Delaware Chancellor William B. Chandler III Speaks on Corporate Director Issues; Worth a Listen for Its National and Transnational Insights

In some quarters it is commonly assumed that American corporations tend to develop behavior norms solely by reference to a fairly narrow formal legalistic approach, beyond which corporations act amorally, opportunistically in accordance with some sort of pathological law of the jungle at odds with the best interests of the communities in which they operate or which they affect.  

 "Never try to teach a pig to sing. It's a waste of your time and it annoys the pig". Image: Halas and Batchelor's Animal Farm. From Animal Farm: The Musical And (Other) Massive Flops

 

It is becoming clearer, though, that even American corporations are deeply embedded within governance frameworks beyond the formal requirements of law.  These governance frameworks, consisting of standards of behavior that affect the way in which corporate conduct is assessed by key corporate stakeholders within and outside the corporate management structure, are assuming a more distinct and autonomous form.  It is this understanding that underlies the current efforts to provide a transnational governance framework for business and human rights.   See, e.g., Report Of The Special Representative Of The Secretary-General On The Issue Of Human Rights And Transnational Corporations And Other Business Enterprises, John Ruggie, Guiding Principles For The Implementation Of The United Nations ‘Protect, Respect And Remedy’ Framework, (Draft 22-1-2010). 

These distinct forms are also being institutionalized, at least informally.  In the U.S., for example, a fairly extensive infrastructure of extra legal institutions are emerging that serve to create a framework for the development and implementation of social norms.   These organizations, some of which comprise members of key corporate stakeholder classes, have emerged as an important source of governance norms for corporate actors that may be substantially affecting the understanding of the form and limits of legitimate conduct.  One of these organizations is the National Association of Corporate Directors.  

The NACD's vision statement suggests the central element of governance animating the organization.

• NACD aspires to a world where...
• Businesses are sustainable, profitable and trusted. 
• Shareowners believe directors prioritize long-term objectives and add unique value to the company.
• Directors provide effective oversight of the corporation and strive to deliver exemplary board performance.
• ...and NACD is providing the tools, resources and voice to advance this vision.

The NACD mission statement well captures the norm framing governance role of the institution:

NACD advances exemplary board leadership - for directors, by directors.  Our team provides the information and insights that board members rely upon to confidently navigate business challenges and enhance long-term shareowner value. Importantly, directors and boards turn to NACD to gain the knowledge and wisdom to become a strategic asset to their companies, and NACD amplifies the collective voice of directors in the national dialogue on board governance issues.  NACD is the Voice of the Director. This is not corporate speak: Our entire organization is focused on meeting the needs of board members, and supporting directors to perform more effectively and efficiently.

For that purpose it publishes a number of guides, and engages in a number of other related activities publicized through its website, including the production of knowledge through the preparation of targeted reports, education services, networking opportunities for socialization, and related services, : NACD Directorship. For a recent example see, NACD Directorship, What Society Thinks About Boards, the 2011 NACD/Deliotte What Society Thinks? survey seeks participation to determine how boardrooms appear to those on the outside ("The objective of the What Society Thinks? survey is to establish a baseline that, reviewed over time, will record changes in perceptions and point to where education and reform are needed in the eyes of the public.").

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Most importantly, NACD provides monitoring, review and evaluation services.  NACD Customized Board Evaluations ("Our clients recognize NACD as a trusted and non-biased third-party facilitator. NACD's customized In-Boardroom evaluation programs put you in charge of establishing a benchmark and enhancing your board's effectiveness.")

Among its more interesting activities are efforts to maintain communication with the producers of the most important interpretations/applications of the formal rules enforced through the domestic legal order of the states in which NACD directors work.  This communication is crucial both for the development of the social norm rules that directors (and related stakeholders) embrace and enforce--through decisions about corporate director elections, investment in corporate debt and equities and other corporate transactions . 

Chancellor Chandler illustration,  From http://www.directorship.com/ Jan. 21, 2011

At the end of 2010, NACD Directorship published an interview by Jeff Cunningham with Delaware Chancellor William B. Chandler. Boardroom Justice, Interview by Jeff Cunningham of Chancellor William B. Chandler III (Dec. 17, 2010). Cunningham notes at the start of the interview:

In a wide-ranging interview with NACD Directorship’s Jeff Cunningham, America’s leading corporate jurist, Delaware Chancellor William B. Chandler III, explains his legal philosophy, concerns about liability, where he sees the line drawn between the federal branch and the Delaware Court, the impact of the Disney case on director behavior, the powerful new mediation alternative and more. 

The interview is well worth reading for its insights on the views of one of the more influential jurists in the United States with respect to matters of the application of law-state rules to business enterprises.  

 Beyond its insights into the relationship of Delaware corporate law to corporate governance in general and the structure of American law, the Chancellor offers some particularly useful insights into the relationship between law-norms and social-norms from the perspective of the state.  

Has the court shifted the balance of power toward shareholders and is this in any way related to the profound shift in public anti-business sentiment?
Well, my hope is that the Court is never viewed as deciding cases based on perceptions of public opinion; our job is to decide cases based on the facts and the law. That is, the members of the Delaware courts try to make decisions based on the legal and well- known equitable principles that have been developed over time. The Court of Chancery has the luxury of a rich body of decisional law and the five members on this court have a shared background and legal experiences that help ensure an even and coherent body of decisions. The other special characteristic is that decisions are offered in a candid manner, describing precisely what is improper so that there is certainty about what corporate planners can or cannot do in the future. So, you can rely on the fact that this Court will not be swayed by public sentiment of the moment; our job is to provide a dispassionate and objective answer. That, I think, is and should be the defining characteristic of court.
Why not be swayed by public opinion?
Litigation is not a referendum on popular opinion. Our job— the job of any tribunal—is to apply the law fairly and impartially to the facts of a dispute. That’s the definition of the Delaware Court of Chancery. Our law holds directors and managers responsible or accountable for their decisions and establishes the right of stockholders to have a role in holding directors accountable— either through exercise of the stockholder franchise or via the litigation process. Plainly speaking, an enormous body of law defines our law and that law will not shift based upon public opinion polls. That is the certainty and predictability that Delaware law and the Court of Chancery uphold as part of the contract with investors and with directors. That is the certainty and predictability that Delaware law and the Court of Chancery uphold as part of the contract with investors and with directors.
Can you relate that to a more specific instance, the Disney case?
Disney encouraged directors to consider best practices but pointed out that directors cannot be held liable for not following a particular best practice. Our fiduciary law is a floor for director conduct, essentially a standard below which they may not fall without risking liability. It would be unfair and counterproductive to hold directors to a standard of care or liability that doesn’t exist at the time they make a decision or at the time a director decided not to take an action. Holding a director to a standard that didn’t exist at the time would be a perverse rule, and no doubt would cause any rational person to reconsider serving in such a capacity.
Is there a bright line here for directors?
What I was hoping to say in Disney is merely that it’s highly unlikely that they would ever be found liable if directors followed a path of best practices. You could look at these best practices similar to a safe harbor provision. But best practices in any endeavor constitutes an aspirational norm rather than a requirement, which hopefully will inspire as well as guide and inform directors in their decision-making.  (From Boardroom Justice, Interview by Jeff Cunningham of Chancellor William B. Chandler III (Dec. 17, 2010)).

Consider the points the Chancellor makes. The Chancellor reminds his listeners of the fundamental structural limits of law-state governance.  Law might well be a political act in its inception, reflecting the political will of those representatives of the holders of sovereign authority within a territory, but once enacted (or incorporated into the decisional law of a jurisdiction) it stands autonomous of that popular will until changed.  Judge Chancellor describes the essence of the rule of law presumption of the American law-state, "you can rely on the fact that this Court will not be swayed by public sentiment of the moment; our job is to provide a dispassionate and objective answer. That, I think, is and should be the defining characteristic of court." (From Boardroom Justice, Interview by Jeff Cunningham of Chancellor William B. Chandler III (Dec. 17, 2010)).  That autonomy and rationality also provides strict limits on the authority of the courts to respond to perceptions of abusive conduct that do not fall within the letter or spirit of the law.  And it suggests a recognition that not all conduct can fall within the letter or spirit of a law.  More importantly, it suggests the boundaries of the relationship between popular will, law, the state judicial apparatus and the corporation, a relationship founded on contract. "That is the certainty and predictability that Delaware law and the Court of Chancery uphold as part of the contract with investors and with directors." (id.).

And it is this understanding of the relationship between state, law, court public opinion and corporation that informs the construction of limits beyond which law cannot be effective.  That was the thrust of suggestion in the Chancellor's discussion of the Disney case. "It would be unfair and counterproductive to hold directors to a standard of care or liability that doesn’t exist at the time they make a decision or at the time a director decided not to take an action." (Id.). Yet the Chancellor also suggests that the law of the jungle does not determine behavior beyond law.  Rather, the Chancellor acknowledges as well the possibility of rule sets that may govern corporate behavior beyond law.  Absent a lawful extension of the law-state system, Courts may not hold corporate actors accountable for breaches of such rules, but other stakeholders, of course, can. More significant, though, compliance with social norm rules would enhance the ability of corporations to resist legal actions against them.  "What I was hoping to say in Disney is merely that it’s highly unlikely that they would ever be found liable if directors followed a path of best practices. You could look at these best practices similar to a safe harbor provision." (Id.).  Effectively, the Chancellor suggested that if stakeholders were unhappy with the conduct of the Disney Board, they could have shown their displeasure by their purchasing and sale decisions--of Disney stick and products. 

These views reflect the position taken at the international level.  See,  Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie, Business and Human Rights: Further steps toward the operationalization of the “protect, respect and remedy” framework, A/HRC/14/27, Human Rights Council, 14th session, Agenda item 3, Promotion and protection of all human rights, civil, political, economic, social and cultural rights, including the right to development.  It also suggests the importance of these social-norm frameworks for guiding corporate action that touches on issues of race and class.  For a view of the Disney litigation from the perspective of directorial independence, and the relationship of independence to assumptions about race and class, see,   Backer, Larry Catá, Director Independence and the Duty of Loyalty: Race, Gender, Class and the Disney-Ovitz Litigation. St. John's Law Review, Vol. 79, 2005. Available at SSRN: http://ssrn.com/abstract=780244