Virginia Law & Business Review








Corporate law has done a very bad job on executive pay: executives have been rewarded for stellar performance that turned out to be anything but stellar, and shareholders have had no meaningful recourse. Indeed, there are many other such cases, where there is no breach of the fiduciary duties of care and loyalty, but the board's behavior nevertheless smacks of a classic agency problem known as structural bias. We argue that law on the books and as enforced is not well situated to deal with structural bias. What shows some promise is the marshaling of extra legal forces that effectively extend Delaware corporate law, constituting a penumbra. Corporate directors' behavior is very much influenced by what is in the penumbra. The penumbra is importantly influenced by the Delaware corporate judiciary's participation in the corporate law debate in fora other than the courtroom. Law firm memos to clients play an important role too, conveying both the court holdings and the dicta as advice to clients. The penumbra also includes the many voices participating in the corporate governance debate through shareholder proposals, court cases brought about shareholder proposals, the views of corporate governance activists involved in the debate. While the penumbra is not an unambiguous good - certainly, actors with problematic self-interests may be among those helping shape it - it provides an important counterweight to the directors' ability to prefer their own interests over those of their principals, the corporation and its shareholders.


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