The Race to the Bottom got a nice mention in this month's edition of the Student Lawyer Magazine, an ABA publication.   As the Student Lawyer describes:   

• The University of Denver Sturm College of Law –based corporate governance blog, The Race to the Bottom ( www.therace tothebottom.org ), has earned its share of respect. It’s cited regularly in other blogs and mainstream media publications regarding shadowy topics in the world of the C-suite and board room, from CEO pay to cooking the books. Several students and their professor, J. Robert Brown, examine corporate America in their blog posts. This summer, the blog was recognized by trade publication Law Week Colorado as Best Law Blog.
  

A post on the decision by Law Week Colorado can be found here.  The Race to the Bottom remains something of a unique model, involving a collaberation of faculty and students.  It is hard work and the recognition is appreciated. 

Delaware law provides substantial benefits to companies with boards consisting of a majority of independent directors.  In the case of transactions not involving a controlling shareholder, courts analyze conflict of interest transactions under the duty of care and the business judgment rule.  In demand excusal cases, demand will not be excused where the board has a majority of independent directors.  Yet despite providing these advantages, an analysis of Delaware decisions indicates that, in practice, the test (and the application of the test) for independence does not ensure that directors are in fact independent.  This issue is discussed at length here.   

The topic is a large one and will be addressed throughout the life of this Blog.  Still, we start today with a list of the top reasons why directors treated as independent under Delaware Law are in fact often not independent. 

1. Delaware courts use a subjective test for defining director independence then disregard it when convenient (such as the categorical exclusion of fees);

2. Delaware courts effectively exclude from the analysis of independence personal relationships (other than those arising from family bonds);

3. Delaware courts largely treat as independent directors employed by non-profit organizations where the non-profit receives substantial contributions from the company (or its employees);

4. Delaware courts impose unreasonable pleading standards, frequently terminating the analysis of independence at the motion to dismiss stage, precluding the use of discovery as a means of uncovering a director’s actual relationship with the company or CEO;

5. Delaware courts typically examine each allegation of non-independence in isolation, without weighing all of the factors together;

6. Delaware courts make factual determinations in connection with the analysis of independent directors on motions to dismiss;

7. Delaware courts discourage challenges to independence by all but requiring plaintiffs to first invoke their inspection rights, a step that adds costs and delay without yielding appreciable benefits;

8. Delaware courts rely on the standards employed by the stock exchanges to justify findings of independence, without discussing the differences in the standards;

9. Delaware courts routinely disregard information suggesting a lack of independence at the motion to dismiss stage; and

10. Delaware courts routinely require, on a motion to dismiss, that plaintiffs produce information about independence that cannot be obtained in the public domain.

1. SOX has improved investor confidence in the financial disclosure of public companies (perhaps there's a relationship between investor confidence and the record high set by the Dow Jones Average last Wednesday, Jan. 24);  see also the student post below this one;  

2. SOX has resulted in the uncovering of a considerable amount of dodgy accounting. A record number of companies have restated their financial statements, with the GAO estimating that the market capitalization of companies announcing restatements between July 2002 and Sept. 2005 "decreased by $63 billion when adjusted for market movement."  GAO Report 6-678 (July 2006).

3. SOX (and the fear of liability) has contributed to the transformation of accounting firms into true gatekeepers against fraud and sloppy financial statements;

4. SOX has resulted in the Audit Committee of the Board of Directors becoming a real watchdog over the accuracy of the financial statements;

5. SOX and the certification requirement has largely eliminated the Bernie Ebbers defense (aka the Ostrich defense) that the financial statements were not the responsibility of the CEO; 

6. SOX, by requiring the attestation of internal controls by independent auditors, has significantly improved the ability of the board to monitor the company’s activities, correcting one of the most serious weaknesses in fiduciary obligations under Delaware law;

7. SOX, by requiring changes of beneficial ownership within two days, has made the practice of backdating more obvious and more difficult;

8. SOX has provided in house counsel with greater leverage to ensure legal and ethical business practices;

9. SOX has provided a greater role for the SEC in the corporate governance process, undoing some of the harm caused by Business Roundtable v. SEC, 905 F.2d 406 (DC Cir. 1990) (see for example the use of the case by Roberta Karmel at Brooklyn Law School citing the case in a letter to the Commission questioning the agency's rule making authority to give shareholders access to management's proxy statement for their director nominees); 

10. SOX has resulted in the widespread use of disclosure committees inside corporate america, broadening the voices involved in the disclosure process; and (I know I said only 10, but its hard to be so limiting when it comes to the benefits of SOX);

11. SOX has encouraged employees to come forward with concerns about financial reporting, through both whistle blowing protections and mechanism that provide mandatory access to the board of directors.