In an August 2, 2011 post on the New York Times Dealbook blog entitled "Ex-Directors of Failed Firms Have Little to Fear"(here), Ohio State University Law Professor Steven Davidoff voices his consternation that the former directors of Bear Stearns and Lehman Brothers seemingly will be able to "continue their prominent careers." Davidoff seems miffed that the former board members of these failed firms have not only been able to get on with their lives but many of them have continued to serve as board directors. Others maintain roles of prominence in academia or business. (Bear Stearns of course did not actually fail but for simplicity of expression in this post I have referred to it using that term.) Davidoff acknowledges that the financial crisis that accompanied these companies' failures was an "enormously complex event" and that officials at these failed firms can argue that "it was the crisis itself – not poor management or inadequate board supervision – that caused their firm's demise." Given that, Davidoff is "not arguing that these directors be tarred and feathered or that they should not be able to earn a living." He is just suggesting that "at a minimum…other public companies might be more hesitant to keep these failed directors on their boards." Davidoff's column does strain to maintain a balanced point of view, but there is nevertheless an unmistakable underlying assumption that these former board members should be shunned or otherwise punished as a result of their former firms' failures. Davidoff's apparent thesis is consistent with a prior post of his, in which he argued that directors should be held liable more often, a point of view with which I disagreed here. I also have some concerns about Davidoff's latest post, which I have outline below. I acknowledge that I have certain biases, which I outlined in my response to Davidoff's prior post. My concerns with the latest post are as folllows. First, the SEC has the authority to bring enforcement actions and, among other things, to impose lifetime bans on individuals from future service as board members of public companies. The SEC has not brought any such action against these individuals, presumably because it does not believe it could bring a meritorious claim against them. Indeed, these individuals have not been found blameworthy or culpable in any way by any legal authority in connection with the demise of these two firms Second, there is a peculiarly American notion that is something has gone wrong, then somebody must be punished – even if the designated scapegoat is not directly to blame for what has gone wrong. But it seems to me that little purpose would be served by forcing these persons onto the shelf and out of productive contributions to corporate life. Stigmatizing them would accomplish nothing, except perhaps satisfaction of some tribal atavistic urge for retribution. It bothers Davidoff that these individuals have been getting on with their lives and in particular that there these individuals apparently have not taken a permanent and disqualifying hit to their reputations. Davidoff ascribes this to the alleged "decline in importance of reputation on Wall Street." I suspect strongly that these individuals would have a far different view of whether or not their have been consequences for them as a result of the firms' failures, and in particular I suspect they would have a lot to say on the specific topic of reputation. Even though these individuals have not been found to have done anything wrong, I am quite certain that these individuals' lives have been quite disrupted as a result of these firms' collapses. Not only has there been the harsh scrutiny they have all had to face, but there has also been a seemingly endless procession of legal events and proceedings. These individuals are undoubtedly spending more time than is healthy in the company of lawyers. I simply cannot agree that reputation has declined in importance, on Wall Street or anywhere else. For several years I have participated in the Stanford Law School Directors College, in connection with which an attendee survey is conducted in which, among other things, the attendees express their concerns about governance issues. An overwhelming majority of attendees indicate that their biggest concern with respect to problems at the companies with which they are associated is not the risk of liability as such, but the risk to their reputations. Most corporate directors have spent their entire lives building their professional reputations and they take them very seriously. None of the former directors affiliated with Bear Stearns and Lehman Brothers can escape their association with those firms' demises. The fact that these individuals have been able to get on with their lives despite these failure of their former firms can be interpreted in a number of ways. One way is to conclude that in the "the old boy network of Wall Street," as Davidoff calls it, the corrupt fat cats complacently overlook each others' peccadillos while lighting cigars with $100 bills. Another way to look at is that the kinds of individuals who serve on public company boards often are highly accomplished individuals whose talents and skills are sufficient that their services are still valued in other contexts despite the tarnish that comes even with association with an event like the collapses of Bear Stearns and Lehman Brothers. It seems to me that Davidoff's real gripe is not really with the individuals themselves but rather is with the rest of the corporate, academic and business world, which just doesn't think, as he does, that these individuals really ought to be more seriously stigmatized for their association with the failed firms. Perhaps these other organizations can see that these individuals have not been found culpable in any way for what happened at Bear Stearns and at Lehman. Perhaps these other organizations, motivated to act in their own best interests, value the service of the individuals for all of their skill, knowledge and experience, notwithstanding their association with Bear Stearns and Lehman. The bottom line for me is that I see no value in demonizing individuals who have not been found to have done anything wrong. To me, allowing on the one hand that these individuals shouldn't be tarred and feathered and should be able to earn a living, but on other hand suggesting that their should be some things they shouldn't be allowed to do is like arguing that they should be allowed to continue their lives, but should just have to wear some type of scarlet letter for which they are universally shunned. I just can't get on board with that. There are plenty of legal mechanisms in our country for determining culpability and imposing penalties. I am very wary of any suggestion that there should be social penalties outside of those processes.
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