The CSR Newsletters are a freely-available resource generated as a dynamic complement to the textbook, Strategic Corporate Social Responsibility: Sustainable Value Creation.

To sign-up to receive the CSR Newsletters regularly during the fall and spring academic semesters, e-mail author David Chandler at david.chandler@ucdenver.edu


Friday, November 4, 2011

Strategic CSR - Corporate Governance

The article in the url below makes the argument that, in spite of growing liability concerns, the directors of the largest corporations face very minor risk of being held accountable for their decisions (Issues: Corporate Governance, p161):

… the truth is that they have about the same chance of being held liable for their poor management of a public firm as they have of being struck by lightning.

The primary reason for this, the article argues, is the preeminence of state law as the governing authority regarding corporate rights:

Since most companies are incorporated in Delaware, this means Delaware law. And Delaware law on this matter sets an extremely high standard for finding directors and officers liable for a company’s mismanagement. A Delaware court is not going to find them liable no matter how stupid their decisions are. Instead, a Delaware court will find them liable only if they intentionally acted wrongfully or were so oblivious that it was essentially the same thing.

And, even if an individual director should be held legally responsible, the firm’s insurance policies that is takes out to protect directors and top executives usually means they will not personally have to pay the fine:

One study found that from 1980 to 2006, there were only two instances of directors of a company incorporated in Delaware being required to personally pay for their misconduct. … [and] no more than $8.35 million in personal payments by directors over more than 26 years.

In those few areas covered by federal law, the record indicates an equally risk-free environment for corporate directors:

The same study found only nine cases where a director was held personally liable for securities fraud in a 26-year period. Three of these were highly notable, Enron, WorldCom and Tyco.

In terms of the recent financial crisis (Issues: Financial Crisis, p235):

… no directors from the financial crisis have yet been found liable under these laws.

Nice work if you can get it:

Outside director salaries average about $200,000 for Fortune 500 companies.

Have a good weekend.
David