Like the Chancery Court, the Supreme Court in Disney distinguished between conduct that violated the duty of care--for which directors were not liable--and conduct that fell below corporate best practices. And both courts agreed that Disney directors engaged in actions that failed to meet the courts' formulations of corporate best practices. I intuitively understand the distinction between conduct that satisfies due care and conduct consistent with corporate best practices--after all, when imposing liability we cannot expect directors' and officers' conduct to be the "best" or perfect. Given this distinction, I wonder what the point is in pinpointing these best practices. Both courts suggest that all directors and officers should use the best practices identified in the opinions as a guide for their own behavior. But why should anyone expect that directors and officers will follow that guide when there are apparently no sanctions for their failure to do so? Indeed, if due care is judged according to a "we don't expect perfection/nobody's perfect" standard, then not only does breaching the standard seem virtually impossible, but also it seems that engaging in behavior that satisfies "best practices" is an option that most corporate actors are free to ignore. Thus, I find myself asking, what is the point in pinpointing aspirational standards that have no connection to the conduct in which we realistically expect directors and officers to engage? Or to put it differently, how do best practices standards help us determine conduct that violates the duty of care? In this regard, I find the distinction frustrating and unhelpful, except to the extent that it suggests that all corporate conduct will satisfy the duty of care because that duty does not require directors and officers to be on their "best" behavior.
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1. Posted by Gordon Smith on June 11, 2006 @ 14:56 | Permalink
Lisa, This issue is the focus of one of my article, which you can download here. I have often wished that I had given that article a better title. No one reads it, but I think the discussion of bifurcated stanards is pretty good. And I still believe that the drafters of the MBCA made hash of them.
2. Posted by Jake on June 11, 2006 @ 15:43 | Permalink
Aspirational standards do not lack value and, over time, often become law. Losing sight of aspirational standards for corporate management would reduce the subject to the sort of Hobbesian corporate regime espoused by Prof. Ribstein or his ideological predecessor, Henry Manne.
3. Posted by Christine on June 11, 2006 @ 16:50 | Permalink
Lisa, when we discussed the trial court opinion in class (which also emphasized that the directors' actions did not live up to best practices), the one takeaway lesson that I mention for practicing attorneys is that best practices let you avoid a trial. Best practices get you out on a motion to dismiss, but sloppiness may cost you the expense of a trial. After the Supreme Court has blessed sloppiness, I'm not sure if that even holds true. But a little effort, or at least formalism, from directors at the outset can save a lot of time and money.
4. Posted by Elizabeth Nowicki on June 11, 2006 @ 17:42 | Permalink
"But why should anyone expect that directors and officers will follow that guide when there are apparently no sanctions for their failure to do so?"
That is a beautiful question.
Great post, btw.
5. Posted by Bill Sjostrom on June 11, 2006 @ 20:20 | Permalink
There may not be any legal sanctions for failure to follow best practices, but certainly in many situations there are market sanctions, e.g., higher cost of capital.
6. Posted by Kate Litvak on June 11, 2006 @ 22:50 | Permalink
Re: why anyone would exert effort if there are no legal sanctions for failure to do so.
What’s next, an argument against academic tenure?