VC Strine and an Admission Against Self Interest

Earlier this month, the SEC conducted a roundtable over the relationship between state law and the proxy rules.  One of the participants was Leo Strine, Vice Chancellor of the Delaware Court of Chancery.  Among the many interesting comments made at the Roundtable, Vice Chancellor Strine had this to say about the behavior of independent directors:

• "We are seeing compromise right and left.  The rise of the independent director affects this in a big way.  A lot of the independent directors now make their living as independent directors.  They don't want to oppose anything at a particular company which will get them in trouble with the advisory institutions.  They are more than willing to compromise.  They look like elected officials, but not the most courageous ones.  They look like the ones who want to stay in office."  (emphasis added)

Judge Strine is admitting that there are a class of "independent" directors who will change their decisions out of desire to remain in office.  In other words, the risk of losing a comfortable, well paid sinecure will influence decision making.  This has been something noted repeatedly on this Blog (go here and here) and in my article on the topic, Disloyalty without Limits:  "Independent" Directors and the Elimination of the Duty of Loyalty.  We are hoping to see this awareness reflected in court decisions in Delaware, which currently employ something approaching a categorical rule that the payment of fees (no matter how exorbitant) will not result in a loss of independence.  

One observation about the comment.  Judge Strine seems peeved by directors influenced by "advisory institutions."  He is presumably referring to ISS, Glass Lewis and similar organizations that take positions on shareholder proposals and candidates for the board.  These organizations represent shareholders.  So he is peeved at directors who take positions viewed as favorable to shareholders. 

He appears not to be bothered by directors who seek to keep their position on the board through excessive deference to executive officers.  It is still the case that while the advisory organizations can turn up the heat, they can engineer the removal of a director only rarely.  Unhappy CEO's, in contrast, have much greater ability to achieve this result.  A director wanting to stay in office and retain the fees has much greater incentive to avoid getting into trouble with the CEO than with advisory organizations.  Delaware courts should keep this in mind when considering the impact of "independent" approval of conflict of interest transactions such as executive compensation. 

Comments

[Gina]

They look like the ones who want to stay in office because the risk of losing comfortable job,fees, but for people that are into ito it for more than just money it is creating independent product that cost more.