ProfessorBainbridge.com

Corporate Law Panel Discussions

A couple of interesting panel discussions have been posted to SSRN:

The Media and Executive Compensation: A Panel Discussion. This paper provides the edited transcript of a panel discussion on the media and executive compensation at the Columbia University symposium on Bebchuk and Fried's "Pay without Performance: The Unfulfilled Promise of Executive Compensation." Several prominent journalists discuss the problems of executive compensation raised by the book and the media's coverage of these problems.

Sympos ium on Director Liability. The edited transcript of a forum on personal liability of directors held at Harvard Law School in November 2005. Eleven panelists offer their diverse views and perspectives on this subject. The participants in the panel, which is moderated by Lucian Bebchuk (Harvard Law School), are Joseph Bachelder (Bachelder Law Offices), Roel Campos (Securities & Exchange Commission), Byron Georgiou (Lerach Coughlin), Alan Hevesi (New York State Comptroller), William Lerach (Lerach Coughlin), Robert Mendelsohn (former CEO of Royal Sun Insurance Group), Robert Monks (Lens Governance Advisors), Toby Myerson (Paul, Weiss), John Olson (Gibson Dunn & Crutcher), Leo Strine (Delaware Court of Chancery), and John Wilcox (TIAA-CREF). A video of the event is available at the website of Harvard Law School's Program on Corporate Governance.

TCS Column: Legal Sex Tournaments

My latest column tackles tournament theory and law firm promotions:

Although women now comprise half of law students and a third of practicing lawyers, they still account for less than 20 percent of large law firm partners. Some of this disparity doubtless can be attributed to glass ceilings, mommy tracks, and the other usual discrimination suspects. Yet, given the considerable inroads diversity policies and political correctness generally have made in big law firms, one suspects something else may also be going on.

The path to partnership in large firms can be understood as a promotion tournament. Many service firms use such tournaments as a mechanism for reducing agency costs through "comparative performance evaluation." In a promotion tournament, the principal ranks its agents by their performance relative to one another. The best performing agents are promoted to positions with higher pay and/or status. In law firms, associates are ranked and the best performers are promoted to partner at the end of an evaluation period.

For law firms, the promotion-to-partner tournament solves two agency cost problems at a single stroke. On the one hand, the firm makes investments in its associates' human capital -- i.e., skills and client relationships -- during their apprenticeship. The firm will want to discourage associates from leaving the firm before it has fully amortized those investments. On the other hand, the firm must also deter shirking by associates.

The firm gives associates incentive both to remain for the optimal period and to maximize their productivity during that period by holding "a tournament in which all the associates in a particular entering class compete and the firm awards the prize of partnership to the top alpha (?) percent of the contestants." The prize of promotion to a more secure and higher status position, plus the accompanying increase in compensation, gives lawyers an incentive to remain at the firm.

Conversely, the threat of losing the tournament deters shirking. A lawyer who fails to win the tournament loses more than just the opportunity for future wealth and status gains. Lawyers make substantial investments in client-specific human capital by developing relationships with the client and familiarizing themselves with the client's business. Because the investment is specific to the particular client, it will be lost if the relationship ends. Hence, the lawyer has a strong incentive to maintain that relationship.

Tournaments are highly risky. Only a small percentage of entering first year associates survive the winnowing process. Even among those who make it through the probationary period to the final promotion decision, a significant number are often denied partnership.

Winning the tournament, moreover, no longer ends the survival of the fittest competition. In recent years, law firms have shifted away from compensating partners on the basis of seniority to an "eat what you kill" model in which compensation is variable and partners lack job security.

Partners whose compensation is based on their continuing ability to attract clients and generate billings are inherently vulnerable to factors over which they have little or no control, such as market conditions, mergers in which clients are acquired, and so on. Yet, unless the partner is able both to maximize her own billings and generate ongoing business to support a team of associates and staff, she is likely to be terminated. Hence, as legal ethics expert Milton Regan put it, "A partner subject to an 'eat-what-you-kill' system may be anxious about where her next meal is coming from."

The likely significance of these risk factors follows from the considerable body of evidence that women are more risk-averse than men. Economist Vickie Bajtelsmit summarizes this research as follows:

"Anecdotal evidence suggests that women are more risk averse than men. A number of studies have confirmed this finding even when controlling for the effects of other individual characteristics such as age, education, and wealth. Jianakoplos and Bernasek ... single women were relatively more risk averse than single men and married couples. The proportion held in risky assets was found to increase with wealth (DRRA) but for single women the effect was significantly smaller than for single men and married couples. ...

"Other studies have explored gender differences in risk aversion in the context of non-financial decisions. These studies also find evidence of women's greater risk aversion. Hersch finds that, on average, women made safer choices than men in a number of risky consumer decisions such as smoking, seat belt use, preventative dental care and having regular blood pressure checks. Hersch looks at gender- specific estimates of illness and injury incidence rates for different industries and occupations and concludes that women are more risk averse than men based on the observation that women are paid a higher compensating wage differential for accepting a given job-injury risk. Brinig, analyzing data on speeding convictions, finds that women appear to be less willing than men to be caught and convicted of speeding."

This research suggests that self-sorting on the basis of risk preferences may explain at least part of the lingering gender disparities among large law firm partners. This inference finds some support in a recent study by Muriel Niederle and Lise Vesterlund, which found that women seek to avoid competition, which may help explain why they are less likely to obtain promotions and more lucrative jobs.

Niederle and Vesterlund asked 80 paid volunteers to perform a series of tasks. The volunteers were paid on a non-competitive piece rate for performing the first task. For the second task, however, payment was based on a competitive "tournament" in which the winners took all and losers received no payment. In the third trial, participants were allowed to choose whether they would be paid on a noncompetitive or tournament basis.

Niederle and Vesterlund found that, "when allowed to choose compensation rates for the third task, 75 percent of the men chose tournament compensation while only 35 percent of the women did so. When the authors compare men and women with the same performance in the second-task tournament, the women have about a 38 percent lower probability of entering the subsequent tournament than the men." The conclusion?

"In this experiment, large gender differences in tournament entry can be observed, even in a case where women are as good as men, where discrimination is absent, and where the time spent on each task is limited, so that time conflicts with raising children are not an issue."

Although Niederle and Vesterlund discount the extent to which risk aversion fully explains their results, their study has obvious implications for large law firm practice. Along with the more general evidence of gender differences in risk aversion, their findings strongly suggest that women will tend to be averse to participation in the promotion tournament and the eat what you kill compensation schemes that dominate large law firm practice.

If this analysis is correct, an obvious normative implication is that one cannot naively ascribe the continuing gender disparity among large law firm partners to either intentional or subconscious discrimination. Instead, it follows in part from an inherent conflict between gender differences and the institutional structures of modern legal practice. Put another way, changing hearts and minds will be unavailing, so long as lawyers are chosen on the basis of promotion tournaments and obliged to eat what they kill.

The Gospel of Judas: Peddling Gnosticism

If you don't read the news accounts relating to the much ballyhooed Gospel of Judas carefully, you might come away with the impression that it is a legitimate alternative to orthodox Christian theology. Indeed, National Geographic is essentially billing it as such. In fact, however, what we know about the document suggests that it is yet another example of the Gnostic heresy. The NY Times reports that:

The most revealing passages in the Judas manuscript begins, "The secret account of the revelation that Jesus spoke in conversation with Judas Iscariot during a week, three days before he celebrated Passover." The account goes on to relate that Jesus refers to the other disciples, telling Judas "you will exceed all of them. For you will sacrifice the man that clothes me."

Likewise, Reuters quotes Bart Ehrman, a religion professor at the University of North Carolina at Chapel Hill, who explains that:

"The idea in this gospel is that Jesus, like all of us, is a trapped spirit, who is trapped in a material body," Ehrman said. "And salvation comes when we escape the materiality of our existence, and Judas is the one who makes it possible for him to escape by allowing for his body to be killed."

This is classic gnosticism, which "taught that salvation is achieved through special knowledge (gnosis)." Likewise, a core tenet of the Gnostics was the "feverish craving to be freed from the body." Both strands jump out of the descriptions of the Gospel of Judas.

Indeed, the Gospel of Judas was expressly condemned as heterodox by church father Saint Irenaeus of Lyons about 180 AD.

So why is the National Geographic peddling heresy at this precise moment in time? I'll give you a hint: May 19, 2006. It looks like a cheap attempt to cash in on the Da Vinci Code phenomenon just as the movie is about to be released.

Outsiders, Insider Trading, and Property Rights

Larry Ribstein and Bruce Kobayashi have just published a very important article on the so-called "outsider trading" phenomenon:

Abstract: Outsiders often have and seek to trade on material nonpublic information about firms. For example, lawyers have traded on advance information about the filing of a lawsuit, a social activist has announced a plan to trade on advance information of a boycott, and a hedge fund operator has engaged in a controversial trading maneuver in a control contest. Trading on nonpublic information is generally permitted if the information was not misappropriated or accompanied by fraud or manipulation or other misconduct. However, recent public focus on the above transactions signals possible regulation in some specific outsider trading situations. More generally, Ayres and Choi propose giving firms broad rights to decide whether outsider trading in their stocks will be regulated. We argue against broad regulation on the basis that outsider trading can provide incentives for socially beneficial conduct. In particular, outsider trading provides an important way to capitalize on investments in intellectual property that are not otherwise protected by the intellectual property laws. Understanding of these benefits is crucial in determining the appropriate limits of regulation.

My own view, as set out in an essay I wrote for the Encyclopedia of Law and Economics is that the critical distinction between illegal insider trading and lawful outsider trading is whether the person who trades has violated someone else's property rights in information by doing so.

There are essentially two ways of creating property rights in information: allow the owner to enter into transactions without disclosing the information or prohibit others from using the information. In effect, the federal insider trading prohibition vests a property right of the latter type in the party to whom the insider trader owes a fiduciary duty to refrain from self-dealing in confidential information.

To be sure, at first blush, the insider trading prohibition admittedly does not look very much like most property rights. Enforcement of the insider trading prohibition admittedly differs rather dramatically from enforcement of, say, trespassing laws. The existence of property rights in a variety of intangibles, including information, however, is well-established. Trademarks, copyrights, and patents are but a few of the better known examples of this phenomenon. There are striking doctrinal parallels, moreover, between insider trading and these other types of property rights in information. Using another’s trade secret, for example, is actionable only if taking the trade secret involved a breach of fiduciary duty, misrepresentation, or theft. As Dooley observes, this is an apt summary of the law of insider trading after the Supreme Court’s decisions in Chiarella and Dirks.

In context, moreover, even the insider trading prohibition’s enforcement mechanisms are not inconsistent with a property rights analysis. Where public policy argues for giving someone a property right, but the costs of enforcing such a right would be excessive, the state often uses its regulatory powers as a substitute for creating private property rights. Insider trading poses just such a situation. Private enforcement of the insider trading laws is rare and usually parasitic on public enforcement proceedings. Indeed, the very nature of insider trading arguably makes public regulation essential precisely because private enforcement is almost impossible. The insider trading prohibition’s regulatory nature thus need not preclude a property rights-based analysis.

The rationale for prohibiting insider trading is precisely the same as that for prohibiting patent infringement or theft of trade secrets: protecting the economic incentive to produce socially valuable information. (An alternative approach is to ask whether the parties, if they had bargained over the issue, would have assigned the property right to the corporation or the inside trader.) As the theory goes, the readily appropriable nature of information makes it difficult for the developer of a new idea to recoup the sunk costs incurred to develop it. If an inventor develops a better mousetrap, for example, he cannot profit on that invention without selling mousetraps and thereby making the new design available to potential competitors. Assuming both the inventor and his competitors incur roughly equivalent marginal costs to produce and market the trap, the competitors will be able to set a market price at which the inventor likely will be unable to earn a return on his sunk costs. Ex post, the rational inventor should ignore his sunk costs and go on producing the improved mousetrap. Ex ante, however, the inventor will anticipate that he will be unable to generate positive returns on his up-front costs and therefore will be deterred from developing socially valuable information. Accordingly, society provides incentives for inventive activity by using the patent system to give inventors a property right in new ideas. By preventing competitors from appropriating the idea, the patent allows the inventor to charge monopolistic prices for the improved mousetrap, thereby recouping his sunk costs. Trademark, copyright, and trade secret law all are justified on similar grounds.

This argument does not provide as compelling a justification for the insider trading prohibition as it does for the patent system. A property right in information should be created when necessary to prevent conduct by which someone other than the developer of socially valuable information appropriates its value before the developer can recoup his sunk costs. Insider trading, however, often does not affect an idea’s value to the corporation and probably never entirely eliminates its value. Legalizing insider trading thus would have a much smaller impact on the corporation’s incentive to develop new information than would, say, legalizing patent infringement.

The property rights approach nevertheless has considerable justificatory power. Consider the prototypical insider trading transaction, in which an insider trades in his employer’s stock on the basis of information learned solely because of his position with the firm. There is no avoiding the necessity of assigning the property right to either the corporation or the inside trader. A rule allowing insider trading assigns the property right to the insider, while a rule prohibiting insider trading assigns it to the corporation. From the corporation’s perspective, we have seen that legalizing insider trading would have a relatively small effect on the firm’s incentives to develop new information. In some cases, however, insider trading will harm the corporation’s interests and thus adversely affect its incentives in this regard. This argues for assigning the property right to the corporation, rather than the insider.

Those who rely on a property rights-based justification for regulating insider trading also observe that creation of a property right with respect to a particular asset typically is not dependent upon there being a measurable loss of value resulting from the asset’s use by someone else. Indeed, creation of a property right is appropriate even if any loss in value is entirely subjective, both because subjective valuations are difficult to measure for purposes of awarding damages and because the possible loss of subjective values presumably would affect the corporation’s incentives to cause its agents to develop new information. As with other property rights, the law therefore should simply assume (although the assumption will sometimes be wrong) that assigning the property right to agent-produced information to the firm maximizes the social incentives for the production of valuable new information.

Because the relative rarity of cases in which harm occurs to the corporation weakens the argument for assigning it the property right, however, the critical issue may be whether one can justify assigning the property right to the insider. On close examination, the argument for assigning the property right to the insider is considerably weaker than the argument for assigning it to the corporation. As we have seen, some have argued that legalized insider trading would be an appropriate compensation scheme. In other words, society might allow insiders to inside trade in order to give them greater incentives to develop new information. As we have also seen, however, this argument appears to founder on grounds that insider trading is an inefficient compensation scheme. Even assuming that the change in stock price that results once the information is released accurately measures the value of the innovation, the insider’s trading profits are not correlated to the value of the information. This is so because his trading profits are limited not by the value of the in-formation, but by the amount of shares the insider can purchase, which in turn depends mainly upon his ex ante wealth or access to credit.

A second objection to the compensation argument is the difficulty of restricting trading to those who produced the information. The costs of producing information normally are much greater than the costs of distributing it. Thus, many firm employees may trade on the information without having contributed to its production.

The third objection to insider trading as compensation is based on its contingent nature. If insider trading were legalized, the corporation would treat the right to inside trade as part of the manager’s compensation package. Because the manager’s trading returns cannot be measured ex ante, however, the corporation cannot ensure that the manager’s compensation is commensurate with the value of her services.

The economic theory of property rights in information thus cannot justify assigning the property right to insiders rather than to the corporation. Because there is no avoiding the necessity of assigning the property right to the information in question to one of the relevant parties, the argument for assigning it to the corporation therefore should prevail.

The argument in favor of assigning the property right to the corporation becomes even stronger when we move outside the prototypical situation to cases covered by the misappropriation theory. It is hard to imagine a plausible justification for assigning the property right to those who steal information.

In contrast, the outsider trading situations identified by Ribstein and Kobayashi present the opposite case. In those situations, the new information was created by outsiders with no connection to the issuer. Accordingly, there is no basis for assigning the property right to such information to the firm and, therefore, no basis for regulating trading by such individuals. To the contrary, if we want to encourage the production of socially valuable information, we would allow such trading so as to provide outsiders with incentives to invest in developing such information.

Not Practicing What You Preach

Steven Waldman is editor in chief of Beliefnet, a Web site devoted to religious topics. He's also become a prominent spokesman for left-leaning people of faith. In a recent Slate column on how the left can appeal to such people, he notes that "Democrats at least need to pretend that they want to reduce the number of abortions." I wonder how he squares that advice with the Ninth Commandment.

Update: Waldman updated his Slate column with a postscript:

Addendum, April 7, 2006: Some readers have interpreted this line?"To frame abortion for this group, Democrats at least need to pretend that they want to reduce the number of abortions"?as me advocating that the Democrats fib. I can certainly see how the line would be read that way! But I was intending to be sarcastic, taking a too-subtle jab at Democrats for their reluctance in the past to talk about reducing abortion as a goal. I don't actually advocate that they build lying officially into their strategy.

Good for him.

Unemployment and Regulation

In reference to French labor law and the student riots, Kevin Drum and Brad Plumer are touting an OECD study claiming that, as Kevin put it, "(a) plenty of countries with strict employment laws also have low unemployment rates, (b) there's not much of a correlation between labor laws and unemployment rates, and (c) when you compare apples to apples, France's unemployment rate isn't as high as it looks anyway."

Unfortunately for their thesis, as Plumer admits, there is an IMF study to the contrary. More recently, economists Simeon Djankov, Rafael La Porta, Florencio Lopez de Silanes, Andrei Shleifer, and Juan Carlos Botero published the results of their study, which found that: "The political power of the left is associated with more stringent labor regulations and more generous social security systems. ... Heavier regulation of labor is associated with a larger unofficial economy, lower labor force participation, and higher unemployment, especially of the young." Likewise Italian economists Carlo Dell'aringa and Claudio Lucifora report that "both strong employment protection regulation and rigid system of wage determination appear to have played a major role in Italy," where the "labour market is characterized by high employment rates for adult males and both low participation and low employment rates for other groups of individuals (such as young, old and females) and by a large share of long-term unemployment."

There thus is important evidence contradicting Kevin's claims a and b. And, as a result, important evidence that the French student riots against labor market reforms are fundamentally misguided.

Will Skilling and Lay Go Down

Tom Kirkendall is arguing that Enron defendants Kenneth Lay and Jeffrey Skilling have "an eminently defensible case." The prediction markets, however, are still predicting guilty verdicts. The latest contract at Tradesports for Lay to be convicted on at least 4 counts was 65.5 and for Skilling to be convicted on a whopping 16 or more counts was 66. In other words, roughly 1-2 odds in favor of conviction.

CSR in the EU

Interesting critique of the close relationship between the EU bureaucrats and the professional corporate social responsibility movement:

CSR ... want the current voluntary benchmarks converted into something more concrete: mandatory requirements. Their goal, simply, is to impose upon companies third-party monitoring and enforcement systems, thus providing themselves with an ample source of future employment, to ensure that pure and unadulterated CSR is practiced company- and region-wide. And they have enlisted none other than national governments and international organizations, including the United Nations, which endorse public "naming and shaming" campaigns in order to "smoke out" (expose and extinguish) corporations' heretical practices. The movement is especially strong in the European Union, where the Commission is expected to and often does embrace every request.

If you combine the political agenda of the CSR movement and the political power of the European Commission, the result may well be explosive. In fact, Europe's business climate is already less-than-welcoming. There continues to be a persistently low rate of economic growth and technological innovation, and a dramatic rise in the number of costly regulations that require strict company compliance. It is no surprise, then, that European companies have chosen to invest significantly less on local research & development than their American and Asian counterparts.

Cox Prejudges the Issue

An SEC advisory committee on implementation of the Sarbanes-Oxley Act is expected to file its report of recommendations later this month. The committee is widely expected to propose significant regulatory relief for smaller public corporations. Yet, if news reports of a speech SEC Chariman Cox gave on Monday are accurate, Cox appears to have already prejudged the outcome:

Cox, in his first public comments on the issue, ruled out a full exemption for small companies from the certification rules, known as Section 404. "Our emphasis is on making 404 work and implementing it in a cost-effective and investor- protected way, rather than simply waiving it," Cox told reporters after a speech to a Stanford Law School forum on corporate governance in Washington.

Given the disproportionate impact of Section 404 on small business, it's disappointing to see that Cox has already made up his mind against possible waivers. Let's hope that "cost-effective" nevertheless leaves room for significant regulatory relief.

Speaking of CSR: The Case of GM

Dale Oesterle on the form of corporate social responsibility waged by GM:

There is a sizable group of academics that favor empowering boards of directors to favor constituencies other than shareholders (employees, suppliers, local citizens) in corporate decision making.  GM overpaid labor, buying peace for managers, at the expense of shareholder profit (and share price) for years.  Now GM's survivability is at stake; employees themselves would be better off it the GM board had been more careful of shareholder profits.  Railroads situation is similar to GM (they have special legislation that protects their unions). Compare GM's (or the railroad's) situation to that of Caterpillar's.  Caterpillar went through some tough strikes to hold the line on labor costs;  Caterpillar is now doing very well and is an international success story. The theory of shareholder primacy, rejected by many academics, is that in 9 cases out of 10, sustained shareholder profits are a surrogate for long-term gains for other constituencies -- when shareholders make money over-time, employees have good, stable jobs.  If we hold boards accountable for profits, all constituencies, over-time, also benefit.  In those rare cases in which interests are at conflict and do diverge, in takeovers for example, shareholder profits should be preferred.  A bidder should not, by law, have to make a payment to workers to buy a company (unless contractually stipulated).

Ditto.

Law schools and Delaware's dominance

My friend Emory law professor William Carney is here today to give a paper at my corporate governance colloquium. His topic is one of perennial interest to corporate lawyers; namely, why Delaware dominates as the state of incorporation. Prof. Carney thinks Delaware law is inferior in many respects, so he's looking for explanations as to why a sub-standard product enjoys a near monopoly. One of his more provocative hypotheses was summarized by one of my students as follows:

Arguably, law schools play a tremendous role in allowing Delaware to enjoy its dominance. Law schools produce lawyers who will advise companies on where to incorporate. If lawyers are only skilled in Delaware law (they may have been exposed to the corporate law of their own state for the Bar exam but probably forgot it shortly thereafter) they will advise their clients to incorporate in Delaware.

But this poses a new question; namely, why do law professors love Delaware? Another one of my students points to the nature of the opinions written by Delaware judges:

... the fact-intensive, academically-written opinions make for good classroom discussion and interesting reading.

That's probably true, but I think there's also a path dependence story. We corporate law professors were taught Delaware law. The case books we use are full of Delaware law. In practice, we mainly used Delaware law. So when we go into teaching, we teach Delaware law. The costs of learning and teaching, say, Wyoming corporate law would be very high, especially for a brand new prof with lots on his/her plate. So we legal academics have an incentive to construct a class room dynamic that inculcates a preference on the part of our graduates for Delaware law. At some point, the process became self-perpetuating.

Courting Failure Revisited

My friend and UCLA law colleague Lynn LoPucki's controversial book on the state of bankruptcy law - Courting Failure - argued that the bankruptcy system is distorted by "forum shopping," in which attorneys choose courts that offer the most favorable outcome for their bankrupt clients. The courts, lured by power and prestige, streamline their requirements and lower their standards to compete for these lucrative cases. He then contends that the result has been a series of increasingly shoddy reorganizations of major American corporations, proposed by greedy corporate executives and authorized by case-hungry judges.

In late 2005, the University of Wisconsin Law School hosted a conference of leading bankruptcy scholars to critique LoPucki's book. The papers from that conference, written by Douglas G. Baird, Mechele Dickerson, Melissa B. Jacoby, Judge Robert D. Martin, Robert K. Rasmussen, David A. Skeel, Jr. and Charles J. Tabb, will be published in a symposium issue of the Buffalo Law Review.

In an article recently posted to SSRN, LoPucki replies to the critiques:

This essay summarizes the critiques and responds. Part I reviews the four-step argument that corruption is the right word for what is happening to the bankruptcy courts. Bankruptcy judges are under pressure to attract big cases. Courts have changed substantive rules and rulings to attract them, affecting such matters as professional fee awards, trustee appointments, deference to consensus, critical vendor orders, conflicts of interest, executive retention bonuses, insider releases and many others. That every significant trend in big cases bankruptcy has been in favor of the professionals, executives, and DIP lenders who are capable of bringing the courts additional cases demonstrates that at least some of the judges are acting in bad faith. That is, at least some of the changes are driven by the desire to get cases, not a good faith belief that the changes are legal or desirable.

Courting Failure argues that court competition caused high reorganization failure rates in Delaware and New York during the period from 1991-96 and then high reorganization failure rates nationally when the competition spread to the rest of the country in 1997. Part II responds to a variety of objections to this argument.

Melissa Jacoby argues that high reorganization failure rates spread too quickly to be the result of competition. I respond that despite the problems with that thesis, it remains the best explanation of the evidence. Baird and Rasmussen argue that the failure of Delaware's prepackaged cases should not count because judges don’t compete for prepackaged cases. I respond with evidence they do. David Skeel argues that Delawares high failure rate may be the result of a selection effect in which the weakest companies chose the Delaware court and were put on a “short leash” by saddling them with heavy debt. I respond by noting the complete lack of any evidence of a selection effect despite substantial efforts to find one.

Merlot Fights Back

To educate the trade about the complex uniqueness of Merlot, Swanson Vineyards is taking its elaborate Merlot seminar on the road this spring, visiting San Francisco, San Diego, Las Vegas, Chicago, New York, New Jersey, Miami, Tampa and Orlando. Winemaker Chris Phelps and General Manager Stuart Harrison will present two flights of Merlots from around the world, followed by a flight of Swanson barrel samples. ?We?re trying to set the record straight on a varietal which has been so misunderstood and maligned,? Harrison explains. ?We?re looking at Merlot from a global perspective, tasting and talking about the realities of the varietal worldwide. The seminar discusses the technical specifics of the variety and the statistical place of Merlot in world grape and wine production,? he adds.

Supporting this effort is a new website, http://www.merlotfightsback.com /, which not only provides details of the seminar but also offers a forum for opinions on Merlot, whether Swanson?s or others. ?We?re coming to the rescue of a wonderful wine, both by bringing this educational seminar to a number of markets and also by bringing the discussion about Merlot to the web,? Stuart Harrison says.

I applaud this effort, provided it is coupled with a commitment by California vintners to provide quality Merlot at fair prices. Back when anything with a Merlot label on it was selling like hot cakes, too much California Merlot was industrial plonk at sky high prices.

My California Merlot reviews.

Associate Trade-offs

At premier NYC law firm Sullivan & Cromwell, the average partner draw reportedly exceeds $2.3 million per year. In large part, the partner's wealth comes from leveraging associates. A young lawyer who is billed out at, say, $250/hour and clocks 2000 billed hours/year brings in $500,000 per year, of which around 25% goes back to the associate as salary. If the firm's got 6 or 7 associates per partner, the profits really start to add up.

Recently, S&C decided to share a bit of the wealth by raising associate starting salaries by $20,000 to $145,000 per year.

If my practice experience a couple of decades ago and the stories I hear from former students hold true, S&C's associates will pay for that raise. The odds are that the number of billed hours associates are expected to work will go up ... again. When I was in practice, 2200 billed hours/year put you in the top echelon of associates. Today, at most firms of S&C's caliber, 2200 hours is the bare minimum expected. In addition, there'll probably be additional salary compression, since the salaries of more senior associates will not go up quite as fast.

Would young lawyers have preferred a different trade-off; namely, a salary cut in exchange for a more humane lifestyle? In a W$J op-ed, Cameron Stracher argues that they would (or, perhaps more accurately, should):

I want to make a modest proposal, something that will improve the lives of young lawyers by forcing them to re-evaluate their priorities: Tomorrow, law firms should cut starting salaries by 50%. The first thing that will happen, I predict, is that associates will rise up in revolt and refuse to work as hard for half the pay. The second thing that will happen is that law firms will need to look for ways to make up the difference.

The facts are not in dispute. In an era in which most Americans have more leisure time, lawyers clearly have less (as I've blogged about before). It's not clear why we should care. To be sure, I made a different lifestyle choice, but there are lots of Type A people who would love the chance to work like dogs for big pay and the possibility of a bigger prize at the end of an 8 or 9 year probationary period.

To make us care, Stracher has to make one of two possible moves. First, he could argue that there's something morally problematic about wealth. Second, he could argue that high associate salaries and partner draws have negative externalities for society. In his op-ed, Stracher makes the second move:

Higher salaries have forced firms to look for new ways to increase revenues. One obvious solution is to throw more lawyers on a case, and to be more aggressive about litigating and challenging small matters that might otherwise go uncontested. The result is that the youngest lawyers get the most trivial and unnecessary work. Law firms claim they staff matters "leanly," but that doesn't justify the huge increases in the costs of litigation (and deal-making), which can only partly be explained by increases in fees. Instead, firms are lawyering matters to death, and killing their associates in the process.

In other words, Stracher wants us to believe that the elasticity of the demand curve for legal services is so elastic that firms can pass increased salaries on to clients who passively pay ever-rising bills. Even though firms like S&C mainly represent large and sophisticated corporate clients. So count me an externality skeptic.

Update: Larry Ribstein has more.

French Takeover Protections

The W$J reports:

The board of Alcatel SA meets Saturday to hash out the final details of a merger with Lucent Technologies Inc. to form a Paris-based company that would be in the top tier of telecommunications-equipment makers in the key U.S. market. If the deal goes ahead, an announcement could be made within days, according to people familiar with the matter.

And also there's this not unrelated story:

In an escalation of Europe's battles over countries shielding companies from takeovers, the European Commission is considering legal action regarding France's protection of 11 "strategic sectors." European Union officials said top regulators will agree Monday to send an official warning to Paris over its move, the day before a general strike is set to hit France over job-protection policy. France would have two months to reply before the commission can sue the French government at the European Court of Justice. ...

The immediate subject of discord concerns the takeover regulation Paris announced in December to protect 11 sectors from foreign takeovers, citing national-security concerns. The decree allows Paris to block foreign takeovers of bioweapons research facilities and defense contractors. But it also blocks foreign gambling firms from buying into the French lottery or horse racing.

As I've explained before, the Alcatel-Lucent deal poses significant security questions and, moreover, provides an opportunity to hold France to account for its protectionism. Congress and the administration ought to be holding this deal up until France addresses these concerns by opening its markets to cross-border mergers and providing assurances against technology transfers to US strategic competitors.