ProfessorBainbridge.com

What would happen if the NCAA adopted Dodd-Frank?

Stanford business law professors David Larcker and Brian Tayan have conducted an interesting thought experitment:

In recent years, NCAA football has been rocked by a string of high-profile violations, including those at USC, Ohio State, the University of Miami, and Auburn. In many ways, these violations were similar to the governance breakdowns at financial and other corporations leading up to the financial crisis of 2008 and 2009.

In the corporate world, Congress responded to the financial crisis by enacting the Dodd-Frank Wall Street Reform Act, which among other things imposed various governance requirements on all publicly traded companies.

What would happen were the NCAA to adopt these same provisions and require them of all universities and their football programs?

In this fictitious tale, we explore what such a set of rules would look like. We ask:

* If these requirements would not work in an athletic setting, should we expect them to work in business?
* Why are the governance provisions of Dodd-Frank legally required, rather than voluntarily adopted by individual companies?
* Why does Dodd-Frank place such emphasis on executive compensation and disclosure? Will its compensation requirements reduce governance failures?

The NCAA Adopts 'Dodd-Frank': A Fable (September 14, 2011). Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-20. Available at SSRN: http://ssrn.com/abstract=1927108

I think I know the answer to their last question, which I address in my forthcoming book Corporate Governance After the Financial Crisis (You can pre-order the book from Oxford or Amazon.)

There is an odd disconnect between the internal logic of Dodd-Frank’s governance provisions and the back story of the financial crisis.

Consider, for example, the question of executive compensation. Regulators identified executive compensation schemes that focused bank managers on short-term returns to shareholders as a contributing factor almost from the outset of the financial crisis. As was the case with almost all public U.S. corporations, banks and other financial institutions shifted in the 1990s to a much greater reliance on equity-based pay for performance compensation schemes. The rationale for such schemes is that they align the risk preferences of managers and shareholders. Because managers typically hold less well-diversified portfolios than shareholders, having significant investments of both human and financial capital in their employers, they tend to be much more averse to firm specific risk than diversified investors would prefer. Pay for performance compensation schemes that link managerial compensation to shareholder returns are designed to counteract that inherent bias against risk and thus align managerial risk preferences with those of shareholders.

Shareholder activists long have complained that these schemes provide pay without performance. This was one of the corporate governance flaws Dodd-Frank was intended to address, most notably via say on pay.

The trouble, of course, is that shareholders and society do not have the same goals when it comes to executive pay. Society wants managers to be more risk averse. Shareholders want them to be less risk averse, for the reasons just discussed. If say on pay and other shareholder empowerment provisions of Dodd-Frank succeed, manager and shareholder interests will be further aligned, which will encourage the former to undertake higher risks in the search for higher returns to shareholders. Accordingly, as Christopher Bruner aptly observed, “the shareholder-empowerment position appears self-contradictory, essentially amounting to the claim that we must give shareholders more power because managers left to the themselves have excessively focused on the shareholders’ interests.”

In sum, the shareholder empowerment measures adopted before the crisis did nothing to prevent it and may well have contributed to it. The new provisions included in Dodd-Frank thus are unlikely to prevent another such crisis and may even increase the odds of some similar crisis induced by excessive risk taking.

Fiddling with my fantasy football teams

I am an unrepentant fiddler with my fantasy football teams (although I'm nowhere near as bad as the guy who is the commissioner in a couple of my leagues). I'm always at or near the top of waiver wire moves by the end of the season.
We're one game into the 2011 season, and I'm already fiddling. Dropping Peyton Manning in favor of Josh Freeman in my Cowboys Drool league was sadly necessary. With Mike Vick as my starting QB, the injury risk required that I grab a (close to) elite QB backup ASAP. On the same team, I've put Ben Tate on the trading block. Sell high is my motto and Foster's hamstring surely will induce somebody to bite, even if Foster's owner doesn't.
The other big change was the addition of Robert Meachem as a WR in 2 of my teams. I had gone into the season deliberately avoiding Saints WRs. Brees just spreads the ball around too much. With Marques Colston out for at least 4 weeks with a busted collarbone and Lance Moore likely to remain on the shelf for a while longer, the Saints WR cupboard is suddenly not as full as it was. I figure Meachem to get most of the workload while they're out. Meachem was a free agent in 2 of my leagues. So I had the Unseen Academicals (PPR H2H) drop Daniel Thomas to add Meachem. Likewise, the LA Prawfs (rotisserie non-PPR) dropped Steve Smith (Carolina) to add Meachem.
I did not, however, jump on the Randall Cobb or Darren Sproles bandwagons. Thursday night's game was a freak show in the return game. Going forward, Green Bay has too many WRs and New Orleans has too many RBs for me to see Cobb or Sproles as week in and week out contributors.

Manchester United Dual Class IPO

The WSJ reports on a controversy over Manchester United's plans to go public with a dual class stock structure via a Singapore-based IPO:

U.K. soccer giant Manchester United Ltd. chose Singapore as the destination for its US$1 billion IPO so it could have a dual-share structure—one with voting rights and one without—that enables its owners to effectively retain control of the team, according to people familiar with the matter. ...

Until June, Hong Kong was the favored listing destination for Manchester United's initial public offering, according to these people, but its bourse banned dual-share listings in 1991 and refused to give Man U a waiver. ...

"Two-tier shares result in disproportionate power relative to the risk that the holder is taking," said David Webb, shareholder activist and former director at Hong Kong Exchanges & Clearing Ltd. "This exacerbates the risk of controlling shareholders placing their own interests ahead of other shareholders when running a company."

The dual-share listing structure has raised concerns about corporate governance at Man U, which is owned by the Glazer family, headed by patriarch Malcolm Glazer, also owner of the NFL's Tampa Bay Buccaneers.

I don't have much sympathy for Mr Webb's complaints. I wrote about dual class stock in my article The Short Life and Resurrection of SEC Rule 19c-4, in which I explained that dual class stock structures established in an IPO (as is the case here) pose few concerns:

Public investors who do not want lesser voting rights stock simply will not buy it. Those who are willing to purchase it presumably will be compensated by a lower per share price than full voting rights stock would command and/or by a higher dividend rate. In any event, assuming full disclosure, they become shareholders knowing that they will have lower voting rights than the insiders and having accepted as adequate whatever trade-off the firm offered in recompense.

Man U public investors will buy their shares knowing that the Glazers are in charge and will remain so by virtue of the dual class stock structure. They will know or should know that dual class stock presents a serious agency cost problem because incumbents who cannot be voted out of office are almost impossible to discipline. Public Man U investors thus implicitly will have accepted whatever trade-offs the deal entailed as appropriate compensation for that risk.

Put another way, the market will price the risk posed by dual class stock, providing investors who buy the lesser voting rights stock with a discount from the price they would have had to pay if they had had full voting rights. Those who buy the stock thus are paying the right price and are fully protected.

Jim Tressel falls on his sword

SI details the tawdry doings at Ohio State's athletic department, especially amongst its football players, concluding that:

Ohio State officials will argue that the school should be spared, in part because they got rid of Tressel, the head of the program that has been so tainted by wrongdoing.

Which called to mind that scene from The Godfather II:

Tom Hagen: When a plot against the Emperor failed... the plotters were always given a chance... to let their families keep their fortunes. Right?
Frank Pentangeli: Yeah, but only the rich guys, Tom. The little guys got knocked off and all their estates went to the Emperors. Unless they went home and killed themselves, then nothing happened. And the families... the families were taken care of.
Tom Hagen: That was a good break. A nice deal.
Frank Pentangeli: Yeah... They went home... and sat in a hot bath... opened up their veins... and bled to death... and sometimes they had a little party before they did it.

Did Tressel have himself a little party first? And did he get a "good break"? Or is Ohio State even more ruthless than the Corleone family?

Random baseball thoughts

"Baseball is the favourite American sport because it's so slow. Any idiot can follow it. And just about any idiot can play it." GoreVidal

"Call me Un-American; call me Canadian or Swedish, I don't care. I hate baseball ... I have lots of reasons to hate baseball. For one it's dull. Nothing happens. Watching baseball is like going to a lecture by a member of the Slow ... Talkers ... of... America. It's like turning on the TV - when the cable is out. It's like watching grass - no, Astroturf grow." Jeff Jarvis

"Calling it the World Series must impress the world as an example of America's modesty." Anon

"To root for the Yankees or the Red Sox is the functional equivalent of rooting for Microsoft or General Electric. No thanks." Malcolm Gladwell

"Baseball has the great advantage over cricket of being sooner ended." George Bernard Shaw

"I never realized how boring this game was." Homer Simpson, when first obliged to watch a baseball game while sober 

"Baseball is what we were, and football is what we have become." Mary McGrory

"The national past-time is juiced." Jose Canseco

"McGwire refused to say whether he ever took steroids but I think he did because, as he was leaving, one of his tits fell out of his suit." Bill Maher

Apparently, I'm supposed to be a Texas Rangers fan

I'm not a baseball fan. Strikes, steroids, and the perpetual ineptitude of my childhood favorite Orioles combined to rob the game of interest. So I pursued the Flowchart: What Baseball Team Should I Root For? merely as an academic exercise. As it turns out, I'm supposed to be a Texas Rangers fan.

I think I'll stick to the NFL.

Who is the single most overrated team in football?

According to DC sportswriter Michael Wilbon, it's the Dallas Cowboys:

The Dallas Cowboys could be the single most overrated team in football ... maybe the single most overrated team in all of professional sports in America. The franchise has won one playoff game since 1996. Every acquisition they make, every game they win is overstated. Their players are overly praised. They haven't mattered in a decade nearly as much as the New England Patriots or Pittsburgh Steelers or Indianapolis Colts or even the New York Giants or Philadelphia Eagles in their own division.

Every single thing about the Cowboys, in recent years anyway, has been overdone. They come into every season being picked to win something between a division and the Super Bowl but limp out to great disappointment annually.

This season the hype has been attached, most specifically, to the Cowboys' offense, to the supposed damage Romo and Miles Austin, Dez Bryant and Felix Jones are going to do, blah, blah, blah. Yet, the Cowboys looked like a bunch of stumblebums in the preseason, and pretty much the same through three quarters of the regular season opener Sunday night.

And no part of the evening was more humiliating for Dallas than the final play of the second quarter, the one that gift-wrapped a 10-0 lead for the Redskins, a play that should never, ever happen beyond high school.

"I'd buy that for a dollar"

26-27-60

No. That's not the measurements of an unusually pear-shaped swimsuit model. It's a rule of thumb for predicting whether a quarterback will succeed in the NFL:

If an NFL prospect scores at least a 26 on the Wonderlic test, starts at least 27 games in his college career and completes at least 60 percent of his passes, there's a good chance he will succeed at the NFL level.

Since 1998, these are some of the NFL quarterbacks who aced all three parts of the Rule of 26-27-60: Peyton Manning, Phillip Rivers, Eli Manning, Drew Brees, Tony Romo, Matt Schaub, Kyle Orton, Kevin Kolb, Matt Ryan, Ryan Fitzpatrick and Matt Stafford.

Meanwhile, among the once highly-touted prospects who failed at least one part of the formula: Ryan Leaf, Joey Harrington, Michael Vick, Akili Smith, Tim Couch, Daunte Culpepper, David Carr, Vince Young and JaMarcus Russell.

There are a few notable exceptions to the rule but only by slight margins. Two-time Super Bowl champ Ben Roethlisberger scored a 25 on the Wonderlic, just one point short of the standard of 26. Jay Cutler -- a mixed-bag thus far in the NFL -- scored exactly a 26 on his Wonderlic and had the starts, but completed 57 percent of his passes at Vanderbilt. Joe Flacco, who's been to the playoffs in each of his first two seasons, fell short in the starts category.

Of the top 4 rookie QBs, only Sam Bradford passes muster on all three scores. Colt McCoy, Tim Tebow, and Jimmy Clausen, all fall short on the Wonderlic by a few points.

As for poor Mr. Bradford, however, I fear that he may prove to be one of the exceptions that proves the rule. With a lousy offensive line and a pathetic receiving corps, he's going to spend most of the 2010 season being driven into the dirt by big, fast, strong defenders. One can easily imagine him going the way of Tim Couch or David Carr health-wise.

John Wooden

This is a really wonderful tribute:

Clint Didier for US Senate

Clint Didier is running for the US Senate. He's a former Washington Redskin tight end and a Republican, which is good enough for me, even if he's endorsed by Sarah Palin. Wikipedia reports:

Didier won two Super Bowl rings as a member of the Redskins in Super Bowl XVII and Super Bowl XXII, scoring the final touchdown of the Redskins incredible 35-point second quarter in Super Bowl XXII. He was also the Redskins leading receiver in Super Bowl XVIII, catching five passes for 65 yards in their 38-9 loss.

He finished his NFL career with 141 receptions for 1,923 yards and 21 touchdowns in 105 games.

I think I'll send him a $141 contribution. It seems apt.

The Redskins Make a Great Fantasy Football Team ... Circa 2006

Washington Redskin owner Danny Snyder is often accused of running the team as though it were a fantasy football squad. His penchant for spending big money on a few high profile players, while neglecting bread and butter stuff like offensive linemen, is infamous.

Although recent moves have suggested (at least to this interested observer) that the new Shanahan/Allen regime is firmly in charge and finally making good decisions, I was nevertheless struck by a WSJ note today:

The Washington Redskins have built an offense that any fantasy owner would lust after.

If it was 2006.

After acquiring quarterback Donovan McNabb this offseason—as well as veteran running backs Willie Parker and Larry Johnson—the Redskins now have five players who were among the top 50 players taken in fantasy football in 2006.

That's more than twice as many as any other team in the NFL this season.

Fantasy Legends

Here's a look at where, on average, some current Washington Redskins were selected in fantasy drafts in 2006.

CURRENT REDSKINS PLAYER	2006 AVERAGE FANTASY DRAFT POSITION
Larry Johnson RB	1.3
Clinton Portis RB	6.17
Willie Parker RB	29.41
Santana Moss WR	36.14
Donovan McNabb QB	41.43

Source: MockDraftCentral.com

None of them (except maybe McNabb) are likely fantasy starters in 2010, so let's hope for synergy and that their collective on the field performance vastly exceeds their individual fantasy values.

The McNabb Trade

As regular readers know, I'm a life-long Washington Redskins fan. My sufferings during the Daniel Snyder era have been unimaginable. Yet, I begin to have glimmers of hope that the new Mike Shanahan/ Bruce Allen regime (a) knows what it's doing and (b) has finally gotten Danny boy's fingers out of the pie. Case in point:

The Philadelphia Eagles traded McNabb to the Washington Redskins for a pair of draft picks Sunday night. The Eagles will receive a second-round pick (37th overall) in this month in the NFL draft and either a third- or fourth-round pick next year.

Here's why I like this trade: Other than not winning a Super Bowl, Donovan McNabb has done everything you'd want from a QB: multiple Pro Bowls, multiple winning seasons, multiple payoff appearances, multiple trips deep into the playoffs. He's only 33 and, despite a few injuries, looks to still have a fair bit of tread on the tires. Having a franchise QB on the team means that we can use the # 4 pick to get a franchise OLT. Maybe Detroit takes Russell Okung (I would if I were them...they;ve got to protect Stafford). If so, trade down to around a few spots to pick up a second or third round pick and take Brian Bulaga or Anthony Davis. Or further down for yet more picks and take a flyer on Bruce Campbell (assuming Al Davis doesn't grab him). But whatever happens, the Redskins must get better at tackle.

OTOH, I'm not sure what Shanahan and Allen are up to at HB. Yes, we knew this would be a RBBC year. Clinton Portis can't be an every down back anymore. But Portis, Larry Johnson, and Willie Parker strike me as an odd committee. They don't really complement one another so much as compete with one another. But time will tell.

Some other random thoughts:

• Donovan must like the idea of having two shots a year at the Eagles for pay back.
• But if I were Donovan, I would have had the Vikings as my first choice. You could walk into a Super Bowl contender and take it over the top.
• If I were Brad Childress, I would have told Bret Favre to stuff it and gone after McNabb. Minnesota's team is young enough to give them a couple of year window to make the Super Bowl. McNabb will be around longer than Favre, giving you multiple bites at the apple. I really don't get it.
• Looks like Mike Vick isn't going anywhere.
• If Donovan brings a 2nd round pick and a condition 3rd, what could the Redskins get for Jason Campbell?
• OTOH, 2010 is a very deep draft year, so it sort of sucks that the 'Skins have so few picks left. OTOH, however, what if there's a lock out in 2011?  A lot of 2010 rookies will make minimal contributions this coming season and then have a year to get out of shape and/or injured.
• Kevin Kolb's probably a better fantasy choice next year than McNabb. More weapons and a pass-heavy system.

Obama to Regulate College Football

One day shortly after the Second World War ended, Winston Churchill and Labour Party Prime Minister Clement Attlee encountered one another at the urinal trough in the House of Common's men's washroom. Attlee arrived first. When Churchill arrived, he stood as far away from him as possible. Attlee said, "Feeling standoffish today, are we, Winston?" Churchill said: "That's right. Every time you see something big, you want to nationalize it."

I'm reminded of that story by news that President Obama plans to regulate the college football playoff system. To be sure, I understand that there are political points to be had by doing so, because there are some powerful Senators whose home state football squads think they get screwed by the BCS system (I'm talking about you Orin Hatch, who ought to be a limited government guy). 

With the government already running the banks and the auto industry, and trying to take over the health care industry, however, one might have hoped that sports would escape the ravening maw of Leviathan. 

But I guess Attlee and Obama are kindred spirits.

Is Breaching a Contract Immoral? With Application to Lane Kiffin

We had a very interesting workshop at UCLA last week, in which Tess Wilkinson-Ryan presented her experimental studies of the relationship between morality and breach of contract. The specific paper she presented "offers experimental evidence that parties are more willing to exploit efficient breach opportunities when the contract in question includes a liquidated damages clause." The abstract further explains that:

The moral obligations entailed by a contractual promise implicate unusually robust moral intuitions, which may deter parties from breaching even when there is an economic incentive to do so. However, those intuitions are not immutable. Decision researchers have found experimental evidence that, when social norms are in conflict with efficiency incentives, a more explicit incentive structure leads to more self-interested behavior. Liquidated damages are a means of making the sanction for breach explicit within a contract. The hypothesis of this research is that parties will be less resistant to breaching a contract that includes a liquidated damages clause. In a series of web-based questionnaires, subjects read contracts scenarios involving efficient breach opportunities. Subjects were asked to imagine themselves in the position of the promisor, and to indicate in each case the lowest offer that they would accept (from a hypothetical third-party offeror) to breach each contract. Subjects were randomly assigned to read either that their contract had a liquidated damages clause specifying damages for breach, or they were assigned to read an identical scenario in which the same damages were said to be "required by the law of contracts." Subjects in the liquidated damages condition gave much lower willingness-to-accept responses; they were willing to breach for less money. This was true even when the liquidated damages clause included a slight penalty on top of the promisee's expected loss. I argue that a liquidated damages clause clarifies the respective normative expectations of the parties, permitting efficient breach without repudiation of the mutual understanding.

This made total sense to me, at least in the context of interpersonal contracts (as opposed to commercial contracts between mega-corporations). In an earlier paper, she relatedly wrote that:

Most people think that breaking a promise is immoral, and that a breach of contract is a kind of broken promise. However, the law does not explicitly recognize the moral context of breach of contract. Using a series of web-based questionnaires, we asked subjects to read breach of contract cases and answer questions about the legal, financial, and moral implications of each case. Our results suggest that people are quite sensitive to the moral dimensions of a breach of contract, especially the perceived intentions of the breacher.

As I listened to the paper, I was reminded of the old joke whose punchline is:

... we've already established that. Now we are haggling about the price

My guess is that most people have moral qualms about breaching a contract, but that there's a price you can pay most people to help them get over it. I think Wilkinson-Ryan's work is consistent with that hypothesis.

All of which was called to mind by Peter King's criticism of Lane Kiffin's decision to jump from Tennessee to USC:

I think there are a lot of people who would not break a contract for three times the salary. I am among them. It's called honesty. I signed a contract with SI for four years, and no matter who offered me what, I would not break it.

Let's assume the conditions of efficient breach. Richard Posner's example from Economic Analysis of Law is well-known:

Suppose I sign a contract to deliver 100,000 custom-ground widgets at $.10 apiece to A, for use in his boiler factory. After I have delivered 10,000, B comes to me, explains that he desperately needs 25,000 custom-ground widgets at once since otherwise he will be forced to close his pianola factory at great cost, and offers me $.15 apiece for 25,000 widgets. I sell him the widgets and as a result do not complete timely delivery to A, who sustains $1000 in damages from my breach. Having obtained an additional profit of $1250 on the sale to B, I am better off even after reimbursing A for his loss. Society is also better off. Since B was willing to pay me $.15 per widget, it must mean that each widget was worth at least $.15 to him. But it was worth only $.14 to A – $.10, what he paid, plus $.04 ($1000 divided by 25,000), his expected profit. Thus the breach resulted in a transfer of the 25,000 widgets from a lower valued to a higher valued use.

Would King criticize the widget maker? If not, what's different about his contract? Assume King's newly tripled salary would permit him to fully compensate SI.com for any damages his breach of contract causes, while still leaving him better off. Would breaching the SI.com contract still be dishonest?

As Wikipedia notes, Charles Fried argued in Contract as Promise that:

A is obligated to honor a contract made with B because A has made a promise. Fried wrote, "The moralist of duty thus posits a general obligation to keep promises, of which the obligation of contract will only be a special case – that special case in which certain promises have attained legal as well as moral force."

Personally, I think there are moral aspects to promise making. When I was awarded the William D Warren at UCLA, I made a moral commitment to then Dean Michael Schill that I would stay at UCLA at least 5 years. At the very least, I would have had qualms about breaking that promise, even though it was not a legal contract.

But context matters. Morality is often contextual, as are social norms. Assume Mike Schill had a 5-year contract to serve as UCLA law school's dean, which he breached to go to Chicago (I actually don't know what the state of Mike's contract was when he left us). I would have no objection to his doing so. I think it's an accepted norm that deans can step down (I had one who quit after less than a year) to move up at will.

Likewise football coaches. Colleges don't show much loyalty to coaches these days and vice-versa. One and one may be at the margin, but lots of coaches get fired these days after one year. I suspect the social norm is that coaches get to change jobs without moral opprobrium.

Although I might be wrong about coaches. Outside of fayetteville, for example, I suspect most people think Bobby Petrino's a schmuck. And the riot that followed Kiffin's announcement tells us what the folks in Knoxville think about one and done coaches. So maybe the social norm in college football still requires a decent interval before hopping jobs.

Anyway, my bottom line is that King was far too categorical. Context matters. The professional norms of one's occupation matter a lot. The expectations of the parties matter. The presence of liquidated damages apparently matters.

Sometimes it's okay to breach efficiently. And sometimes it isn't. They key thing is to be able to tell the differemce.

Redskins hire Mike Shanahan

Dan Snyder's decided to hire Mike Shanahan as the new head coach of my beloved Washington Redskins. The statistical evidence suggests this is a bad decision, like virtually every other decision Snyder's ever made:

"[I]n the end, the majority of the most successful NFL headmen -- past and present -- have possessed at least one of the following four characteristics: 1) They were between ages 41 and 49; 2) they had at least 11 years of NFL coaching experience; 3) they were assistants on teams that won at least 50 games over a five-year span; and 4) they had only one previous NFL head coaching gig." 

Besides the age issue, the fourth characteristic is the real problem. According to an article in the latest ESPN magazine (not on line), coaches on their third NFL head coaching position win only 52% of their games on average.

So who should Snyder have hired? If you believe the data presented by that ESPN article, the answer is: Marty Mornhinweg. He'd have joined Bill Belichick as one of only two current head coaches meeting all four criteria. Not bad company inwhich to find oneself.