Managing Expectations: Does the Directors\u27 Duty to Monitor Promise More than It Can Deliver?

This article grapples with whether we are expecting too much from the duty of oversight. The directors’ oversight duty refers to directors’ responsibility to actively monitor corporate officers, employees, and corporate affairs. Directors breach their oversight duty when officers and employees engage in wrongdoing that causes harm to the corporation and that wrongdoing can be attributed to directors’ failure to monitor. In other words, oversight liability holds directors liable for their failure to act under circumstances where it can be proven that directors should have acted and their actions could have prevented corporate harm.The significance of directors’ oversight duty has grown at least in part because it better captures the role directors play in the modern corporation. While it is true that directors can have both a managerial role and a monitoring role over corporate affairs, most directors of today’s public corporations are not primarily responsible for managing the day-to-day affairs of the corporation. Instead, directors entrust officers and employees with managing the corporate enterprise, and thus are primarily tasked with monitoring officers and employees to ensure that they manage in the corporation’s best interests. The responsibilities directors undertake when carrying out this monitoring role often implicate the oversight duty.While this article agrees that directors must take their monitoring role more seriously, it nevertheless questions whether reliance on oversight offers false hope for those seeking to enhance corporate governance and prevent corporate misconduct for several reasons. First, the oversight doctrine may be too immature and incoherent, undermining the extent to which it can provide meaningful guidance for directors seeking to comply with the oversight duty. Second, the nearly insurmountable standard for imposing liability for oversight breaches at best may render the doctrine irrelevant for purposes of encouraging appropriate director behavior, and at worst may undermine the extent to which directors feel compelled to take their oversight role seriously. Third, even if such a compulsion exists, the size and complexity of the modern corporation may make it impractical for directors to successfully engage in oversight. Finally, the nature of directors’ role in the public corporation, as outsiders serving part-time, may make it unreasonable to expect that directors have the expertise, knowledge, or capacity to effectively monitor the business affairs of large, and increasingly complex corporations. In this respect, efforts at enhancing oversight may be doomed to failure, suggesting that it may be ill-advised to fixate on invigorating oversight as a means for enhancing corporate governance, or otherwise preventing the next corporate crisis

Racial Reckoning with Economic Inequities: Board Diversity as a Symptom and a Cure

In response to the racial reckoning sparked by the police killings of George Floyd, Breonna Taylor and other unarmed Black men and women during the summer of 2020, many corporations publicly expressed their commitment to not only grapple with racial inequities in the economic sphere, but also increase racial diversity on their board, with particular emphasis on Black directors. Most notably, on September 9, 2020, The Board Challenge (founded by business leaders with at least one Black director) launched an initiative encouraging every U.S. company to sign a pledge agreeing to appoint at least one Black director to their board within the next twelve months. As a result, several companies have committed to adding a Black director within the year. The racial reckoning of the 2020 summer also spurred the adoption of new board diversity regulations. California became the first state in the country to require publicly held corporations in California to have a minimum number of directors from an “underrepresented community” on their board. The law defines a “director from an underrepresented community” as “an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender.” Additionally, Nasdaq recently adopted new listing rules requiring all Nasdaq listed companies to publicly disclose diversity statistics regarding their board, and requiring such companies to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as LGBTQ or an underrepresented minority, defined similarly to the California law. Embedded in these commitments and regulations is animplicit presumption that board diversity advances the call to promote racial equity in the economic sphere, particularly with respect to Black people. Confirming this presumption, one supporter of Nasdaq’s proposal proclaimed that Nasdaq was “heeding the call of the moment.” This essay examines this presumption and argues that board diversity is a necessary though far from sufficient component of the movement to achieve racial equity in the economic sphere. This essay then argues that, notwithstanding promising momentum, there remain several significant roadblocks to achieving meaningful progress related to board diversity. Importantly, this essay argues that many of these roadblocks involve racial bias that is implicit but too often unchallenged, and hence insists that these roadblocks will remain unless there is intentional reckoning with this bias

Just Say Yes? The Fiduciary Duty Implications of Directorial Acquiescence

The rise in shareholder activism is one of the most significant recent phenomena in corporate governance. Shareholders have successfully managed to enhance their power within the corporation, and much of that success has resulted from corporate managers and directors voluntarily acceding to shareholder demands. Directors’ voluntary acquiescence to shareholder demands is quite simply remarkable. Remarkable because most of the changes reflect policies and practices that directors have vehemently opposed for decades, and because when opposing such changes directors stridently insisted that the changes were not in the corporation’s best interest. In light of that insistence, and numerous statements from directors that they have conceded to shareholder demands as a result of fear, coercion and even blackmail, this Article focuses on whether a director’s decision to acquiesce to shareholder demands could be viewed as a fiduciary duty breach. Considerable ink has been spilled, over whether a director’s efforts to thwart shareholder demands represents a breach of fiduciary duty. However, the question of whether directors’ decision to acquiesce to shareholder demands has any fiduciary implications has been unexplored.This Article fills this important gap and in so doing advances two critical arguments. First, this Article argues that to the extent directors have conceded to shareholder demands despite believing that they are not in the corporation’s best interests or based on fear of losing their board seat, such concessions clearly raise the specter of fiduciary duty concerns. Notably, this Article advances this argument as a scholar who is a strong advocate of increased shareholder power. In advancing this argument, this Article tackles the many reasons critics may resist characterizing director acquiescence as a breach, including the potential that directors have changed their mind, have engaged in a legitimate cost-benefit analysis, or have an obligation to comply with shareholder preferences. Second, this Article argues that there are significant negative repercussions that flow from our collective failure to highlight and examine the fiduciary implications of acquiesce in the context of shareholder activism. These include negative repercussions for our normative understanding of the appropriate contours of directors’ duties, particularly those duties to the entire corporate enterprise. These also include the need to pay close attention to understanding the appropriate balance between much needed director accountability that could stem from enhanced shareholder power, on the one hand, and on the other hand, the potential for shareholder overreach that could harm the corporation and its stakeholders—both shareholder and non-shareholder. This Article further insists that negative repercussions stem from the very real possibility that very few actors will have the incentive to explore the fiduciary duty issues that animate this Article. Indeed, those upon whom we generally rely to explore and challenge breaches of directors’ fiduciary duties—namely shareholders—are least likely to do so in the context of directorial acquiescence to shareholder demands. Hence, this Article’s exploration is critical because it may be one of the only forums in which this important issue is examined

Toward a Theory of Shareholder Leverage

On Friday, April 11, and Saturday, April 12, 2014, the UCLA School of Law Lowell Milken Institute for Business Law and Policy sponsored a conference on competing theories of corporate governance.Corporate law and economics scholarship initially relied mainly on agency cost and nexus of contracts models. In recent years, however, various scholars have built on those foundations to construct three competing models of corporate governance: director primacy, shareholder primacy, and team production.The shareholder primacy model treats the board of directors as agents of the shareholders charged with maximizing shareholder wealth. Scholars such as Lucian Bebchuk working with this model are generally concerned with issues of managerial accountability to shareholders. In recent years, these scholars have been closely identified with federal reforms designed to empower shareholders.In Stephen Bainbridge’s director primacy model, the board of directors is not a mere agent of the shareholders, but rather is a sui generis body whose powers are “original and undelegated.” To be sure, the directors are obliged to use their powers towards the end of shareholder wealth maximization, but the decisions as to how that end shall be achieved are vested in the board not the shareholders.Margaret Blair and Lynn Stout’s team production model resembles Bainbridge’s in that it is board-centric, but differs in that it views directors as mediating hierarchs who possess ultimate control over the firm and who are charged with balancing the claims and interests of the many different groups that bear residual risk and have residual claims on the firm. Although team production is not explicitly normative, many commentators regard it as at least being compatible with stakeholder theorists who promote corporate social responsibility.This conference provided a venue for distinguished legal scholars to define the competing models, critique them, and explore their implications for various important legal doctrines. In addition to an oral presentation, each conference participant was invited to contribute a very brief essay of up to 750 words (inclusive of footnotes) on their topic to this micro-symposium being published by the UCLA Law Review’s online journal, Discourse.Professor Fairfax’s contribution is Toward a Theory of Shareholder Leverage

Stakeholderism, Corporate Purpose, and Credible Commitment

One of the most significant recent phenomena in corporate governance is the embrace, by some of the most influential actors in the corporate community, of the view that corporations should be focused on furthering the interests of all corporate stakeholders as well as the broader society. This stakeholder vision of corporate purpose is not new. Instead, it has emerged in cycles throughout corporate law history. However, for much of that history—including recent history—the consensus has been that stakeholderism has not achieved dominance or otherwise significantly influenced corporate behavior. That honor is reserved for the corporate purpose theory that focuses on shareholders and profit. Thus, many view the most recent embrace of stakeholderism as empty rhetoric. In light of this view, and the relatively fickle history of allegiance to stakeholderism, this Article seeks to explore whether we can expect that this most recent resurgence of stakeholderism will be different, and hence whether we can expect that corporate actors will work to ensure that their corporations in a way that benefits all stakeholders. Relying on the theory of credible commitment—a theory focused on predicting whether economic actors will comply with their promises—this Article argues that there are considerable obstacles to achieving stakeholderism. This Article first argues that there are some reasons for optimism that this most recent embrace of stakeholderism will translate into reality. Second, and despite that optimism, this Article draws upon credible commitment theory to argue that it is unlikely that stakeholderism will have a lasting impact on corporate conduct unless corporations make a credible commitment to operating in a way that advances stakeholder interests and a broader social purpose. Third, this Article not only highlights the significant credible commitment challenges posed by efforts to pursue a stakeholder-related corporate purpose, but also reveals significant concerns with the ability of prevailing reforms to overcome those challenges. Nevertheless, this Article argues that these concerns do not necessarily doom to failure the credible commitment effort. Instead, relying on the too often overlooked emphasis credible commitment theory places on norms, this Article insists that the collection of governance mechanisms aimed at achieving credible commitment, even if flawed, may facilitate norm internalization in a manner that increases the likelihood that corporate actors will align their behaviors with stakeholderism

Racial Rhetoric or Reality? Cautious Optimism on the Link Between Corporate #BLM Speech and Behavior

The summer of 2022 marks the two-year anniversary of the dramatic rekindling of the #BlackLivesMatter movement because of the murders of George Floyd, Breonna Taylor and other unarmed Black people at the hands of police. The summer of 2020 saw cities in the United States and around the world erupt in protest, with calls to dismantle racist policies and practices both in the criminal system and within the broader society, with a particular emphasis on policies and practices impacting Black people. The summer of 2022 also marks the two-year anniversary of the visible and somewhat surprising avalanche of corporate statements proclaiming solidarity with the Black community, condemning racism and bigotry, and pledging to help eradicate racist policies and practices within their own institutions. Corporations and their brands inundated the public with black squares, #BlackLivesMatter signs, and emphatic insistence that corporate leaders would “not be silent about our fight against racism and discrimination,” and that they would “do more . . . and do it now.” Most commentators viewed these corporate statements with severe skepticism, characterizing them as “cheap talk,” a “marketing ploy,” or “an outright lie.” Relying on original empirical research, this Article refutes that skepticism and demonstrates that, just one year later, many corporations followed through on their talk with actions aimed at promoting diversity and eroding racist and discriminatory practices. This Article makes three critical assertions with respect to these corporate statements. First, this Article uses original empirical research to reveal that the vast majority of the corporate statements made in the summer of 2020 embodied a commitment to actively work against racism and discrimination and actively promote diversity and inclusion. Second, this Article draws upon original empirical research to refute critics and demonstrate that, on the one-year anniversary of these commitments, many corporations followed through on their speech with concrete actions, at least with respect to their boards. Third, after examining the impact of structural limitations and other roadblocks, this Article sounds a note of caution about whether and to what extent we can expect long-term changes in corporate behavior that meaningfully moves the needle on improving racial diversity and equity in the corporate sphere

All on Board? Board Diversity Trends Reflect Signs of Promise and Concern

This Article argues that while there is considerable reason to be optimistic about the possibility that board diversity efforts will create meaningful change in the number of women who occupy board positions, that optimism must be tempered by certain trends suggesting that the board diversity effort will continue to confront challenges. The recently enacted California law mandating board diversity has the potential to significantly increase board diversity not only at those companies that fall within the law’s purview, but also with respect to other companies that may be motivated to increase their board diversity efforts as a result of the legislative and public sentiments symbolized by the law. Legal challenges, however, may mute the law’s impact and reach. Then too, empirical trends as well as direct support and activism from a broad array of influential members of the investment community, including the three largest asset managers, BlackRock, State Street, and Vanguard, are strong indicators of the potential for meaningful change related to board diversity. Empirical trends, however, also reveal that board gender parity continues to be a difficult, if not elusive, goal. Additionally, recent surveys reveal that many corporate directors and members of the investment community continue to question the role and purpose of women on boards and thus still remain skeptical about the value of women board members and board diversity efforts. Hence, any optimism associated with board diversity efforts must be tempered