Business Law, an Oxymoron? Issues of Corporate Governance

For a paper in my business law course, I selected an interesting article in Business Ethics about a proposed remedy for improving corporate governance and ultimately, corporate behavior. Enron, Worldcom, and Tyco demonstrated the damage that could be done by a highly imbalanced corporate governance structure, i.e., a strong management, a weak board of directors, and the resulting lack of oversight. While Sarbannes-Oxley attempts to address this problem by increasing the personal liability of both management and the board, the author of this particular article proposes a more fundamental remedy. Attack the problem at its very source by federalizing the corporate charter process. More than half of all Fortune 500 corporations charter or recharter in the small state of Delaware. Nearly all of those corporations have little or no real business interests in the state. They are merely forum shopping for the state that provides the most management-friendly laws for corporations and in that regard, Delaware is understood to be the haven. Delaware laws are structured in a way that permits management to install a weak board of directors, who in turn rubber-stamp management decisions and approve overblown management pay and compensation. In fact, under Delaware laws, companies are permitted to include provisions in their charters that limit directors’ liability if they fail to take their responsibilities seriously; in other words, management can handpick their directors and shelter them from liability for not doing what they should be doing, i.e., oversight of management and its decisions on behalf of shareholders. By federalizing the charter process and doing away with forum shopping, the author feels there will be greater accountability in the process since Congress will be responsible for one uniform body of corporate law and will be inclined to strengthen corporate governance on behalf of both shareholders and the public in general. Management will have less sway... or so the theory goes. Sounds good, but my study of politics tells me that if you concentrate decisionmaking and power in far fewer hands, the potential for abuse and politicization of the process is substantially greater. One need only look at the actions of companies that are highly regulated by the federal bureaucracy... oil and energy, defense, telecommunications, pharmaceuticals... all have the strongest lobbies on Capitol Hill and throw enormous sums into political fundraising. Their influence on policy and legislation is undeniable. In the end, federalizing the chartering process may only codify the Delaware laws at the federal level and exclude companies from choosing to charter in shareholder-friendly states... the cure becoming worse than the disease.