Chancellor Kathaleen McCormick on Governance, Compensation and Corporate Character

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Chancellor Kathaleen McCormick on Governance, Compensation and Corporate Character

At MLR Media’s 2024 The Character of the Corporation conference, which took place Nov. 20 at The University Club in New York City, Chancellor Kathaleen St. Jude McCormick of the Delaware Court of Chancery served as the opening keynote interview subject, setting the table for an agenda that would touch on many of the topics presenting the most difficult challenges for public company boards, including the nature of geopolitical risk, stakeholder engagement and executive compensation. The session allowed McCormick to provide her perspective on some of the most significant cases for boards and directors but also allowed her to explore not only the purpose of the corporation, but that of the board itself.

The Court and Corporate Governance

Chancellor McCormick described the two sources of Delaware law governing what boards conduct: statutory law — which is enabling for boards, with minimal restrictions, providing companies the tools they need to operate in the ordinary course and structure deals — and common law, or judge-made law, which governs fiduciary obligations. Given the role of judges in shaping fiduciary obligations, the Delaware Court of Chancery effectively makes law for the fiduciary in the room.

“What that means is: each decision of our court serves as a parable for future boards,” said Chancellor McCormick. “And it’s for that reason that we set out the facts and laws and legal principles in such painstaking detail in our written decisions.”

Less Than Meets the Eye?

Chancellor McCormick addressed the 2024 market-practice amendments to the Delaware General Corporation Law, which caused a stir and attracted international attention.  The amendments nullified a trio of decisions by the Delaware Court of Chancery. The situation was detailed in “The Battle Over Who Makes the Rules for U.S. Companies, a Financial Times article that featured the subhead “Lawyers, judges and legislators are locked in a war of words in Delaware, the legal home of more corporations than any other state.” When asked for her reaction to that characterization, Chancellor McCormick – while giving credit to the “great” work of The Financial Times — described the article as “a situation where the headline overstates the reality on the ground.”

“The reality is that [in 2024] the group of people responsible for proposing changes to our statutory law, in my view, broke from tradition and were slightly more aggressive in changing Delaware law than we have historically been. I disagreed with the amendments and the process that led to them, I spoke my mind respectfully, and I’d speak my mind again,” said McCormick. “But at the end of the day, after the amendments were passed, we all went back to our desks to continue doing our jobs. We really don’t have time for petty quarrels. Given the large volume of companies that have place their trust in Delaware, our court is a very busy place.”

Challenge Perceptions on Exec Comp Rulings

Chancellor McCormick has indeed been very busy. You may have read that one of the things preventing her from having idle hands was her position as the deciding judge in Tornetta v. Musk, the case that centered around Musk’s $55.8 billion compensation package with Tesla and Tesla’s efforts to “ratify” the package with a second stockholder vote. Chancellor McCormick, who ruled against the defendants in both instances, was not able to speak in detail about the case since, at the time of her keynote interview, it was ongoing. But she offered a word of caution to directors concerned about the court’s weighing in on what is typically the domain of board compensation committees.

“We encourage boards to seek legal advice. We want them to have candid discussions with their advisors. We protect that advice in myriad ways under Delaware law,” said McCormick. “And if you have advisers telling you that Delaware law has suddenly changed and become totally untethered to precedent, challenge that. Read the decisions yourself. Recall that the cases that go to trial and require post-trial decisions often involve the most egregious fact patterns. They’re the cases where a plaintiff’s firm thought there was value in bringing the case and they weren’t dismissed.”

Maximize Value While “Doing Good”

The theme of this year’s The Character of the Corporation conference was “Corporate Purpose, Board Purpose,” allowing attendees to explore the question of whether the board’s purpose should be the same as the corporation’s purpose, or if there is value in the board having a purpose that is slightly different from that of its company. Would such a dichotomy help to balance the interests of a company’s many stakeholders while maintaining the core objectives of corporate governance? Chancellor McCormick stated her belief that the board’s purpose is maximizing value for its shareholders, and she believes that value maximization comes in many forms.

“Under Delaware law, the focus of corporate conduct is at the board level. The board manages the business affairs of every Delaware corporation. And with great power comes great responsibility. It’s all subject to fiduciary obligations,” said McCormick. “A corporation exists in perpetuity by default, so a board has great freedom to maximize that value for the long term of the firm. I think that means that, in most circumstances, the board has the flexibility to consider stakeholders’ interests. For example, I haven’t met too many people who think it’s a bad idea to treat their employees well. Being good to your employees is a value-maximizing proposition. So, the character of the corporation can be a really positive, socially beneficial thing.”

She continued, “So, what is the character of the corporation? I think it can be what the board wants it to be, subject to minimal restrictions and basic fiduciary principles.”

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