Print
E-MailBrian Cheffins is Professor of Corporate Law at the University of Cambridge. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.
The corporate governance arrangements of U.S. public companies have been transformed over the past four decades. Independent directors now dominate boards (at least numerically), activism by shareholders has become more prevalent and executive pay has become more lucrative and more performance-oriented. The changes have been accompanied by a new nomenclature—the term “corporate governance” only came into general usage in the 1970s. How and why did this transformation of corporate governance come about? Delaware and the Transformation of Corporate Governance, which is based on the 2014 Francis G. Pileggi lecture, addresses these questions by assessing Delaware’s impact on key corporate governance trends.
It might be expected that Delaware, as the state where more than half of U.S. public companies are incorporated, would have done much to dictate the development of corporate governance. “Delaware and the Transformation of Corporate Governance” shows that any analysis of the historical development of corporate governance indeed would be seriously incomplete without taking Delaware into account. Delaware’s courts have led the way, which is not surprising given the crucial role the state’s judiciary plays under what Chief Justice Leo Strine has described as the “Delaware Model” of corporation law.
While Delaware has had a significant influence on the development of corporate governance it has not consistently been a dominant player. Shareholder activism is an important area of corporate governance where Delaware’s contribution has, on balance, been little more than marginal, due at least partly to a lack of opportunities on the part of Delaware’s courts to rule on key issues. The experience with executive pay has been similar. As even Delaware judges have themselves acknowledged, trends in this area have generally developed independently of Delaware jurisprudence.
In contrast, with the board of directors Delaware’s impact on corporate governance has been substantial. Delaware courts helped to lock in the independent director as a core element of the U.S. system of corporate governance by indicating in various well-known judgments from the 1980s that decisions made by independent directors would be subject to less intense scrutiny than decisions made by conflicted directors. Delaware cases such as Smith v. Van Gorkom (488 A.2d 858 (1985)) and Caremark (698 A. 2d 959 (Del. Ch.)) additionally provided directors with incentives to be attentive and to put suitable internal control procedures in place.
Takeovers are a second area where Delaware has made a significant contribution to the development of corporate governance. When frenetic deal-making that characterized the 1980s drew to a close this prompted a shift in orientation from the “external” discipline takeovers impose on managers to “internal” governance mechanisms such as independent directors, incentivized executive pay and shareholder activism. Delaware case law from the mid- and late-1980s indicating directors had substantial scope to deploy takeover defenses contributed to this shift by operating in combination with associated legal developments and changing market conditions to bring the “Deal Decade” to a close.
In sum, with the transformation of corporate governance that has affected U.S. public companies over the past forty years Delaware’s impact has varied from substantial to marginal, depending on the corporate governance topic involved. Moreover, in the areas where Delaware has been influential its contribution generally has been to reinforce trends already present rather than moving matters in a radically different direction. This is not surprising. The Delaware judiciary has spearheaded Delaware’s contribution to the development of corporate governance and courts have, as compared to legislative bodies, restricted scope to open up fields of endeavor for re-examination and to introduce a thoroughgoing overhaul of the law.
The full paper is available for download here.
