Tuesday, September 09, 2014
Call for Papers: AALS Program of the Business Associations Section
You may have seen this elsewhere on the web, or on the listserv, but if not -- you have until Friday! You can submit a paper or an abstract.
CFP: AALS Program of the Business Associations Section
AALS Program of the Business Associations Section
The Future of the Corporate Board
AALS Annual Meeting, January 4, 2015
The AALS Section on Business Associations is pleased to announce that it is sponsoring a Call for Papers for its program on Sunday, January 4th at the AALS 2015 Annual Meeting in Washington, DC.
The topic of the program and call for papers is “The Future of the Corporate Board.”How will boards adapt to recent changes and challenges in the business, legal, and social environment in which corporations operate? The recent global financial crisis and the continuing need for many corporations to compete internationally mean that today’s boards face economic pressures that their predecessors did not. This pressure is heightened by the rise of activist investors, many of whom aggressively push for changes to corporate management and governance. On the legal front, new regulations, such as Dodd-Frank, impose heightened compliance and other burdens on many companies and boards. And on the social front, pressures for socially responsible corporate behavior and greater racial and gender diversity on boards continues. Our program seeks to examine the ways in which boards have, and will in the future, respond to these challenges.
Form and length of submission
Eligible law faculty are invited to submit manuscripts or abstracts that address any of the foregoing topics. Abstracts should be comprehensive enough to allow the review committee to meaningfully evaluate the aims and likely content of papers they propose. Papers may be accepted for publication but must not be published prior to the Annual Meeting. Untenured faculty members are particularly encouraged to submit manuscripts or abstracts.
The initial review of the papers will be blind. Accordingly the author should submit a cover letter with the paper. However, the paper itself, including the title page and footnotes must not contain any references identifying the author or the author’s school. The submitting author is responsible for taking any steps necessary to redact self-identifying text or footnotes.
Deadline and submission method
To be considered, papers must be submitted electronically to Kim Krawiec at firstname.lastname@example.org. The deadline for submission is SEPTEMBER 12, 2014.
Papers will be selected after review by members of the section’s Executive Committee. The authors of the selected papers will be notified by September 28, 2014.
The Call for Paper participants will be responsible for paying their annual meeting registration fee and travel expenses.
Full-time faculty members of AALS member law schools are eligible to submit papers. The following are ineligible to submit: foreign, visiting (without a full-time position at an AALS member law school) and adjunct faculty members, graduate students, fellows, non-law school faculty, and faculty at fee-paid non-member schools. Papers co-authored with a person ineligible to submit on their own may be submitted by the eligible co-author.
Please forward this Call for Papers to any eligible faculty who might be interested.
Wednesday, July 16, 2014
Two (more) op-eds on Hobby Lobby
Ann Lipton has nicely captured the zeitgeist with the notion that "there is something of an obligation for all corporate law bloggers to weigh in on Hobby Lobby." Today, for example, the Conglomerate is starting up on its second Hobby Lobby symposium. So it is with some trepidation that I highlight for you two additional pieces on that speak to this case once again. First, Brett McDonnell defends the decision from a progressive perspective in "Ideological Blind Spots: The Left on Hobby Lobby," appearing in the Minneapolis Star-Tribune. Brett argues that the decision provides space for corporations to have goals outside of shareholder wealth maximization -- something that liberals have promoted in the corporate social responsibility context. The op-ed also recounts the history of RFRA, which overturned Justice Scalia's Smith opinion, and points out that progressives have traditionally been defenders of religious liberty and toleration. The op-ed has (at this point in time) 716 comments, which kind of puts us blawgs to shame.
Second, Grant Hayden and I have penned "Who Controls Corporate Culture?", which appears this morning in the St. Louis Post-Dispatch. Although not written with this intention, it is actually a nice complement/rejoinder to Brett's piece. It argues that folks are riled up about Hobby Lobby in part because the company's 13,000 employees had no role in making the decision. If corporations are going to be according political and religious rights, we argue, the employees need a voice in choosing how to exercise them, particularly when the primary impact is on employees.
Monday, June 23, 2014
Halliburton and the State of the Efficient Capital Markets Hypothesis
Very interesting set of opinions in Halliburton v. Erica P. John Fund, Inc. The continuing vitality of the efficient capital markets hypothesis is one of the big issues in the case, and there are numerous cites to law profs, including the law professors' amicus brief and articles by Lynn Stout, Don Langevoort, and James Cox, among others. Both big opinions cite to Lev and de Villiers. A very interesting example of when theory has a big role to play in doctrine.
From Chief Justice Roberts's majority opinion:
Even though the efficient capital markets hypothesis may have“garnered substantial criticism since Basic,” post, at 6 (THOMAS, J., concurring in judgment), Halliburton has not identified the kind of fundamental shift in economic theory that could justify overruling a precedent on the ground that it misunderstood, or has since been overtaken by, economic realities.
From Justice Thomas's concurrence in judgment:
The Court’s first assumption was that “most publicly available information”—including public misstatements—“is reflected in [the] market price” of a security. [Basic, 485 U.S.] at 247. The Court grounded that assumption in “empirical studies” testing a then-nascent economic theory known as the efficient capital markets hypothesis. Id., at 246–247. Specifically, the Court relied upon the “semi-strong” version of that theory, which posits that the average investor cannot earn above-market returns (i.e., “beat the market”) in an efficient market by trading on the basis of publicly available information. See, e.g., Stout, The Mechanisms of Market Inefficiency: An Introduction to the New Finance, 28 J. Corp. L. 635, 640, and n. 24 (2003) (citing Fama, Efficient Capital Markets: A Review of Theory and Empirical Work, 25 J. Finance 383, 388 (1970)). The upshot of the hypothesis is that “the market price of shares traded on well-developed markets [will] reflec[t] all publicly available information, and, hence, any material misrepresentations.” Basic, supra, at 246. At the time of Basic, this version of the efficient capital markets hypothesis was “widely accepted.” See Dunbar & Heller, [Fraud on the Market Meets Behavioral Finance, 31 Del. J. Corporate L. 455, 463–464 (2006)].
This view of market efficiency has since lost its luster. See, e.g., Langevoort, Basic at Twenty: Rethinking Fraud on the Market, 2009 Wis. L. Rev. 151, 175 (“Doubts about the strength and pervasiveness of market efficiency are much greater today than they were in the mid-1980s”). . . .
Tuesday, May 27, 2014
Book club on "Making the Modern American Fiscal State"
Just wanted to provide a heads-up that on Tuesday, June 10, we'll be hosting a book club on Ajay Mehrotra's new book, "Making the Modern American Fiscal State: Law, Politics, and the Rise of Progressive Taxation, 1877-1929." Joining us for the club will be:
- Reuven Avi-Yonah, University of Michigan Law School
- Steven Bank, UCLA School of Law
- Matthew Lindsay, University of Baltimore School of Law
- Susan Morse, University of Texas School of Law
- Julia Ott, The New School
- Nicholas Parrillo, Yale Law School
Hope you can join us.
Thursday, May 15, 2014
Wrap-Up for Book Club on "Corporate Governance in the Common-Law World"
Many thanks to all our clubbers, particularly Christopher Bruner, for a terrific discussion on "Corporate Governance in the Common-Law World: The Political Foundations of Shareholder Power." Here are the posts from the club:
- Introductory Post
- Sokol: Common Law Corporate Governance
- McDonnell: Corporate Governance and Shareholder Dispersion
- Gold: Common Law Corporate Governance and Legal Ambivalence
- Heminway: Uncommon Law: Social Welfare and Corporate Governance in the Common-Law World
- Bruner: Is the UK really more shareholder-centric than the US?
- McDonnell: The Timing of Corporate Law Developments: Two Questions
- Cioffi: Chris Bruner on Corporate Governance in the Common Law World-Is There a New Grand Bargain Underlying the Varieties of Liberalism?
- Bruner: Corporate governance and social welfare policy -- what's the mechanism?
- Bodie: Bruner Book Club: The Relationship between the Corporation, Employees, and Social Welfare
- Bruner: Corporate governance and social welfare -- mapping the explanatory domain
- Bruner: Corporate governance and social welfare -- stability and change
- Cioffi: Bruner Book Club, continued: Mechanisms, Institutions, & (In)coherence
Many thanks to everyone for a great club.
Tuesday, May 13, 2014
Bruner Book Club: The Relationship between the Corporation, Employees, and Social Welfare
Many thanks to the participants in the club for a great set of responses. I'm coming in late, and given my location here on the employment side of the corporate governance/social welfare axis, I'm going to focus on the social welfare variable in Christopher's equation.
Corporate Governance in a Common-Law World does a great service in expanding and deepening the debate over the nature of corporate governance. Employees have been pretty much left out of the corporate-governance models in legal academia, going back at least to Easterbrook and Fischel, and perhaps as far as Berle and Means. That has changed somewhat, recently: for example, Bruner aptly provides some nice attention to the Gourevitch and Shinn book, which (among others, including John Cioffi) brings employees into the traditional manager/shareholder corporate-governance duality. But Bruner himself has gone a step further: he argues that corporate goverance policies are inextricably intertwined with employee-related social policies -- characterized in his book as "social welfare." By drawing a connection between corporate law and labor and employment law, Bruner has expanded the scope of "the law of the firm," for lack of a better term, to include not just shareholders, boards, and top-level executives, but rather all the participants in the firm, especially employees.
However, there are three issues I would like to raise in this post for further consideration. First, I want to question the definition of "social welfare" within Bruner's model. There has been a lot of focus on the scope of the "corporate governance" variable in his analysis, and I think Brett rightly brings up the roles of shareholder suits and executive compensation. But how about the social welfare side of the equation? I would have appreciated a greater effort by Bruner to develop his social welfare variable more rigorously, by explaining exactly what factors into it. The book does this for corporate governance, using a series of charts to compare differences between the common-law countries as to specific policies. However, his approach to social welfare is more anecdotal, and lumps in a rather large and somewhat amorphous set of policies.
To some extent, Bruner arguably simplifies "corporate governance" into takeover policy, and "social welfare" into unemployment protections. The easy correlation is that the risk of job loss from mergers and acquisitions would be balanced by national health insurance, unemployment insurance, and job retraining programs. But while his work is clearly not limited to that dynamic, it is unclear how far out it expands, particularly with respect to social welfare. He also relies on the work of the late, great David Charny, who set out a list of policies related to what he termed "the employee welfare state." But Bruner does not extensively develop Charny's list. He also focuses on the health care programs in the various countries, comparing the NHS in Britain (and similar systems in Australia and Canada) with the U.S.'s patchwork system of insurance and care. But social welfare policy cannot be limited to health insurance, can it? It would be interesting to see Bruner develop a sharper definition of this category in future work, with a more nuanced approach to subcategories. Is all of "social welfare" correlated with corporate governance, or can we narrow it down to specific subcategories of employee protections?
I bring up the underdeveloped concept of social welfare especially since Bruner makes some very nice observations about the lack of nuance in existing comparative corporate governance models. His criticisms of LLSV, for example, for failing to account for differences between common-law countries make a nice point about the importance of going beyond rather chunky categorizations. But his social welfare category risks making the same mistake. Just as a very particularized example, Sam Estreicher and Jeff Hirsch have recently challenged the notion that U.S. unjust dismissal law is much less employee-friendly than that of other developed countries. And this challenge is on a particular aspect of social welfare policy that most commentators would have thought to be well-settled. So I think we need a sharper definition of the social welfare category, and more nuanced comparisons within that definition, if social welfare is to be a meaningful variable in Bruner's equation.
Second, and perhaps a more interesting question from my perspective, is: what forces drove the societal balancing act into these two sets of policy spheres? Why, in particular, did employees not demand more ownership of the enterprise, rather than simply pushing for beefed-up social welfare programs? Social welfare policy seems like a second-best set of ameliorative efforts to address the lack of power that employees have within their own firms. Labor law is the most direct "social welfare" effort to address that internal power imbalance. However, that set of laws has been very careful calibrated to avoid any infringement upon the so-called "core of entrepreneurial control." Labor law carves out a space for employee power, but that power falls outside the decision-making center of the firm. It's not inevitable that employees must look to generate power outside of the firm, is it? And if not, then why did employees and other members of society choose the social welfare policies at issue as their means of balancing out pro-shareholder corporate governance policies? Bruner mentions two minor aspects of British company law that protect employees: statutory authority to consider shareholder interests and a statutory mechanism for providing payments to employees in the face of bankruptcy or closure. But such protections are, in Bruner's words, still "fundamentally quite shareholder-centric" in their orientation (p. 158). Why didn't or haven't employees pressed for more within corporate law?
Third, Bruner's model implicitly assumes that a pro-shareholder approach is necessarily an anti-stakeholder, particularly anti-employee, approach, at least to the extent that it needs to be balanced out by pro-employee social welfare policies. However, some of the recent battles between shareholders and managers do not seem to fit this rubric. Lucian Bebchuk, for example, is perhaps the scholar most associated with shareholder primacy, but he has been excoriated by business groups for being a tool of not only activist shareholders but also public-employee pension funds. The late Larry Ribstein was deeply suspicious of pro-shareholder reforms such as proxy access and say-on-pay, as he believed they allowed unions to have an undue influence over corporate policy. Bruner is careful in places to acknowledge that pro-shareholder is not necessarily conservative or liberal, but I think his model implicitly assumes that pro-shareholder is anti-employee. To some extent, the efforts of union pension funds to increase shareholder rights seems to belie this notion. Australia's superannuation program, discussed by Bruner, is another interesting example of how this contrast is breaking down in some places and spaces.
I have all these questions because Christopher has written such a provocative, original, and thoughtful study of the relationship between corporations, shareholders, employees, and society. His contribution has significantly added to the extensive literature on these issues, and I'm sure that this book is just the beginning.
Uncommon Law: Social Welfare and Corporate Governance in the Common-Law World
Reports of the uniformity of corporate governance among common law jurisdictions are greatly exaggerated (at least when it comes to shareholder rights and security, anyway). This is an essential descriptive thesis of Chris Bruner's Corporate Governance in the Common-Law World: The Political Foundations of Shareholder Power. It also is undoubtedly an engaging topic for a book--one that demanded my attention and resonated with me almost immediately. In research I did a few years ago for what ultimately became a draft paper and book chapter, I had explored the validity of claims of international convergence in insider trading regulation and found much the same thing that Bruner finds in this book: facial similarities in legal structures and doctrine may mask more interesting and telling differences.
The descriptive account is important, but it is not the heart and soul of the book. Rather, the core value of the book is that it strikes out beyond culture, history, and economics to politics--specifically, social welfare politics--to explain the differences among the corporate governance systems in the four jurisdictions studied--the United States, the United Kingdom, Australia, and Canada. By demonstrating that changes in shareholder power and protections vary with social welfare dynamics, the book begs a far more significant conclusion: that corporate governance oppresses and empowers the populace in much the same way that state government does and that the corporation therefore may be an arm of or a substitute for state government in promoting or effectuating policy. This take-away is unsurprising to me; it is intuitive and sometimes obvious in other contexts. Nevertheless, the weight of proof is hard to come by, and I am grateful for Bruner's work in providing it.
Many elements of the story are compelling.In light of debates here in the United States about the role of shareholders in the corporate form, it was of particular interest to me that the U.K. Companies Act (which I have not independently studied to an significant degree) casts shareholders in the role of principals that can dictate the activities of corporate directors. I had seen evidence of shareholder centrism in takeover regulation in the U.K. (which I teach in Comparative Mergers & Acquisitions, when I get the chance to teach that course), but the revelation that this shareholder-friendliness extends to the broader management function of the firm helped to explain and normalize the pro-shareholder mergers and acquisitions doctrine.
This observation about the doctrine also demonstrates a fundamental difference between the doctrine in the United States and the United Kingdom: in the United Kingdom, the board is an agent of the shareholders. While folks try to make that argument under U.S. law, the agency is not complete given, among other things, the inability of shareholders to direct the board (in most cases). In this aspect, the book's account of U.S. corporate governance offers support, at least from a comparative perspective, for the descriptive accuracy of Steve Bainbridge's evolving director primacy theory. At the very least, as Bruner notes, it is "explicable as a rejection of strict shareholder primacy." See p. 44. On that note, for those who haven't watched the videos of the recent UCLA Lowell Milken Institute event, A Conference and Micro-Symposium on Competing Theories of Corporate Governance, I highly recommend them.
I wonder (and I do not mean for this to be a mere rhetorical question) what, in light of Bruner's observations on U.S. corporate law, he might have to say about the introduction of social enterprise entities into state corporate law in the United States. In the past few years, we have seen in the United States the rise of benefit corporations, flexible purpose corporations, and the like (following on the introduction of B Corp certification and low-profit limited liability companies--L3Cs). This social enterprise entity movement (if you will) is in part a response to the lack of shareholder power under U.S. law to manage the business and affairs of the corporation--specifically, to ensure that the directors take into account social and environmental concerns in addition to traditional, financial shareholder wealth maximization. Yet, that account differs from Bruner's assessment in the book on other-constituency statutes like those in Indiana and Connecticut, see p. 44, which he characterizes as a "marginalization of shareholders." See also pp. 171-73. (I see Andrew also picks up on this thread.) The cultural, historical, economic, and political aspects of the emergence of social enterprise entities raise interesting questions that I would find to be a fruitful subject for further commentary. To the extent they may affect public companies (who may become and are acquiring social enterprise entities), the matter deserves thoughtful consideration. I can see how a treatment of this issue could both substantiate and challenge Bruner's observations about shareholder power under U.S. corporate law.
On a lighter note, as a securities law teacher and researcher, I also enjoyed the brief part of the book that explained the allocation of securities regulation authority in the various federal systems represented by the United States, Australia, and Canada. See p. 78. The issue of where authority in securities regulation resides in state governments outside the United States is always troublesome for those of us who desire to teach foreign law but have spent our time in the thickets of U.S. securities law. In other words, it's always difficult to find securities law in a new jurisdiction when searching for it from an ethnocentric perspective . . . . Here, I was admittedly a bit chagrined that U.S. securities law was classified as national law both as a default and in practice. Although the book only purports to address public companies (which admittedly are largely regulated under federal securities law in the United States), I would argue that a lawyer for a public company who forgets to check on the applicability of state securities law for a particular transaction is committing malpractice. This is true notwithstanding the breadth of constitutional power under the Commerce Clause and the resulting strong preemption provisions in the National Securities Markets Improvement Act of 1996. But I may be misunderstanding Bruner's analysis here.
No matter. The book is a good read (well written and provocative) and promises to generate much conversation here at Prawfs and elsewhere. It conveys a lot of information in a relatable and accessible way. I recommend it for your summer reading list.
Monday, April 07, 2014
Eich and the Politicization of the Corporation
Just a brief word on the (forced) resignation of Mozilla CEO Brendan Eich because of his Prop 8 donations: welcome to the continuing politicization of the corporation. If corporations have speech protections and can play an active role in ideological debates of all stripes, then it matters if the CEO takes a different political position than the majority of stakeholders in the enterprise. The CEO controls the company and speaks for the company. So it is not suprising that stakeholders would be concerned about a CEO that did not reflect their values.
I think we're entering interesting and perhaps dangerous territory here as corporations take on First Amendment roles beyond their core business. Corporations will always be associated with "core concern" speech directly related to the company's products and services. But there is no need for "symbolic" speech that is unrelated to the business. As I discussed at the Glom with regard to the Chick-fil-A controversy, gay marriage has little to do with delicious chicken sandwiches. It is needlessly entangling of commerce and politics to make the purchase of a sandwich into a political act, especially when many participants in the enterprise have no interest in fomenting such a debate. But those lines are blurring. So Chick-fil-A begat the Eich resignation, because Mozilla customers and employees did not want their association with the company to end up labeled as support for limitations on gay marriage.
And that's the concern with Hobby Lobby, too -- if the court upholds First Amendment religion clause rights for a private, for-profit corporation, those who control the corporation will control its religion, too. That means whatever ideologically-charged positions the controllers choose to take, the rest of the participants will be dragged along as well. And that will make the corporation even more of an ideological battlefield.
Monday, December 02, 2013
Happy to be here!
Hi there Prawf readers,
As always, it is nice to return to the Prawfs fold. As some of you may know, my interests lie in the intersection of criminal and corporate law. I teach Criminal Law, Criminal Procedure, Corporations, and a White Collar Crime seminar. I write about corporate compliance and what might generally be referred to as criminal law and economics. Recently, I have become interested in the connection between fraud and two overlapping topics, "temporal inconsistency" and the study of "willpower lapses." Over the years, several scholars, most notably Dan's colleague at FSU, Manuel Utset, have asked: what implications does temporal inconsistency have for criminal law enforcement and punishment? How should our understanding of temporal inconsistency alter the mix of criminal and civil statutes, regulation and enforcement activity that we rely upon to reduce socially undesirable conduct? Recently, I along with several other scholars had the great opportunity to offer some thoughts on this topic in comments that the Virginia Journal of Criminal Law solicited for a volume featuring Utset's work. After completing my own contribution, I decided to write a separate article exploring temporal inconsistency's implications for the corporation's internal compliance function. That paper, Confronting the Two Faces of Corporate Fraud, will appear in the Florida Law Review in early 2014. I'll post and talk about the paper later this month.
Meanwhile, in addition to writing my exam, winding down my classes (last week of teaching) and grading, I plan to blog this month on major developments in the white collar crime world. To that end, it is impossible not to be fascinated by Michael Steinberg's insider trading trial, which seems to be moving along smoothly (at least from the prosecution's perspective) for now. More on that tomorrow - I've got to head home now and light some candles. Happy holidays!
Thursday, August 22, 2013
Reform, Not Rankings?
Should Princeton Review be alarmed? The federal government is getting into the college ratings business. The President yesterday announced a proposed system for rating colleges’ cost-effectiveness, and tying federal loan subsidies to the resulting rankings. If you think the problem is that colleges have no incentive to cut costs, it makes some sense. But the implementation has serious question marks, not the least of which is that someone in the government will have to decide how much more expensive it ought to be to train, say, engineers vs. poets.
What about nonprofit governance reform instead, or maybe also? In my last few posts, I’ve sketched our findings that university dependence on donations tends to restrain executive compensation. We also find a strong correlation between pay and tuition. By itself, that correlation doesn’t really tell us anything about causation. But in combination with our detailed findings about donor influence, it begins to seem more likely that presidents may prefer to emphasize tuition in order to reduce their dependence on donors.
That isn’t exactly iron-clad proof. But it’s at least suggestive. Reforming executive compensation might not give colleges incentives to hold down student costs, but it at least could diminish their executives’ interest in letting costs rise.
Could we tell the same story about law schools? It’s possible---we don’t have much data about private law school deans---but keep in mind the environment is different. Only a handful of law schools get any significant fraction of their operating budget from donations. So I don’t think the story we tell quite translates. That’s not to say there aren’t agency problems in law schools, just that they probably take a different form.
Thursday, August 15, 2013
University Presidents: Pay for Performance or Agency Problem?
Our story so far: nonprofit managers have reason & opportunity to manage their firm in a way that increases their personal rewards. Even if the dollar amounts are small, the managerial consequences could be significant. For instance, we saw last time evidence that university CEO pay, tuition, and expenditures rose sharply for most of the last decade while returns for faculty and for-profit CEOs were relatively flat on average. One can at least tell stories about why a president who wanted to be paid more would increase tuition or overall spending. How can we test those stories? It’s tricky. Universities are complicated places, and lots of factors could be at work. Maybe presidents were just doing a great job, and invested their extra resources wisely, making college a better deal and earning higher pay for themselves.
Our paper therefore tries to look at the extent to which CEO pay is correlated with measures of “agency costs.” That is, is pay lower at schools where presidents are monitored by other stakeholders more closely? If so, that would be evidence at least that presidents’ opportunism contributes to pay levels, though of course it wouldn’t rule out the “pay for performance” alternative I just mentioned--both could be contributing factors.
Long story short, we used a school’s dependence on donations to measure how closely its president was watched. Few donors really take much role in details of school governance; they are rationally ignorant and hope to free ride on watchdog efforts by others. But it turns out that if you make someone angry (or give them a really good feeling from participating) they don’t free ride as much -- their emotions motivate them to be more actively involved. We hypothesize that donors don’t like excessive pay, and that the threat of donor “outrage” would constrain pay levels.
And that’s what we find.
First, we find that donors don’t like learning about high president pay. In one set of regressions, we find that each dollar of reported pay reduces giving in subsequent years (controlling for all the other important observable facts about the university we could measure) by about $30. For instance, if Harvard could have been Harvard while paying its president zero dollars, our results imply it could have pulled in another $30-$40 million in donations.
In another (not on ssrn yet), we look at the effect of being singled out by the Chronicle of Higher Education’s list of the “Top 10 Most Highly Compensated” presidents. Presidents who make the list see about $6 million less in donations, even relative to presidents who just missed making it.
We then find that being more dependent on donations (i.e., getting a bigger fraction of revenue from gifts) does reduce presidents’ pay. Presidents who are more than one standard deviation above average (the top 1/6 or so) in dependence on donations get paid an average of about $110,000 less, all else equal. We also find that showing up in the Top 10 list one year tends to slow the rate of growth of a president’s pay, though obviously there are people like Gordon Gee who just show up every year.
It’s admittedly not immediately obvious how this relates back to the tuition story, and you are already bored, so I’ll fill in what we think the implications of our findings are next time.
Monday, August 12, 2013
Data on Presidents: A First Look
Last time, I promised to show you some evidence about CEO pay at colleges and universities. Well, a picture is worth a thousand, yada yada, so let's start things off with a chart.
What you're looking at are data from about 370 U.S. colleges and universities, drawn from tax returns and school filings with the department of education, and adjusted for inflation. The bars represent total increases over the ten-year period, so the leftmost bar is telling you that mean CEO reported pay went up by 50% over that period in real terms (from $300 to $450K in 2007 dollars).
Many of our readers, of course, will enjoy as we do the relative sizes of the two leftmost bars (but we note that the faculty average salary appears to include full-time instructor averages, not just full-time tenure-track faculty). The other item that is striking, given the theoretical relationship I sketched last time about the relationship between pay and tenure, is the similarity of those two bars. (We report gross tuition here, but "net" tuition, or tuition minus financial aid, grew similarly over this period.) By the way, CEO pay at Fortune 500 firms grew at a fairly small fraction of the rate of university presidents in this period.
At this point, things are looking intriguing enough to want to look at these relationships more rigorously. Is there anything else that might make us think it is "slack" or loose monitoring that drives the tenure/compensation run-ups? Yes, yes there is. Next time: more pictures.
Thursday, August 08, 2013
What's "Obvious" About Corporate Free Exercise?
Rick Garnett suggested recently in this space that it is “obvious” (Rick’s word) that legal entities have Free Exercise rights, and Will Baude has written a bit more cautiously that churches “or the real parties in interest behind them” probably can assert their own first amendment claims. Now, I’m just an unfrozen caveman tax lawyer, but I did once flip through a copy of “First Amendment Institutions” (and write two articles about nonprofit organizations in politics). And I think the “obvious” examples are just intuition pumps. Will argues churches very likely have their own sets of rights, while Rick says that anti-kosher laws would violate the rights of firms selling kosher products.
[UPDATE: Rick points out (see the comments) that his post doesn't quite claim that entities have FE rights qua entities, though his phrasing of that distinction may be too subtle for duller readers (ahem). So substitute for "Rick," with some modest amendment, "Adler," or "Bainbridge" or others, such as this piece by Scott Gaylord of Elon.]
I would say it’s obvious that regulation of churches or religious practices can interfere with individual rights to free exercise. If my religious beliefs include shared worship with a community of likeminded believers, certainly direct restrictions on church (or other religious community) activity can interfere with my exercise of those beliefs. But why does the organization itself need to be able to assert its own claims? Corporations (including nonprofit corporations, such as most churches) can only sue by virtue of state laws giving them that power. Are Will & Rick claiming it is “obvious” that states are constitutionally obligated to give legal personhood to abstract entities?
This may seem a fine distinction, but asserting that law is concerned with the rights of entities, not just the people in them, elides an important element of individual choice. Believers who choose to invest their money in a highly regulated industry can reasonably be presumed to go in with their eyes open to the possibility that regulation will impose a variety of burdens. If they don’t like that, they should take their money elsewhere. That’s a very different thing than a total prohibition on some key religious practice, as in Rick’s kosher example. The degree of imposition is just much smaller in my example, because the government leaves open many alternative avenues for religious expression. Is it zero burden? Of course not, but this is a balancing test, isn’t it?
Of course, SCOTUS also makes this same overly-easy substitution in Citizens United. Why is the right of political expression a right of the entity, not its members? Can’t the members express their political views individually (at least absent some special meaning to speaking together as a legally-recognized group)? Maybe forming a collective facilitates speech. But then the issue is to what extent it is permissible for government to reduce its prior commitments to facilitating expression. That field is treacherous, to be sure. But by simply assuming that the entity embodies its members’ rights, we dodge what ought to be at the center of the debate.
Monday, August 05, 2013
Should we care about college administrator pay & perks?
University presidents do not get paid like Fortune 500 CEO’s. If your alma mater’s president threw herself a birthday party featuring a replica of a Michelangelo, it’s probably just because she held it at the campus library. It’s true, a decent number of presidents these days are taking home more than $1 million, and that’s just the pay that’s reported -- it probably doesn’t include perks like “medically necessary” business-class airfare. But as a fraction of university revenues, we’re talking about chicken feed -- on the order of $100-$200 per student; that’s less than the transcript fee at some places.
Lots of smart people think university executive compensation, and CEO pay in the nonprofit sector generally, is not worth worrying about. Most people who run a large nonprofit organization are talented go-getters who could pull down big bucks somewhere else. They’re taking a pay cut to work at a mission that matters to them. And, since there is little close supervision by any stakeholders, they run the show. Why would they steal from their own piggy bank? And so why invest, say, the board of directors’ time and resources monitoring their pay?
I am not one of those smart people.
But, happily, I live a T ride from an executive pay guru, BU Law’s David Walker. When David explains to me why *he* cares about for-profit CEO pay, he says something like, “it’s not the money, it’s the management.” That is, the raw amount of cash a crafty CEO can pay herself in backdated options or wild parties isn’t a big deal for a large-cap firm. The problem is that the money is a big deal for her. And that means she has incentives to run things in a way that pays her more, or that at least gives her opportunities to pay herself more.
In our paper, we argue that this may also be true at nonprofit firms. Suppose---and for now let’s just assume for the sake of argument that this could be true---that it’s easier to raise your own pay out of tuition dollars than it is to grant yourself a raise with money some donor just handed you in a sack. And suppose presidents know that.
The implication would be that presidents have incentives to raise tuition, in order to facilitate their own rewards. Or, at least, to emphasize tuition over other, more constraining, sources of revenue.
That would be a worry, except that….presidents are giving up big bucks to carry out their mission, aren’t they? Does it make sense that they would give up monetary rewards, and then run their nonprofit in a way that lets them get more monetary rewards?
Maybe. But this being prawfsblawg, there is a good chance that you, reader, made a similar tradeoff. Suppose someone leaves a brown paper bag full of cash on your front doorstep. I can’t say that I would turn it upside down and cast Benjamin Franklin to wherever the winds take him. Not without thinking long and hard, anyway. You?Next time: some evidence.
Wednesday, May 01, 2013
Sleep No More: Sleep Deprivation, Doctors, and Error or Is Sleep the Next Frontier for Public Health?
How often do you hear your students or friends or colleagues talk about operating on very little sleep for work or family reasons? In my case it is often, and depending on the setting it is sometimes stated as a complaint and sometimes as a brag (the latter especially among my friends who work for large law firms or consulting firms). To sleep 7-8 hours is becoming a “luxury” or perhaps in some eyes a waste – here I think of the adage “I will sleep when I am dead” expresses that those who need sleep are “missing out” or “wusses.” My impression, anecdotal to be sure, is that our sleep patterns are getting worse not better and that many of these bad habits (among lawyers) are learned during law school.
One profession that has dealt with these issues at the regulatory level is medicine. In July 2011, the Accreditation Council for Graduate Medical Education (ACGME) – the entity Responsible for the accreditation of post-MD medical training programs within the United States – implemented new rules that limit interns to 16 hours of work in a row, but continue to allow 2nd-year and higher resident physicians to work for up to 28 consecutive hours. In a new article with sleep medicine expert doctors Charles A. Czeisler and Christopher P. Landrigan that just came out in the Journal of Law, Medicine, and Ethics, we examine how to make these work hour rules actually work.
As we discuss in the introduction to the article
Over the past decade, a series of studies have found that physicians-in-training who work extended shifts (>16 hours) are at increased risk of experiencing motor vehicle crashes, needlestick injuries, and medical errors. In response to public concerns and a request from Congress, the Institute of Medicine (IOM) conducted an inquiry into the issue and concluded in 2009 that resident physicians should not work for more than 16 consecutive hours without sleep. They further recommended that the Centers for Medicare & Medicaid Services (CMS) and the Joint Commission work with the Accreditation Council for Graduate Medical Education (ACGME) to ensure effective enforcement of new work hour standards. The IOM’s concerns with enforcement stem from well-documented non-compliance with the ACGME’s 2003 work hour rules, and the ACGME’s history of non-enforcement. In a nationwide cohort study, 84% of interns were found to violate the ACGME’s 2003 standards in the year following their introduction.
Whether the ACGME's 2011 work hour limits went too far or did not go far enough has been hotly debated. In this article, we do not seek to re-open the debate about whether these standards get matters exactly right. Instead, we wish to address the issue of effective enforcement. That is, now that new work hour limits have been established, and given that the ACGME has been unable to enforce work hour limits effectively on its own, what is the best way to make sure the new limits are followed in order to reduce harm to residents, patients, and others due to sleep-deprived residents? We focus on three possible national approaches to the problem, one rooted in funding, one rooted in disclosure, and one rooted in tort law. I would love reactions to our proposals in the paper, but wanted to float the more general idea in this space.
Obesity is a good example of something that through concerted action moved from the periphery to safely within the confines of public health thinking and even public health law. Is it time to do the same for sleep? Should we stop valorizing sleeping very little in our society? Should we be thinking about corporate and public policies directed to improving sleep pattern? What might that look like? One thought I have is about encouraging telecommuting to reduce commuting time, sleep rooms in offices? Of course, on the parenting sleeplessness sides many of the solutions are social support. What about what we tell and model for our students? I try to impart to my students that extra hours spent studying well into the night will have diminishing marginal returns, but who knows if that message is imparted. I also worry that with the number of journals, moot courts, clubs, etc, we encourage our students to join at law school that we are enablers of sleeping too little and perpetuating the “superman” myth (and I do wonder about the gendered component here)... Real men don’t sleep. And then they perform badly at their jobs and get into car crashes….
- I. Glenn Cohen
Wednesday, January 09, 2013
The Religious Freedom Rights of Corporations and Shareholders
A late and grateful hat tip to Charlotte Garden, who posted last week about the Seventh Circuit's decision in Korte v. Sebelius. The court granted a preliminary injunction against the enforcement of provisions of the Patient Protection and Affordable Care Act (“ACA”) and related regulations requiring that K & L Contractors purchase health care coverage for employees that included abortifacient, contraception, and sterilization coverage. Accourding to the majority, the plaintiffs had some likelihood of success on their Religious Freedom Restoration Act (RFRA) claim that the required health care coverage put a substantial burden on their free exercise of religion.
Although the case raises a number of interesting issues, I want to focus on the religious freedom rights of corporations and shareholders. It is the corporation that has the obligations to provide health care coverage with certain coverages. However, the court seems to find that the corporation's obligations infringe on the religious liberties of the shareholders. As the court states:
[T]he government’s primary argument is that because K & L Contractors is a secular, for‐profit enterprise, no rights under RFRA are implicated at all. This ignores that Cyril and Jane Korte are also plaintiffs. Together they own nearly 88% of K & L Contractors. It is a family‐run business, and they manage the company in accordance with their religious beliefs. This includes the health plan that the company sponsors and funds for the benefit of its nonunion workforce. That the Kortes operate their business in the corporate form is not dispositive of their claim. See generally Citizens United v. Fed. Election Comm’n, 130 S. Ct. 876 (2010). The contraception mandate applies to K & L Contractors as an employer of more than 50 employees, and the Kortes would have to violate their religious beliefs to operate their company in compliance with it.In dissent, Judge Rovner took issue with this, but in a somewhat indirect fashion:
Although the Kortes contend that complying with the Patient Protection and Affordable Care Act’s insurance mandate violates their religious liberties, they are removed by multiple steps from the contraceptive services to which they object. First, it is the corporation rather than the Kortes individually which will pay for the insurance coverage. The corporate form may not be dispositive of the claims raised in this litigation, but neither is it meaningless: it does separate the Kortes, in some real measure, from the actions of their company.
Charlotte Garden takes on the issue of whose religious freedom rights are at issue in her post:
This analysis raises an interesting question about the interplay among the rights of majority shareholders, managers, and corporations after Citizens United. The Seventh Circuit seems to treat them as essentially overlapping, so that government regulation of corporations would be unlawful if it violates the rights of one, two, or all three of the above. But it seems to me that Citizens United could also support the contrary result. For example, if the funds of dissenting shareholders can be used for political speech without violating the First Amendment, then why can’t the Kortes’ funds be used for K&L’s contraception coverage without violating their RFRA rights? The Seventh Circuit doesn’t answer this question, though it seems its answer would have to turn on whether or not the shareholders in question were in the majority—a result that seems both counterintuitive and at odds with the Supreme Court’s approach to dissenters’ rights in other context, including the union dues context.
I agree with Charlotte's thinking here. It is the corporation that is being forced to provide a certain level of health insurance to employees. When does a corporation have rights of religious freedom? The court characterizes the company as "secular," and it is clearly not a religious organization. And if it is the Kortes, rather than the corporation, whose rights are being infringed, when do actions taken with respect to a business entity impinge upon the rights of stakeholders? The court mentions that the Kortes are 88% shareholders and that the business is run by the family according to their religious beliefs. Are these material facts? What if they owned 51% of the company, but it was run by someone else? What if they owned 33% but had de facto control? What if they owned a single share?
This case reminds me in part of Thinket Ink Information Systems v. Sun Microsoft, 368 F.3d 1053 (9th Cir. 2004). In that case, the court held that a corporation had a right to bring suit under 42 U.S.C. Sec. 1981 for discrimination based on race. Although noting that a corporation generally does not have a racial identity, the court found that in the particular case, Thinket had "acquired an imputed racial identity" sufficient to bring a claim. The court stated that: "[t]o receive certain governmental benefits, Thinket was required to be certified as a corporation with a racial identity; further, it alleges that it suffered discrimination because all of its shareholders were African–American." This was enough to give the corporation itself standing under Sec. 1981.
At the time, Stephen Bainbridge characterized the Thinket decision as "just nuts" because the corporation was just a legal fiction and instead represented a nexus of contracts. However, he did allow that "[i]t may be useful to invoke that fiction here, so as to promote administrative convenience by allowing the entity rather than its individual constituents to sue, but it doesn't change the basic theory." A similar problem may be presented here. But at the least, a court should establish whether it is the corporation or the shareholders who have standing to sue for actions required of the corporation. And if it's the shareholders who have standing to sue, it seems unclear when they would be sufficiently entwined with the corporation to get that standing.
Thursday, July 26, 2012
The Collection Gap
Along with Ezra Ross (now of UCI), I have started a new blog, The Collection Gap, which deals with regulatory enforcement failure. The blog was inspired by our article, The Collection Gap: Underenforcement of Corporate and White Collar Fines and Penalties, 29 Yale L. & Pol'y Rev. 453 (2011), which found that agencies are leaving billions of dollars in criminal, civil and administrative fines and penalties uncollected, even where offenders have the ability to pay.
One of the things that drove us to pursue this topic was the fact that, while there was much debate about whether or how much to fine corporations, there was little if any discussion about whether the fines that were imposed were ever actually collected--which obviously impacts deterrence and institutional legitimacy, among other things. Agencies like the EPA get the benefit of announcing big headlines ("Biggest fine ever against polluter X..."), but are not held accountable for failing to follow through. Part of the problem is simply resources, but we believe that to a large extent it has to do with insufficient incentives at the institutional and individual levels.
I would welcome thoughts or suggestions about other situations in which problems with policy implementation threaten to undermine the policies themselves. It's the type of thing that often doesn't get much attention, but could have a lot of practical impact regarding how government actually operates and affects people's lives.
Monday, July 16, 2012
Two Resources on Corporate Law
In advertising, repetition is often critical to success.* That's why I'll repeat what Stephen Bainbridge and Gordon Smith have already told you -- check out the new Research Handbook on the Law and Economics of Corporate Law, edited by Claire Hill and Brett McDonnell. You can find an introduction from the editors here. Interestingly, the Amazon price is $10 more than the publisher's price, so this is one instance where buying directly from the publisher pays off.
If you're looking for some nice free downloads, consider Seattle University Law Review's symposium issue for the Berle III conference. (The image above is from the first Berle conference, which can be found here; Berle II is here. Berle IV was held in London last month.) Chuck O'Kelley has organized the ongoing set of Berle conferences, and Berle III centered around the theory of the firm in the corporate law context. There are sixteen papers to choose from, and I very much enjoyed hearing from the terrific group of folks that Chuck had on hand.
* Note: apparently, repetition is useful in the "wearin" phase, but actually becomes harmful to the message when the "wearout" phase is reached. See Campbell & Keller (2003), Brand Familiarity and Advertising Repetition Effects. I'm hopeful that we're still in the "wearin" phase.
Thursday, June 21, 2012
Political Spending = Business Spending (by Unions as well as Corporations)
Earlier this week, the WSJ touted a new Manhattan Institute study showing that political contributions by corporations have a positive effect on the bottom line. The study found that "most firms, like most individuals, behave rationally and strategically in their spending decisions on campaigns and lobbying, devoting resources in ways that, they have reason to expect, will benefit the corporations themselves and their shareholders." And benefits do come, in the form of lower taxes, more favorable regulation, and earmarks that help the business. The authors calculate that these political benefits improve returns for shareholders by 2% to 5% a year.
It should not be a surprise that corporate political spending helps corporations. This recent study follows upon research by Jill Fisch on FedEx's political spending, which found that "FedEx has successfully used its political influence to shape legislation, and FedEx's political success has, in turn, shaped its overall business strategy." The WSJ uses the Manhattan Institute report to beat back critics of Citizens United who are looking to get corporations out of politics. The Journal opines:
Liberals have been trying to persuade CEOs and corporate boards to stop spending money on politics by claiming that it doesn't pay. But according to a new study by the cofounder of the Democratic-leaning Progressive Policy Institute, corporate participation in politics works for the companies and their shareholders. * * *
In a better world, corporations wouldn't have to devote money and time to politics. . . . But politicians have created a gargantuan state that is so intrusive that businesses have no alternative than to spend money to defend themselves and their shareholders from such arbitrary looting as the medical device tax in ObamaCare. Liberals want business to disarm unilaterally.
Oddly, neither the Journal nor the Supreme Court seem to understand these principles when it comes to unions.
In today's Knox v. SEIU, the Court again privileges the rights of represented employees to opt out--or rather, not to have to opt-out in the first place--from union political spending. The Court clings to the trope that the union's political spending is somehow extraneous to the core services provided by the union to the represented employees. But political spending is perhaps even more important to unions than it is to corporations. I have posted before about SEIU's electoral activity, but it bears repeating--SEIU spent an estimated $85 million to help elect Barack Obama in 2008. Although the Obama administration failed to get the Employee Free Choice Act passed, it did pass healthcare reform -- which was arguably more of a SEIU priority. (See Chapter 9 of this book by Steve Early, entitled "How EFCA Died for Obamacare"). Former SEIU President Andy Stern had the highest number of oval office visits of any outsider--22--during the president's first six months in office. Stern was not in there based on his individual perspicacity about the nation's various problems. He was in there as president of the fastest-growing union in the U.S. -- one whose members largely worked in the health care field and would benefit from an expansion of health care benefits.
Knox v. SEIU concerns a "Political Fight-Back Fund" levied against represented employees, including nonmembers, to fund political activities in California. Two propositions were on the California ballot: Proposition 75, which would have required an opt-in system for charging members fees to be used for political purposes, and Proposition 76, which would have given the Governor the ability to reduce state appropriations for public-employee compensation. In response to the petitioner's objection to the special assessment, an SEIU employee said, "we are in the fight of our lives," and it's easy to see the urgency. If you accede to the principles that (1) employees can choose as a majority whether to have union representation, and (2) all represented employees need to pay for their representation, then political spending should not be excluded. In an era where state governments are reconsidering collective bargaining rights for public sector unions, political spending is critical to the unions' very existence as businesses. Unions need to have collective bargaining rights in order to bargain collectively on behalf of represented employees.
The majority's opinion in Knox v. SEIU assumes the distinction between collective bargaining expenses and political expenses without much discussion, other than an interesting block-quote from a Clyde Summers's book review. (I would argue that all of Summers' examples don't really prove his or the Court's point.) And at this point, not even the dissent questions the Hudson framework. But it makes no sense. Unions and academics should start fighting the framework: unions are businesses, and political spending is business spending.
I did see one glimmer in the Court's opinion, in the following passage:
Public-sector unions have the right under the First Amendment to express their views on political and social issues without government interference. See, e.g., Citizens United v. Federal Election Comm’n, 558 U. S. ___ (2010). But employees who choose not to join a union have the same rights.
The Manhattan Institute report, like the Wall Street Journal, recognizes that corporations are not merely "express[ing] their views on political and social issues" when they make political contributions. They are fighting for their businesses. The Court should not continue to disarm unions unilaterally in a post-Citizens United world.
Tuesday, February 07, 2012
Rupert Murdoch and the FCPA
The Foreign Corrupt Practices Act is a controversial federal statute that was enacted in 1977 and was intended to deter and reduce bribery of foreign officials for US business. It has contributed substantially to the number of deferred prosecution agreements (DPA's) that the federal government signs (usually) with large, publicly held corporations. Ordinarily, the corporation gets into trouble when one or more of its employees pays money to a foreign official in connection with the corporation's business transactions.
On those occasions when the government prosecutes the individuals responsible for violating the FCPA, the results can be mixed. For an example of a recent loss, you can see this juror's discussion at Mike Koehler's FCPA Professor Blog, which discusses how and why the government failed to secure convictions in a case that involved an undercover sting and ruse to bribe the defense minister of Gabon. The case had been considered pathbreaking because it involved an undercover sting; now, it may be pathbreaking because it involves a massive loss and the government is considering dropping its remaining prosecutions.
According to the conventional wisdom, FCPA convictions (at least conviction of those individuals willing to take the cases to trial) are difficult to secure because the underyling transactions are often complex and difficult to understand. Reasonable doubt abounds.
But that might not be such a problem if the government decides to go after Rupert Murdoch's News Corp. The company, which is headquartered in New York, is currently the subject of a number of investigations, here and overseas. Senators and Congressmen began calling for investigations back in July, and the FBI's FCPA investigation seems to be moving forward, as reported by Reuters today. The FCPA investigation relates to News Corp employees' payment of money to (British) police officials. Unlike most FCPA cases, I can't imagine jurors will have too much difficulty understanding the underlying transactions. Perhaps this is why News Corp hired Mark Mendelson back in July 2011.
Wednesday, December 21, 2011
Name-Calling in Corporate Law Academia
Roberta Romano, Stephen Bainbridge, and Larry Ribstein all seem outraged at an unpublished, non-SSRN'ed paper by Jack Coffee that Romano (at least) has gotten her hands on. Although I don't have a copy of the paper, they seem to be objecting that Coffee referred to them as "the 'Tea Party Caucus' of corporate and securities law professors." Romano also says that they are referred to as "conservative critics of securities regulation," and that Ribstein and Bainbridge are Romano's "loyal adherents." Romano calls this "serial name calling," Bainbridge complains that this is "insulting" and a "series of ad hominem attacks," and Ribstein says, "It’s sad a scholar of Coffee’s stature sees a need to resort to such rhetoric, though almost understandable since Romano’s devastating critique doesn’t leave him much of a ledge to sit on."
Somehow, I can't gin up much sympathy.Only one of those things in the "series of attacks" is really all that remarkable. Being called a "conservative critic of securities regulation" is insulting? Romano claims that the "conservative" adjective is erroneous, but c'mon -- you all are conservative! Maybe not on all issues, maybe not in your heart of hearts. And look, I've written before about how political labels in the context of corporate law can be misleading. But I still don't think being called "conservative" is an ad hominem, especially if used in reference to the issue being debated. On Sarbanes-Oxley, on Dodd-Frank -- you all are conservative! As to the "adherents" thing, I suppose it makes Bainbridge and Ribstein into followers. But Steve, you did use the whole "quack" meme after Roberta!
That still leaves the "Tea Party" remark, and sure, depending on what you think of the Tea Party, it could be pejorative. (Not everyone would agree!) But it seems pretty mild to me. Plus, it's making a rhetorical point: these three are to corporate law what the Tea Party is to American politics. I don't agree with the rhetorical claim, but it seems like a point one could make legitimately without being too offensive.
And this brings me to my real point. There's the whole "Really?" thing that Seth Myers has going. I find it kind of annoying. But if you like it, then just insert "Really?" after each of these bullet points.
So folks, you're upset about name calling when you've:
- Called a major piece of federal legislation "quack corporate governance." A quack is a fraud; someone who intentionally subjects others to harm and even death in order to make a quick buck selling bad advice. So you're saying that the bill is equivalent to this?
- Called a second major piece of federal legislation "quack corporate governance." Did you not think that calling it "quack" might be offensive?
- Referred to Gretchen Morgenson as "Morgenscreed." And referred to the columns by said Morgenscreed as "lining Wall Street's birdcages." Called one of her columns "the latest extreme idiocy." Called her a "clown." And called her reporting "muck" and "fairy tales." Not resorting to rhetoric, eh?
- Called the Occupy Wall Street folks "a bunch of childish narcissists" and referred to the "moronic" campaign against corporate personhood. Called on state government to "kill" a nearby law school.
- Said this about someone else: "I've spent the better part of my career crossing swords with these folks and I find them a remarkably thin skinned bunch. Call them 'self-appointed' or 'gad flies' or 'water carriers for left liberal organizations like unions' and they get all offended."
I feel like Jon Stewart here -- I could roll clips for twenty minutes. The point is, these three are some of the most elbows-out academics that I know of. And yet here they are, complaining about pretty soft stuff. C'mon, people -- you're looking a little like Scut Farkus.
UPDATE: Stephen Bainbridge responds. He mentions that Coffee apparently compared him to Sergeant Schultz of Hogan's Heroes at AALS a few years back, which I left out because (1) it's not in Coffee's paper and (2) Romano & Ribstein didn't mention it. Surely, that seems insulting, and I wouldn't blame Bainbridge for being upset by it. And I also agree with him that blogging is less serious, more shoot-from-the-hip than scholarship, and different standards apply. But even so, blogging is not a personal diary. People do read it. So perhaps it's less gauche to insult someone on a blog than at a conference. But wherever you dish it out, you should be able to take it, too.
More importantly, I think Steve is wrong when he justifies his "quack" title with: "BFD. There's a huge difference between uncivil towards a person and being uncivil about a piece of legislation." Saying a piece of legislation is "quack" legislation, in the title of your paper, is basically saying that only idiots or frauds could support that legislation. So it's being uncivil to a large swath of people, rather than just one. And it's not an aside at a conference -- it's the whole point of the paper. If we're talking about civility in the context of scholarship, that is NOT civil. Sorry! When you call someone a "quack," you are not "avoiding insulting, demeaning or derisive language" or "genuinely listening to (and trying to make good sense of) what the other person says." You're name-calling. And that ain't civil!
Monday, December 19, 2011
Breaking the Net
Mark Lemley, David Post, and Dave Levine have an excellent article in the Stanford Law Review Online, Don't Break the Internet. It explains why proposed legislation, such as SOPA and PROTECT IP, is so badly-designed and pernicious. It's not quite clear what is happening with SOPA, but it appears to be scheduled for mark-up this week. SOPA has, ironically, generated some highly thoughtful writing and commentary - I recently read pieces by Marvin Ammori, Zach Carter, Rebecca MacKinnon / Ivan Sigal, and Rob Fischer.
There are two additional, disturbing developments. First, the public choice problems that Jessica Litman identifies with copyright legislation more generally are manifestly evident in SOPA: Rep. Lamar Smith, the SOPA sponsor, gets more campaign donations from the TV / movie / music industries than any other source. He's not the only one. These bills are rent-seeking by politically powerful industries; those campaign donations are hardly altruistic. The 99% - the people who use the Internet - don't get a seat at the bargaining table when these bills are drafted, negotiated, and pushed forward.
Second, representatives such as Mel Watt and Maxine Waters have not only admitted to ignorance about how the Internet works, but have been proud of that fact. They've been dismissive of technical experts such as Vint Cerf - he's only the father of TCP/IP - and folks such as Steve King of Iowa can't even be bothered to pay attention to debate over the bill. I don't mind that our Congresspeople are not knowledgeable about every subject they must consider - there are simply too many - but I am both concerned and offended that legislators like Watt and Waters are proud of being fools. This is what breeds inattention to serious cybersecurity problems while lawmakers freak out over terrorists on Twitter. (If I could have one wish for Christmas, it would be that every terrorist would use Twitter. The number of Navy SEALs following them would be... sizeable.) It is worrisome when our lawmakers not only don't know how their proposals will affect the most important communications platform in human history, but overtly don't care. Ignorance is not bliss, it is embarrassment.
Cross-posted at Info/Law.
Posted by Derek Bambauer on December 19, 2011 at 01:49 PM in Blogging, Constitutional thoughts, Corporate, Current Affairs, Film, First Amendment, Information and Technology, Intellectual Property, Law and Politics, Music, Property, Television, Web/Tech | Permalink | Comments (1) | TrackBack
Saturday, December 10, 2011
Copyright and Your Face
The Federal Trade Commission recently held a workshop on facial recognition technology, such as Facebook's much-hated system, and its privacy implications. The FTC has promised to come down hard on companies who abuse these capabilities, but privacy advocates are seeking even stronger protections. One proposal raised was to provide people with copyright in their faceprints or facial features. This idea has two demerits: it is unconstitutional, and it is insane. Otherwise, it seems fine.
Let's start with the idea's constitutional flaws. There are relatively few constitutional limits on Congressional power to regulate copyright: you cannot, for example, have perpetual copyright. And yet, this proposal runs afoul of two of them. First, imagine that I take a photo of you, and upload it to Facebook. Congress is free to establish a copyright system that protects that photo, with one key limitation: I am the only person who can obtain copyright initially. That's because the IP Clause of the Constitution says that Congress may "secur[e] for limited Times to Authors... the exclusive Right to their respective Writings." I'm the author: I took the photograph (copyright nerds would say that I "fixed" it in my camera's memory). The drafters of the Constitution had good reason to limit grants of copyright to authors: England spent almost 150 years operating under a copyright-like monopoly system that awarded entitlements to a distributor, the Stationer's Company. The British crown had an excellent reason for giving the Company a monopoly - the Stationer's Company implemented censorship. Having a single distributor with exclusive rights gives a government but one choke point to control. This is all to say that Congress can only give copyright to the author of a work, and the author is the person who creates / fixes it (here, the photographer). It's unconstitutional to award it to anyone else.
Second, Congress cannot permit facts to be copyrighted. That's partly for policy reasons - we don't want one person locking up facts for life plus seventy years (the duration of copyright) - and partly for definitional ones. Copyright applies only to works of creative expression, and facts don't qualify. They aren't created - they're already extant. Your face is a fact: it's naturally occurring, and you haven't created it. (A fun question, though, is whether a good plastic surgeon might be able to copyright the appearance of your surgically altered nose. Scholars disagree on this one.) So, attempting to work around the author problem by giving you copyright protection over the configuration of your face is also out. So, the proposal is unconstitutional.
It's also stupid: fixing privacy with copyright is like fixing alcoholism with heroin. Copyright infringement is ubiquitous in a world of digital networked computers. Similarly, if we get copyright in our facial features, every bystander who inadvertently snaps our picture with her iPhone becomes an infringer - subject to statutory damages of between $750 and $30,000. Even if few people sue, those who do have a powerful weapon on their side. Courts would inevitably try to mitigate the harsh effects of this regime, probably by finding most such incidents to be fair use. But that imposes high administrative costs, and fair use is an equitable doctrine - it invites courts to inject their normative views into the analysis. It also creates extraordinarily high administrative costs. It's already expensive for filmmakers, for example, to clear all trademarked and copyrighted items from the zones they film (which is why they have errors and omissions insurance). Now, multiply that permissions problem by every single person captured in a film or photograph. It becomes costly even to do the right thing - and leads to strategic behavior by people who see a potential defendant with deep pockets.
Finally, we already have an IP doctrine that covers this area: the right of publicity (which is based in state tort law). The right of publicity at least has some built-in doctrinal elements that deal with the problems outlined above, such as exceptions when one's likeness is used in a newsworthy fashion. It's not as absolute as copyright, and it lacks the hammer of statutory damages, which is probably why advocates aren't turning to it. But those are features, not bugs.
Privacy problems on social networks are real. But we need to address them with thoughtful, tailored solutions, not by slapping copyright on the problem and calling it done.
Cross-posted at Info/Law.
Posted by Derek Bambauer on December 10, 2011 at 06:03 PM in Constitutional thoughts, Corporate, Culture, Current Affairs, Film, First Amendment, Information and Technology, Intellectual Property, Property, Torts | Permalink | Comments (4) | TrackBack
Monday, November 21, 2011
How Not To Secure the Net
In the wake of credible allegations of hacking of a water utility, including physical damage, attention has turned to software security weaknesses. One might think that we'd want independent experts - call them whistleblowers, busticati, or hackers - out there testing, and reporting, important software bugs. But it turns out that overblown cease-and-desist letters still rule the day for software companies. Fortunately, when software vendor Carrier IQ attempted to misstate IP law to silence security researcher Trevor Eckhart, the EFF took up his cause. But this brings to mind three problems.
First, unfortunately, EFF doesn't scale. We need a larger-scale effort to represent threatened researchers. I've been thinking about how we might accomplish this, and would invite comments on the topic.
Second, IP law's strict liability, significant penalties, and increasing criminalization can create significant chilling effects for valuable security research. This is why Oliver Day and I propose a shield against IP claims for researchers who follow the responsible disclosure model.
Finally, vendors really need to have their general counsel run these efforts past outside counsel who know IP. Carrier IQ's C&D reads like a high school student did some basic Wikipedia research on copyright law and then ran the resulting letter through Google Translate (English to Lawyer). If this is the aptitude that Carrier IQ brings to IP, they'd better not be counting on their IP portfolio for their market cap.
When IP law suppresses valuable research, it demonstrates, in Oliver's words, that lawyers have hacked East Coast Code in a way it was not designed for. Props to EFF for hacking back.
Cross-posted at Info/Law.
Posted by Derek Bambauer on November 21, 2011 at 09:33 PM in Corporate, Current Affairs, First Amendment, Information and Technology, Intellectual Property, Science, Web/Tech | Permalink | Comments (2) | TrackBack
Thursday, November 17, 2011
Yesterday, the House of Representatives held hearings on the Stop Online Piracy Act (it's being called SOPA, but I like E-PARASITE tons better). There's been a lot of good coverage in the media and on the blogs. Jason Mazzone had a great piece in TorrentFreak about SOPA, and see also stories about how the bill would re-write the DMCA, about Google's perspective, and about the Global Network Initiative's perspective.
My interest is in the public choice aspect of the hearings, and indeed the legislation. The tech sector dwarfs the movie and music industries economically - heck, the video game industry is bigger. Why, then, do we propose to censor the Internet to protect Hollywood's business model? I think there are two answers. First, these particular content industries are politically astute. They've effectively lobbied Congress for decades; Larry Lessig and Bill Patry among others have documented Jack Valenti's persuasive powers. They have more lobbyists and donate more money than companies like Google, Yahoo, and Facebook, which are neophytes at this game.
Second, they have a simpler story: property rights good, theft bad. The AFL-CIO representative who testified said that "the First Amendment does not protect stealing goods off trucks." That is perfectly true, and of course perfectly irrelevant. (More accurately: it is idiotic, but the AFL-CIO is a useful idiot for pro-SOPA forces.) The anti-SOPA forces can wheel to a simple argument themselves - censorship is bad - but that's somewhat misleading, too. The more complicated, and accurate, arguments are that SOPA lacks sufficient procedural safeguards; that it will break DNSSEC, one of the most important cybersecurity moves in a decade; that it fatally undermines our ability to advocate credibly for Internet freedom in countries like China and Burma; and that IP infringement is not always harmful and not always undesirable. But those arguments don't fit on a bumper sticker or the lede in a news story.
I am interested in how we decide on censorship because I'm not an absolutist: I believe that censorship - prior restraint - can have a legitimate role in a democracy. But everything depends on the processes by which we arrive at decisions about what to censor, and how. Jessica Litman powerfully documents the tilted table of IP legislation in Digital Copyright. Her story is being replayed now with the debates over SOPA and PROTECT IP: we're rushing into decisions about censoring the most important and innovative medium in history to protect a few small, politically powerful interest groups. That's unwise. And the irony is that a completely undemocratic move - Ron Wyden's hold, and threatened filibuster, in the Senate - is the only thing that may force us into more fulsome consideration of this measure. I am having to think hard about my confidence in process as legitimating censorship.
Cross-posted at Info/Law.
Posted by Derek Bambauer on November 17, 2011 at 09:15 PM in Constitutional thoughts, Corporate, Culture, Current Affairs, Deliberation and voices, First Amendment, Information and Technology, Intellectual Property, Music, Property, Web/Tech | Permalink | Comments (9) | TrackBack
Friday, November 04, 2011
Shopping for Settlement
Judge Rakoff of the Southern District of New York has hit the papers again as a critic of the SEC's settlement processes, now in the SEC v. Citigroup Global Markets case. (One report here.)
One function of the review process is to publicize SEC settlement practices. The publicity pressure seems aimed at a few SEC practices, including the practice of allowing settlement with the SEC without admitting or denying the allegations. Judge Rakoff's opinions also highlight some fundamental and possibly intractable problems with entity-level punishment. Namely, who pays when a corporation pays a penalty? (probably current shareholders) Does the channeling of fines to injured investors through Fair Funds change anything (my article about this here)? And to what extent should the SEC pursue individuals?
These settlement reviews in high profile cases also force out information about the facts of the particular case. For instance, one result of Judge Rakoff's initial resistence to the settlement in Bank of America was that the Bank ultimately stipulated to certain facts.
So maybe the chance of public judicial criticism constrains agencies. But both of the options currently on the table seem unappealing: judicial rubber stamping on the one hand or unpredictable judicial intervention on the other. The first is unappealing not only because the agency can come back to the court to enforce compliance (which it seems never to do), but also because these agreements implicate regulatory policy, and the agency is officially acting on the public’s behalf.
On the other hand, I'm not sure the extent of scrutiny should depend on a figurative spin of the judicial assignment wheel. (If it does, a useful question for Rakoff-watchers is how his recent change to senior status as a judge affects the case assignment process.) To the extent particular judges are more willing to scrutinize settlements or develop a reputation for rejecting settlements, agencies may forum shop to avoid this scrutiny. In other words, they may shop for settlement. Finally, it may push agencies to select remedies that avoid judicial review.The backstory: This is not the first time Judge Rakoff has scrutinized, initially rejected, and tweaked a settlement, as well as calling the SEC to task in colorful, widely reported language. When Judge Rakoff reviewed the SEC's 2009 settlement with Bank of America, he said agency claims of victory created a “façade of enforcement.” His initial rejection of the Worldcom settlement in 2003 raised the same sort of questions: Who benefits? What changes in corporate governance? How did the SEC come up with this settlement? (rejection here)
The standard of review: These disputes arise in the context of settlement review by judges. Courts review settlements with the SEC to make sure they are “fair, reasonable, adequate, and in the public interest." The caselaw on how to review settlements reflects the hybrid nature of the settlements: they are both court order and contract. Courts that have emphasized the contractual aspect of these agreements have examined primarily whether the contract was made voluntarily; if so, the court declined to redefine the agreed-upon terms. Others have taken a closer look based on the court's continuing monitoring role, although courts often defer to the agency's view of the public interest.
Thursday, October 20, 2011
Policing Copyright Infringement on the Net
Mark Lemley has a smart editorial up at Law.com on the hearings at the Second Circuit Court of Appeals in Viacom v. YouTube. The question is, formally, one of interpreting Title II of the Digital Millennium Copyright Act (17 U.S.C. 512), and determining whether YouTube meets the statutory requirements for immunity from liability. But this is really a fight about how much on-line service providers must do to police, or protect against, copyright infringement. Mark, and the district court in the case, think that Congress answered this question rather clearly: services such as YouTube need to respond promptly to notifications of claimed infringement, and to avoid business models where they profit directly from infringement. The fact that a site attracts infringing content (which YouTube indubitably does) can't wipe out the safe harbor, because then the DMCA would be a nullity. It may be that the burden of policing copyrights should fall more heavily on services such as YouTube than it currently does. But, if that's the case, Viacom should be lobbying Congress, not the Second Circuit. I predict a clean win for YouTube.
Wednesday, July 27, 2011
Backdating and a culture of endemic corruption
Larry Ribstein continues his campaign against the campaign against backdating by referring to said campaign as an "overblown" "so-called scandal" that essentially led to the Madoff fraud and the 2008 financial crisis. How, you ask? By sucking up enforcement and journalistic resources that would otherwise have ferreted out these more nefarious deeds. In support, he cites a recent paper by Stephen Choi, Adam Pritchard, and Anat Carmy Wiechman that claims the SEC spent more time on backdating that was justified by the subsequent results. It's an interesting theory. But I wanted to point out a few things quickly, just in response to Ribstein's post.
Backdating violates the law, by definition. It is a misrepresentation about the date on which the stock option was granted. Ribstein has done his best to play down, mitigate, justify, rationalize, brush off, scoff at, and ridicule this basic reality, but it's inescapable. Executives lied about when their options were granted in order to get more money than they were legally entitled to. It's a fact -- discovered by a business school professor -- and there's no getting around it. And it happened at many companies, likely hundreds.
Luckily, there proved to be a quick fix to this problem -- change the required time of reporting the option grant. So the problem no longer exists; it is essentially impossible to backdate anymore without being obviously in violation of the law. So in terms of punishing the crime, deterrence, of at least that particular crime, is no longer an issue. That may counsel for civil sanctions rather than criminal prosecutions. To that extent, I agree with Larry -- it seems whimsical and capricious to single out some of the backdaters for jail time when the problem was much more widespread. (Although the Comverse case seems particularly egregious.)
But if anything, I think the backdating scandal has been underappreciated, at least from a corporate governance perspective. Here you had hundreds of executives blatantly lying to their shareholders, federal agencies, and in some cases even the board about their compensation. That to me indicates a culture of corruption -- a culture of "I will get as much as I can, even if I have to lie about it." Sandwiched as it was between Enron and WorldCom before and the financial crisis after, it is yet another indication of the rapaciousness of some significant segment of the corporate and financial communities. It is further indication that executive compensation has deep flaws within its structure, and we need to keep thinking about ways to change the structure and the culture. Even though it has been "solved," with regard to the particular problem, it is a symptom of a much deeper condition. To that extent, the corporate law community should not dismiss backdating as simply an overblown footnote in the annals of finance. Perhaps the criminal prosecutions were overly zealous, in some instances. But that does not mean there wasn't corruption.
Friday, July 22, 2011
NFL Agreement? Don't Count Your Chickens
The theme of my NFL blogging, which you can see here (post-Eighth Circuit hearing) and here (post-Eighth Circuit decision) is that the players' antitrust litigation strategy was really much more effective than the owners anticipated. It totally reversed the usual roles you see in a lockout. Generally, when an employer locks out its employees, it has time on its side. The company closes its gates and waits for the workers to start missing paychecks. (That's what's happening in the NBA.) Ever since the district court enjoined the lockout, however, it's been the NFL owners who can't wait to get an agreement. Check out this remarkable paragraph from ESPN's "Owners approve proposed lockout deal":
In their proposal, the owners told players that they must re-establish their union quickly for the proposed CBA to stand. The NFL also said it wanted evidence by Tuesday that a majority of players have signed union authorization cards.
In the history of labor relations, I don't think I've ever seen employers so eager for employees to (re) join a union. In fact, the point of a lockout is generally to break a union -- or at least, a hoped-for side effect. But the NFL owners can't wait to get the union back in place and, in effect, put back together the Humpty Dumpty CBA they foolishly pushed off the wall.
But wait -- maybe the players aren't all that eager to agree! There's this ominous paragraph:
However, Smith wrote in an email to the 32 player representatives shortly after the owners' decision: "Issues that need to be collectively bargained remain open; other issues, such as workers' compensation, economic issues and end of deal terms, remain unresolved. There is no agreement between the NFL and the players at this time."
So what's going on? The players' representatives are still working things through, but the NFL is using its vote to pressure the players into agreeing to the proposed CBA. Otherwise, why would the lead owner in the negotiations say this?
"That's baffling to me," Panthers owner Jerry Richardson told ESPN's Sal Paolantonio [in response to Smith's email]. "We believe we have handshake agreement with the players."
Although details are somewhat spotty, the deal looks like a decent one for the players. At the very least, it's a much better deal than the owners were talking about when they first went to the negotiating table. It's also a ten-year deal -- much longer than the standard 3 to 5 year agreement. Why? So the players can't bring another antitrust challenge for ten years.
But I think the players have smelled the owners' fear. That's what this is about:
A high-ranking NFLPA executive committee member told Mortensen that the owners' approval "puts the onus on players to make a decision to agree -- paints us into a corner with fans. We'll discuss tonight but the idea of reconstituting as a union has never been a slam dunk as the owners have already assumed."
Said another high-ranking NFLPA official: "We are not happy here. We had to honor to not vote on an agreement that was not final (Wednesday). This is not over. This actually takes away incentives from players to vote yes tonight."
We'll see what happens with the eventual CBA details. But the players have already won.
Friday, July 08, 2011
Injunction Ruling Against NFL Lockout Overturned
The opinion is here. The Eighth Circuit rescinded the district court's lockout based solely on the Norris-LaGuardia Act. As to the other arguments, the majority said:
Given our conclusion that the preliminary injunction did not conform to the provisions of the Norris-LaGuardia Act, we need not reach the other points raised by the League on appeal. In particular, we express no view on whether the League’s nonstatutory labor exemption from the antitrust laws continues after the union’s disclaimer. The parties agree that the Act’s restrictions on equitable relief are not necessarily coextensive with the substantive rules of antitrust law, and we reach our decision on that understanding.
I think this narrow holding preserves the players' longer-term arguments, as I discussed in this earlier post. This decision only dissolves the injunction. As I said at the time:
Let's say the court holds that Norris-LaGuardia prohibits the injunction. Well, that only removes the injunction against the lockout; it does not mean that the NFL won't ultimately be liable for antitrust violations. In fact, Judge Benton seemed to indicate that antitrust damages would continue to accrue even if the lockout could not be enjoined under the NLA.
Perhaps these still-open possibilities are pushing the parties to settle. The named players in the suit may want to blow up the existing system, but it's not clear to me that the lower-paid players want that. And it would likely take at least a year, and likely two or three, for the antitrust case to render the league crippled from a massive antitrust award. So the two sides seem to be stepping away from the precipice.
The fact that the NFL is negotiating at all, however, indicates to me that its lockout strategy was not as effective as predicted. The typical lockout strategy is to lock out and then wait until workers to come crawling back, after they've missed a big chunk of their salaries. I don't know how things will end up, but a deal should come soon. And I expect that the final deal will be much more favorable to the players than most folks would have predicted six months ago.
One final question: why isn't the NBPA pursuing this strategy as well?
Monday, June 20, 2011
Last night I finally got around to watching the academy award winning documentary "Inside Job." I had been planning to watch it for some time, but somehow ended up finding other things to watch instead. I enjoyed it and found it to be very interesting, but I imagine that readers of prawfs might be split on its merits. A good number of professors (primarily business/economics ) get skewered pretty well in the interviews.
Here are some of my favorite quotes from the movie:
Andrew Sheng: Why should a financial engineer be paid four times to 100 times more than a real engineer? A real engineer build bridges. A financial engineer build dreams. And, you know, when those dreams turn out to be nightmares, other people pay for it
Michael Capuano: You come to us today telling us "We're sorry. We won't do it again. Trust us". Well i have some people in my constituency that actually robbed some of your banks, and they say the same thing.
(My paraphrase) "As I recall I was revising a textbook." (You'll have to watch the movie for context on this one)
Posted by Jeff Yates on June 20, 2011 at 03:09 PM in Corporate, Criminal Law, Culture, Current Affairs, Film, First Amendment, Information and Technology, Law and Politics | Permalink | Comments (1) | TrackBack
Monday, April 25, 2011
The Market Myth
For initiates, as Fox shows, the idea of the rational market seems to have arrived with the force of revelation: “After about ten minutes it just hit me, this has got to be true. The idea for me was so powerful; I said to myself, ‘This is order in the universe.’” (105) (quoting Rex Sinquefield, MBA student at the University of Chicago circa 1970 and former Catholic seminarian).
To the extent that the idea of the rational market is not just an ordinary factual proposition but a framework for ordering experience—something that “has got to be true”—then it becomes difficult to evaluate. Perhaps this is why Fox’s title describes the rational market as a “myth.” The word choice suggests that the rational market is more than a false belief. When faced with a myth, we are more likely to ask whether it is useful than whether it is literally true. A myth is a way of explaining a natural or social phenomenon that makes it part of a broader world view, investing it with symbolic value that can legitimate and reinforce norms of behavior. The interpretation of myth, therefore, cannot be separated from the human context in which it arises.
Fox appears to take this approach. He observes that the straightforward problem with the theory of the rational market is that it was clear all along “that price movements also sometimes reflected false information, incorrect interpretation, and plain old mood swings.” (102) Yet, rather than dismissing the rational market idea as utopian economics, Fox maintains that the “unwillingness to give up on theories even when their underpinnings had been largely demolished was, like so many things about rational market finance, not entirely crazy.” (235) As Fox recounts, economists have made important advances using the rational market as a guide, even if their fundamental assumptions were shaky at best.
In the end, Fox concludes mildly that the rational market can help shape individual judgment but should not “substitute” for it. There is more to say about the relationship of myth, financial theory, and markets, and it is a sign of the quality of Fox’s book that it rewards the reader’s attention and invites further inquiry. Given space limitations, I will simply close with a question: does the rationality of the market depend upon who is asking? Finance scholars, investors, government regulators, bankers, and taxpayers may have different perspectives. After all, a theory that usefully motivates academic research can still prove destructive if let loose in the world.
Wednesday, March 02, 2011
Language Arts 101
Thank you to Dan and the PrawfsBlawg community for giving me the opportunity to share in your discussions and for inviting me onto your desks (or desktops), laps (or laptops) or into your hands (or handheld electronic devices). It is indeed a great honor, and I hope we can stimulate discussion and have some fun.
Speaking of fun, I thought I would start with a little snark.
Yesterday, the Supreme Court unanimously shot down AT&T's argument that corporations have "personal privacy" that allows them to withhold information under one of the exceptions to the Freedom of Information Act (FOIA). The opinion, available here, is notable not for its unanimity (Justice Kagan did not participate), but for its nod to everyone who did well in language arts as a child and to those who like to see some humor -- sarcastic or genuine -- in court decisions.
Some linguistic flair and Chief Justice Roberts's sense of humor AFTER THE JUMP.Confronted with a FOIA request from its competitors, AT&T wanted to withhold some documents under FOIA Exception 7(C) as protected by the "personal privacy" rights of the corporation. It argued that since a corporation is a "person," a corporation has "personal" rights; after all, the adjectival form of a defined word should refer to the defined word. The Third Circuit agreed.
Chief Justice Roberts must have found this amusing. For the next few pages, he gives AT&T and the Third Circuit a lesson in the complexity and nuance of American English:
Adjectives typically reflect the meaning of corresponding nouns, but not always. Sometimes they acquire distinct meanings of their own. The noun “crab” refers variously to a crustacean and a type of apple, while the related adjective “crabbed” can refer to handwriting that is “difficult to read,” Webster’s Third New International Dictionary 527 (2002); “corny” can mean “using familiar and stereotyped formulas believed to appeal to the unsophisticated,” id., at 509, which has little to do with “corn,” id., at 507 (“the seeds of any of the cereal grasses used for food”); and while “crank” is “a part of anaxis bent at right angles,” “cranky” can mean “given to fretful fussiness,” id., at 530.
Hilarious. And, a welcome lecture to those of us who have argued the plain meaning of statutory, regulatory or constitutional terms before panels of judges. One of the many things that makes the study of law so incomprehensible to the average American is our oft incomprehensible (mis)use of the English language. We create terms of art that do not always mean what they sound like they should mean and make seemingly arbitrary liguistic distinctions that have great impact. At least when it comes to the strange notion of corporate privacy, common sense wins out.
But, it is worth discussing the importance of FCC v. AT&T not only for the language it includes, but for the words it omits. The word "citizens" never appears, which means that the Chief Justice never referenced Citizens United, the widely criticized decision that used the personhood of the corporation to allow for unlimited election spending. When the Court handed down Citizens United, many scholars wondered what kind of effects that decision's broadening of corporate free speech rights might have. But, Chief Justice Roberts avoided that lightning rod with his linguistic analysis. There was less a discussion of the legal nature of "corporate personhood" than an English professor's discussion of the differences between "person," "personal" and "personhood." Also omitted from the discussion was any analysis of the intent of Congress when passing FOIA, but perhaps that was a strategic omission to obtain unanimity and bring on board those justices who find legislative history as awkward as multivariable calculus.
Some commentators have already suggested that AT&T is the Court taking a step back from Citizens United. I disagree. The fact that we are not required to ascribe all "personal" rights to a "person" -- however that word is defined -- does little damage to the Court's free speech analysis in Citizens United.
Tuesday, February 22, 2011
Is "Intellectually Vacuous" the Right Expression for Veil-Piercing Doctrine?
Over at his blog, Steve Bainbridge endorsed a view, inspired by comments from Steve Bradford (Nebraska) at Business Law Prof Blog to the effect that every time he got to teaching "veil-piercing," he was reminded again how "intellectually vacuous" the doctrine was.
I sympathize. I have the same reaction when I teach veil-piercing. Why? It's the tempest in a teapot problem that affects much of what commercial and business lawyers learn in school, on one hand, and what they practice, on the other. Were you inside the teapot of an idiosyncratic case that ends up as an appellate decision on veil-piercing, it would seem like a Category 5 hurricane. You read five or six cases with outrageous facts and try to reconcile how the doctrine for why corporations legitimately exist (individual use them to shield themselves from liability) is exactly the same as the doctrine under which individuals can be tagged (individuals used them to shield themselves from liability). Blow winds and crack your cheeks, rage, blow! But piercing cases are rare, idiosyncratic, and usually marked by some outrageous conduct that makes the decision, in retrospect, not particularly surprising.
But I disagree that the proper description of the problem is intellectual vacuity. The problem is trying to reduce to propositions something that propositions can't reduce. I've been teaching first year contracts and I've encountered this same "vacuity" problem every time the standard is "justice" (as in promissory estoppel), unconscionability, or mistake. Analogical reasoning doesn't work because it is inductive analogy - the cases are supposed to describe a rule - rails in a Wittgensteinian sense - that point you to the next result, and there are no rails, or there are too many rails, or they aren't parallel (metaphorically speaking). The better way to approach this is to understand that (a) we have a non-propositional conception of the prototypes of corporate legitimacy and corporate legerdemain, (b) the prototypes sit in polar opposition on a continuum, and (c) the rationalizing propositions follow the non-propositional and intuitive metaphoric leap from the specific case before us to a prototype. Another in my series of Venn representations of this kind of polarity is at left - this on unconscionability.
Shameless self-promotion alert: I discuss this cognitive process at length (giving credit where credit is due - I didn't make this stuff up) in three recent papers: Metaphor, Models, and Meaning in Contract Law; The Financial Crisis of 2008-09: Capitalism Didn't Fail But the Metaphors Got a "C" (Minn. L. Rev., forthcoming), and The Venn Diagram of Business Lawyering Judgments (46 Seton Hall L. Rev. 1 (2011), forthcoming).
Wednesday, February 09, 2011
Employees, the Firm, and the Corporation
Last week you may have seen the 2010 productivity numbers from the Bureau of Labor Statistics. Overall nonfarm business productivity was up 3.6 percent for 2010, almost identical to 2009's 3.5 percent growth. Wages, however, were fairly stagnant -- real hourly compensation was up only 0.3 percent. These most recent numbers are just the latest instantiation of the growing gap between productivity and employee compensation -- a trend that began in the 1970s. For a nice series of graphical illustrations of this divergence, check out BLS's The compensation-productivity gap: a visual essay. A similar trend can be seen in this rising share of GDP attributable to corporate dividends. Karl Smith at Modeled Behavior breaks this down: since the late 1980s, dividends as a share of GDP have more than doubled.
These trends illustrate, in my view, another societal development: the corporation has become the perfect legal machine for separating workers from the firm. In Employees and the Boundaries of the Corporation, I argue that our legal construction of the corporation has diverged quite significantly from our theoretical conception of the firm. It's actually quite striking: whenever we think of a firm--whether it be Coase, respondeat superior, or the work-for-hire doctrine--we think of employees. But employees are nowhere to be found in corporate law. The result has been a "firm" that consists mainly of employees and a "corporation" that consists of shareholders, directors, and officers. Labor and employment law seeks to redress the vulnerability of employees left outside corporate boundaries, but these can only go so far.
"Employees and the Boundaries of the Corporation" is a contribution to Elgar's forthcoming Research Handbook on the Economics of Corporate Law (Claire Hill & Brett McDonnell, eds.). (David Walker is also contributing The Law and Economics of Executive Compensation: Theory and Evidence). I would love to hear your thoughts.
Monday, February 07, 2011
Applying SOX (or something like it) to law schools
A comment that I saw on Steve Bainbridge's blog sounds like an interesting way to respond to the claim that law schools all too commonly mislead students about the schools' employment data:
[A]pply Sarbanes-Oxley to college admissions, bursar, and career placement offices, with university presidents having to certify the data.
Now, I'm not a university president, so I suppose it's easy for me to get behind this idea. It has a lot of appeal to me, and not in the snarky way that it did to the commenter, whose full comment evinces glee at the idea of academics being hoisted by a (bad) law that they support being imposed on businesses.
Lots has been written recently about law school debt and declining job prospects for JDs. Indiana (Bloomington) law Professor William Henderson was quoted as saying:
Enron-type accounting standards have become the norm. Every time I look at this data, I feel dirty.
Solving the J.D. overabundance problem, according to Professor Henderson, will have to involve one very drastic measure: a bunch of lower-tier law schools will need to close. But nobody inside of the legal establishment, he predicts, has the stomach for that. “Ultimately,” he says, “some public authority will have to step in because law schools and lawyers are incapable of policing themselves.”
I'm not sure this solution necessarily follows from the diagnosis. If the problem is that there is a bunch of misleading information being put out there by law schools, including misleading or even false employment data, why isn't the more narrow solution to penalize dissemination of such false or misleading information?
Congress could presumably enact a law that requires law schools to provide accurate and detailed data about the employment prospects of their students (for the summers) and graduates, and to have those reports certified by the university president, chancellor, etc., with violations punishable by fines and other penalties.
By focusing on the quality of the data, this approach would, if successful, render law schools more accountable to the market. No more sending survey letters to graduates that say, "if we don't hear from you by X date, we will assume that you have found fulltime employment" (not something that took place at the two institutions I've been employed by, but which I've heard about elsewhere). No more lumping all non-law work with legal employment. (To be sure, there may well be JDs who by their own choice take non-law-related work, but that's still useful information to law school applicants.)
If anything, it seems to me there's arguably a stronger call for enforcing these sorts of disclosure and accuracy provisions on law schools (and universities in general) than on corporations. After all, the cost of corporate malfeasance with regard to balance sheets and the like is diffused across a huge number of investors, who are presumably not taking out huge loans with which to invest in said corporate stock. (I guess there are margin traders, but really, they seem a less sympathetic group for concern than poor students with huge education debt.) The cost of law school malfeasance in terms of misleading or false employment data is visited upon a (relatively) small number of students who are saddled with $50,000 or more in student debt. Shouldn't they be entitled to at least the same level of informational protection that stock investors now get?
Thursday, December 09, 2010
Why Allowing States to Go Bankrupt is a Horrible Idea
At the end of November, an article by David Skeel in the Weekly Standard got many conservative folks a-chattering about letting states go into bankruptcy. The new meme apparently has already had policy ramifications, as James Pethokoukis reports:
Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011.
That’s why the most intriguing aspect of President Barack Obama’s tax deal with Republicans is what the compromise fails to include — a provision to continue the Build America Bonds program. BABs now account for more than 20 percent of new debt sold by states and local governments thanks to a federal rebate equal to 35 percent of interest costs on the bonds. The subsidy program ends on Dec. 31. And my Reuters colleagues report that a GOP congressional aide said Republicans “have a very firm line on BABS — we are not going to allow them to be included.”
In short, the lack of a BAB program would make it harder for states to borrow to cover a $140 billion budgetary shortfall next year, as estimated by the Center for Budget and Policy Priorities. The long-term numbers are even scarier. Estimates of states’ unfunded liabilities to pay for retiree benefits range from $750 billion to more than $3 trillion.
It's clear that states like California and Illinois are much closer to financial default than anytime in the recent past. But allowing states to go bankrupt -- i.e., creating a mechanism which would allow a court to restructure a state's future financial commitments -- is a bad idea with terrible consequences.Why is bankruptcy necessary? As Skeel makes clear throughout the article, the main culprits are overpaid public employees:
California—recently dubbed the “Lindsay Lohan of states” in the Wall Street Journal—has a deficit that could reach $25.4 billion next year, and Illinois’s deficit for the 2011 fiscal year may be in the neighborhood of $15 billion. There is little evidence that either state has a recipe for bringing down its runaway expenses, a large portion of which are wages and benefits owed to public employees. . . .
With liquidation off the table, the effectiveness of state bankruptcy would depend a great deal on the state’s willingness to play hardball with its creditors. The principal candidates for restructuring in states like California or Illinois are the state’s bonds and its contracts with public employees. . . .
California’s most important creditors are its bondholders and its unionized public employees. . . .
Are public employees overpaid? Well, it depends what you mean. If you mean that they are paid more than the states can afford, given the current tax revenue, the answer seems to be "yes" in many states. But are they paid more than they negotiated? No. Are they paid more than comparable private employees? The evidence is mixed. For example, look at this article in the Oregonian about public employee pay:
Yet one fundamental question underlying the debate is whether Oregon's public employees are overpaid.
The objective answer is generally no. Not yet anyway.
It's true that on average, state employees make more than private-sector workers. But the average says more about the professional-type jobs dominating the public work force, and the vast number of unskilled, low-paying jobs in the private sector, than it does about state pay practices.
When the analysis focuses on comparable jobs and education levels, the total compensation of state employees is slightly less than their private-sector counterparts and slightly more than public employees at other levels of government and in neighboring states. That conclusion is consistent whether the data comes from the state's compensation surveys, academic and private-sector analyses, or federal data.
Moreover, look at this graph from the Oregonian:
The highest point on the graph -- the 2004 pay and benefits to the average employee -- is $61,301. That's the highest point on the graph. Average 2009 salary is $41,200. The average California public employee salary is $57, 536. By the way, click on that link and you'll see that the five highest paid public employees are two head coaches (each making over $2 million) and three med school professors.
So yeah, let's allow states to go bankrupt. The bondholders would likely get killed -- and who knows what the interest rates on state bonds would go up to. Skeel is sanguine: "The bond market wouldn’t be happy with a California bankruptcy, but it is already beginning to take account of the possibility of a default." Um -- I think the possibility of bondholders losing money is MUCH greater once Congress allows states to go bankrupt, and I think the bond market would "take account" of that much differently. Oh -- "And bondholders can’t pull their funding the way a bank’s short-term lenders or derivatives creditors can." So that's nice -- they're trapped like rats, so what they do about it doesn't really matter. And state bondholders are usually older folks who need "safer" holdings, but I guess that only means they won't be around so long to complain about it!
What about that other group of creditors?
As for California’s public employees, there is little reason to suspect they will be running anywhere.
Do I hear a little chuckling after that?
If the public thinks it's overpaying its public employees, there's an easy remedy -- elect representatives who won't pay as much. Of course, this is when the same folks who defend Citizens United will bemoan the awesome political power of public unions -- like this, perhaps:
During his recent campaign, Governor-elect Jerry Brown promised to take a hard look at California’s out-of-control pension costs. But it is difficult to imagine Brown taking a tough stance with the unions. Even in his reincarnation as a sensible politician who has left his Governor Moonbeam days behind, Brown depends heavily on labor support. He doesn’t seem likely to bring the gravy train to an end, or even to slow it down much.
So the only answer is to cut off federal assistance. And rather than raising taxes or slashing expenses, the current leadership of states like California and Illinois can take the state into bankruptcy and tell its bondholders and employees to go jump off a pier.
I'll give Skeel one point for consistency -- he was against the AIG and Bear Stearns bailouts; he thought they should have gone bankrupt, too. But they didn't. To me, the case for a federal bailout of a state is much stronger than a bailout of a financial institution. The state isn't going anywhere. The feds can get their money back in a variety of ways. And whereas a bankrupt business cannot get more money out of non-existent customers, a state can always raise taxes or even sell off public holdings. It may not be pretty, but the money is there.
One final note -- a point that shows the absurdity of where we are. If this federal government bails out AIG so that Goldman can get a $1 for every $1, but then lets states restructure their debts so that a 65-year-old ex-cop get $0.25 on the dollar, there may in fact be rioting in the streets. And that would be bad for the economy, no?
UPDATE: Felix Salmon also thinks the bond market would freak out.
Friday, October 15, 2010
Will the deal get done in time?
UPDATE: from the Guardian blog:
3.58pm: LIVERPOOL FC HAVE BEEN BOUGHT BY NEW ENGLAND SPORTS VENTURES, Owen Gibson confirms that the deal is done.
Thursday, October 14, 2010
International Corporate Warfare in Real Time
Whether or not you are a scouser, I would encourage you to go to this page right now -- now! -- to experience the thrill of international corporate warfare in real time. Yesterday a British court ruled that the board of Liverpool Football Club had the power to go through with its sale of the club to the folks who own the Boston Red Sox. I say the "board," although that was part of the dispute, as the owners -- two Americans, including the former owner of the Texas Rangers -- had changed the composition of the board in breach (as the U.K. court found) of an agreement with UBS, who had lent them £200m. If this is all a bit much to figure out, then add in a late-breaking TRO from a Texas trial court judge enjoining the sale! Today the parties are back in U.K. court, and there could be a verdict as I am writing this now. If the sale doesn't go through today, UBS can take over the club tomorrow, which will cripple LFC's standings in the Premier league. So check out David Zaring's piece from yesterday for background, and keep hitting "refresh" at the Guardian's site. And feel free to email the Guardian's reporters if you have any in-depth knowledge about Texas civil procedure.
UPDATE: Mr Justice Floyd is back, but a decision is still pending. Tough to take! And I'm wholeheartedly in the board's camp. I've been brainwashed, perhaps, by things like this.
UPDATE 2: From the Guardian blog:
5.21pm: Judge rules that anti-suit injunction wanted by RBS and other parties (board) against owner's action in Texas is granted. "This case has nothing to do with Texas."
If anyone with international civil procedure expertise would like to weigh in on what happens next, I'd be much obliged.
Tuesday, October 12, 2010
Greg Mankiw is threatening to stop working (again)
Two years ago, Greg Mankiw threatened to stop working if Obama was elected, basically on the theory that his tax rates would go up and his incentives would thereby go down. It was one of those "Going Galt" threats that looks ridiculous in retrospect. Mankiw, of course, is still a professor at Harvard. But he has stopped working in one respect -- he's recycled that old blog post into an op-ed for the New York Times. A few thoughts:
- First, if you're looking for reasons why the print media continues to lose importance and market share, compare this and this. The New York Times essentially ran a two-year-old blog post in its Sunday edition. I can't even really blame Mankiw for this -- where are the editors? In fact, I think Mankiw's op-ed is an elaborate inside joke on his part. "Two years ago, I threatened to stop working. And I made good on that threat! Of course, if people want to pay me for not working, I'm happy to accept it, even with higher taxes. I just won't do any new work."
- I'm willing to offer the Times this two-year-old blog post, which was my response to Mankiw's original post. I could summarize it here, but I'm not getting paid for it, so what's the point? You can read DeLong, Ezra Klein, etc., etc. Frankly, they take his argument far too seriously. I still think Mankiw's blog should have the banner headline, "I'M BLOGGING AWAY MY CHILDREN'S INHERITANCE."
- The man still needs a course in basic taxation. Can I recommend this one next spring, with Louis Kaplow? You can learn about tax goodies.
- Todd Henderson got a ton of grief for a blog post that was far more open and personal about the effect of the tax cuts than Mankiw's op-ed. I disagree with Todd's perspective, but at least he was being honest about his personal concerns. Mankiw should get a lot more grief for this pseudo-threat to stop making the world a better place because he will lose some small percentage of any additional income he brings in. Mankiw admits: "Paying an extra few percent in taxes wouldn’t create a lot of hardship." And yet he claims that percentage will dictate whether he gives a guest lecture, takes on consulting work, or writes an article. That, my friends, is someone with a strange set of utility curves.
Friday, July 16, 2010
Dispatches from the front, circa 1989
From Fred S. McChesney, "Economics, Law, and Science in the Corporate Field: A Comment on Eisenberg," 89 Colum. L. Rev. 1530, 1530 (1989):
As American history demonstrates, the colonization of one territory by inhabitants of another creates at least two problems. First, the colonizers and colonized usually do not speak the same language, and thus must learn to communicate. Ordinarily, the language of the colonizers comes to dominate, a development rarely pleasing to the colonized. Second, patterns of property ownership will likely be disrupted, as colonizers acquire (often by force) rights previously held by the colonized.
The colonization of some fields of law by economic analysis fits this historical pattern. Economics provides a powerful “tool kit” with which to analyze law. It has proven difficult, however, for some adherents of more traditional approaches to law to come to understand the different form of analysis that the use of economic methods entails. Moreover, the economic approach has reduced the value of lawyers' more traditional but less powerful methods of legal analysis. Not surprisingly, many lawyers have objected to the intrusion of economic analysis into law on both grounds.
Wednesday, May 19, 2010
Ideoblog Merges With and Into Truth on the Market
Larry Ribstein, pictured left, whom I joined as a co-author on the fourth edition of Unincorporated Business Entities, the world's premier casebook on non-corporate business associations (note that I didn't simply say "my co-author Larry Ribstein" because it would unfairly reflect our respective contributions), has announced that he is shutting down his six-year old blog and joining Truth on the Market. Terms of the deal were not announced, but sources reported that TOTM paid a significant (some might even say infinite) premium over Ideoblog's current market cap. The rumors are also that Larry will continue moonlighting in television and motion pictures under his stage name, James Rebhorn (known for his recurring role as a sleazy (other than Tovah Feldshuh's character, Danielle Melnick, aren't they all?) defense lawyer on Law & Order and the wimpy defense secretary in Independence Day, pictured right).
Congratulations to Larry, and thank goodness Ideoblog wasn't organized as an LLC in which another member might sue him in a derivative lawsuit and incur his wrath not because of the merits but because of the form of the action. (That's an inside "Agency, Partnership, and LLC" reference.)
Tuesday, May 18, 2010
Lawyers as CEOs
The May 2010 edition of the ABA Journal has as its cover story a feature on the nine lawyers who happen to be CEOs of Fortune 50 companies. The article, I think, wants to argue that there's something systemic about this in the growth of regulation of businesses beyond the traditional home of lawyer-CEOs - financial, insurance, and pharmaceutical industries. That answer seems too simple to me, and I'm inclined to think it's more the result of the evolution of the lawyer's in-house role as I've observed it over the thirty plus years that I've been a lawyer. The respect afforded to the general counsel and to the in-house legal staff has grown steadily; I can remember the general disdain outside big firm lawyers had for their in-house counterparts (this was back in the Analog Age).
Now top notch lawyers tend to be intimately involved with the business and the legal affairs of the company. Indeed, I coached the lawyers I supervised was not to be passive about the business side of any management discussion but, whenever in a meeting, mentally to anticipate and predict the business decision. The article quotes David Steiner, the CEO of Waste Management: "I don't think these boards of directors are turning to lawyers because they are lawyers but because these lawyers also happen to be very good business people." I think that's a lot closer to the truth.
A list of the lawyer CEOs in the Fortune 50 below the break.
Bank of America, Brian Moynihan (Notre Dame)
Kroger, David Dillon (SMU)
Home Depot, Frank Blake (Columbia)
State Farm, Edward Rust, Jr. (SMU)
WellPoint, Angela Braly (SMU)
MetLife, C. Robert Hendrikson (Emory)
Goldman Sachs, Lloyd Blankfein (Harvard)
Pfizer, Jeffrey Kindler (Harvard)
Sears Holdings, W. Bruce Johnson (Duke)
[Source: ABA Journal, May 2010, p. 35]
Tuesday, May 11, 2010
A Corporate Insider's View of Political Funding: A Response to Katrina
I started to write a comment in response to Katrina's question in the preceding post, and it began to take on a life of its own (possibly because I am now into full-fledged grading procrastination mode, and taking a break after doing a dozen or so exams). I'll also take the bait.
Katrina's question is about the strategy/tactic of using shareholder proposals to affect the ability of corporations to involve themselves in the political process following Citizens United. I want to offer a corporate insider's somewhat "yawn" view of the whole issue (not Katrina's post, which is very interesting).
First, as to the shareholder proposal strategy. There's little doubt this is always going to be a matter of a precatory proposal, at least under Delaware law, because the decision whether or not to contribute politically will be a matter wholly within the board's purview under Del. GCL §141(a). As to the filing of a precatory shareholder proposal in the proxy, I don't think the "relevance" exception would permit exclusion of the proposal, which is designed to keep "tail of the dog" business issues out of the proxy statement (e.g., if General Electric has a $1,000,000 business in Burundi, it's simply too dinky for this much effort). This proposal indeed goes to an overall corporate operational issue. If a corporation really wanted to exclude the proposal, the most likely candidate in 14a-8 is the "ordinary business operations" exclusion. But (a) I don't think the SEC would agree that a proposal going to a significant policy issue like this would be within the scope of the exclusion, and (b) I don't think most companies would even bother trying to exclude it rather than addressing it on the merits.
No, the real issue here is the appropriate of the proposal on the merits, and were I still the GC of a public corporation, I'd be writing a response encouraging the shareholders to reject even the precatory proposal as inimical to the best interests of the shareholders. Citizens United didn't change the ability of corporations to involve themselves in the political process; it simply changed the directness of the funding. Corporations have long been able to organize and support PACs, and to direct PAC money to candidates whose views the corporation sees as being in the best interest of the shareholders. As long as the Supreme Court has held that it's legal for corporations to fund political interests under the First Amendment, no rational corporation ought to adopt a blanket policy that ties one arm behind its back, so long as others are able to channel their entrepreneurial efforts (business or social) into strategic political moves ultimately designed to obtain competitive or social advantage. (Compare on the other hand bribery to foreign officials that is illegal under the Foreign Corrupt Practices Act. U.S. corporations simply cannot respond in kind even if it puts them at a competitive disadvantage to companies domiciled in countries without such restrictions.)
Moreover, the "yawn" comes from an insider's perspective that understands just how much the spending of money for any purpose inside a corporation is a zero-sum game. Even under the PAC rules, companies could do all sorts of things to encourage employee PAC contributions, including social events, raffles, making charitable donations to non-political causes in exchange for PAC contributions (I'm pretty sure on this one, but it's been a while.) Nor did anything restrict the amount of money that companies could spend on lobbying efforts, as long as the lobbying efforts were appropriately registered and otherwise transparent. And in a number of states (e.g. Indiana), there were no restrictions on corporate contributions directly to candidates. Nevertheless, as far as I know, no corporation interested in producing returns to shareholders, just for the sake of global hegemony or some such, ever adopted for political influence what the former chairman of IBM once said about his law department: "Every year I give them an unlimited budget and every year they exceed it." (See also commenter Ron's comments after Katrina's post, which make sense to me.)
Finally, at the end of the day, it's a political issue. As long as the source of funds in a campaign is transparent, a candidate will be accountable for his or her acceptance of the funds. If the candidate appears to be beholden to corporate interests, other candidates or interest groups point that out, and the voters don't care, they'll get exactly the government they deserve. And I'm unpersuaded that corporate funding will be so endemic as to crowd everyone else out of the process - Obama's micro-donation campaign as Exhibit A.
Monday, May 10, 2010
Wise (and Nuanced) Advice on Corporate Governance
The problem with nuance is that it is boring. It's far more exciting to hop on the availability heuristic (prediction of the frequency or prevalence of an event or characteristic based on how easily examples can be brought to mind, not the actual data) bandwagon, particularly when the targets are well-paid, like corporate executives (full disclosure: I was one, so take this appeal to wishy-washiness FWIW). Indeed, I think I could make an argument that the availability heuristic is the primary driver of social and political discourse today: see, well, every cable news outlet. My own heuristic for wisdom tends to be some acknowledgment of nuance or counter-intuitive position: such as when a conservative acknowledges some merit in a liberal position or vice-versa (in academia, it's where the author says, "to be sure...")
So l liked the "hey, it's not so bad, but it could be better" view of corporate governance today in the Wall Street Journal, coming from John J. Brennan, the chairman emeritus of Vanguard, as he describes it, "one of the largest index fund providers in the world" and therefore "at a minimum, a 2% owner of just about every public company in the United States." Moreover, Vanguard views itself as a long-term holder, not a day- or even quarterly- trader, which I think is important. I've made the point before that making universal pronouncements (or rules for that matter) based on the pathologies of the worst examples of corporate leadership, even if there are 100 examples, is operating on the availability heuristic, given that there are 9,000 publicly-traded companies (I'm pretty sure that's about right) in the U.S. alone. Brennan observes from his broad perspective that there's been a steady progress in board performance over the last twenty-five years, but nevertheless offers a list of conceptual suggestions for additional improvement: focus on the directors' roles as stewards of shareholders who really don't want to be involved in the management of the company; collaborative rather than confrontational relationships between management and shareholders; and self-reflection and self-evaluation that goes beyond current stock price and earnings to matters such as succession planning, strategy, and big picture goals.
Brennan offers a number of concrete suggestions as well, one of which I like a lot. He suggests that every director of a public company should hold a minimum amount of equity in the company equivalent to a five times multiple of board pay. The problem, which he recognizes, is that making directors buy their way onto boards would mean that only very wealthy people would serve because the purchase of the shares would not be a significant percentage of the director's net worth. Indeed, I'd question the business savvy of somebody who bought her way onto a board by violating basic concepts of diversifying one's own holdings! Brennan proposes, and I concur: pay directors solely in equity (I would amend this to equity and enough cash to pay the taxes on the equity) until they've reached the threshold. I don't see it writ in stone anywhere that directors, who ought to be compensated, should get cash for their work.
Brennan's observations are consistent with my own trafficking in the availability heuristic (and, hence, as subject to revision by the data as the opposite view): what I've seen personally is that "cultural change [from insider to shareholder focus] has been driven by board members themselves." I also think he's correct in believing that that leading directors and leading boards changing the culture of corporate governance is likely to be more effective and more permanent than regulation or legislation.
Wednesday, May 05, 2010
Emory Transactional Skills Conference - Reminder!
Just a quick reminder that Emory Law School's conference, Transactional Education: What’s Next?, is being held on June 4 and June 5. Additional information is available by following the link or contacting Edna Patterson at (404) 727-6506 or email@example.com.
Friday, April 02, 2010
"Hot News" Misappropriation: Implications for Bloggers? for Bloomberg News?
What happens when the interests of newsgatherers and news aggregators collide? That was the issue before District Court Judge Denise Cote last month in Barclays Capital Inc. v. Theflyonthewall.com (S.D.N.Y., 3/18/10), and the opinion in the case arguably has negative (dare I say ominous?) implications for bloggers and for anyone who republishes truthful information about a matter of public concern, even if that information has already leaked into the public domain.
The plaintiffs in the case were the financial services firms Barclays Capital, Merrill Lynch, and Morgan Stanley. They sued Theflyonthewall.com (Fly) for misappropriation and copyright infringement for redistributing their stock analysts' investment recommendations "through unauthorized channels of electronic distribution." Fly is an Internet subscription service that aggregates and distributes "relevant, market-moving financial news and information." Fly often obtained research reports and recommendations via leaks from plaintiffs' employees or clients. Fly would then quickly distribute the recommendations before the New York Stock Exchange opened, thereby undercutting the plaintiffs' abilities to profit from their reports.
After a bench trial, District Judge Cote entered judgment against Fly for copyright infringement, and awarded statutory damages, a permanent injunction against direct copying and republication of the reports, and attorneys' fees for the portion of the litigation expenses associated with pursuing the copyright infringement claim. She also held that Fly had engaged in "hot-news misappropriation" when it redistributed the recommendations from the plaintiffs firms' investment reports before the opening of the New York Stock Exchange and crafted a "time-delay" injunction requiring Fly to delay future distributions for a specified period after the firms released their reports to remedy the problem.[Full details below.]
The theory of "hot news" misappropriation stems from International News Service v. Associated Press, 248 U.S. 215 (1918), in which the Supreme Court held, under federal common law, that "hot" news is "quasi-property." That case involved a claim by the Associated Press against a competing news service that was obtaining and then redistributing on the West Coast AP battlefront news releases during World War I. The Court's decision reflects the notion that "time is property", or as my colleague Michael Wolf puts it, the decision protects the "money value of time" as opposed to the "time value of money." It also protects the "labor value" that AP invested in newsgathering, at least for a limited time. The "hot news" misappropriation doctrine was criticized by no lesser lights than Justice Brandeis and later Judge Learned Hand. In fact, Justice Brandeis wrote in dissent in INS v. AP that "the general rule of law is that the noblest of human productions--knowledge, truths ascertained, conceptions,and ideas--become, after voluntary communication to others, free as the air to common use." Despite the pedigree of its critics, the hot news misappropriation tort nonetheless caught on.
Indeed, Judge Cote relied on a Second Circuit decision, National Basketball Ass'n v. Motorola, Inc., 105 F.3d 841 (2d Cir. 1997), to define the contours of the tort. There, the NBA sued the maker of a hand-held pager that provided real-time information about basketball games. The Second Circuit held that a "narrow" hot news misappropriation claim could survive preemption by the federal Copyright Act when "extra elements" were present. The extra elements are: "(i) a plaintiff generates or gathers information at a cost; (ii) the information is time-sensitive; (iii) a defendants use of the information constitutes free riding on plaintiff's efforts; (iv) the defendant is in direct competition with a product or service offered by the plaintiffs; and (v) the ability of other parties to free-ride on the efforts of the plaintiff or others would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened."
Applying this test, Judge Cote held that Fly had misappropriated the research reports of the financial services firms when it distributed them to its subscribers before the opening of the New York Stock Exchange. Judge Cote wrote: "Fly's core business is its free-riding off the sustained, costly efforts by the Firms and other investment institutions to generate equity research that is highly valued by investors. Fly does no equity research of its own, nor does it undertake any original reporting or analysis . . . [Fly's] only cost is the cost of locating and lifting the Recommendations and then entering a few keystrokes into its newsfeed software. Although Fly does attribute each of the Recommendations to its originating firm, if anything, the attributions underscore its pilfering."
Alarmingly, Judge Cote absolutely rejected the argument that Fly had a right to redistribute truthful information that had already made its way into the public domain. "[I]t is not a defense to misappropriation that a Recommendation is already in the public domain by the time Fly reports it." The judge found it of no moment that the "actors in the marketplace repeat news of Recommendations to their friends and colleagues, such that the word inevitably gets out. Rather, it is that Fly is exploiting its self-described 'hefty relationships with people in the know' to gather information from the rumor mill and run a profitable business dedicated, in large part, to systematically gathering and selling the Firms' Recommendations to investors."
Judge Cote also found that the plaintiffs were in direct competition with Fly even though they were not themselves in the news business. As to the final factor of the NBA test--whether the plaintiffs would have a reduced incentive to invest in research--Judge Cote found that the plaintiffs' investments in research had diminished because Fly and other news services had published their leaked recommendations. Significantly, and quite interestingly, Judge Cote found that the "unauthorized redistribution of [analyst] Recommendations" was a "major contributor to the decline in resources that each Firm devotes to equity research." (emphasis mine) To be fair, the judge did concede that there were other factors in play during this time that might have affected analyst staff and budgets. She observes, for example, that "[s]ince 2008, the world has experienced an economic cataclysm." Still, it is richly ironic that these firms are concerned about protecting the "integrity" of their equity research.
In crafting a remedy for Fly's misappropriation, Judge Cote took into account "public policy considerations" but made no mention of the First Amendment. Specifically, she observed that the production of equity research "is a valuable social good" that will be "underproduced unless the Firms can achieve an economic return on their investment." She also noted that there is an "important" public interest in "'unrestrained access to information', particularly when the information is heavily fact-based." She therefore enjoined Fly from unauthorized redistribution of Plaintiffs' research recommendations released when the market is closed "until one half-hour after the opening of the New York Stock Exchange or 10 a.m., whichever is later." She enjoined Fly from publishing recommendations issued when the market is open until two hours after their release by the Plaintiffs.
From a media lawyer's perspective, there are compelling interests on both sides of the case. On one hand,the newsgatherers and content generators wish to turn a profit (and stay in business), and their ability to do so is threatened by online news aggregators. On the other, this case involves a prior restraint preventing republication of newsworthy information, even if that information has already entered the public domain. It also involves the imposition of tort liability for the publication of lawfully obtained truthful information. Given this conflict, surely the district judge should have at least considered how to reconcile her decision with First Amendment cases like Near v. Minnesota, Florida Star v BJF, and Bartnicki v. Vopper. Fly evidently plans to appeal the district court decision, so perhaps the appellate court will do a better job of reconciling the conflicts present in this case.
Posted by Lyrissa Lidsky on April 2, 2010 at 04:18 PM in Blogging, Constitutional thoughts, Corporate, First Amendment, Information and Technology, Intellectual Property, Torts, Web/Tech | Permalink | Comments (3) | TrackBack
Tuesday, March 30, 2010
Carney's Firing: The Other Side of the Story?
Larry Ribstein and the good Professor Bainbridge are bemoaning last week's firing of John Carney from Business Insider. Ribstein, Bainbridge and others are all citing this story by Foster Kamer as to the reason for the firing:
Blodget wanted more sensational, pageview-grabbing posts and click-friendly features like galleries, while Carney wanted to put forth breaking news scoops that told a longer narrative. It was also speculated that Carney, one of the highest paid members on the Business Insider staff, wasn't bringing the traffic numbers to sufficiently satisfy Henry Blodget, given his high profile within the financial reporting world, but that Clusterstock's homepage had the highest traffic of all the verticals at Business Insider during Carney's tenure, and that his own stories generated "tons of [unique visitors]."
This version of the story is obviously highly sympathetic to Carney; he wanted "breaking news scoops that told a longer narrative," while Blodget wanted "more sensational, pageview-grabbing posts." But from my perspective, Carney's problem was that "longer narrative": he consistently tried to bend news stories around to an extremely conservative/libertarian perspective. The latest example is this bit of regulatory nihilism: "Sorry America, The Latest Round Of Financial Regulation Reform Won’t Fix Anything." And frankly, that post seems rather restrained when compared with "Lying Government Humiliated In The Very First Backdating Conviction" and "How The Government Used The CRA To Push Crappy Lending Standards."
Just to be clear, I'm not saying Carney should have been fired. And I'm not saying he won't come back and be very popular at another site -- he probably will. I'm just pointing out that some readers may have been turned off by the overly-politicized message, as commenters at Felix Salmon opined:
Even with Carney’s thousand word essays on Lehman, I found most of what he wrote to be knee jerk, ad hoc advocacy that was “shallow and vapid.” Clusterstock may be less of a resource without him, but that doesn’t necessarily imply that it was much of a resource with him. I can’t imagine where Blodget is headed if Carney was his upside connection to quality journalism…
UPDATE: Professor Bainbridge responds: "He's the John Stossel of financial news and that's a very good thing."
Thursday, January 21, 2010
Two small thoughts on Citizens United
Just wanted to add these minor notes to the growing agglomeration of commentary:
- For a terrific take on the legitimate uses of corporate money to advocate for policy positions, see Jill Fisch's How Do Corporations Play Politics?: The FedEx Story, 58 VAND. L. REV. 1495 (2005). Fisch does a great job of showing how corporations need to play politics in order to manage their businesses. I think the same applies to unions, as I argued here.
- I predict Citizens United will lead to a new round of shareholder proposals designed to limit corporate political spending. Shareholders -- particularly institutional shareholders -- will want to limit the money that flows out through theoretically "non-business-related" expenses.
These two points are semi-contradictory. Here's an effort to reconcile them: those companies whose contributions seem more ideological (more populist? more conservative?) will find themselves targeted by institutional shareholders, whereas those who play both sides of the street, in a low-key manner, will probably not be.
Friday, January 08, 2010
Apple, Google, and Nexus One: The Role of Eric Schmidt
If you stopped reading fake steve jobs when he went on hiatus as Dan Lyons for a while, it's time to go back. Perhaps "Operation Chokehold" was not as successful as fsj had hoped, but it did point up AT&T's weaknesses with its network. There was even some interesting discussion of shareholders vs. customers -- perhaps fodder for Vic Fleischer's consumer primacy.
Now fsj is all over the Nexus One, Google's attempt to eat into the cell phone (and the iPhone) market. You may remember the fanfare when Eric Schmidt, Google's Chairman/CEO, joined the Apple board. He even worked for free! Well, he's no longer on the board -- he resigned in August. At the time, the real Steve Jobs said in a press release: "Unfortunately, as Google enters more of Apple’s core businesses, with Android and now Chrome OS, Eric’s effectiveness as an Apple Board member will be significantly diminished, since he will have to recuse himself from even larger portions of our meetings due to potential conflicts of interest."
At the time of the resignation, there was some speculation that "[t]he two companies may genuinely dislike each other now." I would say that's a yes. FSJ has a great (hypothetical) conversation between Jobs and Schmidt in the aftermath of N-O:
I’m like, Dude, do you not remember all that stuff you told me about not making a phone, back when you were still not recusing yourself from iPhone discussions during board meetings? You swore, and I mean you looked me in the eye and swore, that you would never make a phone. He says, We’re not making a phone. HTC is making it.
I told him if he wanted to use that line on the retards in the hackery that’s one thing but please don’t insult me with it. He goes, Okay, it’s our phone.
So I guess my underlying legal question is: any possibility that Apple has claims against Schmidt? I would assume not, since this stuff had to have been lawyered up so extensively on both sides that there's no room for illegality. Still, it does seem fairly -- um, unusual -- that two competitors would have been working together so closely. Or does this just mean that boards are a lot less important than corporate law makes them out to be?