When a government agency regulates people and businesses, it must comply with the Administrative Procedure Act (APA) and various other federal statutes that limit government power. It has four basic purposes:
1. To require agencies to keep the public currently informed of their organization, procedures and rules (sec. 3).
2. To provide for public participation in the rule making process (sec. 4).
3. To prescribe uniform standards for the conduct of formal rule making (sec. 4 (b)) and adjudicatory proceedings (sec. 5), i.e., proceedings which are required by statute to be made on the record after opportunity for an agency hearing (secs. 7 and 8).
4. To restate the law of judicial review (sec. 10).
Note carefully the requirement for transparency (#1) and public participation (#2).
In addition, many government agencies are required to conduct cost benefit analyses of their rules so as to ensure that the regulatory burden is not excessive relative to the benefits.
All of thse protections--public scrutiny, public awareness, cost effectiveness-get tossed out the window, however, when the government regulates by prosecution. To be sure, this is a long tanding problem. Law professor Roberta Karmel wrote a great book Regulation by Prosecution on the problem as far back as 1982. But now the problem is far worse, as an expose by Fortune explains:
If you’re running a Fortune 100 company, there’s a 10% chance you’ve got Justice Department lawyers helping you out.
That’s according to preliminary data compiled by researchers at George Mason University, who studied more than 500 criminal settlements between the Justice Department and public companies between 1984 and 2011. The data, which will be refined and released in a report in early 2015, shows that the Justice Department has drastically increased its use of non-prosecution (NPA) and deferred prosecution agreements (DPA) since 2003.
NPAs and DPAs are agreements between prosecutors at the Justice Department and corporations in which the DOJ grants amnesty from criminal conviction in return for the defendant agreeing to a set of requirements, which range from the payment of fines to submitting to new regulations and the creation of new business plans. ...
Copland points to examples where such agreements have resulted in corporate monitors firing executives and board members and changing sales and marketing plans. He argues that these agreements have led to the creation of a “shadow regulatory state” that has not been sanctioned by Congress or, in some cases, even reviewed by a judge.
If the government is going to persist in using NPAs and DPAs as a de facto substitute for regulation, then the government should be forced to ensure that these agreements are subject to the same transparency, public participation, and cost benefit analysis as regulations.
In my seminar on Catholic Social Thought (CST) and the Law tonight’s discussion focuses on usury. Why does the Church oppose usury? What is the current teaching on usury? What is usury? Has the Church’s definition of usury and/or its position on usury changed over time? If so, what does that mean for other Church teachings?
Modern American law defines usury using a four factor test: “1) A loan, express or implied. 2) An understanding between the parties that the money loaned must be repaid. 3) In consideration of the loan, a greater rate of interest than is allowed by law is paid or agreed to be paid by the borrower. 4) A corrupt intent to take more than the legal rate for the use of the money loaned.” Kraft v. Mason, 668 So. 2d 679 (Fla. Dist. Ct. App. 1996).
How well does that definition map to CST’s understanding of usury?
Our discussion is bookended by statements from two Popes named Benedict. First, Vix Pervenit (On Usury and Other Dishonest Profit) by Pope Benedict XIV, issued in 1745. Second, Pope Benedict XVI’s Encyclical Letter Caritas in Veritate (Charity in Truth), which was issued in 2009.
Candidly, I find neither to be very helpful at first glance. Benedict XIV, for example, wrote that “it is essential for these people, also, to avoid extremes, which are always evil. For instance, there are some who judge these matters with such severity that they hold any profit derived from money to be illegal and usurious; in contrast to them, there are some so indulgent and so remiss that they hold any gain whatsoever to be free of usury.”
The implication that not all investment profit is usurious is seemingly confirmed by Benedict’s further statement that:
“We do not deny that at times together with the loan contract certain other titles-which are not at all intrinsic to the contract-may run parallel with it. From these other titles, entirely just and legitimate reasons arise to demand something over and above the amount due on the contract. Nor is it denied that it is very often possible for someone, by means of contracts differing entirely from loans, to spend and invest money legitimately either to provide oneself with an annual income or to engage in legitimate trade and business. From these types of contracts honest gain may be made.”
Likewise, Benedict XVI was careful to draw a distinction between microcredit (of which he approved) and usury (which he condemned):
“The weakest members of society should be helped to defend themselves against usury, just as poor peoples should be helped to derive real benefit from micro-credit, in order to discourage the exploitation that is possible in these two areas.”
But where then is the line between what is licit and what is not? (Or, as one of my students asked, is this ambiguity a feature or a bug?)
In An Essay on Mediaeval Economic Teaching (1920), George O’Brien explains that the origins of CST’s position on usury can be traced far back even into Scripture, but that it was Saint Thomas “Aquinas who really put the teaching on usury upon the new foundation, which was destined to support it for so many hundred years, and which even at the present day appeals to many sympathetic and impartial inquirers.” O’Brien quotes Aquinas at some length:
“… we must observe that there are certain things the use of which consists in their consumption; thus we consume wine when we use it for drink, and we consume wheat when we use it for food. Wherefore in such-like things the use of the thing must not be reckoned apart from the thing itself, and whoever is granted the use of the thing is granted the thing itself; and for this reason to lend things of this kind is to transfer the ownership. Accordingly, if a man wanted to sell wine separately from the use of the wine, he would be selling the same thing twice, or he would be selling what does not exist, wherefore he would evidently commit a sin of injustice. In like manner he commits an injustice who lends wine or wheat, and asks for double payment, viz. one, the return of the thing in equal measure, the other, the price of the use, which is called usury.
“On the other hand, there are other things the use of which does not consist in their consumption; thus to use a house is to dwell in it, not to destroy it. Wherefore in such things both may be granted; for instance, one man may hand over to another the ownership of his house, while reserving to himself the use of it for a time, or, vice versa, he may grant the use of a house while retaining the ownership. For this reason a man may lawfully make a charge for the use of his house, and, besides this, revendicate [i.e., “to bring action under civil law to enforce rights in specific property whether corporeal or incorporeal or movable or immovable’] the house from the person to whom he has granted its use, as happens in renting and letting a house.
“But money, according to the philosopher, was invented chiefly for the purpose of exchange; and consequently the proper and principal use of money is its consumption or alienation, whereby it is sunk in exchange. Hence it is by its very nature unlawful to take payment for the use of money lent, which payment is known as usury; and, just as a man is bound to restore other ill-gotten goods, so he is bound to restore the money which he has taken in usury.”
Aquinas’ analysis rests on the proposition that a loan for consumption—a so-called contract of mutuum in Roman law—is a sale. In turn, Aquinas reasoned, the essential moral and ethical requirement in any sale was “the fixing of a just price.” Because the contract of mutuum “was nothing else than a sale of fungibles,” “the just price in such a contract was the return of fungibles of the same value as those lent.” Finally, a loan of money was deemed to be a loan for consumption of the money. Accordingly, one who lent money was entitled to nothing more than “the return of the same amount of money.” O’Brien thus concludes:
“The scholastic teaching … on the subject was quite plain and unambiguous. Usury, or the payment of a price for the use of a sum lent in addition to the repayment of the sum itself, was in all cases prohibited. The fact that the payment demanded was moderate was irrelevant; there could be no question of the reasonableness of the amount of an essentially unjust payment. Nor was the payment of usury rendered just because the loan was for a productive purpose--in other words, a commercial loan.”
This would seem to render the entire edifice of modern finance morally indefensible. As one of my students noted: “When credit cards, consumer credit, student loans, home mortgages, and car payments run virtually everyone’s lives, who seriously considers what it would mean for the charging of interest to be potentially immoral, at least as usury was understood biblical and in ancient and medieval Church doctrine?”
We turn then to Judge John T. Noonan’s book A Church that Can and Cannot Change: The Development of Catholic Moral Teaching. According to Wikipedia:
“John Thomas Noonan, Jr. (born October 24, 1926) is a Senior United States federal judge on the United States Court of Appeals for the Ninth Circuit, with chambers in San Francisco, California. … Noonan was the 1984 recipient of the Laetare Medal, awarded annually since 1883 by Notre Dame University in recognition of outstanding service to the Roman Catholic Church through a distinctively Catholic contribution in the recipient's profession. Noonan has served as a consultant for several agencies in the Catholic Church, including Pope Paul VI’s Commission on Problems of the Family, and the U.S. Catholic Conference’s committees on moral values, law and public policy, law and life issues. He also has been director of the National Right to Life Committee.”
There is no doubt that Noonan is a brilliant lawyer and a devout Catholic. Yet, his view of Church history has been controversial. In its review of Noonan’s book, the NY Times wrote:
“Noonan drives home the point that some Catholic moral doctrines have changed radically. History, he concludes, does not support the comforting notion that the church simply elaborates on or expands previous teachings without contradicting them.”
In contrast, Avery Cardinal Dulles warned in a review of Noonan’s book published in First Things “that Noonan manipulates the evidence to make it seem to favor his own preconceived conclusions. For some reason, he is intent on finding ‘discontinuity’ but he fails to establish that the Church has reversed her teaching in any of the four areas he examines.” So we proceed with the proverbial grain of salt close at hand.
Noonan starts by drawing the reader’s attention to the Parable of the Talents. The power of teaching by parables is that the audience accepts the secular analogy as obviously correct. When the master praises the two servants who doubled the sums they had been given and condemns the one who simply buried (unproductively) the sum he had been given, the import was that earning a return by productively investing money was legitimate. Indeed, the point is rammed home when the master tells the bad servant that, at the bare minimum, he should have taken the talent to the moneylenders to be lent out for a return.
Yet, Noonan cautions that there are aspects of the parable that implicate ancient Hebrew teachings on usury. (The Old Testament contains many injunctions against usury. See William M. Woodyard & Chad G. Marzen, Is Greed Good? A Catholic Perspective on Modern Usury, 27 BYU J. Pub. L. 185, 192 (2012).) In addition, of course, the other famous Gospel passage in which money changers” appear is that in which Jesus drives them from the Temple, which would seem to condemn money lending. Yet, here again, Noonan is cautious, suggesting that “money changers” may not have been bankers.
Instead, Noonan identifies the key Gospel passage as being Luke 6:35:
“…love your enemies and do good to them, and lend expecting nothing back; then your reward will be great and you will be children of the Most High, for he himself is kind to the ungrateful and the wicked.”
The Church’s teaching on usury, Noonan argues, springs from the phrase “expecting nothing back.” The Early Church Fathers saw this passage as a “fulfillment of Mosaic law by way of expansion; the Christians were to love their enemies and to lend without seeking any benefit.” The Fathers thus refused to acknowledge a distinction between a creditor taking interest where the borrower made a profit from the use to which the loan proceeds were put and a creditor taking interest where the borrower used the loan proceeds to buy food to survive.
Personally, I find that distinction a valid one. The Church teaches that there is a preferential option for the poor. The relevant consideration in assessing the morality of lending thus might not be the paying and receiving of interest, but rather the impact of various lending practices on the poor. Put another way, as one of my students argued, the problem is when “a financially stronger party is exploiting a financially weaker or less financially knowledgeable party to an extent which can be said to be morally unjust.” (Note that Benedict XVI’s distinction between usury and beneficial micro-credit might be seen as reflecting this distinction. Note also the discussion below in which Cardinal Dulles embraces this distinction.)
In any case, Noonan argues that during the Middle Ages and continuing right up until the middle of the 1800s the Church’s canon lawyers developed a complex set of rules under which, for example, it was licit for a capitalist to invest money in a partnership (societas) with the expectation of earning a profit.[*] Eventually the exceptions swallowed the rule.
All of which leads us to the $64 question: If Noonan is right about usury, does that mean the entire Magisterium is up for grabs? But that is also a question for a another day.
Returning to the narrower question of usury, Avery Cardinal Dulles does not dispute Noonan’s presentation of “the interplay between moral teaching and the emergence of new economic systems.” but Cardinal Dulles argues that there was no “reversal of the original teaching but rather a nuancing of it.”
“The biblical strictures on usury were evidently motivated by a concern to prevent the rich from exploiting the destitution of the poor. But when capitalists of early modern times began to supply funds for ventures of industry and commerce, the situation became different. Moralists gradually learned to place limits on the ancient prohibition, so as to allow lenders fair compensation for the time and expenses of the banking business, the risks of loss, and the lenders’ inability to use for their own advantage what they had loaned out to others.
“These concessions do not seem to me to be a reversal of the original teaching but rather a nuancing of it. The development, while real, may be seen as homogeneous. In view of the changed economic system the magisterium clarified rather than overturned its previous teaching. Catholic moral teaching, like contemporary criminal law, still condemns usury in the sense of the exaction of unjust or exorbitant interest.”[†]
In this telling, as Woodyard and Marzen note, the key insight was that usury “was not defined as taking interest on a loan, but rather the acquiring of gain and profit in the situation where one did not undertake any effort or incur any expense or risk.” This definition allowed the development of modern finance once theologians and canon lawyers recognized that “most banks and commercial entities undertook some amount of risk in lending money in the era of Renaissance commerce.”
What then are we to make of Benedict VXI’s seeming revival of the condemnation of usury? Woodyard and Marzen argue that Benedict’s major point in fact was that:
“… in today's modern economic world, regulation of the financial industry is essential to protect the weakest and most vulnerable in society. It is, in essence, a reaffirmation of contemporary Catholic teaching of the preferential option for the poor, which dictates that the greatest of care must be taken for the most vulnerable in society.”
Note, however, that this does not mean one must embrace Elizabeth Warren’s view of financial regulation. Recall that, insofar as prudential judgments about the economy are concerned, Pope John Paul II emphasized that the “church has no models to present.” (Centesimus Annus ¶ 13) As the Catechism (¶ 899) thus teaches, the Church especially encourages lay initiative “when the matter involves discovering or inventing the means for permeating social, political, and economic realities with the demands of Christian doctrine and life.” There thus is a space in which those of us who are both Christians and fans of free markets may work to develop regulatory schemes that optimally protect the poor and stimulate economic growth and vitality.
I thus do not read Caritas in Veritate as changing our understanding of usury as being focused on excessive interest rates, especially “the acquiring of gain and profit in the situation where one did not undertake any effort or incur any expense or risk.”
The problem in operationalizing that insight, of course, is the difficulty of determining what is an “excessive” rate:
“When contracts appear to have very high price terms, a court could determine only with great difficulty whether the high price is due to market power or fluctuations in the costs of inputs. A high interest rate, for example, could result from the creditor's judgment about the risk of default posed by a particular debtor, and generally courts should defer to such judgments. A determination that the creditor has market power requires an evaluation of the structure of the market, a notoriously difficult enterprise usually reserved for antitrust litigation. A seller or creditor with temporary market power as a result of a patent, or some innovation that other market participants have not had a chance to imitate, should (arguably) be permitted to reap above-market returns, for that is how innovation is encouraged in a market economy.
“When contracts appear to have harsh nonprice terms, there is another reason for thinking that these terms are unobjectionable. Even if the seller or creditor has market power, it has the right incentive to supply the terms that parties desire. For example, a debtor might be willing to consent to a harsh remedial term in return for a low interest rate.”
Eric A. Posner, Economic Analysis of Contract Law After Three Decades: Success or Failure?, 112 Yale L.J. 829, 843 (2003).
Given that reality, as one of my students asked, “What can be gained by continuing to talk about usury and how it should influence individual moral decisions, even when it will only have a marginal influence on the broader society?” His answer was that “it may lead individuals as Christians to approach their business affairs with more a grain of salt, shattering what is all too often a complacency with which Christians engage in the affairs of the world and the assumptions the demands of justice do not conflict with our behaviors as workers, business people, and consumers in a capitalist economy.” He also noted that “A return to a traditional understanding on usury might provide an impetus to restore Catholic charitable civic institutions, which can provide a more Christian alternative to the corrupt institutions of a secular society.” Indeed.
[*] One of my students argued that:
The principal practical difference between a loan and an investment into a capitalist venture is the parties who are likely to be involved in such transactions. The parties making and receiving the investment are almost certainly to be relatively sophisticated businessman with some degree of financial literacy. Additionally, those investing in a business or seeking an investment are more likely to have the financial means so that the loss of an investment will not result in abject poverty.
If find that a plausible justification for the distinction, but I am not sure that that is how the Church justified the difference. In the passage from Aquinas quoted above, for example, we see a distinction being drawn between a loan—which is regarded as a transfer of ownership of the money in question—and a temporary lease of a house—in which ownership does not change hands. “For this reason a man may lawfully make a charge for the use of his house, and, besides this, revendicate the house from the person to whom he has granted its use, as happens in renting and letting a house.”
[†] This understanding of usury as the “exaction of … exorbinant interest” may also be reflected in Pope Leo XIII’s condemnation of “Rapacious usury” in Rerum Novarum (1891). As has been noted elsewhere, “To condemn ‘rapacious usury’ is perhaps to indicate that there may be usury that is not ‘rapacious.’ Perhaps, given new economic conditions, there could be interest rates on loans that are not motivated by greed or excess.” The same commentator further notes that:
Leo XIII gives a clearer idea later on in the encyclical about what he might mean by rapacious usury: "The rich must religiously refrain from cutting down the workman's earnings… by usurious dealing." In this paragraph, he lays down the principle that makes usury evil. He writes, "To make one's profit out of the need of another, is condemned by all laws, human and divine.” He makes clear that rich employers must refrain from "usurious dealing" against their poor workers "because the poor man is weak and unprotected, and because his slender means should be sacred in proportion to their scantiness." Usury, then, is an evil because it deprives the poor of even the little they have earned – thus keeping them poor and beholden to their creditors. The poor must be given aid and opportunity to overcome their poverty, not loans designed to keep them bereft even of the little they could otherwise accumulate. The Church always opposed usury due to its tendency to oppress the poor.
Pope Leo XIII thus appears to be articulating a version of the distinction I advanced above between a creditor taking interest where the borrower made a profit from the use to which the loan proceeds were put and, for example, a creditor taking interest where the borrower used the loan proceeds to buy food to survive.
Lawrence Trautman has posted Present at the Creation: Reflections on the Early Years of the National Association of Corporate Directors (July 21, 2014). Available at SSRN: http://ssrn.com/abstract=2296427:
Abstract: Effective corporate governance is critical to the productive operation of the global economy and preservation of our way of life. Excellent governance execution is also required to achieve economic growth and robust job creation in any country. In the United States, the premier director membership organization is the National Association of Corporate Directors (NACD). Since 1978, NACD plays a major role in fostering excellence in corporate governance in the United States and beyond.The NACD has grown from a mere realization of the importance of corporate governance to become the only national membership organization created by and for corporate directors. With a membership in excess of 14,000, today’s NACD is a reliable source of essential resources that assist board directors in strengthening board leadership. Now a member of the Global Network of Director Institutions (GNDI.org), NACD has worldwide impact. Even during the early years, NACD was a significant source of quality education and qualified directors to companies striving to achieve excellence in corporate governance.
My interest in corporate governance covers more than thirty years. During my career, I have found the job of the corporate director both fulfilling and intellectually challenging. My involvement with the NACD dates back to 1978. At that time the Washington, DC-based organization was in its infancy; just a few months old. During NACD’s early months, I was a 28 year-old entrepreneur, serving as chairman and CEO of a Washington, DC-based financial services start-up. I needed to learn about corporate governance and recruit a board of directors capable of governing a national financial services entity, while communicating to the investor community that we were deserving of their support as we contemplated our initial public offering.
NACD’s focus has changed over the years to reflect those issues receiving the most attention in corporate boardrooms at any given time. The Foreign Corrupt Practices Act, signed into law December 19, 1977, was a major development confronting directors as NACD was founded. Next, the SEC’s Advisory Committee on Corporate Disclosure, chaired by A.A. Sommer, held hearings focusing attention on the broad topic of corporate governance and served to highlight the need for increased professionalism by corporate directors. The 1985 decision in Smith v. Van Gorkom held that directors who make an uninformed decision are unprotected by the business judgment rule and, accordingly, face substantial personal liability exposure. Van Gorkom triggered a huge demand for director education. Focus on the need for effective audit committees resulted from the National Commission on Fraudulent Financial Reporting of 1987 (the “Treadway Commission”).
NACD has also proven to be a great source of directors over the years for my involvement with early-stage companies. Experienced senior executive talent, in the form of independent outside board members, can prove to be a profoundly valuable intangible asset of any start-up enterprise. A lifetime of experience teaches that entrepreneurs may enhance the likelihood of ultimate enterprise success by recruiting the assistance of experienced executive talent. Corporate directors provide a useful mechanism in which to tap this asset and leverage many years of experience and personal relationships.
This article discusses the growth of the New York and Baltimore/Washington, DC NACD chapters during these early days, especially at the local level. NACD’s primary strength is found in its local chapter system; these are the “grass roots” that make governance a viable field.
The NACD is a very important and effective organization, so Trautman's account was quite interesting.
My thanks to Daniel Sokol for calling this paper to my attention:
Is There a Vatican School for Competition Policy? - Tihamer Toth (Competition Law Research Centre, Hungary ; Peter Pazmany Catholic University - Faculty of Law)
ABSTRACT: This paper examines whether the Catholic Church’s social teaching has something to tell to antitrust scholars and masters of competition policy. Although papal encyclical letters and other documents are not meant to provide an analytical framework giving clear answers to complex competition questions, this does not mean that these thoughts cannot benefit businessmen, scholars and policy makers. The Vatican teaching helps us remember that business and morality do not belong to two different worlds and that markets should serve the whole Man. It acknowledges the positive role of free markets, the exercise of economic freedom being an important part of human dignity, yet warns that competition can be preserved only if it is curbed both by moral and statutory rules. It is certainly not easy to find a balance between the commandments to ‘love your neighbor’ and ‘you shall not collect treasure on earth.’ I argue that market conduct that undermines business virtues should be prohibited, either by antitrust or other forms of self- or government-regulation.
At a Democratic rally in Massachusetts, Hillary Clinton’s attempt to attack “trickle-down economics,” resulted in a spectacularly odd statement.
Clinton defended raising the minimum wage saying “Don’t let anybody tell you that raising the minimum wage will kill jobs, they always say that.”
She went on to state that businesses and corporations are not the job creators of America. “Don’t let anybody tell you that it’s corporations and businesses that create jobs,” the former Secretary of State said.
WTF? Who does she think creates jobs? Who does she think does?
Even the liberal-leaning Washington Post managed to get this one right:
It makes for a less popular stump speech, but large firms are a vital player when it comes to job creation. Over the past two decades, for example, small and mid-sized businesses have held a larger share of the country’s overall employment (29 percent and 27 percent, respectively) than they have of total jobs added (16 percent and 19 percent). During the same period, companies with more than 500 workers employed about 45 percent of the workforce yet contributed 65 percent of the jobs created since 1990.
In other words, not only do corporations create jobs, the biggest ones are the best at doing so.
So once again, Hillary lied. Why am I not surprised?
Kevin Drum poses the titular question, noting that:
We all learned recently that sandwich shop Jimmy John's forces its workers to sign a noncompete agreement before they're hired. This has prompted a lengthy round of blogospheric mockery, and rightfully so. But here's the most interesting question about this whole affair: What's the point?
Laws vary from state to state, but generally speaking a noncompete agreement can't be required just for the hell of it. It has to protect trade secrets or critical business interests. The former makes them common in the software business, and the latter makes them common in businesses where clients become attached to specific employees (doctors, lawyers, agents) who are likely to take them with them if they move to a new practice. But none of this seems to apply to a sandwich shop.
Indeed. There is general agreement that "when you seek to enforce [a] boilerplate noncompete, will a Virginia court uphold the agreement? Probably not." Hillary J. Collyer, FAIRFAX COURT ISSUES SPLIT DECISION ON EMPLOYMENT CONTRACT, 22 No. 10 Va. Emp. L. Letter 2 (2010). Indeed, that can be true even in industries like IT where noncompetes can make sense.
As a result, the usual advice is that one "should not use the same 'boilerplate' noncompete agreement for everyone. For example, with respect to key employees, the agreement should be drafted to reflect that employee's individual job duties and circumstances." William G. Porter II & Michael C. Griffaton, Using Noncompete Agreements to Protect Legitimate Business Interests, 69 Def. Couns. J. 194, 199 (2002).
So why bother? Cynthia Estlund explains that:
Even a manifestly invalid non-compete may have in terrorem value against an employee without counsel. Some employers insert non-compete covenants as near-boilerplate in employment agreements for a wide variety of positions, with little regard to the particulars of the position or to whether employees are privy to protectible information. As far as the law is concerned, employers risk nothing with that sort of overreaching (though the market might sometimes exact a price), and they might succeed in keeping employees from leaving and moving to competitors when they are entitled to do so.
Cynthia L. Estlund, Between Rights and Contract: Arbitration Agreements and Non-Compete Covenants As A Hybrid Form of Employment Law, 155 U. Pa. L. Rev. 379, 423 (2006). She also notes (fn. 32) that "I recently heard of two law students who were required to sign non-compete agreements in pre-law-school jobs (not as high-level executives!). They did so either reluctantly or with little thought because they wanted the jobs, and then later felt compelled to reject attractive job opportunities that they feared might violate the terms of the non-compete agreement."
In sum, my guess is that somebody at Jimmy Johns figured "it can't hurt, it won't cost anything, and there might be some cases where it'll deter employees for leaving for a better paying job." Whether that is desirable and/or sensible is a question I'll leave for the reader.
Back in the May 2014 Stanford Law Review Todd Henderson and I published an article entitled Boards R Us: Reconceptualizing Corporate Boards, which argued that:
State corporate law requires that “natural persons” provide director services. This Article puts this obligation to scrutiny, and concludes that there are significant gains that could be realized by permitting firms (be they partnerships, corporations, or other business entities) to provide board services. We call these firms “board service providers” (BSPs). We argue that hiring a BSP to provide board services instead of a loose group of sole proprietorships will increase board accountability, both from markets and from courts. The potential economies of scale and scope in the board services industry (including vertical integration of consultants and other board member support functions), as well as the benefits of risk pooling and talent allocation, mean that large professional director services firms may arise, and thereby create a market for corporate governance distinct from the market for corporate control. More transparency about board performance, including better pricing of governance by the market, as well as increased reputational assets at stake in board decisions, means improved corporate governance, all else being equal. But our goal in this Article is not necessarily to increase shareholder control over firms; we show how a firm providing board services could be used to increase managerial power as well. This shows the neutrality of our proposed reform, which can therefore be thought of as a reconceptualization of what a board is rather than a claim about the optimal locus of corporate power.
Maybe we should have patented this as a business process, because it looks like people are taking it seriously. There's an outfit called Integral Board Group, for example, which is now offering BSP-lioke services:
Think of a board made up only of independent directors (acting somewhat as consultants / advisors) all working under a single contract, from a single service provider (vendor) and bound to performance. Sounds like a simple concept to grasp, however, it is truly a new approach - one that should not to be confused with companies that provide executive staffing, individual board advisors, executive coaching or stand-alone independent directors. The holistic approach of a cohesive and collectively-accountable team, directly tied to a client company's performance and bottom line, is not present in these models. It is present, however, in the BSP model along with much needed transparency as well as performance-based metrics. When describing our service to clients we like to say we are an "all or nothing" model - you either get the core board team in its entirety or you get no one. This is due to the belief that it is the collective board's experience, constructive interaction and diverse industry backgrounds that elevates the mission. Additionally, a 'bench' of expert advisors supplements the board team expanding its effectiveness well beyond just the core board members in this type of outsourced model. As I discussed in a previous article, add the element of an elevated 'behavioral predisposition' to the existing 'intellectual capital' of the board team and you have an even more incredible company leadership asset. In essence, the board becomes greater than the sum of its parts.
But didn't the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010 take care of most board-related issues? Hardly. An article in The Economist summarizes "In the May edition of the Stanford Law Review Stephen Bainbridge of the University of California, Los Angeles, and Todd Henderson of the University of Chicago offer a proposal for fixing boards that goes beyond tinkering: replace individual directors with professional-services firms. Companies, they point out, would never buy legal services or management advice from people only willing to spare a few hours a month. Why do they put up with the same arrangement from board members? They argue for the creation of a new category of professional firms: BSPs or Board Service Providers. Companies would hire a company to provide it with 'board services' in the same way that it hires law firms or management consultants. The BSP would not only supply the company with a full complement of board members. It would also furnish it with its collective expertise, from the ability to process huge quantities of information to specialist advice on things such as mergers."
As I understand it, they're currently focused on privately held companies. Even so, it's an interesting development.
An article at Chief Executive on How to “Rightsize” Your Board has attracted some attention on several of the Linkedin corporate governance groups I follow. Curiously, while the article opines that "boards must be the right size for their charge," it fails to propose an optimal number. Instead, it ticks of a checklist of 7 considerations to be taken into account in determining whether a specific board is the right size. It's all pretty vague IMHO.
In fairness, however, getting a handle on the optimal size for a board of directors is very hard. In my article Why a Board? Group Decision Making in Corporate Governance, I review the relevant legal, psychological, economic, and sociological literature to conclude that:
Corporate statutes historically required that boards consist of at least three members who had to be shareholders of the corporation and, under some statutes, residents of the state of incorporation. Today these requirements have largely disappeared. DGCL Section 141(b) authorizes boards to have one or more members and mandates no qualifications for board membership. MBCA Sections 8.02 and 8.03 are comparable. As a default rule, allowing single member boards probably makes some sense. It gives promoters maximum flexibility, while allowing the creation of multi-member boards at low cost. In light of the apparent advantages of group decision making, however, it is hardly surprising that multi-member boards are the norm for corporations of any significant size. To be sure, board sizes vary widely. A 1999 survey found that slightly less than half had 7 to 9 members, with the remaining boards scattered evenly on either side of that range.
Is there an optimal board size? It is mildly puzzling that the literature on group decision making has not paid more attention to questions of group size. Studies in which group size is an experimental variable are rare; worse yet, many studies of other variables fail even to hold group size constant. The principal exceptions are studies of optimal jury size. Unfortunately, those studies are inconclusive at best.
As for studies of board size in particular, one meta-analysis found a statistically significant correlation between increased board size and improved financial performance. Given the potential influence of moderating variables, however, it does not seem safe to draw firm conclusions from that survey. Other studies, moreover, are to the contrary.
Here then is an opportunity for further research. In theory, a number of factors favor large boards. Larger boards may facilitate the board’s resource-gathering function. More directors will usually translate into more interlocking relationships with other organizations that may be useful in providing resources, such as customers, clients, credit, and supplies. Board interlocks may be especially helpful with respect to formation of strategic alliances. Firms considering a joint venture need access to credible information about the competencies and reliability of prospective partners. Almost by definition, however, this information is asymmetrically held and subject to strategic behavior. Interlocks between prospective partners provide both access to such information and, by analogy to hostage taking, a credible bond of the information’s accuracy.
Larger boards with diverse interlocks are also likely to include a greater number of specialists—such as investment bankers or attorneys. This is relevant not only to the board’s resource gathering function, but also to its monitoring and service functions. Complex business decisions require knowledge in such areas as accounting, finance, management, and law. Providing access to such knowledge can be seen as part of the board’s resource gathering function. Board members may either possess such knowledge themselves or have access to credible external sources who do. This hypothesis is consistent with the new institutional economics view of specialists. In that model, specialization is a rational response to bounded rationality. The expert in a field makes the most of his or her limited capacity to absorb and master information by limiting the amount of information that must be processed through limiting the breadth of the field in which the expert specializes. As applied to the corporate context, larger, more diverse boards likely contain more specialists, and therefore should get the benefit of specialization. In addition, with reference to the debate over the best member hypothesis, specialization is a way for the group to identify the superior decision maker with respect to specific issues.
On the other hand, a number of considerations suggest that small boards may be preferable. Large boards will be contentious and fragmented, which reduces their ability to collectively monitor and discipline senior management. In such cases, the senior managers can affirmatively take advantage of the board through “coalition building, selective channeling of information, and dividing and conquering.”
The social loafing phenomena also suggests an upper limit on efficient group size. As group size grows, for example, the number of non-participants (loafers) likely increases. Conversely, larger boards may inhibit the formation of the sorts of close-knit relationships by which groups constrain agency costs.
 MBCA § 8.03(a) cmt.
 National Association of Corporate Directors, Public Company Governance Survey 1999-2000 7 (Oct. 2000) (44 percent between 7 and 9).
 Davis, supra note 98, at 16.
 Id. at 18-21 (summarizing studies).
 Dan R. Dalton, Number of Directors and Financial Performance: A Meta-Analysis, 42 Acad. Mgmt. J. 674, 676 (1999).
 See, e.g., Theodore Eisenberg et al., Larger Board Size and Decreasing Firm Value in Small Firms, 48 J. Fin. Econ. 35 (1998) (finding a significant negative correlation between board size and firm profitability in small and medium Finnish firms); see generally Sanjai Bhagat and Bernard Black, The Uncertain Relationship Between Board Composition and Firm Performance, 54 Bus. Law. 921, 941-42 (1999) (summarizing studies).
 See Ranjay Gulati and James D. Westphal, Cooperative or Controlling? The Effects of CEO-board Relations and the Content of Interlocks on the Formation of Joint Ventures, 44 Admin. Sci. Q. 473 (1999).
 Note that, because their decisions are publicly observable, board members have a strong incentive to defer to expert opinion. Because even a good decision maker is subject to the proverbial “act of God,” the market for reputation evaluates decision makers by looking at both the outcome and the action before forming a judgment. If a bad outcome occurs, but the action was consistent with approved expert opinion, the hit to the decision maker’s reputation is reduced. In effect, by deferring to specialists, a decision maker operating under conditions of bounded rationality is buying insurance against a bad outcome.
In a collegial, multi-actor setting, the potential for log-rolling further encourages deference. A specialist in a given field is far more likely to have strong feelings about the outcome of a particular case than a non-expert. By deferring to the specialist, the non-expert may win the specialist’s vote in other cases as to which the non-expert has a stronger stake. Such log-rolling need not be explicit, although it doubtless is at least sometimes, but rather can be a form of the tit-for-tat cooperative game. In board decision making, deference thus invokes a norm of reciprocation that allows the non-expert to count on the specialist’s vote on other matters. This prediction is supported by findings with respect to group polarization, in which the majority coalition makes small concessions so as to trigger the norm of reciprocity. See Kerr, supra note 140, at 92 (noting the use of such norms).
The normative payoff of this insight is at least two-fold. First, insofar as board decision making itself is concerned, directors should consciously ask whether deference to specialists is appropriate in a particular instance. Second, it validates state statutes relating to board reliance on expert opinion. Under Delaware code § 141(e) directors are “fully protected in relying in good faith” on reports or opinions of external experts. The statute requires that the director reasonably believe the matters in question are within the expert’s professional competence and that the expert have been chosen with reasonable care. Case law suggests that this standard requires at least some inquiry into the basis of the expert’s opinion. See, e.g., Smith v. Van Gorkom, 488 A.2d 858, 874-75 (Del. 1985) (interpreting DGCL § 141(e)).
 Jeffrey A. Alexander et al., Leadership Instability in Hospitals: The Influence of Board-CEO Relations and Organizational Growth and Decline, 38 Admin. Sci. Q. 74, 79 (1993). On the other hand, some commentators contend that large boards provide more opportunities to create insurgent coalitions that constrain agency costs with respect to senior management. William Ocasio, Political Dynamics and the Circulation of Power: CEO Succession in U.S. Industrial Corporations, 1960-1990, 39 Admin. Sci. Q. 257, 291 (1994).
A post by Lissa L. Broome, Wells Fargo Professor of Banking Law and Director of the Center for Banking and Finance at the University of North Carolina School of Law, John M. Conley, William Rand Kenan Jr. Professor of Law at the University of North Carolina School of Law, and Kimberly Krawiec, Kathrine Robinson Everett Professor Law at Duke University Law School, at CLS Blue Sky blog reports results of their research:
Our overall conclusion is that, while everyone we have spoken to endorses diversity in the abstract, very few have been able to tell us why it matters. In fact, pushing the topic has yielded difficult and sometimes uncomfortable conversations. ...
As we discuss at length in other published work, there are numerous tensions in directors’ accounts of race and gender in the boardroom. In this essay, we discuss what we view as the central tension in our respondents’ views on corporate board diversity – their overwhelmingly enthusiastic support of board diversity coupled with an inability to articulate coherent accounts of board diversity benefits that might rationalize that enthusiasm. ...
While conversations about diversity in the boardroom may be fraught with ambiguity, the numbers are not: the corporate boardroom remains an overwhelmingly white, male club.
But apparently nobody can explain why that's a bad thing.
Larry Cunningham has posted an excerpt from his new book Berkshire Beyond Buffett: The Enduring Value of Values:
The following is an excerpt from Chapter 8, Autonomy, from Berkshire Beyond Buffett: The Enduring Value of Values the full text of the chapter, which considers the case for Berkshire’s distinctive trust-based model of corporate governance, can be downloaded free from SSRN here.
Or you could just buy the book and support this blog at the same time: