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39 Wake Forest L. Rev. 691 (2004)
In Re Caremark: Good Intentions, Unintended Consequences

handle is hein.journals/wflr39 and id is 701 raw text is: IN RE CAREMARK: GOOD INTENTIONS, UNINTENDED CONSEQUENCES Charles M. Elson* Christopher J. Gyves** The board of directors' role in ensuring corporate compliance with applicable law has expanded significantly in the last several years. Under the historic notion of the board of a large enterprise as merely a policy-making entity, as suggested by the Delaware Supreme Court in its now infamous 1963 ruling Graham v. Allis- Chalmers Manufacturing Co.,' the board traditionally had no legal duty to enact a legal compliance program in the absence of certain illegality warning signs. Today, however, the board's responsibilities in this respect are viewed entirely differently. With the creation of the Federal Organizational Sentencing Guidelines (Guidelines), which impose more lenient treatment on companies having compliance manuals and programs, and, more importantly, the Delaware Chancery Court's ruling in In re Caremark International Derivative Litigation,2 which imposed an affirmative duty on a board to create some kind of compliance mechanism, boards that fail to establish effective corporate compliance procedures may face substantial liability. Boards must now act prophylactically to ensure corporate legal probity. Following the recent adoption of amendments to the Guidelines, with their increased emphasis on compliance procedures, it is now a good time to re-examine the theory behind Caremark and its resulting impact on corporate behavior. Despite sound and lofty intentions, the consequences of Caremark have been disappointing. Rather than creating more appropriate behavior throughout corporate America, instead, as the corporate scandals of the last * Edgar S. Woolard, Jr. Chair in Corporate Governance and Director of the John L. Weinberg Center for Corporate Governance, University of Delaware. ** Associate, Corporate & Securities Group of the law firm Womble, Carlyle, Sandridge & Rice, P.L.L.C. 1. 188 A.2d 125 (Del. 1963). 2. 698 A.2d 959 (Del. Ch. 1996).