“The Independent Board as Shield” to be Published in Washington & Lee Law Review

The Independent Board as Shield, 77 Wash. & Lee L. Rev. __ (forthcoming 2020), examines the law’s continued, pervasive reliance on independent corporate directors to supervise managers despite many known problems with that model. Many thanks to those who provided comments on earlier drafts; additional feedback is welcome. The abstract and TOC appear below.

The Independent Board as Shield

Gregory H. Shill
University of Iowa College of Law

CEOs and directors are barred by the fiduciary duty of loyalty from managing companies for personal gain. Yet a pair of modern corporate law staples—the independent board and the business judgment rule—overwrites this command, enabling conduct that amounts to self-dealing. Jointly, these devices shield such acts. But the business judgment rule was designed as a shield. What’s curious is that the independent board, ostensibly a pro-shareholder innovation, functions as one, too.

U.S. public companies are overseen by boards composed of outside directors whose raison d’être is to represent shareholder interests and constrain CEOs. The effectiveness of these directors is sharply limited, however. Thus, while the independent board empowers shareholders, it also empowers CEOs. Nowhere is this subtle duality more consequential than in independent directors’ role in voting on whether to authorize transactions that benefit the CEO.

The business judgment rule, which insulates board decisions from review, extends the independent board’s role beyond authorization of such transactions to immunization. The rule is commonly justified as giving legal effect to the comparative advantage of businesspeople in their domain, for example in deciding how many widgets to produce. But independent directors can opt to extend its protection beyond this narrow, unobjectionable category of duty of care cases to acts that squarely implicate the duty of loyalty. The result is a shield for conflicts of interest, with adverse consequences for shareholders and the legitimacy of markets.

This Article proposes to eliminate the independent board’s paradoxical shield quality by ending business judgment rule protection for claims implicating the duty of loyalty. The clearest rationale for this prescription comes from the logic of the rule itself: comparative advantage. Judges, not businesspeople, are best situated to assess conflicts of interest. More broadly, the Article’s analysis suggests that the pro-shareholder reputation of independence is overstated and may have inadvertently fostered a sense of complacency around board power.

Screen Shot 2020-04-07 at 1.35.14 PM.png

New Article: “The Golden Leash and the Fiduciary Duty of Loyalty”

I’m delighted to share a new article by yours truly on corporate governance and shareholder activism, The Golden Leash and the Fiduciary Duty of Loyalty, that will be published in the UCLA Law Review.

The “golden leash” is a controversial form of third-party compensation under which activist hedge funds supplement the salaries of directors they nominate to the board, in exchange for increasing the value of the company. A director compensated pursuant to such an arrangement stands to earn millions of dollars rather than the $250,000 paid to a typical director of a large public company, though the more richly compensated director usually works much harder and takes a lot of public abuse.

I offer a qualified defense of the golden leash, situating it in the context of other, more mainstream structures that depend on a more relaxed, porous conception of the fiduciary duty of loyalty than is commonly applied in the context of the golden leash. I also offer thoughts on how a properly disclosed golden leash can not only work for shareholders but improve procedural corporate governance more broadly.

The abstract follows. I welcome any comments on the draft.

Continue reading