The Car Czar Makes the Case for Access

In the earlier post, we discussed how the Delaware Chancery Court made the case, convincingly, for shareholder access.  The court discounted majority vote provisions, essentially making clear that they enhanced the board's authority not shareholders.

The second case made for access occurred in an interview with Steven Rattner, the Car Czar.  He described the board of directors at General Motors this way:

• if ever a board of directors needed shuffling, it was GM's, which had been utterly docile in the face of mounting evidence of looming disaster. We decided to recommend to Tim, Larry, and ultimately the President a package that would include replacing Rick with Fritz as interim CEO, changing at least half of the board, and making an outside director chairman (which should be universal).

Docile?  In other words, uninvolved.  Why?  Because there is no serious competition for the board.  Shareholders cannot vote them out of office, even if there is a majority vote provision (see above).  It's too expensive to run a competing slate of directors (although shareholder access will provide some savings once the SEC gets around to adopting it).  Our comment letter, including a criticism of majority vote provisions, is here.

But in fact, what explains the docile behavior is Delaware law.  Delaware courts encourage an ostrich approach to governance.  In the Citigroup case, the Chancellor lectured shareholders for trying to require boards to participate in risk review, all but concluding that they had no obligation to know about or participate in review of risk, irrespective of its enormity.  In Amylin, the Chancery Court first, then the Supreme Court in affirming, held that boards have no obligation to know about anti-takeover provisions that seriously undermine the shareholder franchise. 

In short, the courts in Delaware encourage indeed reward boards for not knowing.  In this legal climate, is it really any great surprise when a board acts in a "docile" fashion?  Why should it do otherwise?