October 28, 2008
The Legacy of the Financial Crisis
Posted by Gordon Smith

Remember my September 14 post about the impending financial crisis leading to a reshaping our regulatory system? When I suggested that we would someday be comparing the regulatory reforms to the New Deal, some people scoffed. The same thing happened to me a month later (this time via email, so I can't link to it), when I was quoted in the National Law Journal with the following:

What Delaware should be most worried about is if people begin to associate the financial crisis with executive misconduct. If people really believe this crisis was caused by greed or failure of oversight, well, Delaware, by and large, regulates those through its fiduciary law.

A very prominent corporate lawyer emailed: "I think this angle on the crisis is ridiculous and trivial." He was speaking normatively, not descriptively, and as noted in my post on the subject, I agree. The case against Delaware is weak. Nevertheless, "I am not so sanguine about Congress' ability to craft an appropriate regulatory response or to refrain from messing with Delaware."

Now comes this from the W$J:

The lesson of Enron is, sadly, that there are no lessons.

Less than seven years ago, federal prosecutors began pouncing on the fallen energy company, eventually convicting 22 employees. When Chairman Kenneth Lay and Chief Executive Jeffrey Skilling were finally convicted in May 2006, House Financial Services Committee member Michael Oxley crowed that "justice has been served" and that the "entire debacle" had reinforced executives' duties to public corporations.

Today's financial crisis has shown what a real debacle looks like. And it has made clear that executives' duties to public companies have, if anything, been loosened, not reinforced. What is worse, the post-Enron crackdown appears not only to have failed to stop flagrant corporate risk-taking, but to have lulled Washington to sleep.

The article quotes Larry Ribstein, who certainly doesn't have it in for Delaware, but the larger point is the one I was making to the NLJ: the debate over the legacy of the financial crisis has begun, and fiduciary duties are on the table.

Corporate Governance, Corporate Law, Delaware | Bookmark

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