“The American Civil Liberties Union has filed a federal action against the U.S. Conference of Catholic Bishops, alleging that its ethical guidelines given to Catholic hospitals resulted in negligent care for a miscarrying woman.” The suit, in the name of a Muskegon, Mich. woman who allegedly experienced pain and suffering by not being advised at once to abort a doomed fetus, also names as defendants three individuals who have chaired a church-affiliated body by the name of Catholic Health Ministries. The suit does not however name as a defendant Mercy Health Partners, where plaintiff Tamesha Means was treated, nor does either the Bishops’ Conference nor CHM own Mercy. So what’s the legal theory? Well, the bishops issued ethical guidelines they expected Catholic-affiliated hospitals to follow, and CHM acted as Mercy’s “Catholic sponsor” vouching for its compliance with those guidelines. So maybe the theory consists of “incitement to commit malpractice.” Is it rude to point out that the law recognizes no tort of that sort? [ABA Journal, MLive, Alex Stein/Bill of Health (background on Michigan med-mal law)]
Proxy advisory firms have gained an outsized role in corporate governance in the United States largely as a result of the unintended consequences of SEC action. ...
The SEC has been concerned about the role of proxy advisors for some time. In a 2010 concept release often referred to as the “proxy plumbing release,” the Commission revisited the issue of proxy advisory firms by highlighting several of its concerns, including conflicts of interest and the lack of accuracy and transparency in formulating voting recommendations. Since then, increased calls for a review of the role of proxy advisors have come from a wide range of parties, including Congress, academia, the media, and a national securities exchange. ...
As an aside, I am one of those who has expressed concern. But back to Gallagher:
I think a major lesson is that regulators should avoid granting these firms special privileges, intentionally or otherwise. This was a painful and costly lesson the SEC learned with respect to credit rating agencies after we created an outsized role for so-called Nationally Recognized Statistical Rating Organizations by incorporating those entities into our rules. The parallels between the regulatory privileges granted to NRSROs and proxy advisory firms are striking. ...
I believe that the Commission should withdraw the two proxy advisor staff no-action letters and, ideally, replace them with Commission-level guidance. Such guidance should be designed to ensure that investment advisers are complying with the original intent of the 2003 rule and effectively carrying out their fiduciary duties. This would go a long way toward mitigating the concerns arising from the outsized and potentially conflicted role of proxy advisory firms.
I have previously spoken about additional actions the Commission should take, including measures to increase transparency in this area. Due to the privileges the SEC has bestowed upon proxy advisory firms, however, before we can see whether transparency measures would be effective, the Commission needs to remedy the problematic staff guidance.
In yesterday's WSJ, David Larcker and Allan McCall explain that:
The Securities and Exchange Commission's roundtable on proxy advisory firms last week was long overdue. ...
Another concern [posed by such services], even more basic, is the current regulatory structure—which effectively requires all institutional investors to vote their shares, prove that their votes are not conflicted, and allows them to prove this by relying on proxy advisory firms. Does this system help or hurt shareholders? SEC Commissioners Daniel Gallagher and Michael S. Piwowar attempted to raise this fundamental issue at the roundtable. Unfortunately, there was little interest among the proxy advisers and institutional investors, who dominated the meeting, to pursue the matter.
Equally unfortunate, there was no direct representation of corporate directors on the panel, leaving out the very people the law requires to be responsive to shareholders. A thorough assessment of the impact of proxy advisers (and proxy voting regulation) on all shareholders cannot be obtained without understanding how corporate board members evaluate feedback from proxy voting and turn it into action.
I discuss ISS and Glass Lewis at some length in my Corporate Governance after the Financial Crisis. In it, I argue that ISS has gotten too powerful, has too many conflicts of interest, and is too biased against management. It's time for it to get reined in. Unfortunately, it sounds like the Roundtable let ISS off too easy.
David Benoit reports that Carl Icahn has had a good run this year:
Carl Icahn, long seen as the archenemy of chief executives, is finding the path to the boardroom easier to tread. Mr. Icahn, among the most relentless of activists, secured representatives on more boards this year than he ever has, without resorting to shareholder-vote battles.
"I'm even surprised," Mr. Icahn said in an interview. "Being admitted to all these boards without a proxy fight would have been unthinkable only a year ago."
Mr. Icahn attributes his streak to a new openness among companies to the notion that working with him could be good business. "The thing that changed is people understand that the thing I do is very often successful," he said.
Successful measured how? Icahn has been successful at financial engineering, but has he ever actually made anything? Has any company in which Icahn successfully intervened made better products or offered superior services as a result of his intervention? I stand prepared to be corrected, but my answer is no.
Activist investors are increasingly encountering an unusual reception when approaching corporate targets: an open door.
Instead of pulling up the drawbridge as activists approach, corporate executives and directors more often are engaging, concluding that it is easier and cheaper to negotiate rather than resist and risk a public fight, advisers and executives said.
Even Carl Icahn, long seen as the archenemy of chief executives, is finding the path to the boardroom easier to tread. Mr. Icahn, among the most relentless of activists, secured representatives on more boards this year than he ever has, without resorting to shareholder-vote battles. ...
Others point out that companies are generally becoming more receptive because activists increasingly enjoy the support of long-term institutional shareholders that traditionally allied with management. That relationship means companies who resist activists could risk alienating their broader shareholder base.
A lot of these boards are "receptive" in the same way the Neville Chamberlain was in 1938 or Obama was re Iran and Syria. But Martin Lipton wants boards to show some spine:
For a number of years, as the new year approaches I have prepared for boards of directors a one-page list of the key issues that are newly emerging or will be especially important in the coming year. Each year, the legal rules and aspirational best practices for corporate governance, as well as the demands of activist shareholders seeking to influence boards of directors, have increased. So too have the demands of the public with respect to health, safety, environmental and other socio-political issues. In reviewing my 2013 issues memo, I concluded that the 2013 issues continued as the key issues for 2014 with a few changes in detail or emphasis. My key issues for 2014 are: ...
- Working with management and advisors to review the company’s business and strategy, with a view toward minimizing vulnerability to attacks by activist hedge funds.
- Resisting the escalating demands of corporate governance activists designed to increase shareholder power.
Climate scientists from the University of Bristol in England have used a climate model to simulate the climate of Middle Earth. The model was also used to determine where on Earth is most like certain places in Middle Earth.
According to Dr. Dan Lunt:
This work is a bit of fun, but it does have a serious side. A core part of our work here in Bristol involves using state-of-the-art climate models to simulate and understand the past climate of our Earth. By comparing our results to evidence of past climate change, for example from tree rings, ice cores, and ancient fossils of plants and animals, we can validate the climate models, and gain confidence in the accuracy of their predictions of future climate.
In the UK, the Shire's climate was most similar to Lincolnshire and Leicestershire. Eastern Europe, particularly Belarus, had the highest concentration of Shire-like areas.
As for Mordor, "Los Angeles and western Texas are notable for being amongst the most Mordor-like regions in the USA."
That explains a lot.
The campaign to have the SEC regulate corporate political activity was a partisan boondoggle from start to finish. Hundreds of thousands of form letters urging the SEC to regulate corporate political spending, most raging about the Supreme Court decision in Citizens United, were ginned up by liberal advocacy groups. Democratic lawmakers pressured the SEC to regulate. The reason was simple – many Democrats believe that such regulation would harm their political opposition. Frustrated by the Federal Election Commission’s bipartisan requirement for adopting regulations and congressional inaction, many partisans thought that they could pressure the SEC, with its 3-2 Democratic majority, to adopt rules on a partisan basis.
The proposed regulatory mission was one for which the SEC is ill suited, a distraction from its work regulating capital markets and protecting investors, and would have required the agency to butcher its longstanding and important standards of materiality. The SEC’s professional staff was purportedly aghast at the thought of being dragged into political regulation, especially after seeing the IRS engulfed in scandal by its regulations on political activity.
SEC Chair Mary Jo White deserves kudos for refusing to let the agency be yanked into this fiasco. ...
Credit where credit is due.
Cleveland Plain Dealer discusses the argument advanced by by friend and fantasy football mate Jonathan Adler:
If the law known as Obamacare gets struck down in the latest court challenge, the victors will thank a Hudson resident and Case Western Reserve University law professor who discovered what the law's critics say is a major flaw.
Jonathan Adler, 44, says he didn't even appreciate initially how significant his discovery might be. He thought it was an interesting bit of legal arcana, worthy of scholarship. But his analysis of the Affordable Care Act, or ACA, has led to four pending cases in federal courts, two likely to be decided within months, that offer ACA opponents their best chance of gutting the law. ...
Adler, a Case law professor since 2001, pored over the ACA after it passed in 2010 and found this: Congress created a system for providing tax subsidies and penalties in order to give incentives for people to buy health insurance or for employers to provide it. States were supposed to create new agencies that would offer online insurance-shopping options, and states would tie into a federal tax system to dole out the subsidies and assess the penalties.
But the ACA made clear, Adler says, that the subsidies were to be used in these new state marketplaces, or "exchanges." There is no record, he says, that shows Congress directed the subsidies to what has since evolved: a large, federally run, health-policy shopping exchange. When the subsidies are mentioned in the law, Adler says, it is always and only in the context of state exchanges. ...
Without the tax subsidies, the ACA cannot work. Its central tenet is insuring nearly every American, but health insurance would be too expensive for many people without the subsidies.
Adler, commenting via Twitter this afternoon, said that "our argument is that the law should be enforced as written." He also tweeted, "It's the IRS and Administration that are trying to 'overturn' the law with creative re-interpretations."
One of the principal criticisms of my director primacy model of corporate governance has been that it doesn't describe the real world of boards. In my essay, Director Primacy, which was published in The Research Handbook on the Economics of Corporate Law , I explained that my model was developed for a very different purpose:
I set out not to reform the statutory allocation of power, but simply to understand it. My premise is that corporate law tends towards efficiency. A state generates revenue from franchise and other taxes imposed on firms that incorporate in the state. The more firms that choose to incorporate in a given state, the more revenue the state generates. Delaware, the runaway winner in this competition, generates so much revenue from incorporations that its resident taxpayers reportedly save thousands of dollars a year.
In order to attract capital, managers must offer investors attractive terms. Among those terms are the corporate governance rules imposed on investors by the law of the state of incorporation. Accordingly, managers have an incentive to incorporate in states offering terms preferred by investors. In turn, states have an incentive to attract incorporations by offering such terms. State competition for charters therefore results in a race to the top, driving corporate law towards efficient outcomes. Accordingly, the task was to develop a model that explains and predicts the structure of corporate law as it exists today.
Yet, I also argued in The New Corporate Governance in Theory and Practice that director primacy has increasing real world relevance as boards have become more active and stronger.
Forty years ago, managerialism dominated corporate governance in the United States. In both theory and practice, a team of senior man¬agers ran the corporation with little or no interference from other stake-holders. Shareholders were essentially powerless and typically quiescent. Boards of directors were little more than rubber stamps.
Today, American corporate governance looks very different. The Imperial CEO is a declining breed. Some classes of shareholders have become quite restive, indeed. Most important for our purposes, boards are increasingly active in monitoring top management rather than serving as mere pawns of the CEO.
Several important trends coalesced in recent decades to encourage more active and effective board oversight. Much director compensation now comes as stock rather than cash, which helps to align director and shareholder interests. Courts have made clear that effective board proc¬esses and oversight are essential if board decisions are to receive the defer¬ence traditionally accorded to them under the business judgment rule, especially insofar as structural decisions are concerned (such as those relating to corporate takeovers). Director conduct is further constrained, some say, by activist shareholders. The Sarbanes-Oxley Act mandated enhanced director independence from management, as did changes in stock exchange listing standards.
Today, as a result of these forces, boards of directors typically are smaller than their antecedents, meet more often, are more independent from management, own more stock, and have better access to information. As The Economist reported in 2003, “boards are undoubtedly becoming less deferential. . . . Boards have also become smaller and more hard¬working. . . . Probably the most important change, though, is the growing tendency for boards to meet in what Americans confusingly call ‘executive session,’ which excludes the CEO and all other executives.” In sum, boards are becoming change agents rather than rubber stamps.
Today board primacy is even more a valid description of corporate governance in the real world than was the case when I wrote those words 5 years ago. In the latest issue of The Economist, the Schumpeter columnist explains that:
For most of their history, boards have been largely ceremonial institutions: friends of the boss who meet every few months to rubber-stamp his decisions and have a good lunch. Critics have compared directors to “parsley on fish”, decorative but ineffectual; or honorary colonels, “ornamental in parade but fairly useless in battle”. Ralph Nader called them “cuckolds” who are always the last to know when managers have erred. The corporate scandals of the early 2000s forced boards to take a more active role. The Sarbanes-Oxley act of 2002 and the New York Stock Exchange’s new rules in 2003 obliged directors to take more responsibility for preventing fraud and self-dealing. This led to a big increase in the quality of boards. But it also wasted a lot of talent on form-filling and box-ticking.
In a new book, “Boards That Lead ”, Ram Charan, Dennis Carey and Michael Useem argue that boards are in the midst of a third revolution: they are becoming strategic partners. ...
Mr Charan and his co-authors lay out two clear rules. The first is that boards should focus on providing companies with strategic advice.
I agree, but the problem is that US legal rules put so much emphasis on the board's monitoring role, that the board's advisory role gets squeezed out of the way. Too many quack corporate governance rules impede effective board functioning.
The second rule is that boards should focus on getting their relationship with the CEO right. It is not enough to act as monitors in the Sarbanes-Oxley mould. They need to act as personal mentors and high-level talent scouts.
Again, I agree, but I wonder whether the amount of time and effort the law requires boards to put into monitoring interferes with the board's mentoring role. In addition to the lack of time, effective monitoring can have an adversarial component that makes mentoring relationshiops difficult to create and sustain.
There are problems with this new model board. Can directors fulfil their legal duties to monitor performance if they are also responsible for helping to set strategy and appointing the CEO? Are organisations that meet a dozen times a year capable of offering strategic guidance in a fast-paced world? Will CEOs willingly give up more power to boards, or will they fight back? Getting the new model right will entail careful negotiations not only between boards and executives but also between firms and regulators.
Again, I agree, but these sort of questions are precisely the reason Todd Henderson and I proposed our Boards R Us Model:
State corporate law requires director services be provided by “natural persons.” This Article puts this obligation to scrutiny, and concludes that there are significant gains that could be realized by permitting firms (be they partnerships, corporations, or other business entities) to provide board services. We call these firms “board service providers” (BSPs). We argue that hiring a BSP to provide board services instead of a loose group of sole proprietorships will increase board accountability, both from markets and judicial supervision. The potential economies of scale and scope in the board services industry (including vertical integration of consultants and other board member support functions), as well as the benefits of risk pooling and talent allocation, mean that large professional director services firms may arise, and thereby create a market for corporate governance distinct from the market for corporate control. More transparency about board performance, including better pricing of governance by the market, as well as increased reputational assets at stake in board decisions, means improved corporate governance, all else being equal. But our goal in this Article is not necessarily to increase shareholder control over firms – we show how a firm providing board services could be used to increase managerial power as well. This shows the neutrality of our proposed reform, which can therefore be thought of as a reconceptualization of what a board is rather than a claim about the optimal locus of corporate power.
We think our model solves a lot of these problems.
Boards-R-Us: Reconceptualizing Corporate Boards (July 10, 2013). University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 646; UCLA School of Law, Law-Econ Research Paper No. 13-11. Available at SSRN: http://ssrn.com/abstract=2291065
James Taranto has a very scary example of how colleges and universities are denying the accused due process in sex-related cases. I think it is hard to argue with his conclusion that:
It would be better still if universities could get out of the discipline business altogether, except for scholarly offenses like plagiarism, cheating and falsification of data. Ordinary civil and criminal courts are immensely more competent to adjudicate allegations of sexual harassment and violent crime, in open proceedings subject to appellate review, without trampling the rights of the accused.