In that regard, it as interesting to note that when the Senate approved a ban on insider trading by members of Congress it apparently included an amendment that touched on compensation.  An amendment called for the prohibition on bonuses to senior executives of Fannie and Freddie.  See List of Amendments Considered for S. 2038, Feb. 2, 2012  ("McCain #1471 (prohibit bonuses for senior executives at Fannie Mae and Freddie Mac); Agreed to by Voice Vote").   It passed. 

SOX took some tepid steps, particularly with respect to clawbacks of compensation.  Dodd-Frank roared forward, giving the SEC the authority to regulate compensation committees of exchange traded companies, toughening the clawback requirements, mandating say on pay, increasing disclosure (particularly with respect to compensation ratios), and providing some substantive authority to regulate compensation practices that resulted in excessive risk.  One might also argue that shareholder access was motivated at least in part by the concerns over executive compensation. 

Is this going to stop?  Almost certainly not.  Delaware currently imposes no effective limits on executive compensation (waste is a theoretical limit but one, as In re Goldman shows, has little content).  To the extent that compensation continues an inordinate path upward, pressure will continue to build for additional federal intrusion. 

Preemption has significant and far reaching consequences, although they are only just beginning to be felt.  The trends represent a fundamental transfer of authority that has, for over a century, been with states.  Moreover, once it occurs, the shift will be almost impossible to reverse.

Even more profoundly, the shift from state to federal regulation will affect the dynamics of the corporate governance debate.  As long as matters remained at the state level, the conversation over reform was mostly between shareholders and managers (actually in Delaware it was a conversation often with only the managers present).  The preferred approach toward regulation was private ordering, an area where management had inherent advantages.  See Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom.   

Shifting the venue to the federal level resulted in an increased use of categorical rules.  It also expanded the interest groups that could effectively participate in the debate.  In those circumstances, resolution ceased to turn solely on the needs of shareholders and managers but on a broader set of interests. 

Is there anything that can stop this trend?  Is there anything that can keep these matters within the state law framework?  There is one way but it is highly unlikely to ever happen.  At the AALS conference, Vice Chancellor Laster noted a possibility.  Here is how it was described by Gordon Smith. 

Teasing the assembled law professors, Vice Chancellor Laster suggested that the Delaware courts could decide to review pay decisions with a form of enhanced scrutiny (because that standard of review applies to situations involving structural bias), but he rightly observed that such a move would be comparable to Smith v. Van Gorkom in 1985.

Enhanced scrutiny would mean greater judicial examination of compensation, perhaps requiring some review of substance rather than for the most part only process.  The degree to which it would actually reform compensation would depend upon the level of "enhancement" applied by the courts.  It probably wouldn't be very high but it would presumably be enough to scare boards into avoiding compensation packages on the margins that were widely seen by the public as abusive.  With these packages vanquished, additional pressure for federal intervention would probably wane.  

This isn't going to happen.  As Gordon noted:  "Plaintiffs lawyers should not get their hopes up, absent a big shift in the debate on executive compensation."  In truth, a change in the compensation standard would provide other states with an opening for poaching some of the public companies currently incorporated in Delaware.  If that happened, the abuses would continue only not in Delaware corporations.  Delaware would lose business while the risk of preemption would remain.  

In short, the race to the bottom, something that usually benefits Delaware, can also be a liability.  Efforts to elevate the standards of corporate governance will flounder because of it.  This is true even if, in the long term, states will benefit by holding onto their authority and preventing additional federal preemption. 

In the case involving the Joseph Schlanger 2006 Insurance Trust, Lincoln National Life Insurance Company (“Lincoln”) issued a $6 million life insurance policy for Joseph Schlanger with the Schlanger Trust as the beneficiary.  This insurance policy contained an incontestability clause, which stated that Lincoln would not contest the policy after it had been in effect for two years from the issue date.  Schlanger died more than two years after the policy’s issue date, at which time Lincoln learned that Schlanger was no longer the beneficiary of the trust. Instead, Schlanger had sold his interest in the trust to GIII, a private investing entity.  GIII paid all the premiums and then used the trust to speculate on Schlanger’s life. The District Court for the District of Delaware consolidated this case with PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust, C.A. No. 10-964-BMS (D. Del. Nov. 12, 2010), which also involved a life insurance policy that lacked an insurable interest.  The court then certified the following question to the Supreme Court of Delaware: “Can a life insurer contest the validity of a life insurance policy based on a lack of insurable interest after expiration of the two-year contestability period set out in the policy as required by 18 Del. C. § 2908?”

To answer this question, the Supreme Court of Delaware looked at the origins and purpose of the incontestability provision.  These provisions were first created to encourage potential customers to buy insurance policies.  Life insurance companies included these clauses to ensure that after the customer paid the premium on the policy for a number of years, the company would not contest the policy due to innocent misrepresentations in the application.  With this in mind, the court determined that the language of Section 2908 of the Delaware Insurance Code makes the incontestability period of the policy directly contingent on the formation of a valid contract.  Because this contract lacked an insurable interest and violated Delaware’s public policy against wagering, the policy was void ab initio under Delaware common law.  Therefore, the court held that an insurer “could challenge the enforceability of a life insurance contract after the incontestability period on the basis of a lack of an insurable interest.”

The primary materials for this case may be found on the DU Corporate Governance website.

At the same time, this puts the NYSE in the middle of a potential quagmire.  Presumably the NYSE will have to define the particular proposals that fall within the definition of corporate governance.  This will no doubt entail an annual analysis.

The NYSE shift raises once again the question of whether Rule 452 ought to simply bar brokers from voting uninstructed shares.  The main advantage seems to be the need to have the shares present at the meeting for quorum purposes.  But this justification seems doubtful.  In some states, the quorum can be set at almost any percentage.  It is not uncommon for companies to have quorum percentages of one third.  See Del. Code § 216 ("in no event shall a quorum consist of less than 1/3 of the shares entitled to vote at the meeting"). 

Any company depending upon uninstructed shares to meet a quorum requirement of 33% has not done a particularly good job at getting shareholders to attend the meeting (by proxy or otherwise).   Moreover, the uninstructed shares could represent a sizable percentage of the 33% that are present at the meeting.  Because they cannot vote on many matters (corporate governance proposals, uncontested elections for the board, etc) the company is effectively deciding these issues through the vote of a very small percentage of the remaining shares.  It is not at all clear that a meeting should be held under these circumstances. 

At a minimum, the NYSE should conduct an empirical study to determine how often uninstructed shares are needed to ensure the presence of a quorum.  The data may suggest that they are not necessary.  To the extent, however, that they are, a second best alternative would be to allow shareholders to vote only on one matter, the outside accounting firm.  Most companies (but not all) submit the auditor to shareholders for approval.  The vote is never controversial and auditors are routinely approved with percentages above 95%.   For a more detailed discussion of shareholder approval of the auditor, see Essay: The Politicization of Corporate Governance: Bureaucratic Discretion, the SEC, and Shareholder Ratification of Auditors.

As a corporation law casebook and treatise author, [Stone] is the sort of opinion that drives me crazy. The Supreme Court seemingly set out to solve some doctrinal puzzles, but in doing so made things worse. Lots of questions are thus presented.

What follows is my attempt to make the case digestible for students encountering it for the first time.  There are obviously other approaches.

_____________________________________________________

1.       What is the Caremark duty of oversight?

A duty to “attempt in good faith to assure that a corporate information [gathering] and reporting system … exists.”  Caremark, 698 A.2d at 970.  However, “only a sustained or systematic failure of the board to exercise oversight—such as an utter failure to attempt to assure a reasonable information and reporting system exists—will establish … liability.”  Id. at 971.

2.      That sounds an awful lot like an aspect of the duty of care.  Why not treat it as such?

If a violation of the duty of oversight is treated as a violation of the duty of care, directors who violate this duty would be exculpated under DGCL s 102(b)(7).  Immunizing directors from liability for an “utter failure” to carry out their duties is arguably excessive.

3.      Well, if we’re not going to treat failure of oversight as a violation of the duty of care—how are we going to categorize it?

Of the “triad” of duties (care, loyalty, and good faith), good faith is the leading candidate because of how similar the most commonly cited standard for bad faith (conscious disregard for one’s duties) is to the standard of liability for lack of oversight (utter failure).

4.      Okay, so is that it?

To allow a violation of the duty of good faith to serve as an independent ground for liability would arguably expand director liability excessively because there remains at least some uncertainty as to what the duty of good faith covers.  As Chancellor Chandler said in McPadden v. Sidhu, 964 A.2d 1262, 1263 (Del. Ch. 2008): “[W]hat must be shown for bad faith conduct has not yet been completely defined.”  Therefore, where bad faith constitutes the basis for rebutting the business judgment rule presumption in favor of directors, an additional step is required whereby ultimate liability is grounded in the duty of loyalty where applicable.  In other words, the bad faith conduct must rise to the level of violating the duty of loyalty for ultimate liability to exist.  The conscious disregard for one’s duties manifest in an utter failure of oversight rises to such a level and thus results in a non-exculpable duty of loyalty violation.

The Rule has been at the center of controversy.  Most recently, the NYSE amended the Rule to prohibit brokers from voting in uncontested elections to the board of directors.  With majority vote provisions and "just say no" campaigns, votes by brokers in uncontested elections could carry dispositive weight.  In the "just say no" campaign against directors at Disney, some of the candidates apparently received a majority only because of the uninistructed shares voted by brokers.  Congress also stepped in by essentially requiring this result in Dodd-Frank. 

Most recently, the NYSE issued an Information Memo essentially containing further limits on the right of brokers to vote uninstructed shares.  The Memo noted that "[i]n the past, the Exchange has ruled certain corporate governance proposals as 'Broker May Vote' matters for uninstructed customer shares when the proposal in question is supported by company management."  Not any more.  Pointing out the "public policy trends disfavoring broker voting of uninstructed shares", the NYSE determined: 

that it will no longer continue its previous approach under Rule 452 of allowing member organizations to vote on such proposals without specific client instructions. Accordingly, proposals that the Exchange previously ruled as “Broker May Vote” including, for example, proposals to de-stagger the board of directors, majority voting in the election of directors, eliminating supermajority voting requirements, providing for the use of consents, providing rights to call a special meeting, and certain types of anti-takeover provision overrides, that are included on proxy statements going forward will be treated as “Broker May Not Vote” matters.

As a result, brokers will cease to have a role in the approval of certain types of corporate governance proposals.  We will discuss the implications of this proposal in the final post.

Under state law, voting rights belong to record owners.  DTC, however, does not want the voting rights.  Instead, the depository routinely (but not always) transfers voting rights to the brokers and banks that have deposited the shares.  At the time of a meeting, therefore, it is the broker that for the most part has the legal right to vote shares.

A complicated set of rules requires that brokers pass voting rights to street name owners.  They typically do so by distributing voting instructions to the account holders.  These instructions are executed then returned to the broker.  The broker will total up the votes and send the company a proxy card that reflects the views of street name owners.  For a discussion of this system, see The Shareholder Communication Rules and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility?

The system gives street name ownes a guaranteed opportunity to vote at shareholder meetings even though they are not record owners for state law purposes.  Many street name owners, however, do not return their voting instructions.  Without some kind of regulatory or contractual intervention, brokers can vote the shares.  This gives them a potentially significant role in shareholder decisions even though they have no economic interest in the shares. 

The easiest thing to do would be a rule that bans brokers from voting uninstructed shares.  Opposition to this usually centers around the perceived concern that without voting the shares, they will not be deemed present at the meeting for quorum purposes.  To the extent a company lacks a quorum, it will have to reschedule and hold another meeting, causing additional delay and cost.

As a result, brokers are allowed to vote uninstructed shares.  Rule 452 delineates the circumstances where they are not allowed to do so.  Thus, if something is not listed in the Rule, brokers can vote the uninstructed shares.  Rule 452 in turn contains a complicated list of 21 items, including such matters as those relating to "executive compensation," something that, according to the notes, encompasses say on pay. 

The Rule has undergone considerable revision over the years.  An Information Memorandum issued by the NYSE effectively continues this process.  It prohibits brokers from voting uninstructed shares for certain corporate governance provisions even when supported by management.  We will discuss this interpretation in the next post.  

The case arose out of a challenge to a board approved a compensation package in 2010.  The package, according to the court, resulted in an increase for each executive officer of "60 up to 160%." During the same year, return to shareholders in 2010 "was a negative 7.7 percent."  Submitted to shareholders for an advisory vote, shareholders expressed disapproval in fairly emphatic terms. 

Umpqua shareholders rejected the 2010 executive compensation program by approximately sixty-two to thirty-five percent (with three percent abstaining).  Those voting against the proposed executive compensation package included thirteen of Umpqua's twenty largest shareholders.

Defendants sought dismissal for failure of shareholders to make demand and for failing to state a claim.  The magistrate agreed to dismiss only on the basis of the demand issue, without reaching the substantive claim.  Id.  ("The court expresses no opinion regarding the merits of the Plaintiffs' allegations or the Defendants' defenses.").

The first question was to resolve the applicable law.  Umpqua is an Oregon corporation but, as the court noted, the law in the state was "undeveloped."  As a result, the parties and the court opted to rely on Delaware law. 

That meant an application of the much litigated two prong standard set out in Aronson.  The first permitted demand excusal where the board lacked a majority of independent and disinterested directors.  Plaintiff sought to meet this standard by asserting that independence was lost as a result of the threat of liability arising out of action.  In addition, the CEO, as an interested director, was “in a leadership position or otherwise wield[ed] significant influence.” 

The argument that directors ceased to be disinterested because of concern over liability was described by the magistrate as a “novel theory”.   

Under Plaintiffs' reasoning, the fact that presuit demand is itself suggestive of impending liability is sufficient to create the type of self-interest that triggers the demand futility exception. This would permit every derivative action plaintiff to argue that demand is futile and need not be made because no board would be able to act objectively in evaluating a presuit demand.  Such a result would effectively erase the demand requirement and negate its purpose.

As for the argument that the CEO exercised excessive influence, the magistrate concluded that the assertion had not been pled with sufficient particularity.

The second prong of Aronson required a showing that there was “reasonable doubt that the challenged action was the result of reasonable business judgment.”   Plaintiffs asserted that the negative vote coupled with the company’s poor performance deprived the board of the presumption of the business judgment rule.  The magistrate found this insufficient.

Plaintiffs' essential position is that if a simple comparison reveals a level of compensation inconsistent with general corporate performance, the business judgment presumption is necessarily overcome, a position that is unsupported by the applicable standards.

In reaching its decision, the magistrate disregarded the analysis in Cincinnati Bell, the one case that has allowed a say on pay based case to go forward noting that “it is unlikely that the case remains viable legal authority."  Instead, the magistrate pointed to Teamster Local 237 v. McCarthy, Civ. No. 2011-cv-197841 (Superior Court of Fulton County, Ga., September 16, 2011), the decision that dismissed a say on pay based claim.  In that case, the court reasoned: 

Given that Delaware law, which the Dodd-Frank Act explicitly declined to alter, places authority to set executive compensation with corporate directors, not shareholders, this Court will not conclude that an adverse say on pay vote alone suffices to rebut the presumption of business judgment protection applicable to directors' compensation decisions.

Plaintiff filed objections to the magistrate's decision.  As the Objections describe: 

Plaintiffs respectfully submit that Magistrate Judge Acosta’s Recommendation applied the wrong legal standard, improperly accepted defendants’ explanations rather than the allegations of the Complaint, and effectively created a pleading standard that requires plaintiffs to prove their case before bringing it. Plaintiffs respectfully object.

The case, therefore, continues. 

For the most part, this case is a difficult one for shareholders.  It is premised mostly upon facts that arise from the negative say on pay vote by shareholders.  Standing along, courts will probably not, for the most part, allow a negative say on pay vote (in the context of poor earnings) be sufficient to allow for demand excusal.  On the other hand, a negative say on pay vote in the context of a broader challenge to board behavior with respect to compensation (perhaps challenging the process used by the board or demonstrating poor performance over a more protracted) will likely have a better chance of overcoming a motion to dismiss for failure to make demand.

Primary materials in this case are located at the DU Corporate Governance web site.

This article asserts that the current FCPA enforcement environment does not adequately recognize a company’s good faith commitment to FCPA compliance and does not provide good corporate citizens a sufficient return on their compliance investments. This article argues in favor of an FCPA compliance defense meaning that a company’s pre-existing compliance policies and procedures, and its good faith efforts to comply with the FCPA, should be relevant as a matter of law when a non-executive employee or agent acts contrary to those policies and procedures and in violation of the FCPA. This article further argues that a compliance defense is best incorporated into the FCPA as an element of a bribery offense, the absence of which the DOJ must establish to charge a substantive bribery offense. 

Mike currently edits the FCPA Blog, and his expertise on the FCPA is extensive.  For FCPA fans or foes, the article is worth the read.

Conference Organizers:

Barbara Black
Eric C. Chaffee
Steven M. Davidoff

This morning, I watched an interview of David Segal, the reporter from The New York Times, who has been very critical of legal education.  Although I agreed with some of his points, I was troubled by the fact that he faulted law schools for using tuition dollars to support research and scholarship.  I do admit that the model for legal education should and must evolve and that funding for research and scholarship has to be considered in the process.  With that said, however, I think it's important to remember that research and scholarship improves teaching, the practice of law, and the human experience. 

If high quality writing is meant to be free, I look forward to my free copy of The New York Times tomorrow.  I also hope that Mr. Segal will consider donating his salary to this site.

In the complaint, Sterling alleged that Nestlé engaged in anti-competitive conduct from June 2003 through October 2009. Sterling contested the Nestlé merger with Payco Foods Corporation (“Payco”) in 2003 that made Nestlé the largest ice cream distributor in Puerto Rico and making Sterling the second largest distributor.  The Puerto Rico Office of Monopolistic Affairs approved the merger upon stipulated conditions. Sterling did not allege breach of any of those conditions.  Instead, Sterling presented a two-part injury and damages theory.  First, Sterling alleged that but-for Nestlé’s exclusivity agreements with a multitude of grocery stores, Sterling missed out on an additional $21-29 million in gross sales.  Second, Sterling alleged that Nestlé’s merger limited Sterling’s market share and caused a decrease in efficient operations.

The district court found that the Puerto Rico ice cream distribution market expanded during the relevant time period, the merger did not restrict output, consumer prices did not increase, and on certain products consumer prices actually decreased. The record also showed that before the merger, Payco and Nestlé had a combined 85% market share, and by 2007, the combined market share fell to 70%.  Sterling’s market share on the other hand, increased from 14.7% in 2003 to 22% in 2008.  Sterling’s sales, which declined $1.06 million from 2001 to 2003, increased after the merger at an average of 11% a year.  

To determine whether Sterling had standing, the court considered “(1) the causal connection between the alleged antitrust violation and harm to the plaintiff; (2) an improper motive; (3) the nature of the plaintiff’s alleged injury and whether the injury was of a type that Congress sought to redress with the antitrust laws (‘antitrust injury’); (4) the directness with which the alleged market restraint caused the asserted injury; (5) the speculative nature of the damages; and (6) the risk of duplicative recovery or complex apportionment of damages.”

The First Circuit applied the Supreme Court’s six-factor standing test, and emphasized causation of the injury.  The court reinforced that, “absence of ‘antitrust injury’ will generally defeat standing” and measured injury by a decrease in output and an increase in prices in the relevant market.  Sterling’s expert failed to show evidence that output within the Puerto Rico ice cream market declined or that consumer prices increased after the merger.  In addition to the findings that the Puerto Rico ice cream market statistics did not support Sterling’s argument, Sterling could not attribute any injury directly caused by Nestlé.  Sterling argued that a “plaintiff’s post-violation successes do not necessarily preclude compensation.” However, the First Circuit disagreed with Sterling’s alternatives to the classic evidence of antitrust injuries.

Sterling also failed to show the requisite injury. Under §2 of the Sherman Act, Sterling must show that Nestlé’s monopoly power prevented competitors from entering the market.  However, new competitors entered the Puerto Rico ice cream market after the merger.  Without establishing any injury to itself or to the competiveness of the market, Sterling’s claims lacked standing.

The primary materials for this case may be found on the DU Corporate Governance website.

Of the eight cases, one has been dismissed and one has survived a motion to dismiss (and challenge to demand excusal).  The latest decision occurred in Dennis v. Hart, 2012 US Dist. Lexis 1893 (SD CA Jan. 6, 2012).  The derivative action was originally filed by shareholders of  PICO Holdings in state court but was eventually removed to federal.  Plaintiffs sought to trigger federal jurisdiction by seeking declaratory relief and asserting that, because the case involved allegations arising from the negative say on pay vote, the Complaint "pose[d] substantial federal questions" that "necessarily arise under federal law." 

Shareholders, among other things, argued that the negative say on pay was "evidence that the 2010 pay hikes were irrational and unreasonable under the circumstances, and were not primarily motivated by a desire to protect PICO's interest."  As a result, they asserted that the "presumption of business judgment has been rebutted, and the burden of proof ... now rests with the PICO Board."

The court, however, dismissed the claim for declaratory relief.  The opinion noted the language in the statute providing that say on pay "may not be construed ... to create or imply any change to fiduciary duties" and does not "create or imply any additional fiduciary duties." 15 USC 78n-1(c).  As a result, the "Dodd-Frank Wall Street Reform Act did not change state law regarding fiduciary duty or the business judgment presumption." 

The court did not, however, resolve whether "say on pay" could rebut the presumption of the business judgment rule.  Instead, the court noted that the matter was a matter of state law.  "To the extent that Plaintiff seeks to use the negative say on pay vote as evidence that the business judgment presumption was rebutted, resolution of the issue depends on California state law."  As a result, the case was remanded to the California Superior Court "where it was originally filed". 

The court focused on one of the interesting anomalies of the say on pay provision.  The statute does in fact include rules of construction providing that the advisory vote shall not "create or imply any change to the fiduciary duties" of the board of directors.  See Section 951 of Dodd Frank.  To the extent this language was intended to prevent say on pay from having any impact on fiduciary duties, it was ineffective.  As we have noted on this Blog:

Fiduciary duties are matters of state law.  Whatever limits Congress intended to impose on federal regulators, the provision was not designed to limit states and their right to develop fiduciary obligations.  Nor did the provision prohibit courts from taking notice of the results of an advisory vote when considering alleged fiduciary violations.  

This case is an example.  The federal court did not view the case as raising a federal question but did not hold that the issue raised by shareholders was somehow foreclosed by the say on pay provision.  Instead, it was a matter for a state court, relying on state law, to resolve.

At first glance, this may seem to be the case of strange bedfellows.  After all, it was the Business Roundtable that challenged the SEC’s shareholder access rule and essentially helped generate an opinion from the DC Circuit that will bedevil rulemaking endeavors for years to come. For an article criticizing that decision, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC. 

But in fact the connection is a natural one.  To see the two as strange bedfellows is to see the role of the SEC as anti-business.  It is not.  The Commission’s goal of ensuring efficient capital markets benefits all participants.  It may be the case that in ensuring an appropriate regulatory regime the Commission sometimes tilts in favor of investors and shareholders.  But this is in large part a consequence of a shareholder unfriendly regulatory environment in Delaware.  It is a restoration of a necessary balance. 

Still, it seems as if the Business Roundtable and the SEC often find themselves on opposite sides.  Shareholder access is an obvious example.  What explains this?  It is not that one has a pro and the other an anti -business approach to regulation.  The difference is horizon. 

In the shareholder access case, those challenging access essentially sought to preserve the status quo.  The status quo is that directors are nominated by the board (often with considerable influence from the CEO, something chronicled in Essay: Neutralizing the Board of Directors and the Impact on Diversity) and elected by shareholders in a Soviet style contest (this is true even with majority vote provisions). 

As a result, directors often do not represent the interests of shareholders.  Under this electoral approach, there have been repeated breakdowns at the board level that have spurred calls for additional regulation, whether the failure to monitor for fraud that contributed to the pressure for Sarbanes Oxley or the failure to monitor for risk that contributed to the adoption of Dodd Frank. 

The status quo leaves in place a system that has resulted in a cycle of board failure followed by federal intervention and increased regulation.   Certainly this can be seen most clearly in the area of executive compensation, with the SEC now regulating compensation committees, overseeing say on pay, policing clawbacks, and banning practices that induce excessive risk taking.

Access alters the status quo but it also likely alters the cycle of board failure followed by increased federal regulation.  Access, under the model put forward by the SEC, limited the authority to long term investors and only permitted the election of a minority of directors on the board.  The presence of these directors in the boardroom would likely result in increased oversight of critical areas such as risk management and executive compensation.  Access challenges would also provide shareholders with an outlet for their frustration with management and reduce the need to seek a regulatory solution. 

Finally, the presence of shareholder nominated directors would probably stiffen the spine of the remaining directors and, at least in some cases, increasing the degree of oversight.  Under the current configuration, no one on the board wants a reputation as a trouble maker or someone who can be counted on to oppose the CEO.  This no doubt stifles genuine disagreement.  But if the disagreement is initiated by shareholder nominated directors, the others have more room to participate.

In other words, access holds the promise that by changing the status quo the inevitable dynamic of board failure followed by increased regulation will be allayed.  It is a long term benefit but one that trumps the short term consequences.  For now, however, the status quo remains in place and, as a result, so does the cycle of breakdown and regulation.