A recent Delaware Chancery Court decision provides useful guidance to the compliance committee, as well as to the general counsel and the compliance officer, on the types of board/committee conduct (or lack thereof) that could undermine the effectiveness of the compliance program. This is an important consideration given the dedicated resources within DOJ’s Fraud Division that analyze compliance program effectiveness.

On one level, the decision (Reiter v. Fairbank) confirms the long-standing judicial perspective that “bad faith” is required to establish a cause of action for breach of a director’s Caremark compliance plan oversight obligations in a shareholder derivative action. In its decision, the court provides examples of what bad faith conduct constitutes with respect to the oversight obligation—in contrast to what it found to be the good faith response by the defendant’s board. But a heightened pleading standard is not the same as a lowered compliance program oversight standard. There can be consequences to the corporation, and to individual directors, by interpreting regulatory compliance plan effectiveness standards to require only the lowest level of board engagement; the avoidance of bad faith.

Indeed, the compliance oversight conduct of a corporate officer or director can come under scrutiny in ways apart from the derivative environment. Furthermore, it can serve as a powerful boardroom motivation for continued vigorous and fully informed oversight over, and decision-making with respect to, the corporation’s compliance function. For example, it is possible that the DOJ’s compliance program expert or a state attorney general, called upon to review a health system board’s compliance oversight, may be less inclined than the Delaware courts to tolerate inadequate or flawed compliance oversight.

Reiter and similar decisions provide a timely opportunity for the general counsel and the chief compliance officer to team on advising the board’s audit and compliance committee on the most appropriate standard of conduct they should exercise in connection with their oversight of the health system’s compliance program. There is much useful direction from the Delaware courts and other resources on what may, and what may not, constitute appropriate conduct under the circumstances.