Reply #9: It’s Time To Federalize Corporate Charters [View All]

[goodhue]

http://www.business-ethics.com/FederalizeCorpChart.htm

It’s Time To Federalize
Corporate Charters
We can no longer leave
corporate chartering in the
lax hands of the states
By Kent Greenfield

A good many reforms have been proposed in the wake of recent corporate scandals, but there’s one that could make a real difference which has rarely been mentioned. It’s the idea that corporate governance should be a matter of federal rather than state law.

Currently in the U.S., the rules about internal governance of corporations come not from the U.S. Congress but from the various states. There’s an oddity about this: corporations don’t have to incorporate where a firm is headquartered, or even where it employs the most people. Managers can go jurisdiction-shopping, looking for the most advantageous set of laws, since getting a corporate charter is easier than getting a driver’s license. As a result, some 60 percent of the Fortune 500 is incorporated in Delaware, which is most protective of managerial interests. Managers then go back to Texas, California, or wherever and act as if nothing is odd about running a firm with a charter issued by a state having no relation to the company.

States compete to issue these corporate charters, because incorporation fees can fatten lean state budgets. It is no coincidence that the state that has won this competition, Delaware, has taken a largely laissez faire attitude to directorial oversight of everything from outlandish managerial compensation to companies’ compliance with laws. Indeed, Delaware allows companies to include provisions in their charters that limit directors’ liability if they fail to take their responsibilities seriously. Delaware has also refused to pass a ‘stakeholder statute,’ which would allow directors to consider the interests of employees and other stakeholders when important decisions are made.

Delaware courts have long been reluctant to disturb the decisions of corporate boards. It should be no surprise, then, when directors grow complacent and inattentive. Only when such docility costs shareholders billions do they notice that they have little recourse.

* * *

Federal chartering has been a popular idea at various times in our history, most recently during the late 1970s. Corporate crime was in the headlines, then, too, as almost 400 firms admitted to bribing foreign or American officials or making illegal campaign contributions. The idea of federal charters was dropped after the Reagan victory of 1980, but it deserves resuscitation now. If we are serious about reforming corporate behavior and protecting the public interest, we can no longer leave the states in charge of corporate chartering. The only way out of this mess is to have corporate law be federal law, and for Congress or the SEC to define the obligations of corporate managers and directors.

Kent Greenfield is an associate professor at Boston College Law School and a corporate law scholar. This commentary is reprinted from the on-line journal www.TomPaine.com

http://www.business-ethics.com/FederalizeCorpChart.htm