Neglecting To Plan For Disasters Might Lead To Liability For Directors

Wednesday, October 29, 2003

Bruce Blythe, Terri Butler Stivarius, and John Stivarius, Abstracted from: Negligent Failure To Plan: The Next Liability Frontier?, http://

Crisis Management International, Atlanta, GA (BB); and Epstein Becker & Green, Atlanta, GA (TS, JS)

Directors Monthly - Vol. 27, No. 7, Pgs. 10-12

Overview: Warns that directors could face lawsuits alleging their failure to plan for disasters. Explains a liability theory combining negligence and fiduciary duty. Identifies unconvincing excuses for failing to plan.

New kind of liability emerging.
In the wake of the September 11th terrorist attacks and other recent tragedies, corporate directors might soon find themselves defending against a new kind of liability. Bruce Blythe, Terri Butler Stivarius, and John Stivarius proffer the next frontier in corporate liability: the board's negligent-and perhaps even intentional-failure to eliminate or, at the least, lessen the risks of natural and man-made disasters. In addition to terrorist attacks, these events would include workplace violence, industrial accidents, product tampering, and hurricanes, all of which are unpredictable but certainly foreseeable. No reported cases test this innovative legal concept, which applies the common law of negligence in the corporate context.

Negligent failure to plan.
The authors apply to the boardroom the essential elements of a traditional negligence claim-the breach of a legal duty by not employing the standard of care that a reasonably prudent individual would use in comparable circumstances, thereby directly and foreseeably causing damage. The requisite legal duty is the director's fiduciary obligation to the corporation and its shareholders. Each board member is individually liable for breaches that result in shareholders' losses. The business-judgment rule shields directors from liability if they act in good faith and exercise due care, but it might leave them exposed if they neglect to prevent foreseeable disasters or prepare for those that are not preventable. The duty to plan for disasters seems to be a logical extension of an employer's obligations under OSHA and analogous state regulations. In the current environment, filled with mistrust of corporate leadership, the plaintiffs' bar is bound to seize upon the theory that directors are liable for neglecting to exercise due care by planning for disasters. Shareholders could seek damages from directors if, for example, a disaster resulted in a consumers' boycott or enormous payments to victims, which caused the stock price to plummet.

Preparation pays.
Studies show that disaster preparedness can avert harm to a corporation's personnel, finances, and reputation. Companies that fail to plan adequately, the authors scold, might find five common excuses all too familiar. Corporations sued for failing to deal with workplace problems such as harassment, safety risks, and substance abuse have unsuccessfully asserted the following excuses: denial (no problems exist here); reluctance (we cannot divert preparedness resources from the core mission); ignorance (who knew? we never did an analysis of foreseeable risks, internal or external); oblivion (disregarding warning signs, past near misses, and problems experienced by others in the same sector or region); and false reliance (depending on a haphazard or untested plan). Even a superior plan requires continuous updating, since the company's risks are always changing.

Abstracted from Director's Monthly, published by National Association of Corporate Directors, 1828 L Street NW, Suite 801, Washington, DC 20036

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