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PUBLICATION:	SUNDAY NEWS JOURNAL
DATE:	03-02-2008
HEADLINE:	Del. legal academic sees time for a change

Del. legal academic sees time for a change

Corporate governance director pushes for pro-investor tweaks to state code

By MAUREEN MILFORD The News Journal

With his gentlemanly demeanor, Charles Elson doesn't come across as a firebrand.

Indeed, most people would peg him as an Ivy League lawyer at a Manhattan law firm. His bock-lined office at tlie Weinbeig Center for (Corporate Governance at the University of Delaware only reinforces that irnage. The lithograph of Harvard University hanging on the wall of his office is more than a display of his academic pedigree. It's a symbol of what makes Elson tick.

Elson inherited the picture from his grandfather, Charles Goodman, a Dartmouth graduate with a Master of Business Administration from Harvard. Goodman was working on Wall Street in the summer of 1929, just before the stock market crashed. When he retumed to Harvard in the faU, the world tumed upside down and Goodman's WaU Street career ended. With no jobs available after graduation, Goodman retumed to the family's textile business in Memphis, Tenn.

"That story stuck with me. When you think you got it down pat, you don't. I keep that picture in my office as a reminder that nothing is stable and set in concrete," Elson said.

Now, Elson, 48, who became the first director ofthe corporate governance center in 2000, is raising questions about Delaware's incorporations gold mine. He's publicly urging the state to consider small changes to its corporate law code in response to growing calls for

greater rights for stockholders in public companies. Delaware has created a near nionopoly on incorporations over the past century by quickly tweaking its constitution, laws and court when the need arises. Today, taxes, fees and other income paid by companies represent about one-third of Delaware's budget.

"That's what an academic does," he said. "If you're not challengmg people to think, you haven't done your job."

But Elson's call to action failed to rouse some legal experts in Delaware, who urged caution, saying.the state should not pass laws in haste. The so-called "Delaware Way" has been to deliberate behind the scenes.

"The way the law has been changed

over the last 40 years has involved input from lawyers who represent corporate clients and investors. It hasn't been done through public relations campaigns," said Lawrence Hamermesh, director of the Widener Institute of Delavvare Corporate and Business Law. "Any time we change the corporation law, there isn't a whole lot of public debate about it."

Richard Geisenberger, Delaware's assistant secretary of state and director of corporations, which oversees the incorporations business, said he respects Elson's right to express his individual view as a member of the academy. But Geisenbei^er echoed the sentiments of some Delaware lawyers when he said the university's corporate governance center wasn't created for the purpose of advocating changes to Delaware law.

Some in the legal community have suggested Elson isn't playing by Delaware rules.

"People have said to me there is process in Delaware," Geisenberger said.

Elson did present his views to the Delaware State Bar Association's corporations law section, according to Edward Welch, head of the section. "In fact, he's following the process. He subniitted his thoughts," Welch said.

To Elson, it boils down to risk analysis.

"If I'm wrong, there's no downside," said Elson, who is also a corporate director on two company boards. "If I'm right, there's a real problem."

Saul Levmore, dean of the University of Chicago Law School and Elson's former teacher, sees Elson as "a breath of fresh air."

"He believes Delaware should protect its asset, which is a near nionopoly," Levmore said. "This is not a rebellion."

Mel Eisenberg, a professor of law at the University of California School of Law, Berkeley,

See ELSON — F3

said he is bafiled that anyone could be upset with Elson's push for pro-investor changes to the Delaware corporate code.

"Charles is not far out," in his views, Eisenberg said. "Maybe he's not middle-of-theDelaware road, but he's middle ofthe road."

Elson has important champions in Delaware.

"He's doing this for all the right reasons," said R. Franklin Balotti, a corporate lawyer at Richards, Layt;on & Finger. "Charles genuinely believes that there's a threat of federal intervention in traditional state corporate law. It's an area of total judgment. You can't prove him right and can't prove him wrong. But there's nothing wrong with getting people thinking about it and coming to a decision."

One of Elson's great strengths is his massive Rolodex that includes people who are dealing with corporate governance issues in the trenches, said Delaware Supreme Court Chief Justice Myron Steeie. Elson has his pulse on issues percolating in the nation that could affect the state, Steeie said. Last year, Elson was named one of the most influential people in the field of corporate governance by Directorship magazine. He was listed No. 17 ofthe top 100.

"It seems to me there's profit in talking about it and being prepared to deal with it," Steeie said.

A concem for public interest

Because ofhis sunny disposition, Elson seems like the guy who would be voted "most popular" in high school.

But Elson clearly has strong convictions - and he's not afraid to act on them, say those who have known him for years.

"He cares passionately about things and what is in the public interest," said 4th Circuit Court of Appeals Judge J. Harvie Wilkinson HI, who was Elson's former professor. "He is not selfish in his agenda at aU."

Wilkinson, who employed Elson as his law clerk, said Elson loves to debate legal matters.

"He's a live wire," Wilkinson

said. "But he's a total gentleman."

Balotti said "he's a reaUy caring, wonderful person."

Doreen Kelly Ruyak, director of msirketing and development with the National Association of Corporate Directors in Washington, said she frequently asks Elson to participate in conferences because she wants people who will raise the hard issues. It doesn't hurt that Elson is a director of AutoZone Inc. and HealthSouth Corp., as well as an academic, she said.

"There's a lot of difficult decisions for boards today that go beyond [SEC] compliance," she said. "He's able to speak for directors. And he will hold his peers accountable."

Elson was a "contrarian" from his childhood in Atlanta, The oldest son of a wealthy entrepreneur, Elson was discouraged by his father from going to law school when he was in prep school at Andover. The senior Elson has gone to law school, but never practiced.

"I liked the law. He did not," Elson said. "I didn't take the advice."

While majoring in American history at Harvard, Elson thought he would be a legal historian. Later, at the University of Virginia School of Law, he considered being a litigator because he "liked to argue," he said.

But during a summer internship at a New York City law firm, Elson came to the conclusion that litigation was "form over substance." After he took a corporate law course with Levmore, he was hooked on corporate governance.

Once out of law school, Elson worked in mergers and acquisition and corporate finance at Sullivan & Cromwell in Manhattan. Then one of Elson's law professors took him aside on a boat trip in Russia and told Elson he was a natural teacher. The key was to make the jump to academia before it was too hard to walk away from the money in law. Elson sent out his resume and soon landed a job teaching corporate law at Stetson University CoUege of Law in Gulfport, Fla.

The story might have ended

there. But life took an abrupt turn in 1993, when Elson published a paper - against the advice ofa more senior law professor - that proposed that corporate directors be paid in stock.

"The theory is that director ownership aligns the interest of the director with the shareholder and breaks the traditional bond between director and management, which led to inefficient management - or what we caU management capture," he said.

Performance is questioned

As it tumed out, Elson tested his theory personally.

In 1996, Elson was approached by the Sunbeam Corp.'s then chief executive, Al Duniap, who was riding high as

a corporate cost-slasher. Duniap had read Elson's paper about director stock ownership and thought he would be a good presence on the board.

"To his credit, he wanted a governance advocate," Elson said.

As a show of commitment to the company and shareholders, Elson bought 5,000 shares of Simbeam for $100,000. But 18 months into his directorship. Sunbeam suffered huge losses and the stock tanked. Dunlap's performance was caUed into question.

"It was horrible. He was someone I liked and respected and I had invested in the company," Elson said.

At a board meeting, it became apparent something was terribly wrong at the company. Elson attempted to question Duniap about the problems and the meetmg tumed ugly, Elson said.

Within the week, Elson made the motion to fire Duniap. "He was speechless," Elson said.

StiU, Sunbeam couldn't be saved from bankruptcy, and Elson shared the misery of common stockholders. He lost his $100,000 investment, plus the taxes he paid on his director's eamings in worthless stock.

"I was there with the shareholders," Elson said. "I lost my investment and then some."

Life changed again in 1999, when Elson got a call from the University of Delaware to take a look at the newly formed corpo-

rate governance center at the University of Delaware.

"My first reaction was not to do it, because there wasn't a law school. I was a law professor," he said.

Elson came to Delaware and met with the corporate lawyers and judges. He was quickly sold. Today, he lives with his wife, Aimee, and two chUdren, Caroline, 8, and Chip, 4, in Westover Hills in Greenville.

The advantage of having someone of Elson's standmg in Delaware is that he can bring together the corporate elite for conferences on pressing issues in corporate governance. In November, for example, he held a seminar that discussed North Dakota's new shareholder-

friendly corporate code, among other things.

That kind of lively discussion adds a lot to the debate, Steeie said.

"He provides the forum for the dialogue and elevates the issue a little bit higher so it will be on the radar screen ofthe policymakers," said Bobby Gempesaw, dean ofthe Lemer CoUege of Business and Economics at the University of Delaware. "When Charles talks about this issue, it's not just Delaware it's aU over. It sends the message that instead of just being reactive, we're moving to look at progressive changes."

Contact Maureen Miljord at 324-2SS1 or mTnilford@deUiwareonUne.com.

IMAGINE

A third of state

revenue depends

on corporate

business. But a

national effort

could jeopardize

that. M

The News Journal/FRED COMEGYS

"If you're not challenging people to think, you haven't done your job," said Charles Elson of the Weinberg Center for Corporate Governance at the University of Delaware,