As most food company executives and investors know, board members owe a “fiduciary duty” to the corporation that they serve consisting of the “duty of care” and “duty of loyalty.” Generally, more recently a board member’s duties have been expanded and refined to include a “duty of oversight” and a “duty to monitor.” These duties now appear to include the need to adopt “a reasonable board-level system of monitoring and reporting with respect to food safety,” which was characterized as “mission-critical” in the Blue Bell Creameries case.
In allowing claims against the Blue Bell board of directors to proceed beyond the pleading stage, the Court based its decision in part on the fact that “no board-level system of monitoring or reporting on food safety existed.”
Blue Bell had a compliance program which flagged food safety issues. These issues were reported to management, but management never reported these issues to the board. Management only informed the board of food safety issues once Blue Bell issued its first recalls of contaminated product. Blue Bell’s board minutes reflected that there was no in-depth discussion by the board about food safety issues, and upon learning about product recalls, the board ultimately issued a resolution expressing their support of the management team. In regulated industries, like food manufacturing, key compliance issues should be reported and discussed at the board level.
In an even more recent case, Clovis Oncology, the Delaware court reiterated the importance of the Blue Bell case, by noting that:
- When a company operates in an environment where regulatory compliance is mission critical, the board must make a good faith effort to implement an oversight system and then monitor that system by being sensitive to compliance issues intrinsically critical to the company.
- If red flags of non-compliance on mission critical issues are waved before the board, the board cannot choose to ignore it.
While the Clovis board had adopted a board reporting protocol, it had failed to act to address failures of the established safety procedures.
As a result of the Blue Bell and Clovis decisions, food companies’ boards should review carefully their board processes and procedures to ensure that “reasonable compliance system and protocols” are in place with respect to “safety and legal compliance” and other regulatory and business threats that may pose significant risks for their particular company.1
Accordingly, to ensure that food company boards are fulfilling their duties, and that such fulfillment is documented, the board should consider the following:
- Include on each board meeting agenda a “Report on Food Safety” from the appropriate management employee that:
- Reviews the company’s and any contract manufacturers’ procedures and protocols regarding food safety;
- Reports on any food safety incidents and how they were handled and resolved; and
- Reports on food safety training.
- Periodically review third party “best practices” regarding food safety issues.
- Reflect the reporting, discussion and action items in board minutes.
Boards that take steps to become and stay informed of compliance risks, and then apply what they have learned to problems that arise, will protect the organization, themselves, and the organization’s employees and customers from both injuries and liability.