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Abstract
The "irrational exuberance"' of the late 1990s, marked by frenzied stock trading and risky investment strategies, fueled aggressive accounting practices that exaggerated real achievements and camouflaged setbacks. During that time, investors accepted business practices that measured performance by revenue, rather than earnings or cash, and by the number of "eyeballs hitting Internet sites." According to Federal Reserve Chairman Alan Greenspan, "when greed swept through our nation, we were not prepared to address it." The result was accounting scandals at Enron, WorldCom and other organizations, in which directors failed to ask "questions of management to determine whether the stock was rising solely as a result of smoke and mirrors." In 2002, Congress responded to these scandals with the Sarbanes-Oxley Act, which modified governance, reporting and disclosure rules for public companies.
Beyond the federal legislative response, these corporate scandals occasioned a new judicial and regulatory focus on directors' good faith performance of their corporate responsibilities. This trend has been evident in recent state and federal court decisions addressing directors' fiduciary duty of good faith and the business judgment rule. Most notably, in the 2003 decision In re The Walt Disney Co. Derivative Litigation, a Delaware chancery court declined to apply the business judgment rule in a derivative action where the court found that the company's directors failed to exercise any judgment in their decision making.9 According to one commentator, the court's decision raised concerns among many corporate directors about their own personal liability when making decisions on behalf of their corporations, and "serves as a warning to corporate directors that state courts are now willing to allow plaintiffs to prove that directors who fail to exercise due care in carrying out their fiduciary duties should be liable to the shareholders of the corporation, even without the suggestion of self-dealing." The Disney case seems to have been well-received by the Delaware Supreme Court, suggesting that this approach will influence other jurisdictions.
Recommended Citation
Thomas Rivers,
How to Be Good: the Emphasis on Corporate Director's Good Faith in the Post-Enron Era,
58 Vanderbilt Law Review
631
(2005)
Available at: https://scholarship.law.vanderbilt.edu/vlr/vol58/iss2/6