America’s recent corporate scandals have wreaked havoc with other institutions empowered to regulate the nation’s errant businessmen: the Securities and Exchange Commission (SEC) lost a chairman, as did the New York Stock Exchange—and both have lost plenty of prestige. Yet Delaware has escaped, once again, untouched.
This is all the more extraordinary given Delaware’s controversial history. Under America’s federal system, state governments, rather than central government, enact most corporate laws. So there have always been suspicions that most states compete to pass laws which favour management (who get to choose where to incorporate) over shareholders (who don’t), and that Delaware has simply been the most successful at this game.
In 1899, the year that Delaware enacted its general corporate law, the American Law Review attacked its liberal, management-empowering statute as a bid by a “little community of truck-farmers and clam-diggers…determined to get her little, tiny, sweet, round, baby hand into the grab bag.”
Proposing to federalise corporate law in the 1970s, William Cary, a former SEC chairman, lashed out at his predicament in which “a pygmy among the 50 states prescribes, interprets, and indeed denigrates national corporate policy.”
Three times in the past century Delaware faced explicit federal threats to its influence. Yet today, even as Americans choke with disgust at monstrous executive pay, corporate looting and spineless boards, no one in power suggests that supposedly business-friendly Delaware should be stripped of its authority. This particular pygmy, it seems, plays a very fine game indeed.
As it must. More than one-quarter of state revenues come from its corporate franchise tax—about $3,000 a year for every household. Revenues from shareholder litigation and all those rich resident lawyers concentrate minds further. The legislature, Delaware’s powerful state bar association and its judiciary are all hypersensitive to anything that might damage the state’s attractiveness to companies.
One explanation for Delaware’s success is that its power is, in reality, something of an illusion; that America’s federal authorities, either directly or by threatening action, in effect set policy; and that Delaware has learned to toe the line. As Mark Roe of Harvard Law School puts it, “that which persists in Delaware is that which the federal authorities tolerate.”
Over the last century, the Feds have taken from Delaware its powers to police antitrust laws and the issuance of corporate securities (such as bonds and shares), and have made rules on disclosure, insider trading and director elections. In its most recent spasm, Congress last year passed the Sarbanes-Oxley act, which cuts deep into Delaware territory with its many prescriptions for boardroom behaviour.
Under pressure from the SEC, meanwhile, America’s big stock exchanges have passed onerous new listing requirements, with stricter rules for director independence, the composition of boardroom committees and the like.