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UCLAW's Jim Park on "From Managers to Markets: Valuation and the Shareholder Wealth Paradigm"

Interesting new paper from my friend and UCLAW colleague James Park:

The shareholder wealth paradigm displaced a managerialist model where investors deferred to managers with the expertise to efficiently allocate resources within the firm. The corporate managers who administered such internal capital markets faced less pressure to generate profits than they do today. The conventional explanation of the transition from managerialism to shareholder wealth maximization points to changes in ideology favoring shareholders. This Article argues that a more significant cause of the decline of the managerialist model was a fundamental shift in the way that investors value companies. As managerial skill improved, companies with strong management teams were viewed as more likely to generate earnings over time. Participants in external capital markets became more confident in forecasting earnings for companies with superior management and stock prices for companies increasingly reflected the present value of the company’s earnings potential. As investors focused on projecting future performance, it became important for managers to signal their ability to produce earnings by consistently meeting market projections of such performance. Rather than ideology, the need to demonstrate earnings potential is the primary reason why public companies generally prioritize shareholder wealth maximization. If the transition to shareholder wealth maximization was driven by changes in valuation, it is possible that shifts in valuation methods could result in a world in which shareholder wealth maximization plays a lesser role in shaping corporate purpose.

Park, James J., From Managers to Markets: Valuation and the Shareholder Wealth Paradigm (November 15, 2020). UCLA School of Law, Law-Econ Research Paper No. 20-09, Available at SSRN: https://ssrn.com/abstract=3731764

Is Caremark evolving and, if so, to what?

Very interesting new paper by Roy Shapira:

What role does corporate law play in holding directors accountable for compliance failures? Until recently, the answer has been “very little.” The prevalent standard for director oversight duties (Caremark duties) was set high, effectively demanding that plaintiffs show scienter without having access to discovery. As a result, derivative actions over directors’ failure of oversight were routinely dismissed at the pleading stage, and many commentators considered Caremark duties largely irrelevant. Yet, starting in June 2019, a string of successful Caremark cases have signaled a new era of enhanced oversight duties. This Article contributes to our understanding of the new Caremark era along three dimensions. First, the Article delineates the contours of the shift in Delaware courts’ approach to oversight duties. The courts now increasingly apply the “mission critical compliance” exception to justify enhanced duties, and lower the threshold for receiving information in order to investigate potential failure-of-oversight claims. Second, the Article identifies the drivers of this “new Caremark era,” with special emphasis on the role of a seemingly disparate development in shareholders’ right to information from the company. Shareholders now enjoy much better pre-filing discovery powers, which they can utilize to plead with particularity facts about how the board never even discussed a critical compliance issue, or how they knew about critical problems but chose to ignore them. Armed with these newfound pre-filing investigatory tools, shareholders can overcome what once seemed insuperable pleading hurdles. Finally, the Article evaluates the desirability of the new Caremark era, spotlighting its likely positive effects on information flows inside companies and the ability of the market to discipline corporate misbehavior (better reputational discipline), as well as the ways in which it nicely compensates for the blind spots of other enforcement mechanisms.

Shapira, Roy, A New Caremark Era: Causes and Consequences (December 10, 2020). 98 Washington University Law Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3732838

I remain hopeful that Caremark liability will not become routine, for the reasons I articulated in Caremark and Enterprise Risk Management, 34 Journal of Corporation Law 967 (2009), and The Convergence of Good Faith and Oversight, 55 UCLA Law Review 559 (2008) (Coauthors: Star Lopez and Benjamin Oklan). But I think Professor Shapira's analysis may well be right as a descriptive matter.

I blame Leo Strine (in the friendliest possible way). His opinion in Guttman v. Huang recharacterized Caremark as a duty of loyalty case instead of a day of care case. Once the Delaware Supreme Court swallowed that in Stone v. Ritter we faced the potential of a slippery slope in which Caremark could go from being the hardest corporate law claim to prove to a potentially crippling source of liability.

Spaghetti with Asian Mushrooms

This recipe is an attempt to replicate a delicious pasta course I once had at Tetsuya's in Sydney.

• 8 ounces thin spaghetti (I prefer De Cecco's # 11 Spaghetti)
• 3.5 ounces bunapi mushrooms, remove the fibrous base (Hokto Kinoko Company Organic is the brand most available in LA)
• 5 ounces shiitake mushrooms, stemmed and sliced thinly
• 2 cloves garlic, pressed (I like my Oxo garlic press)
• 3 tablespoons sake
• 2 ½ tablespoons mirin
• 1 ½ tablespoons low sodium soy sauce
• 1 ½ tablespoons fish sauce (as always, I prefer Red Boat)
• 1 tablespoon Worcestershire sauce
• 2 teaspoons sesame oil
• ½ cup water from cooking the pasta
• ¼ teaspoon Better than Bouillon chicken flavor base
• ¼ teaspoon Better than Bouillon beef flavor base
• 1 tablespoon chives cut to ~¼ inch length
• ½ tablespoon chives, cut to 1 inch length
• olive oil
• salt and pepper

In a large pot, bring 4 quarts of water to a rolling boil. Add a couple of large pinches of salt. Cook spaghetti for 6 minutes, reserve ½ cup of the pasta water in a small bowl, and drain pasta and set aside. 

While the reserved pasta water is still hot, add the Better than Bouillon and stir to dissolve. Combine the other liquid ingredients in a small bowl and whisk briefly to combine. 

Place a 3 quart sauté pan (I love my All-Clad pan) over medium-high heat. After a couple of minutes, add a large drizzle of olive oil. As soon as it starts to shimmer, add the mushrooms. The mushrooms will exude a considerable amount of water. Allow the water to boil off, stirring frequently. Once the water has evaporated and the mushrooms begin to sizzle, reduce the heat to medium, season with salt and pepper (go light with the salt) and sauté until they have softened and begun to take on some color. Add garlic and sauté for 1 minute.

Add the sake mixture and deglaze the pan, scrapping up any brown bits. Add the bouillon mix and the short chives. Raise the heat to high, bring the sauce, and allow it to reduce for a minute or two.

Add the pasta and let it finish cooking in the sauce for a minute or two (at most) depending on how al dente you like it.

Serve in large pasta bowls, garnish with the long pieces of chives.

Tastes earthy and warming.

We drank a 2018 Tablas Creek Esprit de Tablas (Paso Robles), which is a blend of 40% Mourvèdre, 27% Syrah, 23% Grenache, and 10% Counoise. (Counties is a blending grape best known as part of the Chateauneuf-du-Pape blend.) Deep purple. Big nose of blue and black berries. On the palate, the flavor associations included blackberries, raspberries, pepper, and warm spices. Juicy and a bit jammy. Impression of sweet fruit on the finish.

Pappardelle with Tomato-Cream Sauce

This recipe was an attempt to recreate Louise Trattoria’s Pappardelle with Spicy Sausage. I’ve made it with both spicy and mild Italian sausage, boneless and skinless chicken thighs, crawfish tails and andouille sausage, and meatballs. It’s always turned out great.

• 8 ounces pappardelle pasta (I prefer De Cecco)
• 8 ounces Italian sausage (buy in bulk or buy links and remove casings)
• 1 28-ounce can whole peeled San Marzano tomatoes, drained (optional: reserve juice), and roughly chopped (I usually opt for Cento)
• 6 basil leaves, cut chiffonade
• 2 cloves garlic, minced
• ½ tablespoon tomato paste
• ¾ cups heavy cream
• Red pepper flakes (optional)
• Olive oil
• Salt
• Black pepper freshly ground
• 6 ounces Pecorino Romano, grated

Bring large pot of well salted water to a boil and cook the pasta for 4 minutes, reserve ¾ cup of pasta water, drain.

Heat a large sauté pan over medium-high heat. Add a drizzle of olive oil, add the sausage and brown. Break up the sausage as it cooks. When the sausage is browned blot with paper towels to take off excess fat. Add tomatoes, 2/3 of the basil, pepper flakes, and salt and black pepper to taste. Sauté for 2 minutes. Add garlic and tomato paste; sauté for a minute. Add cream, bring to a boil, reduce heat to a low simmer and allow sauce to thicken slightly. Add pasta and cook for a minute or two to al dente. Add half the cheese and combine. If the sauce has thickened up too much, add pasta water by the tablespoon until it is as runny as you like it. Alternatively, if you like a redder sauce, use the reserved tomato juice.

Serve in pasta dishes. Garnish with the remaining cheese and basil.

You can control how spicy the dish turns out by varying whether you use spicy or mild sausage and controlling the amount of pepper flakes you add (if any). If you make it with crawfish and andouille sausage, swap out a Cajun seasoning mix for the red pepper flakes.

Senator Warren Plus Business Roundtable Plus Vanguard, State Street, and Blackrock = Green Washing

1/ Very interesting paper by @AfraAfsharipour on #corporatesocialresponsibility #CSR https://t.co/L7LMqOAbi3 pic.twitter.com/4itRTRr1aT

— Steve Bainbridge (@PrawfBainbridge) January 21, 2021

2/ @AfraAfsharipour concludes "where politics and business are deeply intertwined, and where powerful controlling stockholders have an outsized role, stakeholderism may make little headway." Think about intersection of progressive politics and concentration of share ownership.

— Steve Bainbridge (@PrawfBainbridge) January 21, 2021

3/ In sum, crossing @BusinessTable @Vanguard_Group @blackrock @StateStreet with @SenWarren-style politics mainly results in green washing rather than socially "responsible" actions.

— Steve Bainbridge (@PrawfBainbridge) January 21, 2021

ESG Investment Screens versus Green Innovation

#ESG screens's political biases may be causing ESG funds to be missing out on innovation, including green innovation.https://t.co/0BgtUQT54M pic.twitter.com/VWLb2PH0be

— Steve Bainbridge (@PrawfBainbridge) January 21, 2021

Yours truly on the Federalization of Corporate Law from a 2009 Federalist Society Program

What I've been reading: A Very Short Introduction to Augustine

I just finished and highly recommend Henry Chadwick's Augustine: A Very Short Introduction. As I've often said, I love the VSI series. It's filling in all the gaps in my education. The book description for this 144 page text reports that:

Augustine was arguably the greatest early Christian philosopher. His teachings had a profound effect on Medieval scholarship, Renaissance humanism, and the religious controversies of both the Reformation and the Counter-Reformation. Here, Henry Chadwick places Augustine in his philosophical and religious context and traces the history of his influence on Western thought, both within and beyond the Christian tradition. A handy account to one of the greatest religious thinkers, this Very Short Introduction is both a useful guide for the one who seeks to know Augustine and a fine companion for the one who wishes to know him better.

As for Chadwick:

Henry Chadwick KBE FBA^[1] (23 June 1920 – 17 June 2008) was a British academic, theologian and Church of Englandpriest. A former Dean of Christ Church Cathedral, Oxford – and as such, head of Christ Church, Oxford – he also served as Master of Peterhouse, Cambridge, becoming the first person in four centuries to head a college at both universities.

A leading historian of the early church, Chadwick was appointed Regius Professor at both the universities of Oxford and Cambridge. He was a noted supporter of improved relations with the Catholic Church, and a leading member of the Anglican–Roman Catholic International Commission. An accomplished musician, having studied music to degree level, he took a leading part in the revision and updating of hymnals widely used within Anglicanism, chairing the board of the publisher, Hymns Ancient & Modern Ltd., for 20 years.

I found Chadwick's treatment orthodox, accessible, clear, and enlightening. It's an outstanding literary biography that combines an overview of Augustine's life and concise expositions of his major works.

I'm thinking about not teaching inherent agency power (a.k.a. inherent authority) anymore

Inherent agency power is a stupid doctrine, which the drafters of the Restatement (Second) of Agency invented mainly because they had one case--Watteau v. Fenwick--that couldn't slot into any of the existing categories.

As I discuss in my book Agency, Partnerships & LLCs, the problem is that inherent authority is so formless that it could gradually swallow the entire area of authority. The Restatement (Third) dropped the phrase “inherent agency power.” Instead, it offers a revised and broader version of apparent authority, making clear that conduct such as placing an agent in a position of authority can create apparent authority to do what is customary. To deal with cases like Watteau, the Restatement adopts a new concept called “estoppel of an undisclosed principal.”

Students have a very hard time getting their hands around inherent agency power (as do a lot of judges). It takes more time in class than actual and apparent authority combined.

I wondered whether the effort is worth it. A Westlaw search found only one case referring to "inherent agency power" in the last three years and it was an unreported federal district court decision out of Oklahoma. The same search found only three law review articles in the last three years.

A search for the phrase ["inherent authority" /5 agent] found only two pertinent cases in the last three years. The same search found only one law review article in the last three years.

In sum, inherent authority was controversial from the outset. It is no longer recognized by the Restatement. Courts are no longer citing it. So why am I still teaching it? And why is it still included in my casebook?

 

 

Gary Gensler: Securities & Exchange Commission Chairman and Mushroom Farmer

In light of Joe Biden's reported intent to nominate former CFTC Chairman Gary Gensler to be the next SEC Chairman, I offer a prediction.

I have know many SEC Commissioners over the years. Virtually all of them have said that their Chairman--regardless of political party--treated them like mushrooms: i.e., kept them in the dark and dumped manure on them. 

I'm willing to wager Gensler will continue that not very proud tradition.

But the staff may be in for even worse treatment. At the CFTC, Gensler so antagonized the staff that they successfully unionized. The CFTC was named one of the worst federal agencies for work-life balance, pay, and leadership.

Apparently, none of that matters.

Sam Bray on "The Changing Face of the SEC Restitution Remedy"

Samuel Bray (Notre Dame) is one of our leading experts on equitable remedies and has paid special attention to the use of such remedies by the Securities and Exchange Commission. He has a recent post at Volokh on the implications of the recent Liu v. SEC decision for SEC suits seeking restitution. Recommended reading.

Some personal thoughts on teaching in times of crisis

I’ve noticed several fellow law professors posting on Facebook and on Twitter pondering whether to address the current crisis in class. It’s a legitimate question. And, I think, a hard one.

I was teaching Business Associations at Illinois the morning after Desert Storm started. I told the students it felt weird to be talking about agency law while thousands of people were at war. I also told them that my dad had been a career soldier, so I was really feeling strong emotions. That took about a minute.

But then I told them that part of being a professional is doing your job even in times of stress. Being a fiduciary meant showing up and getting on with your duties to your clients even when you feel like curling up in a corner. So I started teaching (scope of employment, if memory serves).

The law school newspaper said I was the only faculty member who mentioned the war. (It was a different time. Today, of course, there would be multiple institutional emails. Which is probably a good thing.)

In recent years, I’ve had younger colleagues tell me I need to be more sensitive and use class time to talk about what we’re all feeling. Maybe so, although I am personally very uncomfortable with that approach. Especially at UCLA, where what I’m feeling is often out of step with the majority. (Although I assume that I join 99.9999% of my colleagues and students in condemning the insurrection we saw the other day.) But even setting that aside, it’s just not in my comfort zone.

I’m not sure what I would do if I had to teach this week. I’m grateful UCLAW doesn’t start until after the Inauguration. I think I’d give them some version of what I gave the students at Illinois, although maybe accompanied with a more express acknowledgement that that’s hard. Because I think that principle is something they need to learn and one we don’t talk about enough these days.

FWIW, I got amazing student evaluations that semester. Many of them spoke of that moment with warmth and admiration.