The Disney verdict is examined.
From the time of the Vietnam War, I remember a subtle, ambiguous poem describing a protest march on Richard Nixon’s White House. It began:
When the water woman died
on television of napalm we
came looking for you
and all the others who
were not responsible . . .
The words came back to me when I read the opinion in the case against the board of Walt Disney Company.
Judge William Chandler III, chancellor of the Delaware Chancery Court, acquitted all the Disney board members of the charges that they failed in their fiduciary duty to the shareholders over the $140 million severance payment to Michael Ovitz.
In their lawsuit, the shareholders accused the board of negligence in failing to scrutinize the terms of Ovitz’s contract before his appointment and in failing to consider the terms of his dismissal. Shareholder funds had been squandered, they alleged, by a complacent board of directors, willing to take the chief executive officer’s word without question.
In his judgment, Chandler decries Eisner’s ‘Machiavellian nature as CEO.’ He had ‘stacked his board of directors with friends and other acquaintances’ who were ‘not necessarily beholden to him in a legal sense . . . but certainly more willing to accede to his wishes and support him unconditionally than truly independent directors.’ In waving through the Ovitz appointment, the directors had ‘underperformed,’ but they weren’t grossly negligent and didn’t act in bad faith.
Recruiting Ovitz was a calculated business risk, and the business of boards is to take risks. It proved to be a mistake, but so are a lot of other business decisions. It’s not for the courts – even the top business court in Delaware – to punish directors for bad decisions. That, said Chandler, is the market’s job.
The decision was a remarkable and ambiguous one, which at once reinforces the status quo and signals a new standard by which directors may be judged in the future:
- Directors can breathe more easily, provided they act with the interests of shareholders’ in mind
- Directors should take risks, and when they do, the courts – at least in Delaware – won’t second guess them
- Directors can be lazy and get away with it. Falling asleep isn’t the same thing as gross negligence
However, it’s clear from the judgment that Chandler himself isn’t all that happy about this conclusion. He’s uncomfortable that it flies in the face of best practices in corporate governance, an area where Disney’s recent board reforms make glaringly obvious its prior shortcomings. The actions – and failures to act – in this suit took place a decade ago, before Enron and WorldCom. ‘Applying 21st-century notions of best practices in analyzing whether those decisions were actionable would be misplaced,’ he wrote.
Does that mean new cases might go a different way? Not necessarily. ‘Unlike ideals of corporate governance, a fiduciary’s duties do not change over time,’ Chandler writes. ‘This court strongly encourages directors and officers to employ best practices .. . . But Delaware law does not – and common law cannot – hold fiduciaries responsible for a failure to comply with the aspired to ideals of best practices.’
So, the next time shareholders stage a protest march on a corporate headquarters, we’ll know the court has already decided at least one thing: The directors are not responsible.
