The Management Friendly Nature of Delaware Courts: Of Boards, Ostriches, and the Absence of a Duty to Create a “Better” Reporting System (Part 3)
We are discussing In re General Motors Co. Derivative Litigation, a recent case in the Chancery Court holding that directors had no obligation to ensure that a reporting system was sufficiently robust to ensure that certain vehicle safety issues were reported to the board prior to 2014.
Although allegedly percolating within the GM bureaucracy, the safety issues with respect to the faulty ignition switch did not arrive at the board until sometime in 2014.
The governance structure, therefore, was not sufficient to ensure that this type of information was elevated to the board. With respect to the governance and reporting at GM, Plaintiffs alleged that in 2010 the Board created a risk committee. The Charter provided that the Committee would “review internal systems of formal and informal communication across business units and control functions to encourage the prompt and coherent flow of risk-related information and, as needed, escalation of information to management (and to the Committee and Board as appropriate).”
The Board also created the position of chief risk officer (“CRO”). The CRO was to report to the risk committee. Approximately a year later, however, the position of CRO were eliminated and the responsibilities transferred to the General Auditor. In 2012, the risk committee was eliminated and oversight transferred to the audit committee.
An internal report described the board process with respect to the reporting of vehicle safety related issues.
- "no single committee of the Board was responsible for all vehicle safety-related issues,” and that “the Board of Directors was not informed of any problem posed by the Cobalt ignition switch until February 2014. Moreover, “the system put in place by the Board did not require that serious defects detected by GM's legal department, its engineering department, consumer protection organization, or law enforcement agencies be reported to the Board.” [The report author] concluded that the Board “did not discuss individual safety issues or individual recalls except in rare circumstances,” though it did receive “a wide variety of reports,” and that the litigation reports to the Board did not mention ignition switch or airbag issues.
Plaintiffs asserted, therefore, that the report "describes GM's 'phenomenon of avoiding responsibility,' embodied in the so-called 'GM salute,' which involved 'a crossing of the arms and pointing outwards towards others, indicating that the responsibility belongs to someone else, not me.'”
For primary materials in this case, go to the DU Corporate Governance web site.