ProfessorBainbridge.com

NY Times Stockholder Revolt

Like a lot of previously family-owned firms, especially in the newspaper industry, the New York Times was incorporated with multiple classes of stock. Public investors own Class A shares, with one vote per share, while the Sulzberger family owns 91% of the Class B shares, which represent only 19% of the company's equity but have effective voting control.

The Sulzberger's management has not been particularly beneficial for the company's other shareholders. In January 2005, for example, Business Week reported that:

NYT Co.'s stock is trading at about 40, down 25% from its high of 53.80 in mid-2002 and has trailed the shares of many other newspaper companies for a good year and a half. "Their numbers in this recovery are bordering on the abysmal," says Douglas Arthur, Morgan Stanley's (MWD ) senior publishing analyst. ... In fact, for much of its history, the Times barely broke even. Recasting the paper into a publicly held corporation capable of pursuing profit as determinedly as Times editors chase Pulitzers was the signal achievement of Arthur Jr.'s father, Arthur O. "Punch" Sulzberger Sr. Still, NYT Co. consistently fails to post the 25% profit margins of such big newspaper combines as Gannett Co. (GCI ) and Knight-Ridder Inc. (KRI ) mainly because of the Times's outsize editorial spending, which the paper does not disclose but which is thought to exceed $300 million a year.

Now Morgan Stanley is trying to upset the apple cart:

Morgan Stanley Investment Management said Tuesday it withheld votes for the Times' director nominees because it believes the company's board and management have become unaccountable to shareholders.

The firm, which says it owns more than 5% of the Times' Class A stock, called for the elimination of the dual-stock structure that leaves control of the board with minority shareholders led by the founding Sulzberger family. ... "MSIM believes that the dual-class voting at The New York Times Company, which is an exception to the general rule of one-share, one-vote, creates special privileges as well as responsibilities," the firm said in a Tuesday-afternoon statement out of London. "MSIM contends that the Board and management at The New York Times Company have failed to fulfill these responsibilities effectively.While it may have at one time been designed to protect the editorial independence and the integrity of the news franchise, the dual-class voting structure now fosters a lack of accountability to all of the company's shareholders."

(For a discussion of the mechanics of electing corporate directors and what it means when a shareholder withholds its votes, see my post Withhold my vote.)

I'm no fan of the Sulzberger's holier-than-thou approach to journalism, but I'm also no fan of shareholder activism. And, in this case, I'm particularly unsympathetic to Morgan Stanley's position.

I wrote about dual class stock in my article The Short Life and Resurrection of SEC Rule 19c-4, in which I explained that dual class stock structures established in an IPO (as was the NYT's) pose few concerns:

Public investors who do not want lesser voting rights stock simply will not buy it. Those who are willing to purchase it presumably will be compensated by a lower per share price than full voting rights stock would command and/or by a higher dividend rate. In any event, assuming full disclosure, they become shareholders knowing that they will have lower voting rights than the insiders and having accepted as adequate whatever trade-off the firm offered in recompense.

Morgan Stanley bought Class A shares in the Times knowing that the Sulzbergers were in charge and would remain so by virtue of the dual class stock structure. Morgan Stanley knew or should have known that dual class stock presents a serious agency cost problem because incumbents who cannot be voted out of office are almost impossible to discipline. Morgan Stanley accepted whatever trade-offs the deal entailed as appropriate compensation for that risk.

Now Morgan Stanley wants a second bite at the apple. I say, Morgan Stanley made its bed and now must lie in it.

Cars, Religion and Politics

Here in Los Angeles, you are what you drive. It appears that the same holds true elsewhere. The W$J reports:

... just as the country has polarized along political lines between red-state Republicans and blue-state Democrats, a similar map could be drawn when it comes to hybrids: Blue-state drivers are embracing them much more than their red-state counterparts are. Similarly, red-state drivers tend to be bigger fans of SUVs. And as regional preferences for vehicles vary, so does related legislation: It's the blue states that are providing more incentives for people to buy hybrids.

And then there's this Beliefnet story on "metrospirituals" (presumably a meterosexual that goes to church?):

Do you go out of your way to buy organic food? Have you thought about the wu wei in your home? Have you tried yoga, belly-dancing, or surfing recently? Are you attracted to traditional crafts from other cultures or have you started knitting? Do you own a Prius or have you thought about buying a hybrid car? Are you a tea connoisseur or an organic wine- and beer-drinker? Is there a certain aromatherapy scent that brings you comfort, especially in candle form? If most of your answers are yes, then count yourself among the growing numbers of metrospirituals—the kinder, gentler post-Yuppies who want to treat the earth and native cultures with respect, connect with their inner source and inspiration, test their bodies and expand their minds with ancient physical practices—and do it all with serious style.

Do "crunchy cons" drive Priuses? Probably. Personally, "I think that cars today are almost the exact equivalent of the great Gothic cathedrals: I mean the supreme creation of an era, conceived with passion by unknown artists, and consumed in image if not in usage by a whole population which appropriates them as a purely magical object." Roland Barthes (1915–1980), French semiologist. “The New Citroën” (1957). In the language of that wonderful metaphor, the decision to buy a Prius is not unlike an agnostic choosing to visit one of the great Gothic cathedrals. You have chosen to be in but not of the experience.

Books on Investing

Jonathan Clements rev iews and recommends 5 books on personal investing:

Curiously, he omits what I regard as THE fundamental treatise on personal investing of our era: Burton Malkiel's Random Walk Down Wall Street.

In RANDOM WALK DOWN WALL STREET, Burton Malkiel sets out the basics of modern corporate financial theory in a way accessible to the law reader. As a teacher of corporate finance to law students, I have recommended this book to my students for over 10 years. Numerous alumni have told me that was the best advise they got in law school (a sad commentary on American legal education, but that's another story).

Two basic theories are expounded here. First, modern portfolio theory (MPT), which elucidates the relationship between risk and diversification. Because investors are risk averse, they must be paid for bearing risk, which is done through a higher expected rate of return. As such, we speak of a risk premium: the difference in the rate of return paid on a risky investment and the rate of return on a risk- free investment. In the real world, we measure the risk premium associated with a particular investment by subtracting the short-term Treasury bill interest rate from the risky investment's rate of return. The risk premium, however, will only reflect certain risks. MPT differentiates between two types of risk: unsystematic and systematic. Unsystematic risk might be regarded as firm-specific risk: The risk that the CEO will have a heart attack; the risk that the firm's workers will go out on strike; the risk that the plant will burn down. These are all firm-specific risks. Systematic risk might be regarded as market risk: risks that affect all firms to one degree or another: changes in market interest rates; election results; recessions; and so forth. MPT acknowledges that risk and return are related: investors will demand a higher rate of return from riskier investments. In other words, a corporation issuing junk bonds must pay a higher rate of return than a company issuing investment grade bonds. Yet, portfolio theory claims that issuers of securities need not compensate investors for unsystematic risk. In other words, investors will not demand a risk premium to reflect firm-specific risks. Why? There is a mathematical proof, which relates to variance and standard deviation, but Malkiel explains it in a way that is quite intuitive. Investors can eliminate unsystematic risk by diversifying their portfolio. Diversification eliminates unsystematic risk, because things tend to come out in the wash. One firm's plant burns down, but another hit oil. Thus, even though the actual rate of return earned on a particular investment is likely to diverge from the expected return, the actual return on a well-diversified portfolio is less likely to diverge from the expected return. Bottom line? If you hold a nondiversified portfolio (say all Internet stocks), you are bearing risks for which the market will not compensate you. You may do well for a while, but it will eventually catch up to you (as it has recently for tech stocks).

The second pillar of Malkiel's analysis is the efficient capital markets theory (ECMH). The fundamental thesis of the ECMH is that, in an efficient market, current prices always and fully reflect all relevant information about the commodities being traded. In other words, in an efficient market, commodities are never overpriced or underpriced: the current price will be an accurate reflection of the market's consensus as to the commodity's value. Of course, there is no real world condition like this, but the securities markets are widely believed to be close to this ideal. There are three forms of ECMH, each of which has relevance for investors: **Weak form: All information concerning historical prices is fully reflected in the current price. Price changes in securities are serially independent or random. What do I mean by "random"? Suppose the company makes a major oil find. Do I mean that we can't predict whether the stock will go up or down? No: obviously stock prices generally go up on good news and down on bad news. What randomness means is that investors can not profit by using past prices to predict future prices. If the Weak Form of the hypothesis is true, technical analysis (a/k/a charting)-the attempt to predict future prices by looking at the past history of stock prices- can not be a profitable trading strategy over time. And, indeed, empirical studies have demonstrated that securities prices do move randomly and, moreover, have shown that charting is not a long-term profitable trading strategy. ** Semi-Strong Form: Current prices incorporate not only all historical information but also all current public information. As such, investors can not expect to profit from studying available information because the market will have already incorporated the information accurately into the price. As Malkiel demonstrates, this version of the ECMH also has been well established by empirical studies. Implication: if you spend time and effort studying stocks and companies, you are wasting your time. If you pay somebody to do it for you, you are wasting your money. ** Strong Form holds that prices incorporate all information, publicly available or not. This version must be (and is) false, or insider trading would not be profitable.

In the last section of RANDOM WALK, Malkiel distills all this theory into an eminently practical life-cycle guide to investing. As one may infer, it has two basic principles. First, diversification. Second, no one systematically earns positive abnormal returns from trading in securities; in other words, over time nobody outperforms the market. Mutual funds may outperform the market in 1 year, but they may falter in another. Once adjustment is made for risks, every reputable empirical study finds that mutual funds generally don't outperform the market over time. Malkiel's recommendation: put your money into no-load passively managed index mutual funds. You will see lots of anonymous reviews of RANDOM WALK claiming Malkiel is wrong. Odds are, most of those folks are have either been misled by the long bull market or, even more likely, are brokers or other market professionals who make a living selling active portfolio management. In sum, buy it, read it, believe it, and practice it.

Should Moussaoui Die?

There is no question in my mind but that Zacarias Moussaoui is twisted and evil:

Moussaoui said he had "no regret, no remorse" about the 9/11 attacks. Asked by prosecutor Rob Spencer if he would like to see it happen again, Moussaoui responded: "Every day until we get you." (Link)

But should he put to death?

The best analysis of the morality of the death penalty I've ever read was Avery Cardinal Dulles' April 2001 First Things article Catholicism & Capital Punishment. His careful and nuanced analysis concludes by extracting 10 theses from the Magisterium:

1. The purpose of punishment in secular courts is fourfold: the rehabilitation of the criminal, the protection of society from the criminal, the deterrence of other potential criminals, and retributive justice.
2. Just retribution, which seeks to establish the right order of things, should not be confused with vindictiveness, which is reprehensible.
3. Punishment may and should be administered with respect and love for the person punished.
4. The person who does evil may deserve death. According to the biblical accounts, God sometimes administers the penalty himself and sometimes directs others to do so.
5. Individuals and private groups may not take it upon themselves to inflict death as a penalty.
6. The State has the right, in principle, to inflict capital punishment in cases where there is no doubt about the gravity of the offense and the guilt of the accused.
7. The death penalty should not be imposed if the purposes of punishment can be equally well or better achieved by bloodless means, such as imprisonment.
8. The sentence of death may be improper if it has serious negative effects on society, such as miscarriages of justice, the increase of vindictiveness, or disrespect for the value of innocent human life.
9. Persons who specially represent the Church, such as clergy and religious, in view of their specific vocation, should abstain from pronouncing or executing the sentence of death.
10. Catholics, in seeking to form their judgment as to whether the death penalty is to be supported as a general policy, or in a given situation, should be attentive to the guidance of the pope and the bishops. Current Catholic teaching should be understood, as I have sought to understand it, in continuity with Scripture and tradition.

As they say in the blogosphere, go read the whole thing.

I take it that, as applied to Moussaoui, the critical theses are #s 7 and 8. Can the legitimate goals of punishment be accomplished by imprisonment? Executing Moussaoui obviously precludes any chance that he can be rehabilitated and brought to remorse. Conversely, society can be protected from him by locking him up and throwing away the key. So the argument for death must be either that executing Moussaoui is necessary to deter others or to achieve retributive justice. As to the former, wouldn't the prospect of martyrdom encourage Islamic terrorists as opposed to deterring them? As for retribution, was Moussaoui sufficiently closely involved in the 9/11 attack to deserve death in response? I haven't followed the trial closely enough to know the answer to that question, but my impression is that only he knows for sure, and that he may well be deluding even himself.

As for #8, I think the key issues are whether (1) executing Moussaoui will make society more or less vulnerable to terrorism and (2) we are executing him not because of whatever he may have done but as a substitute for the actual 9/11 conspirators who are now beyond human justice.

I'd love to know what Cardinal Dulles thinks. Personally, I think the death penalty always raises tough moral issues and this case is no exception.

The Ultimate in Law Porn

Sextonism is a neologism coined by Brian Leiter to describe the following phenomenon:

... a disease familiar to law faculty, in which a good school suddenly lapses in to uncontrolled and utterly laughable hyperbole in describing its faculty and accomplishments to its professional peers. The NYU alumni magazine, which was sent to all law faculty nationwide, was so plagued by Sextonism that a Stanford professor memorably dubbed it "law porn."

Today's mail brings from Boston College what surely must be the ultimate in law porn: A hardback book collecting recent faculty scholarship:

In this pioneering book, Cunningham arranges selected contributions of his faculty?s scholarship into a meditation upon justice. The book weaves a combination of theory and practice to articulate moral and ethical values that facilitate rational application of law. It envisions legal arrangements imbued with commitments of the Jesuit tradition, including the dignity of persons, the common good and compassion for the poor. This reflective collection of inquiry evokes a signature motif of the BC faculty in dozens of different legal subjects. (Link)

You can even buy it on Amazon. I like and respect a lot of the folks at BC, especially its leadership, so I say this with all good intentions and affection: Enough already!

Reagan and International Law

Hadley Arkes on Ronald Reagan's approach to international law, pointing to an an interview in which the president was asked how, as an officer under the law, he could support the Contras in Nicaragua when they were seeking to overthrow the purportedly legitimate government of that country:

The president responded that it was indeed true that the Contras were seeking to take power at the point of a gun, in resisting the oppressive regime of the Sandanistas. But the Sandanistas, he observed, held power at the point of a gun. And so, as he mulled aloud to the reporter, he did not quite see the moral difference between the Contras and what the reporter was pleased to call "the legitimate government of Nicaragua."

Now the Gipper could not fill in the bibliography. He probably could not have explained that his reflections here had led him back to the difference between an international law that was "positivist" in character and an understanding of international law influenced more fully by the axioms of natural law. When the positivist asked the question, "Who formed the legitimate government of Nicaragua?," the answer came back without any moral ingredients: The legitimate government was the government that had effective control of the territory. That was not necessarily a government that enjoyed the consent of the governed. It could be a Hitlerite regime, but if it were in firm control of the territory, it counted, in the positivist reckoning, as the legitimate government.

But to insist on a moral test ? that a government had to meet certain moral qualifications before it could be recognized or approved as a decent and legitimate government ? was to back into the principles of an older version of international law. It was the brand of international law that was understood more readily before the middle of the 19th century, when the doctrines of legal positivism came to secure a firmer hold on the legal profession and the teaching of law.

Even Reagan, with his surprisingly wide reach of reading, probably could not readily bring out, in his support, the writings of Grotius or Pufendorf. But again, the striking thing about him was that, on his own, with his own pondering about the moral questions in politics and law, he often moved along paths of reflection that had been trod before him by writers more accomplished and celebrated in political philosophy.

What's interesting about this in light of the discussion in the comments section to an earlier p ost is that Reagan rejected the law of the jungle approach to international law being espoused by so many of the commenters. Instead, Reagan recognized constraints that arose out of law rather than just the point of a gun even on the world stage.

International Law and the Preemptive Use of Force

My friend (and international law expert) Tony Arend has published a timely article on legality of the Bush Doctrine of preemptive use of force:

Although it is true that contemporary international law dealing with the recourse to force in self-defense does not adequately address the problem of WMD and terrorism, no clear legal standard has yet emerged to determine when preemptive force would be permissible in such cases. Some scholars have suggested standards, but it does not seem that either treaty law or custom has yet come to endorse one. ...

I would recommend the following approach: First, the administration should accept as a matter of policy the notion that preemptive force in self-defense should only be undertaken unilaterally if the Caroline criterion of imminence was met. Irrespective of the current status of international law on this question, such a policy would be less destabilizing, and it could contribute to a return to a more rule-based legal regime. Second, the administration should indicate that, as a matter of policy, the use of preemptive force should be undertaken in the absence of imminence only with the approval of the Security Council. Such a policy would ensure multilateralsupport for such action and would likely prevent the opening of the flood gates to unilateral preemptive action by other states. Third, the United States should acknowledge that existing international law relating to the use of force is highly problematic and seek, through the Security Council, to move toward the development of a legal regime that would be truly authoritative and controlling of state behavior. This may be a daunting task, and the United States might prefer that the law be left "in a fog," as Glennon has said. Nevertheless, if the legal regime for the recourse to force is to return to something more closely resembling a stable order, the United States?as the superpower in the international system?needs to take the lead both in acknowledging the deficiency in the current legal structure and in pointing the way to its improvement.

A Proposal to Ditch Proposals

We're currently in the middle of proxy season -- the time of year during which public corporations hold their annual shareholder meetings. Most investors don't attend the annual meeting in person; instead, they vote by proxy, which is the corporate governance equivalent of an absentee ballot. Along with a proxy card on which to record their vote, the shareholders receive a proxy statement, in which the company's management makes extensive disclosures about the issues on which shareholders will be voting.

The typical proxy statement also includes one or more (often many more) proposals put forward by shareholders for a vote at the annual meeting. Some of these proposals relate to core economic issues, such as proposals to ban takeover defenses or to limit executive compensation. Indeed, left-leaning social activists have often used such proposals to advance their agenda. For example, in recent years, Wal-Mart annually has faced one or more shareholders proposals intended to facilitate unionization of Wal-Mart's employees.

Under Securities and Exchange Commission Rule 14a-8, a qualifying shareholder may submit a proposal and short supporting statement to be voted on at the next shareholder meeting and, more important, to be included in the corporation's own voting materials sent to shareholders. It is thus a cheap and easy way for activist shareholders to get their message out to a lot of other investors and get a vote.

Curiously, right-leaning social activists have not made use of the shareholder proposal process. If liberal shareholders were proposing that tobacco companies limit advertising, why weren't social conservatives proposing that media companies limit family unfriendly programming? If liberal shareholders were proposing divestment of defense-related lines of business, why weren't right-leaning shareholders proposing divestment of abortion-related lines of businesses and so on.

Perhaps the one-sided nature of the shareholder proposal system is changing. American Express recently reported receiving the following shareholder proposal:

"The Proposal requests that the Company 'form a committee to explore ways to formulate an equal employment opportunity policy which complies with all federal, state and local regulations but does not make reference to any matters related to sexual interests, activities or orientation.' The Proposal's supporting statement indicates that 'while the legal institution of marriage should be protected, the sexual interests, inclinations and activities of all employees should be a private matter, not a corporate concern.'"

The obvious intent of the proposer is to exclude sexual orientation as a protected class from AmEx's EEO policies. The company argued this would be potentially detrimental in terms of liability exposure and was an intrusion on management decision-making prerogatives:

"Companies manage risk through the implementation of various policies and procedures that specify the best accepted practices in many areas, such as environmental policy, quality assurance policy, health and safety policy and securities trading policies. Due to the complexity of federal, state and local employment laws, and the risk to the company of non-compliance, most prudent company managements develop policies to govern equal employment opportunity practices.

The Proposal seeks to take risk-management decisions regarding the Company's equal employment opportunity policy away from management and put them in the hands of shareholders. Specifically, the Proposal seeks to amend the policy to exclude reference to sexual interest, activities or orientation. ... Discriminating on the basis of sexual orientation or preferences is illegal in many states in which our Company has employees and does business .... The Proposal, if adopted, would expose the Company to increased risk of employment-related lawsuits from those who believe their employment at the company was terminated or refused due to their sexual orientation -- a situation which would be illegal in many jurisdictions. Should such an employment-related lawsuit be filed against the Company, the fact that the Company removed any reference to non-discrimination on the basis of sexual orientation from its equal employment opportunity policy would be a critical piece of evidence that the plaintiff could use against the Company. In fact, removal increases the Company's exposure to charges that it is implicitly sanctioning this discriminatory conduct."

The SEC nevertheless declined to authorize exclusion of the proposal from AmEx's proxy statement.

None of which is to say that I think anybody ought to be using the shareholder proposal rule to propose any such things. To the contrary, sound policy requires that the shareholder proposal rule -- if it is to exist at all, itself a debatable proposition -- should be limited to matters directly relating to corporate governance rather than social issues.

Think about your least favorite political cause. Do you really want companies in which you invest to have to provide a free platform for proponents of that cause to advance their agenda?

Yet, as we've seen, many proposals have less to do with a company's economic performance than with providing a soap-box.

To limit the use of the rule by social activists, the SEC ought to adopt a rule that would exclude shareholder proposals unless a reasonable shareholder of the specific corporation in question would regard the proposal as having material economic importance for the value of his shares.

This standard is based on the well-established securities law principle of materiality. It is intended to exclude proposals made primarily for the purpose of promoting general social and political causes, while requiring inclusion of proposals a reasonable investor would believe are relevant to the value of his investment. Such a test seems desirable so as to ensure that an adopted proposal redounds to the benefit of all shareholders, not just those who share the political and social views of the proponent.

Absent such a standard, the shareholder proposal rule becomes nothing less than a species of private eminent domain by which the federal government allows a small minority to appropriate someone else's property -- the company is a legal person, after all, and it is the company's proxy statement at issue -- for use as a soap-box to disseminate their views. Because the shareholders hold the residual claim, and all corporate expenditures thus come out of their pocket, it is not entirely clear why other shareholders should have to subsidize speech by a small minority.

If proposals like the one made at American Express become more common, maybe we'll finally have a bipartisan constituency for limiting the shareholder proposal rule once and for all.

Drum on the Minimum Wage

In a post on proposals to raise the California minimum wage, Kevin Drum makes a couple of sound debater's points about opponents of a wage hike, but ultimately goes awry:

So how about if we stop listening to fatuous stuff like this and just give the working poor a helping hand instead? Raising the minimum wage a buck or two is the least we can do for them.

First, the minimum wage debate is not really a debate about how much money the working poor make. Instead, it is mainly a debate about how much working teenagers and twenty-somethings in their first job ought to make. The federal Bureau of Labor Statistics reports that (in 2002):

Minimum wage workers tend to be young. About half of workers earning $5.15 or less were under age 25, and slightly more than one-fourth were age 16-19.

Among workers over 25, only two percent - 2%! - earned the minimum wage. Sympathy for the working poor thus ought not to be a driver of minimum wage debates.

Second, setting aside the debate of whether an increase in the minimum wage affects the supply of jobs for teenagers (wages go up, employers hire fewer workers), an increase in the minimum wage increases the demand by teenagers for work:

Minimum wages increase the probability that teenagers leave school to become employed or work more hours, and increase the probability that they leave school and become non-enrolled and non-employed. Minimum wages also increase the probability that lower-wage employed teenagers become non-enrolled and non-employed. (Link)

In other words, because teenagers tend to apply too high a discount rate to the higher future income associated with higher educational attainment, they systematically underestimate the present value of the future deferred income associated with staying in school. As a result, when deciding between work and a present paycheck versus school and deferral of income, they will tend to err towards the former. Increasing the minimum wage simply makes the choice of work even more attractive.

This analysis has two implications for minimum wage policy. First, a differential lower minimum wage for those who have not completed a high school degree probably would result in a lower dropout rate. Second, the minimum wage ought to be indexed, so that it grows no faster than inflation, so as to not further bias the choice between work and school.

Third Point's run at Massey Energy

Hedge fund Third Point is running a proxy contest at Massey Energy. Tim Huber reports:

UCLA law professor Stephen Bainbridge described the results [of such hedge fund activism] as a mixed bag. For instance, financier Carl Icahn had to back off in an attempt to break up Time Warner Inc. earlier this year and other funds failed to thwart the merger of long- distance telephone company MCI Inc. with Verizon Communications in favor of a deal with Denver-based Qwest Communications International Inc.

Hitting Hollywood with Disclosure

The SEC's proposed executive compensation rules have Hollywood up in arms:

The proposed regulation, under consideration by the Securities and Exchange Commission, would require a corporation to publish the salary details of as many as three nonexecutive employees whose total compensation exceeds that of any of its top five officers. Companies currently have to disclose only the pay of the chief executive officer and the next four highest-paid officers. The new rule, which the SEC is expected to decide on later this year, would apply to all listed companies but would likely have the most impact in industries such as media, financial services, technology and pharmaceuticals, in which star performers can earn more than CEOs.

... In the past, media companies have taken great pains to have their studio chiefs not classified as corporate officers because their salaries often came close and sometimes topped the salary of the CEO. It isn't unheard of for a top studio executive to earn well in excess of $5 million in salary and bonus.

If you think corporate compensation disclosure is a good thing, admittedly a debatable proposition, there's no good reason to limit such disclosure to officers. In some industries, of which Hollywood is the leading but not only example, there are key employees who don't technically meet the statutory definition of a corporate officer, but who are very highly paid and critical to the success or failure of the firm. Why then should be disclosure limited to statutory officers?

Note, by the way, that the rule likely will not apply to "talent," such as actors or directors. Those folks are usually independent contractors who are unlikely to be deemed employees for this purpose.

Will the Delaware Sup Ct Reverse Disney?

Ribstein thinks it could happen. Given the intense factual detail and richness of Chancellor Chandler's decision after trial, I don't see how the Delaware Supreme Court could reverse without creating new law. And I don't see anyway for the Supreme Court to create new law in this case without creating bad law. Chief Justice Steele recently explained that:

“Delaware will not test the judgment of members of the board of directors so long as no credible issue is raised about the objectivity of the directors’ decision making or their candor in stating the basis for their decision making.” He went on to say that a genuine question about a director’s independence or personal interest in the outcome would have to be raised before a Delaware court would be interested in scrutinizing more carefully a decision by the board of directors. “Otherwise, we’ll trust the directors’ judgment. This approach will not change in Delaware.”

The Disney directors did a pretty bad job by most accounts, but I don't see any basis in Chandler's decision for the requisite finding of "a genuine question about a director’s independence or personal interest in the outcome." Hence, as I argued in my article The Business Judgment Rule as Abstention Doctrine, the Supreme Court should abstain from reviewing the merits of the Disney board's decision.

In response to an email query from Larry, I should emphasize that I don't think Steele's statement (of which I heartily approve) is inconsistent with the requirement of an informed decision the Delaware Supreme Court imposed in Smith v. Van Gorkom. I continue to believe that Van Gorkom rests not on failure to comply with some judicially imposed decisionmaking model but on the absence of a sufficient record of any deliberative process a major transaction having final period consequences. Put differently, if the decisionmaking process is adequate, the court will continue to defer to the decision that emerges from that process. The basic thrust of the opinion then is that the board must provide some credible, contemporary evidence that it knew what it was doing. If such evidence exists, the court will not impose liability—even if the decision proves to have been the wrong one. Accountability thus appropriately trumped authority on the facts of Van Gorkom. But not on Disney's facts.

SEC Mutual Fund Rules Struck Down ... Again

The DC Circuit's decision. Ma rketWatch news story. Oesterle and Ribstein react. Law geek trivia: Eugene Scalia represented the Chamber of Commerce in this case.

Elson on CEO Pay and Boards

Congrats go out to my friend and law school classmate Charles Elson, who is now director of the the John L. Weinberg Center for Corporate Governance at the University of Delaware and one of the nation's leading experts on boards of directors and corporate governance, for scoring a full-length interview by the NY Times business section. Money quote:

"Disclosure is like aspirin; it can make you feel a little better, but it can't even cure the common cold," he said. "The fact is, a board that overpays the C.E.O. is in all probability not minding the store on other issues, either."

There's a subtle difference, by the way, between Elson's aspirin analogy and the chicken soup one Larry Ribstein uses. Aspirin actually does work. Whether the SEC's proposed new compensation disclosures will prove to be aspirin, chicken soup, or fugu remains to be seen. Personally, however, I'm not convinced that therapy by disclosure is a good idea, even if it does work.

Books about Business and Law

Several of my corporate law students have asked for recommendations of books dealing with big corporate law litigation or deals. The idea is to put into context some of what we've been learning in class. So here is a list of such books that I've read and found very helpful in thinking about the way corporate law and governance work in the real world. (If the generic Amazon ad shows up, try reloading your page.)