The Stupidity Rule

Later this week, former Citigroup honchos Charles Prince and Robert Rubin will be on the hotseat in front of the Congressional Financial Crisis Inquiry Commission. Ex-CEO Prince, who was forced out in 2007 in the face of billions in write-downs, received an exit bonus of $12.5 million. In the Times today, Andrew Ross Sorkin argues that the commissioners’ inquiries, rather than focus on exotic derivatives and subprime loans, should explore why even big mistakes have no consequences on Wall Street.

Sorkin’s piece heaps some commonsensical scorn on the “business judgment rule,” also known among some lawyers as the “stupidity rule”:

This rule, at its essence, means that no matter how dumb a board’s decisions proved to be, as long as they were not fraudulent and were made in good faith, they were O.K. Even running a company into the ground is O.K. as long as the board provided a “duty of care.”

In fairness, the rule itself is important to protect board members so they can make decisions on behalf of the company without fear that every one of them could be litigated to death. But it also has kept a whole lot of directors out of hot water.

-posted by brian