I'm reading Leo Strine and Nicholas Walter's new article, Conservative Collision Course?: The Tension between Conservative Corporate Law Theory and Citizens United (August 1, 2014). Harvard Law School John M. Olin Center Discussion Paper No. 788. Available at SSRN: http://ssrn.com/abstract=2481061. Here's the abstract:
One important aspect of Citizens United has been overlooked: the tension between the conservative majority’s view of for-profit corporations, and the theory of for-profit corporations embraced by conservative thinkers. This article explores the tension between these conservative schools of thought and shows that Citizens United may unwittingly strengthen the arguments of conservative corporate theory’s principal rival.
Citizens United posits that stockholders of for-profit corporations can constrain corporate political spending and that corporations can legitimately engage in political spending. Conservative corporate theory is premised on the contrary assumptions that stockholders are poorly-positioned to monitor corporate managers for even their fidelity to a profit maximization principle, and that corporate managers have no legitimate ability to reconcile stockholders’ diverse political views. Because stockholders invest in for-profit corporations for financial gain, and not to express political or moral values, conservative corporate theory argues that corporate managers should focus solely on stockholder wealth maximization and non-stockholder constituencies and society should rely upon government regulation to protect against corporate overreaching. Conservative corporate theory’s recognition that corporations lack legitimacy in this area has been strengthened by market developments that Citizens United slighted: that most humans invest in the equity markets through mutual funds under section 401(k) plans, cannot exit these investments as a practical matter, and lack any rational ability to influence how corporations spend in the political process.
Because Citizens United unleashes corporate wealth to influence who gets elected to regulate corporate conduct and because conservative corporate theory holds that such spending may only be motivated by a desire to increase corporate profits, the result is that corporations are likely to engage in political spending solely to elect or defeat candidates who favor industry-friendly regulatory policies, even though human investors have far broader concerns, including a desire to be protected from externalities generated by corporate profit-seeking. Citizens United thus undercuts conservative corporate theory’s reliance upon regulation as an answer to corporate externality risk, and strengthens the argument of its rival theory that corporate managers must consider the best interests of employees, consumers, communities, the environment, and society — and not just stockholders — when making business decisions.
An initial reaction is that we need to draw a sharp distinction between what Strine calls "conservative corporate law theory" and the Roberts Court's decisions in cases like Citizens United and Hobby Lobby. As I observed of the Supreme Court's decision in Federal Communications Commission v. AT&T, Inc.:
Twelve pages of what purports to be legal and grammatical analysis follows. But Chief Justice Roberts could have summed up his opinion far more succinctly: "Because at least 5 of us say so."
The Citizens United decision last term attracted much criticism--not least from Con Law Professor-in Chief Obama--for holding that a corporation is a person and as such has certain constitutional rights. While I agreed with the holding, I was disturbed that the Chief Justice's majority opinion for the Supreme Court so obviously lacked a coherent theory of the nature of the corporation and, as such, also lacked a coherent theory of what legal rights the corporation possesses.
The utterly specious word games that drive this opinion simply confirm that Chief Justice Roberts has failed to articulate a plausible analytical framework for this important problem.
In short, nothing the SCOTUS says should be understood as affecting our understanding of corporate law or corporate law theory. They're just making this stuff up as they go along. On a preliminary read, I don't think Strine makes this mistake, but his article provides a useful opportunity for reminding us of this basic point.
Second, I don't agree with Strine that the political spending poses a threat to conservative corporate law theory. For one thing, the so-called flood of money really is a trickle. As a society, we spend much more money advertising toilet paper than we do deciding who should run the most powerful country in the world.
For another, and more pertinent to Strine's point, I don't see any evidence that corporate political spending is significantly chipping away at "regulation as an answer to corporate externality risk." To the contrary, the regulatory burden on US corporations continues to rise despite Citizens United. The Obama administration has used its executive powers to adopt a raft of pro-worker and anti-business regulations. The EPA is protecting the environment without much regard for cost-benefit analysis. We are dealing with massive regulation by prosecution:
The problem is not just that companies are ever more frequently treated as criminals. It is that the crimes they are accused of are often obscure and the reasoning behind their punishments opaque, and that it is far from obvious that justice is being done and the public interest is being served.
In sum, it seems entirely plausible that corporate political spending does not erode labor and environmental protections but simply slows the rate at which new regulations are piled onto the mountain of laws to which corporations are already subject. Indeed, maybe such expenditures provide a pro-social service by creating incentives for regulators to take the costs of their rules into account. By analogy, for example, the US Chamber of Commerce has been able to get a number of SEC regulations overturned because the agency had failed to conduct adequate cost-benefit analyses. If corporate lobbying encourages regulators to consider business' objections to a rule, then maybe agencies will be more likely to be more thorough in ensuring that the benefits of their rules outweigh their costs.
Finally, and most importantly, the case against corporate social responsibility rests on many legs of which the "regulation solves externalities" claim is but one. Speaking only for myself, I would still oppose CSR even if we lived in a night watchman state. (Hey, that's a good article title: Corporate Social Responsibility in the Night Watchman State! Fellow academics: I will track you down and wreak terrible vengeance if you swipe it.)
I'll have more detailed reactions later. But for now I urge you to go read the article and encourage comments.
There are a lot of problems with big-ticket settlements like the one the DoJ recently enetered into with Bank of America. First and foremost, they punish the wrong people; namely, BoA's shareholders. BoA shareholders did not make the decisions for which the government prosecuted BoA, but the fine comes out of the company's bottom line and thus out of the shareholders' return. It's unfair and plain bad policy, for reasons we have frequently discussed on this blog before.
But another key problem is that liberal prosecutors frequently divert substantial parts of such settlements to left-wing activist groups. Eliot Spitzer was notorious for doing so (when he wasn't screwing escorts) back when GuvLuv was NY attorney general:
[T]o a host of Empire State charities and well-connected law-school deans, the crusading New York attorney general is acting a lot ... like Santa Claus.
We apparently can add Eric Holder to the list of liberal Santa Clauses:
Radical Democrat activist groups stand to collect millions from Attorney General Eric Holder's record $17 billion deal to settle alleged mortgage abuse charges against Bank of America.
Buried in the fine print of the deal, which includes $7 billion in soft-dollar consumer relief, are a raft of political payoffs to Obama constituency groups. In effect, the government has ordered the nation's largest bank to create a massive slush fund for Democrat special interests. ...
The more we learn about this settlement, the more it stinks.
First Lady Michelle Obama will jet off to Omaha, Nebraska, where she'll attend an Obama campaign fundraiser. Hosting the Omaha event (attendees who donate $5,000 can meet and take a photo with the First Lady) will be none other than Warren Buffett, the "Oracle of Omaha," an Obama campaign official told Mother Jones. And joining Michelle Obama and Warren Buffett at the Omaha fundraiser will be Susie Buffett, Warren's daughter and a philanthropist herself.
President Obama turned to Warren Buffett when naming his plan to raise taxes on those earning a million dollars or more a year. And in 2012, Obama has used the so-called Buffett Rule—and Republican opposition to it—as a hammer with which to bash Republicans and as a way to highlight Mitt Romney's support for lowering taxes on the rich. Obama only amped up the criticism after the Senate killed the Buffett Rule in mid-April. ...
President Obama, Vice President Joe Biden, the First Lady, and their allies have repeatedly invoked the Buffett name on their travels around the country to raise money ....
And so today's announcement that Buffett will help finance Burger King's tax inversion is both amusing and illuminating:
Mr. Buffett's Berkshire Hathaway Inc. BRKB +0.34% would invest in the deal in the form of preferred shares, some of the people said. Berkshire is expected to provide about 25% of the deal's financing, one of the people said.
As the WSJ wryly observed this am, "Buffett's inversion play looks awkward for the White House."
What can we infer from this? I must admit at the outset that I'm no fan of Buffett's professed politics (or somewhat odd personal life), so I'm biased and I'd be interested to know what a Buffett fan like Larry Cunningham thinks, but here's my take:
And a question: Will the Occupy Wall Street types calling for a Burger King boycott now try to boycott Berkshire Hathaway? I doubt it, mainly because I doubt whether they're capable of figuring out what Berkshire Hathaway does.
Update: In fairness, I should note that FT.com is reporting that:
Berkshire Hathaway’s taxes, at least, will be higher rather than lower as a result of the inversion. Dividends on its $3bn of preferred stock will be taxed at the 35 per cent rate for foreign dividends, rather than the 14 per cent rate that would prevail in the US, according to people familiar with the arrangements. The company will pay an extra $60m a year to the US Treasury as a result.
On the other hand, FT.com is also reporting that:
Mr Buffett is said to have negotiated for a higher dividend to compensate Berkshire Hathaway for the higher taxes.
Plus, of course, Buffett will also benefit to the extent that Burger King's tax savings increase the value of the BK preferred stock he will own. So I think my point stands.
Republican law profs cited more often than Dems. http://t.co/YVe1d9PYac So who's the stupid party now?— Stephen Bainbridge (@ProfBainbridge) August 25, 2014
As I read this study, a law dean who wants to raise the school's academic reputation, should hire more Republicans. http://t.co/YVe1d9PYac— Stephen Bainbridge (@ProfBainbridge) August 25, 2014
First day of school. N-12 14 years + 4 in college + 2 in grad school + 3 at UVa law + 8 teaching at UIUC + 19 at UCLAW. Wow: 50 first days.— Stephen Bainbridge (@ProfBainbridge) August 25, 2014
Case in point from ThinkProgress:
Your Whopper May Soon Come With A Side Of Tax Avoidance
American fast food chain Burger King is in talks to buy Tim Hortons, a doughnut and coffee chain based in Canada, the New York Times reported Monday.
A deal, which could be reached as soon as this week, would mean the iconically American company would be headquartered in Canada, and benefit from the country’s lower corporate tax rate, 15 percent, compared to the on-paper 35 percent rate in the U.S.
Among the comments: "I ate my last BK meal last week. Never again will I grace their doors."
The potential departure of an iconic American company because of "corporate greed" will be trotted out on the campaign trail.
And then we get to the Twitter world:
Send a message, and denounce Burger King's tax dodge scheme:... http://t.co/8zdPpQ6ZDQ— Left Action (@LeftAction) August 25, 2014
The traitorous Burger King sits on a throne of fries.— Scott Lincicome (@scottlincicome) August 25, 2014
Here's my question for anybody who's upset about tax inversions: Do you have an IRA? or a 401(k)? Did you take any deductions on your tax return last year? or any tax credits? If so, you used a perfectly legal "tax avoidance" strategy. Which is exactly what Burger King is considering.
I stand with Judge Learned Hand who famously opined that:
Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.
Interesting article in the WSJ over the weekend:
Investors are pouring money into Vanguard Group, the epitome of the hands-off approach to investing, flocking to funds that track market indexes and aren't run by stock pickers or star managers. ...
The surge is part of a sea change in the fund business in which investors are increasingly opting for products that track the market rather than relying on managers to pick winners. ...
Traditional stock-fund managers—old-fashioned stock pickers—have been the hardest hit in the wave toward passive investment. Through July, passively managed stock funds have seen a net $128.4 billion in investor inflows, compared with $18 billion for traditional stock funds, according to Morningstar.
Even uber-active investor Warren Buffett has seen the light, recently disclosing how he wants his estate invested: "Mr. Buffett, 83 years old and with a net worth of $66 billion, wrote that he advised his trustee to 'put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.).'"
If you want to know why index funds are deservedly beating the crap out of actively managed funds, read this post and then go buy Burton Malkiel's book:
Like a lot of his fellow shareholder gadfly activist proponents Broc Romanek seems a bit put out by Steven Davidoff Solomon's NY Times column Grappling With the Cost of Corporate Gadflies. Broc listed 10 reactions. Here are my reactions to Broc:
1. Never Use the Loaded “Gadfly” Term – It’s politically incorrect to call someone a “gadfly.” Trust me, it is. ...
And your point would be what? If the shoe fits, etc.... Political correctness is lame.
2. Gilbert Brothers Brought Rule 14a-8 to Life ....
Apropos of Broc's point # 1, here was the headline for John Gilbert's obituary: John J. Gilbert Is Dead at 88; Gadfly at Corporate Meetings. If gadfly is good enough for the Grey Lady, it's good enough for me. Anyway, the obit went on to say of his persistent questioning of CEOs that "not a few of whom considered it badgering." In 1982 alone, these busybodies submitted 198 shareholder proposals to companies. In 1991, they submitted a whopping 75 out of 319 proposals. (Data from this paper.) What I can't find is data on how many of these proposals passed. My guess is zero. In any event, that's not governance. It's a fraking obsession. See Douglas M. Branson, Corporate Social Responsibility Redux, 76 Tul. L. Rev. 1207, 1215 (2002) ("in those years the shareholder proxy proposal area was a territory occupied by corporate gadflies, such as the Gilbert brothers and Evelyn Davis. Critics pointed out that most proposals were motivated more by narcissism than by any heartfelt concern about improved governance or social responsibility"); D. A. Jeremy Telman, Is the Quest for Corporate Responsibility A Wild Goose Chase? The Story of Lovenheim v. Iroquois Brands, Ltd., 44 Akron L. Rev. 479, 487 (2011) ("There arose in the 1940s the phenomenon of the “gadfly investor.” Three such investors, Lewis and John Gilbert and Evelyn Davis, still accounted for 30% of the resolutions submitted to corporations as late as 1982. Their prominence among proponents led to cries that the process was being abused by people who were not interested in the economic well-being of the corporation but by people promoting 'crackpot' ideas or 'afflicted with an insatiate desire for personal publicity.'").
3. Most Individual Proponents Don’t Like Being Grouped Together – John Gilbert hated being lumped together with EYD in media articles. They didn’t act in concert.
And your point would be what? I'm sure Iraq, Iran, and North Korea didn't like being lumped together as the axis of evil.
4. Remarkable That Anyone Bought EYD’s “Highlights & Lowlights” – It’s amazing to me that any company would cave to what is essentially blackmail and buyEvelyn Davis’ “Highlights & Lowlights” – which essentially was a publication about herself. But it was a smart investment for anyone that didn’t want EYD to cause trouble at the annual meeting.
EYD was running a racket not unlike the Sōkaiya in Japan: Blackmailing "companies by threatening to publicly humiliate companies and their management, usually in their annual meeting." Today, of course, its union pension funds that abuse the 14a-8 shareholder proposal to extract private gains at the expense of their fellow shareholders. But 14a-8 is still an enabler of racketeers.
Speaking of Evelyn Davis, here's a few more facts: "Until rather recently, people like Johnny Carson,96 Dr. Spock,97 and others of their ilk were nominated from the floor of the annual meeting by the Evelyn Davises of the world." Thomas J. Andre, Jr., The Corporate Governance Reform Act of 1995, 17 J. Corp. L. 87, 101 (1991). "Mrs. Davis stated at the 1972 annual meeting ‘I'm opposed and against women directors and women officers. I'd much rather deal anytime with the worse men than the friendliest woman.’" Leila N. Sadat-Keeling, The 1983 Amendments to Shareholder Proposal Rule 14a-8: A Retreat from Corporate Democracy?, 59 Tul. L. Rev. 161, 197 n.112 (1984).
5. What Is a “Successful” Shareholder Proposal? – Davidoff presumes that a shareholder proposal is successful only if it receives majority support from shareholders. But I define it much differently. For the proponent who brought the proposal, the definition of success may vary. They merely might want to force the board to consider the issue of the proposal. They actually might want to use a proposal to gain attention so they can obtain a meeting to discuss a more pressing issue (for which they don’t want to publicly disclose).
Does Broc really want to celebrate the use of Rule 14a-8 for disingenuous private purposes? Or to celebrate forcing companies to spend money - i.e., to coerce speech - to give some asinine gladfly a soapbox? Even a proponent of board-shareholder engagement admits that "there is a lot of anecdotal evidence suggesting that often the few people who attend annual meetings do so in order to be disruptive. These anecdotes support the notion that shareholder meetings have become, in one expert's words, a '[t]heater of the [a]bsurd.'" Lisa M. Fairfax, Mandating Board-Shareholder Engagement?, 2013 U. Ill. L. Rev. 821, 837 (2013).
I say repeal 14a-8 and let them send out tweets.
6. Most Recent Court Cases Have Resulted in Losses for Companies
Which is sort of the point. The law is too favorable for shareholder proponents.
7. $87 Grand for No-Action Requests? Call My Lawyer – The gist of the Davidoff article is that shareholder proposals are costing companies so much money. Of course, that depends on whether a company decides to seek no-action relief from Corp Fin to exclude them. Davidoff throws out that it costs companies $87,000 per proposal for “dealing with them.”
Sorry, but we really are talking about serious money here. As far back as 2001, Roberta Romano tolds us that "the estimated present value of the cost of the current regime ... ranges between $293 million and $1.9 billion." Less Is More: Making Institutional Activism A Valuable Mechanism of Corporate Governance, 18 Yale J. on Reg. 174, 182 (2001). See also Alan R. Palmiter, The Shareholder Proposal Rule: A Failed Experiment in Merit Regulation, 45 Ala. L. Rev. 879, 926 n.15 (1994) (citing Susan Leibler's well-known study "using reported costs of shareholder proposals in 1976 and 1981 to estimate that shareholder proposals, both included and excluded, during 1975-1976 proxy season cost U.S. companies a total of $7 million").
8. No-Action Process Ripe for Reform? – Anyways, if the real beef is cost – why not go to the heart of the matter and reduce the costs inherent in the no-action process?
I actually agree with the need for no action letter reform, but that doesn't change the fact that we also need Rule 14a-8 reform.
9. Do Institutional Investors Support Proposals From Individual Proponents? – It appears that Davidoff didn’t bother to talk to any institutional investors to ask their opinion about individual proponents. If he did, I can tell you that most would support the right of these shareholders to submit proposals (in fact, EYD was known to pick topics that would receive wide support on purpose). And that institutions have supported their proposals many times over the years
Broc's probably right that union and state/local government pension funds support expansive Rule 14a-8 rights. After all, they're big abusers of the rule too. I'm not convinced that mutual funds and so on would be so supportive.
10. Shouldn’t the Topic of the Proposal Matter, Not Who Submitted It? – Yep. Amen.
No. The identify of proponents matters a lot. We need to make it a lot harder for hobbyist gadflies like the Gilberts and private rent-seekers like union and state/local government pension funds to abuse the process.
I’m honored to be giving this lecture at my alma mater, and thanks go to Charles Elson for the opportunity and Kim Ragan for organizing the event. It’s the first in the book tour that will take me to many other great universities with thanks to many more wonderful colleagues nationwide. More details as they are finalized.
Have you bought his new book about Warren Buffett yet?