Our justice system is hardly speedy. The shareholder lawsuit regarding former Disney (NYSE:DIS) executive Michael Ovitz was filed in 1997, but we only got a decision on it yesterday.
In 1995, Disney CEO Michael Eisner hired his longtime friend Ovitz. After 14 months on the job, Ovitz left with roughly $140 million. (Yes, that works out to $10 million per month.) That wasn't some special bonus -- it was the standard severance under his employment agreement. The Disney counsel found no reason to deny the package.
In light of this, Disney shareholders had legitimate concerns: Did the board perform its fiduciary duties on behalf of the company? Under Delaware corporate law, those responsibilities include two elements. The duty of care means the board must apply a certain amount of diligence when making decisions. The duty of loyalty requires the board to refrain from helping competitors or engaging in self-dealing.
Still, corporate law in Delaware (where many public companies are incorporated) gives the board tremendous discretion. The courts don't want to start making management decisions; if a board fouls up, well, it's just business. A clear-cut "line" between business and negligence doesn't exist, though the court generally errs on the side of less involvement.
However, Delaware requires that a board not engage in "gross negligence" of its duties. In the Disney case, the court ruled that the board's actions didn't live down to this standard.
Don't assume the court was content with the board's largesse. In the opinion, the judge indicated that Disney's board "fell significantly short of the best practices of ideal corporate governance." Under Delaware law, though, that's not enough to hold a board liable.
Does this give corporate boards free reign? Probably not. In fact, in the Delaware opinion, the judge specified that if a case like Ovitz had occurred post-Sarbanes-Oxley, the result may have been different.
Besides, the Delaware courts aren't the only check on corporate power. Sarbanes-Oxley itself may be shareholders' most potent weapon. Its provisions include certification of financial statements by CEOs and CFOs; increased civil and criminal penalties; enhanced disclosure of internal controls; no more loans to corporate officers, and much more.
Sarbanes-Oxley won't stop boards' bad decisions. But when board members are considering a major corporate decision -- such as hiring a high-profile executive -- it may give them pause before they rubber-stamp a confirmation, especially where compensation is concerned.
Further Foolishness on the House of Mouse:
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Fool contributor Tom Taulli does not own shares mentioned in this article.
