ProfessorBainbridge.com

What are the most over studied problems in corporate law?

Dave Hoffman recently posted on the question of whether corporate veil piercing is really the most frequently litigated issue in corporate law, to which I responded (civilly, mind you) by posing a question of my own. In response, Hoffman wrote:

I suppose I care, mildly, because it might be that attention better spent on other issues in corporate law, like someone's ... nontraditional ... theories of director primacy, has instead been diverted to veil piercing on the theory that piercing is more practically important than it is.  And because if if you search the web, you'll find dozens of companies puffing this exact claim to sell you their incorporation products and advice.  Or it might be that the question is worth asking simply for love of the game.

The love of the game answer is, of course, unresponsive because the same answer would justify paying attention to veil piercing.

Hoffman's other point, however, is both responsive and quite interesting. In effect, he's asking what corporate law topics get more attention from legal scholars then their real world importance merits and which topics get too little attention given their real world importance. And that's a question worth thinking about, because it implies that we corporate law scholars are collectively falling down on the job. Put another way, we're exhibiting classic herding behavior by collectively beating a few horses to death.

So what would go on my list of topics to which we devote too much attention? Please note, that I'm not necessarily saying these are unimportant topics. I'm just saying they get more attention than necessary. So here are some candidates, in no particular order. 

• Whether the corporation is a nexus of contracts
• Corporate philanthropy
• Corporate social responsibility
• Predicting what Rawls or Dworkin would say about anything remotely related to corporate law
• The Perlman v. Feldman suite of issues
• The utility of rational actor models in the law and economics of corporate governance
• Anything having to do with the Constitution and corporations
• Insider trading? (Very important, of course, but written to death)
• Executive compensation (ditto)
• Agency costs (ditto)
• Corporate takeovers (ditto, at least back in the day)
• The race to the bottom
• Fiduciary duty of directors in the vicinity of insolvency
• A federal law of corporations
• Corporate personhood

Mea culpa.

I'm opening comments on this post, for on topic non-anonymous suggestions only.

"Is Any CEO Worth $189,000 Per Hour?"

Prompted by news of the $378 million new Apple CEO Tim Cook will make in his first year on the job, BusinessWeek posted an article headlined by the titular question. It's a fair article, which you ought to go read.

Qoheleth tells us that "What has been, that will be; what has been done, that will be done. Nothing is new under the sun! Even the thing of which we say, 'See, this is new!' has already existed in the ages that preceded us."

Just so.

Back in the 1930s, a lawsuit challenging executive bonuses as corporate waste gave rise to the aphorism “no man can be worth $1,000,000 per year.” One wonders what the anti-CEO pay campaigners of those days would make of a man supposedly worth $1 million per 5.3 hours?

I discuss these arguments in my new book Corporate Governance after the Financial Crisis, in which I argue that:

The rhetoric of class warfare makes a poor foundation for economic policy. As a justification for regulating executive compensation, however, it is particularly inapt. First, why single out public corporation executives? Many occupations today carry even larger rewards. The highest paid investment banker on Wall Street in 2006 was Lloyd Blankfein of Goldman Sachs, for example, who “earned $54.3 million in salary, cash, restricted stock and stock options,”[1] or about 4 times the median CEO salary from the year before. The pay of some private hedge fund managers dwarfed even that sum. Hedge fund manager James Simons earned $1.7 billion in 2006, for example, and two other hedge fund managers also cracked the billion-dollar level that year.[2] Not to mention, of course, the considerable sums earned by top athletes and entertainers.

Second, regulating executive compensation may scratch the public’s populist itch, but it does little to address inequalities of income and wealth. To be sure, as Brett McDonnell observes, fat cat “CEOs have become poster boys for” the dramatic increase in “inequality in income and wealth in this country.”[3] Even if one assumes that redressing such inequalities is appropriate social policy, however, capping or cutting CEO pay is not an effective means of doing so.

---

[1] Jenny Anderson & Julie Creswell, Top Hedge Fund Managers Earn Over $240 Million, N.Y. Times, Apr. 24, 2007.

[2] Id.

[3] Brett H. McDonnell, Two Goals for Executive Compensation Reform, 52 N.Y.L. Sch. L. Rev. 586, 587 (2008).

 

Quoted re STOCK Act's impact on political intelligence

The WSJ ran a story today on the potential impact of the STOCK Act on gathering of political intelligence, in which yours truly was quoted:

The new concern of the political-intelligence industry stems from the legislation giving lawmakers an explicit "duty" not to act on nonpublic, material information. Prior to the legislation, many securities lawyers thought it was unclear if such a duty—a key tenet of insider-trading law—existed on Capitol Hill.

In establishing that legal duty, however, the legislation also could put lawmakers and aides in legal jeopardy if they divulge that same information to individuals who then trade on the information. "Now that Congress is covered by the insider-trading law, if a member of Congress gives a tip to a hedge fund manager, that is going to be illegal," says Stephen Bainbridge, a securities-law professor at the University of California, Los Angeles School of Law.

Of course, it also would have to be shown that the Member got a personal benefit from making the tip, such as a political contribution, log-rolling support for legislation, or enhanced repuation.

Crony ecomentalist capitalism in the White House

WaPo:

Overall, the Post found that $3.9 billion in federal grants and financing flowed to 21 companies backed by firms with connections to five Obama administration staffers and advisers. ... White House officials stress that staffers and advisers with venture capital ties did not make funding decisions related to these companies. But e-mails released in a congressional probe of Obama’s clean-tech program show that staff and advisers with links to venture firms informally advocated for some of those companies.

It's called a conflict of interest.

What's the most frequently litigated issue in corporate law?

A better question might be "who gives a sh*t?" but apparently someone does.

Did the SEC violate the APA in its new say on pay guidance?

Keith Paul Bishop discusses the titular question

Does better corporate governance result in higher stock prices?

The Economist claims that South Korea's allegedly weak corporate governance rules are responsible for South Korea's allegedly underperforming equitiy market:

So what is the source of the “Korea discount”, which means that the KOSPI has a forward price-to-earnings ratio of under ten, below most other Asian stockmarkets (see chart)? There are a few possibilities. The national economic model is still built on exports, often in highly cyclical industries such as shipbuilding. The capital structure of South Korean firms has historically been debt-heavy.

But the prime cause of the discount is more likely to be poor corporate governance at the family-run chaebol conglomerates that dominate the economy. Nefarious schemes to pass on control to sons, avoid taxes and exploit company assets for the benefit of family members are widely discussed in private.

What I know about South korean corporate governance would not take very long to recite, but even so I read the Economist article with some skepticism.

While superior corporate governance logically ought to lead to superior stock performance, the evidence of such an effect is weak. Indeed, event studies (at least in the US) generally don't show much of a link between the two:

Virtually all of the important mechanisms of corporate governance have been subjected to event study analysis. These include boards of directors, shareholder proposals, derivative lawsuits, and executive compensation. Although all of these devices have been posited to perform a critical function of reducing the agency costs of the separation of ownership and control in the U.S. public corporation, empirical studies do not provide strong support for this viewpoint. Neither shareholder proposals nor lawsuits have a significant positive price effect. A positive stock price effect is associated with appointment of an independent director to the board, but board composition has not been found to impact positively on performance. 

Sanjai Bhagat & Roberta Romano, Event Studiesand the Law: Empirical Studies of Corporate Law, 4 Am. L. & Econ. Rev. 380, 401 (2002).

There are, I suppose, two possible explanations for that finding. First, superior corporate governance rules either do not affect stock prices or have such a minor effect that they are swamped by other factors. Second, conventional wisdom about what constitutes superior corporate governance is wrong. Both explanations suggest that The Economist's recommendation that South Korea adopt such rules may not corret the alleged problem. As Bhagat and Romano observed of their findings: "These findings suggest that widely shared beliefs concerning what are essential components for effective corporate governance may be mistaken and that affirmative policies to foster such devices ought to be reconsidered."

Another reason I'm skeptical of The Economist's account is my understanding that chaebol “can be thought of as the brainchild of the government.” Sung-Hee Jwa, The Evolution of Large Corporations in Korea: A New Institutional Perspective on the Chaebol 19 (2002). “Basically, the formation and growth of the chaebol was a result of the interaction between the government's industrial policies and the chaebol's responses to them.” Id. at 27. According to Gilson and Milhaupt, "important bilateral monopoly qualities of the government-chaebol relationship remain to this day." 59 AMJCL 227, 249 (2011).

One therefore wonders whether state meddling is more to blame than poor governance.

Scalzi shorts

Just read two short stories by science fiction writer John Scalzi. An Election is an interesting, quirky story about an election campaign in a city where humans and aliens cohabit more or less peacefully. There's a fair bit of Scalzi's traemark style of humor, about which folks seem to be sharply divided. I get it and like it, but YMMV. Anyway, at $0.99, what do you have to lose?

In contrast to An Election, which is a stand-alone story, Questions for a Soldier is situated in Scalzi's Old Man's War universe. It'll appeal mainly to fans of those books, since it fills in a bit more of their back story. Having said that, however, Scalzi's ruminations on imperialism and soldiers are worth the $0.99 price of admission even for those who haven't read the series.

 

The non-religious liberty liberty critique of Obama's contraception mandate

Most of the debate over Obamacare's contraception mandate has been framed as an infringement of the religious liberty of the Catholic Church, which, of course, is precisely what the mandate is.

But the mandate also infringes on another liberty interest that every economic actor shares, as Michael Sykuta explains:

The underlying premise of the Administration’s decision is that the federal government has the right to force people to give away the products and services they produce. If the government can force insurance companies to “give away” health care coverage to avoid a political embarrassment, what is to prevent the government from requiring other companies or industries to give away their products if such a mandate would be politically expedient?

It becomes increasingly clear that there are no limits on the power of the state in Obama's world.

Tom Mengler: I knew him when

When I first arrived at the UIUC College of Law as a brand new law professor, one of the first people to befriend me was a junior civil procedure professor named Tom Mengler. Tom was a wonderful teacher and scholar, as well as a kind and generous person with great judgment. After Illinois went through a couple of disatrous failed deadships and dean searches, the powers that be finally decided to take a chance on the then still quite young Mengler. Tom did a great job as Dean at Illinois. Indeed, the prospect of continuing to serve under his leadership was one of the few factors that weighed in favor of staying at Illinois when I was offered my current job at UCLA. (Sorry, Tom, but not even your leadership could overcome the disparity in weather!) Tom went on to a successful deanship at St Thomas and has now been named President of St. Mary's University -- the first lay President in the University's history, no less. 

Elizondo said that Mengler's experience in academics, fundraising and his “firm foundation in faith” were reasons he stood out.

As dean for the past 10 years, Mengler guided the School of Law to several important milestones, including American Bar Association accreditation, the $100 million mark in fundraising and hiring a nationally recognized faculty, according to a St. Thomas news release.

I'm not surprised Tom has had this record of success. He took to academic administration like a duck to water, But I'm proud to say that I knew him when ....

Grieving for dead celebrities

The wailing and gnashing of teeth over Whitney Houston's death has yet to approach the hysteria that accompannied that of, say, Michael Jackson or Princess Diana, but it still strikes me as going way over the top. So I direct you to a post by my friend and UCLA law colleague Jonathan Zasloff in which he writes that:

From Andrew Sullivan:

The untimely death of the great Whitney Houston cannot but provoke intense sadness.

No.

He goes on to relate some things that really should provoke intense sadness, none of which include the death of a drug- and alcohol-added minor celebrity.

Jonathan's headline calls Sullivan's hyperbole the "overstatement of the decade," which strikes me as a bit hyperbolic, but I'm in complete agreement with every word of the text of his post. (Which may be a first.)

Our society's fascination with celebrities, many of whom are famous simply for being famous, has become a deep social mental illness. From Wikipedia:

Times journalist Patrick West said in his booklet Conspicuous Compassion that "mourning sickness is a religion for the lonely crowd that no longer subscribes to orthodox churches. Its flowers and teddies are its rites, its collective minute's silences its liturgy and mass." ...

Carol Sarler, writing as a guest columnist for The Times, noted that "this new and peculiar pornography of grief" is sometimes called a 'tribute', "the cruder truth is that ersatz grief is now the new pornography; like the worst of hard-core, it is stimulus by proxy, voyeuristically piggy-backing upon that which might otherwise be deemed personal and private, for no better reason than frisson and the quickening of an otherwise jaded pulse.

Exactly.

Lying to internet website surveys: Mortal or venial sin?

When confronted with those popups at internet sites that want me to answer a marketing survey, I occasionally take the survey but lie massively. For example, I just told one at The Atlantic (sorry Megan) that I'm 98 years old and access the internet from a computer shared by 21 people. Was that wrong?

Enforcing the STOCK Act

The Washington Post reported that Representative Spencer Bachus was under investigation by Office of Congressional Ethics.  According to the article: 

via www.theracetothebottom.org

Jay Brown's got an excellent post on the practical difficulties likely to be faced by the SEC in seeking to enforce the STOCK Act's ban on Congressional insider trading. Just because a thing is hard, however, doesn't mean it isn't worth doing.

Does the STOCK Act's impending passage argue for self-funding by the SEC?

The STOCK Act is intended to make clear that the SEC can successfully bring insider trading cases against members of Congress who trade on the basis of material nonpublic information. The practical question that will be posed by passage of the Act is whether the SEC will actually dare bite the hand that feeds it. With that in mind, consider Broc Romanek's argument that:

I've written repeatedly how absurd it is for a so-called independent federal agency - like the SEC - to be subject to the very real political pressures and whims of Congress. And the political pressures faced by the SEC have only grown since the passage of Dodd-Frank a mere two years ago. You may recall that the Senate's version of Dodd-Frank envisioned a self-funded SEC - a concept to be lost during the House-Senate conferencing leading up to the bill's enactment (if I recall, House conferees had accepted self-funding but some Senators stripped it from the final bill). Dodd-Frank also was supposed to dramatically bolster the SEC's resources, a notion that was quickly buried after it became law.

So what to do with the front-page article in the Washington Post today that Rep. Spencer Bachus (R-Ala.), Chair of the House Financial Services committee - the one that oversees the SEC - is being investigated for insider trading by the Office of Congressional Ethics? The case is the first of its kind involving a member of Congress. 

It's a legitimate problem. On the one hand, there have to be mechanisms for holding the SEC politically accountable and control of the budget is a critical mechanism for doing so. Second, we know from watching law enforcement agencies enforcing laws that allow them to get a slice of money forfeited by defendants that self-funding leads to abuses, some very serious. Third, in a democracy founded on the principle of no taxation without representation, the people's House is supposed to control the purse strings.

On the other hand, will the SEC bite the hand that feeds it? I'm not at all sure.

My preference would be to find ways to encourage the SEC to enforce the STOCK Act without moving to a self-funding model.

Pitfalls in forming a benefit corporation

Keith Paul Bishop notes "a few drafting pitfalls" to be avoided when forming a flexible purpose corporation or benefit corporation.