Corporate Governance

Corporate Governance Reform and the SEC: Affecting the Stubstantive Behavior of the Board

By J. Robert Brown

The SEC has put out a relatively massive proposal to improve corporate governance disclosure.  Exchange Act Release No. 60280 (July 10, 2009) prints off at a hefty 137 pages. The release contains a number of proposals, some centering around compensation, some around director disclosure. 

There are two broad points, however, to make about the release before delving into the specifics.  First, at least one portion of the Release would essentially preempt aspects of Delaware law, to some degree overturning the astounding decision in In re Citigroup, a Delaware decision that largely exonerated the board from having any involvement in systemic review of risk (even though the board already had a risk management committee).

Second, the release, as it must, focuses on disclosure, the area of governance unequivocally ceded to the SEC.  Much of the disclosure, however, seems to have less to do with information important to reasonable investors and more to do with altering substantive behavior within the corporation.  This has been discussed at length in Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure.  In effect, the SEC is trying to fill gaps left by the pro-management decisions flowing out of Delaware.  Because the courts in that state impose few if any meaningful standards of behavior on directors, the SEC has had to use disclosure to try to require directors to do more.  Disclosure in this area at least sometimes forces directors to take additional steps or implement additional actions relating to their task of overseeing the corporation.  Moreover, false disclosure in this area is left to the federal courts under the ubiquitous Rule 10b-5.

We will write a few posts on this release, noting some of the high points.

Full post as published by The Race to the Bottom on July 28, 2009 (boomark / email).