October 02, 2008
Do we need a corporate governance response to the current crisis?
Posted by Lisa Fairfax

As I begin teaching about boards of directors and their fiduciary duties, I have begun to wonder if there should be any corporate governance changes in response to the current crisis. 

On the one hand, a corporate governance response may not be advisable or appropriate, at least not right now.  Indeed, given the federal government’s efforts to craft some responsive legislation, it may not be appropriate to consider corporate efforts unless and until the federal effort does not pan out and/or we have sufficient time to analyze the impact of that effort.  Also, it could be that both the type of issues involved and the far-reaching impact of the crisis require a federal response.  Moreover, it could be that the crisis—at least at its core—does not stem from any significant corporate governance failures and hence does not need any significant corporate governance solutions.  From this perspective, there should be no corporate governance response because such response could not hope to have any appreciable impact on the problem--and perhaps would just be viewed as piling on.

On the other hand, it is not clear what a corporate governance response would encompass.  To be sure, the federal response (at least the current version) includes at least some focus on executive compensation, suggesting that perhaps there should be some additional corporate law focus on the executive compensation problem.  Indeed, J. Robert Brown at TheRacetotheBottom.org argues that the crisis should prompt courts to more closely scrutinize executive compensation, and therefore apply a duty of loyalty analysis to such compensation decisions.  It is certainly possible that the federal government's actions on this issue could prompt courts, particularly Delaware courts, to assess executive compensation issues more stringently (at least in the short term), presumably in order to prevent further intrusion into state corporate law matters.  Of course, despite its apparent prominence, the issue of executive compensation is just a piece of a very large financial meltdown and hence a response that focuses on such an issue seems to be a relatively small response. 

The federal response also places some emphasis on oversight so perhaps this is where corporate law should focus its attention.  And yet, if it is the case that business leaders made mistakes/bad judgments, it is not clear that their actions indicate an oversight problem, and hence require an oversight solution.

Another possibility is increasing shareholder power.  J. Robert Brown also suggests that the current crisis may have an impact on discussions regarding shareholder access to the proxy and advisory votes on pay.  But what kind of impact?  To the extent the public has expressed concern about ways to counteract corporate greed, perhaps we do need greater checks on board behavior and allowing shareholders some increased voice could provide one of those checks.  And yet it could be that at least some shareholders’ efforts at securing short terms gains from corporate boards exacerbated the problems we are now confronting.

If not increased shareholder power, do we need to revisit the discussion about invigorating the duty of care?  In other words, does the current crisis say something about the lack of incentives for directors and offers to take greater care when carrying out their duties?  Of course, while it may be likely that courts become more vigilant in their scrutiny of care breaches in the immediate aftermath of the crisis, given the long-standing commitment to the business judgment rule, it does not seem likely that revisiting this discussion will have any significant repercussions in the long-term.

So alas, while it may seem like when corporations have stumbled so fantastically that there should be some corporate governance/corporate law response, perhaps there is very little (or very little of substance) a corporate response could add at this point.

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