ProfessorBainbridge.com

Smith's Dystopian Perspective on CSR

Gordon Smith has a very fine new paper, The Dystopian Potential of Corporate Law. Here's the abstract:

The community of corporate law scholars in the United States is fragmented. One group, heavily influenced by economic analysis of corporations, is exploring the merits of increasing shareholder power vis-à-vis directors. Another group, animated by concern for social justice, is challenging the traditional, shareholder-centric view of corporate law, arguing instead for a model of “stakeholder governance.”

I guess I'm a group of one, but while my director primacy model assumes that shareholder wealth maximization is the proper decision making norm for corporate governance, as argued in The Case for Limited Shareholder Voting Rights, I also contend that "that the director primacy-based system of U.S. corporate governance has served investors and society well. This record of success occurred not in spite of the separation of ownership and control, but because of that separation." Anyway, back to Gordon's abstract

The current disagreement within corporate law is as fundamental as in any area of law, and the debate is more heated than at any time since the New Deal. This paper is part of a debate on the audacious question, “Can Corporate Law Save the World?” In the first part of the debate, Professor Kent Greenfield builds on his book, THE FAILURE OF CORPORATE LAW: FUNDAMENTAL FLAWS AND PROGRESSIVE POSSIBILITIES, offering a provocative critique of the status quo and arguing that “corporate law matters” to issues like the environment, human rights, and the “labor question.”

In response, Professor Smith contends that corporate law does not matter in the way Professor Greenfield claims. “Corporate law” is the set of rules that defines the decision making structure of corporations, and reformers like Professor Greenfield have only two options for changing corporate decision making: changing the decision maker or changing the decision rule. More specifically, he focuses on board composition and shareholder primacy. Professor Smith argues that changes in corporate law cannot eradicate poverty or materially change existing distributions of wealth, except by impairing the creation of wealth. Changes in corporate law will not clean the environment. And changes in corporate law will not solve the labor question. Indeed, the only changes in corporate law that will have a substantial effect on such issues are changes that make the world worse, not better.

Gordon explains that:

I invoked Edward Bellamy's famous utopian novel, Looking Backward, which was written in 1887. (If you teach corporate law and you haven't read Looking Backward, you should put it on your summer reading list. You can find it online here or here.) Looking Backward presents a horrifying vision:

Early in the last century the evolution was completed by the final consolidation of the entire capital of the nation. The industry and commerce of the country, ceasing to be conducted by a set of irresponsible corporations and syndicates of private persons at their caprice and for their profit, were entrusted to a single syndicate representing the people, to be conducted for the common interest for the common profit. The nation, that is to say, organized as the one great business corporation in which all other corporations were absorbed; it became the one capitalist in the place of all other capitalists, the sole employer, the final monopoly in which all previous and lesser monopolies were swallowed up, a monopoly in the profits and economies of which all citizens shared.

My argument is that Kent's proposals for reforms are motivated by the same impulses that motivated Bellamy, and the results of implementing those proposals ... well, I think you can see why I used the word "dystopian."

Ribstein comments:

Like Gordon, I believe that less accountability is likely to lead, not to some utopian prospect of "socially responsible" firms, but to higher agency costs and less social wealth.

Ditto.

Pine Ridge Rutherford Cabernet Sauvignon (Napa Valley) 2004

Middling quality, especially at this price ($40+). Decent dark and black fruit, but on opening there was something slightly sour on the finish that I found off-putting. The firm tannins are mouth puckering at this stage. As the wine breathed, it softened and the sour element blew off. For near term drinking, I'd suggest double decanting and allowing it to breath for at least an hour before serving. Grade: B

The Difference Between RLBOs and Quick Flips

Deal Journal reported that:

The public shareholders in leveraged buyouts are starting to fight back.

The latest battleground is a Texas court, where buyout firms Silver Lake Partners and TPG, (formerly Texas Pacific Group) — which are trying to buy Sabre Holdings — agreed to share some of the spoils with the public shareholders they are buying the travel-reservations provider from if they quickly turn around and sell it. Read about what we’ll call a quick-flip tax at our friends over at the LBO Wire here.

Shareholders — and some directors — of publicly traded companies are fed up watching private-equity firms get all the glory and the cash. Deals like the $1.1 billion dividend loan Blackstone took out last week against Travelport, the Sabre rival it bought last year, are sparking unrest from public shareholders there, who want a slice of the pie. It’s also making image-conscious directors less eager to sell out, which makes the buyout firms’ hunt for targets all the more challenging.

And then they further reported that:

Now comes a story today from our colleagues over at the LBO Wire newsletter from Dow Jones Newswires that quotes Joseph Bartlett (left), a private-equity attorney at Fish & Richardson PC: “People are going to be alarmed that this sets a precedent.”

But what caught our eye wasn’t the scare quote, but the following. He goes on to say that these are relatively painless concessions, and he recommends that PE firms suck it up and accept these kinds of terms if “it would quiet the concerns and public alarm that they’re taking value away from shareholders without paying for it.”

Harvard Business School's Working Knowledge column offers a Q&A with Josh Lerner, in which he draws an important distinction between quick-flips and reverse leveraged buyouts:

Studying almost 500 private equity-led IPOs over a 22-year period, Lerner and co-researcher Jerry Cao conclude that reverse leveraged buyouts in general outperformed other IPOs and the market as a whole. Quick flips, however, are another story. Key concepts include:

• RLBOs have outperformed other types of IPOs, perhaps because private equity groups prepare their portfolio companies to perform as public companies.
• RLBOs have performed well across many market cycles.
• The most successful performances were associated with larger RLBOs, as well as offerings by larger groups.

...In essence, RLBOs are the offering of new shares in a company or part of a company that had been taken private in an initial leveraged buyout. Usually, buyout specialists will hold their portfolio firms for several years, working with existing management as well as bringing in new managers to improve the firm, Lerner says. After a number of years, the buyout team sells its stakes in these firms.

Critics complain that buyout firms suck out profits rather than improve the firms they acquire, making these companies weakened goods when the IPO is launched. IPO investors suffer when these crippled companies fail in the market.

But when Lerner and Cao started analyzing the actual performance numbers, they saw that conventional wisdom had it wrong. "Reverse LBOs appear to consistently outperform other IPOs and the stock market as a whole. The positive returns appear to be economically and statistically meaningful. Moreover, there is no evidence of a deterioration of returns over time, despite the growth of the buyout market: RLBOs performed strongly in the late 1980s, the mid-1990s, and the 2000s."

... Not all RLBOs are golden. So-called quick-flips—when a private equity firm sells off an investment within a year after acquisition—are underperformers compared to other IPOs and the market at large. The analysis found flips underperformed the S&P 500 by 5 percent in the following three years.

Lerner believes that problems with quick flips occur because of the short period that private equity groups have to work with these firms. "While I cannot prove this, my suspicion is that in many cases, the groups are less effective in reshaping the processes and systems of these companies, stemming largely from the fact that they have worked with management for so much shorter a period. It is as if you took your dog to obedience school for one lesson, and expected him to do all sorts of tricks!"

In other words, including a quick-flip tax provision in the LBO deal may not only be good PR but also may promote efficiency.

Pine Ridge Crimson Creek Merlot (Napa Valley) 2002

Pine Ridge is a very reliable winery and their Crimson Creek Merlot usually makes for enjoyable quaffing. This bottle from the 2002 vintage, however, was just awful. Industrial and medicinal flavors and aromas dominated. If I were going to assign a grade, I'd give it a D. Considering that the Spectator gave it an 85, however, I'm going to give Pine Ridge the benefit of the doubt and assume I got a bum bottle. (Interestingly, however, the Spectator's tasting note offers this cryptic comment: "Better than previously reviewed." Maybe they got an above average bottle.)

Busted

When I bought my Porsche, there was a certain amount of blogosphere speculation as to the over and under for when I'd get my first ticket. If you had 12 months and 20 days in the pool, congratulations. You're a winner!

Annoyingly, it wasn't even for speeding or any other fun stuff. Just a piddling little illegal left turn.

On to traffic school.

Dobson's Lost It

I n the odd world inhabited by Focus on the Family founder James Dobson, Fred Thompson cannot be endorsed for President because ... well, it's not really clear:

"Everyone knows he's conservative and has come out strongly for the things that the pro-family movement stands for," Dobson said of Thompson. "[But] I don't think he's a Christian; at least that's my impression," Dobson added, saying that such an impression would make it difficult for Thompson to connect with the Republican Party's conservative Christian base and win the GOP nomination. ...

In a follow-up phone conversation, Focus on the Family spokesman Gary Schneeberger stood by Dobson's claim. He said that, while Dobson didn't believe Thompson to be a member of a non-Christian faith, Dobson nevertheless "has never known Thompson to be a committed Christian?someone who talks openly about his faith."

"We use that word?Christian?to refer to people who are evangelical Christians," Schneeberger added.  ...

I gather Mormons and Catholics need not apply, eh? As Andrew Sullivan properly observes, what we have here is:

A religious test for public office - clearly stated by the GOP's most powerful base figure.

But it gets better (or, do I mean worse?):

While making it clear he was not endorsing any Republican presidential candidate, Dobson, who is considered the most politically powerful evangelical figure in the country, also said that Gingrich was the "brightest guy out there" and "the most articulate politician on the scene today."

There is much that is admirable about Newt, but let's face it. Newt's got the sexual mores of a billy goat. He told his first wife about his plans for a divorce while she was in hospital recovering from cancer. He divorced his second wife in 1999 to marry a woman almost half his age. And he had been having an affair with the woman who became his third wife while leading the charge to impeach Bill Clinton! How can a supposedly pro-marriage guy like Dobson even hint an endorsement of a guy with a marital track record like Newt?

The Tort Law System's Drag on the Economy

The Pacific Research Institute's McQuillan and Abramyan published an important op-ed in today's W$J:

Based on our estimates, and applying the best available scholarly research, we believe America's tort system imposes a total cost on the U.S. economy of $865 billion per year. This constitutes an annual "tort tax" of $9,827 on a family of four. It is equivalent to the total annual output of all six New England states, or the yearly sales of the entire U.S. restaurant industry.

PRI has set up a website with the study and background materials.

2008 US News Rankings Leaked. UCLA # 15

Dave Hoffman has what purports to be a leaked copy of the US News top 100 law schools. UCLA comes in # 15, ahead of crosstown rival USC (tied with Vanderbilt for 16). Orin Kerr also offers what purports to be the "top 35" from the forthcoming US News ranking. A fast skim suggests they're from the same list. Meanwhile, Chapman law professor Tom Bell suggests UCLA is gaming our reporting of employment statistics. (HT: Leit er) Harumph! I believe it was Groucho Marx who observed "I'd horsewhip him if I had a horse"!

Judicial Objectivity and Elite Values

Brian Tamanaha has an interesting post on judicial objectivity/activism, in which he quotes at some length from a 1948 law review article by George Braden. One of Braden's comments jumped out at me:

Every constitutional question involves a weighing of competing values. Some of these values are held by virtually everyone, others by fewer people. Supreme Court justices likewise hold values. The more widely held are the values in society, the more likely the Supreme Court will hold them; the more controversial the values, the more likely the Supreme Court is to divide over them.

Assume arguendo Braden's right that making constitutional law requires weighing values, although I don't really believe that (see my Groping Towards a Conservative Theory of Judicial Review. My point here is that Braden's wrong about it being more likely that SCOTUS members will hold those values that are most widely held in society. Instead, I would argue, that SCOTUS members are most likely to hold the values of social elites.

And so we come to Christopher Lasch, who wrote that:

[T]he new elites, the professional classes in particular, regard the masses with mingled scorn and apprehension. In the United States, ?Middle America??a term that has both geographical and social implications?has come to symbolize everything that stands in the way of progress: ?family values,? mindless patriotism, religious fundamentalism, racism, homophobia, retrograde views of women. (The Revolt of the Elites: And the Betrayal of Democracy at 28.)

Given the prevalence of religious faith in America, Lasch's comments about elite attitudes toward religion are particularly telling:

A skeptical, iconoclastic state of mind is one of the distinguishing characteristics of the knowledge classes. ... The elites? attitude to religion ranges from indifference to active hostility. (Id. at 215.)

Not surprisingly, when it comes to the culture wars, for example, the SCOTUS swing votes (e.g., O'Connor and Kennedy) have consistently come down on the same side as elite opinion. To be sure, the Greenhouse Effect plays a role, but the cultural divide between ordinary Americans and SCOTUS members may be even more important.

Director Independence

There is a very fine new paper by Donald Clarke on director independence, Three Concepts of the Independent Director:

Abstract: Despite the surprisingly shaky support in empirical research for the value of independent directors, their desirability seems to be taken for granted in policy-making circles. Yet important elements of the concept of and rationale for independent directors remain curiously obscure and unexamined. As a result, the empirical findings we do have may be misapplied, and judicial gap- filling may be harder than imagined when legislative intent cannot be divined or is contradictory.

This article attempts to unpack the concept broadly understood by the term independent director and to distinguish among its various concrete manifestations. In particular, I discuss the critical differences between independent, outside, and disinterested directors, arguing that these manifestations serve different purposes and should not be confused with each other. This discussion is illustrated with examples from United States state and federal laws as well as stock exchange regulations, and supplemented with comparative reference to the United Kingdom, Germany, and Japan, with a brief mention of Chinese practice as well. I also argue that the whole purpose of having independent directors is surprisingly undertheorized, leading to inconsistent rules, in particular regarding the effect of director shareholding, both across countries and within the United States.

While we're on this topic, I also want to highly commend to your attention The Fetishization of Independence by Usha Rodrigues.

Abstract: According to conventional wisdom, a supermajority independent board of directors is the ideal corporate governance structure. Debate nevertheless continues: empirical evidence suggests that independent boards do not improve firm performance. Independence proponents respond that past studies reflect a flawed definition of independence.

Remarkably, neither side in the independence debate has looked to Delaware, the preeminent state source for corporate law. Comparing Delaware's notions of independence with those of Sarbanes-Oxley and its attendant reforms reveals two fundamentally different conceptions of independence. Sarbanes-Oxley equates independence with outsider status: an independent director is one who lacks financial ties to the corporation and is not a close relative of management. Delaware's approach to independence, in contrast, is situational. As different conflicts arise in different contexts, the focus of concern - the influence from which we wish to insulate directors - varies as well.

There are at least two lessons for corporate reformers. First, the definition of independence should be refined to address the conflict at hand. For example, if the area of concern is executive compensation, the question is not merely whether the director lacks financial ties to the corporation and familial ties to corporate executives, but also whether the director lacks financial ties to the executives being compensated. Current independence rules overlook this obvious hole. Second, and more fundamentally, independent directors are useful only in situations where a conflict exists. An independent director - a part-timer whose contact with the corporation is necessarily limited - is not inherently better suited to further the interests of shareholders than is an inside director. Current rules thus over-rely on independence, transforming an essentially negative quality - lack of ties to the corporation - into an end in itself, and thereby fetishizing independence.

They are both on to something here.

Sauce, Meet Ms. Goose, Esq.

The WSJ blog reports:

Bryan Cave sponsored a ?shoe event? in Manhattan recently for its female lawyers and female clients, described in great detail in a WSJ column yesterday. Earlier this month, Skadden Arps hosted its ninth annual Skadden Women?s retreat at the Ritz Carlton in Naples, Fla., attended by some 60 women partners and 135 women clients. The same weekend, Akin Gump held a similar event in Washington, D.C., for all of its female attorneys.

These types of women-only networking events are proliferating. ?There are spa retreats, conferences at resorts, evenings at art galleries and cooking demonstrations, all organized by women who want to network and socialize with clients in their own way ? at least some of the time,? writes the WSJ.

These confabs raise some complicated issues. What about the male clients of female lawyers? And the female lawyers of male clients? Some women think these events perpetuates stereotypes. And some men wonder, ?With all the equality women have achieved, why do they continue to have these separate events??

One also wonders how loud the howls from the bar and media would be if somebody reintroduced men-only events - maybe a dinner [update: a dinner and smoker at an all-male dining club] with red meat, foie gras, and red wine, passing of the port after dinner and smoking of cigars - for men "who want to network and socialize with clients in their own way ? at least some of the time"? Deafening would be my guess. Sauce. Gander. Goose.

The End of Rome

And so the brilliant HBO series Rome has come to a final conclusion with Octavian's triumph. (Season one is now available on DVD and should be on everyone's buy list.) I shall miss it. Television of this caliber is so very rare.

I don't buy the effort to turn Octavian into a villain. The Republican constitution had broken down, as almost a century of civil war proved. As Russell Kirk observed, "a just government maintains a healthy tension between the claims of authority and the claims of liberty." In the late Republic, the balance between order and liberty had failed. Rome required order if it were to survive, which the Augustan constitution provided for over 400 years.

I commend to you Werner Eck's outstanding The Age of Augustus.

In any case, Rome the series ended well. And now on to the final episodes of The Sopranos.

From Priest Abuse to Legal Abuse

The Roman Catholic Diocese of San Diego recently declared bankruptcy, becoming the fifth and largest American diocese to initiate a bankruptcy proceeding in the face of massive tort lawsuits arising out of priest sex abuse allegations.

No person of good will denies that true victims of priest sex abuse deserve compensation for any physical or mental injuries they may have suffered. Likewise, no person of good will denies that priests proven to have abused their position deserve to be punished to the fullest extent of the law, as do bishops who may have protected such priests from criminal or civil action.

Yet, the victims and their lawyers aren't going after just the priestly abusers and their enablers in the hierarchy. Instead, they're going after the deep pockets by suing the dioceses in which the priests served. Typically, the diocese is sued directly for negligent hiring or supervision of priests; more rarely, the plaintiff may seek to hold the diocese vicariously liable for a priest's sexual misconduct.

Courts have consistently held that the First Amendment guarantee of free exercise of religion is not implicated in such suits. Yet, priest sex abuse litigation unquestionably implicates the ability of ordinary Catholics to exercise their religion.

In a diocese such as San Diego, there are hundreds of parishes, schools, orphanages, homeless shelters, hospitals, nursing homes, and so on, each ministering to numerous worshippers and even non-Church members. When the diocese faces mass tort liability, the assets and property of many parishes and other ministries that had no connection with any incident priest sex abuse are thus made available to satisfy the claims of sex abuse plaintiffs. Inevitably, execution of a judgment against such assets would impede, if not destroy, the ability of these ministries to serve the needs of their congregants. Indeed, the mere threat of liability might do so. As Edward Gaffney and Philip Sorensen have observed, "Both church and society will suffer if the continuation of ministries prompted by compassion—ministries often involving risks—is stopped short by the nervous calculation of legal liabilities."

In turn, the impact of such liability—or even the risk of such liability—on parishioners inevitably redounds against the Church. If parishioners come to believe that donations to their local parish, which they expect to be used in the main for the benefit of the local church and its ministries, are being siphoned off to pay diocesan claims and legal bills, their attitude towards giving to the support of the parish will inevitably sour. In turn, this is likely to impact the morale and effectiveness of the parish priest and other local church workers, whose morale may already be in doubt due to the threat to their retirement and health benefits. As Mark Chopko explains, "Religious entities, to a greater extent than their secular entities, rely on the unbridled goodwill of volunteers to make their operations run."

Put simply, the parties with an interest in priest sex abuse litigation are not just the victims and their abusers. All American Catholics are stakeholders in this litigation. The risk that abuse litigation poses to the financial viability of the Church and, as such, the implications of such litigation for the values that inform the First Amendment's guarantee of freedom of religion must be taken into account when secular courts assess the claims of the competing interests.

HLS Bulletin on Bebchuk

Lucian Bebchuk gets a well-deserved write up in the Harvard Law Bulletin, in which the author observes:

Bebchuk?s calls for [corporate governance] reform have struck a nerve, and he has no shortage of critics. Last year, for example, the Harvard Law Review published responses by Vice Chancellor Leo E. Strine Jr. of the Delaware Court of Chancery and UCLA?s Stephen Bainbridge to Bebchuk?s arguments for a greater shareholder role in governance arrangements.

Indeed, with all due deference to Prof. Bebchuk, I remain concinced that if his agenda for issues of federalism and corporate governance were to succeed, American business and the American economy would be the loser.

As I've noted before, Lucian's views on competitive federalism have been criticized by yours truly in The Creeping Federalization of Corporate Law, as well as by Steven Choi and Andrew Guzman, Jonathan Macey, and Robert a Romano. Lynn Stout and I have criticized Bebchuk's arguments for shareholder primacy in takeovers, as has student commentator Kevin Turner. Leo Strine and I criticized Bebchuk's proposals for shareholder empowerment, as have Martin Lipton and Mark Gordon. Core, Guay, and Thomas criticized Bebchuk's work on executive compensation, as have Jeff Gordon and I.

Ridge Geyserville (Sonoma County) 2000

Vintage charts will tell you that 2000 was not a particularly good year for Zinfandel and that Zin-based wines from that year will not age well. As the 2000 Geyserville (66% Zinfandel with 17% @ of Petitie Sirah and Carignane) approaches its seventh birthday, however, it is still going strong. Black pepper and blackberry are the dominant flavor associations. Perhaps a bit more rustic than the usual wine from this very reliable source, but still an excellent steak wine. With two bottles left in my cellars, I plan to give this wine until fall 2008 or so to see if it continues to resolve. Grade: B+