The following text is from the opinion of Gagliardi v. Trifoods International, Inc., delivered by Chancellor William T. Allen:

“I start with what I take to be an elementary precepts of corporate law: in the absence of facts showing self-dealing or improper motive, a corporate officer or director is not legally responsible to the corporation for losses that may be suffered as a result of a decision that an officer made or that directors authorized in good faith.

“… Obviously, it is in the shareholders’ economic interest to offer suffcient protection to directors from liability for negligence, etc., to allow directors to conclude that, as a practical matter, there is no risk that, if they act in good faith and meet minimal proceduralist standards of attention, they can face liability as as rsult of a business loss.”

What exactly is the shareholders’ economic interest in shielding directors from negligence (practically all negligence you can imagine)? Isn’t it the shareholders’ economic interest to motivate managers to reduce negligent behaviors? One may argue that if managers are legally obliged to avoid negligent behaviors, they will choose risk-averse management style which would damage shareholder’s interest. BUT no social science has proved such result yet. Plus, shareholders are theoretically still able to fire those risk-averse managers, therefore managers may not do so.

The shareholders’ economic interest is a myth. When a court is telling the shareholder that the court will rule for the manager who harmed him for his economic interest, it is not only claiming that the shareholder is a fool, but also that there is a myth about his own economic interest–and DON’T ask any more.