Larry Cunningham discusses. BTW, have you ordered his book yet? If not, why not? After all, I have.
Larry Cunningham discusses. BTW, have you ordered his book yet? If not, why not? After all, I have.
Few people have done a better job of chronicling Warren Buffett's illustrious career than Law Professor Lawrence Cunningham. Larry's forthcoming book Berkshire Beyond Buffett: The Enduring Value of Values tackles a critical question; namely, what happens after Warren goes to his eternal home. Cunningham argues that Berkshire Hathaway can not just survive but even thrive once Warren is off the scene:
In a comprehensive portrait of the distinct corporate culture that unites and sustains Berkshire's fifty direct subsidiaries, Lawrence A. Cunningham unearths the traits that assure the conglomerate's perpetual prosperity. Riveting stories recount each subsidiary's origins, triumphs, and journey to Berkshire and reveal the strategies managers use to generate economic value from intangible values, such as thrift, integrity, entrepreneurship, autonomy, and a sense of permanence.
I've read all of Larry's other Buffett books and have found each to be highly entertaining and informative. So I confidently recommend this one sight unseen.
Update: There is an interesting interview of Cunningham by Joan Heminway over at Business Law Prof Blawg. Highlight:
Q: Care to give us a thumbnail sketch of the book’s outline?
A: Sure. The opening chapters cover Berkshire’s origins and foundations, with surprises even for those most familiar with this terrain, including rich connections between Berkshire’s early acquisitions and the conglomerate today. While Berkshire appears vast, diverse, and sprawling, this synthesis of corporate culture shows instead a close-knit organization linked by discrete values.
The middle chapters, the heart of the book, take a series of deep dives into fifty Berkshire subsidiaries to illuminate each of the traits and how they give Berkshire its identity and destiny. I was delighted that, when circulating the manuscript for comment among Berkshire devotees, even the most avid readers found new facts, fresh insights, and a whole new way of thinking not only about Berkshire but about Buffett.
The closing chapters reflect on what Berkshire’s corporate culture means for Buffett’s legacy. They explore the elaborate succession plan at Berkshire, which most people misunderstand, and identify challenges Berkshire will face. I also draw specific lessons for investors, managers, and entrepreneurs who can benefit from Berkshire’s distinctive approach—lessons that business lawyers and policymakers will want to learn as well.
On 24 June 2014 White & Case and PwC hosted a round table breakfast to discuss the effect of recent sanctions on financial institutions. Sir Andrew Wood gave a keynote address in which he considered the relevant macroeconomic and political factors that come into play when doing business in Russia in the current environment as well as the future prospects for business and investment in the region. He then led a discussion (under the Chatham House Rule) on the impact of sanctions against Russia and Ukraine together with sanctions experts from White & Case and PwC.
You can download an extended review of the program here.
Given the new sanctions the US just announced and the potential for even more sanctions if Russia turns out to be responsible for the downing of that Malaysian passenger jet, this is an especially timely program for business persons and the lawyers that advise them.
In a May 22 opinion piece for The Wall Street Journal, "The Pope's Case for Virtuous Capitalism," Cardinal Timothy Dolan of New York criticized the media for giving the impression that "the only thing on the pope's mind was government redistribution of property, as if he were denouncing capitalism and endorsing some form of socialism."
They overlook, the cardinal argues, "the principal focus of Pope Francis' economic teaching -- that economic and social activity must be based on the virtues of compassion and generosity."
Cardinal Dolan believes that "the spread of the free market has undoubtedly led to a tremendous increase in overall wealth and well-being around the world," but he also agrees that "far too many people live in poverty and have few opportunities to achieve prosperity." ...
In short, he argues that the capitalism criticized by the pope is not the kind of capitalism practiced in the United States. "For many in developing or newly industrialized countries, what passes as capitalism is an exploitative racket for the benefit of the few powerful and wealthy."
Of course, many would argue that the kind of capitalism increasingly practiced in the United States is crony capitalism in which government restrictions on markets enables the government to pick and choose winners and losers. And, as examples running from Halliburton to Solyndra demonstrate, it's a bipartisan endeavor.
All of which leads me to concur wholeheartedly with this observation by Reese (channeling Dolan):
The proper response to the problems of the free market is "not to reject economic liberty in favor of government control," he writes. "The church has consistently rejected coercive systems of socialism and collectivism, because they violate inherent human rights to economic freedom and private property."
Unfortunately, as Reese notes, Cardinal Dolan's column "did not sit well with theologians who specialize in Catholic social teaching."
They strongly disagree with Dolan's equating the American economic system with "virtuous capitalism." Pope Francis was talking about American capitalism, the theologians say.
As always, of course, the problem is that "theologians who specialize in Catholic social teaching" simply don't understand American capitalism or even basic economics. As preeminent scholar Michael Novak sagely observed in Toward a Theology of the Corporation, theologians tend to be poorly trained in economics and inexperienced with the business world. They “are likely to inherit either a pre-capitalist or a frankly socialist set of ideals about political economy.” (59) Consequently, theologians “are more likely to err in this territory than in most others.” (12)
A persistent error “in this territory” is the tendency towards what Milton Friedman called “the collectivist moral strain” in Catholic social thought. Milton Friedman, Good Ends, Bad Means, in The Catholic Challenge to the American Economy: Reflections on the U.S. Bishops' Pastoral Letter on Catholic Social Teaching and the U.S. Economy 99 (Thomas M. Gannon ed. 1987). Indeed, it is fair to assert that some documents in the social teaching more closely resemble “the platforms of European social democratic parties” than Biblical exegesis. Robert Benne, The Bishops’ Letter—A Protestant Reading, in The Catholic Challenge to the American Economy: Reflections on the U.S. Bishops' Pastoral Letter on Catholic Social Teaching and the U.S. Economy 76, 79 (Thomas M. Gannon ed. 1987).
Fortunately, I suspect Cardinal Dolan will end up having more influence on the Pope than random catholic theologians embedded in left-liberal dogma.
Enterprise risk management has become a key issue for corporate boards, with both liability and business exposure for unprepared boards. There's a very valuable case study from the Stanford Rock Center for Corporate Governance that explores this issue in more detail:
On March 5, biotechnology company Chimerix refused to provide a potentially life-saving drug to 7-year old Josh Hardy who was battling cancer. The drug had not yet received FDA approval, and the company had discontinued its "compassionate use" program to dedicate resources to Phase 3 testing of the drug.
Five days later, following a massive social media onslaught that captured national attention, the company relented.
In this Closer Look, we dissect the powerful force of social media and examine its potential impact on corporate reputation. We ask:
1. Why aren’t more companies prepared to deal with the reputational risks that emerge through online channels?
2. How should information gathered from social media outlets be used to supplement a comprehensive risk management program?
3. Are stories such as this one a board-level issue? If so, at what point do they become one?
4. If Chimerix were your company, what would you do differently?
Larcker, David F. and Larcker, Sarah M. and Tayan, Brian, Josh Hardy and the #SaveJosh Army: How Corporate Risk Escalates and Accelerates Through Social Media (April 14, 2014). Available at SSRN: http://ssrn.com/abstract=2424451
Greetings from New Zealand, where I am the Cameron Visiting Fellow at the University of Auckland Faculty of Law for the next three weeks. An article in yesterday's NZ Herald caught my eye. UK Telegraph commentator Allister Heath opposes government efforts to block Pfizer from buying AstraZeneca:
There is no room for nationalism in business, and no place for meddling politicians. Countries still matter immensely but their role is now as hosts and hubs: they provide the legal and physical infrastructure, the workforce and the tax system.
Companies locate themselves wherever makes sense to them, guided almost exclusively by commercial considerations. That is the reality of the world in which Western as well as emerging nations operate, and we should embrace, not fear it, for it works better than any other system when it comes to creating growth, productivity and jobs. ...
I basically agree with his argument, so long as we're talking about countries with more or less shared values on issues like the rule of law, protection of intellectual property rights, and so on. In contrast, Heath would carve out only "a very small number of exceptions relating to genuine questions of national security," which I don't think goes far enough.
In any case, I certainly agreed with his ultimate conclusion:
On balance, competitive profit-seeking capitalists are less likely to take bad decisions than politicians, and countries that allow market forces to determine ownership, investment, research and jobs perform better than those that politicise business.
The NY Times Joe Nocera is one of the worst business "journalists" in that business. Highly opinionated and dumb makes for a bad combination. So it warmed my heart to see the Times' public editor take Nocera to the woodshed for his egregious recent columns on St. Warren:
After a complaint from Mr. Buffett, which I was sent a copy of, corrections were appended to the columns, and published in print. (One correction, however, was left out. In his first column, Mr. Nocera referred to Mr. Buffett as a member of the Coca-Cola board; that hasn’t been true for eight years. That error was never formally corrected, although it gets a mention in the second column, in which, remarkably, Mr. Nocera uses his own original error to bash Mr. Buffett further: “He should be embarrassed. It’s actually worse than I had realized. My original assumption was that Buffett didn’t want to offend his fellow board members, especially those on the compensation committee, who had vouched for the equity plan. But Buffett left the board in 2006.”)
But there’s a much bigger problem. The entire premise of the second column is built on a mistake: that Mr. Buffett had changed his tone after “licking his wounds” over the reaction to statements he made on April 23, including Mr. Nocera’s criticism. As Mr. Nocera told it in the second column, after several days of this embarrassment passed, Mr. Buffett decided to “bite back” by going on the offensive in a Fortune interview on April 28.
But that “remarkable interview” with Fortune – the so-called biting back — actually took place the same day as the initial statements, not after five days of wound-licking.
I asked Mr. Nocera if he planned to write anything in his column about the errors; he said he thought the corrections were sufficient, since they did not gloss over the seriousness of the errors.
The question now is: What more would it take for Nocera to get fired?
Interesting new paper by Dallan Flake, Image is Everything: Corporate Branding and Religious Accommodation in the Workplace:
There is growing tension in the law between an employee’s right to religious expression in the workplace and an employer’s countervailing right to cultivate the corporate image of its choosing. The existing case law provides little meaningful guidance to employers and employees faced with this conflict; not only do case outcomes vary from court to court, but the analysis and reasoning underlying these decisions is often inconsistent and, in some cases, contradictory. I argue that because a company’s image is one of its most valuable assets, courts should more closely scrutinize religious-accommodation claims that interfere with a company’s ability to control its image. This does not require a break from Supreme Court precedent, but rather stricter adherence thereto. I offer three recommendations for how courts can recalibrate their analysis of religious-accommodation cases involving corporate-image concerns to produce a more even case law that better comports with Supreme Court precedent and provides employers and employees greater clarity in navigating this sensitive and complex issue.
The decision by workers at the Volkswagen plant in Chattanooga, Tennessee to reject the United Auto Workers is the best news so far this year for the American economy. Even with Volkswagen management on its side, the union that combined with CEOs to nearly ruin U.S. car makers couldn't persuade a majority voting in a secret ballot to let it become their agent to bargain with the foreign-owned company.
This wasn't merely one more failed union organizing attempt. The UAW and its chief Bob King spent years working toward this vote as part of its strategy to organize plants in the American South, and all the stars were aligned in its favor. …
The UAW may be able to negotiate a near-term increase in pay and job security for current workers. But the price—in addition to the steep coerced dues—is usually a less competitive company that means less security and fewer jobs in the long run. The best proof is the UAW itself: It has lost 75% of its members in 35 years as its demands and work rules made their employers less competitive. …
Don't believe those who say this means the end of the UAW. It has too many friends in high political places, as the 2009 auto bailouts proved. Federal law is also stacked in favor of unions, and President Obama's NLRB is routinely stretching and breaking the law to make it even more so.
But the fact that unions must rely on brute government force shows how out of touch they are with modern economic reality.
Alsion Frankel has the dirt on Dish Network controlling shareholder Charles Ergen's remarkably shoddy corporate governance attitudes and practices, summarizing:
So to recap, this large public company appropriately appointed an independent committee to evaluate a transaction in which its controlling shareholder had a substantial personal interest. The board then declined to protect the committee through indemnification while the majority shareholder made it clear that he regarded the committee as nothing more than expensive window-dressing for a deal he would actually control. When committee members dared to condition their recommendation on a continuing evaluation of the majority shareholder’s conflict, the board effectively fired them.
There's litigation pending in Las vegas, but wouldn't you love to see what Leo Strine would do to this guy?
In today's WSJ, economist Richard Grossman argues we should scrap the London Interbank Offering benchmark rate (LIBOR). To be sure, as Grossman argues, the LIBOR rate has been plagued by scandal:
Because so much money is riding on Libor, banks have an incentive to alter submissions—up or down, depending on the situation—to improve their bottom lines. Many in the financial community had long known about Libor manipulation. As early as 2008, then-president of the Federal Reserve Bank of New York Timothy Geithnerwarned the Bank of England that Libor's credibility needed to be enhanced. E-mails between bankers that have come to light since the scandal broke almost a year ago prove conclusively that cheating was commonplace.
Instead of fixing LIBOR, however, Grossman wants to scrap it:
The British government should announce that, six months from today, Libor will cease to exist. The British Bankers' Association, which technically owns the interest-rate index, has been so wounded by the scandal that it has been willing to follow the government's lead and will no doubt agree.
And how will markets react? The way they always do. They will adapt.
Financial firms will have six months to devise alternative benchmarks for their floating rate products. Given the low repute in which Libor—and the people responsible for it—are held, it would be logical for one or more market-determined rates to take the place of Libor.
Grossman's argument is fraught with error. First, he far too glibly assumes that markets will easily adjust. But LIBOR is not just used in spot markets, which could adjust in the short term, but is also used in countless long-term contracts. As I explain in my article, Reforming LIBOR, attempting to replace LIBOR with an alternative benchmark likely would have triggered massive dislocation--and, as a result, massive litigation. In addition, the extensive network effects associated with LIBOR suggest that change would be costly due to path dependency.
Second, it's not obvious that there are any plausible alternatives to benchmarks based on interbank lending. Grossman argues that there are at least two:
One often mentioned candidate is the GCF Repo index published by the Depository Trust & Clearing Corp. This index is based on actual repurchase agreement transactions, and is thus a better indicator of the cost of funds than banks' internal estimates—even if those estimates were unbiased. Another option might be some newly constructed index based on credit-default swaps transactions, corporate bonds and commercial paper.
Like other interbank offering rate benchmarks, however, LIBOR submissions combine three components: (1) compensation to the lender for the time value of money, (2) compensation for the risk that the counterparty bank will default, and (3) a liquidity premium reflecting market transaction costs. This combination has proved highly useful for lenders. It allows lenders to pass on changes in their funding costs to borrowers and thus minimize basis risk, for example, by pegging the borrower’s interest rate to LIBOR plus an appropriate risk premium reflecting the borrower’s creditworthiness. As such, if the lending bank’s funding rate rises, so too will the rate the borrower must pay, ensuring that the lending bank will continue to receive the full risk premium. Grossman's alternative index based on CDSs etc... lack those characteristics.
The GCF Repo index also differs from bank funding costs, consisting of "the average daily interest rate paid for the most-traded GCF Repo contracts for U.S. Treasury bonds, federal agency paper and mortgage-backed securities [MBS] issued by Fannie Mae and Freddie Mac." The GCF Repo index also is problematic because it's based on US instruments. One of LIBOR’s major advantage is that the London time zone allows it to straddle the Asian and U.S. markets.
Finally, Grossman ignores the reforms that the UK government has put into place to ensure that the reformed LIBOR benchmark will be less vulnerable to manipulation. Specifically, LIBOR submissions will be based on a hierarchy of transaction types. A panel bank first looks to its own transactions in the inter-bank deposit market, in other deposit markets such as commercial paper, and finally in other related markets such as derivatives. In the absence of good data from such transactions, a panel bank next looks to its observations of third party transactions in those markets. The third tier of the hierarchy consists of third party quotes to panel member banks in those markets. Only in the absence of any such transaction data should a panel member rely on an estimate in making its LIBOR submission.
In order to further strengthen the link between LIBOR and actual transaction data, the number of currencies and maturities for which a LIBOR benchmark is quoted are to be reduced by eliminating currencies and maturities traded in particularly thin markets.
In sum, the case simply has not been made for scrapping LIBOR. Instead, we need to be careful to ensure that the new administrator is well supervised. This is so, because Grossman is right about one thing: NYSE Euronext is a suspect administrator. The BBA failed in large part because it had no skin in the game. NYSE Euronext has the opposite problem; i.e., too much skin in the game:
British authorities earlier this month granted a contract to run the index to NYSE Euronext, a company that owns the New York Stock Exchange, the London International Financial Futures and Options Exchange, and a number of other stock, bond, and derivatives exchanges. NYSE Euronext is scheduled to be taken over by IntercontinentalExchange, a firm which owns even more derivatives markets.
In other words, the company that will be responsible for making sure that Libor is set responsibly and fairly will be in a position to profit like no one else from even the slightest movements in Libor.
The UK regulators will need to closely supervise NYSE Euronext to ensure it doesn't cheat and be prepared to force NYSE Euronext to step aside if necessary. But that's an argument for supervision, not for scrapping the whole project.
In the prior post, I noted that former SEC inspector general David Weber who was fired for blowing the whistle on corruption and sexual shenanigans at the agency has been vindicated by a very favorable settlement of his claims. Which is a good thing. we want people to blow the whistle on illegal and ethical conduct. Which brings me to WW's post on the campaign to smear NSA whistle blower Edward Snowden:
One need not believe that Mr Snowden is a hero to see that the campaign to smear him is in large part a campaign of pre-emption against future leakers. The prestige and infamy that ultimately attach to Mr Snowden will surely affect the supply of future leaks. The rush to lionise and belittle Mr Snowden is a rush to get the jump in the fight to determine the level of status that whistle-blowers will enjoy, or suffer, in our culture.
The outcome of this fight matters, because, as economists like to say, incentives matter. But few incentives are pecuniary. Humanity operates primarily within an economy of esteem, and one basic function of any human society is to assign status, to distribute honour and shame. That pundits hustled to pass judgment on Mr Snowden is no surprise, but the way it has been done is illuminating, and depressing. Another, better, society might heap socially fatal shame upon David Brooks for his reckless, smug psychologising of Mr Snowden. Sadly, this sort of inane, moralising, diagnostic speculation falls well within the bounds of accepted American discourse, which reflects rather poorly on us. That we do not readily see that it reflects poorly on us also reflects poorly on us. The questions Americans do and do not find sensible to raise also provide grounds for sorrow. It makes sense to Americans to ask, "What kind of person would defy authority in this way?" But somehow it does not make sense to ask, "What kind of person seeks to join the special forces of a country known to conduct unjust wars?" or "What kind of person helps the state conduct its business outside the scope of public deliberation and democratic authority, and does not seek to expose it?" ...
The attack on Mr Snowden's reputation is in no small part a rearguard action to keep America's spies and generals beyond the reach of suspicion, to maintain their relative immunity from serious democratic scrutiny so that that the public will continue complacently to trust them when they say, in so many words, "Trust us...or else". But it is democratic affirmation, not uniforms and security clearances, that makes state power legitimate. When the state acts without proper democratic authority, it acts as a rogue operation—as just another band of thugs with money and guns and a dangerous sense of self-righteousness. Whether the NSA's monitoring programmes are actually legal and effective may be morepressing questions than whether Mr Snowden deserves our esteem. But it became possible to address those questions openly only because Mr Snowden chose to speak up. If we wish to keep similarly pressing policy questions available for public examination, we must defend the honour of whistleblowers like Edward Snowden.
A column by Buttonwood offers this fascinating finding:
A study by the University of Exeter Business School analysed 80,000 trades in the UK market and found an interesting dichotomy when looking at trades made by male and female directors. When men bought, the market responded by pushing the shares an average 1.55% higher in the following 20 days; when women bought, the gain was just 0.88%. Perhaps this discrepancy is driven by sexism because most fund managers are men. You can imagine the thought process: "Women directors! They're just there as tokens. Now where's my BMW? I'm off for a round of golf."
But here is the best bit. If the men had only listened to the women, their performance would have been better. In the year after a director's purchase, the average monthly gains were 0.68% when females bought, and just 0.37% for males; a cumulative spread of almost 4 percentage points a year. Women were better at taking the longer view.
Make of it what you will.
The WSJ informs us that:
Americans have long taken pride in their willingness to bet it all on a dream. But that risk-taking spirit appears to be fading.
Three long-running trends suggest the U.S. economy has turned soft on risk: Companies add jobs more slowly, even in good times. Investors put less money into new ventures. And, more broadly, Americans start fewer businesses and are less inclined to change jobs or move for new opportunities.
The changes reflect broader, more permanent shifts, including an aging population and the new dominance of large corporations in many industries.
Personally, I think the trend has other causes. First, the dearth of US citizens pursuing careers in science and engineering. Second, the impact of law and regulation.
In my essay, Corporate Governance and U.S. Capital Market Competitiveness, I discuss how "the massive growth in corporate and securities litigation risk and the increasing complexity and cost of the U.S. regulatory scheme" adversely affected risk taking in the capital markets. Instead of choosing to go public via an IPO, start ups took the safer route of merging with established companies. This reduced both the cash and psychic rewards to entrepreneurship, which inevitably had a negative impact on the volume of entreprenurial activity.
When you add up the growing costs of regulation and the growing risk of litigation, there's no wonder smaller firms and start ups struggle. Only big firms can achieve the sort of economies of scale that make such costs bearable.
Interesting paper by Lawrence Trautman for the Conference Board:
How do you build the best board for your organization? What attributes and skills are required by law and what mix of experiences and talents will give you the best corporate governance? What are the commonly required director attributes that are a must for each board and how do you customize and fine-tune your search to achieve a high performance board? Optimal board composition, that is, the best mix of director skills and experience will depend on many company-specific variables. Some of the most important of these variables include: (1) company lifecycle stage, (2) extent to which international markets are mission critical to your future (detailed understanding of target culture, markets and business risk); (3) unique technology dependence; and (4) need for access to financial and capital markets. My goal in writing this paper is to provide: answers to these basic questions, a roadmap for the entrepreneur faced with recruiting a board for the first time, a matrix methodology that every nominating committee and board can employ to systematically define their needs and explore their options, and provoke radical thinking about how any company-specific system of corporate governance may be improved by questioning existing fundamental assumptions.
This discussion of board composition is not set out in a vacuum; rather, it is based on a clear prejudice by the author that all current business operations should be a part of and based upon articulated enterprise strategy that is headed somewhere with purpose, and clearly communicated to all involved.
And another, longer law review from the same author is here.