Academic

The Bar on Director and Officer Bars

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

During the AALS BA Section, Renee Jones noted that, in terms of enhancing corporate accountability, it may be helpful to focus on sanctions that do not involve imposing direct personal liability such as director and officer bars.  In response, Alan Beller (former head of the SEC's Corporate Finance Division) agreed that he thought such bars were a good way to enhance accountability by potentially deterring misconduct while helping to ensure that such misconduct is not allowed to reoccur at other companies.  However, he noted that while the SEC has demonstrated an increased willingness to impose such bars, courts have not.  His observations appear to be confirmed by this 2006 memo noting a rise in the SEC's use of director and officer bars, and this recent note indicating that federal courts continue to apply stringent criteria when analyzing the appropriateness of such bars.  Hence, while Sarbanes-Oxley relaxed the standard under which the SEC could seek to bar directors and officers, it appears that such relaxation has not made the kind of difference that it should have made.  This seems troubling.  It is possible that, particularly in high-profile cases, reputational sanctions may be enough to ensure that directors and officers who have engaged in inappropriate conduct at one company are not allowed to potentially repeat their mistakes at other firms.  However, it does not seem that we should rely solely on such sanctions in all cases, particularly in cases that are not so well known and particulary because we sometimes have short memories.  As with all remedies, a bar is not a cure-all and certainly may not be appropriate in all instances, but it should be a realistic part of the corporate accountability arsenal--and it does not seem like it is.

Full post as published by Conglomerate on January 12, 2010 (boomark / email).