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“Corporate law provides a ready-built method for policing, at least to some degree, corporate executive self-dealing or incompetence. All that is required now is a modest extension of existing doctrine and precedent,” writes FEP Director Scott Shepard in his latest commentary for Real Clear Markets.
As Shepard points out, a proper interpretation of business law principles prevents corporate executives from using a legal principle known as the “business-judgment rule” to protect them from consequences of violating their fiduciary duties of care and loyalty.
“Upon the advent of shareholder-derivative suits claiming that executives have breached their legal duties to act in the objective best interests of shareholders, the executives will seek protection behind the ‘business-judgment rule,’ a rule under which courts generally do not second-guess business decisions by corporate executives,” Shepard writes.
But as he notes, although judges tend to be deferential to executives when applying this rule, the rule is not without exception:
[T]he rule is bounded by two limitations…. The first, arising from the fiduciary duty of care, arises in cases of demonstrable executive incompetence. The second, arising from the duty of loyalty, establishes that the rule does not apply in instances in which the courts find evidence that the executives were acting in their own personal interests rather than in the objective best interests of their shareholders (for whom they are, whatever their pretentions, hired managers).
This means that as execs seek to put their own political and policy preferences ahead of their fiduciary duties to shareholders, though they may try to hide behind longstanding corporate law doctrine, that same doctrine nonetheless protects shareholders from decisions that are contrary to their interests.
Shepard’s reference to Disney CEO Bob Chapek’s recent faux pas over Florida’s “Parental Rights in Education” law is particularly relevant.
Rather than staying silent on a politically charged issue involving the teaching of issues surrounding sexual orientation and gender identity to young children – Disney’s key demographic – Chapek waged war on Florida, pushing the social agenda of a vocal minority and the Hollywood elite on the citizens of the Sunshine State. Many estimate that Chapek and Disney’s liberal leadership team have done irreparable damage to Disney’s brand. Though the extent of the damage will reveal itself in the months and years to come, there is no doubt that Disney’s leadership (or lack thereof) has cost it viewers and dollars. Should shareholders seek to file suit for these losses due to Chapek’s poor decision making, Shepard’s legal analysis provides a solid roadmap.
To read Shepard’s analysis in its entirety, click here.
Author: Sarah Rehberg