ProfessorBainbridge.com

Scalzi's Human Division

I very uch enjoyed John Scalzi's The Human Division when it came out in installments earlier in the year. Now there's a hardback edition with extra material. The WSJ gave it a strong review today:

John Scalzi's "The Human Division" (Tor, 431 pages, $25.99), the fifth novel in a sequence that began with "Old Man's War" (2005), is in a long tradition too, back to Robert Heinlein's "Starship Troopers" (1959), Joe Haldeman's "Forever War" (1974) and Orson Scott Card's "Ender's Game" (1985). Humans have colonized other worlds and created a specialized military caste for protection from potentially hostile aliens. Ever since Heinlein, however, there has been uneasiness about the too-quick identification of "alien" as "enemy."

Mr. Scalzi's current volume follows up on that uneasiness. The "division" part of "The Human Division," is between Earth and its colonies. Both sides need each other, but their interests are opposed. Alien races, meanwhile, alarmed at expansion of the Colonial Union, have formed a "Conclave" to block it. But will they distinguish Earth, which supplies recruits for the Colonial Defense Forces in exchange for protection, from the CU?

Unusually, "The Human Division" consists of 13 linked short stories. Showing a complex situation from different angles, they roughly alternate between the main plot and side plots. It's slightly confusing at first, but Mr. Scalzi is one of the slickest writers that sci-fi has ever produced. His clever narration keeps you turning the pages, as the Conclave confronts wildcat colonies, the CU deals with "Earth Rule" insurgents and agents provocateurs unsettle all sides.

Recommended.

Calling Charlie Stross: Corporate cyberwar against the hackers

Interesting article in today's WSJ on the potential for private cyberwar:

As companies weather a spate of high-profile computer attacks, support is growing for an option that for now is probably illegal: fighting back.

The Justice Department has long held that if a company accesses another party's computer network without permission, for whatever purpose, it is breaking the law. 

But the idea of allowing the private sector to retaliate against hackers, euphemistically known as "hacking back," has gained momentum as U.S. companies wake up to the pervasive threat of cybercrime.

I've thought for some time that a science fiction triller about a corporation waging cyberwar would make a great story. If I had any skills at all at fiction, I'd be working on one of the Amazon 99-cent jobs. Lacking such skills, however, I'd love to be able to draft Charles Stross to write it. His prior work experience in the computer industry coupled with his demonstrated skills at thrillers (see The Laundry series) make him the ideal guy to tackle this subject. (See my list of favorite Charles Stross novels).

How American Corporate and Securities Law Drives Business Offshore

The American Illness: Essays on the Rule of Law is a new book from Yale University Press edited by Frank Buckley. Amazon's description informs that:

This provocative book brings together twenty-plus contributors from the fields of law, economics, and international relations to look at whether the U.S. legal system is contributing to the country’s long postwar decline. The book provides a comprehensive overview of the interactions between economics and the law—in such areas as corruption, business regulation, and federalism—and explains how our system works differently from the one in most countries, with contradictory and hard to understand business regulations, tort laws that vary from state to state, and surprising judicial interpretations of clearly written contracts. This imposes far heavier litigation costs on American companies and hampers economic growth.

Yale's site offers up these blurbs:

"Buckley has assembled essays by many, perhaps most, of the best economic and legal scholars in the Anglo-American world to consider seriously the ways in which the American legal system burdens our citizens and our economy and puts us at an international competitive disadvantage. The "rule of law" we so earnestly commend to other countries is clearly in need of serious reform at home. The rigor of these historical, economic, and comparative studies, and the logic of the framework within which Buckley presents them, make a compelling case for law reform scaled to our needs for the 21st Century."—Judge Douglas H. Ginsburg, U.S. Court of Appeals and NYU Law School

"This book presents strong evidence of American hyper-litigiousness and the social costs it creates. The editor has assembled an impressive array of authors, who attack these issues with rich empirical evidence."—Eugene Kontorovich, Northwestern University School of Law

"This authoritative collection of essays draws a vivid portrait of a legal system that is out of control. The Rule of Law in America has become a kind of Frankenstein’s monster, bashing indiscriminately both good and bad conduct without proportion or self-awareness. These vivid essays let the facts drive you to this unavoidable conclusion: American law is indeed “exceptional”—but no longer in a way that supports either freedom or regulatory protection."—Philip K. Howard, author of The Death of Common Sense and Chair of Common Good  

I was privileged to be one of those asked to contribute an essay to the project. My offering is entitled "How American Corporate and Securities Law Drives Business Offshore," a preview of which is available here.

I've been reading the other essays in the volume and each is a gem. Collectively, they are essential reading for anyone interested in how law is choking our economy and society.

The false attribution fallacy, the Left, and Judge Richard Posner

From his review of Miarcia Coyle's new biography of SCOTUS CJ John Roberts, The Roberts Court: The Struggle for the Constitution, LA Times editor at large John Newton makes a classic liberal commentator's move; to wit, invoking statements by Judge Richard Posner as evidence of what conservatives think:

No area belies Roberts' assertions of judicial modesty more clearly than the court's new approach to guns. Under the leadership of Justice Antonin Scalia, the court in District of Columbia vs. Heller for the first time held that the 2nd Amendment protects an individual's right to bear a weapon rather than hinging that right on its relationship to a militia.

That may have been right as a matter of law — and the ruling has been broadly misinterpreted as prohibiting regulation of guns when, in fact, it specifically countenances restrictions on gun ownership — but it certainly was not an act of restraint. It overturned the District of Columbia government, relied on a shaky reading of history and ignored decades of prior court rulings.

Because of that, Heller has been roundly criticized — by conservatives. As federal judge Richard Posner said, "it is evidence that the Supreme Court, in deciding constitutional cases, exercises a freewheeling discretion strongly flavored with ideology." Posner compared the Heller decision to Roe vs. Wade.

So much for Roberts as umpire.

The great difficulty with this argument, of course, is that it is an example of the false attribution informal fallacy; to wit, an appeal "to an irrelevant, unqualified, unidentified, biased or fabricated source in support of an argument."

Judge Richard Posner has never been a conservative. I therefore once remarked that "Posner never was a conservative, so how can he become less of one?" Having said that, however, it does seem to me that Posner has shifted from his long held stance as a pragmatic classical liberal to a mushier mix that includes a substantial dose of East Coast elite modern liberal thinking.

So much for Posner as an authority on what it means to be a conservative.

Also, did you note the sleight of hand Newton makes elsewhere in the passage?

That may have been right as a matter of law ... but it ... relied on a shaky reading of history and ignored decades of prior court rulings.

I'm no fan of guns, but Heller was clearly correct. It rested on the now widely accepted view that the Second Amendment creates an individual right, a view that is attributable in part "to the work over the last 20 years of several leading liberal law professors." So how can something that was right on the law relt on shaky history?

Finally, it ill becomes Newton, the author of Justice for All: Earl Warren and the Nation He Made, to complain about judicial ruling that ignore "decades of prior court rulings." The Warren Court used to reverse long-settled precedent twice a morning before breakfast. "Under Chief Justice Earl Warren, the Court took an 'activist' role, deviating from precedent ...." 90 Cornell L. Rev. 419, 430. Indeed, even CJ Warren himself acknowledged that "Of course the rule of stare decisis is not and should not be an inexorable one. This is particularly true with reference to constitutional decisions involving determinations beyond the power of Congress to change...." James v. U.S., 366 U.S. 213, 233 (1961). 

So much for Newton as objective journalist.

In the mail: Research Handbook on Insider Trading

Today's mail brought an advance copy of the Research Handbook on Insider Trading, edited by yours truly.

In most capital markets, insider trading is the most common violation of securities law. It is also the most well known, inspiring countless movie plots and attracting scholars with a broad range of backgrounds and interests, from pure legal doctrine to empirical analysis to complex economic theory. This volume brings together original cutting-edge research in these and other areas written by leading experts in insider trading law and economics.

The Handbook begins with a section devoted to legal issues surrounding the US's ban on insider trading, which is one of the oldest and most energetically enforced in the world. Using this section as a foundation, contributors go on to discuss several specific court cases as well as important developments in empirical research on the subject. The Handbook concludes with a section devoted to international perspectives, providing insight into insider trading laws in China, Japan, Australia, New Zealand, the United Kingdom and the European Union.

This timely and comprehensive volume will appeal to students and professors of law and economics, as well as scholars, researchers and practitioners with an interest in insider trading.

Table of Contents (below the fold)

Who invented game theory?

In the UCLA news:

Is it John Nash, the Nobel Prize–winning mathematician portrayed in a 2001 Oscar-winning biopic? John von Neumann, game theory's founding father? Go back further, much further, urges a UCLA game theory expert and fan of 19th-century novelist Jane Austen.

"Austen's novels are game theory textbooks," Michael Suk-Young Chwe writes in Jane Austen, Game Theorist, which Princeton University Press published April 21. "She's trying to get readers to use their higher thinking skills and to think strategically."

At its most basic level, game theory assesses all the choices available to two (or more) people in a given situation and assigns a numerical value to the benefit each person reaps from each choice. Often, the choice that is most valuable to one player comes at the expense of the other; hence, game theory's best-known phrase — "zero-sum game." But just as frequently, there is a choice with unexpected benefits for both players.  

"In game theory, you make choices by anticipating the payoffs for others," Chwe explains.

Chwe argues that Austen explores this concept in all six of her novels, albeit with a different vocabulary than the one used by Nash, von Neumann and other game theory greats some 150 years later. In Austen's romantic fiction, this type of strategic thinking is described as "penetration," "foresight" or "a good scheme."

In "Pride and Prejudice," for instance, Mrs. Bennet, a mother eager to marry off her five daughters, sends her oldest, Jane, on horseback to a neighboring estate, even though she's aware a storm is on the way. "Mrs. Bennet knows full well that because of the rain, Jane's hosts will invite her to spend the night, thus maximizing face time with the eligible bachelor there, Charles Bingley, whom Jane eventually marries," Chwe said.

 

The Essays of Warren Buffett

I'm not a huge fan of Warren Buffett's politics or some of his corporate governance moves (e.g., his failure to do proper succession planning and the way he threw David Sokol under the bus), but his annual letters to the shareholders of Berkshire-Hathaway are legitimate milestones in American business thinking. Lawrence Cunningham has collected those letters and essays in a series of anthologies, the most recent of which is now available (it's the one on the far left).

Cunnigham lays out the importance of the essays in a post at Harvard's corporate governance blog:

The essays address some of the most important governance problems. The first is the importance of forthrightness and candor in communications by managers to shareholders. Buffett tells it like it is, or at least as he sees it, and laments that he is in the minority. Berkshire’s annual report is not glossy; Buffett prepares its contents using words and numbers people of average intelligence can understand; and all investors get the same information at the same time. Buffett and Berkshire avoid making predictions, a bad managerial habit that too often leads other managers to make up their financial reports.

Cunningham goes on to summarize the lessons he thinks we can learn from Buffett's letters.

Pamela Holmes reviewed the latest edition (the one on the far left above) for Conglomerate:

The first edition of The Essays of Warren Buffett: Lessons for Corporate America was the focus of a symposium held twenty years ago and was the standard textbook for a specialized course taught by the author, Professor Lawrence A. Cunningham of George Washington University Law School.  It has since been adopted by many law and business schools for study in investment, finance and accounting.  Investment firms have used this book in their staff and investor training programs.  However, the layman should not be put off by these credentials as the book is an approachable guide to understanding investment.  Buffett quotes Twain, Churchill and even Woody Allen.  If it's a matter of faith in Warren's wisdom, you may be reassured by the sprinkling of Biblical references used to illustrate his points.

A sampling of Buffett's sage advice to shareholders includes, "Beware of companies displaying weak accounting."  If you question what you see, "it is likely they are following a similar path behind the scenes.  There is seldom just one cockroach in the kitchen."  Berkshire Hathaway's board of directors do not receive company stock as part of their compensation, they "purchased their holdings in the market just as you did...I love such honest-to-God ownership.  After all, who ever washes a rental car?"  Another gem, "...lemmings as a class may be derided but never does an individual lemming get criticized."

Organized by topic rather than chronologically, the words of Mr. Buffett are the words of every man - there is extremely little corporate lingo and no baffling verbiage.  His plain-speak is valuable guidance to learning the history of investing in the U.S., the good and the bad, and to understanding how you can make an intelligent investment decision if effort is put into researching the integrity and focus of company and management behind the investment. ...

Kevin LaCroix writes that despite some quibbles:

The book itself is quite an accomplishment; it is that rare business book that is both worthwhile and enjoyable to read.

He also writes that:

The latest edition is updated to include excerpts from Buffett’s most recent letters. The book not only facilitates quick location of Buffett’s statements on specific topics, but it also affords an opportunity to see how Buffett has developed his themes over time, which unquestionably provides great insight into Buffett’s investment views.

 

In the mail: Corporate Governance in the Shadow of the State

I'm reading Corporate Governance in the Shadow of the State by Marc T Moore. The book description at Amazon explains that:

This book provides a fundamental re-conceptualization of the main aspects of corporate governance law and regulation in the UK, with the aim of highlighting the significant and integral role of the political State in the corporate rule-making process. It demonstrates that the key laws and regulations pertaining to corporate governance in the UK are motivated, less by the private search for efficient institutional structures, and more by the public goal of ensuring a form of quasi-democratic legitimacy consistent with the State's role as ultimate bearer of economic risk in respect of large, socially significant corporate organizations. The book argues that the legitimate function of corporate law is not simply that of mimicking the market by providing the sets of rules which participants themselves would rationally have bargained for in the absence of a formal legal framework. Rather, its analysis portrays the corporate rule-making process as a complex hybrid of publicly- and privately-driven pressures motivating compliance with accountability norms and entailing continual adaptation of institutional structures to dual political and economic forces. This has the dual effect of widening the ambit of the State's legitimate policy-making role in corporate governance, while at the same refuting the purported survival value of prevailing governance structures in British public companies.

And from the publisher's website:

Over recent decades corporate governance has developed an increasingly high profile in legal scholarship and practice, especially in the US and UK. But despite widespread interest, there remains considerable uncertainty about how exactly corporate governance should be defined and understood. In this important work, Marc Moore critically analyses the core dimensions of corporate governance law in these two countries, seeking to determine the fundamental nature of corporate governance as a subject of legal enquiry. In particular, Moore examines whether Anglo-American corporate governance is most appropriately understood as an aspect of 'private' (facilitative) law, or as a part of 'public' (regulatory) law. In contrast to the dominant contractarian understanding of the subject, which sees corporate governance as an institutional response to investors' market-driven private preferences, this book defines corporate governance as the manifestly public problem of securing the legitimacy – and, in turn, sustainability – of discretionary administrative power within large economic organisations. It emphasises the central importance of formal accountability norms in legitimating corporate managers' continuing possession and exercise of such power, and demonstrates the structural necessity of mandatory public regulation in this regard. In doing so it highlights the significant and conceptually irreducible role of the regulatory state in determining the key contours of the Anglo-American corporate governance framework. The normative effect is to extend the state's acceptable policy-making role in corporate governance, as an essential supplement to private ordering dynamics. 

As a committed contractarian, of course, I'm approaching the normative argument with a certain amount of skepticism. After reading the first couple of chapters, however, I must commend Moore for having written a very readable, balanced, nuanced, thoughtful analysis of the state of corporate governance. I'm looking forward to reading the whole thing and considering how it might inform my own analysis of the issues.

My Corporate Governance After the Financial Crisis is reviewed

In the Texas Law Review by Holly J. Gregory and Rebecca C. Grapsas. They open by stating that:

Professor Stephen M. Bainbridge’s Corporate Governance After the Financial Crisis presents a cogent discussion of the congressional and regulatory reaction to two significant economic crises within the past decade and the unprecedented federal expansion into the traditional state bulwark of corporate law that resulted. Much has been written about corporate governance and the federal reaction to these crises in the aftermath of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act or Sarbanes-Oxley) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act or Dodd-Frank). For those trying to understand the state of corporate governance regulation today and the key debates and tensions that are at work, Bainbridge’s book is a must read, along with Lynn Stout’s The Shareholder Value Myth, and—to balance things out with a broader perspective about how crises drive governance regulation and change—Ira Millstein’s and Paul MacAvoy’s book, The Recurring Crisis in Corporate Governance. Indeed, when the next crisis comes along, but before the federal legislators and regulators pick up their pens, these should all be required reading to help avoid further federal imposition of “quack corporate governance” as Bainbridge—borrowing from Professor Roberta Romano—colorfully terms the recent federal efforts. 

SF writer Charles Stross offers up an amusing April Fools Day

Here. I especially like it because it's got a crowd funding component.

Attention corporate law professors needing an article idea

The Michigan Law Review has announced that:

The Michigan Law Review publishes an Annual Survey of Books dedicated to book reviews. Book reviews are not included in any other issue of the Michigan Law Review. The Survey includes reviews of books published in the current year and the past two years. So, for example, the 2014 Survey, which will be published in April 2014, will include reviews of books published in 2012, 2013, and 2014.

The 2014 Survey of Books is currently accepting submissions for the 2014 Review. The Book Review Office welcomes unsolicited submissions. Proposal guidelines can be downloaded here.

My book Corporate Governance after the Financial Crisis was published in 2012. Just sayin'.

 

WSJ reviews The AIG Story

From the Wall Street Journal:

Did the U.S. government break the law when it seized control of American International Group during the financial crisis of 2008? In "The AIG Story," the man who built the giant insurer says that the answer is yes and explains his reasoning. Former AIG chief executive Maurice R. "Hank" Greenberg—along with his co-author, Lawrence A. Cunningham—also offers a fascinating company history and an account of how, after Mr. Greenberg's ouster in 2005, AIG made the disastrous mortgage bets that drove it into the arms of the feds. ...

Taking over in 1968, Mr. Greenberg launched the company on one of the great winning streaks in corporate history. By 2005, the authors report, the value of the company had increased by 19,000%, and AIG was the world's largest insurance company. The streak ended that year when New York Attorney General Eliot Spitzer accused Mr. Greenberg of fraud—specifically, of having engineered a sham reinsurance transaction to boost AIG's reserves against losses—and bullied the AIG board into firing him with threats of a corporate indictment. Like many of Mr. Spitzer's prosecutions, the case turned out to be less successful in court than in the media. No criminal charges were ever filed against Mr. Greenberg, and much of the civil suit was later dropped. ...

When the day of reckoning came in 2008 and the failed mortgage bets threatened to sink the firm, the government took control of AIG. Mr. Greenberg argues that it was illegal since the feds never received the approval of shareholders.

This is a great book and a must read.

The AIG Story

Prominent and respected corporate law professor Larry Cunningham has teamed up with former AIG CEO Hank Greenberg to write The AIG Story. According to Amazon:

In The AIG Story, the company's long-term CEO Hank Greenberg (1967 to 2005) and GW professor and corporate governance expert Lawrence Cunningham chronicle the origins of the company and its relentless pioneering of open markets everywhere in the world. They regale readers with riveting vignettes of how AIG grew from a modest group of insurance enterprises in 1970 to the largest insurance company in world history. They illustrate AIG's distinctive entrepreneurial culture and how its outstanding employees worldwide helped pave the road to globalization. 

• Corrects common misconceptions about AIG that arose due to its role at the center of the financial crisis of 2008.
• Unique account of AIG by one of the iconic business leaders of the twentieth century who developed close relationships with many of the most important world leaders of the period and helped to open markets everywhere.
• New critical perspective on battles with N. Y. Attorney General Eliot Spitzer and the 2008 U.S. government seizure of AIG amid the financial crisis.
•  Confidential information shared publicly for the first time.

The AIG Story captures an impressive saga in business history--one of innovation, vision and leadership at a company that was almost destroyed with a few strokes of governmental pens. The AIG Story carries important lessons and implications for the U.S., especially its role in international affairs, its approach to business, its legal system and its handling of financial crises.

I've been reading it and have been fascinated. Highly recommended.

I'll keep my day job

When I was a kid I wanted to be (among other things) a science fiction writer when I grew up. But I think I'll keep my day job. Apparently being one of the best current writers out there just doesn't pay all that well. 

Bainbridge's study aids for corporation law, agency & partnership, and/or business associations courses

Bainbridge on Agency, Partnerships & LLCs:

The emergence of the limited liability company has kindled renewed interest in unincorporated business associations among legal scholars. This revival was further stimulated by the multiple revisions made to the Uniform Partnership Act in the 1990s. By lending new intellectual respectability to the study of unincorporated business associations, these developments stimulated the supply side of the curricular equilibrium. Courses on unincorporated business associations have thus sprung up at many law schools. A number of very fine casebooks compete for that market, including one co-edited by the author of this volume. This text is intended to provide students taking a course in unincorporated business associations with a reader-friendly, highly accessible overview of the law and economics of unincorporated business associations. In addition, students taking a basic course in corporations or business associations may find this volume helpful as a more expansive treatment of the law of agency, partnership, and limited liability companies. The text does not shy away from bringing theory to bear on doctrine. While the text has a strong emphasis on the doctrinal issues taught in today’s unincorporated business associations classes, it also places significant emphasis on providing an economic analysis of the major issues in that course. Agency, Partnership and Limited Liability Companies thus offers not only with an overview of the black letter law of unincorporated business associations, but also a unifying method of thinking about the subject. Using a few basic tools of law and economics — such as price theory, game theory, and the theory of the firm literature — the reader will come to see the law in this area as the proverbial “seamless web.”

Bainbridge on Corporation Law:

Corporations classes present students with two related problems: First, many students have trouble understanding the cases studied because they do not understand the transactions giving rise to those cases. Second, Corporations classes at many law schools are taught from a law and economics perspective, which many students find unfamiliar and/or daunting. Yet, with few exceptions, corporate law treatises and other study aids have essentially ignored the law and economics revolution. 

This book is intended to remedy these difficulties. The pedagogy is up-to - date, with a strong emphasis on the doctrinal issues taught in today’s Corporations classes and, equally important, a mainstream economic analysis of the major issues in the course. As such, the text is coherent and cohesive: It provides students not only with an overview of the course, but also (and more importantly) with a unifying method of thinking about the course. Using a few basic tools of law and economics-price theory, game theory, and the theory of the firm literature-students will come to see corporate law as the proverbial “seamless web.” Finally, the text is highly readable: The style is simple, direct, and reader- friendly. Even when dealing with complicated economic or financial issues, the text seeks to make those issues readily accessible.