The impact of the hopefully resolving financial crisis on corporate governance is substantial. My first concern is a backdrop to this, which I will explain. I’ll talk about how we have been developing corporate governance in Delaware, and then I’ll tell you what I think the future holds, understanding, of course, [that] although the word “we” may slip in from time to time, I speak only for myself, not for my colleagues on the Delaware Supreme Court, in the Court of Chancery, on the Superior Court, or for that matter, the Justice of the Peace Courts in Delaware. I may be the only person in Delaware that has this view. But I think we would make a serious mistake if we didn’t focus, as we reshape corporate governance, on the global competition for capital goods and services. It’s becoming apparent that it’s no longer necessary for international entrepreneurs to come to the United States for capital. There’s competition for capital, there’s competition for ideas, there’s competition in labor costs, which we simply cannot meet.
The Concept of Patient Capital
If we’re going to compete nationally and internati
onally, we have to focus on what some people have characterized as “patient capital.” We have to develop a framework in which investors can invest for the long term, and allow capital to produce what is typically American–innovative products that impact productivity, generate new ideas, and make our goods marketable across the world. Ultimately, this great engine that is the corporation is designed to enhance wealth for those who invest in it.
We should be careful when we reshape the framework of internal governance in a corporation, and not take our eye off the larger ball. In today’s red-hot politicizing of corporate governance principles, we would do well, I think, to thoughtfully approach changes in those principles, changes that affect the relationship between the directors’ exercise of their authority, and their accountability for the way in which they exercise that authority.
The Limits of Director Responsibility
In Delaware’s chartered corporations, the law empowers directors to manage the corporation. But there are limits, and those limits are well described. Some of the limits are shareholders’ concurrent power to amend bylaws, shareholders’ required votes to approve certain transactions, shareholders’ power to elect directors, and more importantly, to proscribe the process for electing directors, and effective August 1 in Delaware with a new proxy access law, proxy access with the right to propose a short slate.
It bears emphasis to suggest that 14a-8 still blocks the now liberal proxy access that’s available under the Delaware law. HealthSouth is the first Delaware corporation, to my knowledge, to adopt a proxy access bylaw consistent with our August 1 statute. It goes nowhere unless the SEC allows proxy access. I would say to SEC Chairman [Mary] Schapiro and her colleagues, “Chairman Schapiro, tear down that wall.”
Give us the opportunity at the state level to shape proxy access as it suits each individual corporation and its investors. Don’t mandate proxy access in a way that may work for some but not for others…Let us experiment. Let us see how it works.
The Answer to Our Problems
The answer to most of our problems, if not all of them today, is to enhance the quality of directors, and focus them on their attention to their fiduciary duties. For breach of duty of care in most chartered corporations, there is an exculpatory provision: 102(b)(7), we call it. Other states that have copied it call it something else in their code, obviously.
But basically, it says, in order to encourage directors to take a reasonable risk, that they would not be liable for a breach of the duty of care. They’re only liable for breaches–personally liable for breaches of the duties of loyalty, or a failure to carry out the duties of loyalty and care in good faith…It’s an obligation of directors, I think, to see to it that the full range of fiduciary duty, instruction, and assistance be made available to officers as well as directors, and it’s even more important that that happen sooner rather than later.
The other thing that we are concerned about in Delaware, and should be, is that our law is not applied in such a way that it chills responsible risk taking – that risk taking has been the engine that’s driven the corporation. It’s been the source of wealth enhancement for American corporations for almost 200 years.
On Legislating Governance
The politicizing of corporate governance today is remarkable. We have bills in Congress that are variously styled. They’re all hyperbolic. A bill of rights for shareholders–what American is opposed to a bill of rights? A shareholder empowerment bill–who can be opposed to power to the people? Who is opposed to strengthening corporate governance, empowering shareholders, or voting for a bill of rights? No one, until you look at what actually might happen. These corporate governance principles, whether you agree with them individually or not, counter-intuitively could not be better for everyone under every circumstance. Yet, all are mandated under each piece of this legislation.
A Belief In Shareholder Democracy
Now, I use the word change. I do not use the word reform. Until I personally see empirical data that supports in a particular business sector, or for a particular corporation, that separating the chairman and CEO, majority voting, elimination of staggered boards, proxy access with limits, holding periods, and percentage of shares–until something demonstrates that one or more of those will effectively alter the quality of corporate governance in a given situation, then it’s difficult to say, that all, much less each, of these proposed changes are truly reform. Reform implies to me, something better than you have now. Prove it, establish it, and then it may well be accepted by all of us.
But when you think about it, it’s ironic that these measures are styled “shareholder democracy,” because each of them actually limits what shareholders can choose. Under the state systems—at least, under ours—all of these listed principles of corporate governance can be adopted by a Delaware chartered corporation, but they’re not mandated. Why? Because we truly believe in a shareholder democracy. By mandating a set of new corporate governance principles that everyone must swallow, as if it were a pill for a disease you do not have, it seems to me, does not enhance majority voting in a shareholder democracy.
The Mouse That Roars
I recognize that in the wider world of things, Delaware’s role is small. Wags have said that Delaware is the mouse that roared. I don’t suggest to you that my ideas about corporate governance are better than anyone else’s. I’m perfectly convinced that many of these corporate governance principles may well help individual corporations. But common sense also tells me to mandate all of these principles for every corporation on a condition of being listed in our markets is counterproductive at best and foolish, at worst. We will continue in Delaware to try to shape corporate governance on a case-by-case basis, and address, and look for and find hopefully that proper balance between director authority and director accountability.
‘Too Small to Fail’
I hope that what we will see is a thoughtful, considered, incremental development of the future of principles of corporate governance. There is a publicly traded corporation that says, “Progress is our most important product.” In Delaware, what progress and the development of principles of corporate governance means is, incremental change within a known factual context over time. It’s deliberate, thoughtful, predictable, consistent, and clear. That’s the path we will continue to travel, and I can be sure of one thing absolutely. Delaware is too small to fail.