My UCLA law school colleague Lynn Stout has a very thoughtful op-ed in today's LAT on the shareholder suit against Disney's board over the huge executive comp payout to Michael Ovitz. Her key point is a very important one:
Many observers see the case as a trial over whether Disney board members made a stupid decision. And it certainly seems they did. First, they followed the advice of Disney's imperial CEO, Michael Eisner, and hired Ovitz ? once known as "the most powerful man in Hollywood" ? as Disney's president and Eisner's heir apparent. Then, 14 months later, the board fired him, again at Eisner's behest. But because the board did not fire Ovitz for gross dereliction of duty or illegal behavior ? "cause" ? Ovitz was entitled to a $140-million consolation prize under the terms of his contract. It is this payout that prompted the lawsuit accusing Disney's board (which included Ovitz and Eisner) of breaching their fiduciary duties.
The case seems easy. The Disney board made a huge and costly mistake. It should be held liable. Shareholders should be made whole. Right?
Wrong. The Disney case is a hard one, due to a basic doctrine of corporate law called the business judgment rule. This rule allows disinterested corporate directors to make foolish, even disastrous, decisions without being second-guessed by courts, so long as their process was reasonable and their decision "informed." The rule says, in effect, that it is the process, not the outcome, that matters.
Exactly right. If you want to learn more about the business judgment rule, check out my law review article The Business Judgment Rule as Abstention Doctrine. And if that's not enough for you, check out my treatise Corporation Law and Economics (makes a great holiday gift), which offers up over 60 pages on the business judgment rule.
