Touch Stone Publishers | Board Intelligence | For Tuesday, June 9, 2026
Executive Summary
The Delaware Court of Chancery has held that a board's failure to respond to credible red flags of workplace sexual misconduct can sustain a Caremark oversight claim, and that a CEO who concealed those reports breached his duty of loyalty. For Fortune 500 boards, the duty of oversight now reaches workplace culture, not just financial and regulatory compliance. The defensible posture is to treat culture-risk reporting as a board-level control system before the next audit committee charter review.
The Signal at a Glance
PRIORITY 10 | SILO: Judicial
Chancery extends the duty of oversight to workplace sexual-misconduct risk, and lets a duty-of-loyalty claim against the CEO proceed to discovery.
The Deep Dive
The Signal
In Los Angeles City Employees' Retirement System v. Glenn Sanford, the Delaware Court of Chancery denied motions to dismiss oversight and loyalty claims against directors and officers of eXp World Holdings. The plaintiffs alleged that the company's fiduciaries ignored credible reports of sexual assault and harassment, and that the CEO concealed those reports and retained high-producing agents accused of misconduct because they drove revenue. The court found the allegations reasonably conceivable. (opinion PDF)
The ruling extends the Caremark duty of oversight beyond the financial and regulatory compliance failures that have defined the doctrine since 1996. Workplace culture is now an oversight domain a Delaware court will police.
The Evidence
The opinion was penned by Chancellor Kathaleen St. J. McCormick, Los Angeles City Employees' Retirement System v. Sanford, C.A. No. 2024-0998-KSM (Del. Ch. Jan. 16, 2026). The court applied the two-prong Caremark framework: a fiduciary must establish reasonable information and reporting systems, and must respond in good faith once red flags surface. Nominal or superficial responses were held insufficient.
The loyalty claim against the CEO cleared a higher bar. The court accepted as conceivable that he placed personal financial interests, including equity value and performance-tied compensation, above the corporation's legal and ethical obligations. That distinction matters: loyalty claims grounded in bad faith or concealment are not exculpated by a Section 102(b)(7) charter provision, so the CEO faces potential personal liability and discovery.
The decision was published to the Harvard Law School Forum on Corporate Governance on March 27, 2026, in the Delaware law series, confirming its standing as a precedent practitioners are now briefing to boards. (analysis)
The Strategic Implication
Defensive Risk. The exposed parties are audit committee chairs and lead independent directors at companies where culture-risk reporting does not reach the board, and any officer who learns of credible misconduct and contains it below board level. What breaks is the assumption that culture is a management matter outside Caremark: a board with no escalation pathway for harassment and assault reports now has the same structural gap the doctrine punishes in financial compliance, and a concealing officer loses Section 102(b)(7) protection. The window is the next audit committee charter review and the next 10-K culture and human-capital disclosure cycle, where any gap between internal knowledge and public statements becomes the activist and enforcement vector. The defense move is to re-paper the audit committee or a designated committee charter to give one committee explicit oversight of workplace-misconduct reporting, with a standing escalation path to the full board.
Offensive Advantage. Boards that build a documented culture-risk reporting system ahead of peers convert a liability into a governance credential. A board that can show a functioning escalation pathway, independent investigation protocols, and board-level visibility into misconduct data is positioned to price culture risk in acquisitions, answer activist campaigns from a position of evidence rather than defense, and present a cleaner risk profile to D&O underwriters who are now scrutinizing oversight exposure. The advantage goes to the board that treats this ruling as a prompt to build the control system before a plaintiff or an activist demands it.
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