Maui Wildfire Lawsuits Could Spark Calls For Greater Director Liability

The city of Lahaina in Maui Hawaii before the wildfires.
Shareholders want Hawaiian Electric Company directors held personally accountable for the 2023 wildfires. Here's what boards should consider in the face of these lawsuits.

The series of lawsuits to emerge from the Maui wildfires of 2023 are an indication that some shareholder groups are more willing now than in the past to hold corporate board members personally liable for damages when companies are involved in crisis situations. Many of these lawsuits are different from typical shareholder lawsuits seeking damages for corporate failures in that they argue that key executives and board members of the Hawaiian Electric Companies should be made to pay tens of millions of dollars of their personal fortunes to victims of the fires which killed more than 100 people, destroyed more than 2,200 structures and resulted in more than $5.5 billion in damages. If any of these lawsuits are successful, they would raise the level of responsibility corporate directors shoulder to new levels.

In the past, corporate directors have had salary and stock options clawed back because of poor business performance or misconduct. However, this case involves wildfires, which are generally seen as a natural disaster, so why would shareholders push for personal liability and personal damages?  The lawsuits are asking that executives and directors return some compensation to the company and pay damages that will contribute to monies that the company will likely pay victims of the disaster.

According to news reports, shareholder complaints allege that Hawaiian Electric Company officials were aware that the energy system was vulnerable to high winds, but failed to implement upgrades and had no plan to shut off power in an emergency. Apparently, they want directors held accountable for those failures, primarily because so many deaths and such devastating destruction were involved. Company lawyers have defended Hawaiian utility executives and directors by claiming that “officers and directors acted entirely properly, faithfully discharged their fiduciary duties and truthfully disclosed information about HEI’s safety and wildfire mitigation efforts.”

Corporate board members will no doubt want to pay attention to see what happens with these lawsuits. The following are issues directors might want to consider:

Is seeking legal damages from corporate directors for a wider array of business failures going to become a trend? The shareholder lawsuits associated with the Maui wildfires appear to be an attempt to hold directors more accountable. This indicates that the standards for holding directors accountable have increased. Even if the lawsuits do not find directors personally liable for the deaths and destruction from the wildfires, the fact that it is being considered sends a message. Asking that directors be held accountable with their personal wealth adds a new level of risk to making business decisions. Whether such accountability is justified or not is a subject that will spark tremendous debate among corporate governance professionals. This is a potential trend that should be monitored.

How effective is your board at correcting potential vulnerabilities in critical systems? A very sensitive subject for boards has become more critical in the current environment of ever-expanding business risks. Many risks from Artificial Intelligence adoption haven’t even been identified yet, but boards will be held accountable if a company experiences a material financial setback because of AI. Boards are also asked to make sure systems are upgraded to deal with cybersecurity risks that multiply each year and they are also expected to maintain quality control at the highest levels. Corporate boards must review their policies and procedures for spotting and correcting vulnerabilities in business operations regularly, or suffer the consequences. Self-evaluation in this area could save the company (and the board) from lawsuits.

What will happen if your board is hit with a similar shareholder lawsuit? Generally, once one type of shareholder lawsuit is filed, similar lawsuits at other companies are a strong possibility. Any company that might have its operations significantly disrupted by risks from natural disasters might want to consider what course of action the company might take if shareholders attempted to blame the board for damages that might have occurred.  Considering how you might handle such a lawsuit should stimulate conversations about the company’s readiness to deal with disasters.

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