Derivative Impact? Some Early Reflections on the Corporation Law Implications of the Enron Debacle

Abstract

This essay concentrates on some of the more important ways in which the Enron experience is likely to strain existing doctrines of state corporation law. First, it examines some of the ways Enron's collapse might influence legal arguments made to courts regarding the concept of the independent director. In particular, the author notes that the general common-law presumption of independence - already criticized by some commentators - may come under increasing fire. Second, the essay examines how the Enron experience might exert pressure on courts to look more carefully at whether directors have made a good-faith effort to accomplish their duties. In particular, courts may be asked to conclude that directors who are conscious that they are devoting insufficient time to their duties are not acting in good faith - and are therefore not entitled to exculpation from damages liability. Third, the essay notes possible grounds for concern over whether the corporate governance system has become too imbalanced in favor of incentives for short-term stock value maximization. In so doing, the author observes the move in recent decades away from a safe managerialist perspective, in which stewards of the corporation favor long-term stability over short-term profit, in favor of a more entrepreneurial, risk-taking, and competitiveness-enhancing stance among boards. Fourth, the essay examines the possibly contradictory implications the collapse of the energy giant might have for corporate takeover law. On the one hand, because the pre-collapse price of Enron shares was arguably driven more by speculation than by fundamental indicia of long-term corporate performance, Enron deals a potentially heavy blow to the efficient market theory. On the other hand, the collapse also troubles the director-centered approach to corporate law, which presupposes that directors know more than stockholders about the value of the company and must be permitted to protect stockholders from their less-informed views on value. In the absence of credible information supporting the view that directors know best, the author notes that proponents of the director-centered model are possibly in a weaker position to assert that directors should make fundamental investment decisions for stockholders. Finally, the author warns of the dangers of overreacting to the Enron experience by enacting extreme legislative changes at the federal level. He concludes by noting that the most vigorous monitoring of managers has been, and must continue to be, performed by the stockholders themselves - with the assistance of state judges applying traditional principles of fiduciary duty.

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