Magazine article Risk Management

Technology and the Reasonable Director. (Executive Tech Accountability)

Magazine article Risk Management

Technology and the Reasonable Director. (Executive Tech Accountability)

Article excerpt

"Today, the power to create value critically depends upon [a business'] knowledge or information and intellectual property in it; on know how and a trained workforce; on brand identification; on business systems and information networks that sustain a firm's ability to create new value; and, finally, on legal forms of organization and governance that sustain efficient production."

These comments were made by William Allen, director of the New York University Center for Law and Business (and from 1985 through June 1997, chancellor of the Delaware Court of Chancery), on the occasion of the Centennial of the Delaware General Corporation Law in 1999, which gave rise to the incorporation of so many of America's leading companies in this state. His words highlight the role of technology for today's directors and officers, a role of importance that brings with it the potential for new realms of liability.

If information technology is the most valuable asset of a corporation, it is not surprising that senior management executives of many large companies, universities and public entities consider network security to be a major concern. But how many of them really know what is being done to protect their organizations' assets?

While executives may rely on a large staff of technology specialists, they often do not sufficiently understand the processes and systems they oversee. Consequently, they may find themselves legally liable when their companies suffer network security breaches or fail to deliver on technologically oriented products or services.

Pleading Ignorance

In the United States, the duties of officers and directors are defined by both state and federal law. While state laws differ, the basic precepts can be found in Delaware corporate law cases such as In re: Caremark, a seminal case of the past decade, and Smith v. VanGorkom, among others.

The Delaware courts note that: "Director liability for [failure to detect illegal actions] may arise (1) from a board decision that resulted in a loss because the decision was ill-advised, or (2) from `an unconsidered failure of the board to act in circumstances in which due attention would, arguably, have prevented the loss.'"

Further, when director liability is predicated upon ignorance of activities, the court has decreed that "only a sustained or systematic failure of the board to exercise oversight--such as an utter failure to attempt to assure a reasonable information and reporting system exists--will establish the lack of good faith that is a necessary condition to liability."

So, is the act of simply listening to the technology staff proof that there has not been an "utter failure" in establishing correct reporting relationships? Perhaps not.

At the very least, the director will be held to the standard of a reasonable person in the same position. And, while this "reasonable person" may be illusory, the amount of information available on network security issues, for example, is not.

Getting Informed

It can be assumed that the reasonable director does not read Nando Times or Silicon Valley News. The same director, however, would almost certainly find The New York Times, The Wall Street Journal, The Economist, The Chicago Tribune, The Los Angeles Times, Time, Newsweek and Forbes readily available, if not required reading. The major wire services also provide content to many publications in smaller markets. All these sources have warned of the danger of network security breaches, viruses and the damage such events can cause to business.

The director should at least evince an interest in current events. Again, this does not necessarily mean following the daily online reports by CNET or GigaLaw, but whose influence should be accepted as reasonable? The FBI, the President of the United States, executives of major corporations or former Delaware Chancery court justices who now head major business schools? …

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