The limited-liability status of corporations allows them greater latitude in decision-making, by taking away the risk that corporate owners and decision makers will be held personally responsible for their actions. It also makes corporations less likely to respond wisely and decently to concerns raised by people outside the main circle of decision makers. As a result, it invites government to step in and regulate corporate behavior directly.
Recent corporate scandals have place increased pressure on management and boards to institute more effective ethical self-policing. Without the incentives of real liability, however, such actions are not likely to have much effect.
Hence the recent court decision regarding Disney’s $140 million payoff to former Disney president Michael Ovitz, who served in that capacity for all of 14 months, has greater implications than just the relief it brings the Disney board, whose actions in hiring, firing, and paying off Ovitz “did not violate duties to shareholders,” according to the judge’s ruling.
The judge, however, was highly critical of the Disney board’s behavior, writing in his opinion, “Many lessons of what not to do can be learned from defendants’ conduct here.” Today’s New York Times story on the matter noted that even though Disney won the case, scrutiny over corporate boards and management will increase:
[B]oard members have good reason to adopt a more conservative stance in compensation matters and avoid second-guessing, said Charles M. Elson, head of the John L. Weinberg Center for Corporate Governance at the University of Delaware’s Lerner College of Business and Economics.
Although the judge ultimately found that the Disney board did not breach its duties, he discussed a tough standard for the diligence required of board members, Mr. Elson said. The standard has been clarified, and directors at other times and at other companies could be held accountable under it.
“It means that you can’t just make a decision with a devil-may-care attitude,” Mr. Elson said, adding, “it has altered director behavior forever.”