Just finished Declare by Tim Powers for $15.53 https://t.co/cCmr1PwWhu Loved it. Wash up of religion, horror, and spy thriller. Well done.— Stephen Bainbridge (@ProfBainbridge) January 18, 2016
Oops.I meant "Mash up." January 18, 2016
I have been reading with great interest William Caferro's biography John Hawkwood: An English Mercenary in Fourteenth-Century Italy. It interests me both because of my longstanding interest in military history and because, as Caferro notes:
Mercenary bands were corporate in structure. The captain stood at the head of his brigade in a manner similar to the way a modern CEO stands at the head of his firm. When the captain decided to leave, the company did not disband but retained its name and elected another man. (Kindle Locations 1511-1513).
And here's a really interesting fact about those companies: the most famous and successful condottieri got paid a very substantial multiple of what the common soldiers made.
The famous Italian mercenary Giovanni d’Azzo deli Ubaldini earned an impressive salary of 500 florins a month in Sienese service in 1381. But his cavalrymen earned only 6 florins a month .... (Kindle Locations 1665-1667).
Granted, a multiple of 83 to 1 is lower than the multiple earned by many of today's top CEOs. But it's still a very dramatic difference.
What's going on here? There are two basic theories of executive compensation: managerial power and arms'-length bargaining:
The so-called principal-agent problem arises because agents who shirk do not internalize all of the costs thereby created; the principal reaps part of the value of hard work by the agent, but the agent receives all of the value of shirking.
Although agents thus have strong ex post incentives to shirk, they have equally strong ex ante incentives to agree to contractual arrangements designed to prevent shirking.Wherever a principal-agent problem is found, we thus expect to see a mixture of carrots and sticks designed to constrain shirking. The sticks include ex post sanctions, up to and including dismissal. The carrots include incentives that align the agent's interests with those of the principal.
In theory, these divergences in interest can be ameliorated by executive compensation schemes that realign the interests of corporate managers with those of the shareholders.
Stephen M. Bainbridge, Book Review Essay Executive Compensation: Who Decides?, 83 Tex. L. Rev. 1615, 1620 (2005), reviewing: Pay without Performance: The Unfulfilled Promise of Executive Compensation, Cambridge, Ma: Harvard University Press, 2004. Pp. Xii, 278. $24.95. (Draft available here.)
In the arms'-length model, "compensation schemes are claimed to be 'the product of arm's-length bargaining' between managers 'attempting to get the best possible deal for themselves and boards seeking to get the best possible deal for shareholders.' As a result, financial economists loyal to the arm's-length-bargaining model assume compensation schemes are generally efficient, while courts generally defer to decisions by the board of directors." Id. at 1623.
In contrast, the managerial power model claims that:
... boards of directors--even those nominally independent of management--have strong incentives to acquiesce in executive compensation that pays managers rents (i.e., amounts in excess of the compensation that management would receive if the board had bargained with them at arm's length). The first of these incentives flows from the fact that directors often are chosen de facto by the CEO. Once a director is on the board, pay and other incentives give the director a strong interest in being reelected; in turn, due to the CEO's considerable influence over selection of the board slate, directors have an incentive to stay on the CEO's good side. Second, Bebchuk and Fried argue that directors who work closely with top management develop feelings of loyalty and affection for those managers, and they become inculcated with norms of collegiality and team spirit that induce directors to go along with bloated pay packages. (Id. at 1624-25)
The net effect of managerial power is that CEO pay packets are higher than would obtain under arm's-length bargaining and less sensitive to performance. (Id. at 1626.)
A condottieri's pay ought to be the product of arms'-length bargaining rather than managerial power. In the first instance, the condottieri's pay is set in the condatta (the contract between the city-state employer and the condottieri), which presumably is negotiated more or less at arms' length (of course, the condottieri has a considerable degree of bargaining power in the form of the military band at his disposal).
In the second, unlike public corporations where the owners of the business are dispersed and relatively powerless, the condottieri is elected by his employees. In theory, employee ownership should obviate the agency cost problem that drives up CEO pay.
Interestingly, however, the modern evidence suggests that employee owned enterprises should have much lower ratios of CEO to worker pay. In the famous Mondragon cooperative, the permissible ratio of the highest paid to lowest paid employee has gradually risen but only to 8.91 to 1. (Jones, D. C. 2013. The Ombudsman: Employee Ownership as a Mechanism to Enhance Corporate Governance and Moderate Executive Pay Levels. Interfaces, 43(6): 599-601.)
Why then did the condottieri's pay so greatly exceed that of the common soldier? One likely explanation is the tournament theory of executive compensation.
As the story goes, tournaments are a mechanism for reducing agency costs by providing incentives through “comparative performance evaluation.” In a promotion tournament, the principal ranks its agents by their performance relative to one another. The best performing agents are promoted to positions with higher pay and/or status.
Stephen M. Bainbridge, The Tournament at the Intersection of Business and Legal Ethics, 1 U. St. Thomas L.J. 909, 911 (2004). (Draft available here.)
Caferro's book offers some support for this hypothesis:
The pay structure provided obvious financial incentive for cavalrymen and officers to seek advancement to the leadership of companies. (Kindle Locations 1673-1674).
But why would the common soldier tolerate the vast disparity in pay? What did the common soldier get out of working for a condottieri who made more than 80 times what he did? Interestingly, Caferro informs us that:
There was surprisingly little connection between the wages of cavalrymen and those of the captains for whom they worked. Service for a renowned mercenary did not result in higher pay. The famous Italian mercenary Giovanni d’Azzo degli Ubaldini earned an impressive salary of 500 florins a month in Sienese service in 1381. But his cavalrymen earned only 6 florins a month, the same as those in the employ of the obscure mercenary Riccardo Dovadola, whose own monthly stipend was 24 florins.
But it turns out that soldiers in the mercenary companies were not paid by salary alone:
The appeal of working for a well-known captain lay in his ability, through victories, to bring earnings beyond salaries in the form of spoils of war and, perhaps, through his reputation, to increase the likelihood that an employer would pay wages he promised. (Kindle Locations 1664-1669).
So it turns out that the winner of the tournament does have coattail effects on those below him in the hierarchy.
I'm not sure if this has anything to do with modern corporation CEO pay, but it does suggest new ways of thinking about CEO pay in workers cooperatives, employee-owned corporations, and maybe even law firms.
In an interesting post on the role of "willing suspension of disbelief" in science fiction and fantasy, Charles Stross has a throw away line that caught my attention:
Certain patterns are guaranteed to make me throw a book at the wall these days (or they would, if I wasn't doing almost all my reading these days on an iPad), or at least stop reading on the spot.
I do virtually all of my pleasure reading in digital formats. Professional and devotional reading less so, although I increasingly ponder a digital missal.
But I do almost no reading on my iPad. Instead, I use either a computer or a Kindle PaperWhite. Why? Because I find the iPad--even the current generation--too heavy and awkward to hold for extended periods of time without wrist and hand strain. Days when I use my iPad to do a lot of reading, emailing, recipe hunting, Angry Birding, tweeting, and FBing can lead to severe shoulder, elbow, and/or hand pain.
I could see using an iPad if you can't afford a dedicated e-reader. But otherwise, I would think the smaller and lighter Kindle would be much superior. (Or the Nook if you really hate Jeff Bezos.)
But maybe I'm doing something wrong. Any advice?
My friend Eric Orts has just had a new edition of his excellent book Business Persons: A Legal Theory of the Firm been published in a paperback edition. Eric took advantage of the occasion to write a new preface that discusses the controversial Hobby Lobby decision as well as other related developments. As the blurb says:
Business firms are ubiquitous in modern society, but an appreciation of how they are formed and for what purposes requires an understanding of their legal foundations. This book provides a scholarly and yet accessible introduction to the legal framework of modern business enterprises.
Many students find their Corporation Law class difficult because they do not understand the transactions giving rise to those cases. As with its predecessors, this third edition is intended to assist students by not only restating the law but also by putting the law into its business and financial context. The pedagogy is up-to-date, with a strong emphasis on the doctrinal issues taught in today's Corporations classes. 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.
This new edition brings the material up-to-date with complete coverage of developments in both state corporate law and federal securities law.
This text provides a reader-friendly, accessible overview of unincorporated business associations. While emphasizing the doctrinal issues taught in today's unincorporated business associations classes, it places significant emphasis on economic analysis of the major issues in that course. The second edition has been comprehensively updated. It includes extensive new treatment of the now final Restatement (Third) of Agency and amendments to the various uniform acts governing unincorporated business associations. The coverage has been expanded to include additional topics, especially in the chapter on limited liability companies, so as to reflect their continually growing popularity as a choice of form for small businesses. Among these new topics are single member LLCs, shelf LLCs, conversion to an LLC from other forms of business organizations, promoters' duties, non-profit and low profit LLCs, and freedom of contract in LLC law.
I've been reading about World War I lately. Two books specifically, First, G.J. Meyer's A World Undone: The Story of the Great War, which I very highly recommend. Amazon says:
The First World War is one of history’s greatest tragedies. In this remarkable and intimate account, author G. J. Meyer draws on exhaustive research to bring to life the story of how the Great War reduced Europe’s mightiest empires to rubble, killed twenty million people, and cracked the foundations of the world we live in today.
I say it's very well written, easy to read, pegged at just the right level of detail, offers some really interesting digressions, and had both facts and insights I had not seen in books on the subject I had read previously.
I also read, but am much less enthusiastic about Kristian Coates Ulrichsen's The First World War in the Middle East. Here's what Amazon says:
The First World War in the Middle East is an accessibly written military and social history of the clash of world empires in the Dardanelles, Egypt and Palestine, Mesopotamia, Persia and the Caucasus. Coates Ulrichsen demonstrates how wartime exigencies shaped the parameters of the modern Middle East, and describes and assesses the major campaigns against the Ottoman Empire and Germany involving British and imperial troops from the French and Russian Empires, as well as their Arab and Armenian allies.
Also documented are the enormous logistical demands placed on host societies by the Great Powers' conduct of industrialised warfare in hostile terrain. The resulting deepening of imperial penetration, and the extension of state controls across a heterogeneous sprawl of territories, generated a powerful backlash both during and immediately after the war, which played a pivotal role in shaping national identities as the Ottoman Empire was dismembered.
This is a multidimensional account of the many seemingly discrete yet interlinked campaigns that resulted in one to one and a half million casualties. It details not just their military outcome but relates them to intelligence-gathering, industrial organisation, authoritarianism and the political economy of empires at war.
I had high hopes for this book, because it's an interesting aspect of the Great War that often gets short shrift in one-volume histories, and because I expect that much of today's mess in the Middle East can be traced back to decisions made by the British and French during and immediately after the war. Sadly, I did not find it very accessible. Instead, I found it very academic ... and not in a good way. There's an awful lot of "Historian Joe Bob said XY&Z about this, while Historian Jane Does said AB&S." It's pretty heavy going. On top of which, the Kindle edition has a lot of errors. So I confess to not having finished it. But YMMV.
I just finished the Wright Brothers, which I enjoyed, even though I don't think it's one of McCullough's best books. My main criticisms? The treatment of the events of December 1903 get relatively short shrift, especially compared to the elongated discussions of the Wright Brothers' adventures in France. Mainly, however, he provides almost no information about the patent lawsuits that preoccupied Wilbur until he died. I learned more about them from Wikipedia. Still, it's a good and fast read.
Praise for Bainbridge's Corporate Law (2d ed): "It's a great summary -- very concise and easy to understand." http://t.co/YNK7IV8MXS— Stephen Bainbridge (@ProfBainbridge) May 12, 2015
Praise for Mergers and Acquisitions: Bainbridge is a phenomenal writer, and this book does not disappoint http://t.co/xatQEwcqTO— Stephen Bainbridge (@ProfBainbridge) May 12, 2015
If you measure them by academic cachet, the answer is almost certainly no. But if you measure tham by influence on the bench and bar, the answer often is yes, Wendy Gerwick Couture explores this question in connection with the late great Alan Bromberg's treatise on securities regulation (which I suspect pales in influence besides the treatise he and my late friend Larry Ribstein co-wrote on partnership law):
Abstract: This essay is part of a symposium edition honoring the scholarly contributions of SMU Distinguished Professor Alan R. Bromberg. This essay focuses on the unique scholarly role of his treatise on securities fraud, which he first published as a single volume in 1967. In 1979, Lewis D. Lowenfels joined Professor Bromberg as a co-author, and in 2012, Michael J. Sullivan joined as a second co-author. Now, 48 years after the first volume was published, the treatise, re-titled Bromberg and Lowenfels on Securities Fraud, has reached eight volumes in length. The treatise has been cited nine times by the Supreme Court and extensively by lower courts and other scholars.Treatises currently play a somewhat controversial role within legal scholarship. Historically, the writing of treatises was closely tied with American legal education. More recently, however, numerous scholars have documented the decline of treatise-writing by law professors, citing the rise of the realist movement and the waning prestige of treatises among legal academics. In addition, treatises often influence in the shadows, consulted but not cited by practitioners and courts. Finally, a treatise is uniquely ephemeral, with early insights lost as the treatise is updated to reflect primary authority, with the treatise’s role in shaping that authority lost in the process.
Against this backdrop, this essay argues that Professor Bromberg’s and his co-authors’ treatise on securities fraud demonstrates the important role that treatises can continue to play within legal scholarship. This essay revisits earlier versions of the treatise to identify factors that led to its importance and to trace its influence in shaping the modern law of securities fraud. In particular, Professor Bromberg created his treatise when securities fraud jurisprudence was in a dynamic state, and he promoted clarity by creating an interpretive framework and providing guidance therein. The treatise was thus poised to exert influence at pivotal moments in the development of securities fraud doctrine, such as in the creation of the widely-applied Cammer factors, and to serve as a springboard for other scholarly contributions.
When the news makes me unhappy, as it has been doing lately, I find comic relief in Terry Pratchett. I rate Terry Pratchett's Discworld series just slightly behind The Lord of the Rings as best fantasy series ever and just slightly behind PG Wodehouse's Jeeves Stories as best humor series.
io9 has a good overview of the Discworld series here.
Reynolds: You are probably breaking the law right now http://t.co/sMORmEm3CM over criminalization is a growing problem— Stephen Bainbridge (@ProfBainbridge) March 30, 2015
I've been cooking a lot lately out of the Slow Cooker Revolution. This weekend, for example, I made the Balsamic-Braised Chicken with Swiss Chard and the Short Ribs in Red Wine Sauce. Both were big hits. Deep, rich flavor. Easy to make, easy to like. I love this cookbook, so I just ordered Slow Cooker Revolution Volume 2.
One of the real advantages of this cookbook series is that they show you how to use your slow cooker to make a host of meals beyond the usual braises, stews, and soups. As the blurb for Volume 2 explains:
With this volume, we looked at this must-have appliance in new ways to truly maximize its potential. You'll learn how to make a host of dishes like Garlicky Shrimp, Chicken Soft Tacos, and Flourless Chocolate Cake--recipes you'd never expect to see coming out of a slow cooker. The moist heat of the slow cooker is tailor-made to serve up flavorful stews, chilis, and braises (and don't worry--we've included a good number of these), but with our smart strategies and clever ingredient selections, we were also able to pull off spice-rubbed roast chicken, ziti with meaty ragu, rare roast beef, poached salmon and even cheesecake.
With the sad passing of my friend and mentor Henry Manne, it seems appropriate to point out that he is one of the few American legal scholars whose works have been collected into a single set of three edited volumes. The Collected Works of Henry G. Manne consists of:
Volume 1, The Economics of Corporations and Corporate Law, includes Manne's seminal writings on corporate law and his landmark blend of economics and law that is today accepted as a standard discipline, showing how Manne developed a comprehensive theory of the modern corporation that has provided a framework for legal, economic, and financial analysis of the corporate firm.
Volume 2, Insider Trading, uses Manne's ground-breaking Insider Trading and the Stock Market as a framework for many of Manne s innovative contributions to the field, as well as a fresh context for understanding the complex world of corporate law and securities regulation.
Volume 3, Liberty and Freedom in the Economic Ordering of Society, includes selections exploring Manne's thoughts on corporate social responsibility, on the regulation of capital markets and securities offerings, especially as examined in Wall Street in Transition, on the role of the modern university, and on the relationship among law, regulation, and the free market.
I was honored to be chosen as the editor for the second volume. You can download my introduction, Manne on Insider Trading, from SSRN: http://ssrn.com/abstract=1096259