HOWZAT

In a recent case concerning the software firm Oracle, for example, a Delaware court ruled that “quasi-financial” relationships between directors and a company could be enough to jeopardise independence. A Stanford professor asked to conduct an independent review of Oracle may have been affected in his judgment by his university’s close relationship with the company, the court argued.

Elson said the Delaware courts were emphasising that directors had a duty to be independent and to be shown to be doing their jobs. If they failed to do so, they faced costly battles in court.

More actions are on the cards. Lawyers for Hollinger’s shareholders are watching the Disney case closely. Hollinger, formerly chaired by Lord Black, has a star-studded board. Past and present members include a former US secretary of state, Henry Kissinger, ex-Sotheby’s boss Alfred Taubman, Lord Weidenfeld, the British publisher, former Pentagon adviser Richard Perle and Marie-Josee Kravitz, wife of the billionaire financier Henry.

Investor Cardinal Capital’s suit against the company alleges that the board of directors “comfortably settled into its role as rubber-stamping the self-dealing transactions conceived by Black . . . to the point where they did not mind being relegated to providing their approval after the fact”.

Elson said that in the Disney case the fact that a trial was now taking place was possibly more important than the eventual outcome. “This is a signal that Delaware is getting tough,” he said. “The courts are saying that they take investor protection very seriously. There has been a high level of frustration from investors about the accountability of boards and the fact that the case is in court shows that directors are indeed accountable to investors.”

In allowing the case to proceed, Judge Chandler noted that board minutes showed that little time was spent approving Ovitz’s contract and no questions were asked. A clear implication that process at least was not followed. Chandler questioned whether directors could “be held personally liable to the corporation for a knowing or intentional lack of due care”.

Nell Minow, editor of The Corporate Library, a governance watchdog, said that it was now clear that investors were going to play a greater role in board decisions. She pointed to a controversial “shareholder access” proposal by the Securities and Exchange Commission (SEC) to open up board elections to shareholder-nominated directors.

The proposal is being pushed by William Donaldson, chairman of the SEC, but is meeting fierce resistance from some in the business community. According to Public Citizen, a Washington-based lobby group, about $12.8m has been spent by corporations lobbying against the ruling.

The Business Roundtable, which represents 157 of America’s top chief executives, argues that the proposal would allow groups such as unions and environmental activists to push their agendas at the expense of the company, employees and shareholders.

The SEC and corporate- governance groups argue that it is accountability, not interference, that lies behind the proposal.

But the lobbying may well have paid off. Donaldson is said to be considering a series of compromises that would keep the business community happy.

“My fear is that we will end up with a watered-down proposal,” said Minow.

Shareholders may well lose the battle over board elections. One SEC source said similar proposals had been mooted since 1934 without making it into legislation.

But one thing does seem certain: when chief executives go wild, directors had better hold them to account.

If they don’t, shareholders will see them in court.

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