outsourcing of critical thinking by corporate boards: developments in international law profs....
TRANSCRIPT
Outsourcing of Critical Thinking by Corporate Boards: Developments in International Law
Profs. Ashley Burrowes, PhD FCA &
John E. Karayan, JD PhD
Duties of Boards of Directors
Role of Boards
Duties derive from Common Law, Statutes, & Ethics
Overall: Fiduciary Duty of Due Care
Duties of Boards of Directors
Enhanced by Company Law
Enhanced By Securities Laws for publicly traded
Due Care and Financial Statements
Excuses for Dumb Decisions
Company Law waters down Common Law rules:
Delaware “business judgment rule”
Securities laws waters down Common Law rules:
Due Care and Financial Statements
SOX: mandatory 1 person on Audit Committee with minimum financial literacy (not expertise)
In re Walt Disney Derivative Litigation (Del. June 8, 2006)
Disney CEO Eisner teams with Pres.Wells
Wells dies sudden; Eisner bad heart
Eisner tries to reteam with Ovitz
Eisner dumps Ovitz (no-fault)
after only 14 months
$10M per Month for Leaving
Ovitz gets $130 million severance under Board-approved 5 yr employment contract
remaining salary+ 7.5M/yr bonus + options
“Shareholders” sue Board for breach of fiduciary duty, etc.
Reliance on Experts
Irwin Russell Disney Director & Chair of Compensation Committee Board lead financial negotiations
Wrote case study warning that terms were “extraordinary”, exceeded Disney + US standards +“raise very strong criticism”
Instead of disclosure, new study
Reliance on Experts, Redux
Exec comp. consultant Graef Crystal + Ray Watson, member Disney Comp. Committee & former Chair of Board
Black Shoales spreadsheetsCrystal memo: 5 year total $23.6m /year
After Announce, Committee meets & gets “term sheets” only
“Empty Head, Pure Heart” Defense
Presumption Defective Judgment excused so long as good faith/not gross negligence
conflicts of interest disclosed
followed process
reliance on experts allowed
Outsourcing Critical Thinking
The Disney Rule allows reliance on outside “Experts”
International Dimensions:
Ministry of Economic Development v Feeney and Ors (District Court, Auckland CRI-2008-044-29199, 2 August 2010) [“Feltex”]
An Unwelcome Export from America
Feltex: ANZAC’s Enron
Financial statements in public offering and subsequent periods did not meet IFRS
standards: true an fair view
E.g., ending balances on one not tie to other; ratio analyses shows very odd trends; defaults on long term loans required reclass to current liability
Reliance on defective Ernst & Young opinions freed the Feltex Five from criminal securities charges