ProfessorBainbridge.com

Becker on Chicago on Big Box Stores

Chicago seems to be making a play for the "peoples republic of" title long enjoyed by Berkeley, Santa Monica, and their ilk. Smo king bans. Foie gras bans. Potential bans on trans fats. The professional do gooders now running what used to be the City of Big Shoulders recently adop ted living wage legislation applicable to big box stores. Long time readers will recall that I'm no fan of big box stores, but this is getting ridiculous.

University of Chicago economist Gary Becker does a great job of shredding the big box legislation:

In a city like Chicago the burden from these responses to the ordinance will fall disproportionately on African Americans and Latinos since fewer jobs will be available to workers in the city with less education and lower skills. In addition, prices in Chicago of items sold relatively cheaply by stores like Wal-Mart and Target will rise because fewer of these stores will open in the city. The mega stores that remain will raise their prices because their costs will go up. Since city customers of these stores are mainly families with modest incomes who seek low prices rather than elaborate service, they more than the affluent classes will be hurt by the rise in prices and reduced availability of big box outlets.

I'm less persuaded by his comment that the law raises serious Constitutional law issues. Unlike the Maryland law recently struck down, living wage ordinaces like this generally are not preempted by ERISA. Absent such a conflict with federal law, this sort of economic regulation tends to get very deferential judicial review under both the (substantive) due process and equal protection clasuses. Or am I missing something?

Turtledove's Grapple

Just finished Harry Turtledove's Settling: Accounts: The Grapple, the latest addition to Turteldove's long-running series reimagining American History in light of a Confederate victory in the Civil War. Imagine what would happen if what Henry Kissenger called the modern Hundred Year War had played out on North America, with the CSA playing the German role and the USA playing that of France. We're now deep into World War II, with the CSA on the defensive.

Confederate leader Jake Featerston continues his Final Solution of the black "problem," the a-bomb race is in full swing, and the industrial might of the North has come into full play. (As Shelby Foote famously observed of Civl War counterfactuals, if the North had ever been in serious danger of losing, it just would have taken its other hand from out of its pocket.)

The plotting here is faster than in some previous installments and the writing seems tighter. Certainly, it held my attention far better than some recent installments.

I can’t help wondering how many more installments Turtledove has in him. Is he going to take us through a Cold war on North America? Although Turtledove sticks pretty closely to a historical precedent in his major plotting, I'm doubtful whether he'll put us through a cold war. Instead, he seems to be foreshadowing a shift to the War on Terror as his model. He's pretty clearly signalling a coming occupation of a defeated CSA by the USA, which will look a lot like the occupation of Iraq with civil war, suicide bombers, and so on.

If this alternate history teaches us anything about our own timeline, it is that the Union victory was a heaven-sent blessing. The timeline Turtledove constructed on the basis of a CSA victory is a much darker and nastier place, but it is a very plausible and convincing counterfactual. If the South was able to justify slavery and Jim Crow, it's not hard to imagine a CSA that loses World War I churning up a Hitler-clone with plans for a black Holocaust. Lincoln was right: The CSA had to be beaten to preserve the last best hope.

Hedge Fund Activism

Law professors Marcel Kahan and Ed Rock have just posted to SSRN a very interesting paper on hedge fund activism, in which they argue that:

Hedge funds have become critical players in both corporate governance and corporate control. In this article, we document and examine the nature of hedge fund activism, how and why it differs from activism by traditional institutional investors, and its implications for corporate governance and regulatory reform. We argue that hedge fund activism differs from activism by traditional institutions in several ways: it is directed at significant changes in individual companies (rather than small, systemic changes), it entails higher costs, and it is strategic and ex ante (rather than intermittent and ex post). The reasons for these differences may lie in the incentive structures of hedge fund managers as well as in the fact that traditional institutions face regulatory barriers, political constraints, or conflicts of interest that make activism less profitable than it is for hedge funds. But the differences may also be due to the fact that traditional institutions pursue a diversification strategy that is difficult to combine with strategic activism.

Although hedge funds hold great promise as active shareholders, their intense involvement in corporate governance and control also potentially raises two kinds of problems: The interests of hedge funds sometimes diverge from those of their fellow shareholders; and the intensity of hedge fund activism imposes substantial stress that the regulatory system may not be able to withstand. The resulting problems, however, are relatively isolated and narrow, do not broadly undermine the value of hedge fund activism as a whole, and do not warrant major additional regulatory interventions.

The sharpest accusation leveled against activist funds is that activism is designed to achieve a short-term payoff at the expense of long-term profitability. Although we consider this a potentially serious problem that arguably pervades hedge fund activism, we conclude that a sufficient case for legal intervention has not been made. This conclusion results from the uncertainties about whether short-termism is in fact a real problem and how much hedge fund activism is driven by excessive short-termism. But, most importantly, it stems from our view that market forces and adaptive devices taken by companies individually are better designed than regulation to deal with the potential negative effects of hedge fund short-termism while preserving the positive effects of hedge-fund activism.

My take: I agree with Kahan and Rock that the case has not been made for SEC regulation of hedge funds. (See my TCS Daily column.) On the other hand, I worry more than Kahan and Rock about the prospect of hedge funds pursuing private interests. Accordingly, I stand by the position I took in Director Primacy and Shareholder Disempowerment; i.e., that the case also has not been made for empowering hedge funds and other shareholder activists via legal intervention in their favor.

Pouilly-Fuiss�?

Ann Althouse has had well-deserved success as a blogger (not to mention as a law professor), so I'm mildly appalled to see her candidly admit to sipping Pouilly-Fuiss�. For those who don't know their French wines, Pouilly-Fuiss� comes from a pair of villages in Burgundy whose wine is made from Chardonnay grapes. Among the cognoscenti, its success is attributed not to the quality of its wine, but to the fact that Americans and other English-speakers like saying the name. To be blunt, Montrachet it ain't. Heck, it isn't even Meursault.

Internal Affairs

The internal affairs doctrine is a very important conflict of laws rule, pursuant to which the state of incorporation’s law governs questions of corporate governance. Many folks, including yours truly, believe that a combination of the dormant commerce clause and the full faith and credit clause raise the IA doctrine to the status of constitutional principle. Christine Hurt and Larry Ribstein are blogging about Friese v. Superior Court, in which a California appellate court held that California's state insider trading laws could be applied to insiders of a Delaware corporation. Larry thinks the IA doctrine should precule application of California law to a company incorporated in Delaware. I agree, although perhaps for slightly different reasons. As I've argued elsewhere at great length, insider trading is best understood as a species of property rights regulation effected via the fiduciary duties of directors and officers. As such, it is a core matter of corporate governance properly regulated by the law of the state of incorporation.

Sparking Shiraz: An Appreciation

When Helen and I were in Australia last summer, we found many wonderful wines, but our favorite discovery was the sparkling Shiraz we first tasted at Domaine Chandon. It was a revelation: a red wine made into a champagne-style sparkling wine.

I don't understand why this style of wine isn't in huge demand in the United States. It offers the cold bubbles we love in cola drinks; indeed, some taste just like cherry cola (albeit with a kick!). Also, it can be drunk far colder than most red wines (45 minutes in the refrigerator is ideal), which also should appeal to an American palate brought up on soft drinks. Yet most are vinified to produce dry wines (i.e., not sweet), so they match well with food.

Sparkling Shiraz is a true red wine, so those of us hoping the French paradox will stave off heart trouble ought to embrace it. It's got intense berry flavors, far beyond any true Champagne, which matches nicely to the spicy food we love. In fact, if there is a better match for pork or chicken doused in barbecue sauce, I haven't found it. The bubbles - along with a healthy dose of acids and round tannins - scrub your palate clean, which makes it a great match not only for BBQ but also greasy foods like pepperoni pizza.

Although the froth signals a fun wine, most are serious wines that offer the connoisseur all the intellectual pleasure of a quality still red wine. If you pay attention, the difference between a sparkling Shiraz sourced from the Barossa Valley and one made from Yarra Valley grapes become apparent with experience.

There is no reason why US wineries couldn't make great sparkling red wines. After all, we're making great Syrah in places like California and Washington, which would make fine sparkling Shiraz. Besides which, there was a time when California's own Zinfandel routinely was made into champagne style white wines (and some wineries still do so, especially Beringer). Why not turn red Zinfandel wine into our sparkling red wine? I just don't get it.

For my reviews of Australian sparkling Shiraz, go here. The best US source I've found for these wines is the Jug Shop in San Francisco, which sells online and ships to most of those enlightened states that allow direct-to-consumer sales.

Lazy Man's Chicken on a Can

• 1 organic, free range fryer chicken (3-4 lbs)
• 2/3 cup poultry brine mix
• 4 cups cold water
• 4 tablespoons Dean & DeLuca poultry rub
• 1-1/2 cups Stubb's Original BBQ sauce
• 1 cup Coca-Cola
• 1 can beer (I like Guinness stout, but your mileage may vary)

Stir the brine mix in the cold water until the salt crystals dissolve. Remove the giblets from the chicken and trim off any excess skin or fat, especially from the tail section. Discard giblets and trimmings. Rinse the chicken thoroughly inside and out. Put the chicken in a large zip-lock bag. Pour the brine over the chicken. If necessary, add additional water so that the chicken is completely submerged. Put the closed bag in a plastic or glass container and place in the refrigerator. Allow chicken to soak in the brine for 3-5 hours.

Using a church key, poke a bunch of holes in top of beer can. Put several cups of wood chips (I like hickory) in a bowl. Pour about half the beer over the wood chips, adding enough water to cover chips. Let chips soak for 1 hour.

Drain wood chips, Place chips in a smoker box (or make a pouch of aluminum foil with some holes in the top). If using a gas grill, put smoker package on top of the drip rails. (If using charcoal, you're on your own from here out.) Heat grill on high until wood is smoking. Then adjust for medium indirect heat.

Remove chicken from brine (discarding brine). Rinse thoroughly. Pat dry with paper towels. Rub 1-1/2 tablespoons into chicken cavity. Rub another 1-1/2 tablespoons rub all over the skin; if possible, work some rub under the breast meat skin.

Pour last tablespoon of rub into beer can. Slide chicken onto beer can, neck side up. Carefully move upright chicken on can to the grill. Make sure chicken remains upright when placed on grill rack. Carefully close top and walk away for about 65 minutes.

Combine BBQ sauce and Coke in a medium saucepan. Simmer until reduced by one-third.

Mop chicken with BBQ sauce and then let cook 10 more minutes.

Remove chicken from grill. Carefully! The remaining beer is HOT! Over a sink, carefully remove chicken from can. Let chicken rest 10 minutes. Serve with remaining sauce on side.

Grilled corn on the cob makes a nice accompaniment. Sparkling Shiraz is the wine of choice.

Schild Estate Sparkling Shiraz (Barossa) 2003

Deep dark purple with tons of medium-fine bubbles. Intense cherry, spice, and black pepper on the nose. The same on the palate, with a touch of plum and prune in the fairly long finish. Manages to be big and refreshing at the same time, always a tough combination to pull off. Grade: A-

Perks for Perps?

My latest TCS column tackles perquisites (I don't write the damn headlines, BTW):

Remember ex-Tyco CEO Dennis Kozlowski's $2.1 million birthday trip for his wife, Karen, and their $6000 gold-and-burgundy floral patterned shower curtain? Well, Kozlowski's in jail, but lavish corporate spending on executive perks hasn't gone away.

As the SEC readies its package of new executive compensation disclosure rules (about which I wrote in When Less Really Is More), executive perquisites are once again getting a close look. Back in January, the SEC provided guidance for companies preparing executive compensation disclosures under which a benefit must be disclosed as a perquisite if it gives the executive has any personal aspect, regardless of whether there is a business reason for the benefit or even if it is provided for the convenience of the company, unless the benefit is available on a non-discriminatory basis to all employees. Only items integrally and directly tied to the performance of the executive's duties are exempt, and the SEC takes a very narrow view of what items qualify under that standard. The traditional income tax rules that perks are not income if they are provided with a business purpose or for the company's convenience, for example, are not enough.

Reportedly, as the SEC has been reviewing the executive disclosures filed since the January guidance was issued, the Commission and its staff have been dissatisfied with the quality of those disclosures. Apparently, the SEC thinks corporate disclosures still are not providing enough clear information for shareholders to assess executive pay and perks. It's widely expected that the forthcoming rules will revisit the question of perks to insist upon greater transparency.

The problem is that the SEC and shareholder activists are painting with far too broad a brush. Nobody seriously defends Kozlowski's show curtain, but many so-called perks are perfectly appropriate forms of compensation.

A study by economists Raghuram Rajan and Julie Wulf, examined the provision of perks by large companies over an extended period of time (1986-1999). As they explain:

"A widespread view in the corporate finance literature is that executive perks are a form of agency or private benefit and a way for managers to misappropriate some of the surplus the firm generates. According to this view, firms with plenty of free cash flow that operate in industries with limited investment prospects should typically offer perks. The theory also suggests that firms that are subject to more external monitoring should have fewer perks."

Their findings provided, "at best, mixed evidence" for the conventional wisdom. Instead, as The Economist explained, their findings supported two alternative hypotheses:

"First, firms in the sample with more hierarchical organizations lavished more perks on their executives than firms with flatter structures. Why? Perks are a cheap way to demonstrate status. Just as the armed forces ration medals, firms ration the distribution of conspicuous symbols of corporate status.

Second, perks are a cheap way to boost executive productivity. Firms based in places where it takes a long time to commute are more likely to give the boss a chauffeured limousine. Firms located far from large airports are likelier to lay on a corporate jet."

In other words, Rajan and Wulf's results indicate that executive perks are generally set with shareholder interests in mind.

Additional support for that proposition is provided by Todd Henderson and James Spindler's analysis of a number of controversial compensation practices, including perquisites, corporate loans, and encouragement of conspicuous consumption by top management. In brief, they hypothesize that firms seek to discourage top employees from saving so as to avoid the final period problem that arises when such employees accumulate sufficient wealth to fund a luxurious retirement. Reduced savings by such employees encourages them to seek continued employment, which vitiates the final period problem and provides ongoing incentives against shirking. By encouraging current consumption, the oft-decried practices of providing top employees with munificent perks and loans in fact maximize the joint welfare of managers and shareholders.

Even some of the insufferable Dennis Kozlowski's perks arguably could be justified as advancing shareholder interests. Reportedly, for example, many of the guests at his wife's lavish birthday party represented Tyco customers and suppliers. Building interpersonal relationships with the top management of key stakeholders could well redound to the benefit of shareholders.

As the Kozlowski story illustrates, even with additional disclosure, shareholders still will have only crude tools with which to assess executive perks. At best, they can compare the size of perks to firm returns, but little more. Detailed analysis of whether particular perks are appropriate or not requires the kind of detailed information and regular supervision available only to the board of directors. It's thus hard to see the point of extensive new disclosures.

In any case, the SEC's approach is overbroad. By refusing to take into consideration whether there is a legitimate business purpose for the perk or whether the perk is provided for the convenience of the company, the SEC itself is the one who is misleading investors.

Cycling and Drugs

So Tour de France winner Floyd Landis reportedly tested positive for excess testosterone, creating yet another doping scandal for a sport that has been plagued by them. Which leads me to wonder: why do we care? As fans, why does it matter whether a player is on the juice or not? So Barry Bonds hits a few more homers than he otherwise would? Who cares? Indeed, since baseball is otherwise one of the most boring games known to man, isn't that a good thing?

The only rationales for caring I've ever been able to see are (1) paternalism to protect players from themselves and (2) drug use by some creates a market for lemons (see my TCS column Drug Testing and the Market for Lemons). I'm somewhat persuaded by the latter, but at the end of the day it's just not much of an issue for me. I wouldn't watch baseball or cycling whether the players were juiced or not, while I would watch football and basketball whether the players were juiced or not.

The War

A couple of tidbits from today's W$J. (1) Avaliable free at OpinionJournal.com is former Bush administration official Dan Senor's column, in which he admits:

During his trip to Washington earlier this week, the Iraqi prime minister again failed to condemn Hezbollah and instead focused exclusively on the "destruction that happened to the Lebanese people as a result of the military air and ground attacks." ... [It] wasn't supposed to be this way. We had thought that a post-Saddam Iraqi government would be less susceptible to Arab League pressure; Israel as the old whipping-boy was to find little resonance there. This change of tone was to be a model for the region. Wasn't the road to Arab-Israeli peace supposed to go through Baghdad?

Sure doesn't look that way. Senor blames the malicious influence of Moqtada al-Sadr. Of course, al-Sadr has power only because the US invasion of Iraq created a power vacuum, after which al-Sadr proved adept at manipluating the rules of the US-imposed democracy.

(2) From a WSJ editorial, also availlable free at OpinionJournal.com:

The number of bombs since the death of Abu Musab al-Zarqawi only reinforces our view that the majority of Sunni violence has always come from elements of the former regime, such as its KGB-trained mukhabarat, and not al Qaeda.

So much for the theory that Iraq is a front in the war on al Qaeda terrorism.

The Judicial We

There are various situations in which an individual speaker (or writer) will use the first person plural pronoun to say something like "we believe," even though he is speaking solely for himself. Wikipedia explains that:

Pluralis majestatis ("majestic plural") is the plural pronoun where it is used to refer to one person alone. This is also known as the "royal "we"" or the "Victorian "we"" because it has usually been restricted to august personages such as monarchs, bishops, Popes, and university rectors. The idea behind the pluralis majestatis is that a monarch or other high official always speaks for his or her people.

The "editorial we" is similar, in that "the writer has once more cast himself or herself in the role of spokesman: either for the media institution who employs him, or more generally on behalf of the party or body of citizens who agree with the commentary." (Here at PB.com, we occasionally have come in for cri ticism for using the "editorial we" formulation, but since we are a spokesperson for all those right-minded readers who agree with us, our use thereof is perfectly appropriate in our view.)

All of which is preface to Orin Kerr's discussion of the use by trial judges of what might be called the "judicial we." Much of the discussion in the comments focuses on whether the trial judge is acting as a spokesman for the court, which the erudite references we provide for our readers herein suggest is the right question.

In any event, Orin opines:

... some readers suggest that district court judges properly use ?we? because their rulings are understood to be rulings of the entire Court as an institution. This is a possibility, but I?m not sure the argument works. First, individual judges who are members of the same Court can disagree on an issue, so one judge?s ruling isn?t necessarily the view of other judges. Second, I don?t think I have ever heard a single trial judge use ?we? when making a ruling from the bench in open court. In my experience, at least, judges in court usually are comfortable with using ?I? when making oral rulings; it?s the switch from oral to written decisions that seems to trigger the occasional switch from ?I? to ?we.?

What do we think? Does the "judicial we" make sense? Or is it just pomposity? Also, question for lawyers, have we ever heard a trial judge use the "judicial we" orally from the bench (other than in reading an opinion into the record)?

(Bonus points for correctly identifying the type of "we" we used in the preceding paragraph.)

BTW, notice that this post introduces a new category tag - Tongue in Cheek - for the benefit of some of our more literal-minded readers.

Duties of Directors of an Insolvent Corporation

A new federal bankruptcy court decision out of Delaware deals with the situation in which the officers and directors of an insolvent subsidiary allegedly looted it for the benefit of the parent corporation. The defendants argued they couldn't be held liable to creditors of the insolvent subsidiary, because they owed their fidicuary duties solely to the parent corporation. The bankruptcy court rejected that argument. In re Scott Acquisition Corp., 2006 WL 1731277 (Bkrtcy. D.Del. 2006), available online here.

It seems self-evident that directors and officers of an insolvent subsidiary corporation shouldn't be allowed to stiff the sub's creditors for the benefit of the parent (let alone for their own personal benefit). Unfortunately, in reaching that perfectly plausible result the court chose to phrase the relevant legal issue as being "whether the directors and officers of a wholly-owned insolvent subsidiary owe a fiduciary duty to that subsidiary." In my article Much Ado About Little? Directors’ Fiduciary Duties in the Vicinity of Insolvency, I explained why so phrasing the issue is an error:

From a doctrinal perspective, this emphasis on fiduciary duties to the corporate entity is essentially incoherent. As to solvent corporations, the law already distinguishes between duties running to the corporate entity and to the shareholders. This distinction is what differentiates direct from derivative shareholder litigation, after all. But if directors already owe some duties to the corporate entity, what changes doctrinally when the corporation is in the “vicinity of insolvency”?

[Focusing on duties running to the entity,] moreover, conflates issues of pie expansion and pie division. Suppose the board of directors was faced with a true zero sum decision, in which the sole issue is how to divide a static sum between two or more corporate constituencies. [The court’s] analysis fails to offer directors any guidance for making that decision. This is so because, in the zero sum case, the value of the corporate entity by definition will be unaffected by the decision. ...

In addition to being doctrinally incoherent, the notion that directors owe duties to the corporate entity is inconsistent with the dominant contractarian theory of the firm. … The corporation is not a thing to which duties to can be owed, except as a useful legal fiction. Instead, in contractarian theory, the corporation is thought of as a nexus of contracts. Although this is a very useful and important concept, however, it too is somewhat misleading. After all, to say that the firm is a nexus is to imply the existence of a core or kernel capable of contracting. But kernels do not contract – people do. In other words, it does us no good to avoid reifying the firm by reifying the nexus at the center of the firm. Hence, it is perhaps best to understand the corporation as having a nexus of contracts.

If the corporation has a nexus, where is it located? The Delaware code, like the corporate law of every other state, gives us a clear answer: the corporation’s “business and affairs . . . shall be managed by or under the direction of the board of directors.” Put simply, the board of directors is the nexus of a set of contracts with various constituencies that the law collectively treats as a legal fiction called the corporation. As such, it simply makes no sense to think of the board of directors as owning fiduciary duties to the corporate entity. Indeed, since the legal fiction we call the corporate entity is really just a vehicle by which the board of directors hires factors of production, it is akin to saying that the board owes duties to itself.

Hence, the bankruptcy court should have concluded that the duties of direcors and officers of an insolvent subsidiary run to the creditors of the subsidiary. See Southwest Holdings, L.L.C. v. Kohlberg & Co. (In re Southwest Supermarkets, L.L.C.), 315 B.R. 565, 575-76 (Bankr. D.Ariz. 2004) (holding that "the fiduciary duties become owed to creditors").

BTW, the Southwest Holdings case suggests that "the ordinary business judgment rule no longer applies when the corporation is insolvent." Id. at 575. As a matter of Delaware law, however, this seems clearly erroneous. In Much Ado About Little?, I asked:

What standard of review will a Delaware court ..., assuming arguendo that the creditor is owed some sort of fiduciary duty under Credit Lyonnais? The answer almost certainly is the business judgment rule:

The Credit Lyonnais decision’s holding and spirit clearly emphasized that directors would be protected by the business judgment rule if they, in good faith, pursued a less risky business strategy precisely because they feared that a more risky strategy might render the firm unable to meet its legal obligations to creditors and other constituencies.

In other words, so long as the board of directors is independent and disinterested and otherwise satisfies the preconditions for application of the business judgment rule, the court will abstain from reviewing the merits of the board’s decision.

The block quotation is taken from Leo Strine's opinion in Production Resources Group, LLC v. NCT Group, Inc., 863 A.2d 772, 788 (Del. Ch. 2004). See also Angelo, Gordon & Co., L.P. v. Allied Riser Communications Corp., 805 A.2d 221, 229 (Del. Ch. 2002) (“My preliminary view is that, even where the law recognizes that the duties of directors encompass the interests of creditors, there is room for application of the business judgment rule.”).

UCLA Alum Jim Barrall and Option Backdating

In a recent report on how law firms are helping clients deal with the option backdating "scandal," the W$J profiled UCLA Law alum Jim Barrall (class of 1975). Jim even got one of those very cool pencil portraits (a long time personal ambition of the management here are PB.com). Barrall, who is chairman of the executive compensation practice at Latham & Watkins, is the founding chair of UCLA Law's Law Firm Challenge and serves on the Dean's Advisory Board. If I were chair of the compensation committee of the board of directors of a company that had been giving out backdated and/or spring-loaded options, I'd want Jim on my team.

The Journal reports:

[Latham & Watkins] held an internal conference call in which it established an options-timing working group. In June, Latham held a firmwide seminar on options timing, with topics ranging from SEC enforcement to tax implications to insurance for directors and officers. Now, the group, more than 80 lawyers strong, receives daily emails and has set up an internal Web site to track options-timing issues as they evolve.

Whether the date on a stock-option grant is the actual date on which the grant occurred may not seem, at first blush, to be a thorny legal question. But "as you peel back the layers of the onion, what you find is that this gets extraordinarily complicated and cuts across many specialties in the legal field," says Robert Cleary, a white-collar defense lawyer at Proskauer Rose and a former U.S. attorney in New Jersey.

Take the tax implications of a backdated option, which could constitute "nonqualified deferred compensation" and expose option recipients to additional tax liabilities and penalties if the options aren't amended by year end. Or, in the realm of directors and officers insurance, lawyers are examining whether an insurer can argue that misconduct by a single director or executive in granting or dating stock options can justify refusing to honor coverage for all of the other directors and officers who were involved in making the grant even if they didn't participate in the misconduct.

Many companies ensnared by the scandal have assigned the audit committees of their boards to conduct independent investigations into their stock-option practices or have formed special board committees to carry out the inquiries. Those committees often retain independent law firms, separate from the company's traditional outside law firm, to conduct the investigations.

SEC to Mandate More Executive Compensation Disclosure

From CNN Money:

Corporations will have to give out more and clearer information about the pay and perks of top managers and directors under rules adopted by the Securities and Exchange Commission by a 5-0 vote Wednesday. ...

Chairman Christopher Cox said: "It will demystify any financial dealings between the executives and the companies they work for ... It is not the job of the SEC to judge what constitutes the right level of compensation."

Everytime the SEC amends the rules on executive pay disclosure, somebody at the SEC always says the new rules "will demystify" the process. And, every time, the process remains foggy.

The SEC press release summarizes the new rules:

The amendments will refine the currently required tabular disclosure and combine it with improved narrative disclosure to elicit clearer and more complete disclosure of compensation of the principal executive officer, principal financial officer, the three other highest paid executive officers and the directors.

New company disclosure in the form of a Compensation Discussion and Analysis will address the objectives and implementation of executive compensation programs - focusing on the most important factors underlying each company's compensation policies and decisions.

• The Compensation Discussion and Analysis will be filed and will thus be a part of the disclosure subject to certification by a company's principal executive officer and principal financial officer. ...

Following the Compensation Discussion and Analysis section, executive compensation disclosure will be organized into three broad categories: compensation over the last three years; holdings of outstanding equity-related interests received as compensation that are the source of future gains; and retirement plans, deferred compensation and other post-employment payments and benefits.