Corporate Governance

Obama, the Courts, and Governance

By J. Robert Brown

We have noted on this Blog on several occasions that one of the biggest impediments to improved investor protection and corporate governance is the judiciary.  It is the DC Circuit that struck down the SEC's nascent attempts to regulate hedge funds in Goldstein by requiring increased reporting, leaving the market and regulators largely in the dark when the crash came.  It is the US Supreme Court that has made it a goal, expressed in Stoneridge, to cut back on Rule 10b-5, not because the language of the rule (or the relevant Code section) commands it but because the conservative justices don't like the private right of action under the provision. 

Finally, the Delaware courts have to be viewed as responsible to a large degree for the problem of executive compensation, something that is likely to lead to greater federal intrusion into state regulation.  They have largely eliminated fairness from the determination of executive compensation, substituting process in its place.  This is discussed at greater length in Returning Fairness to Executive Compensation. 

These are courts and justices hostile to the rights of shareholders and investors.  They are imbued with a pro-market and/or pro-management philosophy that, for example in the case of Stoneridge, overrides even the language of the relevant provision itself.

President Obama can't appoint judges to the Delaware Court of Chancery or Delaware Supreme Court (although he can, with the assistance of Congress, preempt the law in that jurisdiction) but he can appoint federal judges.  And, according to the WSJ, he will have plenty of appointments to make, particularly in the 4th Circuit (four appointments).  The 4th Circuit is perhaps the most conservative in the nation, taking pride in adopting positions even too conservative for the current Supreme Court (for more information about the 4th Circuit, see Neutral Assignment of Judges at the Court of Appeals). 

Most importantly, however, he has two appointments to make in the DC Circuit, both the most politicized circuit and the one that will hear most administrative appeals coming from the executive branch.  Even with these appointments, it will take two terms to fully shift the courts towards a more reasonable philosophy with respect to investors and shareholders.  But at least that process is underway.

Full post as published by The Race to the Bottom on January 22, 2009 (boomark / email).