In this previous post here, I discussed the recent case of Lingis v. Motorola. However, I left the most interesting part of the case (IMHO) for this discussion, and that has to do with the plaintiffs' claims against the directors and what the district court had to say about the duty to monitor.
In another previous post here discussing the whole issue of directors and their fiduciary status under ERISA, I discussed how, when directors have the duty to appoint other fiduciaries, they are then left with an ongoing "monitoring duty" under ERISA which is a more limited duty related to overseeing the fiduciaries they appoint. The court in Lingis wrestled with the extent of this monitoring duty and its conclusions are worth noting. While the court said at the outset that the 404(c) defense was good against Count III of the complaint (which was leveled against the directors and said that they had failed, among other things, to monitor the fiduciary/committee members that were serving under the plan) the court then went on in dicta to give its views on the duty to monitor.
The plaintiffs had argued that the directors' duty to monitor entailed monitoring the actual stock fund and whether the stock continued to be a "prudent investment." However, the court was not willing to carry the duty to monitor that far:
The Department of Labor regulation cited above stated that fiduciaries can comply with the duty to monitor by reviewing the fiduciaries’ performance “at reasonable intervals.” 29 C.F.R. § 2509.75-8 (FR-17). Beyond this review, as the Seventh Circuit has stated, one with the authority to appoint and remove fiduciaries is “not obligated to examine every action taken by [the fiduciary].” Leigh, 727 F.2d at 135. Members of the Profit Sharing Committee of Motorola were elected to one-year terms during the class period, a process that allowed for an annual review of the Committee members’ performances. (Defs.’ 56.1 ¶¶ 33-34.) Although Plaintiffs have cited the testimony of a number of Motorola directors that they did not perform any direct monitoring of the Plan, Plaintiffs have not directly challenged the contention that one-year terms provides for a systematic monitoring mechanism on at least an annual basis. In addition, the Board arranged for its external auditor, KPMG, to review the performance of the Plan and report on anything out of the ordinary. (Id. ¶ 42.) (Emphasis added.)
Thus, the court's opinion was that the duty to monitor in this case would have been satisfied by the fact that the committee members had to be reappointed every year (which in the court's view would have necessarily involved an assessment process) and that the plan was audited by an external auditor every year as well. In fact, to hold otherwise, the court indicated, would undermine the general practice that corporate boards have of delegating various responsibilities to "specialized committees":
Here, however, members of the Board who were tasked with appointing—and, if necessary, removing—members of the Committee were not required to monitor the prudence of the individual investments offered under the Plan. Such a broad duty to monitor would undermine the entire rationale of creating a specialized committee tasked with determining what investments should be offered under the Plan. Plaintiffs effectively suggest that the entire board of one of the world’s largest telecommunications company was required not only to monitor the competence and overall performance of its 401(k) committee, but also to monitor the committee’s individual decisions. Plaintiffs’ proposed rule would defeat the efficiency gains corporate boards routinely achieve by delegating primary responsibility for particular functions to specialized committees. See generally ABA, Corporate Director’s Guidebook, Third Edition, 56 BUS. LAW. 1571, 1596-99 (2001). ERISA does not require such a result. 29 U.S.C. § 1002(21)(A) (persons are only fiduciaries “to the extent” that they exercise control over the plan). (Emphasis added.)
Conclusion: The court in Lingis was willing to give the directors "the benefit of the doubt" when it came to whether or not they were regularly assessing the performance of the committee members due to the fact that the committee members were only elected to one-year terms. The court held that this meant the directors had a "systematic monitoring system" in place which, when coupled with the annual audit conducted by an independent auditor, would have been enough to show that the directors had fulfilled their monitoring duty under ERISA. While attorneys who regularly advise directors in this area would likely not consider the system to be a "best practice" to emulate (without some improvement), it was certainly enough, in at least one court's view, to satisfy the duty to monitor under ERISA.
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