ProfessorBainbridge.com

Shareholder Proposals and Conservative Activism

Every time I teach the shareholder proposal rule (Securities Exchange Act Rule 14a-8) in Business Associations, I always wonder the same thing: Why don't conservative activists use the rule more often? Under this rule, a shareholder who has owned at least 1% or $2,000 (whichever is less) of the issuer's voting securities for at least one year may submit to the issuer a proposal to be included on the company's proxy statement and voted on at the company's annual meeting of the shareholders.

In recent years, the shareholder proposal rule has been widely used by institutional investors to press corporate governance matters. For example, proposals in recent years have included such topics as repealing takeover defenses, confidential proxy voting, regulating executive compensation, and the like. Traditionally, however, shareholder proposals were the tool of choice of social activists. Prior to the end of apartheid in South Africa, for example, many proposals favored divestment from South Africa. Shareholders have also used Rule 14a-8 to urge tobacco companies to stop making cigarettes and utilities to get out of the nuclear power business. Many companies have received shareholder proposals relating to non-discrimination on the basis of sexual orientation. And so on.

Yet, we rarely - if ever - see conservative activists using the proposal rule. I find this most curious. Granted, libertarian and pro-business activists might avoid the rule, but what about social activists? Why aren't the Pat Robertsons and James Dobsons of the world using Rule 14a-8 as a cheap way of spreading their views of corporate social responsibility?

A reader who pretty clearly knows what he's talking about wrote in with these thoughts:

It seems that conservatives have attempted to push a limited agenda through the 14a-8 process. For instance, here is a list of some "conservative"proposals that have been submitted:

• prohibit providing support to abortion providers;
• cease supporting NPR;
• charitable contributions to a particular organization or cause;
• prohibit advertising on certain TV shows or with stations that run objectionable material; and
• prohibit the company from giving same sex benefits.

In almost all of these cases, these types of proposals were excluded under 14a-8(i)(7) [as an ordinary business matter]. Which brings me to your point. I think that most proposals pushing a conservative agenda would deal with ordinary business matters. Most significant social policy proposals (cigarettes, the environment, slave labor, etc) tend to be liberal positions. Also, this may be a stereotype, but most conservatives are more interested in making money than the particulars of how the company does it. Most conservatives do not feel strongly enough about how Exxon drills for oil or how much GE pays its senior executives as long as shareholder value is increasing. Therefore, most positions that would be advocated would probably fall into (i)(7).

Earlier you asked about Abercrombie and Fitch's advertising and the use of 14a-8 to limit their advertising. A shareholder proposal seeking to stop an ad campaign would probably fall into the 14a-8(i)(7) - method of advertising line of no-action letters. Additionally, it helps to understand the people submitting proposals. Most proposals are submitted by unions, nuns and John Chevedden/Evelyn Davis types. The average shareholder (liberal or conservative) does not submit shareholder proposals and conservatives do not organize (like the sisters or unions) to push for their vision. Maybe this will change in the future, but I doubt it. That's my brief take on the situation.

Privatizing UC Law and Business Schools

On his blog, the LAT's Michael Hiltzik offers up his column on "privatization" efforts at the UC system's law and business schools. And elaborates:

One observation that didn't make it into the column because of space constraints came from Stephen Bainbridge of UCLA Law School, who observed that the real problem with state funding of UC is its volatility: In good times, the state gives UC lots of money, and in bad times it takes it away. (My apologies to Prof. Bainbridge, who stresses that he was speaking for himself, not UC or UCLA.) Well, he can say that again: UC's share of the general fund careens about like a roller-coaster. A graph of the journey was provided to legislators by the university in 1999 (see page 22), and that was before the tech crash.

The Left's Anti-Catholic Bigotry

Over at Mirror of Justice, some of my fellow participants have been discussing what Greg Sisk calls "the prospect of a politician who dissents from fundamental church teachings on public protection of human life becoming the most prominent Catholic in America." See also Greg's earlier post Kerry, the Catholic Public Servant, and Catholic Teaching. (Update: Here's another interesting take.) I've stayed out of it, because I tend to use that blog mostly to write about Catholic social teaching and the corporation, doing my poliblogging over here.

A recent Time magazine article brought the issue into national focus, however, by quoting a Vatican official, who is an American: "People in Rome are becoming more and more aware that there's a problem with John Kerry, and a potential scandal with his apparent profession of his Catholic faith and some of his stances, particularly abortion." True to form, this brought out the best in Matt Yglesias, who went all Stalinesque (or would it be Maoesque? I can never remember which of them killed more people), opining that "the Vatican is the tenacious foe that the left can never quite seem to kill off." To the contrary, it was the Vatican - in the person of John Paul II - that played a key role in killing off the left's great 20th century experiment in Soviet communism.

In any case, as a number of those who left comments at Yglesias' blog pointed out, the US Catholic hierarchy is very hard to place on the standard 2-dimensional chart of US politics. If Yglesias had bothered to inform himself before spewing his bile, he might have found the thoughtful comments at Mirror of Justice of my co-bloggers Vince Rougeau and Mark Sargent, neither of whom think Catholics have a home in the American political scene as it is currently organized.

Oh well, at least the next time somebody asks me for proof of Philip Jenkins' claim that anti-Catholic bigotry is "America’s last acceptable prejudice," I can just point them to Yglesias.

Update: TM Lutas chimes in with:

I'm a Catholic. Clearly, I think that the idea that the Church is fascistic or otherwise 'not an admirable organization' as Matt Yglesias put it is simply false and insulting. But for those who do believe such things, how can they pull the lever for Kerry? Either they really don't believe what they say or they simply don't think that membership in a fascistic organization is all that bad. I'm not quite sure which is worse.

Me either.

Scalia Recusal Issue

My friend and former Illinois colleague, Ron Rotunda is a leading legal ethics expert. On Sunday he weighed in on the Scalia recusal kerfuffle, coming down on the side of non-recusal:

There is a fair amount of case law interpreting the language Justice Scalia's attackers hurl against him. And the precedent says Justice Scalia is right.

For example, in a case interpreting this exact same language, the Pennsylvania Supreme Court held the judge in a murder trial did not have to disqualify himself simply because he knew the victim and was a mourner at his funeral. The convicted murderer did not like that result.

In another case, the complaining witness in an attempted rape prosecution was a high school classmate and "a close personal friend" of the judge's daughter, who attended the trial. The victim would also be maid of honor in the daughter's forthcoming wedding. The Oklahoma court held the judge acted properly in refusing to recuse himself. ... [Ed.: Numerous other examples omitted.]

There is a good reason courts, both state and federal, interpret the "appearance of impartiality" language objectively and narrowly. Judges do not divorce themselves from the world when they don their robes. They still are allowed to have friends, go on hunting trips and live a life.

Chief Justice Harlan Fiske Stone [did not] disqualify himself from cases involving President Herbert Hoover, although he was a buddy and a member of Hoover's informal "medicine ball" Cabinet. (They would throw medicine balls at each other before breakfast.) Nor did Justice Robert Jackson, who was a personal friend of Franklin D. Roosevelt and took vacations with him. Nor did Justice William O. Douglas, who was a poker buddy of FDR. Nor did Chief Justice Frederick Vinson, who was a poker buddy of Harry Truman's. Come to think of it, Justice Ruth Bader Ginsburg has given her name and presence to a lecture series cosponsored by the NOW (National Organization for Women) Legal Defense and Education Fund, an organization that often argues women's rights issues before Justice Ginsburg. Should she disqualify herself from issues involving women's rights?

As Ron concludes, the Scalia flap is about partisan politics not judicial ethics.

Shareholder activism by public and union pension funds

The most activist investors tend to be union and public pension funds. I worry that their interests may depart from those of other investors, which is the subject of a very good article in today's LA Times($):

"I don't want my board of directors worrying about whether they're going to have problems with the union pension fund if they drive a hard bargain at the bargaining table," said Stephen M. Bainbridge, a professor at the UCLA School of Law.

Joseph A. Grundfest, a professor at Stanford and a former SEC commissioner, called it "fair and appropriate" to consider the pressures and motivations that influence the giant pension funds in their dealings with companies — just as the public has long scrutinized the conflicts of corporate executives. "What's good for the goose is good for the gander," he said. "There are potential conflicts on both sides of this fence." ...

"You don't run General Motors like a New England town meeting," Bainbridge said. "You can't have millions of shareholders weighing in on every decision that the board makes."

Well, you can see why I thought it was so good, but it really is pretty thoughtful (especially by the Times' standards!).

Senate Hardball

So Daschle wants to play hardball, does he?

Senate Democrats, turning up the heat in their long-simmering feud with President Bush over judicial nominations, vowed on Friday to block all new federal court appointments unless the White House promises to stop installing judges while Congress is in recess.

If Daschle tries, Bush ought to ratchet things up by following Randy Barnett's suggestion:

The one real power Republicans have over the Democrats in this fight is the recess-appointment power. It's the only threat that could force Senate Dems to budge. ... The main problem with a recess strategy is that it makes the GOP's best nominees temporary second-class judges. Not only would this fail to realign the judiciary, but it would deter the most promising judicial candidates from accepting. For this reason, recess appointments, as currently conceived, are not a credible threat. Well, until you add a twist.

President Bush could threaten to line judicial openings with committed conservative and libertarian recess appointees, people who are too old, too young, too smart, too conservative, or too burned by previous failed nominations to ever be considered for ordinary judicial appointments. Unlike practitioners who cannot abandon their practice for a short stint on the bench, professors who can take a few semesters off and judges with no prospects of higher judicial office would be ideal. It would be like a judicial clerkship program for conservative and libertarian law professors that can continue as long as there is a Republican president.

I'd volunteer. In the unlikely event somebody ever offered me a regular judgeship, I'd say no - I wouldn't expose myself to jerks like Leahy and Schumer in a confirmation fight - but it would be fun to spend a year or two sabbatical on the 9th Circuit. Especially if doing so flipped Daschle, Schumer, and Leahy the bird.

Microsoft and Bundling

The critical defect in the US settlement with Microsoft and the critical thing the EU got right goes to the issue of bundling. Brad DeLong writes:

Remember the days when there was not one single dominant browser that came preinstalled on 95% of PCs sold? Back then there was ferocious competition in the browser market, as first a number of competitors and then Netscape and Microsoft worked furiously to upgrade their browsers and add new features to them. Most of these new features turned out to be idiotic. Some turned out to be very useful. Progress in making better browsers was rapid, because browser-makers wanted to make a better product and any new idea about what a browser should be was rapidly deployed to a large enough user base to make it worthwhile for web designers to try to use the new feature.

And now? There is no progress in browsers at all. Why should anyone (besides crazed open sourcies) write a new browser? Why should Microsoft spend any money improving its browser? The point of giving Internet Explorer away for free is to protect Windows's market, after all.

Yeah, I know some antitrust experts opine that bundling is good for consumers. And, yes, some of them don't even work for Microsoft. But I don't see it. Bundling of private goods is fundamentally anti-competitive and, accordingly, reduces innovation. (As an alert reader pointed out, bundling private and public goods can be beneficial because public goods tend to be underproduced. In this case, however, neither WMP nor Windows are public goods.) Prohibiting Microsoft from bundling, say, media players and search engines into the Windows operating system is critical to preserving competition and promoting innovation.
Henry Farrell elaborates:

Albert Hirschman’s Exit, Voice and Loyalty ... points out that the real costs of monopoly are much greater than the inefficient prices they maintain to extract rents. Monopolies are lazy. They have no reason to respond to their customers - where else, after all, can dissatisfied customers go? Without the threat of exit, monopolies face few incentives to improve their service.

I like Hirschman's book a lot, and recommend it highly, but had forgotten he made that argument therein. I'm glad to be reminded; must pull it off the shelf and reread it soon (it's a very short and highly accessible text).

Update: I got a surprising amount of flack on this post, which I find very surprising. Barry Nalebuff quite conclusively rebutted the standard argument that bundling is efficient because it allows a monopolist to price discriminate. As Nalebuff's paper Bundling shows, bundling creates significant barriers to entry. He also showed that the gains to the monopolist from price discrimination are minor compared to those that come from impeding competition by creating barriers to entry. Which is precisely what Microsoft does!

In defense of Pasadena

Kieran Healy is bad mouthing Pasadena over at Crooked Timber. The commenters are even worse (proving once again that my policy against them is correct). In sharp contrast, Crescat Sententia's Amy Lamboley rises to defend Pasadena, opining that:

Old town Pasedena is ok, if you like that sort of thing, but the Descanso Gardens are magnificent, including a veritable forest of camellia bushes, and a formal rose garden. Whenever I fly back home going through Los Angeles, I always like to stop at the Descanso Gardens as a reminder that I am indeed back in the land of perpetual spring. The camellias are probably fading by now, but the roses should be just coming into bloom.

Exactly right. The gardens are magnificent.

The neighborhood around the garden includes some lovely Arts and Crafts houses, including Gamble House, which is open for tours. Other houses can only be viewed from the outside, and directions for a walking tour are provided in the Gamble House gift shop.

Oh to live in the Gamble House. I am a big fan of the Arts and Crafts period, and the Gamble House may well be the finest expression of it anywhere. If you get within 100 miles of Pasadena, you must find a way to visit the Gamble.

The gardens are the best feature of the Huntington as well. I especially recommend the herb garden and the palm garden, but other places are often nicer in the right season. The art collection I didn't find particularly distinguished, but the manuscripts on display are quite nice.

How could Amy forget the rose gardens? I love roses and routinely visit the Huntington for ideas. Indeed, it was at the Huntington that I first discovered the David Austin English Roses that are the pride of my own rose garden.

In sum, I like Pasadena - a lot. I wouldn't want to live there, because the commute to UCLA would be hellish. But I like that I can pop over whenever I want. (Be sure to check out Amy's post, I only excerpted part.)

Bubble Laws

In my TCS column Does the SEC Know When Enough Is Enough?, I wrote:

Corporate scandals are always good news for big government types. After every bubble bursts, going all the way back to the South Sea Bubble, a slew of new laws have been enacted. Why? There is nothing a politician or regulator wants more than to persuade angry investors that he or she is "doing something" and being "aggressive" in rooting out corporate fraud. Look, for example, at how vigorously the SEC is trying to keep up with attorney general Spitzer.

Harvard law professor John Coates emails the following correction:

I endorse the thrust of the sentence, and would debate the implication (that the new laws are bad because they're passed when a bubble bursts), but the claim that the South Sea Bubble spawned reactive legislation perpetuates a myth. The so-called "Bubble Act," banning unchartered companies from holding themselves out as incorporated entities, did not follow but preceded (and perhaps helped cause) the bursting of the South Sea Bubble. To my knowledge, no major reactive legislation was passed in response to the bursting of the South Sea Bubble.

Harris's explanation of the way the Bubble Act myth got going is interesting: England switched from the Julian to the Gregorian calendar in 1751; until then, what we would call January 1 was called March 25. Later writers - including Blackstone, Maitland, and Plumb - were misled into believing the Bubble Act was adopted in the year after the end of the Bubble, when in fact it was adopted during the Bubble, before it burst. And in fact, the moniker, "Bubble Act," was only added many decades later to the law known when passed as "an Act for better securing certain Powers and Privileges, intended to be granted by His Majesty by Two Charters, for Assurance of Ships and Merchandise at Sea, and for lending Money upon Bottomry; and for restraining several extravagant and unwarrantable Practices therein mentioned." Ron Harris, Industrializing English Law (2000).

Huh. Well, at least with Blackstone et al. I'm in good company.

The Separation of Ownership and Control Myth

An article in today's WSJ ($) on the SEC's pending shareholder access proposal perpetuates a number of myths about the history of corporate governance and law. One of the more egregious examples is the authors' discussion of the purported process by which the separation of ownership and control evolved in the US:

In the early 19th century, companies usually had just a handful of shareholders. They ran the company, controlled the board and chose directors from among themselves. At the time, U.S. companies granted shareholders one vote per person, according to Colleen Dunlavy, a professor at the University of Wisconsin-Madison.^* As competition for capital increased, rules were changed to give more say to bigger investors. By 1850, most companies awarded one vote per share. Directors tended to represent the largest investors.

In the early 20th century, power was diffused as stock ownership spread. Individual shareholders' clout was diluted. Sometimes they were asked to vote for directors without knowing the identity of the nominees, says Mr. Seligman, who has written a history of Wall Street.

As companies grew, "no shareholders or groups of shareholders had enough shares to dominate the board," says Charles Elson, a corporate-governance scholar at the University of Delaware, who sits on three boards. "There was a vacuum, and management filled that vacuum by nominating their own folks."

This account is based on Adolf Berle and Gardiner Means' 1932 book The Modern Corporation and Private Property, which did much to popularize this version of history (although it did not originate it). Being based on what is probably the most famous and influential book ever written about corporate governance doesn't make the account true, however. I recounted the real history in my article, The Politics of Corporate Governance: Roe's Strong Managers, Weak Owners, where I explained that:

Economic separation of ownership and control in fact was a feature of American corporations almost from the beginning of the nation: “Banks, and the other public-issue corporations of the [antebellum] period, contained the essential elements of big corporations today: a tripartite internal government structure, a share market that dispersed shareholdings and divided ownership and control, and tendencies to centralize management in full-time administrators and to diminish participation of outside directors in management.” The legal rules upon which Berle and Means laid most of the blame for the separation of ownership and control came along much later, however, presumably as an adaptive response to the economic forces that caused ownership and control to separate. [Citations and footnotes omitted]

Corporations have never been democracies in which ownership and control were united either in law or fact. Claims to the contrary are ahistorical, frequently motivated by the present-day ideological concerns of institutional investors (in particular public and union pension funds, whose interests in corporate control obviously can diverge from those of investors at large).

^* The claim attributed to Professor Dunlavy is another historical error. The actual pattern of shareholder voting rights was more complicated. Prior to the adoption of general incorporation statutes in the mid-1800s, the best evidence as to corporate voting rights is found in individual corporate charters granted by legislatures. Three distinct systems were used. A few charters adopted a one share-one vote rule. Many charters went to the opposite extreme, providing for one vote per shareholder without regard to the number of shares owned. Most followed a middle path, however, limiting the voting rights of large shareholders. Some charters in the latter category simply imposed a maximum number of votes to which any individual shareholder was entitled. Others specified a complicated formula decreasing per share voting rights as the size of the investor's holdings increased. These charters also often imposed a cap on the number of votes any one shareholder could cast. Gradually, to be sure, a trend towards a one share-one vote standard emerged. Yet, this history demonstrates the fundamentally undemocratic nature of the corporation. Contrary to the democratic rhetoric of today's shareholder activists, limitations on shareholder voting rights in fact are as old as the corporate form itself.

Update: Gordon Smith expands the historical background to the discussion by observing that:

Most early American businesses were closely held, but they typically were organized as partnerships (or, in some instances, limited partnerships), not as corporations. Businesses that organized as corporations were capital-intensive undertakings, such as banks, toll roads and bridges, insurance companies, etc. In these entities, the separation of ownership and control was alive and well. What changed in the late 1800s and early 1900s was that the corporate form was used for all sorts of businesses, not just "public works" projects. In short, the corporation became a more important feature of American business life. Since that time, it has commanded most of our attention in debates about economic development.

Quite right. Probably the best treatment of the historical issues is Walter Werner, Corporation Law in Search of its Future, 81 Colum. L. Rev. 1611 (1981). I also highly recommend The Company : A Short History of a Revolutionary Idea.

Run Away, Jury

My latest TCS Daily column

The government's case against Martha Stewart is going to the jury this week. As I'm sure you know by now, Stewart was a close friend of Samuel Waksal, former CEO of ImClone. According to the government, Waksal learned that the FDA had refused to approve ImClone's cancer drug Erbitux, after which Waksal dumped his ImClone shares and tipped off his father and daughter, who dumped their shares. (Ironically, some months after Waksal pled guilty to insider trading, the FDA approved Erbitux.)

Nobody claims that Waksal told Stewart Erbitux had been denied approval. Instead, according to the government, Stewart's broker Peter Bacanovic told Stewart -- via his assistant, Douglas Faneuil -- that Waksal was dumping his shares. In any case, Stewart did sell all her ImClone shares. When the SEC and federal prosecutors investigated, Stewart claimed that she and Bacanovic had a prearranged plan to sell ImClone if the price fell below $60 per share. (Indeed, she set up a web site to publicize her protestations of innocence. For a very funny parody of Stewart's site, check out MarthaStewartTalks.com.)

The government disbelieved Stewart's $60 story. Instead of indicting Stewart for insider trading, however, the government prosecuted her for obstructing justice by lying to federal prosecutors and for securities fraud in misleading Martha Stewart Omnimedia (MSO) shareholders by her public denials of guilt. (The SEC has brought a civil insider trading claim against Stewart. On my blog, I've explained why that claim is a very aggressive -- and dubious -- extension of existing insider trading law. The Justice Department apparently agrees, as prosecutors explained that indicting Stewart on insider trading charges would be an "unprecedented" expansion of the law.)

The presiding judge dismissed the securities fraud claim last week. The false statement and obstruction of justice charges, however, will go to the jury.

The remaining counts against Stewart thus include: (1) conspiracy to obstruct justice, make false statements, and commit perjury in violation of 18 U.S.C. § 371; (2) making false statements in violation of 18 U.S.C. § 1001; and (3) obstruction of justice in violation of 18 U.S.C. § 1505. After an exchange of blog posts, University of Iowa law professor Tung Yin convinced me that the government's allegations, if proven beyond a reasonable doubt, constitute a technical (arguably hyper-technical) violation of those provisions. Even so, as a matter of sound prosecutorial discretion, those claims never should have been brought.

The government's chief star witness, Douglas Faneuil, should not have been a very credible witness. Faneuil dramatized his performance to the point that a defense lawyer asked whether he had taken acting lessons. If you believe his version of events, Faneuil admits that he lied for months. Why should the jury take the word of an admitted liar? Especially an admitted liar who cut a deal with the prosecution and now has every incentive to sing the song written for him by the prosecutors? On top of which, he's a regular drug user who feared drug prosecution. (Admittedly, however, the press reports seem to indicate that he came across as credible to those who were in the courtroom.)

Another star witness, Mariana Pasternak, a friend of Stewart for more than 20 years, testified one day that Stewart recalled Waksal ''was selling or trying to sell his stock, that his daughter was selling or trying to sell his stock.'' She said Stewart added, ''Isn't it nice to have brokers who tell you those things?" The next day, however, it turned out that Pasternak may be a bit off-center. On cross examination, Stewart's attorney asked whether that conversation had actually taken place or if it was all in her head. Pasternak answered: "I do not know if the statement was made by Martha or if it was thought in my mind." She also said she previously told prosecutors that she was not sure about her recollection of events. Ouch.

Even if the key witnesses were credible, however, the obstruction and false statement charges are pretty pathetic. We have here a case in which is the government flung allegations at Stewart, which they ended up deciding not to charge her with. The government then prosecuted Stewart for having denied the very same allegations the government decided it couldn't prove.

Judge John Sprizzo, who is presiding over Stewart's civil case, opined from the bench that:

"I read this indictment. I tell you something ... we have seen a lot more serious obstruction cases. This is not the strongest obstruction case I have ever seen. This is not John Gotti," the judge said, according to a transcript of the pretrial hearing, referring to the notorious Mafia figure.

By bringing such weak charges the prosecution undercut the requirement that the government prove guilt beyond a reasonable doubt. Granted the 5th amendment only gives you a right to remain silent, but shouldn't you be allowed to tell the cops "I didn't do it" without getting hauled up on charges later -- especially if they end up deciding not to charge you with the underlying crime? How many times have you told a copy you didn't see that stop sign? Should you have gone to jail for doing so?

The government is asking us to believe that Martha Stewart, TV show host, corporate president and directors, and multi-millionaire risked her reputation, livelihood, and fame to avoid losing the whopping sum of $45,673 on ImClone stock. The government decided not to charge Stewart with insider trading; instead, the government decided to claim that Stewart's protestations of innocence to investigators and the public violate the law. I can understand why the government would want to hang a high profile scalp on the wall, but this is a case that never should have been brought.

And they say Republicans are the party of the rich...

Drudge reports:

John Kerry is set for a 5-day luxury break at his Sun Valley.... 19.5 rooms at 7,749 square-feet, with a market value of $4.9 million [property taxes of more than $30,000 annually], Kerry's Idaho vacation getaway will be the setting of a Spring Break regroup and unwind....

Kerry is looking forward to enjoying the property, including the grounds, which have been freshly landscaped with Canadian Bluegrass, Fescue and Brome Mixes at a cost of more than $200,000, records show. ... The mansion's "Great Room" is a 500 year old Barn, imported from England and then reassembled in Idaho. ...

While rejuvenating in Sun Valley, Kerry may meet with neighbor George Soros. The financier and philanthropist - and outspoken critic of the Bush administration - recently purchased a 9,000-square-foot 11-bedroom spread close to the Kerry compound.

If the GOP is the party of the rich, maybe the Democrats are the party of the super-rich?

CalPers strikes out at HP

One of the big questions after the Disney vote was whether the uprising against Eisner et al. was a one-time thing or marked a new era of institutional investor activism. We still don't know the answer to that question, but developments at HP suggest that it may be the former:

Hewlett-Packard Co. shareholders re-elected all nine members of the computer maker's board of directors Wednesday, flouting a recommendation by the nation's largest public pension fund. The California Public Employees Retirement System, or CalPERS, last week urged shareholders to withhold votes from five board members who approved Ernst & Young as HP's auditor and tax adviser. CalPERS said the New York-based consulting giant should avoid nonauditing business relationships with HP.

But during HP's annual meeting in Houston, shareholders sided with HP Chairwoman and CEO Carly Fiorina, who said those board members had provided "excellent" advice to senior executives. Eight board members were re-elected by more than 90 percent of shareholders, according to a preliminary ballot count, including four people CalPERS did not support: Lawrence Babbio, Patricia Dunn, George Keyworth and Robert Knowling. Another director, Sanford Litvack, was re-elected with votes from slightly more than 60 percent of shareholders.

I'm an admitted skeptic of institutional investor activism. I think it's an episodic and largely peripheral phenomenon, at least outside the context of takeover fights where the institutions do seem to matter. I also think shareholder activism is bad policy. (See my article Director v. Shareholder Primacy in the Convergence Debate.) My work in this area, however, pre-dates the Disney episode. Over the summer I plan to write a new law review article assessing the state of shareholder activism post-Disney. In the meanwhile, maybe some preliminary thoughts should be my next TCS column. (Update: An alert reader pointed out that director Litvak got dinged badly enough to allow CalPers to nominate an outside candidate if the new shareholder access rule goes through. Good point, but they still only got one out of five.)

HR 3920

My friend and colleague Eugene Volokh analyzes the Congressional Accountability for Judicial Activism Act of 2004, which provides that

The Congress may, if two thirds of each House agree, reverse a judgment of the United States Supreme Court-(1) if that judgment is handed down after the date of the enactment of this Act; and (2) to the extent that judgment concerns the constitutionality of an Act of Congress.

Eugene pays the drafters the compliment of taking the bill at face value and, accordingly, suggests a number of objections to the bill on both constitutional and practical grounds. (See also Amanda Butler's circularity question and Dahlia Lithwick's typically hyperbolic critique.)

I think taking the bill at face value misses the point, however. Or, at least, it misses what my point would be in offering such a bill: namely, to send courts a signal. As a Congressman, I would support such a bill, even if I knew it would never be used. Why? To tell the courts that we've had it with courts using the Constitution to enact the personal policy preferences. To tell them we've had it with courts thinking that they are some sort of super-legislature with power to set social policy on everything from economics to sexuality. And to remind them that in a democracy, it is the will of the people - not of nine unelected old men and women - that is the ultimate authority.

Stewart Appeal

The key plank of Martha Stewart's pending appeal comes as no surprise:

Martha Stewart's lead attorney Robert Morvillo intends to appeal her conviction by arguing the judge unfairly prevented him from explaining to the jury Stewart had not been charged with criminal insider trading, according to a person close to the defense team.

"We think that was important," a person knowledgeable with the strategy told CNNfn. "Some of the jury comments afterwards indicated they felt they were punishing her for the trade. We should have been able to explain you're not being asked to judge the propriety of the trade."

Prosecutor Karen Seymour in her opening argument said Stewart "was told a secret tip" from broker Bacanovic that "the head of ImClone was trying to get rid of his shares." "Morvillo was never allowed to clarify that," the source said. "If you're looking at the state of mind of Martha Stewart you need to know there's no underlying crime to cover up."

It's not a legally very strong case, in my view, but it makes a key moral point about this indictment; namely, the oddity (if not outright unfairness) of charging somebody with lying to you about an underlying activity you decide not to prosecute. Given that the jury clearly was impacted by the prosecutor's "secret tip" allegations, as well in all probability by outside of court publicity, Judge Cedarbaum's refusal to allow Morvillo to drive the point home has long struck me as singularly unfair.