The Model Business Corporation Act and Corporate Governance: An Enabling Statute Moves toward Normative Standards

Article excerpt

I

INTRODUCTION

The Model Business Corporation Act (MBCA) was first published in 1950 as a typical, if forward looking, enabling statute with a close family resemblance to the Delaware General Corporation Law and other state statutes of the time. With the governance failures and accounting frauds of the early part of this decade--leading to the enactment of the Sarbanes-Oxley Act of 2002--and the financial meltdown at the end of the decade, the drafting body and custodian of the MBCA, the Committee on Corporate Laws of the American Bar Association Section of Business Law (Committee), has moved, at times fitfully, but quite clearly, from the traditional enabling statute, with most governance choices left to private ordering, to the accommodation, if not embrace, of normative governance rules.

MBCA developments have often lagged behind those in Delaware--where the bar and legislature are closely attuned to corporate governance concerns, but with a strong director- and management-centric bias because of the economic importance to that state of its predominant role as a domicile for public companies. At times, however, as with amendments adopted in 2005, the MBCA has moved ahead of Delaware to break new ground. As in Delaware, the changes have been more evolutionary than revolutionary, and the Committee has remained committed to keeping the statute primarily an enabling vehicle, giving wide range for private ordering. (1) In fact, prior to 2001 (pre-Enron Age), before the public and political focus on corporate governance and the rebalancing of the relationship between shareholders, directors, and managers that began with the failures of Enron and WorldCom, governance changes in the MBCA, as in Delaware law, were infrequent and focused primarily on defining the role of directors and limiting their liability. Following the pre-Enron Age, the Committee made a course correction in the MBCA-responding to public concern, investor-activist calls for greater director accountability, and the threat of federally imposed normative governance standards--with a series of amendments that expanded the descriptions of directorial duties and provided specific authority for shareholders to become more directly involved in director elections.

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CHANGES REGARDING THE ROLE OF THE BOARD OF DIRECTORS

Section 8.01(b) of the MBCA sets forth the general role of the board of directors at public corporations and currently provides that "the business and affairs of the corporation shall be managed by or under the direction ... of its board of directors." (2) The Committee has made two key changes to this section in the past seventy years--one in 1974 and the other in 2005--the latter clearly in response to changing external circumstances. These changes reflect the different focuses of the Committee in the pre- and post-Enron Ages.

A. 1974 Amendments

In 1974, the Committee added the language "or under the direction of" to section 8.01(b) of the MBCA to recognize the limited roles and responsibilities of boards of directors, particularly at public corporations. Prior to the 1974 amendments, section8.01(b) pr[section]vided that "the business and affairs of a corporation shall be managed by a board of directors," and could be read as requiring active day-to-day involvement by directors in management. By 1974, it was recognized that, at least for public companies, this language did not accurately describe the role of directors. In adopting the 1974 amendments, the Committee noted that "many commentators had recently voiced concern that [the prior] language may be interpreted to mean that directors must become involved in the detailed administration of the corporation's affairs" and therefore, made this change "to adapt to current corporation life." (3) The purpose of the change was to "eliminate any ambiguity as to the director's role in formulating major management policy as opposed to direct involvement in day-to-day management in publicly-held corporations. …