Conglomerate Blog: Business, Law, Economics & Society

Chancellor Chandler was involved in two of the cases which crucially shaped the emerging doctrine of good faith over the last ten or fifteen years. Steve Davidoff and Matt Bodie have already discussed Disney. Claire Hill and I have written on the case at length, but long story short, I think the Chancellor got things basically right. He struck a delicate balance. On the one hand, executive compensation is a real corporate governance problem, both in general and at the Disney board in particular. On the other hand, the court cannot usefully replace the board in crafting appropriate compensation packages. So what to do? The Chancellor used good faith to allow the case to continue for a while, and to lecture the board on the shortcomings in its process (Matt reproduces some of that lecturing in his post), but in the end the board escaped liability, as it should.

I am less satisfied with what happened in the Citigroup opinion. It did allow the case to continue for a while (on the waste claim), and it will presumably avoid imposing liability, as it should. But the rhetoric is wrong. It is all about the vital importance of the business judgment rule and the inappropriateness of the Court second-guessing the board. The Chancellor is not willing to state that the Caremark duty to monitor extends to business risk as well as legal violations, although he does not quite exclude the possibility either. Even Steve Bainbridge believes that Caremark should apply to enterprise risk management, although he stresses that it should be almost impossible to succeed on this theory. I agree with Bainbridge that plaintiffs should be fated to fail, but the thin sliver of space for making a claim should allow courts to sternly lecture boards that have been clearly remiss in their duty to monitor. And surely the Citigroup board was an instance of that. Where is the lecture to this board that was asleep at the wheel as it allowed its traders and others to gamble the future of the company, taking both Citgroup and the U.S. economy as a whole to the brink of catastrophe (and for the U.S. as a whole, maybe beyond the brink)? Where is the outrage?

I also find the weak rhetoric in Citigroup a bit puzzling in its institutional politics. I have speculated that the Chancellor's 2003 Disney opinion, along with several other Delaware opinions at about the same time that were surprisingly skeptical of management, represented in part an attempt to show some spine in the face of the Enron and Worldcom scandals and pressure to extend federal regulation of corporate governance. When times get hard, Delaware needs to show it is up to the job of regulating boards or else it will lose that role to the federal government. Yet, here we are in the midst of a much worse crisis, and I see very little evidence of vertebral columns in Wilmington. What gives?

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Chancellor Chandler was involved in two of the cases which crucially shaped the emerging doctrine of good faith over the last ten or fifteen years. Steve Davidoff and Matt Bodie have already discussed Disney. Claire Hill and I have written on the case at length, but long story short, I think the Chancellor got things basically right. He struck a delicate balance. On the one hand, executive compensation is a real corporate governance problem, both in general and at the Disney board in particular. On the other hand, the court cannot usefully replace the board in crafting appropriate compensation packages. So what to do? The Chancellor used good faith to allow the case to continue for a while, and to lecture the board on the shortcomings in its process (Matt reproduces some of that lecturing in his post), but in the end the board escaped liability, as it should.

I am less satisfied with what happened in the Citigroup opinion. It did allow the case to continue for a while (on the waste claim), and it will presumably avoid imposing liability, as it should. But the rhetoric is wrong. It is all about the vital importance of the business judgment rule and the inappropriateness of the Court second-guessing the board. The Chancellor is not willing to state that the Caremark duty to monitor extends to business risk as well as legal violations, although he does not quite exclude the possibility either. Even Steve Bainbridge believes that Caremark should apply to enterprise risk management, although he stresses that it should be almost impossible to succeed on this theory. I agree with Bainbridge that plaintiffs should be fated to fail, but the thin sliver of space for making a claim should allow courts to sternly lecture boards that have been clearly remiss in their duty to monitor. And surely the Citigroup board was an instance of that. Where is the lecture to this board that was asleep at the wheel as it allowed its traders and others to gamble the future of the company, taking both Citgroup and the U.S. economy as a whole to the brink of catastrophe (and for the U.S. as a whole, maybe beyond the brink)? Where is the outrage?

I also find the weak rhetoric in Citigroup a bit puzzling in its institutional politics. I have speculated that the Chancellor's 2003 Disney opinion, along with several other Delaware opinions at about the same time that were surprisingly skeptical of management, represented in part an attempt to show some spine in the face of the Enron and Worldcom scandals and pressure to extend federal regulation of corporate governance. When times get hard, Delaware needs to show it is up to the job of regulating boards or else it will lose that role to the federal government. Yet, here we are in the midst of a much worse crisis, and I see very little evidence of vertebral columns in Wilmington. What gives?

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