The 2005 edition of the Delaware directors roundtable is now available online (free):
At the fourth annual Directors’ College, directors of prominent public companies joined together on the University of Delaware campus to exchange insights and strategies with one another, the Chief Justice of the Delaware Supreme Court, a prominent CEO, senior-level regulators, high-profile attorneys, and other governance specialists. Executive compensation, majority vote rules for directors, governance ratings, recent court rulings, and Section 404 of the Sarbanes-Oxley Act were on the discussion menu.
I found Chief Justice Steele's statement of the principles on which Delaware corporate law rests especially interesting:
“Delaware will not test the judgment of members of the board of directors so long as no credible issue is raised about the objectivity of the directors’ decision making or their candor in stating the basis for their decision making.” He went on to say that a genuine question about a director’s independence or personal interest in the outcome would have to be raised before a Delaware court would be interested in scrutinizing more carefully a decision by the board of directors. “Otherwise, we’ll trust the directors’ judgment. This approach will not change in Delaware.”
His statement confirms, I think, that my theory of director primacy explains what's going on in Delaware corporation law better than any of the alternative models out there, especially when it comes to issues like the business judgment rule, where Steele's willingness to trust director judgment tracks my theory that the business judgment rule is a principle of judicial abstention.
My take on director primacy:
Any model of corporate governance must answer two basic sets of questions: (1) Who decides? In other words, when push comes to shove, who has ultimate control? (2) Whose interests prevail? When the ultimate decisionmaker is presented with a zero sum game, in which it must prefer the interests of one constituency class over those of all others, whose interests prevail? On the means question, prior scholarship has almost uniformly favored either shareholder primacy or managerialism.
This article argues that control - the power and right to exercise decisionmaking fiat - is vested neither in the shareholders nor the managers, but in the board of directors. According to this "director primacy" model, the corporation is a vehicle by which the board of directors hires various factors of production. The board of directors thus is not a mere agent of the shareholders, but rather is a sui generis body - a sort of Platonic guardian - serving as the nexus of the various contracts making up the corporation.
As a positive theory of corporate governance, director primacy thus claims that fiat - centralized decisionmaking - is the essential attribute of efficient corporate governance. As a normative theory of corporate governance, director primacy claims that resolving the resulting tension between authority and accountability is the central problem of corporate law.
On the ends question, prior scholarship has tended to favor either shareholder primacy or various forms of stakeholderism. Again, director primacy rejects both approaches. Although shareholder primacy and the shareholder wealth maximization norm are often conflated, one can have the latter without necessarily endorsing the former. Hence, this article argues that director decisionmaking primacy can be reconciled with a contractual obligation on the board's part to maximize the value of the shareholders' residual claim.
My take on the business judgment rule:
The business judgment rule is corporate law's central doctrine, pervasively affecting the roles of directors, officers, and controlling shareholders. Increasingly, moreover, versions of the business judgment rule are found in the law governing the other types of business organizations, ranging from such common forms as the general partnership to such unusual ones as the reciprocal insurance exchange. Yet, curiously, there is relatively little agreement as to either the theoretical underpinnings of or policy justification for the rule. This gap in our understanding has important doctrinal implications. As this paper demonstrates, a string of recent decisions by the Delaware supreme court based on a misconception of the business judgment rule's role in corporate governance has taken the law in a highly undesirable direction.
Two conceptions of the business judgment rule compete in the case law. One views the business judgment rule as a standard of liability under which courts undertake some objective review of the merits of board decisions. This view is increasingly widely accepted, especially by some members of the Delaware supreme court. The other conception treats the rule not as a standard of review but as a doctrine of abstention, pursuant to which courts simply decline to review board decisions. The distinction between these conceptions matters a great deal. Under the former, for example, it is far more likely that claims against the board of directors will survive through the summary judgment phase of litigation, which at the very least raises the settlement value of shareholder litigation and even can have outcome-determinative effects. Like many recent corporate law developments, the standard of review conception of the business judgment rule is based on a shareholder primacy-based theory of the corporation.
This article extends the author's recent work on a competing theory of the firm, known as director primacy, pursuant to which the board of directors is viewed as the nexus of the set of contracts that makes up the firm. In this model, the defining tension of corporate law is that between authority and accountability. Because one cannot make directors more accountable without infringing on their exercise of authority, courts must be reluctant to review the director decisions absent evidence of the sort of self-dealing that raises very serious accountability concerns. In this article, the author argues that only the abstention version of the business judgment rule properly operationalizes this approach.
