A Lapse in Safety Can Lead to Lawsuits for Directors and Officers. Boeing’s Board Learned That Firsthand.

In a precedent-setting case, Boeing's Board of Directors reached a $225 million settlement in response to Caremark claims related to the tragic crashes of two 737 Max jetliners. The implications extend beyond the aerospace giant, serving as a stark reminder to board members across industries about the potential consequences of neglecting risk oversight.

The Delaware Court of Chancery's decision in the case of "In re The Boeing Company Derivative Litigation" highlighted the critical role of board oversight in monitoring "mission critical" safety risks. Shareholder plaintiffs alleged that Boeing's directors failed to adequately monitor aircraft safety, leading to the crashes, and neglected to implement proper oversight procedures.

Boeing's $225 million settlement underscores the real and significant consequences directors face when they fall short in overseeing mission-critical safety risks. This landmark case challenges the traditional notion that risk management is solely the responsibility of management and emphasizes the shared accountability of board members.

The court's findings revealed that Boeing's Audit Committee, while responsible for risk oversight, did not have a specific mandate to monitor airplane safety. The board's failure to discuss and address airplane safety issues, coupled with the absence of established processes for reporting "red flags," formed the basis of the Caremark claims.

The court's decision, drawing from the "Caremark International Inc. Derivative Litigation," established that directors may be held liable for a "sustained or systematic failure" in exercising oversight. This failure includes the complete absence of a reporting system for "mission critical" risks or the failure to monitor an established system, especially if directors were aware of and ignored warning signs.

In the Boeing case, the court highlighted the board's failure to prioritize safety oversight during the development of the 737 MAX plane. Rather than inquiring about product safety, the board's primary focus was on the rapid and cost-effective development of the aircraft. The board delegated extensive authority to the CEO without establishing robust safety oversight at the highest corporate level.

The ruling serves as a wake-up call for boards to proactively engage in risk oversight and prioritize safety, especially in industries where safety is paramount. Directors must make good faith efforts to implement and monitor effective risk oversight systems. The court emphasized that occasional, discretionary communications that are not safety-centric are insufficient, and boards must actively seek information and engage when safety concerns are raised.

Boeing's settlement and the court's decision signal a shift in the legal landscape regarding director and officer liability. Boards facing traumatic events due to safety lapses are likely to be scrutinized, and shareholders and creditors may pursue D&O claims for financial losses. The key takeaway is clear: in times of crisis, directors must promptly and actively engage in risk management to protect both the company and themselves from potential liability.