Max Oversight Duties: How Boeing Signifies a Shift in Corporate Law

In September 2021, the Boeing 737 Max debacle turned into an important moment in corporate law. A Delaware court allowed a derivative lawsuit brought by Boeing shareholders to proceed, based on the theory that Boeing’s directors breached their oversight duties by not doing enough to monitor, prevent, and react to fatal airplane safety issues. In a new essay, I explore what the Boeing decision means for director oversight duties and use it to discuss broader trends in corporate law.

Boeing signifies and puts an exclamation mark on a new era of heightened oversight duties (dubbed Caremark duties, after Delaware’s leading precedent). Corporate law courts are increasingly willing to designate certain compliance risks as “mission critical,” thereby activating enhanced scrutiny. Following the 2019 Marchand decision (which was the first in a line of recent successful Caremark claims), Boeing designates product safety risks as “mission critical” for manufacturers operating in regulated industries (read: practically all industries). In fact, Boeing arguably goes beyond Marchand by applying the mission critical designation even in the context of giant companies. Marchand (and Clovis, which was the second in the chain of successful Caremark cases) invoked mission critical compliance in the context of “monoline” (single-product), smaller companies. Directors in giant companies, by contrast, have historically faced a lower prospect of oversight liability. In the prior precedent of Allis-Chalmers, Delaware’s Supreme Court based its refusal to impose liability on the presumed inability to monitor misconduct in massive corporations. In companies such as Allis-Chalmers (with over 30,000 employees and 24 plants), the inherent complexity and decentralized decision-making processes make it impracticable to expect directors to know when company employees engage in misconduct, or so the court implied. Boeing is much larger (with about 140,000 employees), yet the court still applied the mission critical designation, suggesting that size is no longer a barrier for enhanced scrutiny of board oversight.

Following Boeing, one could argue that practically all directors of manufacturing companies are operating in or around the mission critical zone. Boeing also illustrates just how enhanced the scrutiny is once a board is in this zone, in the following two ways: (1) scrutinizing directors not just for what they knew but also for what they should have known; and (2) scrutinizing directors not just for doing nothing but also for not doing enough.

Boeing further illustrates the second pillar of this new Caremark era, namely, increased willingness to grant outside shareholders access to internal company documents in order to investigate potential failure-of-oversight claims. Shareholders have always enjoyed a qualified right to inspect their company’s “books and records,” nestled in Delaware’s Section 220. But in recent years the courts have expanded their interpretation of Section 220’s requirements, so that they now order provision of documents in more cases and order provision of more types of documents. From this vantage point, the most important part of the Boeing decision is footnote 1. Vice Chancellor Zurn tells us there that much of the case rests on a prior Section 220 request, which provided plaintiffs with access to over 44,000 internal documents containing 630,000 pages about Boeing’s oversight of airplane safety. Such richness of detail allows outside shareholders to plead with particularity facts about what corporate insiders knew, when they knew it, and what they did or did not do to address problems. Armed with such a powerful pre-filing discovery tool, plaintiffs these days are more likely to be able to show that a board never even discussed a critical compliance issue, or that the board was notified of a critical issue yet failed to make efforts to remedy it.

The combination of enhanced scrutiny and greater inspection rights allows shareholders to regularly overcome what once seemed like an insuperable pleading hurdle in oversight cases. The chain of recent successful Caremark claims is therefore a trend, and Boeing signals that the trend is only accelerating.

Boeing also illustrates how corporate law guides behavior not just directly, through legal sanctions, but also (and indeed more so) indirectly, through shaping norms and reputations in the business community. Boeing did not end in a verdict in favor of the plaintiffs; it was instead settled quickly after the motion to dismiss, with the insurance picking up the tab. Still, the case created significant changes in the advice that lawyers give their director clients and in the volume and tone of media coverage, which in turn created reputational fallouts.

More generally, one could argue that Boeing signifies a broader shift in corporate law and how it treats societal interests (cue the “ESG” and “Corporate Purpose” buzzwords). Unlike past Caremark cases that focused on scrutinizing compliance with regulations meant to protect investors (such as financial reporting), current successful Caremark cases scrutinize compliance with regulations meant to protect broad societal interests (such as product safety). Boeing, for example, faults directors for discussing operational and design issues prior to the crashes only in terms of meeting benchmarks for quick entry to market and for discussing safety issues after the crashes only in terms of restoring the company’s profitability and image. In other words, Boeing faults directors for putting short-term shareholder returns ahead of consumer safety.

My essay then evaluates the desirability of the Boeing development. In some areas, the Boeing development may risk straying too far from well-accepted Delaware principles and create perverse incentives for directors. My essay highlights four aspects worth worrying about. The Boeing development could potentially (1) remove some self-imposed guards against judicial-hindsight bias, (2) discourage investments in subsequent remedial measures, (3) create perverse incentives for boards to be overly confrontational with management once crisis hits, and (4) too readily let corporate officers off the hook.

Still, overall, the revamped approach to oversight duties that Boeing signifies seems desirable, as it holds the potential to balance the flaws of other enforcement mechanisms. Pertinently, the new Caremark era can mitigate the tendency toward willful blindness. Corporate directors have strong incentives to remain ignorant about decisions that prioritize profits over safety or skirt regulatory requirements more generally. Prioritizing profits is good for directors who receive substantial stock-based compensation. And remaining ignorant about how profits were obtained is good for directors’ ability to maintain plausible deniability and escape accountability. The new mode of oversight-duties litigation, as illustrated in Boeing, counters these dynamics by emphasizing culpable ignorance (faulting directors for what they should have known) and proper documentation (creating incentives to ensure information flows up the corporate hierarchy).

All in all, Boeing puts a final stamp of approval on and further extends the trend that started in Marchand of holding directors accountable for compliance failures. With mounting regulatory requirements and societal demands, and dozens of billions of dollars spent on internal compliance programs, it is crucial to get corporate compliance right. Yet until recently, corporate law played a surprisingly limited role in compliance. As Boeing decidedly shows, this is no longer the case.

This post comes to us from Roy Shapira, professor of law at Reichman University. It is based on his forthcoming article, “Max Oversight Duties: How Boeing Signifies a Shift in Corporate Law,” forthcoming in the Journal of Corporation Law and available here.