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Deborah Post at SaltLaw:

I have always thought that responsibility for bad choices should be shared by those in whom we repose both power and trust with an expectation that they will exercise sound judgment. The idea that the duty of care should be abrogated and replaced by an ethic of self reliance and duty to diversify reverberates through other contract and corporate doctrines as well.

Corporate law scholars and judges like to flirt with liability for directors for lack of care. The idea has some surface appeal: we make most everyone else responsible for their negligence, why not directors? The usual answer comes from Chancellor Allen in Gagliardi v. TriFoods International, 683 A.2d 1049:

Shareholders don't want (or shouldn't rationally want) directors to be risk averse. Shareholders' investment interests, across the full range of their diversifiable equity investments, will be maximized if corporate directors and managers honestly assess risk and reward and accept for the corporation the highest risk adjusted returns available that are above the firm's cost of capital. 

But directors will tend to deviate from this rational acceptance of corporate risk if in authorizing the corporation to undertake a risky investment, the directors must assume some degree of personal risk relating to ex post facto claims of derivative liability for any resulting corporate loss. 

Corporate directors of public companies typically have a very small proportionate ownership interest in their corporations and little or no incentive compensation. Thus, they enjoy (as residual owners) only a very small proportion of any "upside" gains earned by the corporation on risky investment projects. If, however, corporate directors were to be found liable for a corporate loss from a risky project on the ground that the investment was too risky (foolishly risky! stupidly risky! egregiously risky! -- you supply the adverb), their liability would be joint and several for the whole loss (with I suppose a right of contribution). Given the scale of operation of modern public corporations, this stupefying disjunction between risk and reward for corporate directors threatens undesirable effects. Given this disjunction, only a very small probability of director liability based on "negligence", "inattention", "waste", etc., could induce a board to avoid authorizing risky investment projects to any extent! Obviously, it is in the shareholders' economic interest to offer sufficient protection to directors from liability for negligence, etc., to allow directors to conclude that, as a practical matter, there is no risk that, if they act in good faith and meet minimal proceduralist standards of attention, they can face liability as a result of a business loss.

The usual reply to this line of reasoning is that the business judgment rule provides an incentive for excessive risk taking. One might argue that the courts should discourage excessive risk taking through fiduciary law ... perhaps the duty to act in good faith? Chancellor Chandler entertained such a claim last year in In re Citigroup Inc. Shareholder Derivative Litigation, 964 A.2d 106 (Del.Ch. 2009), and the claim did not fare well:

Citigroup was in the business of taking on and managing investment and other business risks. To impose oversight liability on directors for failure to monitor ?excessive? risk would involve courts in conducting hindsight evaluations of decisions at the heart of the business judgment of directors. Oversight duties under Delaware law are not designed to subject directors, even expert directors, to personal liability for failure to predict the future and to properly evaluate business risk.

This is the right answer, both as a matter of doctrine and as a matter of policy. The fact that directors may engage in excessive risk taking merely prompts the next question: which institution is best equipped to police such behavior? Courts, with their limited capacity to evaluate risk and their admitted propensity for hindsight bias? Or markets (shaped by regulation), which define the corporate playing field, then provide incentives for market participants to make good investments on that playing field? Both institutions will make mistakes, so don't compare the virtues of fiduciary law with market failures. Look at them both, warts and all. In my view, we are better off allowing markets to regulate risk taking. 

And it's not a close call.

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