Vindication — or a Narrow Escape?

Anger and disappointment. That was my first reaction to the news that Delaware's Court of Chancery had cleared the Disney board of fiduciary wrongdoing when it approved a $140 million severance package for short-lived COO Michael Ovitz. How will boards take governance more seriously, I wondered, if they don't risk major personal liability for the decisions they make?

Then I thought about it a bit more and changed my mind. I certainly don't believe that Ovitz's payment was deserved after just fourteen months of work, nor do I think that the board—at the time made up of many of Eisner's buddies—was justified in approving it. But I do think that one unintended result of the governance changes of the past few years has been to make board service so onerous that many smart, honest qualified people won't do it anymore for fear of getting caught up in a scandal they didn't create. In this context, forcing the directors to pay $200 million might have been the death knell for anyone contemplating sitting on a board. There has to be a happy medium between the clubby, asleep-at-the-wheel boards of the late 1990s and the so-scared-of-lawsuits-that-we-don't-do anything boards that may be arising today. Thoughts?

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  • meryl steinberg

    Joe, Jennifer--
    What is important to you about "the corporate veil". Why does it exist in the first place? Have you considered what happens to a society that is covered in veils and individuals are left to act without accountability.

    Why only pierce the veil for fraud? Why not have people held responsible for gross misfeasance or gross negligence?

  • Jim Durbin

    Not everyone is shielded from lawsuits.

    Ask managers sued who are sued individually in step with the corporation for employment related issues.

    I'm not sure that thinning the herd is what is going to happen. The purpose of serving on a board is largely an ego and influence matter. Threatening financial consequences is a sure way to dry up potential applicants.

  • Bob

    Jennifer, Joe:

    I tend to agree with Joe's comments -- it's difficult to hold individuals accountable when they are working for the corporation or on its behalf. I believe the fact that the case went as far as it did -- combined with the more recent Grasso case -- should have boards on high alert when it comes to executive compensation and other issues that previously flew under the radar. I don't agree with Jennifer's reasoning that a judgment against board members would stifle smart execs from joining or staying on boards. I think it would "thin the herd," and cause those who are unqualified -- or those hoping for a free ride -- to decline board seats.

  • Joe

    I'm a strong believer in the corporate veil, offering financial protection to the employees of a company. That is, an individual isn't financially responsible for misteps of the corporation. Whether the courts agree with me or not, I feel this should include members of the board.

    Barring fraud and other illegal activities, I think it's unreasonable to hold the board of directors financially responsible because you don't like a decision they made.

    If the shareholders don't like the way the board is conducting business, they can appoint a new board that will be more focused on the desires of shareholders.