uncertainties.

4. A landmark case:

4.1 Facts of the case

The Delaware Supreme Court’s Decision in Marchand v. Barnhill (2019): A landmark case that has had a profound impact on corporate governance was the Delaware Supreme Court’s ruling in Marchand v. Barnhill in 2019. The case stemmed from a food contamination incident that caused the death of a shareholder of Blue Bell Creameries, a major ice cream manufacturer in the United States.

The Delaware Supreme Court’s decision in Marchand v. Barnhill clarified directors’ duties to oversee the company’s compliance with legal obligations and risks associated with its business operations. The court held that directors have a duty to implement and monitor systems and controls reasonably designed to detect and address risks related to the company’s central compliance issues.

This ruling emphasised the importance of robust corporate governance practises and highlighted the need for directors to actively engage in risk oversight, particularly in industries prone to significant regulatory risks. It underscored the board’s responsibility to establish a corporate culture that prioritises compliance and risk management, ensuring the safety of consumers, and protecting shareholder value.

4.2 Impact and Evolution

The Marchand v. Barnhill case has had a far-reaching impact on corporate governance practises, encouraging companies to prioritise risk management and compliance oversight. It has prompted boards of directors to reevaluate their responsibilities and actively engage in proactive risk assessment and monitoring.

In response to this ruling, companies have taken steps to strengthen their risk management frameworks, enhance board-level oversight, and establish clearer lines of communication between management and the board. It has prompted a shift in mindset, encouraging directors to adopt a more proactive approach to risk management rather than a purely reactive one.

Moreover, the case has raised awareness among shareholders and the public about the importance of effective corporate governance. It has highlighted the need for increased transparency, accountability, and directorial responsibility, thereby fostering trust and confidence in the corporate sector.

5. Key responsibilities of the board of directors:

A corporation’s business is managed under the board’s oversight. The board also has direct responsibility for certain key matters, including the relationship with the outside auditor and executive compensation. The board’s oversight function encompasses a number of responsibilities, including:

• Approving corporate strategy and monitoring the implementation of strategic plans:The board should have meaningful input into the company’s long-term strategy from development through execution, should approve the company’s strategic plans, and should regularly evaluate the implementation of the plans that are designed to create long-term value. The board should understand the risks inherent in the company’s strategic plans and how those risks are being managed.
• Setting the company’s risk appetite, reviewing and understanding the major risks, and overseeing the risk management processes: The board oversees the process for identifying and managing the significant risks facing the company. The board and senior management should agree on the company’s risk appetite, and the board should be comfortable that the strategic plans are consistent with it. The board should establish a structure for overseeing risk, delegating responsibility to committees, and overseeing the designation of senior management responsible for risk management.
• Focusing on the integrity and clarity of the company’s financial reporting and other disclosures about corporate performance. The board should be satisfied that the company’s financial statements accurately present its financial condition and results of operations, that other disclosures about the company’s performance convey meaningful information about past results as well as future plans, and that the company’s internal controls and procedures have been designed to detect and deter fraudulent activity.
• Allocating capital. The board should have meaningful input and decision-making authority over the company’s capital allocation process and strategy to find the right balance between short-term and long-term economic returns for its shareholders.

• Reviewing, understanding, and overseeing annual operating plans and budgets. The board oversees the annual operating plans and reviews the annual budgets presented by management. The board monitors the implementation of the annual plans and assesses whether they are responsive to changing conditions.
• Reviewing the company’s plans for business resilience. As part of its risk oversight function, the board periodically reviews management’s plans to address business resiliency, including such items as business continuity, physical security, cybersecurity, and crisis management.

6. Implement oversight measures and document risk assessments.

As made clear in Marchand, critical to the defence of any oversight suit is the ability of the board to show its participation in the good faith implementation of reasonable oversight measures and in the reasonable monitoring of significant compliance risks. The following steps are just a few of those that can be taken by company boards to help insulate themselves from such claims:

• Board members should, of course, continue to keep themselves informed on issues of significance to the company or of high risk. Directors should receive regularly scheduled updates from either in-house or outside experts regarding risks in various aspects of corporate affairs.
• The board should establish protocols requiring management to keep the board apprised of compliance practises, incidents, red flags, and risks in a timely manner.
• The board should insist that there be a reasonable system to assure updates and information flow on important issues and risks.
• Delegate to an existing or new committee additional oversight of the occurrence and general topics of major risk areas for the company; memorialise general topics of board discussions on oversight and risks in board minutes;
• Boards should continue to ensure that they have adequate D&O insurance to protect against any potential claims they may face. Companies should interview and work closely with a D&O broker as a trusted advisor to see to it that the right policies are chosen.

7. Importance of corporate governance

Corporate governance ensures that stakeholders are not deprived of their rights. In addition, it facilitates compliance. It initiates the formulation of seamless procedures and practises, ensuring transparency. It limits corruption and other malpractices.

An efficient framework facilitates better risk mitigation; such balanced firms attract more investors. Good governance attracts top talent. Ultimately, a well-run ship reflects better share prices.

8. Conclusion

The evolution of corporate governance has been greatly influenced by landmark cases such as Marchand v. Barnhill. This case served as a wake-up call for companies and directors, emphasising the significance of robust risk management, compliance oversight, and ethical decision-making.

As the corporate landscape continues to evolve, it is imperative for companies to prioritise effective governance mechanisms. Directors must be proactive in identifying and addressing risks, establishing a culture of compliance, and ensuring that stakeholder interests are protected. In order to achieve these purposes and to encourage the success of Delaware corporations, the board must create or approve a reasoned approach to maintaining a reasonable system for causing information to be transmitted to the board concerning material issues for the business of the company and significant risks to that business. If such a reasonable system is created in good faith and monitored in good faith, under Delaware law, the board will be protected from claims of a lack of oversight.

The Marchand v. Barnhill case represents a milestone in the ongoing development of corporate governance, reaffirming the importance of responsible business practises and the critical role that boards of directors play in safeguarding shareholder value and public trust.