The Delaware Model and Preemption: Congress Begins to Act

We have long noted that the problems with corporate governance (most noticeably in the realm of executive compensation and risk oversight) have arisen because of the refusal of Delaware courts to impose meaningful standards on directors.  The problem has called for a federal solution, preempting the role of states incapable or unwilling to take the necessary governance steps.  We have been waiting for a federal solution and apparently one is coming.

According to the WSJ, Senator Schumer will introduce legislation that will preempt state law in a number of respects.  The legislation will call for separating the CEO and chairman (a practice common overseas but not in the US), imposing say on pay, eliminate staggered boards (does anyone really take the argument that these are needed to ensure "continuity" on the board seriously?), requiring directors to be elected by a majority vote (apparently avoiding the system where the directors have to resign and the board need not accept the resignations), and requiring a special committee to oversee risk management.

All of this is appropriate and overdue.  But it solves only part of the problem.  For example, Citigroup actually had a risk assessment committee but the Delaware Chancery Court largely eviscerated the duties and obligations of the committee.  As a result, it will be necessary to define the responsibilities of the committee to prevent this from happening. 

Moreover, the legislation was designed to respond to the "warped executive-pay practices."  But other than say on pay, none of the proposals listed in the WSJ article addressed the "warped compensation" problem.  Nonetheless, this is a major advance forward and if it is adopted, will improve the governance of public companies and further the trend of removing the governance issue from Delaware and the Delware courts.