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Alan Murray on CSR and Eco-Terror

Alan Murray is one of my favorite WSJ columnists, but I have to call him out on today's column on corporate social responsibility. Murray starts out okay:

The last time I wrote skeptically about corporate social responsibility, I received a curt email from my mother. "So," she wrote, "corporations shouldn't be socially responsible?"

Let me try again. The question isn't whether corporations have social responsibilities. The question is: Who gets to decide what those responsibilities are? Increasingly, clever activist groups, which have failed to achieve their goals through legitimate political means, are using the social-responsibility mantra to try to impose their will on companies. All too often, beleaguered companies are caving.

So far so good. I yield to no one in as a defender of the shareholder wealth maximization norm. I also agree with Murray's observation that CSR advocates are trying to pressure corporations to advance aspects of the activists' political agenda that they have been unable to acheive through the legislative process. Finally, I agree that spineless managers caving to CSR pressure is a problem.

But then Murray segues into a discussion of how fringe CSR groups who activities verge on eco-terrorism pressured the NYSE into refusing to list a company that does animal experiments. Obviously, I have no truck with these animal rights extremists, but Murray's flat statement that "The New York Stock Exchange is the latest example" of how companies cave to CSR advocates arguably could be read as tarring mainstream CSR activists with the eco-terrorist brush. A clear statement by Murray that he recognizes the difference would have been appropriate.

There is no slippery slope between conventional CSR and the sort of extremism Murray appropriately condemns. Hence, he could have condemned the latter without opening his column with a suggestion that he was talking about CSR in general.

Roberts Takes the Easy Way Out

I haven't seen the transcript yet, so the following is merely provisional, but I'm disappointed by how SCOTUS CJ nominee John Roberts reportedly handled one issue:

Judge Roberts testified, as he was pressed for his views on legalized abortion, that there is nothing in his Catholic faith that would prevent him from adhering to settled law on the bitterly divisive issue.

Senator Specter questioned him about the 1973 Supreme Court decision that upheld the right of a woman to choose abortion and the 1992 decision that reaffirmed it.

Mr. Specter wanted to know if Judge Roberts agreed with what Senator John F. Kennedy told a group of Protestant ministers in 1960: "I do not speak for the church on public matters, and the church does not speak for me."

"I agree with that, senator, yes," said Judge Roberts.

As those who followed my extended debate with David Giacalone know, I believe that Kennedy's famous Houston speech was a cop-out and inconsistent with clear Catholic teaching on the civic responsibilities of Catholics. This is not to say, of course, that a Catholic judge inevitably must vote to strike down Roe. As I have emphasized repeatedly, this issue presents complex moral and judicial ethical issues. I'm just disappointed (but not especially surprised, I guess, given the politicization of the confirmation process) that Roberts so blithely opted for the easy way out.

In related news, James Joyner takes Roberts to task for his statement that Roe is "settled law." here's what Roberts reportedly said:

The heart of the abortion ruling is "settled as a precedent of the court, entitled to respect under principles of stare decisis," the concept that long-established rulings should be given extra weight, Roberts said.

Here's James' take:

John Roberts may have considerably set back his prospects for getting confirmed as the next Chief Justice of the Supreme Court, telling the Senate that Roe vs. Wade is "settled law." ... The mere fact that the Supreme Court rules on something does not make it settled law. Abortion remains the single most controversial issue in American public policy, precisely because many view the Roe precedent as illegitimate. The right to abortion was created in 1973 as an extension of the right to privacy created in 1965. Neither have any but a tangential basis in the Constitution.

I take James' point, but I'm inclined to think that Roberts may have left himself some wiggle room. Obviously Roe is established as "a precedent of the court," and like any other precedent is "entitled to respect under principles of stare decisis," but that doesn't mean it is carved in stone. Stare decisis is subject to lots of exceptions. (If it were not so, the Court in Brown would have been stuck with the separate but equal rule of Plessey.) What Roberts said, in my view, would not prevent him from later writing an opinion that nods to stare decisis and then limits or even overturns Roe on grounds that one or more of established exceptions to the rule of stare decisis is present.

BTW, the Times also reports on the tenor of questioning by Senator Ted Kennedy:

Senator Kennedy seemed unconvinced, sometimes cutting off the judge's replies.

"Let him finish," Senator Specter, who heads the panel, told Mr. Kennedy more than once.

Wouldn't you just love to see somebody someday get a chance to subject Ted to that kind of questioning with respect to some of Ted's more infamous past exploits?

Cost-Plus No-Bid Contracts

As the Katrina recovery effort begins, critics are already hounding the administration's chosen approach:

... the current emergency has created a rush to skimp on competitive bidding processes designed to increase potential savings and enhance work quality. A handful of no-bid, “cost-plus” contracts similar to the ones handed out in Iraq have already been signed—with some of the same companies. This time the administration has begun to use the current emergency as an excuse to circumvent routine competitive-bidding processes, while virtually deflecting the hundreds of businesses that have been calling the Army Corps and FEMA to learn how they can get in on the action. We can expect new tales of wasted money and shoddy work. (Link)

What's understand is that it is the combination of no-bid, cost-plus contracts, and cronyism that is the proper target of criticism. Taken individually, they would be far lass objectionable.

No-bid contracts generally are to be disfavored, because they eliminate the cost-savings that can be generated when potential suppliers are forced to compete. Yet, they also are a perfectly appropriate way of slicing through government red tape during an emergency.

As for cost-plus contracts, they have a well-established economic justification, as I explained in a recent TCS column on the very subject of post-Katrina disaster relief:

Fixed price contracts, under which the contractor gets a set fee no matter what it costs the contractor to perform, provide particularly high-powered incentives for cost-saving because the contractor profits only to the extent it can hold costs below its fee. Although cost savings of this sort may be what we want in some contexts, the incentive fixed fee contracts provide for the contractor to shirk on quality likely will rule it out as an option in this context.

Cost-plus contracts reimburse the contractor for all expenses and provide a set fee on top thereof as the profit margin. These contracts provide low-powered incentives for cost reduction, but provide higher-powered incentives to produce high quality. Indeed, the economic literature on contracting finds that cost-plus contracts often yield "gold plated" services. Where complex tasks must be performed at a high level, with no margin for shirking or opportunism, cost-plus contracts therefore often are the way to go.

Finally, as for cronyism, there's no real justification for it, but it is important to remember that it is a bipartisan sport, as Michelle Malkin recently observed:

On Saturday, CNN.com had a piece [9/12 clarification carried by Reuters] titled "Firms with White House ties get Katrina contracts:"

Companies with ties to the Bush White House and the former head of FEMA are clinching some of the administration's first disaster relief and reconstruction contracts in the aftermath of Hurricane Katrina. ... One is Shaw Group Inc. and the other is Halliburton Co. subsidiary Kellogg Brown and Root. Vice President Dick Cheney is a former head of Halliburton.

The Baton Rouge-based Shaw Group, CNN tells us, is a major corporate client of Joe Allbaugh, President Bush's former campaign manager and a former head of the Federal Emergency Management Agency. Among its Katrina-related contracts are this one valued up to $100 million from FEMA; and this one also valued up to $100 million from the Army Corps of Engineers.

But in their zeal to embarrass the Bush administration, CNN overlooks one very fat and inconvenient fact--and embarrasses only itself.

The Shaw Group, a multi-billion-dollar conglomerate, is headed by Jim Bernhard, the current chairman of the Louisiana Democratic Party. Bernhard worked tirelessly for Democrat Louisiana Gov. Kathleen Blanco's runoff campaign and served as co-chair of her transition team. Another Shaw executive was Blanco's campaign manager. Bernhard is back-scratching chums with Blanco, whom he has lent/offered the Shaw Group's corporate jets to on numerous occasions.

So, why was none of this mentioned in CNN's Bush-profiteers-are-evil narrative?

My point is not that the Bushies should be exempt from criticism on this score; my point is only the criticism should be informed rather than reflexive.

Optimal Gadget Number

In today's WSJ($), Lee Gomes notes:

One of the great guessing games in Silicon Valley is to figure out how many electronic gadgets people ultimately are willing to carry around. One? Two? Four?

This got me to thinking: I normally carry three electronic gadgets on my person: An iPod, a Treo cell phone, and one of those keychain memory flash drives. But do people in Silicon Valley really wonder about the possibility of four gadgets? What would be the fourth? A PSP?

Anyway, Gomes continues:

... cellphones represent the final frontier of consumerism. You can use them to buy anything you want, from wherever you are, and have it right this very second. It is a shopping fix that will last a few hours or maybe even several days; until the sweaty-palm urge to buy something strikes again. ...

The way Apple has branded an essentially generic digital-storage device such as the iPod, and given it must-have status, is a marketing story for the ages. Chapter Two, though, is just now getting under way. Everyone has a cellphone. When the day comes that a phone also will hold endless gigabytes of music, will everyone also have a music player, too?

In deciding that question, branding will be important, of course. But a winner-take-all consumer device also must be able to give people their instant consuming fix, like ring tones do so very well. To paraphrase Baba Ram Dass, "Buy Here Now."

The lesson of the new Apple iPod Nano and the Apple/Motorola ROKR may well be that the day in fact is fast approaching when one gadget will be small enough to be carried on your person and do eveything we now need three or four to do. Personally, I'm looking forward to it.

Amar on the Constitution

This week's issue of The Economist($) gives a generally positive review to Akhil Amar's "biography" of the US Constitution:

Akhil Reed Amar, a Yale law and political science professor, has written an original, thorough and opinionated guide to the goals and meaning intended by those who drafted and ratified the original 1787 document and its 27 amendments. ... Although Mr Amar is generally classified as a liberal, his analysis is even-handed. ... The indispensable starting point for construing the constitution has to be the document's original meaning. And the best available guide to what the draftsmen originally meant is contained in Mr Amar's excellent ?biography?.

I must confess to not having read it yet, but given this review, I'm going to do so ASAP.

Barnett on Rehnquist

Randy Barnett's thoughtful and provocative WSJ($) essay on the late SCOTUS CJ William Rehnquist's New Federalism is now available to non-subscribers on OpinionJournal.com. It's definitely one of those "go read the whole thing" pieces.

Law Profs' Left Knees Jerk

Tung Yin deconstructs the anti-SCOTUS nominee John Roberts letter circulating among law professors:

The weakness of the letter, as I see it, is that it fails the basic lesson of writing: "show, don't tell."  The letter tells us that Judge Roberts does not deserve to be on the Supreme Court because the letter writer does not like Roberts' views of the right to an abortion or of the scope of the Commerce Clause or other areas of con law.  What the letter does not do is show us that Roberts' views are intellectually flawed, deceptive, or otherwise objectionable on any basis other than outcome. ...

From the perspective of the goal of advocacy, I also have a hard time seeing how asserting by fiat that President Bush should appoint someone whose views are consistent with those of persons that Kerry would have appointed is likely to persuade the undecideds that Roberts should be kept off the Court.

I'm disappointed (but not especially surprised) that the usual suspects among my colleagues signed on. Sigh.

New paper on shareholder activism

My paper Shareh older Activism and Institutional Investors has been posted to SSRN and is available for downloading. Here's the abstract:

Recent years have seen a number of efforts to extend the shareholder franchise, principally so as to empower institutional investors. The logic of these proposals is that institutional investors will behave quite differently than dispersed individual investors. Because they own large blocks, and have an incentive to develop specialized expertise in making and monitoring investments, institutional investors could play a far more active role in corporate governance than dispersed individual investors traditionally have done. Institutional investors holding large blocks thus have more power to hold management accountable for actions that do not promote shareholder welfare. Their greater access to firm information, coupled with their concentrated voting power, might enable them to more actively monitor the firm's performance and to make changes in the board's composition when performance lagged.

In fact, however, institutional investor activism is rare and limited primarily to union and state or local public employee pensions. As a result, institutional investor activism has not - and cannot - prove a panacea for the pathologies of corporate governance. Activist investors pursue agendas not shared by and often in conflict with those of passive investors. Activism by investors undermines the role of the board of directors as a central decision-making body, thereby making corporate governance less effective. Finally, relying on activist institutional investors will not solve the principal-agent problem inherent in corporate governance but rather will merely shift the locus of that problem.

Keywords: corporate governance, corporation law, shareholders, voting rights, institutional investors

JEL Classifications: K22

Tag: Business Organizations Research Law

New paper on shareholder activism

My paper Shareholder Activism and Institutional Investors has been posted to SSRN and is available for downloading. Here's the abstract:

Recent years have seen a number of efforts to extend the shareholder franchise, principally so as to empower institutional investors. The logic of these proposals is that institutional investors will behave quite differently than dispersed individual investors. Because they own large blocks, and have an incentive to develop specialized expertise in making and monitoring investments, institutional investors could play a far more active role in corporate governance than dispersed individual investors traditionally have done. Institutional investors holding large blocks thus have more power to hold management accountable for actions that do not promote shareholder welfare. Their greater access to firm information, coupled with their concentrated voting power, might enable them to more actively monitor the firm's performance and to make changes in the board's composition when performance lagged.

In fact, however, institutional investor activism is rare and limited primarily to union and state or local public employee pensions. As a result, institutional investor activism has not - and cannot - prove a panacea for the pathologies of corporate governance. Activist investors pursue agendas not shared by and often in conflict with those of passive investors. Activism by investors undermines the role of the board of directors as a central decision-making body, thereby making corporate governance less effective. Finally, relying on activist institutional investors will not solve the principal-agent problem inherent in corporate governance but rather will merely shift the locus of that problem.

Keywords: corporate governance, corporation law, shareholders, voting rights, institutional investors

JEL Classifications: K22

Subsidiarity and Katrina

Rene Henry Gracida, Bishop Emeritus of Corpus Christi, opines:

The principle of subsidiarity was evidently ignored by those holding responsibility for the government of the State of Louisiana and the City of New Orleans. This principle was first clearly defined by Pope John XXIII and then later by the Second Vatican Council. The principle is valid for both the secular as well as the ecclesiastical realm. The principle of subsidiarity is the principle by which those in authority recognize the rights of the different members of society. Those in higher authority respect the rights of those in lower authority. And of course, with rights go responsibilities.

MOJ blogger Rob Vischer takes a more expansive view, opining:

In the case of Katrina, I think there's plenty of blame to go around at both the local and federal levels.  I do agree with Carter, though, that conservatives often invoke subsidiarity without acknowledging its full import, an argument I've made elsewhere.  (This is not to excuse liberals, who tend to ignore subsidiarity completely.)

The "Carter" to whom Rob refers is evangelical blogger Joe Carter who observes:

According to the principle of subsidiarity, governmental agencies and leaders at the city, parish, and state agencies hold primary responsibility for implementing the evacuation process. The city of New Orleans apparently agrees, since in their “Comprehensive Emergency Management Plan” they vest the authority to authorize an evacuation with the Mayor and the implementation of such an action with the city’s Office of Emergency Preparedness. The state’s official hurricane evacuation plan even notes that the primary means of evacuation will be personal vehicles but that school and municipal buses, government-owned vehicles, and vehicles provided by volunteer agencies may be used to provide transportation for individuals who lack transportation and require assistance in evacuating.  ...

Principles such as subsidiarity, federalism, and limited government are often considered cornerstones of conservative political thought. But when it comes to their actual implementation they are merely given lip-service. While aspiring young politicos sing the praises of states-rights, they prefer to do so on Capital Hill or in D.C. think tanks rather than in the choirs of their state legislatures or local governments. The very idea that our most competent conservative statesmen should be working in their actual states rather than in Washington is considered ludicrous. After all, everyone knows that state and local governments are reserved for the also-rans and has-beens rather than for the able and ambitious. Any job in FEMA, for instance, is considered superior to working in the New Orleans’s Office of Emergency Preparedness.

I agree with the second paragraph from Joe's post, as well as the view that both he and the Bishop express with respect to who has immediate and initial responsibility, but on the general application of the subsidiarity principle am closest to what I take to be Rob's position.

The principle of subsidiarity, I believe, derives from the Church’s understanding that Leviathan and community are incompatible. Communities cannot be created from without; they must be built from within, as Richard Epstein observed somewhere or another, but they easily “can be destroyed from without.” Subsidiarity thus teaches that to empower higher authorities as anything but second-best solutions or even last resorts endangers the rights and liberties of those who are most affected.

At the same time, however, subsidiarity also teaches that higher authority properly intervenes when 4 conditions are met:

• The first, the ‘sufficiency criterion,’ states that smaller institutions or individuals alone will not be able to solve the problem. Help is required from a larger body.
• The second, the ‘benefit criterion,’ states that intervention by a higher authority should bring greater benefit than the smaller institutions alone could have achieved.
• The third, the ‘close to the citizen criterion,’ states that action should be taken in close cooperation with locally affected individuals.
• The fourth, the ‘autonomy criterion,’ dictates that the intervention of a higher power must secure greater freedom for individuals.

Disaster relief pretty clearly satisfies all 4 conditions for national governmental action in my view. Local communities have responsibilities, but quickly can be overwhelmed. The greater resources of the national government likely can do things the local and state authorities cannot. The national government can and should closely work with local, state, and private parties. What more basic freedom is there than the necessities of survival?

The fact that subsidiarity doesn't preclude national involvement, of course, doesn't answer the question of the form that involvement should take. Personally, I think as a prudential matter we should be looking very seriously at outsourcing disaster relief. See my TCS column and followup blog post.

Garnett on Rehnquist

Rick Garnett has some touching personal thoughts on the funeral of CJ William Rehnquist. Money quote:

It was striking, to me, how few of the visitors were people of the "kind" I expected to see - - i.e., D.C. lawyers in charcoal grey suits.  All kinds of people -- tourists, cab drivers, barristas, maintenance workers, and Senators -- passed in front of the casket, often stopping to cross themselves.  Some of the Court police and building staff, whom I knew from a decade ago, talked with me about how much the Chief meant to them, and how much he had done for them.

O'Connor's Replacement

Conservative legal activist Manuel Miranda rates possible replacements for Supreme Court Justice Sandra Day O'Connor in three categories: women, hispanics, and senators. Meanwhile, at Tradesports, contracts have been traded recently on 5 potential nominees, with these prices:

• Edith Clement - 22.0
• Alberto Gonzales - 18.0
• Edith Jones - 15.0
• Michael Luttig - 12.5
• Michael McConnell - 5.0

Were I a betting man, the prices on Jones and McConnell might look attractive.

Outsourcing Disaster Relief: Take 2

Undaunted by the nattering of nabobs of negativity, I run the idea of outsourcing disaster relief up the flagpole over at TCS.

Three items in today's WSJ lend additional support to my thesis. First, John Berthoud reminds us how the government spent gobs on pork while letting key infrastructure go underfunded:

The $286.5 billion highway bill is evidence that Washington is spending record amounts on infrastructure. And there's lots being lavished on all types of capital expenditures. The budget of the Army Corps of Engineers -- the federal agency tasked to help waterproof New Orleans -- is 31% higher today than it was 10 years ago. ...

So government dollars at federal and state levels are plentiful. Post-Katrina questions, then, should focus not on how much government has been spending but on how it has been spending. ... The highway bill is a case study in spending money based on political prioritization, not economic or social need. Amid the 6,500 earmarks in that bill, Louisiana pols managed to sneak in $400,000 for the Mississippi River Trail and Bikepath and $3,200,000 for bike and pedestrian crossings of the Washington-Palmetto Canal. While the bill could be stretched to include bike paths for Louisiana, it apparently couldn't to include funding for levee construction.

Second, Congressman Bobby Jindal reports on how red tape has interfered with efforts to aid his constituents:

There have already been a number of instances in which an overly inhibitive bureaucracy prevented an appropriate response to the disaster.

• A mayor in my district tried to get supplies for his constituents, who were hit directly by the hurricane. He called for help and was put on hold for 45 minutes. Eventually, a bureaucrat promised to write a memo to his supervisor.
• Evacuees on a boat from St. Bernard Parish could not find anyone to give them permission to dock along the Mississippi River. Security forces, they say, were prepared to turn them away at one port.
• A sheriff in my district office reported being told that he would not get the resources his office needed to do its job unless he emailed a request. The parish was flooded and without electricity!
• Unbelievably, first responders were hindered by a lack of interoperable communications. Do you recall how New York police and fire departments on 9/11 could not talk with each other? Four years later, despite billions spent on homeland security, state, federal, and local officials in Louisiana had the same problem.

My office became so frustrated with the bureaucracy that we often turned to private companies. They responded more quickly and flexibly.

Finally, a Journal editorial suggests at least one reason Congressman Jindal had better luck getting help from the private sector: Corporations stepped up to the plate using the same best practices they've refined to compete in the marketplace:

The straightforward generosity of the corporate sector has been well reported. By last count, donations had exceeded $200 million. Besides cash, companies have handed out free drugs, suspended finance payments on cars and mortgages and helped emergency personnel with equipment. As interesting, though, has been the application of corporate best practices -- from supply-chain management to logistics -- to a natural disaster.

The private-sector planning began before Katrina hit. Home Depot's "war room" had transferred high-demand items -- generators, flashlights, batteries and lumber -- to distribution areas surrounding the strike area. Phone companies readied mobile cell towers and sent in generators and fuel. Insurers flew in special teams and set up hotlines to process claims.

This planning allowed the firms to resume serving customers in record time. ...

At the heart of the corporate response was a stunning array of advanced communications networks that kept firms in touch and coordinating. Following on last year's tsunami aid effort, the Business Roundtable had by August of this year arranged for each of its 160 member companies to designate a disaster relief point man. These folks were in place and ready to help before Katrina made landfall. The U.S. Chamber of Commerce, through its non-profit Center for Corporate Citizenship, became a clearinghouse, fielding calls from many of its 3,000 state and local organizations and compiling lists of needed supplies.

By the weekend the Chamber's CCC was turbo-charging a new computer program, designed by tech firm i2, which served as a kind of bridal registry for needed relief supplies. Each donor company indicated what order it would fill, avoiding duplication or delay. IBM got to work on a computerized job bank to help place those who'd lost work. The American Trucking Association set up a Web site to update everyone on road conditions.

I say it's time to put those energies, skills, and knowledge to work in a systematic way.

Good Grief

I'm left speechless by this report from SLW:

... on August 15, 2003 (the very first day this blog was in existence, by the way), we posted here about the 71-year-old West Palm Beach retiree who lost $2 million when MCI and WorldCom stock plummeted and sued Citigroup for his pain and suffering, high blood pressure, anxiety attacks, and so on under the Florida tort of "outrage."

Now a different Florida investor who lost $600,000 in WorldCom stock has launched another theory at another quite unexpected defendant-- Nasdaq. Steven Weissman is suing Nasdaq because, he alleges, "advertisements by Nasdaq influenced his decision to purchase more than $600,000 of stock in WorldCom Inc." ...

[snipped quote from a news account]

For those of you who are already muttering "Motion to Dismiss granted," the article notes that last year, U.S. District Judge William Zloch denied Nasdaq's motion to dismiss the suit, finding that Nasdaq was not immune to Weissman's allegations. Oral argument in Nasdaq's appeal of that ruling is scheduled for sometime this month.

My professional opinion as a teacher and one-time practitioner of securities lawyer is: sheesh. I know my fellow lawyers can be, shall we say, imaginative in finding deep pockets, but really ....

Stuntz on Bush and Rehnquist

Harvard law professor Bill Stuntz proves once again why he is quietly becoming one of the very best public intellectuals in the legal academy with a very thoughtful TCS column on the late Chief Justice and the incumbent President. I liked the opening:

The Reagan-Scalia style of conservatism is more ideological; its intellectual lodestar is an intellectual: Friedrich Hayek. Bush and Rehnquist are more bottom-line oriented -- if Bush's is a business-school presidency, Rehnquist's was the closest we are likely to see to a business-school Chief Justiceship. Their conservatism is more Burke than Hayek -- though Burke is too much of a traditionalist for these two sons of the wide-open, fast-changing West.

But I loved the penultimate paragraph:

Conservatives have long believed that human nature disposes us to arrogance, that we're not as smart and not nearly as farsighted as we think we are. The world is a terribly complicated place. If I think I've figured it out, I'm bound to be wrong, maybe disastrously so. Those who run things should not be enforcing some ideological orthodoxy but muddling along -- looking for targets of opportunity, picking up money on the table, testing their intuitions against those of others. It's not a grand vision of how the Supreme Court or the White House should work. But perhaps all those grand visions -- there is no shortage of them -- will lead us to very bad places.