ProfessorBainbridge.com

Hewitt Vineyard Estate Grown Cabernet Sauvignon (Rutherford)

Where's the Rutherford dust? Setting that pressing question aside, this is a very fine wine. Huge nose and big flavors. Blackberries, mocha java, and cassis. Very drinkable now, but has enough tannin/acid structure to support a decade of cellaring. Grade: A-

Hamas Wins. Bush Loses?

The GOP's foreign policy traditionally was dominated by realists and national interest types, who were deeply suspicious of nation building and the like. Bush ran on that platform but after 9/11 veered off into a Wilsonian program of promoting democracy in the Middle East. Now we see what an apparently fair election in Palestine leads to: a decisive victory by a terrorist organization hostile to both the US and Israel. And this is a good thing?

Conservative icon Russell Kirk put the question quite bluntly in his criticism of Bush 41's foreign policy:

Are we to saturation-bomb most of Africa and Asia into righteousness, freedom, and democracy? And, having accomplished that, however would we ensure persons yet more unrighteous might not rise up instead of the ogres we had swept away? Just that is what happened in the Congo, remember, three decades ago; and nowadays in Zaire, once called the Belgian Congo, we zealously uphold with American funds the dictator Mobutu, more blood-stained than Saddam. And have we forgotten Castro in Cuba?

How, indeed?

Sarbanes-Oxley: How Are People Voting with Their Pocketbooks?

In my Corporate Governance Colloquium this week, we discussed Eric Talley?s paper Going-Private Decisions and the Sarbanes-Oxley Act of 2002: A Cross-Country Analysis:

Abstract: This article investigates whether the regulatory regime created by the Sarbanes- Oxley Act of 2002 (SOX) has driven firms in general, and small firms in particular, out of the public capital market. Previous attempts to address this question have had difficulty controlling for other factors that could have affected exit decisions around the enactment of SOX. To address this difficulty, we examine the post-SOX change in the propensity of public American target firms to be bought by private acquirers rather than public ones with the corresponding change for foreign target firms, which were outside the purview of SOX. Our findings are consistent with the hypothesis that SOX induced small firms to exit the public capital market during the first year of its enactment. Large firms, by contrast, do not appear to have been affected.

As we discussed in the seminar, there is a real problem identifying and quantifying the benefits of SOX. Observing how economic actors behave - how they vote with their pocketbook - is one solution to that problem. Talley's article is consistent with other data points suggesting that economic actors perceive SOX's costs as exceeding its benefits. (For blogospheric discussion of the Talley article see Vic Fleicher and Larry Ribstein's posts.)

On our Colloquium blog today, one of my students pointed the class to today?s Wall Street Journal article, ?Tougher Venture: IPO Obstacles Hinder Start- Ups? (page C1), which addresses an effect of SOX that Talley did not examine: the reduction in ?going public? rates. The article reports that 41 venture-backed start ups went public in 2005, down from 67 in 2004. ?Small companies considering going public also must contend with new auditing and reporting requirements, including the 2002 Sarbanes- Oxley law. The law makes it more expensive to be a public company, requires top executives to vouch for the accuracy of their books and includes stiff penalties for violations, all of which makes start-ups think twice about going public, small-company executives and venture capitalists say.? The Wall Street Journal article does not isolate the effect of SOX, and also discusses other regulatory obstacles to going public. However, it could add to the existing evidence of the costs of SOX.

What Clinton and the Democrats Wrought in 1994

Kevin Drum has an epiphany:

The good news is that Congress is set to pass a bill that prevents companies from funding lavish executive pension plans if the pension plan for their regular workers is underfunded and going bankrupt. ... But then there's this:

For decades, executives relied on the same pension plan as other company employees, so they had an incentive to make it generous. The shift toward a dual system started in 1994, when Congress passed a law intended to limit the cost to taxpayers of runaway executive pay. The law barred companies from taking a tax deduction on compensation in excess of $1 million a year for any current employee. The result: Companies began setting up supplemental pension plans that encouraged senior managers to defer compensation.

Well. That's certainly a good example of the law of unintended consequences, isn't it? I mean, I'm sure the $1 million cap seemed like a good idea at the time.

Here's a couple of other observations for Kevin to chew on. First, the 1994 tax change was effected not by some generic "Congress" but by Bill Clinton and the Congressional Democrats over GOP objections. Second, the Democrat tax change also was a major factor in the Enron, WorldCom, and other scandals of the tech bubble period.

In addition to leading to supplemental pension plans, because incentive-based pay didn't count against the $1 million cap, the Clinton/Democrat tax change encouraged companies to shift executive compensation from salaries into stock options. In turn, the shift towards stock options gave executives strong incentives to managethe stock price rather than the business. And, in some cases, to commit fraud so as to ensure that the company hit its forecasts.

Discussing Disney

There's a number of bloggers over at Conglomerate discussing the oral argument before the Delaware Supreme Court in the Disney-Ovitz executive compensation case.

Elizabeth Nowicki observes:

The points made by appellants’ counsel (as I recall) include: 1.  The directors had the obligation to meet together (as a group) and deliberate together on the decision to fire Ovitz.  By failing to do so, the directors breached some duty, per se.

I tend to sympathize with Larry Ribstein's point that:

I would hope that, after its mistake in Van Gorkom, the court now recognizes how wrong it would be to insist on excessive procedures, including requiring a meeting in order to satisfy due care duties.  And clearly that shouldn't matter for good faith purposes under 102(b)(7).

Yet, it is important to recognize that corporate law's insistence that boards of directors act collectively has a sound basis. Indeed, the very existence of the board of directors is predicated on the superiority of group as opposed to individual decision making. Or so I argued in my article Why a Board? Group Decisionmaking in Corporate Governance:

Abstract: The default statutory model of corporate governance contemplates not a single hierarch but rather a multi-member body that acts collegially. Why? This article reviews evidence that group decisionmaking is often preferable to that of individuals, focusing on evidence that groups are particularly likely to be more effective decisionmakers in settings analogous to those in which boards operate. Most of this evidence comes not from neo-classical economics, but from the behavioral sciences. In particular, cognitive psychology has a long-standing tradition of studying individual versus group decisionmaking. This article contends that behavioral research, taken together with various strands of new institutional economics, sheds considerable light on the role of the board of directors. In addition, the analysis has implications for several sub-regimes within corporate law. Are those sub-regimes well-designed to encourage optimal board behavior? Two such sub-regimes are surveyed here: First, the seemingly formalistic rules governing board decisionmaking processes turn out to make considerable sense in light of the experimental data on group decisionmaking. Second, the adverse consequences of judicial review for effective team functioning turns out to be a partial explanation for the business judgment rule.

Indeed, in that article, I even went so far as to venture a defense of the Van Gorkom decision:

… the Van Gorkom court arguably created a set of incentives consistent with the teaching of the literature on group decision making. The decision disfavors agenda control by senior management, penalizes boards that simply go through the motions, and encourages inquiry, deliberation, care, and process. The decision strongly encourages boards to seek outside counsel and financial advice, which is consistent with evidence groupthink can be prevented by outside expert advice and evaluations. Even the court’s criticism of the board’s willingness to take action after a single meeting is consistent with suggestions that a “second-chance meeting” also helps prevent groupthink. As such, the oft-repeated law and economics critique of Van Gorkom appears overblown. Contrary to what most law and economics scholars have asserted, there is a rational basis for the seemingly formalistic procedures mandated by that opinion.

According to Elizabeth, plaintiff's (i.e., appellant's) counsel also argued that:

Chancellor Chandler erred in placing the officers within the protection of the business judgment rule presumption.

In my treatise, Corporation Law and Economics, I argued that officers should get the benefit of the BJR:

It is reasonably well-settled that officers owe a duty of care to the corporation. It is less well-settled that officers get the benefit of the business judgment rule. Under the ALI PRINCIPLES, the rule applies to both directors and officers. [ALI Principles § 4.01.]

Judicial precedents are divided, however. [Compare Galef v. Alexander, 615 F.2d 51, 57 n.13 (2d Cir. 1980) (holding that the business judgment rule “generally applies to decisions of executive officers as well as those of directors”); FDIC v. Stahl, 854 F. Supp. 1565, 1570 n.8 (S.D. Fla. 1994) (holding that the rule “applies equally to both officers and directors”) with Platt v. Richardson, 1989 WL 159584 at *2 (M.D. Pa. 1989) (holding that the rule “applies only to directors of a corporation and not to officers.”). At least one court claims that the former view is the majority position, rejecting an argument that “the business judgment rule applies only to the conduct of corporate directors and not to the conduct of corporate officers” on grounds that it was “clearly contrary to the substantial body of corporate case law which has developed on this issue.” Selcke v. Bove, 629 N.E.2d 747, 750 (Ill. App. 1994).]

Most of the theoretical justifications for the business judgment rule extend from the boardroom to corporate officers. Many corporate decisions are made by officers, for example, who are likely to be even more risk averse than directors. Accordingly, insulation from liability may be necessary to encourage optimal levels of risk-taking by officers. Just as the board of directors is properly regarded as a production team, so is the so-called top management team. Accordingly, internal team governance may be preferable to external review. In sum, the better view is that officers are eligible for the protections of the business judgment rule.

Alito's Chances

Despite the party line vote in the Judiciary Committee and paltry announced Democratic floor support, Tradesports is still predicting that Alito will be confirmed, albeit with less than 60 votes. FWIW.

Alito Vote

Even though the latest CNN poll indicated the American people support Samuel Alito's nomination to the Supreme Court, and the same poll indicated that barely a third would support a Democrat filibuster, all of the Democrats on the Senate Judiciary Committee have voted against Alito.

The politicization of the confirmation process the Democrats began when they first turned bork into a verb thus continues.

Of course, the confirmation process has become so politicized precisely because our courts have become so politicized. We have allowed nine old men and women in robes to elevate themselves into a super-legislature in which they exercise privileges they deny to our elected representatives.

I wonder what the founders would think of our modern Supreme Court as it happily goes about the business of, as Justice Scalia put it, "Day by day, case by case, ... designing a Constitution for a country I do not recognize." My guess is that many of them would agree with Judge Bork that the courts have taken sides in the "struggle between the cultural or liberal left and the great mass of citizens who, left to their own devices, tend to be traditionalists. The courts are enacting the agenda of the cultural left." And even among those founders who would take the other side of the culture wars (Jefferson?), there might be some who would recognize that their cherished checks and balances are breaking down as the Court becomes less and less accountable. (Quotes taken from Richard Neuhaus' review of Bork's latest book: Coercing Virtue: The Worldwide Rule of Judges.)

Clinton on Post-1968

Blogger Mark Stricherez interviews Bill Clinton on the changes in the Democratic party post-1968. And then offers some post- interview thoughts. This one, which speaks to the role of values in elections, struck me as especially interesting:

Mr. Clinton's best point was his last one: that Republicans cannot win by running solely on cultural conservatism. He's right about that. Witness the failed gubernatorial campaign of Jerry Kilgore, who ran on support for the death penalty and little else. Kilgore offered no positive program for voters or even anything substantative. Very few candidates running in a close race can win by running on cultural issues. Consider the counter-example of President Bush. He ran in 2000 on a campaign that featured reform of the public schools, and it helped him get elected. Then before the 2004 race, he signed the Medicare prescription drug benefit, and it helped him win re-election. There's a pattern there.

Alito to be confirmed but with less than 60 votes

According to Chris Masse's RSS feed (for which I don't know how to provide a permanent archival link):

Judge Alito has lost the support of some moderate Democratic Senators. TradeBetX/TradeSports/InTrade now predicts that he won't get over 60 votes ?though, the exchange stands on its prediction that he'll get at least 51, and that's enough to make the trick.

Update: Don Luskin has this comment: "That means that the Democrats will dare to pull a unanimous blockade, but not dare to filibuster." ...

My preferred law blogger: Professor Bainbridge (conservative, but in a smart, open-minded way ?not a neo-con). He'll certainly feed you with updates. {ProfB: My blushes!} ...

[This RSS post is in contravention with David Pennock's fatwa that says that "RSS items does not link off directly to 3rd party sites." I called down the thunder, I should now get ready for the BOOM. The terror is welling inside me. My whole body is shivering...]

[Update: My ideological friend Donald Luskin read me the riot act for not giving readers "a way to archivally link" to this item.]

I concur with Luskin. On both points.

The Future of Corporate Governance

Larry Ribstein comments on an article by law professor James Fanto:

A disturbing new vision of the corporation has just appeared on SSRN: Fanto, Paternalistic Regulation of Public Company Management: Lessons from Bank Regulation January 4, 2006. Here's a piece of the abstract:

The Article proposes that the SEC appoint a corporate governance monitor for certain of the largest public firms who would have a role like that of an examiner of a large bank or financial holding company. The SEC would hire, train, and oversee the performance of, these monitors, who would be supervised by that part of the SEC?s Division of Corporation Finance responsible for their firms and industry.

Wow! What an idea. Turn what?s left of dynamic American enterprise into banks. The article?s theory is that group psychology prevents realistic monitoring by people who have been socialized to be part of the group, which is all of the gatekeepers and monitors we rely on today ? outside directors, lawyers, auditors, etc. So we need an outsider ? namely the SEC.

Do go read the whole thing; it's an excellent critique. And it includes a comment by Fanto in defense of the paper. As somebody who lived through the S&L crisis while I was in practice, however, I think commenter Robert Schwartz nicely captured by gut reaction:

And it worked so well with the Savings & Loan business.

Update: See also Matt Bodie's (partial) defense of Fanto's proposal.

Does the Academy Police Itself?

The brouhaha last week at UCLA over the Bruin Alumni Association prompted the LA Times' to devote most of its editorial section today to the question of whether universities are biased ideologically. Granted, the BAA's UCLAProfs.com site undermined its credibility by mixing apples and oranges, as I pointed out:

If BAA is going to go forward, a question on which I am firmly agnostic, I should think that they want to avoid violating IP law and university policy respecting copyright and so on. I should think they also need to draw a distinction between in-class abuse of position and legitimate political expression outside of class. So far, it would seem, they are falling down on both scores.

Put bluntly, however, the claims by the defenders of the status quo are even more bogus as the BAA's criticisms.

UCLA Professor Saree Makdisi claims that:

A method for assessing how professors treat their students is already built into how universities work. Every course at UCLA gives students the opportunity to anonymously evaluate their professors, and those evaluations are used in hiring, promotion and tenure decisions; abusive professors don't get very far in their careers.

Institute for Advanced Study Professor Joan Scott apparently got the same set of talking points:

... there are abuse-monitoring mechanisms in academia that distinguish between responsible work and polemic, between teaching that aims to unsettle received opinion and teaching that seeks to indoctrinate. Universities have established procedures to adjudicate complaints of indoctrination, charges of unfair grading and other denials of student rights, and, for the most part, they work.

Neither Makdisi nor Scott offers empirical support for their claims, although the latter claims that "study after study," none identified, validates her argument.

In contrast, I offer you some data. First, as explained in the preceding post, university hiring practices have a demonstrable disparate impact on the political and ideological composition of university faculties. Second, as I noted in my TCS column, these disparities clearly have a deleterious effect on the learning environment. A survey of students at 50 top U.S. universities and colleges conducted by the Center for Survey Research & Analysis at the University of Connecticut, for example, found considerable evidence that politics pervaded the classroom:

For instance, nearly half said that their professors frequently comment on politics in class even though it has nothing to do with the course or use the classroom to present their personal political views. In answers to other questions, the majority acknowledged that liberal views predominate. Most troubling, however, were the responses to the survey item On my campus, there are courses in which students feel they have to agree with the professor's political or social views in order to get a good grade -- 29% agreed.

I don't know whether Makdisi and Scott are simply uninformed or are being disingenuous. I do know that the system is broken and that public scrutiny of how universities spend taxpayer dollars is both appropriate and inevitable. The academic left's knee-jerk effort to delegitimize such scrutiny by invoking labels like witch hunt or McCarthyism will be as bootless as they are duplicitous.

Disparate Impact in Academic Hiring

Much of the LA Times' editorial section is devoted today to the question of whether universities discriminate against conservatives. I've argued in the past that there is such discrimination, although much of it is a question of critical mass and network effects rather than intentional discrimination.

Yet, I am reminded of a question Joe Biden put to Samuel Alito during the recent SCOTUS nomination hearings:

... discrimination has become very sophisticated. It's become very, very sophisticated, very much more subtle than it was when I got here 34 years ago or 50 years ago. ... I mean, there's all different ways in which now it's become so much more subtle. And that's why we all, Democrat and Republican, wrote Title VII. ... What we observed in the real world is it's real subtle. And yet it's harder to make a case of discrimination even though there's no doubt that it still exists.

The concept of disparate impact has become one of the chief tools courts use to address such discrimination. The Supreme Court set out the basic principle in Griggs v. Duke Power Co., 401 U.S. 424, 431-32 (1971), holding that Title VII "proscribes not only overt discrimination but also practices that are fair in form, but discriminatory in operation. . . . [G]ood intent or absence of discriminatory intent does not redeem employment procedures or testing mechanisms that operate as 'built-in headwinds' for minority groups and are unrelated to measuring job capability."

To invoke disparate impact, the plaintiff must prove, generally through statistical comparisons, that the challenged practice or selection device has a substantial adverse impact on a protected group.

With that background in mind, consider these data from the Times:

Academics who identified themselves as left or liberal

in 1984: 39%

in 1999: 72%

Academics who identified themselves as right or conservative

in 1984: 34%

in 1999: 15%

Among faculties in 1999, Democrats outnumbered Republicans 5 to 1

The Democratic advantage by department in 1999 English: 35 to 1 History: 17.5 to 1 Biology: 4 to 1 Engineering: 3 to 1 Computer science: 2 to 1 Chemistry: 1.5 to 1 But in agriculture, Republicans held a 1.3-1 edge.

In 2004, employees of the University of California and Harvard University were John Kerry's largest dollar contributors and among Howard Dean's top five.

I'd say that makes out a prima facie case that university hiring practices are having a disparate impact. The burden of proof is therefore on the university to show why this disparity exists.

Spare me tired arguments like "liberals have a social conscience," "conservatives only care about money," and such nonsense. I've heard it before ... and rebutted it before.

Clarendon Hills Blewitt Springs Vineyard Old Vines Grenache

Possibly the finest Australian wine I have tasted to date. A huge wine. A John Wayne of wines. Big and brawny. Deep black even at age 10 and despite having thrown an tremendous amount of sediment. Very prominent legs. Immense nose of leather, cigars, and roasted game. Surprisingly fresh red fruit on the palate, with a subtle sweetness that refreshes rather than cloys. Delightful to drink now, but doubtless could have aged another decade or more

I must confess that Grenache is not a grape variety for which I have had much respect in the past. Indeed, I had no idea Grenache was capable of producing a wine of this excellence. Thank goodness a friend gave me this bottle. Once again, an amazing wine broadens one's horizons. Grade: A

J. Davies Cabernet Sauvignon Diamond Mountain District (Napa

The first I tried of this wine was badly corked. After I complained, the good folks at Schramsberg (which owns J Davies) sent along a replacement bottle. We tried it tonight and it was excellent. Big nose. Mint, chocolate, and bright red fruits, with an interesting undertone of earth and minerals. Grade: A-

Ca' del Solo Big House Red (California) 2003

As usual, this wine includes everything but the kitchen sink. In 2003, it includes Syrah, Petite Sirah, Zinfandel, Carignane, Barbera, and Malbec. It's a good value generic red (<$10), but not especially memorable. Raspberry and blackberry flavors/aromas. Bonus points for value and using a screwcap, but it's still pretty pedestrian. Grade: B-