ProfessorBainbridge.com

Nukes Not Needed. Alito's All but in. But where was Hagel?

Despite threats from Kerry and Kennedy to filibuster SCOTUS nominee Samuel Alito's confirmation vote, the Senate just voted by 72-25 to end debate. Nineteen Democrats voted for cloture. (Roll Call) Republican Senators Ensign and Hagel missed the vote. Ensign's got a good excuse: he was injured in an auto accident while on his way to the airport to go to DC to vote. But where was Hagel? For somebody who wants to run for the GOP Presidential nomination in 2008, but already has a lot of problems with the base, missing this vote was not a good idea. I, for one, plan to remind folks when the primaries run around.

What's the Appropriate Game Theory Model for Shareholder Behavior?

In my class blog (to which we do not allow public access for reasons of student privacy), we have been discussing Iman Anabtawi's paper on shareholder power, which Iman will be presented in the seminar today. One of my students made an interesting observation, which prompted a discussion as to what is the appropriate game theory game for modeling shareholder interactions. Is it the Prisoner's Dilemma, as my student argues, or something else?

Student Post:

Anabtawi notes that shareholders could engage in collective action for disciplining managers, an assumption crucial to shareholder primacists, but such coordination is impractical given the wide fragmentation of ownership. At the individual level, a rational shareholder would internalize the costs of disciplining management only if its proportionate share is more than its expected costs. At the collective level, it would be desirable for a shareholder to discipline managers if the expected collective benefits exceed their expected costs. The result is that there is no collective action, given that the substantial discipline costs outweigh the expected benefits. As Anabtawi notes, increasing shareholder power in this context is unlikely to generate more shareholder action, given the substantial costs and modest expected benefits. This result is similar to the Tragedy of the Commons, a phrase used to describe a situation where the exercise of individual interests leads to the deterioration of the common good, given that individuals do not have strong incentives to collectively invest or work towards a particular common interest. Here, shareholders’ expected benefits, either individual or collective, do not exceed the expected costs of disciplining management, so individual shareholders would rather pursue other interests other than this “common good”. As Anabtawi notes, increasing shareholder power may actually lead shareowners to underdiscipline management when promoting their private interests at the expense of the general shareholder interests.

Anabtawi’s account of shareholders’ divergent interests is parallel to the classic example of the Prisoner’s Dilemma in game theory, where two separate prisoners must decide separately whether to confess to a crime: if a prisoner confesses, she will get a lighter sentence and her accomplice will get a heavier one, but if neither confesses, sentences will be lighter than if both confess. In the absence of shareholder collusion for a common interest i.e. collective action to discipline management, shareholders instead will compete amongst each other in an attempt to further their own private interests e.g. short-term vs. long-term interests. Such competition will lead to a decrease in overall shareholder value, given that some private interests conflict with the interests of shareholders in general. In other words, even though shareowners are better off collectively by cooperating with each other, their self-interest will deal them to compete with each other, disregarding the negative effects that such competition may have on other shareholders.

To which I responded:

The difficulty I have with using the Prisoner's dilemma to model the shareholder situation is the number of players involved. In a classic prisoner's dilemma, the dilemma arises where the game is played a single time. Where the game is played in multiple iterations, however, a tit-for-tat strategy has been shown to induce the players to reach the collective best outcome. Although the shareholder-shareholder interaction is a repeate game with no finite terminus, which should be ideal for tit-for-tat strategies, the number of players involved would seem to preclude that solution.

To which the student responded:

In regards to your comment, professor, at first I hesitated in using the prisoner's dilemma as an example of shareholder vs. shareholder interactions. It's true that this dilemma is typically used for 2 players where the game is only played once. But I think that if we assume that a large shareowner of a major corporation represents player A, and the remaining shareholders are minor and fragmented in a way that altogether can be categorized as player B, and the game is repeated infinitely, then we may end up with Nash equilibrium where player A would pursue its own self-interests given what player B does, and vice versa. Player A’s actions would likely be designed to benefit its own private interests, while Player B’s actions may be designed to benefit shareholders overall. Or Player A may just engage in a dominant strategy where it will pursue its own interests, no matter what Player B does over time. Of course, the collusion of small shareholders as Player B is an assumption that Anabtawi’s article challenges, thereby suggesting that Player A would eventually win if more shareholder power is granted. This may be a stretch of game theory as applied to shareholder primacy, but it doesn’t hurt to try (I hope).

Anabtawi on Shareholder Power

Today's speaker at my seminar is my friend and UCLA colleague Iman Anabtawi. Iman teaches in the Corporate Law Concentration with an emphasis on teaching transactional skills in courses such as Venture Capital Financing Transactions and Mergers and Acquisitions Transaction Planning.

At Oxford University, Professor Anabtawi was a Marshall Scholar, receiving an M.A. (in philosophy, politics, and economics). At Stanford Law School, she was articles editor of the Stanford Law Review, won the Hilmer Oehlmann, Jr. First Year Writing Award, and received the John M. Olin Prize in Law and Economics. She clerked for the Honorable Laurence H. Silberman of the U.S. Court of Appeals for the D.C. Circuit, and then Justice Sandra Day O'Connor of the U.S. Supreme Court. She then practiced for eight years with the firm of O'Melveny & Myers, where she consecutively held the positions of Tax Associate (Transactional Tax); Corporations Associate; and Special Counsel, Corporations Department. During this time, she specialized in mergers and acquisitions, joint ventures and strategic alliances, funds and acquisition vehicles, and financial products, as well as general corporate representation.

Anabtawi will be presenting her paper SOME SKEPTICISM ABOUT INCREASING SHAREHOLDER POWER.

Abstract: This Article examines shareholder primacists' claims that making boards more accountable to shareholders would go a long way toward solving the agency problem between shareholders and managers and enhancing shareholder welfare. I argue that in the shareholder power debate over whether to vest corporate decisionmaking authority primarily in a firm's shareholders or in its board of directors, shareholder primacists underplay deep rifts among the interests of large-block shareholders - those shareholders most likely to make use of increased shareholder power. The argument for reapportioning decisionmaking authority within the firm away from boards toward shareholders assumes that shareholders are a monolith with the single, overriding objective of maximizing share value. Some of the most significant modern shareholders, however, have private interests that conflict with (1) the goal of maximizing shareholder value generally or (2) the interests of other shareholders who would choose to maximize shareholder value differently, given their peculiar characteristics. Such private interests may induce influential shareholders to engage in rent-seeking behavior at the expense of overall shareholder welfare. In light of this possibility, which I argue is substantial, we would do well to pause before implementing corporate governance measures designed to further empower shareholders.

FYI: Anabtawi's paper is, in considerable measure, a critique of Harvard law professor Lucian Bebchuk's article THE CASE FOR INCREASING SHAREHOLDER POWER. My article, Director Primacy and Shareholder Disempowerment, which is forthcoming in the Harvard law Review, is also a response to Bebchuk's argument.

Abstract: This essay is a response to Lucian Bebchuk's recent article The Case for Increasing Shareholder Power, 118 Harvard Law Review 833 (2005). In that article, Bebchuk put forward a set of proposals designed to allow shareholders to initiate and vote to adopt changes in the company's basic corporate governance arrangements. In response, I make three principal claims. First, if shareholder empowerment were as value-enhancing as Bebchuk claims, we should observe entrepreneurs taking a company public offering such rights either through appropriate provisions in the firm's organic documents or by lobbying state legislatures to provide such rights off the rack in the corporation code. Since we observe neither, we may reasonably conclude investors do not value these rights. Second, invoking my director primacy model of corporate governance, I present a first principles alternative to Bebchuk's account of the place of shareholder voting in corporate governance. Specifically, I argue that the present regime of limited shareholder voting rights is the majoritarian default and therefore should be preserved as the statutory off-the-rack rule. Finally, I suggest a number of reasons to be skeptical of Bebchuk's claim that shareholders would make effective use of his proposed regime. In particular, I argue that even institutional investors have strong incentives to remain passive.

For a broad overview of the law and economics of shareholder voting rights, see my article The Case for Limited Shareholder Voting Rights, which is forthcoming in the UCLA Law Review.

Ebay's Business Model: Facilitating Fraud?

The NYT reports:

A year ago Jacqui Rogers, a retiree in southern Oregon who dabbles in vintage costume jewelry, went on eBay and bought 10 butterfly brooches made by Weiss, a well-known maker of high-quality costume jewelry in the 1950's and 1960's. At first, Ms. Rogers thought she had snagged a great deal. But when the jewelry arrived from a seller in Rhode Island, her well- trained eye told her that all of the pieces were knockoffs.

Even though Ms. Rogers received a refund after she confronted the seller, eBay refused to remove hundreds of listings for identical "Weiss" pieces. It said it had no responsibility for the fakes because it was nothing more than a marketplace that links buyers and sellers.

That very stance ? the heart of eBay's business model ? is now being challenged by eBay users like Ms. Rogers who notify other unsuspecting buyers of fakes on the site. And it is being tested by a jewelry seller with far greater resources than Ms. Rogers: Tiffany & Company, which has sued eBay for facilitating the trade of counterfeit Tiffany items on the site.

If Tiffany wins its case, not only would other lawsuits follow, but eBay's very business model would be threatened because it would be nearly impossible for the company to police a site that now has 180 million members and 60 million items for sale at any one time. ...

"We never take possession of the goods sold through eBay, and we don't have any expertise," said Hani Durzy, an eBay spokesman. "We're not clothing experts. We're not car experts, and we're not jewelry experts. We're experts at building a marketplace and bringing buyers and sellers together."

My first question is a pure business one. If your business model is based on building a market, don't you have to worry about a variant of Gresham's law? If people can't distinguish between real and fake products in your marketplace, they will assume that all products are fakes. In other words, your market place has become a market for lemons. This will reduce both the volume of transactions and the prices people are willing to pay for those transactions that do occur. Since eBay's fees are based on the volume and price of transactions, it's business model appears to be inherently self-destructive. Accordingly, unless I'm missing something, it would seem to be in eBay's self-interest to police its market. Yet, they don't do so. I find that very puzzling.

My second question is an IP law one. If eBay is facilitating transactions in which copyright, trademark, service mark, or trade dress laws are being violated, wouldn't eBay be subject to the same legal problems that brought down file-sharing networks like Napster?

In sum, I don't get eBay's unwillingness to be proactive on this issue. It would seem to be both a bad business strategy and a bad legal strategy. Thoughts?

Pixar's Firm Culture

Vic Fleischer and Larry Ribstein have both posted comments on the portion of the Disney-Pixar deal that creates a steering committee to preserve Pixar culture post-merger. I'm in substantial agreement with the former's observation that:

I am a believer in the significance of institutional culture and corporate culture.  But I wonder -- can you really maintain culture with a steering committee?  Top-down force feeding of culture won't work.  Leadership by example, though, helps, and if Jobs and the other Pixar bigwigs stay the course, maybe it will all work out.

Back when I was working on employee involvement/participatory management in the 1990s, it became clear that firm cultures exist and that they matter. Indeed, in my article on Privately Ordered Participatory Management, I argued that they mattered a lot with respect to whether an employee involvement:

When Bill Gore founded W. L. Gore & Associates (the maker of, inter alia, Gore-Tex), he adopted a “lattice” system of employee self-management. The lattice system is a radical form of employee involvement, which verges on a true participatory democracy, but which also resembles a very large self-directed work team. Although Gore & Associates has been quite successful, Gore acknowledges that the lattice system would not work in many firm cultures. As he opines, “established companies would find it very difficult to use the lattice. Too many hierarchies would be destroyed.” He further opines that the lattice system works best in start-ups so organized from the outset.

The empirical evidence confirms Gore’s intuition that employee involvement is almost certain to fail if firm culture is not receptive to participation. Irene Goll found, for example, that competitive pressures and other business environment considerations were not positively correlated with adoption of participatory management programs, but that corporate ideology, especially as it relates to corporate social responsibility, was positively correlated to their adoption. Coye and Belohlav found statistically significant relationships between the degree of employee involvement and both the number of participatory management programs offered by the firm and the average participation in those programs. John Cotton reports that most consultants in the quality circle field posit that some firms are not ready for operational participation in terms of corporate culture.

Firm cultures are highly path dependent creatures, which can prove quite resistant to change. As a result, an inhospitable firm culture can prove a potent and long-lasting barrier to successful employee involvement. In particular, I speculate that firms with strongly entrenched hierarchies and/or a long history of adversarial labor relations are poor candidates for successfully involving employees in decisionmaking.

An illustrative anecdote comes from the paper industry: Both International Paper and Otis Specialty Paper asked their respective employees to cooperate in preparing a job handbook. Otis’ culture emphasized labor—management cooperation. International Paper’s culture emphasized adversarial labor relations and included a recent history of prolonged and violent strikes. Otis’ employees cooperated as requested and the handbook became part of the firm’s participatory management program. International Paper’s employees refused to cooperate reportedly because they believed the project was intended not to introduce participatory management but to provide training manuals to be used by replacement workers in the event of a strike.

The paper industry anecdote suggests one way firm culture affects the viability of participatory management: A long history of adversarial relations precludes the “we’re all in this together” attitudes participatory management needs to foster. A tradition of intra-firm competition can have similar effects.

Firm culture will also impact management decisionmaking about employee involvement. Firm culture is likely to affect not only the basic decision to adopt employee involvement, but also to influence the choice of which program to adopt. Firms with a strong ideological commitment to participatory democracy are likely to adopt very different programs than those firms doing so for purely instrumental reasons. Finally, firm culture has indirect effects by affecting worker tastes. Firm culture not only forms employee tastes, but it also is formed by them.

Recall the evidence that employee tastes differ. The management-oriented literature on participatory management confirms that not all employees are well-suited for employee involvement. J. Richard Hackman, for example, opines: “Every organization has some members who make their best contributions as solo performers.” Indeed, Hackman further opines that some employees are “team destroyers,” who can prevent employee involvement from succeeding. The prevalence of such workers in a firm will go a long way towards determining whether its culture will prove receptive to participatory management.

It is worth noting that worker resistance to participatory management is neither irrational nor deserving of condemnation. Behavioral patterns that are learned over many years, and reinforced by past rewards, are exceedingly difficult to change. As such, firm culture becomes a shorthand for a path dependent explanation for resistance to participatory management. Introduction of participatory management within a firm typically entails substantial change, which will threaten vested interests in the workforce. Self-directed work teams threaten the seniority—and even the jobs—of foremen and other supervisory employees. Surviving supervisors are thrust into new positions as “team consultants” rather than bosses, with new and demanding responsibilities. Gain-sharing, pay for skills, and team-based compensation all threaten traditional seniority-based compensation. Training may be resisted by some workers: the old dogs who don’t want to learn new tricks. The job rotation and stress on “continuous improvement” characteristic of self-directed work teams in a TQM environment will threaten those workers who prefer a more mundane set of job responsibilities.

All of which serves to confirm that cultural conditions may undermine participatory management even if conditions are otherwise appropriate for it.

The Politics of Healthcare

Kevin Drum opines:

... while Democrats might very well need a Newt Gingrich of their own, what they really need if they want to win back control of Congress is a tectonic shift they can take advantage of — and so far I just haven't seen any big, pent-up frustration on the part of center-right voters that might turn large numbers of them into center-left voters instead. It'll be healthcare eventually, but in the meantime I'm stumped.

Maybe, but my guess is that the big business/big government/K Street wing of the GOP is already trying to figure out how to do some version of Hillarycare-lite. In April of last year, I blogged about GM CEO Rick Wagoner's desire to shift GM's healthcare legacy costs on to the taxpayer:

Wagoner mentioned health care in answers to 5 questions, including one that asked what GM's problems were other than health care costs!

Remember the old saying, what's good for GM is good for the country? It was never really true, but it hid a deeper truth; namely, that what GM thinks is good for it will soon become national policy.

Public choice theory teaches us that legislation is a commodity sold by politicians to well-organized interest groups (to grossly oversimplify things). In 1994, Hillarycare died because powerful interest groups were lined up on both sides of the issue, with the main business lobbies lined up against it. So there was no sale.

I predict that the next time a universal single payer plan gets to the policy table, however, that business will be first in line to back it. When you read interviews like the one Rick Wagoner gave the Journal, one can but conclude that business is itching to shift health care costs off their books and onto the American taxpayer.

GOP-sponsored federalization of health care is coming as sure as day follows night. And it'll be one more nail - or maybe a whole bunch of nails - in the coffin of small government.

Kerry Compliments Us re Alito

Kerry's Kos post announcing his plan to filibuster Sam Alito gives those of us who opposed Harriet Miers a (presumably unintended) compliment:

Under fire from his conservative base for nominating Harriet Miers--a woman whose judicial philosophy they mercilessly attacked--President Bush broke to extreme right-wing demands. 

This was a coup.

The principal definition of coup is:

A brilliantly executed stratagem; a triumph.

Kerry, who served in Viet Nam, presumably meant a coup d'�tat, but was afraid to remind people that he's a Francophile given to absurd hyperbole.

Reid Concedes on Alito

The legs have been cut out from under John Kerry's quixotian attempt to filibuster SCOTUS nominee Samuel Alito by no less a figure than Senate Minority Leader Harry Reid:

"Everyone knows there is not enough votes to support a filibuster," Reid said, referring to the procedural roadblock that some Democrats said should be used to put off a vote on Alito.

As I ponder Kerry's return from Switzerland in a bid to appeal to the Kos wing of the Democratic Party, I'm somehow reminded of Robert Burn's Od e to a Haggis:

Let them that o'er his French ragout,
Or hotchpotch fit only for a sow,
Or fricassee that'll make you spew,
And with no wonder;
Look down with sneering scornful view,
On such a dinner.

Poor devil, see him eat his trash,
As feckless as a withered rush,
His spindly legs and good whip-lash,
His little feet
Through floods or over fields to dash,
O how unfit.

Sarbanes-Oxley: How Are People Voting with Their Pocketbooks?

In my Corporate Governance Colloquium this week, we discussed Eric Talley?s paper Going-Private Decisions and the Sarbanes-Oxley Act of 2002: A Cross-Country Analysis:

Abstract: This article investigates whether the regulatory regime created by the Sarbanes- Oxley Act of 2002 (SOX) has driven firms in general, and small firms in particular, out of the public capital market. Previous attempts to address this question have had difficulty controlling for other factors that could have affected exit decisions around the enactment of SOX. To address this difficulty, we examine the post-SOX change in the propensity of public American target firms to be bought by private acquirers rather than public ones with the corresponding change for foreign target firms, which were outside the purview of SOX. Our findings are consistent with the hypothesis that SOX induced small firms to exit the public capital market during the first year of its enactment. Large firms, by contrast, do not appear to have been affected.

As we discussed in the seminar, there is a real problem identifying and quantifying the benefits of SOX. Observing how economic actors behave - how they vote with their pocketbook - is one solution to that problem. Talley's article is consistent with other data points suggesting that economic actors perceive SOX's costs as exceeding its benefits. (For blogospheric discussion of the Talley article see Vic Fleicher and Larry Ribstein's posts.)

On our Colloquium blog today, one of my students pointed the class to today?s Wall Street Journal article, ?Tougher Venture: IPO Obstacles Hinder Start- Ups? (page C1), which addresses an effect of SOX that Talley did not examine: the reduction in ?going public? rates. The article reports that 41 venture-backed start ups went public in 2005, down from 67 in 2004. ?Small companies considering going public also must contend with new auditing and reporting requirements, including the 2002 Sarbanes- Oxley law. The law makes it more expensive to be a public company, requires top executives to vouch for the accuracy of their books and includes stiff penalties for violations, all of which makes start-ups think twice about going public, small-company executives and venture capitalists say.? The Wall Street Journal article does not isolate the effect of SOX, and also discusses other regulatory obstacles to going public. However, it could add to the existing evidence of the costs of SOX.

What Clinton and the Democrats Wrought in 1994

Kevin Drum has an epiphany:

The good news is that Congress is set to pass a bill that prevents companies from funding lavish executive pension plans if the pension plan for their regular workers is underfunded and going bankrupt. ... But then there's this:

For decades, executives relied on the same pension plan as other company employees, so they had an incentive to make it generous. The shift toward a dual system started in 1994, when Congress passed a law intended to limit the cost to taxpayers of runaway executive pay. The law barred companies from taking a tax deduction on compensation in excess of $1 million a year for any current employee. The result: Companies began setting up supplemental pension plans that encouraged senior managers to defer compensation.

Well. That's certainly a good example of the law of unintended consequences, isn't it? I mean, I'm sure the $1 million cap seemed like a good idea at the time.

Here's a couple of other observations for Kevin to chew on. First, the 1994 tax change was effected not by some generic "Congress" but by Bill Clinton and the Congressional Democrats over GOP objections. Second, the Democrat tax change also was a major factor in the Enron, WorldCom, and other scandals of the tech bubble period.

In addition to leading to supplemental pension plans, because incentive-based pay didn't count against the $1 million cap, the Clinton/Democrat tax change encouraged companies to shift executive compensation from salaries into stock options. In turn, the shift towards stock options gave executives strong incentives to managethe stock price rather than the business. And, in some cases, to commit fraud so as to ensure that the company hit its forecasts.

Discussing Disney

There's a number of bloggers over at Conglomerate discussing the oral argument before the Delaware Supreme Court in the Disney-Ovitz executive compensation case.

Elizabeth Nowicki observes:

The points made by appellants’ counsel (as I recall) include: 1.  The directors had the obligation to meet together (as a group) and deliberate together on the decision to fire Ovitz.  By failing to do so, the directors breached some duty, per se.

I tend to sympathize with Larry Ribstein's point that:

I would hope that, after its mistake in Van Gorkom, the court now recognizes how wrong it would be to insist on excessive procedures, including requiring a meeting in order to satisfy due care duties.  And clearly that shouldn't matter for good faith purposes under 102(b)(7).

Yet, it is important to recognize that corporate law's insistence that boards of directors act collectively has a sound basis. Indeed, the very existence of the board of directors is predicated on the superiority of group as opposed to individual decision making. Or so I argued in my article Why a Board? Group Decisionmaking in Corporate Governance:

Abstract: The default statutory model of corporate governance contemplates not a single hierarch but rather a multi-member body that acts collegially. Why? This article reviews evidence that group decisionmaking is often preferable to that of individuals, focusing on evidence that groups are particularly likely to be more effective decisionmakers in settings analogous to those in which boards operate. Most of this evidence comes not from neo-classical economics, but from the behavioral sciences. In particular, cognitive psychology has a long-standing tradition of studying individual versus group decisionmaking. This article contends that behavioral research, taken together with various strands of new institutional economics, sheds considerable light on the role of the board of directors. In addition, the analysis has implications for several sub-regimes within corporate law. Are those sub-regimes well-designed to encourage optimal board behavior? Two such sub-regimes are surveyed here: First, the seemingly formalistic rules governing board decisionmaking processes turn out to make considerable sense in light of the experimental data on group decisionmaking. Second, the adverse consequences of judicial review for effective team functioning turns out to be a partial explanation for the business judgment rule.

Indeed, in that article, I even went so far as to venture a defense of the Van Gorkom decision:

… the Van Gorkom court arguably created a set of incentives consistent with the teaching of the literature on group decision making. The decision disfavors agenda control by senior management, penalizes boards that simply go through the motions, and encourages inquiry, deliberation, care, and process. The decision strongly encourages boards to seek outside counsel and financial advice, which is consistent with evidence groupthink can be prevented by outside expert advice and evaluations. Even the court’s criticism of the board’s willingness to take action after a single meeting is consistent with suggestions that a “second-chance meeting” also helps prevent groupthink. As such, the oft-repeated law and economics critique of Van Gorkom appears overblown. Contrary to what most law and economics scholars have asserted, there is a rational basis for the seemingly formalistic procedures mandated by that opinion.

According to Elizabeth, plaintiff's (i.e., appellant's) counsel also argued that:

Chancellor Chandler erred in placing the officers within the protection of the business judgment rule presumption.

In my treatise, Corporation Law and Economics, I argued that officers should get the benefit of the BJR:

It is reasonably well-settled that officers owe a duty of care to the corporation. It is less well-settled that officers get the benefit of the business judgment rule. Under the ALI PRINCIPLES, the rule applies to both directors and officers. [ALI Principles § 4.01.]

Judicial precedents are divided, however. [Compare Galef v. Alexander, 615 F.2d 51, 57 n.13 (2d Cir. 1980) (holding that the business judgment rule “generally applies to decisions of executive officers as well as those of directors”); FDIC v. Stahl, 854 F. Supp. 1565, 1570 n.8 (S.D. Fla. 1994) (holding that the rule “applies equally to both officers and directors”) with Platt v. Richardson, 1989 WL 159584 at *2 (M.D. Pa. 1989) (holding that the rule “applies only to directors of a corporation and not to officers.”). At least one court claims that the former view is the majority position, rejecting an argument that “the business judgment rule applies only to the conduct of corporate directors and not to the conduct of corporate officers” on grounds that it was “clearly contrary to the substantial body of corporate case law which has developed on this issue.” Selcke v. Bove, 629 N.E.2d 747, 750 (Ill. App. 1994).]

Most of the theoretical justifications for the business judgment rule extend from the boardroom to corporate officers. Many corporate decisions are made by officers, for example, who are likely to be even more risk averse than directors. Accordingly, insulation from liability may be necessary to encourage optimal levels of risk-taking by officers. Just as the board of directors is properly regarded as a production team, so is the so-called top management team. Accordingly, internal team governance may be preferable to external review. In sum, the better view is that officers are eligible for the protections of the business judgment rule.

Alito's Chances

Despite the party line vote in the Judiciary Committee and paltry announced Democratic floor support, Tradesports is still predicting that Alito will be confirmed, albeit with less than 60 votes. FWIW.

Alito Vote

Even though the latest CNN poll indicated the American people support Samuel Alito's nomination to the Supreme Court, and the same poll indicated that barely a third would support a Democrat filibuster, all of the Democrats on the Senate Judiciary Committee have voted against Alito.

The politicization of the confirmation process the Democrats began when they first turned bork into a verb thus continues.

Of course, the confirmation process has become so politicized precisely because our courts have become so politicized. We have allowed nine old men and women in robes to elevate themselves into a super-legislature in which they exercise privileges they deny to our elected representatives.

I wonder what the founders would think of our modern Supreme Court as it happily goes about the business of, as Justice Scalia put it, "Day by day, case by case, ... designing a Constitution for a country I do not recognize." My guess is that many of them would agree with Judge Bork that the courts have taken sides in the "struggle between the cultural or liberal left and the great mass of citizens who, left to their own devices, tend to be traditionalists. The courts are enacting the agenda of the cultural left." And even among those founders who would take the other side of the culture wars (Jefferson?), there might be some who would recognize that their cherished checks and balances are breaking down as the Court becomes less and less accountable. (Quotes taken from Richard Neuhaus' review of Bork's latest book: Coercing Virtue: The Worldwide Rule of Judges.)

Alito to be confirmed but with less than 60 votes

According to Chris Masse's RSS feed (for which I don't know how to provide a permanent archival link):

Judge Alito has lost the support of some moderate Democratic Senators. TradeBetX/TradeSports/InTrade now predicts that he won't get over 60 votes ?though, the exchange stands on its prediction that he'll get at least 51, and that's enough to make the trick.

Update: Don Luskin has this comment: "That means that the Democrats will dare to pull a unanimous blockade, but not dare to filibuster." ...

My preferred law blogger: Professor Bainbridge (conservative, but in a smart, open-minded way ?not a neo-con). He'll certainly feed you with updates. {ProfB: My blushes!} ...

[This RSS post is in contravention with David Pennock's fatwa that says that "RSS items does not link off directly to 3rd party sites." I called down the thunder, I should now get ready for the BOOM. The terror is welling inside me. My whole body is shivering...]

[Update: My ideological friend Donald Luskin read me the riot act for not giving readers "a way to archivally link" to this item.]

I concur with Luskin. On both points.

The Future of Corporate Governance

Larry Ribstein comments on an article by law professor James Fanto:

A disturbing new vision of the corporation has just appeared on SSRN: Fanto, Paternalistic Regulation of Public Company Management: Lessons from Bank Regulation January 4, 2006. Here's a piece of the abstract:

The Article proposes that the SEC appoint a corporate governance monitor for certain of the largest public firms who would have a role like that of an examiner of a large bank or financial holding company. The SEC would hire, train, and oversee the performance of, these monitors, who would be supervised by that part of the SEC?s Division of Corporation Finance responsible for their firms and industry.

Wow! What an idea. Turn what?s left of dynamic American enterprise into banks. The article?s theory is that group psychology prevents realistic monitoring by people who have been socialized to be part of the group, which is all of the gatekeepers and monitors we rely on today ? outside directors, lawyers, auditors, etc. So we need an outsider ? namely the SEC.

Do go read the whole thing; it's an excellent critique. And it includes a comment by Fanto in defense of the paper. As somebody who lived through the S&L crisis while I was in practice, however, I think commenter Robert Schwartz nicely captured by gut reaction:

And it worked so well with the Savings & Loan business.

Update: See also Matt Bodie's (partial) defense of Fanto's proposal.