Minor Meyers’s paper on the decisions of special litigation committees is a welcome and timely edition to recent discussions of the role of independent directors in contemporary corporate governance.  While I believe that independent directors have been oversold as a cure for corporate governance ills, Minor’s research suggests that at least with respect to special litigation committees, independent directors may be operating as intended, or at least not conducting mere “show trials” to exonerate their accused colleagues.

Pity the independent director.  So much is expected, yet they remain suspected.  While the role of director independence has perhaps been undertheorized (as suggested by Glom guest blogger Donald Clarke), some empirical research also suggests that director independence has little or no positive effect on firm performance (see, e.g., Bhagat and Black’s article “The Non-Correlation Between Board Independence and Long-Term Firm Performance”).  Further, social scientists tell us that a truly disinterested or independent director is difficult, if not impossible, to find.  I was reminded of this in a conference last week as I listened to Antony Page present his paper “Unconscious Bias and the Limits of Director Independence” (forthcoming, U. Ill. L. Rev.).  Antony gives a number of reasons, gleaned from various behavioral studies, which create suspicion that independent directors deserve the level of trust afforded them by corporate law. 

Minor’s paper adds to this debate by empirically evaluating the decisions of special litigation committees.  Here Minor finds some fertile, unexplored ground for research in SEC filings reporting on special litigation committees.  Contrary to the suspicion that special litigation committees routinely dismiss derivative claims, Minor finds that while the majority (60%) of claims are initially dismissed, the SLC settles approximately 30% of claims and decides to pursue the litigation in 10% of the cases.  While I suspect the relatively small percentage of pursued claims will not eliminate suspicion of independent director “capture”, Minor can reliably state that the SLC is not merely a veneer, as some have claimed.  Courts’ treatment of the SLC’s motion to dismiss is also largely positive, with courts granting the motion to dismiss nearly two-thirds of the time. 

I have no expertise that would allow me to address the methodological aspects of Minor’s paper—Christine has wisely included others in this responding group who can address such issues much better.  Still, I have a couple of questions about the reliability and completeness of the data.  As Minor acknowledges, SEC disclosures on issues such as SLCs are far from uniform.  While Minor has addressed this issue in the paper to some degree (in footnote 41, in particular), it seems that one would find the number of dismissed suits underrepresented in the total because the company found the suit immaterial or because of the variations in the way the litigation was described.  Conversely, the number of settled and pursued claims might tend to be well reported, especially in cases where the company is attempting to provide bona fides for a new regime (for instance, in cases where prior directors were asleep at the switch, the company may be quite deliberate in disclosing how such problems were addressed in an effort to bolster investor confidence).  Minor mentions that 84% of the companies in reported court cases also disclosed such information to the SEC; however, firms that settle are not likely to report (only 2 of 29 did so), and if settlements are not disclosed (because they are immaterial) we would not capture the outcomes for these firms under either disclosure outlet.

Importantly, also, the disclosures also will not provide reliable information on the settlements.  Minor also anticipates this concern, acknowledging that it is “impossible to distinguish between a fig-leaf settlement and a good-faith settlement.”  To paraphrase Hyman Roth, this is the data we’ve chosen, and Minor does very important and helpful analysis of it.  To be sure, though, one would like to get the whole story on the issue of settlements.  As a reflection of the larger issue, the goal with settlements is to divine whether the SLC is truly functioning in good faith, or whether the decision to settle, and the settlement itself, is just an adornment—a fig leaf.  Apart from the SEC filings and case reports (with case reports’ paucity of settlement disclosures), perhaps the only way to get at such information is through the bar.  Trying to analyze settlements through interviews with the bar 1) is its own large project, 2) would likely be imprecise and non-verifiable, and 3) would recall the good will of a small group of firms that may not be willing or even, for confidentiality reasons, to discuss settlement outcomes, even in generalities.  While such a project may not be feasible, I would think that it would be useful (if it has not already been done) to check in with a few experienced members of the Delaware bar to get their perceptions of the results from the data that is available.  Do the numbers seem accurate, based on their experience (in other words, do the disclosures capture the reality)?  What is their feel for settlements?  Good faith?  Fig leaf?  To be clear, I am not recommending anything drastic such as adding in a section or even a lengthy footnote with the results of such discussions.  Instead, I see it as merely a low-cost means of checking for issues that may not be apparent to academics.

In this paper, Minor has done some very interesting work with SLCs that will certainly get some discussion in my (and many others’) BA class this fall—I am a sucker for empirical-analysis-meets-perceived-wisdom papers.  My small concerns with the piece are really regrets that the data cannot tell us more, rather than concerns with the way Minor has used or interpreted the data.  I look forward to seeing more of his work.

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