Corporate governance has become an increasingly important issue in recent years,
with many companies facing scrutiny and criticism over their business practices.
The Board of Directors is responsible for overseeing the management of a company
and ensuring that it operates in the best interests of its stakeholders.
However, in recent times, there have been several instances of corporate scams,
where the Board of Directors has been found to have engaged in fraudulent or
unethical practices, resulting in significant harm to the company and its
stakeholders. This research paper examines the powers of the Board of Directors
and the extent of judicial scrutiny and review of these powers in the context of
recent corporate scams.
One of the most notable cases is the Satyam scam
the Board of Directors of Satyam Computer Services was accused of fabricating
the company's accounts and inflating profits. The scam, which came to light in
2009, caused significant losses to investors and employees, and the company's
reputation was severely damaged.
In another case, the IL&FS scam, the Board of Directors of Infrastructure
Leasing & Financial Services (IL&FS) was accused of misusing the company's funds
and indulging in fraudulent activities. The scam, which came to light in 2018,
caused significant damage to the Indian financial system, and several companies
associated with IL&FS defaulted on their payments.
Judicial scrutiny and review of the powers of a board of directors is necessary
to ensure that the board acts in the best interests of the company and its
shareholders. This scrutiny is particularly important when the board exercises
significant decision-making powers, such as those related to corporate strategy,
mergers and acquisitions, executive compensation, and dividend policy.
The board of directors has the responsibility to manage the affairs of the
company and to make decisions that will maximize shareholder value. However, the
board is not infallible, and its decisions may be influenced by personal biases,
conflicts of interest, or lack of information. Therefore, it is essential to
have an external mechanism to ensure that the board is acting in the best
interests of the company and its shareholders.
Law and regulations governing Board of Directors
The powers and responsibilities of a board of directors are typically defined by
the laws and regulations of the jurisdiction in which the company is
incorporated or operates. In the United States, for example, the powers of a
board of directors are typically governed by state corporate law, which varies
from state to state.
One key aspect of the legal framework governing board powers is the fiduciary
duty owed by directors to the company and its shareholders. This duty requires
directors to act in the best interests of the company and its shareholders and
to exercise their powers with care, loyalty, and good faith. This duty is
generally recognized in both common law and statutory law, and violations of the
duty can result in legal liability for directors.
In addition to fiduciary duty, other legal principles and regulations may impact
the powers of a board of directors. For example, securities laws and regulations
may impact the board's ability to make decisions regarding stock offerings or
insider trading. Antitrust laws may impact the board's decisions regarding
mergers and acquisitions. And environmental or labor laws may impact the board's
decisions regarding corporate social responsibility.
Types of Judicial Scrutiny and Review
Judicial scrutiny and review of the powers of a board of directors can take many
forms, including legal challenges, shareholder lawsuits, and regulatory
investigations. Each type of scrutiny has its own characteristics and
implications, as outlined below.
Legal challenges are often initiated by stakeholders, such as
shareholders, who believe that the board of directors has acted improperly or in
violation of the law. Legal challenges can take the form of lawsuits, which may
seek damages or injunctions to prevent the board from taking specific actions.
Examples of legal challenges include claims of breach of fiduciary duty, insider
trading, and securities fraud.
Shareholder lawsuits are a specific type of legal
challenge that is initiated by shareholders who believe that the board of
directors has acted in a manner that harms the interests of shareholders.
Shareholder lawsuits may be brought as class actions, in which multiple
shareholders join to bring a lawsuit against the board. Shareholder lawsuits may
seek damages, changes to corporate governance practices, or other forms of
Regulatory investigations are often initiated by
government agencies, such as the Securities and Exchange Commission (SEC), in
response to allegations of corporate misconduct or violations of the law.
Regulatory investigations may result in fines, sanctions, or other forms of
punishment for the board of directors. They may also result in changes to
corporate governance practices or other reforms.
Impact of judicial scrutiny and review:
Judicial scrutiny and review of the powers of a board of directors can have a
significant impact on corporate governance, both in terms of specific outcomes
and broader effects on corporate culture and practices.
One of the most obvious impacts of judicial scrutiny is the potential for legal
liability and financial penalties. If a board of directors is found to have
acted improperly or in violation of the law, it may be required to pay damages
or fines, which can have a significant impact on the corporation's financial
health and reputation.
However, the impact of judicial scrutiny and review extends beyond legal
liability. Scrutiny can also lead to changes in corporate governance practices
and culture, as well as broader reforms in the industry. For example,
shareholder lawsuits and regulatory investigations can prompt boards of
directors to adopt more rigorous oversight practices, such as independent board
chairs, risk committees, and whistle-blower policies. Scrutiny can also lead to
increased transparency and accountability, as boards are required to provide
more detailed disclosures about their activities and decision-making processes.
- Re Caremark International Inc. Derivative Litigation
In this case, the Delaware Chancery Court held that directors of a corporation
have a duty to monitor the corporation's compliance with legal obligations and
to implement a system of controls to ensure that the corporation is complying.
The case arose out of a derivative lawsuit brought by shareholders of Caremark
International Inc. after the company was fined by the federal government for
Medicare fraud. The plaintiffs alleged that the directors had breached their
duty of loyalty by failing to adequately monitor the company's compliance with
The court held that a board's failure to implement a system of controls to
monitor legal compliance, particularly in a company that operates in a heavily
regulated industry, can constitute a breach of the director's duty of loyalty.
The court also held that a director's liability for a breach of the duty to
monitor is a derivative claim, meaning that it belongs to the corporation and
not to the individual shareholders.
- Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985)
In this case, the Delaware Supreme Court held that the directors of Trans Union
Corporation had breached their fiduciary duties of care and loyalty by approving
a merger with another company without adequately informing themselves of the
value of Trans Union's stock. The board relied on a presentation by the CEO and
did not conduct an independent investigation or seek the advice of financial
The court held that the directors had breached their duty of care by failing to
inform themselves of all material information reasonably available before
approving the merger. The court also held that the directors had breached their
duty of loyalty by approving the merger despite knowing that it was not in the
best interests of the shareholders. The court's decision in this case
established the "duty of informed judgment," which requires directors to inform
themselves fully before making decisions on behalf of the corporation.
One important aspect of judicial scrutiny is the role of the business judgment
rule, which presumes that directors are acting in good faith and in the best
interests of the corporation. However, this presumption is not absolute, and
directors can be held liable for breaching their fiduciary duties if they act in
bad faith, engage in self-dealing, or otherwise act outside the scope of their
authority. As a result, courts play an important role in balancing the interests
of directors, shareholders, and other stakeholders in the corporation.
There is a substantial body of literature on the impact of judicial scrutiny and
review on corporate governance. Some studies suggest that scrutiny can improve
governance by promoting transparency and accountability, increasing the quality
of decision-making, and deterring misconduct by directors and executives. For
example, one study by Bebchuk and Hamdani (2012) found that the threat of
litigation and regulatory enforcement had a positive impact on board
independence and oversight.
However, other studies have highlighted the potential negative effects of
scrutiny on corporate governance. For example, some scholars have argued that
excessive scrutiny can lead to a culture of risk aversion and bureaucratic
decision-making, which can stifle innovation and harm long-term value creation.
Others have raised concerns about the potential for scrutiny to create a
"litigation overhang," in which directors are discouraged from taking bold
actions due to the fear of legal liability.
Judicial scrutiny and review of the powers of the board of directors is a
critical issue in corporate governance that has significant implications for the
functioning and performance of corporations. The legal challenges, shareholder
lawsuits, and regulatory investigations that accompany such scrutiny can lead to
a wide range of outcomes, including increased transparency and accountability,
changes in corporate culture and practices, and legal liability and financial
While there is a substantial body of literature on the impact of judicial
scrutiny and review on corporate governance, there are still many unanswered
questions and areas for further research. One important area for future research
is to examine the impact of scrutiny on the long-term performance of
corporations. While some studies suggest that scrutiny can improve governance
and deter misconduct, it is not yet clear how these effects translate into
sustained value creation for shareholders and other stakeholders.
Overall, the issue of judicial scrutiny and review of the powers of the board of
directors is a complex and multifaceted issue that requires ongoing attention
and research. By continuing to explore the impact of scrutiny on corporate
governance and identifying effective strategies for mitigating the risks
associated with scrutiny, we can help ensure that corporations are able to
create sustained value for all of their stakeholders.
- Bebchuk, L. A., & Hamdani, A. (2012). Vigilant directors and compliance with the corporate opportunity doctrine. Journal of Corporation Law, 37(4), 967-1006.
- Bhagat, S., & Bolton, B. (2008). Corporate governance and firm performance. Journal of Corporate Finance, 14(3), 257-273.
- Coffee Jr, J. C. (2006). The future as history: The prospects for global convergence in corporate governance and its implications. Northwestern University Law Review, 100(2), 599-625.
- Fanto, J. A. (2017). Hedge fund activism and the corporate governance landscape. Journal of Corporation Law, 42(4), 709-736.
- Galanter, M., & Palay, T. (1991). Tournament of lawyers: The transformation of the big law firm. University of Chicago Press.
- re Caremark International Inc. Derivative Litigation, 698 A.2d 959
(Del. Ch. 1996)
- Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985)