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Benefits and Pensions MonitorDisney’s Fiduciary Duty
With this decade almost half over, there is still no clear consensus about how corporate boards – from pension to executive compensation – should behave. While ‘good corporate governance’ is now a goal that people strive for, many questions remain. Is there one set of best practices that can be universally applied? Can you have good governance when boards and groups are sometimes dysfunctional? Is fiduciary duty the same as good governance? Shedding some light on all of these issues is a remarkably clear 174-page opinion from Delaware’s Court of Chancery on a high profile case just recently concluded: a lawsuit brought by Walt Disney Company shareholders alleging that the board of directors breached their fiduciary duties in connection with the hiring in 1994, and firing one year later, of Michael Ovitz as president. Ovitz’s $140 million severance package made headlines a decade ago, but what the opinion gives us is a rare glimpse into how boards can work in real life. In this case, the court was very clear – Disney’s board failed to meet any good governance test. Speaking of one expert’s testimony, the court noted: “Her testimony clarified how ornamental, passive directors contribute to sycophantic tendencies among directors and how imperial CEOs can exploit this condition for their own benefit, especially in the executive compensation and severance area.” This dysfunctional board ended up turning the process into a “public spectacle” with “breathtaking amounts of severance pay” to Ovitz as the consequence. Fiduciary Duty Breached “Unlike ideals of corporate governance, a fiduciary’s duties do not change over time … This Court strongly encourages directors and officers to employ best practices, as those practices are understood at the time a corporate decision is taken. But Delaware law does not – indeed, the common law cannot – hold fiduciaries liable for a failure to comply with the aspirational ideal of best practices, any more than a common law court deciding a medical malpractice dispute can impose a standard of liability based on ideal, rather than competent or standard medical treatment practices.” So while any fiduciary is held to a high standard in fulfilling their stewardship over the assets of others, this standard may not always meet the needs or changing ideals of what is the best corporate governance. Seeking to develop and meet model governance goals are worthwhile pursuits, but should not be confused with the legal requirements that apply to human behaviour in practice. Faithful And Honest “Should the Court apportion liability based on the ultimate outcome of decisions taken in good faith by faithful directors or officers, those decision-makers would necessarily make decisions that minimize risk, not maximize value. The entire advantage of the risk-taking, innovative, wealth-creating engine that is the Delaware corporation would cease to exist, with disastrous results for shareholders and society alike.” Severance packages to short-tenured executives seem to be as great today as they were a decade ago when Ovitz got his package from Disney. The court references the work of Lucian Bebchuk and Jesse Fried, Pay Without Performance: The Unfulfilled Promise of Executive Compensation (the subject of my June column ‘Pay Me If I Perform’) and notes that others will have to determine whether his ruling offers some guidance to corporate directors. It does, but clarification of the fiduciary duties of care and good faith doesn’t mean that people won’t still make bad decisions from time to time. Jim Helik is co-author of Energy Markets Risk Management, a textbook published by the Canadian Securities Institute. He also teaches at the School of Business, Ryerson University in Toronto. |
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The board acted in good faith in its duties, although its actions were far and away from today’s standards of corporate governance. Here is what the court says: 