Several people have inquired about this W$J editorial on the Disney case, so I thought I would take the opportunity to explain more fully here. Here is the last paragraph of the editorial, if you are having trouble with access:

A director's job is to decide what's best for investors, not what's most risk-averse. Disney's shareholders had proper recourse, says Gordon Smith, a professor of securities law at the University of Wisconsin Law School who has followed the case, "but it's not ex post in suing directors for bad decisions. It's ex ante in getting good directors to make the decisions." We're glad Judge Chandler agrees.

Chancellor Chandler expressed the same sentiment in this way: "The redress for failures that arise from faithful management must come from the markets … and not from this Court." In corporate governance circles, the word "markets" traditionally has been limited to the buying and selling of shares, including via hostile takeovers. Over the past decade, however, increasing activism by pension funds and other institutional investors has expanded the menu of market mechanisms.

In my view, one lesson of Disney and similar corporate governance failures is that shareholders should be more focused on board composition than they are now. The SEC's failed director nomination rule was a ham-handed effort at facilitating shareholder participation in board composition, but even without any rule changes, much can be done. Perhaps the Disney case will serve as a reminder that fixing problems after they have occurred is no substitute for electing competent directors.

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