International Conference to Commemorate the Fortieth Anniversary of the Korean Commercial Code
Abstract
The revelation of massive accounting irregularities at Enron, which began to come to light last October, has ushered in a new wave of concern over the accountability of large publicly-traded corporations in the U.S. It was soon followed by stories of significant misconduct at Global Crossing, Tyco International, Adelphia Communications, WorldCom and others. As a result, the subject of corporate governance presently occupies a place at the forefront of U.S. public attention that it has not enjoyed for 25 years. From Main Street to the White House, Enron has touched a nerve. Most of the public condemnation has been reserved for the insiders. Kenneth Lay, Jeffrey Skilling and Andrew Fastow of Enron; John Rigas of Adelphia; and Bernard Ebbers of WorldCom have all received extensive front-page coverage in the U.S. and worldwide media over the last few months. But substantial criticism has also been directed at the boards of these companies, including the outside directors, for allowing the false accounting and other misconduct to occur and go undetected. Probably the most dramatic attacks have been reserved for the outside directors of Enron. The AFL-CIO, the umbrella group for U.S. labor unions, launched a campaign urging other companies on whose boards these individuals also served not to re-nominate them. This resulted in at least four of Enron's former outside directors stepping down from board seats at California Water Service Group, Harvard University, Invesco Funds and Motorola. What about the potential legal liability of these outside directors for the losses incurred by their corporations? In the U.S. this issue is governed by what has come to be known as the director's 'oversight function.' It is a branch of the larger duty of care. Most of the focus on the director's duty of care in recent decades has concerned specific decisions or actions by the board that turn out poorly, and the availability of the business judgment rule to protect the directors from personal liability for the resulting losses. The duty of oversight, which in contrast deals with the board's failure to take action, has received less attention and is, as a result, less well developed. This paper explores the director's duty of oversight: how it had evolved prior to Enron, the reforms that Enron has triggered, and what we may expect in the future. One distinctive feature of corporate governance in the U.S. is that the responsibility for making law is shared by many institutions - some better equipped to respond quickly than others. To date, Congress, the Securities & Exchange Commission and the New York Stock Exchange have each initiated corporate governance reforms in the wake of Enron. We have yet to hear, however, from the institutions with the primary responsibility for writing corporate law - the legislatures and courts of the various states, notably Delaware. In the final analysis, they will have principal responsibility for spelling out the content of the director's duty of oversight in the post-Enron world.
