Fuzzy Logic and Corporate Governance Theories

[Excerpt] “Fuzzy logic is a theory that categorizes concepts or things belonging to more than one group. A methodology that explains how things function in multiple groups (not fully in one group or another) offers advantages when no one definition or membership in a group accounts for belonging to multiple groups. The principal/agent model of corporate governance has some characteristics of fuzzy logic theory. Under traditional agency theory of corporate governance, shareholders, directors, and senior corporate officers each belong to groups having multiple attributes. In the principal/agent model of corporate governance, shareholders are owners or principals; directors are shareholders and agents of the corporation; and senior corporate officers are directors’ agents, shareholders’ agents, and agents of the corporation. Each one functions within multiple groups serving multiple agency roles, and each owes fiduciary duties that vary depending on whose agent they are functioning as. Such a multi-dimensional role for corporate actors is a consequence of multi-definitional corporate purpose within agency theory of governance. This multi-dimensional group membership is not easily reconciled within agency theory and is therefore not always explained. However, traditional corporate governance theory can borrow another basic tenet of fuzzy logic theory. Fuzzy theory not only accounts for membership in multiple groups, but also explains how things work because they are multidimensional or ambiguous. This article seeks to explain the ambiguities of corporate governance theory and suggests a framework that accounts for the multi-agent role of senior corporate officers of public companies. It offers a kind of fuzzy logic theory for understanding the fiduciary duties of senior officers. The purpose of this article is to evaluate other models of corporate governance that account for the multi-agent role of senior officers of public companies and assess the ability of various models to hold senior officers accountable to the corporation.

Senior Corporate Officers and the Duty of Candor: Do the CEO and DFO Have a Duty to Inform?

This article focuses on the duty to inform as a framework to assess liability of senior officers of public companies who withhold information from directors. The broadening of the definition of the duty to inform that senior officers owe directors to include an underlying affirmative duty to provide information, even when director or shareholder action is not requested, offers an opportunity for greater monitoring of corporate governance by focusing on those often most culpable. Currently, the plain language of Delaware’s delegation of authority statute protects directors who reasonably rely in good faith on the reports of corporate officers. However, officers’ reports must include more than minimum disclosure requirements. An affirmative duty to inform means senior corporate officers many not remain silent when in possession of superior information unknown to directors and that they have an underlying obligation of disclosure to enable directors to properly meet their oversight obligations. Part II of this article provides an overview of the Disney litigation. Part III of this article explores the rationale that senior corporate officers and directors owe the same fiduciary duties. Part IV examines the duty of disclosure in Delaware. Part V explores the fiduciary duties of senior officers as managers of the day-to-day affairs of the corporation and their superior position of control over directors. Finally, in Part VI, this article concludes that Delaware state fiduciary claims remain an important tool for shareholders to monitor corporate governance

Codes of Ethics and State Fiduciary Duties: Where is the Line?

The important function of disclosure under federal securities laws and regulations, and the role of management in running the affairs of the corporation consistent with state fiduciary principles have a history of discord. The recent mandates of the Sarbanes-Oxley Act (“SOX Act” or “SOX”), and the Security and Exchange Commission’s (“SEC”) implementing regulations continue to increase the disclosure obligations of public companies. This article examines the implementation of code of ethics requirements under SOX. It examines the SEC’s regulations, which implement SOX requirements on the disclosure of codes of ethics, and self-regulatory agency (“SRO” or “listing agency”) rules on codes of ethics for public companies. This article argues that code of ethics rules encroach into state law in defining the fiduciary obligations of officers and directors. Specifically, this article argues that the SEC’s approval of New York Stock Exchange (“NYSE”) and National Association of Securities Dealers (“NASD” or “Nasdaq”) rules allow the SEC to do indirectly what it could not do directly. This article, therefore, calls for an amendment to the SEC’s code of ethics implementing regulation to provide a safe-harbor for senior financial officers and principal executive officers

Codes of Ethics and State Fiduciary Duties: Where is the Line?

The important function of disclosure under federal securities laws and regulations, and the role of management in running the affairs of the corporation consistent with state fiduciary principles have a history of discord. The recent mandates of the Sarbanes-Oxley Act (“SOX Act” or “SOX”), and the Security and Exchange Commission’s (“SEC”) implementing regulations continue to increase the disclosure obligations of public companies. This article examines the implementation of code of ethics requirements under SOX. It examines the SEC’s regulations, which implement SOX requirements on the disclosure of codes of ethics, and self-regulatory agency (“SRO” or “listing agency”) rules on codes of ethics for public companies. This article argues that code of ethics rules encroach into state law in defining the fiduciary obligations of officers and directors. Specifically, this article argues that the SEC’s approval of New York Stock Exchange (“NYSE”) and National Association of Securities Dealers (“NASD” or “Nasdaq”) rules allow the SEC to do indirectly what it could not do directly. This article, therefore, calls for an amendment to the SEC’s code of ethics implementing regulation to provide a safe-harbor for senior financial officers and principal executive officers

Corporate Responsibility: Ensuring Independent Judgment of the General Counsel - A Look at Stock Options

Recent corporate scandals and allegations of corporate fraud in public companies have most people asking how things went so wrong. When looking to assess blame for corporate malfeasance, many ask, “Where were the lawyers?” In several high-profile corporate fraud investigations, outside and in-house lawyers were criticized for not doing more to prevent corporate executives from violating the law, and several general counsels were charged with criminal misconduct by state and federal authorities. Why would the general counsel of a public corporation risk his or her career, reputation, and criminal prosecution to assist executives in perpetuating corporate fraud? The answer may be in the purported reason for corporate greed and ultimately corporate fraud – the desire for equity wealth. This article generally explores the issue of whether stock options granted to the general counsel increases financial dependence of the general counsel on a single client, aligns the financial interests of the general counsel too closely with the financial interests of senior management, and risks the loss of independent judgment and candor by general counsel. Part II of the article reviews the role of the general counsel in public companies, the growth in salary and stock option compensation, and introduces discussion of the Sarbanes-Oxley Act. Part III examines case law and administrative decisions, the Sarbanes-Oxley Act, and subsequent Securities and Exchange Commission regulations

Fuzzy Logic and Corporate Governance Theories

Fuzzy logic is a theory that categorizes concepts or things belonging to more than one group. A methodology that explains how things function in multiple groups (not fully in one group or another) offers advantages when one definition or membership in a group accounts for belonging to multiple groups. A principal/agent model of corporate governance has some characterizations of fuzzy logic theory. The purpose of this article it to evaluate other models of corporate governance that account for the multi-agent role of senior officers of public companies and assess the accountability to the corporation. Corporate governance theorists continue to debate the inefficiency of agency theory, control costs, the role of management, and corporate purpose. This article furthers that discourse by examining an assumption within the principal/agent model of governance – that senior officers and directors owe the same fiduciary duties. Part II examines the incongruent nature of corporate purpose under the traditional principal/agent model of corporate governance and its role in fostering conflicts between the shareholders’ and the corporations’ interests. Part III then evaluates the stewardship theory. Part IV evaluates the mediating hierarchy theory of corporate governance. Finally Part V examines the judicial standards of review in Delaware – the business judgment rule, enhanced scrutiny, and entire fairness

Preventive Law: A Strategy for Internal Corporate Lawyers to Advise Managers of Their Ethical Obligations

This article examines the efficacy of Preventive Law jurisprudence to internal corporate law practice. The article compares internal corporate law practice to the practice approach of Preventive Law. The article explores the benefits of Preventive Law jurisprudence to internal corporate law practice. Part I discusses the history and various vectors of Preventive Law. Part II examines the responsibilities of corporate law departments. Part III compares Preventive Law practice skills to internal corporate law practice, and explores the utility of Barton’s problem solving approaches to internal corporate law practice. Finally, the article concludes arguing internal corporate law practice is Preventive Law practice. This article suggests an understanding of the role of internal corporate lawyers as practicing Preventive Law in the context of Preventive Law jurisprudence