The importance of principles of corporate governance has become a significant topic in the wake of the Enron Corp., Global Crossing and WorldCom Inc. scandals in USA, Satyam financial scandal in India and the Golden Key and Sakvithi scandals in Sri Lanka that have shaken investor confidence and stirred the stock markets.
The best way to understand a particular complicated area of law (like corporate governance) is to step back and examine how other systems address the same issues.
In this article, I cite one of the most important cases decided in USA on principles of corporate governance (especially under Delaware laws) since corporate governance developments in USA often serve as a guide to other jurisdictions.
In the Walt Disney Co. Derivative Litig. C.A. No. 15452 (Del. Ch. Aug. 9, 2005) (“Disney IV”) Case involved the hiring and firing of Walt Disney’s former president, Michael Ovitz, the plaintiffs alleged that the company’s directors exercised no business judgment and deferred all decisions regarding the hiring to the company’s CEO, Michael Eisner. If Disney fired Ovitz for any reason other than gross negligence or malfeasance, Ovitz would be entitled to a non-fault termination (“NFT”) payment which consisted of his remaining salary, $7.5 million a year for any unaccrued bonuses, the immediate vesting of his first tranche of options and a $10 million cash payment. In the end, Eisner terminated Ovitz and the company honoured its contractual obligations by paying to Ovitz his NFT benefits under his employment agreement with the company.
According to the complaint the directors violated their fiduciary duties when they spent less than an hour reviewing the hiring, and approving a $120 million employment agreement, which entailed hardly one year of service. In the Chancery Court’s view, good faith mandates not only compliance with a director’s duties of care and loyalty, but also that she acts with an honesty of purpose. According to the court, one standard of bad faith is the “intentional dereliction of duty, a conscious disregard for one’s responsibilities.”
As stated by the Chancellor, below are things that various Disney directors (company’s CEO, Michael Eisner; chairman of Disney’s compensation committee, Irwin Russell; members of the Company’s compensation committee, Poitier and Lozano; the Company’s General Counsel, Sanford Litvack; and the Disney Board as a whole) could have done better: Eisner stacked “his” board of directors with friends and acquaintances, never called a board meeting, and obtained no consent or authorization from the board before agreeing to hire Ovitz, before agreeing to the substantive terms of Ovitz’s employment (at Id 136-38, 140), and no effort to inform the full board of his discussions with Ovitz until they were essentially completed and an agreement in principle had been reached. Id. at 137; Russell failed to independently and objectively verify representations made by Ovitz’s negotiators regarding his income with his prior company.
Id. at 144, and failed to investigate Ovitz’s background. Id.; Poitier and Lozano became involved in the process of Ovitz’s hiring very late in the game. Id. at 148, failed to review and discuss the then existing draft of the full text of the Ovitz employment agreement Id. at 154 and failed to review the compensation consultant’s report; Litvack failed to speak up when Russell incorrectly informed the responsible committee that Ovitz’s 1995 bonus (which the committee later reconsidered) was contractually required. Id. At 169-71, and created no written record to support his “no cause” to terminate Ovitz decision; and Disney Board collectively failed basically to ensure that its minutes were correct, reflected who attended meetings, or the consideration given to a significant transaction, including the absence of a record of topics considered during executive sessions.
The lessons learnt from the decided cases in other jurisdictions will assist in implementing the provisions of , “Code of Best Practice on Audit Committees” issued by the ICASL in 2002, “Code issued jointly by the Securities and Exchange Commission of Sri Lanka & the Institute of Chartered Accountants of Sri Lanka”, on 26th June 2008 and “Finance Companies (Corporate Governance) Direction, No. 3 of 2008” given by the Monetary Board of the Central Bank (CB) of Sri Lanka, effectively to restore the investor confidence.
(Ms Dharmawardana is the author of the book titled “Principles and Practice of Company Law in Sri Lanka, 2008”) |
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