Good faith and law’s penumbra

Abstract

Corporate managers have a duty of good faith to their corporation and its shareholders. Caremark, establishing a significant component of that duty, requires directors to take sufficient steps to ensure that a corporation does not violate the law, even if violating the law is profitable for the corporation. The duty must therefore be serving another function, that of advancing whatever societal interests motivated the law. If the duty incorporates society’s interests as reflected in law, given that law is admittedly imperfect at capturing those interests, then the logic behind Caremark duties supports an understanding of the duty as encompassing a penumbra that reflects law’s spirit—the concerns that animate law. This Article makes the argument in support of this position, and explains how to understand and articulate the penumbra’s reach. A complementary argument that informs the penumbra's reach is that corporations enjoy societally granted privileges, notably including limited liability, as part of a bargain intended to further societally beneficial risk-taking. Corporations violate the bargain when they exploit those privileges for risk-taking that is societally harmful.

A specific view of the relationship between corporations and the broader society underlies my analysis: one in which corporations have some duty to honor law’s spirit, and that duty is a floor for good corporate citizenship. A competing view is that whatever is not prohibited is permitted: the public interest is government’s responsibility, profitability is the corporation’s, and corporations have no obligations beyond compliance with law’s letter without regard to its spirit. Few hold either view in its pure form. My argument largely relies on the first view; it also suggests an internal disconnect for those who are keenly aware of law’s shortcomings but nevertheless accord law more efficacy than it has to promote societal interests.