ProfessorBainbridge.com

Catholic social thought versus big business

Over the last year, I've spent a lot of time reading populists like the Southern Agrarians and Catholic social thought. It strikes me that both share a preference for an economy comprised mainly of small communities of yeoman farmers and artisans that would be more familiar to fans of J.R.R. Tolkien’s The Shire than most modern developed nation workers. Case in point:

It is certainly true that it is difficult to describe the large public corporation as a community of shared values. Such corporations in fact resemble the nanny state—a large, impersonal bureaucracy with the power to terrorize, but no ability to nurture.

But so what?

Must every human institution "foster human development"?

Perhaps the large corporation has a different role to play in an ordered society. Most people belong to a host of communities with the potential to inculcate virtue and other communal values: churches, schools, fraternal organizations, and the like. While it may be unrealistic to think of a large multinational corporation as constituting such a community, it is perfectly plausible to think of the corporation as an intermediary institution standing between the individual and Leviathan. In other words, while virtuous citizens are developed by smaller institutions with roots in the local community, the corporation still can act as a vital countervailing force against the state. Only the large corporation has the power to withstand assaults from the modern state, which allows it to serve as a focus of resistance to the state.

Too much of the literature on Catholic social thought and corporate purpose is mere ipse dixit

I've been reading a lot of Catholic social thought on corporate purpose this summer. The primary documents are pretty good. But the secondary literature-especially by theologians and philosophers--is replete with arguments and analyses that barely rise above ipse dixit. Case in point:

Why must there be a social understanding? Why must it be informed by truth, justice, and the American way (or whatever)? What does it mean to develop workers?

Answering more Quora questions: What's the difference between a CEO and COO? Can I just transfer a corporation to someone else?

Answer to What is the difference between CEO & COO? by Stephen Bainbridge https://t.co/4wcpSH1OtV

— Professor Bainbridge (@ProfBainbridge) July 22, 2019

Answer to How can you sign your corporation over to another corporation? by Stephen Bainbridge https://t.co/kiyXcVgtUy

— Professor Bainbridge (@ProfBainbridge) July 22, 2019

It was not shareholder passivity that caused the financial crisis, it was shareholder activism

I cannot believe that a decade after the financial crisis people are still spreading these stories:

In policy circles, the currently prevailing narrative views shareholder engagement as a desirable corporate governance attribute, which is able not only to improve corporate governance and performance, but also to ensure long-term stability and social responsibility. This narrative—also associated with lingering post-global-financial-crisis views that attribute managerial excessive risk-taking and corporate failures to the lack of shareholder engagement and excessive short-termism—found expression in the enactment of the 2010 UK Stewardship Code (revised in 2012 and currently under revision), which aims at making institutional investors serve the whole economy under a long-termism wrapper.

In my book, Corporate Governance after the Financial Crisis, I explain that it was much more likely that shareholder activism that contributed to the financial crisis:

As we have seen, regulators and some commentators identified executive compensation schemes that focused bank managers on short-term returns to shareholders as a causal factor in the financial crisis of 2007-2008. As we have also seen, 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. 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.”

Senator Warren has a plan for private equity and it stinks

In his latest encomium for Senator Elizabeth Warren, The Economist's Lexington columnist tells us that has a pan for everything. Whether that's a good thing, of course, depends on the merits of the plans.

Senator Warren's most recently announced plan is, as Bloomberg reports, intended "to transform private equity firms, which she said often act like 'vampires' when they buy companies by 'bleeding the company dry and walking away enriched even as the company succumbs.'” [Insert rolling eye emoji here.]

Like everything devised by the mind of Man, private equity is hardly perfect. But it is generally accepted that private equity has a number of advantages that redound to the benefit of investors and the economy as a whole:

Among the advantages of private equity cited by commentators are: (1) better governance and a greater willingness to take risks, (2) the ability to focus on long-term issues and a more stable shareholder base, (3) the ability to attract better management talent, (4) creating a sense of urgency, (5) the ability to use leverage more effectively, (6) avoiding the costs imposed by the Sarbanes-Oxley Act, and (7) freedom from shareholder suits.

Scott J. Davis, Would Changes in the Rules for Director Selection and Liability Help Public Companies Gain Some of Private Equity's Advantages?, 76 U. Chi. L. Rev. 83 (2009).

With some exceptions, moreover, this vampire business is just stuff and nonsense:

Despite the common media characterization and focus on leveraged buy-outs (LBOs) or “rip, strip, and flip” funds,295 private equity provides an investment vehicle that has the ability to inject capital and create value in companies that are otherwise capital-starved in the United States.As an investment vehicle, these funds are entrusted to create stable returns for charitable organizations, universities, and pension funds.

Sarah Sutton Osborne, Carried Away: Sun Capital, Politics, and the Potential for A New Spin on "Trade or Business" in Private Equity, 45 Cumb. L. Rev. 595, 633 (2015).

How does private equity create new wealth?

Private-equity involvement strengthens board monitoring of derivative exposures by reducing board size, improving information flows to the board, increasing board control over managers, sharpening director financial incentives to monitor derivative exposure carefully, and attracting highly qualified, more financially sophisticated directors who are better able to understand the associated risks. It also creates incentives for managers to carefully evaluate risk-return tradeoffs. These strengths could be particularly important for financial firms that have experienced tremendous write-downs of their loan portfolios ....

Large increases in debt also create strong managerial incentives to improve firm efficiency because they: (1) make stock prices much more sensitive to improvements in firm value; and (2) motivate managers to use firm cash conservatively and to eliminate underutilized assets so as to minimize the risk of bankruptcy, financial distress, and the accompanying forced management turnover. Moreover, debtholders and institutional investors can further improve firm risk monitoring since they are large investors who frequently hold both debt and equity positions in private-equity-controlled firms. This gives them good access to and strong incentives to monitor proprietary firm information flows to accomplish this goal. Thus, the shift toward greater private-equity ownership in the economy can be viewed as a value-creating response to increased derivative activity and contract exposure levels, especially in less competitive industries where product market competition is a weaker alternative mechanism for motivating managers to improve firm efficiency and profitability.

Ronald W. Masulis & Randall S. Thomas, Does Private Equity Create Wealth? The Effects of Private Equity and Derivatives on Corporate Governance, 76 U. Chi. L. Rev. 219, 220–21 (2009)

 

My article, Enhanced Accountability: The Catholic Church’s Unfinished Business, has been posted to SSRN

Enhanced Accountability: The Catholic Church’s Unfinished Business (July 17, 2019). 53 University of San Francisco Law Review 165 (2019); UCLA School of Law, Public Law Research Paper No. 19-22. Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3421795

Abstract: Events of the Summer 2018 brought the long running sexual abuse crisis in the Roman Catholic Church back onto the front pages, highlighting the role of diocesan bishops in covering up the scandal and enabling abusers. In response to these developments, the Church is again considering reforms to protect victims and punish abusers and enablers. This article proposes that the Church create a system for laity to anonymously report allegations, enact strong protections for whistleblowers, and impose a mandatory whistleblowing requirement on priests. As a 2018 Pennsylvania grand jury report demonstrates, however, the laity was reporting the abuse to the Church but the hierarchy buried those reports in secret files. The ultimate problem thus is not so much the lack of reporting, as it was the lack of action after the report. Accordingly, the article’s principal proposal is the creation of both diocesan and national disciplinary bodies led by expert lay members as the ultimate authorities in sex abuse cases. The proposal draws an analogy between these bodies and corporate audit committees and argues that a number of aspects of how audit committees function can be usefully adapted to the proposed review bodies.

Keywords: Roman Catholic Church, corporate governance, compliance, law and economics, credence good

Sadly, the article was finalized before the USCCB's June meeting. In anticipation of the proposals likely to be considered at the June meeting, the article was revised at the last minute to critique such ideas as the metropolitan model. I was able to get that critique into the public domain by posting a revised working draft of this paper to SSRN and by writing several short essays for Public Discourse. Although the article's criticisms did not prevail, the USCCB's June 2019 reforms have a three-year sunset provision. I hope my article will provide guidance for that review.

New SSRN Posting--"Bob Cochran on Law and Lawyering--A Catholic Perspective"

Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3421790

Abstract

This essay is a contribution to a festschrift honoring Pepperdine law professor Robert Cochran. In addition to his many other professional accomplishments, Professor Cochran is a leading figure in the study of Law and Christianity.

One strain of Law and Christianity scholarship focuses on normative critiques of substantive legal issues based on Christian theology. In other words, it seeks to make the civil law more moral; i.e., to conform Man’s Law to God’s Law. A second strain seeks to help lawyers deal with the difficulties inherent in being a Christian and a lawyer. As Cochran has put it, one might ask “whether there is a connection between religious faith and what ordinary lawyers do in ordinary law offices on ordinary Wednesday afternoons.”

Cochran’s work has intersected both possibilities. In Part I of this Article, I tackle his analysis of the extent to which we should strive to harmonize God’s and Man’s Law. In Part II, I turn to Cochran’s analysis of the Christian lawyer’s vocation. In both parts, I come at his work from the perspective of a Roman Catholic called upon to give religious assent to both Christian scripture and, where I differ from Cochran, the Church’s Magisterium.

Keywords: law, jurisprudence, law and religion

Apparently, I'm the Avis of corporate law professors

Readers of a certain age will recall Avis Rent-a-Car's slogan "We're #2. We try harder." Apropos of which I refer you to Robert Anderson's post: Citation Engagement Counts - The Case of Corporate Law Scholars:

Citation counts (and other types of citation-based metrics) are increasing in importance in the legal academy. Some people like the objectivity of these measures and others lament their failure to capture important non-quantifiable aspects of scholarly influence.

One of the most influential citation count rankings in the legal academy is the Sisk-Leiter approach that Greg Sisk updates every three years. Last fall when the new Sisk et al. citation count study came out I proposed a small change to the Sisk-Leiter method that would attempt to measure engagement, defined as citing a particular article more than once. This was designed to address the "throwaway" citation problem that critics of citation counts have raised--that some papers may receive a large number of perfunctory "one off" citations that are less meaningful as a measure of scholarly influence.

I decided to experiment with this using the most highly cited scholars in my field, corporate law and securities regulation, using the citation count rankings as compiled by Brian Leiter. ...

Although the two measures do produce slightly different ordinal rankings, the differences are not significant at least for this small group of 20 scholars. Professor Stephen Bainbridge moves up from third place to second place and Professor Donald Langevoort moves up from 7th place to 5th place.

Will the SEC stop policing shareholder proposals? If so, how will that work?

Bloomberg reports:

Companies that receive shareholder proposals and want to prevent them from going to a vote can ask the SEC to weigh in, a process that was delayed this year by the federal government’s longest shutdown. The commission currently reviews all such proposals, but it’s considering how to “still actively monitor” them without issuing a response every time, Bill Hinman, who directs the SEC’s Division of Corporation Finance, said in a July 16 speech. ...

... the SEC’s potential pullback could lead to more litigation over shareholder proposals and limit the paper trail used for company requests, shareholder reaction, and SEC staff responses.

Indeed. Unless the SEC simultaneously imposes sharp limits on shareholder proposals, it is very hard to see how this would work. My best guess:

• Proponent submits proposal
• Issuer decides to exclude
• Issuer asks SEC to issue no-action latter
• SEC ignores request
• Company goes ahead and excludes proposal
• Proponent files lawsuit
• Company tries to run up proponent's legal expenses

That doesn't look like much of an improvement.

California versus the NCAA re profits from players' names and likenesses

Usually when California and the NCAA are squabbling, my attitude is "it's a pity they can't both lose." But in this case I'm definitely on California's side:

The Fair Pay to Play Act, which was introduced in February by state Sens. Nancy Skinner and Steven Bradford, would prohibit schools in California from taking away scholarships or eligibility from college athletes who use their notoriety to make money. The proposal also allows for athletes to hire an agent or attorney to represent them in business deals without losing their eligibility. Skinner explained that it would not require schools to pay its players, but instead guarantee players the same rights given to Olympic athletes. The law, if it is passed, would not go into effect until January 2023.

NCAA president Mark Emmert wrote a letter to California legislators in May asking that they consider delaying their vote while his organization considered the impact of the law. The NCAA formed a working group in May to examine issues with its current rules, which prevent any student-athletes from marketing their own names, images or likenesses. Emmert said in his letter that if California passes the bill its universities would be violating the organization's bylaws and therefore might not be allowed to participate in NCAA-sanctioned championship events. ...

"Why does a free-market system work for everyone but the student athlete?" Okung asked. "It's about basic civil liberties and repressive measures that still exist today."

Big time college sports treats "student"-athletes as indentured servants. Schools profit hugely off of the students work, including by monetizing their names and likenesses in a variety of ways, usually without even having to pay taxes on those revenues. It's about time somebody forced the NCAA to reform because it's not going to do so voluntarily.

Commissioner Hester Peirce Has Concerns About California's Gender Quota Mandate

Keith Paul Bishop reports on Commissioner Pierce's comments to the Society for Corporate Governance:

The text of the bill explicitly makes a business case to justify the law’s existence; it points to the financial benefits to firms of having women on their boards.  As I noted earlier, the mixed findings of research in this area may not support this business case.

These state efforts concern me because they micromanage an aspect of corporate governance that corporations, boards, and shareholders seem perfectly capable of handling on their own.

The full text of Commissioner Pierce's speech is here. Oddly, the Commissioner failed to cite my work on the subject.

The difference between "publicly held" and "publicly traded"

Keith Paul Bishop explains