Speaking Out on Governance

What Stakeholders Say About the Revolution

Deborah Hicks Midanek

• Verlag: De Gruyter
• Jahr: 2020
• ISBN:
  9783110666700
• Auflage: 1
• Thema: Business
• Thema: Leadership

Winner of the GOLD Nonfiction Book Award presented by the Nonfiction Authors Association!

Speaking Out on Governance presents a range of viewpoints concerning the role of today's corporation and its board of directors. The author engages in candid discussion with subject matter experts including boardmembers, corporate attorneys, academics, institutional investors, regulators, and activists. These interviews of leading authorities in the corporate governance arena provide the reader with unique insight into the vitally important but often misunderstood role played by the board.

Deborah Hicks Midanek discusses perspectives regarding what directors of businesses actually do and should do; the true motivations and concerns of the various parties seeking to influence corporate behavior; legal issues surrounding the board; and the key similarities and differences of opinion that may help improve effectiveness of all parties and increase board and director effectiveness. This book is essential reading for corporate directors and would-be directors, senior managers, attorneys, consultants and anyone interested in what drives organizational behavior.

Chapter 1 One size does not fit all

Myron T. Steele

Myron T. Steele, former Chief Justice of the Supreme Court of Delaware, is currently a partner at Potter Anderson & Corroon LLP. He served as a judge of the Superior Court and as Vice Chancellor of the Delaware Court of Chancery following 18 years in private litigation practice. He has presided over major corporate litigation and LLC and limited partner governance disputes and writes frequently on issues of corporate document interpretation and corporate governance.

Chief Justice Steele has published over 400 opinions resolving disputes among members of limited liability companies and limited partnerships, and between shareholders and management of both publicly traded and closely held corporations. He speaks and writes frequently on issues of corporate document interpretation and corporate governance.

He has long been ranked by various publications as among the most influential people in corporate governance and in business ethics in addition to being recognized as among the nation’s leading lawyers and best judges.

Deborah Midanek: It’s a privilege to speak with you. Would you give us some insight into how you became involved doing what you’ve spent your life doing? What pulled you into the world of the law and then the judiciary?

Myron Steele: I suppose what pulled me into the world of the law is where I went to college, I went to the University of Virginia and had the opportunity there to major in foreign affairs and believed that I would ultimately become an international lawyer. So I went to Virginia Law School, took all the international law courses and then had the huge benefit of having two corporations classes from Ernie Folk, Professor Ernest Folk who taught corporations and corporate finance. In 1967, he was the author of the rewrite of the Delaware General Corporation Law, or the DGCL as it’s called.

He had a major influence on me and turned me to thinking about going to Delaware, which was attractive for a number of reasons. My wife was from Maryland so I wouldn’t be taking her too far from home. And I was recruited by a law firm in Wilmington, then called Prickett, Ward, Burt & Sanders. Rod Ward’s family owned Corporation Services. Corporation Services was the publisher of the new corporation code and had worked closely with Ernie Folk. Ernie Folk was kind enough to recommend me.

Without his recommendation and without his generous grades when I was in his classes, I probably would have never gotten involved in corporate law or understood Delaware’s importance. I probably would have gone to a foreign country. As a child, I had lived in Japan and Morocco and I was fascinated with the world.

As time went on, my interests focused on the relationship between the constituencies within the corporation and, ultimately, thinking about corporate governance and its importance and transparency and accountability – all that comes with the judicial oversight that Delaware provides.

After 18 years of private practice, including an extraordinary stint of two years away from the firm on loan to the attorney general’s office in which I prosecuted cases, I ended up on the bench.

Deborah Midanek: Were they securities cases that you prosecuted?

Myron Steele: No. Regular criminal prosecution. But the beauty of that was getting comfortable with jury trials at the age of 24. That was very helpful in learning how to interact with people and understand the dynamic of the other side of the law. Ultimately, I ended up on the court of chancery and then I was absorbed for six years in the intricacies of chancery litigation as it applied both to the corporate world and to the chancery’s other equity jurisdiction. Then I ended up on the Delaware Supreme Court and then, ultimately, chief justice.

There I had a good deal of interaction with corporate governance and its thought leaders as well as opportunities to speak on the topic over the Sarbanes-Oxley and Dodd-Frank years and the continuing war of the worlds, if I can use the term from H. G. Wells. There is tension between the federal government’s approach and state common-law’s application of fiduciary duty to what I consider to be the scheme for oversight of directors and all the corporate constituencies with the common-law fiduciary duty overlay.

Deborah Midanek: It’s a wonderful answer and very useful. I grew up across the street from Adolf Berle, so I knew that the corporation was a person from a very young age. I just wanted to meet that person.

Myron Steele: You do recognize it’s a very schizophrenic person? The corporate entity itself has many minds. It may be a person, but it certainly isn’t one person.

Deborah Midanek: That is true. One of the things that’s endlessly intriguing about “corporate governance” is its inherent ambiguity. The power of the corporate form adopted in 1602 was remarkable as a capital-raising device capable of transforming the known world, yet what the Dutch did was borrow the guild structure to create the idea of the governing board, which morphed from being a regulatory function into being an operating overseer. That ambiguity is still being resolved now, as we explore the requirements of the job of board member.

Now that you’re not on the bench or in that public spotlight quite so much now, is there an aspect of governance and the drama that you find most interesting?

Myron Steele: What has always dominated my thinking is what I’ve considered to be the pall over governance cast by dysfunctional Washington, DC. I fear that one day someone will wake up and think that the federal government, dysfunctional as it is, may be the best voice and vehicle for implementing one-size-fits-all regulatory demands on what is otherwise the dynamic, as I see it, boardroom. One size clearly doesn’t fit all, depending on the business niche of the company, the company culture, the geography, the shareholder base, and so on.

My thinking about regulatory mandates is based on Brandeis’ dissent where he described the states as clinical opportunities to experiment in the business world; to try programs that change society and see how they work in a clinical empirically based experience. If it doesn’t work, abandon it. If it’s doable and successful, export it.

What I feared during what I’ll refer to as my “later formative years” working with Sarbanes-Oxley and Dodd-Frank was the political pressure from certain constituencies suggesting to Congress that they could mandate through federal legislation what they believe to constitute good principles of corporate governance. I made any number of speeches suggesting that that is problematic if for no other reason than because it was dominated by political ideology and not by any empirical data. The great reformers, the great progressives, believed that change is the equivalent of progress and betterment when change isn’t always related to progress at all, in my view.

I used to refer to it as faith-based corporate governance principles. People just knew that this was better than what currently existed and therefore it had to be mandated by federal regulation. Not tried out by the states with their chartering systems but mandated nationwide, on the theory that, after all, these are nationally traded public companies.

Therefore, what works for General Electric must also work for Revlon. I’ve never believed that, and I also believe there was no data to support the many mandates that were tried out with Sarbanes-Oxley and Dodd-Frank. Setting a mandatory number of independent directors, separating the chairman and the CEO, eliminating the staggered board; these ideas are not well supported by data. Everyone just knew that they were better for corporate governance.

Of course, the ideas were pushed by ISS, Glass Lewis, and others; largely, institutional stockholders in the public arena. It was almost like the Ten Commandments came down from the mountain and this had to be the way it was. This is exactly how you’re going to improve and live your lives. I’ve never believed in that. I believed in the flexible, contextual discipline of the court system that annunciates common-law principles that have been with us for a long time.

Roman law suggests what constitutes the role of a fiduciary and discusses policing the fiduciary and punishing the fiduciary when they fail. But at the same time, giving reasonable deference to the decision-making of that fiduciary because, after all, those whom the fiduciary serves selected them to be their fiduciary. It is important to give some credence to people’s ability to choose who it is that’s going to be handling their assets and handling them loyally and with care.

I may have something of a contrarian lack of optimism about the ESG [Environmental, Social, and Governance] movement today because it seems to me that it is virtue-signaling in the same way. But consistent with my view, I do believe that it would benefit corporations to look at community values and the interests of other constituencies; to consider what might be the best thing for them to do for their employees, their stockholders, their directors, their managers or officers. Delaware law has no prohibition against a corporation’s board of directors adopting ultimately an ESG concept whether it’s the expanded one that people are talking about right now or just environmental, social, and governance change.

What I think hasn’t been adequately researched, because I don’t think the data is there, is whether these systems will result in long-term improved success for the corporation, or whether they are merely driven by a certain mentality today that short-termism is bad.

It’s humorous for a guy who lived through it to look back at the takeover era. At the time, I owned Time Warner stock and was shocked that Time Warner’s board was rejecting a $200-plus takeover price for a stock that was in the $60s at the time. I couldn’t understand why they would reject it, and then couldn’t understand why Chancellor Allen said, “It’s perfectly all right to reject it because your duty is owed to the corporation long term,” as I interpret his case. He said, “This takeover is inconsistent with what is a thoughtful long-term strategy for enhancing the value of this corporation over time. And you have a corporate culture that you’re advancing and has been successful up to this point. Therefore, you haven’t breached your fiduciary duty by blocking what is more than double the stock price being offered by a takeover artist that doesn’t fit that culture and would ultimately change the entire strategy of your corporation.”

One of the beauties of the common-law system based on hindsight review of actions by directors prompted by litigation or by criticism is that a number of our judges over the years have been prolific writers and have advanced the thinking of how corporate governance should work. I’ve had some wonderfully thoughtful colleagues over the years who have added to the literature considerably by law review articles and speeches that they’ve made.

It has nonetheless always seemed to me that the greatest threat to what I would consider to be good governance initiatives that meet the goal of long-term success for corporations and their investors and their other constituencies would be a mandated rule-based process where every board, irrespective of their corporation’s situation, must follow these rules.

People have said to me over time, “Well, everybody should follow the same rules.” My response was, “We’re not talking about the rules of the road for drivers of automobiles here.” Just because you drive a Jaguar doesn’t mean you can drive faster than someone who drives a Fiat on the highway. There are rules for that, but that’s not what corporate governance is all about.

The most important factor I think in good governance is stockholder selection of good people to serve on the board. One of the questions that you sent to me asked if I would suggest an example of a board doing a bad job and of a board doing a good job. The poster child for a bad job is Enron. The oddity there, as I think everybody remembers, is that every member of that board was an outstanding individual in the world from which they came. Yet they didn’t pay attention to what was going on. Despite ethical rules posted in the boardroom for everyone to follow, they were not providing thoughtful oversight. The most important thing is to have a system that encourages good people to serve on the board, which I still believe to be the root of reliance on the business judgment rule.

As long as you are loyal, as long as you understand your duty of care consisting of the need to develop a thoughtful reasoning process for the decision you make, and you document that process, having spent sufficient time to understand what’s going on and to inform yourselves before you make a decision, you shouldn’t be shamed if it just turns out to be the wrong decision.

Deborah Midanek: In recent conversations with institutional investors, they are saying the same thing you are. There is no one-size-fits-all, which I found interesting coming from the BlackRock point of view.

Myron Steele: It’s always been my belief that the heart and soul of governance is the good people who can be encouraged to serve. In order to create the necessary balance within the accountability system, you have the business judgment rule that allows some freedom to take risk, but you want directors to take thoughtful risk. You don’t want them to personally take advantage of the opportunities they have as a fiduciary, yet you do want to incentivize them to work for their corporation and its other constituencies long term.

It’s fascinating to me that there’s dialog about the other constituencies now beyond just the stockholder; that it’s incumbent upon boards now to consider the environment, the social issues, and governance issues, and to have more concern about the welfare of the employee. That strikes me as a return to the Sarbanes-Oxley, Dodd-Frank ideological faith-based approach because I don’t think you can legislate that across the board.

But I also don’t think Delaware would ever say, “You’ve breached your fiduciary duty by considering those constituencies, even under circumstances where it might not be as good for today’s shareholder when your thought is focused on 20 or 30 years from now and the impact that the corporation is going to have on everything around it including everyone who works there over that 20-year period.”

Delaware law would accept that. I don’t have any question about it even though I’m not around to shape it or participate in shaping it as I used to be. On the other hand, what I’m seriously concerned about is ideology in Washington, DC, concluding that the states aren’t moving in that direction fast enough to mandate it, therefore the feds have to step in and mandate it for everybody everywhere irrespective of their individual situations. That, in my view, is the great threat on the horizon that would disrupt corporate governance through far too much government intervention by the politicians that shape policy based on ideology and not on thoughtful empirical evidence.

At the end of the day, it is not so much a legal question, but a social policy question. The question is, does the law get in the way of it, or does the law promote it, or does the law sit back as I think the law ought to do? Considering where the law is today and whether the law should move in a particular d...

Inhaltsverzeichnis

• Title Page
• Copyright
• Contents
• Dedication
• About the series editor
• Introduction
• Chapter 1 One size does not fit all Myron T. Steele
• Chapter 2 Invest in respect, trust, and procedural justice Bernard C. Bailey
• Chapter 3 Courage and humility combat crisis of conformity Halla Tómasdóttir
• Chapter 4 Independent workers and the tinker toy corporation Carl T. Camden
• Chapter 5 Taking a stand in the community Catherine A. Allen
• Chapter 6 You cannot govern what you do not understand Bob Zukis
• Chapter 7 How is it we have earned that return? Anne Sheehan
• Chapter 8 Respect for the individual opinions of each and every one Paula Stern
• Chapter 9 Driven to develop a framework about how the world works Jane Diplock, AO
• Chapter 10 The job of the company is to make the world a better place  Roger Martin
• Chapter 11 Why things don’t work as they’re supposed to, and what to do about it Nell Minow
• Chapter 12 What we need to do is listen to each other  Michael Useem
• Chapter 13 Clarity on the board’s role can be transformative only if it is honest Paul Halpern
• Chapter 14 None of us has the monopoly on wisdom  Paul Washington
• Conclusion: Developing the corporate director’s creed
• Index