ProfessorBainbridge.com

SEC Gets Disney Right ... Finally

For months now, the SEC has been considering a rule proposal under which shareholders would be allowed to place director nominees on the corporation's proxy statement at company expense. The proposal's in deep political doo-doo and seems unlikely to pass, at least in current form. So some big union pension funds decided to try an end-run on the political process by putting forward a Rule 14a-8 shareholder proposal at Disney that would allow such nominations. Worse yet, the SEC staff decided to do an end-run around the Commission by requiring Disney to put the shareholder proposal on the ballot for the next shareholders' meeting.

Fortunately, somebody at the Commission apparently gave the staff a good talking to about how the regulatory process is supposed to work. Today, the staff announced that it would not require Disney to put the proposal up for a vote.

Good. The proposed rule is a piece of crap - it's lousy public policy (see my TCS columns The SEC: From Bad to Worse?, Pension Funds Play Politics, and Does the SEC Know When Enough Is Enough?). But it's a lot worse when the unelected and unappointed staff tries to do an end-run around both the appointed Commission and the administrative process. Somebody needed to rein in the staff and it looks like somebody did.

The Constitution in Exile

Orin Kerr's got a nice post on Cass Sunstein's use of the phrase: "The Constitution in Exile." According to Sunstein, the phrase is routinely invoked by Conservatives to describe the understanding of the Constitution pre-New Deal. Kerr notes that the phrase, in fact, tends to be used by liberals (mainly Sunstein himself), which Kerr sees as a rhetorical device on their part:

Sunstein's claim is ... that conservatives themselves use the phrase ? "right-wing activists . . . talk about restoration of the 'Constitution in Exile'." The difference matters, I think, because describing something as being "in exile" suggests recognition of a revolutionary agenda. If a government is overthrown and the old leaders flee but remain intact, referring to the old leaders as "the government in exile" suggests that the old government is just biding its time before it can launch a counterrevolution. The rhetorical power of Sunstein's claim lies in its suggestion that conservatives see their own goals as truly revolutionary. If the phrase is not actually used by conservatives, but rather is a characterization by their critics, I think that makes a notable difference.

In my experience, conservatives much more often invoke Scalia's distinction between the "living constitution" advocated by liberals (like Sunstein) and the "dead constitution" advocated by conservatives (like Scalia .. or me, for whatever it's worth). Note that this dichotomy also some rhetorical power. One imagines Dr. Frankenstein (i.e., the Supreme Court) standing above the dead Constitution sprawled out on slab. Throw the switch in time that saved nine, and "It's Alive!" So we spin the "living Constitution" as "Frankenstein's Monster." Heh.

Cass Sunstein is a Very Smart Guy

In a review< /a> of Mark Tushnet's new book on the Rehnquist Supreme Court, Cass Sunstein makes a very cogent observation about the current Court:

Tushnet does not adequately defend his central claim, which is that the division on the Rehnquist Court reflects a split between old and new Republicans. I believe that the split lies elsewhere. Tushnet thinks that the traditional Republicans favor less economic regulation without being social conservatives, whereas the new Republicans are conservative on both economic and social issues. But it is not easy to show that affirmative action, abortion, and gay rights were favored by some older generation of Republicans. Many of the current divisions in the Republican Party involve a split between the libertarians, who favor free markets and also privacy rights of various sorts, and the more powerful Reaganites, who favor free markets but also have sympathy with the religious right and hence distrust privacy rights. O'Connor and Kennedy have some libertarian inclinations, but they are hardly libertarians. In any case, many contemporary Republicans are moderate on both economic and social issues (Christine Whitman, Rudolph Giuliani, George Pataki). In short, it is not easy to map divisions in the Republican Party onto the Rehnquist Court.

My own view is that the real divisions in the Rehnquist Court involve two radically different approaches to constitutional law. In a nutshell: O'Connor and Kennedy are incrementalists, reluctant to make large-scale changes in existing understandings of the law. Scalia, Thomas, and (to a lesser extent) Rehnquist are legal fundamentalists, or "movement judges," eager to insist on the supremacy of their own view of the Constitution, whatever the precedents say.

I think that's basically right. Scalia and Thomas, in particular, are best understood as advocates of the so-called "dead constitution." Advocates of a "living Constitution" are really advocating a legal regime in which the law is whatever 5 out of 9 old men and women in robes say it is (or, in Charles Krauthammer's memorable phrase, "The Constitution is whatever Sandra Day O'Connor says it is. On any given Monday.").

I gather that Tushnet and Sunstein prefer a "living Constitution." As for me, I'm with Scalia and Thomas. I like my constitutions stone cold dead.

In any case, even though I disagree with them about most everything, both Tushnet and Sunstein are very smart guys whose analysis deserves to be read not only by their fellow leftists but also by those of us right of center. Go check them out.

Christmas Eve Dinner: Beef Tenderloin Steaks with Goat Cheese Sauce

Beef Tenderloin Steaks with Goat Cheese Sauce

• 2/3 cups milk

• 1 slice white bread, crusts trimmed, torn into small pieces

• 1 large egg, hard-boiled, chopped

• 1/4 cup crumbled soft fresh goat cheese

• 1 garlic clove, crushed

• 1 teaspoon Dijon mustard

• 1 tablespoon extra virgin olive oil

• juice of 1 small lemon

• Pinch sugar

• Pinch salt

• 1 teaspoon ground white pepper

• Pinch nutmeg

• 1 pound beef tenderloin cut into 8 slices

• 1/2 cup all purpose flour

• 1/4 teaspoon black pepper

• 1/8 teaspoon salt

• 1 tablespoon butter

• 1 tablespoon olive oil

• 1/4 cup Cabernet Sauvignon

• 2 tablespoons Cognac

• 3 tablespoons finely chopped fresh chives

Scald the milk in a small saucepan. In a small food processor, combine the scalded milk, bread, egg, and garlic. Process until well blended. Add the goat cheese, garlic, mustard, olive oil, lemon juice, sugar, salt, pepper, and nutmeg. Process to a smooth consistency. Transfer sauce to a medium saucepan.

Using the heel of your palm, briefly pound out filet slices to about inch thickness. Mix flour, salt, and pepper. Lightly dredge steaks in flour mixture, shaking off excess. Melt 1 tablespoon butter together with olive oil in a large skillet over high heat. Saut beef in batches until brown, about 1 minute per side. Transfer beef to platter. Add wine to skillet; bring to boil. Add cognac. Touch a match to wine/congac mixture to flame. Add beef; turn to coat.

 

Bring goat cheese sauce to a simmer. Stir in 2 tablespoons of the chives. Spoon onto plate; top with beef slices; dot beef slices with a bit of sauce.

 

Serve with gnocchi and Cabernet Glazed Shallots

Cabernet Glazed Shallots

• 1 tablespoon butter

• 8 shallots, peeled and trimmed

• 2 cups Cabernet Sauvignon

• 3 tablespoons sugar

• 1/3 cup sparkling apple juice

Melt the butter in heavy skillet over low heat. Add the shallots. Saute until the shallots are begin to soften, stirring occasionally, about 10 minutes. Add the Cabernet and sugar. Stir until the sugar dissolves. Simmer mixture until the liquid is reduced to a glaze consistency, stirring occasionally (about 20 minutes).

Add the apple juice to skillet, increasing heat to return liquid to boil. Reduce heat and simmer until the liquid is reduced to a glaze consistency, stirring occasionally (about 15 minutes). Season to taste with salt and pepper.

Serve with:

Gnocchi (locally I can get the Frerrara brand)

A well-aged Cabernet Sauvignon (preferably 10 years old or more)

Scatter remaining chives over each plate and dot plate borders with remaining glaze from shallot preparation.

Cowen on Bebchuk and Fried on Executive Compensation

Regular readers will recall that I'm spending my Christmas break writing a review for the Texas Law Review of Lucian bebchuk and Jesse Fried's book Pay Without Performance: The Unfulfilled Promose of Executive Compensation. Their book is getting a lot of attention both in the press and the academy - and deservedly so, as they do a very good job as advocates of a so-called managerial power model of executive compensation.

Bebchuk and Fried forcefully contend that “managers have used their influence [over corporate boards of directors] to obtain higher compensation through arrangements that have substantially decoupled pay from performance." In other words, the executive compensation scandal is not the rapid growth of management pay in recent years, as too many glibly opine, but rather the failure of compensation schemes to award high pay only for top performance. They attribute this failure to management’s control over the board of directors. They claim that “directors have been influenced by management, sympathetic to executives, insufficiently motivated to bargain over compensation, or simply ineffectual in overseeing compensation.” As a result, executive pay has greatly exceeded the levels that would prevail if directors loyal to shareholder interests actually bargained with managers at arms-length.

In today's WSJ($), economist and blogger Tyler Cowen offers a very thoughtful review of Pay without Performance. Key observations:

Messrs. Bebchuk and Fried focus their criticisms on the "arm's length" model of hiring CEOs. According to such a model, a potential CEO and the company in search of an executive will strike a rational bargain, calculating costs and benefits on each side and picking the compensation scheme that will best serve the purposes of all concerned. Messrs. Bebchuk and Fried assemble an array of evidence to suggest that cozy deals between CEOs and their boards get in the way of this admirable rationality.

But the arm's-length model is not so easily defeated. Assume the worst -- that CEOs and boards are in cahoots. Outside capital still approaches this corrupt bundle from its own arm's-length point of view. If the problem were a big one, surely some firms would set up truly rational and fair executive-pay incentives to attract capital at a lower cost. And over time we would expect those firms to succeed in the marketplace. But there is no evidence of this happening. One would think that new firms would be in the best position to correct the inefficient status quo, but the data do not suggest that they are set up with more "rational" models of governance.

(Temporary nonsubscriber link here.)  In other words, you would only buy Bebchuk and Fried's thesis as a complete explanation of what's going on with executive compensation if you have no faith in markets at all. When you see my review, you'll see that I've concluded that their model is but one of several complimentary rather than competing explanations for the observed pattern of executive compensation practices.

Bill Klein

My UCLA colleague, co-author, and friend Bill Klein is one of the few legal scholars to have established a world-class reputation in two distinct fields (in Bill's case, taxation and business associations). Tax Prof Blog has posted a profile of Bill, which focuses on his tax work. It's a very nice tribute to a great scholar.

A New Strategy for Fixing the SEC

I've been a big proponent of the dump William Donaldson movement. The nominally Republican SEC Chairman has been a disaster: he consistently sides with the Democrats on the Commission, consistently supports expanding government regulation (see, e.g., hedge funds and mutual funds), and has pursued Spitzer-like questionable enforcement cases. (Type Donaldson into the search box in the left sidebar of you want tons of documentation.)

Unfortunately, as the WSJ ($) points out today, firing Donaldson would be a tough call for Bush:

Getting rid of Mr. Donaldson would bring its own complications. For one, he is credited with calming the waters after the stormy tenure of former SEC Chairman Harvey Pitt, who was criticized for not uncovering corporate fraud at companies like Enron Corp. The SEC also was seen as taking a back seat to New York Attorney General Eliot Spitzer in revealing conflicts of interest on Wall Street. ...

Mr. Donaldson's most potent weapon might be the support he enjoys from powerful lawmakers on Capitol Hill, including Rep. Michael G. Oxley (R., Ohio), chairman of the House Financial Services Committee, and Sen. Richard Shelby (R., Ala.), who is chairman of the Banking Committee. ...

If the White House replaces Mr. Donaldson, Mr. Bush runs the risk of looking like he's cowing to business, and the SEC once again could become a lightning rod for criticism. ...

There is another reason President Bush might want to keep Mr. Donaldson as chairman. Political observers say the president will need a tough securities watchdog if he expects his Social Security overhaul initiative to pass. The plan, which would let taxpayers create private investment accounts, would require vigorous oversight of the financial markets. Mr. Bush might not want to risk a debate over how committed the White House is to policing financial fraud.

Finally, Donaldson is an old family friend of the Bushes. But the Journal has a new solution:

The White House will have the opportunity to replace the agency's two Democratic commissioners next year with the departure of Harvey Goldschmid, whose term already has expired, and Roel Campos, whose term expires in June. While Senate Democrats can recommend successors, the White House has the final say about who is nominated. The nominee must be confirmed by a majority of the Senate.

Replacing Goldschmid would be a particularly helpful move, as he's been the intellectual force behind a lot of these anti-business moves at the Commission. The problem will be to find some pro-business Democrats. Are there any left or have they also become economic populists? (Hmm... I wonder what would happen if I changed my party registration to Democrat?)

New Paper on SEC Shareholder Access Proposal

My paper A Comment on the SEC Shareholder Access Proposal can now be downloaded. Abstract:

The Securities and Exchange Commission (SEC) recently proposed a set of amendments to its proxy rules intended to provide shareholders of public corporations with a limited ability to nominate candidates for a corporation's board of directors and to have their nominee placed on the corporation's own proxy statement and card. This essay reviews the principal features of the proposal and identifies several issues remaining for resolution. The essay concludes that the SEC likely has authority to adopt the proposal, but argues that the costs the rule will impose on corporations outweigh any likely benefits from greater shareholder democracy.

Exam Day

I doubt whether students know (or care) that exam day can be almost as stressful for the professor as for the student. (Well, not quite, but we're older and more decrepit.) You have to be in the building, just in case some problem with the exam arises. If you run into students before the exam, a large percent give you the evil eye (sort of the way suspected heretics might have watched Torquemada). Even worse, if you run into them afterwards, a certain percentage start eyeing you the way Tony Soprano does when he's sizing up a guy for cement overshoes. Being the delicate type that I am, I tend to make a mad dash for my office, hunker down, and keep my fingers crossed.

My Waitlist

The Associate Dean just informed me that my Business Associations class next semester is full and has 20 students on the waiting list. She's going to make me move to a bigger room and take the students off the waiting list. (Why she didn't make me do that in the fall when the class was also over-subscribed is something of a mystery, but I don't ask obnoxious questions of a lady with the power to make me teach at 8 am!)

But hold on a minute. Via Marginal Revolution, we learn of this amusing story:

Jay Wilson, a second-year law student at New York University, was desperate to register for a popular course in constitutional law.

Unfortunately for him, the course, taught by the youthful Daryl Levinson, was completely booked for the upcoming spring semester. Fortunately, Mr. Wilson had some money to spare. In a posting on an online bulletin board at the law school, Mr. Wilson offered $300 to any student willing to drop the course to make room for him...

Students interviewed at the law school said the practice of exchanging course spots is common at the school. As a kind gesture, some cash-strapped students have promised to bake cookies for willing traders or pass them invitations to exclusive parties.

Mr. Wilson, they said, took things to a new level: a no-nonsense business deal, the sort of financial transaction that they expect to deal with only after graduation. (Link)

Marginal Revolutionary Alex Tabarrok goes on to observe:

Of course, the authorities soon moved to quash such deals.  The dean, however, did not explain why paying to get into a class is wrong but paying to get into law school is good.  Hmmm....perhaps Mr. Wilson would have had better luck had he offered to pay the dean rather than another student.

So why shouldn't the Associate Dean let me auction off, say, 10 spaces to the students on the waiting list? I'd go halfsies with her. Heck, I'd even make a donation to the law school's annual fund.

Larry Ribstein has a somewhat more serious (and sensible) take on the matter:

I have a follow-up suggestion:  limit enrollment of every course to some minimum required to offer the course, then let students bid, and evaluate professors based on the bids.  For this purpose, it doesn't have to be real money -- just offer the students a set amount of "class cash" so they have to ration their resources.  [ProfB: Hey! Wait just a darn minute. I like cold cash better than "class cash."]

... If we are going to have students evaluate teachers, let's do it in a meaningful way, with markets.

You say this is not nuanced enough -- we don't know why students are bidding high for a course and it might be for bad reasons?  But students have a lot at stake in their legal education, and they are entitled to the assumption that they're mature, responsible adults. No reason not to trust the market in this case.

The Naked Public Square

First Things' web site has just posted the sympos ium from the last issue on the 20th anniversary of Father Richard John Neuhaus' classic work The Naked Public Square: Religion and Democracy in America. Two decades on, it remains the single best work I've ever read on the proper role of religion in public discourse in a liberal democracy. The contributors to the symposium are generally positive in their appraisal, although many offer candid and constructive critiques of at least portions of Neuhaus' argument. Well worth reading.

Oracle wins

So PeopleSoft has finally agreed to be acquired by Oracle. Quick thoughts: It proves hostile takeovers will work in the technology sector. In the boom days, you couldn't do hostile takeovers because your main asset was the people who worked for the target and they could easily jump ship. Today, they have few places to go, which makes consolidation much easier and hostile tactics viable. You can risk alienating some of the target's employees, because they don't have zillions of alternative employment options anymore.

Delaware Vice Chancellor Leo Strine won't get the chance to strike down the poison pill, as the litigation presumably will settle. I don't know how Strine was going to do it, given the clear Delaware supreme court precedents upholding the pill, but he's a very smart guy who likely would have come up with an interesting idea.

Larry Ellison will be even more insufferable than ever.

Age

I've been 46 for two days now. Funny, I don't feel any more decrepit. Of course, that's not saying all that much.

The Disney Case

NY Post quotes us:

If the shareholders win, boards could be held liable "not just for big decisions like mergers but also compensation and other run-of-the-mill decisions," said Stephen Bainbridge, a law professor at UCLA.

Silver Oak Cabernet Sauvignon (Alexander Valley) 1992

A beautiful Cabernet at prime drinking age. A rich bouquet of black currants, cedar, and olives. Deep flavors of prunes, cassis, leather, and cedar. Grade: A