A director's greatest virtue is the independence which allows him or her to challenge management decisions and evaluate corporate performance from a completely free and objective perspective. A director should not be beholden to management in any way. (1)
Enron. (2) WorldCom. (3) Tyco. (4) The accounting scandals surrounding these former market giants (5) have precipitated a revolution in corporate governance (6) the likes of which the nation has never seen. (7) Congress passed the Sarbanes-Oxley Act of 2002 (8) ("Sarbanes-Oxley") less than two months after the WorldCom debacle. (9) Sarbanes-Oxley required the Securities and Exchange Commission (SEC) to demand that self regulated organizations (SROs), like the New York Stock Exchange (NYSE) and National Association of Securities Dealers (NASD), promulgate new listing requirements focusing on corporate governance measures. (10)
At the heart of this new wave of reform is a call for more independence within boards of directors. (11) Sarbanes-Oxley requires there to be independent directors on all auditing committees. (12) The SROs have gone further and demand more of listed companies in terms of director independence. (13) Yet this is only the beginning. Institutional investors with significant market clout view Sarbanes-Oxley and the new SRO regulations as only a starting point. For example, one of the largest institutional investors in the country, CalPERS, (14) has an extensive manual specifically defining what kinds of directors they consider to be truly independent and outlining how such directors should function. (15)
Lurking beneath this global whirlwind (16) is an issue that has not gained much attention in recent scholarship: corporate charitable contributions. (17) As noted above, many governmental, regulatory, and institutional organizations have gone to great lengths to issue proposals to arrest the apparent decline of corporate governance standards. Few of them, however, have considered the likes of Ellen Futter. Ellen Futter is the president of the American Museum of Natural History in New York City and she "serves on four [corporate boards of directors]: insurer American International Group Inc., pharmaceutical maker Bristol-Myers Squibb Co., the energy company Consolidated Edison Inc. and J.P. Morgan Chase & Co., the nation's second-biggest bank." (18) During Futter's tenure as President, the Museum of Natural History has received several large donations from the corporations on whose boards Ms. Futter sits. (19) Corporations such as these seek independence and credibility in the boardroom by employing accomplished and well-respected individuals, such as Ms. Futter, as directors. (20) The individuals, of course, have many reasons for serving as a director, but one cannot overlook the opportunity for those individuals to fundraise for their respective organizations through their special relationship with the corporation and its leaders.
In the past, there were relatively few instances where the courts (21) squarely confronted this ostensible conflict of interests. (22) Recently, however, the Delaware Chancery Court has dealt with the issue in two cases that gained significant attention from the media. Though corporate charitable contributions were not the primary issue in In re Walt Disney Co. Derivative Litigation, the court did make a determination in that case that director Father Leo J. O'Donovan, the President of Georgetown University, was not influenced by Chief Executive Officer (CEO) Michael Eisner's charitable contributions to the university. (23) The court acknowledged that Eisner had made donations of over $1 million to the school since 1989, but it quickly dismissed the plaintiffs' allegation that the donations affected O'Donovan's independence as a director. (24) More recently, the court took a completely different stance in In re Oracle Corp. Derivative Litigation. (25) In this lengthy opinion, the court thoroughly analyzed the independence of two members of a special litigation committee CSLC") charged with considering allegations against Oracle. …