Corporate Governance

Corporate Governance Practices and the Failure of the Delaware Model: The Last Word (For Today)

By J. Robert Brown

The transcript of Greenspan's testimony before the House Committee on Oversight and Government Reform is posted.  Here is what he said on Thursday about the Delaware model:

• Mr. GREENSPAN. I made a mistake ín presuming that the self-interest of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.

In other words, allowing top officers and directors to profit from the company (greed in short) was not the best way to protect shareholders.  It is, as we have noted, a frontal assault on the Delaware model of governance.  The Delaware model presumes that directors should have something approaching unlimited discretion and will use that authority to benefit shareholders.  The courts have done so by all but eliminating the duty of care and removing fairness from the analysis of the duty of loyalty.  The problem of excessive compensation demonstrates that the system works in the best interests of officers and directors.  The current financial turmoil demonstrates that the approach does not work in the best intersts of shareholders.  We have discussed this at length in the article, Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty.

We welcome Alan Greenspan to the position, but note that it took the greatest financial crisis since the Depression to bring him along.

At the same hearing, Congressman Mark Souder had this to say:

• But one of the questions here is where are the corporate boards? Those of us who believe in the private sector believe that there was supposed to be some kind of corporate check on the stockholders. Do any of you have any suggestions of what we might be looking at here because clearly they were asleep at the wheel,

It is the great unaddressed issue.  With the bailout proceeding apace, one can wonder why there has not been an attempt at systemic reform that increases the responsibility of the board of directors to oversee the activities of the company, including examination of excessive risk taking.

Full post as published by The Race to the Bottom on October 29, 2008 (boomark / email).