SCOTUS Blog reports that:
Two of the cases [on which the Court granted cert] –Sebelius v. Hobby Lobby Stores, Inc., and Conestoga Wood Specialties Store v. Sebelius – were consolidated for one hour of oral argument, during which the Court will consider challenges to the Affordable Care Act’s requirement that employers provide their employees with health insurance that includes access to birth control. ... Lyle covered all four grants for this blog yesterday; Matthew Porny did the same for JURIST. Coverage focused on the grants in the contraceptive mandate cases came from Nina Totenberg of NPR, Jess Bravin of The Wall Street Journal, Bill Mears of CNN, and Richard Wolf of USA Today. In an op-ed for CNN, Elizabeth Wydra urges the Court to uphold the mandate, arguing that the lower courts’ decisions striking it down turn “first principles of religious freedom, as well as fundamental tenets of corporate law, on their head.” And at Federal Regulations Advisor, Leland Beck predicts that, although the Court “can reach the constitutional issue of whether Obamacare is inconsistent with the First Amendment,” the cases are “more likely to be decided on narrow regulatory and statutory grounds.”
Which seems to me to be a perfectly good reason for reminding folks that I have offer a different approach to the problem, which modesty prevents me from suggesting that the Supreme Court should adopt, in my article Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers, 16 Green Bag 2d 235 (2013):
Reverse veil piercing (RVP) is a corporate law doctrine pursuant to which a court disregards the corporation’s separate legal personality, allowing the shareholder to claim benefits otherwise available only to individuals. The thesis of this article is that RVP provides the correct analytical framework for vindicating certain constitutional rights.
Assume that sole proprietors with religious objections to abortion or contraception are protected by the free exercise clause of the First Amendment and the Religious Freedom Restoration Act (RFRA) from being obliged to comply with the government mandate that employers provide employees with health care plans that cover sterilizations, contraceptives and abortion-inducing drugs. Further assume that incorporated employers are not so protected. This article analyzes whether the shareholders of such employers can invoke RVP so as to vindicate their rights.
At least one court has recognized the potential for using RVP in the mandate cases, opining that these cases “pose difficult questions of first impression, including whether it is “possible to ‘pierce the veil’ and disregard the corporate form in this context.” The court further opined that that question, among others, merited “more deliberate investigation.” This article undertakes precisely that investigation.
Invoking RVP in the mandate cases would not be outcome determinative. Instead, it would simply provide a coherent doctrinal framework for determining whether the corporation is so intertwined with the religious beliefs of its shareholders that the corporation should be allowed standing to bring the case. Whatever demerits RVP may have, it provides a better solution than the courts’ current practice of deciding the issue by mere fiat.
Page 2, footnote 3 of Bhattacharya , Utpal, Insider Trading Controversies: A Literature Review (October 15, 2013). Available at SSRN: http://ssrn.com/abstract=2340518:
No brag, just fact.
The guilty plea hearing last week in the Justice Department’s prosecution of SAC Capital Advisors raised an interesting question about the law of insider trading: Just who are the victims of a violation? A provision of the federal securities laws gives those who traded at the same time as the insider a right to sue for a violation, but the Justice Department said they are not victims of the crime. ...
Instead, the focus in insider trading prosecutions is on protection of the markets, and the broader economy, as the true victim of the violation. In sentencing Raj Rajaratnam to 11 years in prison after his conviction, Federal District Court Judge Richard J. Holwell said that “insider trading is an assault on the free markets” and the “crimes reflect a virus in our business culture that needs to be eradicated.”
Yet the federal securities law sends a different message by authorizing those who traded at the time of the insider transactions to pursue a private lawsuit. The case filed by the Elan and Wyeth investors against SAC is under a little used provision,Section 20A of the Securities Exchange Act of 1934, that gives “contemporaneous traders” a right to sue those trading on inside information. ...
That creates an odd situation because investors on the opposite side of the transactions are provided a right to enforce the law but are not considered victims of the crime for purposes of whether to accept a plea agreement involving the same trades.
Insider trading is more about the unfairness of someone realizing benefits from unauthorized trading on confidential information than about identifying victims of the violation.
Sorry, but much of that analysis is wrong. To be sure, Henning is correct that individual investors are not the "victims" of insider trading. As I explain in Insider Trading: An Overview. Available at SSRN: http://ssrn.com/abstract=132529:
Insider trading is said to harm the investor in two principal ways. Some contend that the investor’s trades are made at the “wrong price.” A more sophisticated theory posits that the investor is induced to make a bad purchase or sale. Neither argument proves convincing on close examination.
An investor who trades in a security contemporaneously with insiders having access to material nonpublic information likely will allege injury in that he sold at the wrong price; i.e., a price that does not reflect the undisclosed information. If a firm’s stock currently sells at $10 per share, but after disclosure of the new information will sell at $15, a shareholder who sells at the current price thus will claim a $5 loss. The investor’s claim, however, is fundamentally flawed. It is purely fortuitous that an insider was on the other side of the transaction. The gain corresponding to shareholder’s “loss” is reaped not just by inside traders, but by all contemporaneous purchasers whether they had access to the undisclosed information or not. Bainbridge (1986, p.59).
To be sure, the investor might not have sold if he had had the same information as the insider, but even so the rules governing insider trading are not the source of his problem. The information asymmetry between insiders and public investors arises out of the federal securities laws’ mandatory disclosure rules, which allow firms to keep some information confidential even if it is material to investor decisionmaking. Unless immediate disclosure of material information is to be required, a step the law has been unwilling to take, there will always be winners and losers in this situation. Irrespective of whether insiders are permitted to inside trade or not, the investor will not have the same access to information as the insider. It makes little sense to claim that the shareholder is injured when his shares are bought by an insider, but not when they are bought by an outsider without access to information. To the extent the selling shareholder is injured, his injury thus is correctly attributed to the rules allowing corporate nondisclosure of material information, not to insider trading.
A more sophisticated argument is that the price effects of insider trading induce shareholders to make poorly advised transactions. In light of the evidence and theory recounted above in Section 6, however, it is doubtful whether insider trading produces the sort of price effects necessary to induce shareholders to trade. While derivatively informed trading can affect price, it functions slowly and sporadically. Gilson and Kraakman (1984, p.631). Given the inefficiency of derivatively informed trading, price or volume changes resulting from insider trading will only rarely be of sufficient magnitude to induce investors to trade.
Assuming for the sake of argument that insider trading produces noticeable price effects, however, and further assuming that some investors are misled by  those effects, the inducement argument is further flawed because many transactions would have taken place regardless of the price changes resulting from insider trading. Investors who would have traded irrespective of the presence of insiders in the market benefit from insider trading because they transacted at a price closer to the “correct” price; i.e., the price that would prevail if the information were disclosed. Dooley (1980, p.35-36); Manne (1966b, p.114). In any case, it is hard to tell how the inducement argument plays out when investors are examined as a class. For any given number who decide to sell because of a price rise, for example, another group of investors may decide to defer a planned sale in anticipation of further increases.
But the idea that a prohibition of insider trading is necessary to protect the markets is simply not true, as I explain in that article:
In the absence of a credible investor injury story, it is difficult to see why insider trading should undermine investor confidence in the integrity of the securities markets. As Bainbridge (1995, p.1241-42) observes, any anger investors feel over insider trading appears to arise mainly from envy of the insider’s greater access to information.
The loss of confidence argument is further undercut by the stock market’s performance since the insider trading scandals of the mid-1980s. The enormous publicity given those scandals put all investors on notice that insider trading is a common securities violation. If any investors believe that the SEC’s enforcement actions drove insider trading out of the markets, they are beyond mere legal help. At the same time, however, the years since the scandals have been one of the stock market’s most robust periods. One can but conclude that insider trading does not seriously threaten the confidence of investors in the securities markets.
Likewise, insider trading is simply not unfair. Granted, there seems to be a widely shared view that there is something inherently sleazy about insider trading. As a California state court put it, insider trading is “a manifestation of undue greed among the already well-to-do, worthy of legislative intervention if for no other reason than to send a message of censure on behalf of the American people.”
Given the draconian penalties associated with insider trading, however, vague and poorly articulated notions of fairness surely provide an insufficient justification for the prohibition. Can we identify a standard of reference by which to demonstrate that insider trading ought to be prohibited on fairness grounds? In my judgment, we cannot.
Fairness can be defined in various ways. Most of these definitions, however, collapse into the various efficiency-based rationales for prohibiting insider trading. We might define fairness as fidelity, for example, by which I mean the notion that an agent should not cheat her principal. But this argument only has traction if insider trading is in fact a form of cheating, which in turn depends on how we assign the property right to confidential corporate information. Alternatively, we might define fairness as equality of access to information, but this definition must be rejected in light of Chiarella’s rejection of the Texas Gulf Sulphur equal access standard. Finally, we might define fairness as a prohibition of injuring another. But such a definition justifies an insider trading prohibition only if insider trading injures investors, which seems unlikely for the reasons discussed in the next section. Accordingly, fairness concerns need not detain us further; instead, we can turn directly to the economic arguments against insider trading.
Instead, insider trading is a problem only to the extent that it involves theft of information:
There are essentially two ways of creating property rights in information: allow the owner to enter into transactions without disclosing the information or prohibit others from using the information. In effect, the federal insider trading prohibition vests a prop-erty right of the latter type in the party to whom the insider trader owes a fiduciary duty to refrain from self-dealing in confidential information. To be sure, at first blush, the in-sider trading prohibition admittedly does not look very much like most property rights. Enforcement of the insider trading prohibition admittedly differs rather dramatically from enforcement of, say, trespassing laws. The existence of property rights in a variety of in-tangibles, including information, however, is well-established. Trademarks, copyrights, and patents are but a few of the better known examples of this phenomenon. There are striking doctrinal parallels, moreover, between insider trading and these other types of property rights in information. Using another’s trade secret, for example, is actionable only if taking the trade secret involved a breach of fiduciary duty, misrepresentation, or theft. As Dooley (1995, p.776) observes, this is an apt summary of the law of insider trad-ing after the Supreme Court’s decisions in Chiarella and Dirks.
In context, moreover, even the insider trading prohibition’s enforcement mechanisms are not inconsistent with a property rights analysis. Where public policy argues for giving someone a property right, but the costs of enforcing such a right would be excessive, the state often uses its regulatory powers as a substitute for creating private property rights. Insider trading poses just such a situation. Private enforcement of the insider trading laws is rare and usually parasitic on public enforcement proceedings. Dooley (1980, p.15-17) . Indeed, the very nature of insider trading arguably makes public regulation essential pre-cisely because private enforcement is almost impossible. Bainbridge (1993, p.29) . The insider trading prohibition’s regulatory nature thus need not preclude a property rights-based analysis.
The rationale for prohibiting insider trading is precisely the same as that for prohibit-ing patent infringement or theft of trade secrets: protecting the economic incentive to produce socially valuable information. (An alternative approach is to ask whether the par-ties, if they had bargained over the issue, would have assigned the property right to the corporation or the inside trader. For a hypothetical bargain-based argument that the prop-erty right would be assigned to the corporation in the lawyer—corporate client context, see Bainbridge (1993, p. 27-34) .)
As the theory goes, the readily appropriable nature of information makes it difficult for the developer of a new idea to recoup the sunk costs incurred to develop it. If an in-ventor develops a better mousetrap, for example, he cannot profit on that invention with-out selling mousetraps and thereby making the new design available to potential competitors. Assuming both the inventor and his competitors incur roughly equivalent marginal costs to produce and market the trap, the competitors will be able to set a mar-ket price at which the inventor likely will be unable to earn a return on his sunk costs. Ex post, the rational inventor should ignore his sunk costs and go on producing the improved mousetrap. Ex ante, however, the inventor will anticipate that he will be unable to gener-ate positive returns on his up-front costs and therefore will be deterred from  devel-oping socially valuable information. Accordingly, society provides incentives for inventive activity by using the patent system to give inventors a property right in new ideas. By preventing competitors from appropriating the idea, the patent allows the inven-tor to charge monopolistic prices for the improved mousetrap, thereby recouping his sunk costs. Trademark, copyright, and trade secret law all are justified on similar grounds.
This argument does not provide as compelling a justification for the insider trading prohibition as it does for the patent system. A property right in information should be created when necessary to prevent conduct by which someone other than the developer of socially valuable information appropriates its value before the developer can recoup his sunk costs. Insider trading, however, often does not affect an idea’s value to the corpora-tion and probably never entirely eliminates its value. Legalizing insider trading thus would have a much smaller impact on the corporation’s incentive to develop new infor-mation than would, say, legalizing patent infringement.
The property rights approach nevertheless has considerable justificatory power. Con-sider the prototypical insider trading transaction, in which an insider trades in his em-ployer’s stock on the basis of information learned solely because of his position with the firm. There is no avoiding the necessity of assigning the property right to either the cor-poration or the inside trader. A rule allowing insider trading assigns the property right to the insider, while a rule prohibiting insider trading assigns it to the corporation.
From the corporation’s perspective, we have seen that legalizing insider trading would have a relatively small effect on the firm’s incentives to develop new information. In some cases, however, insider trading will harm the corporation’s interests and thus adversely affect its incentives in this regard. This argues for assigning the property right to the corporation, rather than the insider.
Those who rely on a property rights-based justification for regulating insider trading also observe that creation of a property right with respect to a particular asset typically is not dependent upon there being a measurable loss of value resulting from the asset’s use by someone else. Indeed, creation of a property right is appropriate even if any loss in value is entirely subjective, both because subjective valuations are difficult to measure for purposes of awarding damages and because the possible loss of subjective values pre-sumably would affect the corporation’s incentives to cause its agents to develop new in-formation. As with other property rights, the law therefore should simply assume (although the assumption will sometimes be wrong) that assigning the property right to agent-produced information to the firm maximizes the social incentives for the produc-tion of valuable new information.
 Because the relative rarity of cases in which harm occurs to the corporation weakens the argument for assigning it the property right, however, the critical issue may be whether one can justify assigning the property right to the insider. On close examina-tion, the argument for assigning the property right to the insider is considerably weaker than the argument for assigning it to the corporation. As we have seen, some have argued that legalized insider trading would be an appropriate compensation scheme. In other words, society might allow insiders to inside trade in order to give them greater incen-tives to develop new information. As we have also seen, however, this argument appears to founder on grounds that insider trading is an inefficient compensation scheme. Even assuming that the change in stock price that results once the information is released accu-rately measures the value of the innovation, the insider’s trading profits are not correlated to the value of the information. This is so because his trading profits are limited not by the value of the information, but by the amount of shares the insider can purchase, which in turn depends mainly upon his ex ante wealth or access to credit.
A second objection to the compensation argument is the difficulty of restricting trad-ing to those who produced the information. The costs of producing information normally are much greater than the costs of distributing it. Thus, many firm employees may trade on the information without having contributed to its production.
The third objection to insider trading as compensation is based on its contingent na-ture. If insider trading were legalized, the corporation would treat the right to inside trade as part of the manager’s compensation package. Because the manager’s trading returns cannot be measured ex ante, however, the corporation cannot ensure that the manager’s compensation is commensurate with the value of her services.
The economic theory of property rights in information thus cannot justify assigning the property right to insiders rather than to the corporation. Because there is no avoiding the necessity of assigning the property right to the information in question to one of the relevant parties, the argument for assigning it to the corporation therefore should prevail.
The argument in favor of assigning the property right to the corporation becomes even stronger when we move outside the prototypical situation to cases covered by the misappropriation theory. It is hard to imagine a plausible justification for assigning the property right to those who steal information.
My article Unocal at 20: Director Primacy in Corporate Takeovers, 31 Delaware Journal of Corporate Law 769 (2006), was reprinted in its entirety in I Law and Economics of Mergers and Acquisitions 449 (Steven M. Davidoff & Claire A. Hill eds. Edward Elgar Publishing 2013), along with many other fine (albeit lesser) articles. Granted, it's a bit pricey, but consider the priceless prose that would be at your disposal!
The Harvard Law School Forum on Corporate Governance and Finance published a short summary of my article Must Salmon Love Meinhard? Agape and Partnership Fiduciary Duties, which concludes:
So must Salmon love Meinhard? As I show in the essay, despite Cardozo’s inspiring rhetoric, the law clearly has said “no.” Agape is simultaneously too indeterminate and too demanding a standard to be suitable for business relationships.
Should Salmon love Meinhard? In the essay, I argue that the answer is “yes” (and vice-vice versa). My analysis of Cardozo’s rhetoric and the intent behind it suggests that agape has great instrumental value. Partners who love one another can trust one another. In turn, partners who trust one another will expend considerable less time and effort—and thus incur much lower costs—monitoring one another.
Agape thus should not be the law, but the law should promote agape as best practice.
The full essay is available for download here.
Justin Fox at HBR has an interesting analysis of the recent rash of insider trading cases, in the course of which he comments that:
... the insider trading prohibition has been elaborated through Supreme Court decisions and SEC orders in the U.S., and has spread to many other countries as well. It has also been the source of unending discussion and controversy among legal scholars. Just in the past few months, the Columbia Business Law Review has come out with an entire issue devoted to the topic (based on a symposium held at Columbia last fall), and Edward Elgar has published a 512-page Research Handbook on Insider Trading edited by UCLA Law Professor (and prolific blogger) Stephen Bainbridge.
I will not claim to have read all or even most of the contributions to these volumes (law professors write long), but just dipping into them is an educational if bewildering experience. (The Langevoort article cited above is from the Columbia Business Law Review; my brief history of insider trading law is partly cribbed from Bainbridge’s introduction to the Handbook.)
I contributed an article on the effect excessive and poorly chosen corporate and securities laws have on the viability of US business to a recent volume entitled The American Illness. The volume has now received a positive review from an English barrister named John Holbrook:
Against a litigious background on both sides of the Atlantic, it is refreshing to come across a collection of essays that puts the US legal system in the dock and subjects it to the sort of forensic analysis that lawyers usually reserve for others. The 20-plus contributors to The American Illness focus on the relationship between law and economics and ask whether and why the US legal system has contributed to the country’s long postwar decline. ...
Several authors draw attention to the harm that several decades of expanding liability is now causing the American economy. Whereas low levels of liability boost investments in novel technologies, product innovation is harmed at very high levels of liability. Nowadays, American consumers are effectively required to purchase product-liability insurance with everything they buy and producers have been turned into general insurers. This constitutes a deadweight cost that makes American producers less competitive in the international marketplace. Neither do consumers benefit because, apart from paying higher prices, the burdens imposed from a safety first-and-foremost regulatory framework reduces consumer choice.
The book’s strength is its compelling analysis of the relationship between law and economics. Too many lawyers, academic and practising, see law as a discipline to be understood on its own terms. Yet The American Illness makes clear that too many lawyers can be positively harmful for an economy. The recognition of the legal system as a means of making the economy work more efficiently is also welcome, not just because it is true but because it also raises this question: at what point does the legal system cease to be a force for good and become a force for harm?
When addressing this issue, the contributors demonstrate the need not just for an appreciation of economics and law, but also for an understanding of the overriding importance of politics. The argument that there can be an optimum number of lawyers per head of population is a technical approach to the issue that goes nowhere because it all depends what those lawyers do. Neither can it be right that increasing liability is merely a response to increasing wealth and consumer demand, as another contributor remarks. ...
By drawing attention to the significant economic harm that litigation is causing America, The American Illness is a welcome contribution to a debate that needs to be had. But if the safety first-and-foremost approach of legislators and judges is to end there needs to be a much wider debate about the political and moral values that fuel a blame-and-claim culture.
Kindly go read the whoile thing. Oh, and don't forget to buy the book.
In re Capital One Derivative Shareholder Litigation, --- F.Supp.2d ----, 2013 WL 3242685 at *16 n.25 (E.D. Va. 2013):
Although there is some force to the notion that it is always futile to ask directors to sue themselves, nonetheless settled Delaware law requires that this be done unless the pleadings show that the majority of the directors face a substantial likelihood of liability. The “substantial likelihood of liability” test strikes a balance between (1) the principle that ordinarily directors, not shareholders, are presumed to act in the best interest of the corporation and make decisions on behalf of the corporation and (2) the principle that shareholders should have a remedy when directors fail to act on behalf of a corporation. Should plaintiffs fail to re-plead successfully their assertion that demand would be futile, they will be required to make demand of Capital One's board of directors. Should the board decline to sue themselves after demand is made, plaintiffs may seek judicial review of the board's decision not to bring a suit, but the reviewing court will evaluate the decision in accordance with the business judgment rule. SeeSpiegel v. Buntrock, 571 A.2d 767, 776 (Del.1990) (citing Aronson, 473 A.2d at 813; Zapata Corp. v. Maldonado, 430 A.2d 779, 784 n. 10 (Del.1981)); See also Stephen Bainbridge, Corporate Law 211 (2nd ed. 2009).
Must Salmon Love Meinhard? Agape and Partnership Fiduciary Duties (October 8, 2013) is now available at SSRN: http://ssrn.com/abstract=2337659. It is to be presented at the Law and Love Conference, to be held at Pepperdine University School of Law, on February 7-8, 2014.
Jeffrie Murphy has noted that “John Rawls claimed that justice is the first virtue of social institutions,” but Murphy then went on to ask “what if we considered agape to be the first virtue? What would law then be like?” When I was asked to contribute a paper on business organization law to a conference organized around Murphy’s question, the conference call immediately brought to mind then-Judge Benjamin Cardozo’s opinion in Meinhard v. Salmon, which famously held that a managing partner “put himself in a position in which thought of self was to be renounced, however hard the abnegation.” The parallels between Cardozo’s framing of the partner’s duties and a standard definition of agape, which holds that it is a “self-renouncing love,” are obvious and striking.
What then would partnership fiduciary duty law be like if it were organized around the value of agape? This essay concludes that partners need not love one another, at least as a matter of legal obligation. Agape is simultaneously too indeterminate and too demanding a standard to be suitable for business relationships. On the other hand, however, I conclude that partners ought to love one another. An analysis of Cardozo’s rhetoric and the intent behind it suggests that agape has great instrumental value. Partners who love one another can trust one another. In turn, partners who trust one another will expend considerably less time and effort — and thus incur much lower costs — monitoring one another. Agape thus should not be the law, but the law should promote agape as best practice.
It's a nice concise 5000 or so words.
I'll be interested to see where it places when I send it out to the reviews. Will the theological slant help or hurt?
Of course, this is not prime law review submission season. A lot of reviews aren't considering submissions, but I've sent it to those of the top 20 reviews that appear to be accepting submissions for either the print or online versions. Let's keep our fingers crossed. I'll report back when it finds a home.
Update: I'll be spending three weeks at the University of Auckland as a Cameron Law Fellow. Part of the deal is a commitment to do a lecture that will be published in the New Zealand Law Review. I took a chance and offered them the agape article ... and they took it. Very cool.
That's Not Market blog says:
AN INTERESTING PROPOSAL BY A COUPLE OF CORPORATE LAW PROFESSORS MAY CAUSE YOU TO RETHINK HOW COMPANIES POPULATE THEIR BOARDS.
Law professors M. Todd Henderson (U. Chicago) and Stephen M. Bainbridge (UCLA) have proposed a novel way to expand further the universe of corporate service providers by allowing the outsourcing of board functions.
The profs note that critics complain that the array of tasks for a board to deal with are too vast for a board to perform effectively. They also note that “boards fail to police managers adequately or make good decisions” and that they are generalists without the breadth of experts the company may need.
So. Any rich venture capitalists want to hire Todd and myself to launch this project?
Via email from SSRN.com comes this news:
Your paper, "DIRECTOR PRIMACY AND SHAREHOLDER DISEMPOWERMENT", was recently listed on SSRN's Top Ten download list for: ERPN: Governance (Management) (Topic).
As of 01 September 2013, your paper has been downloaded 2,390 times. You may view the abstract and download statistics at:http://ssrn.com/abstract=808584.
I quote the abstract:
This essay is a response to Lucian Bebchuk's recent article The Case for Increasing Shareholder Power, 118 Harvard Law Review 833 (2005). In that article, Bebchuk put forward a set of proposals designed to allow shareholders to initiate and vote to adopt changes in the company's basic corporate governance arrangements.
In response, I make three principal claims. First, if shareholder empowerment were as value-enhancing as Bebchuk claims, we should observe entrepreneurs taking a company public offering such rights either through appropriate provisions in the firm's organic documents or by lobbying state legislatures to provide such rights off the rack in the corporation code. Since we observe neither, we may reasonably conclude investors do not value these rights.
Second, invoking my director primacy model of corporate governance, I present a first principles alternative to Bebchuk's account of the place of shareholder voting in corporate governance. Specifically, I argue that the present regime of limited shareholder voting rights is the majoritarian default and therefore should be preserved as the statutory off-the-rack rule.
Finally, I suggest a number of reasons to be skeptical of Bebchuk's claim that shareholders would make effective use of his proposed regime. In particular, I argue that even institutional investors have strong incentives to remain passive.
The Drucker Exchange blog thinks he might approve:
It’s a simple idea: Outsource your board to get a better one.
Law professors M. Todd Henderson of UCLA [sic] and Stephen M. Bainbridge of the University of Chicago [sic] even have a name for the entities companies could hire to do the job: board service providers.
The pair write in Bloomberg Businessweek that there are plenty of reasons to find a new way of populating and operating corporate boards, which so often “fail to police managers adequately or make good decisions.” For starters, “directors are part-timers with weak incentives and limited information.” What’s more, they’re generalists, “meaning the average board is unlikely to have all the experts it needs at any given time.” And, the professors point out, they don’t have a lot of accountability to shareholders.
“We propose a better way: permitting independent firms (e.g., partnerships, corporations, etc.) to provide board services,” write Henderson and Bainbridge. A company like Microsoft or Altria could “hire another entity, call it Boards-R-Us, to provide director services, instead of the group of unrelated individuals it currently hires to provide these services.” Board service providers would supply experts at the “daunting array of tasks” directors are expected to perform.
Peter Drucker, as we’ve written, found boards to be vexing entities that rarely managed to fulfill all the duties required of them. And finding the right people to serve wasn’t easy. “Board members should have proven their ability as senior executives—whether in a business, in government service, or in other institutions,” he wrote in Management: Tasks, Responsibilities, Practices. “Second, board members should have time for the job.”
So the idea of Boards-R-Us may well have struck Drucker as ideal. Indeed, he came close to endorsing something similar. “The effective board member has to be a ‘professional director,’” he suggested. “Indeed, board membership should be recognized as a full-time profession for a really first-rate man. And it should be paid as such, i.e., by a fee and not by stock options or a share in the profits.”
The notion of board service providers would be consistent with Drucker’s view that activities without “a career ladder up to senior management” should be farmed out. “To get productivity, you have to outsource activities that have their own senior management,” Drucker said in an interview that appears in Managing in a Time of Great Change. “Believe me, the trend toward outsourcing has very little to do with economizing and a great deal to do with quality.”
I don't think I mentioned it, but we accepted an offer from the Stanford Law Review. Very pleased.
Update: As a sharp-eyed reader noted, the good folks at Drucker switched Todd and my affiliations. But we're both really still at our respective home bases.