ProfessorBainbridge.com

The Latin Rite

For hundreds of years, the Latin Mass was a potent symbol of the Church Universal, which transcended nationality, ethnicity, culture, and language.

The Latin Mass familiar to Catholics old enough to remember how worship was conducted before Vatican II was known as the Tridentine Rite because it had been codified by the Council of Trent. From 1570, when Pope Pius V's Quo Primum bull authorized the use of that rite, "without scruple of conscience or fear of penalty," until the post-Vatican II liturgical reforms of the 1960s and 1970s, the Tridentine Mass was the distinguishing characteristic of the Roman Church.

The Vatican II reformers pressed a broad liturgical modernization program, at the core of which was a move towards conducting the Mass in the local vernacular. Granted, there was a case to be made for de-emphasizing Latin. First, Christ's Great Commission commands Christians to "make disciples of all nations." The arcane elements of the Tridentine Mass and the use of a strange tongue supposedly made evangelism by Catholics nearly impossible. Second, many uneducated Catholics had only a limited understanding of the Mass and, as a result, lacked a meaningful worship experience. Indeed, among the least educated, the Tridentine Mass had magical and superstitious connotations. Third, even as to Catholics who fully understood what was happening in the Tridentine Rite and possessed a reasonable command of the Latin liturgy, the structure of the Tridentine Mass precluded the full and active participation of the laity in the ritual.

The Sacrosanctum Concilium (i.e., Constitution on the Sacred Liturgy) issued by the Second Vatican Council began a process of reform that culminated in the 1970 Missal and, to some extent, continues even today. Contrary to popular belief, Vatican II did not ban the use of Latin or the Tridentine Rite. Instead, the choice of whether to permit the use of the Tridentine Rite and/or Latin was left to the discretion of each diocesan bishop.

In the United States, the vast majority of diocesan bishops have sharply restricted the use of the Tridentine Rite. This remains the case even though Pope John Paul II's 1988 Ecclesia Dei declaration stated that "respect must everywhere be shown for the feelings of all those who are attached to the Latin liturgical tradition" and urged diocesan bishops to make "wide and generous application" of their power to authorize the use of that tradition. In the Archdiocese of Los Angeles, for example, Cardinal Mahoney reportedly insists that the Tridentine Mass should be available only to those were alive and actively attending Mass pre-1965. Those of us born into the Church (or, as in my case, who converted) after 1965 are denied access to the Tridentine Mass. (Fortunately, Mahoney's opposition to the Tridentine Rite does not preclude the use of Latin entirely. My parish, St. Victor Church in West Hollywood, has a lovely Sunday Vigil Mass in which extensive use is made of Gregorian chant.)

Almost since the beginning of Pope Benedict XVI's papacy, there has been rampant speculation that he will issue a universal indult that will bypass recalcitrant diocesan bishops like Cardinal Mahoney. The Times of London reported recently on the latest rumors out of the Vatican, which sound as though it is a done deal:

"Pope Benedict XVI is understood to have signed a universal indult — or permission — for priests to celebrate again the Mass used throughout the Church for nearly 1,500 years. The indult could be published in the next few weeks, sources told The Times. ... The new indult would permit any priest to introduce the Tridentine Mass to his church, anywhere in the world, unless his bishop has explicitly forbidden it in writing."

In other words, although the new indult will not ensure that the Tridentine Mass is universally available, it would reverse the presumption against the Tridentine Rite by requiring local bishops proactively to proscribe that Rite. It remains to be seen whether Vatican II diehards like Mahoney will accept the change with good grace or actively resist it with written proscriptions.

There is no guarantee that the rumors are true, of course. The Vatican remains very much a black box in this area, as in many others. Yet, we may nevertheless ponder the merits of the rumored indult.

The arguments for the vernacular mass are undoubtedly strong. In theory, at least, the Mass has become more accessible both to cradle Catholics and prospective converts. In practice, however, the post-Vatican II liturgy all too often has been trite or even embarrassing. As "liberal" Archbishop Rembert Weakland observed back in 1999, many priests "adopted a kind of colloquial style that was and is unbefitting the liturgical movement." And, of course, the music has been even worse. To again quote Weakland, "most of the new music created for the liturgy has been and continues to be trite in both musical form and text, more fit for the theatre and the pub than for church."

Archbishop Weakland argued that the post-Vatican II liturgical reforms have created serious theological shortcomings in Catholic practice by promoting "a diminution of respect for and belief in the real presence in the Eucharist". Among the problems Weakland identified are "the tendency to stand, not kneel," "the placement of the tabernacle in the church away from the central axis," and the demise of genuflections. Taken together, he argued, the reforms "have reduced the sense of the transcendent and an appreciation for God's presence and role in the liturgy."

Weakland's critique, of course, was a call for more and better liturgical reform rather than for a restoration of the Latin Tridentine Mass. Yet, given the repeated failures of the reform movement, and with the Tridentine Rite lying to hand as a long-proven alternative, why not at least make it widely available as an option?

Making the Tridentine Rite widely available in Latin would be an important signal to Catholics and all Christians that we are members of a universal Church. The Catholic Church is universal across both time and space. In temporal terms, it is a partnership between the living, those who have gone before us, and those who will come after us. Christians throughout history used the Latin Mass. When we use it today, we reaffirm our place in that history. It reminds us of the traditions of our faith and, as St. Paul put it, of the great cloud of witnesses before whom we run our race.

In spatial terms, the Church transcends national boundaries and linguistic barriers. The Latin Mass reminds us that we are just Americans but also Catholic Christians. Indeed, it reminds us that we are Christians first and Americans second. There is something very profound and moving in knowing that millions of people around the world, in dozens of countries, are saying precisely the same words that you are speaking.

Catholics around the world hunger for the return of the Latin Mass, not just quasi-schismatic traditionalists and sedevacantists. In Atlanta, for example, it is reported that the regularized Latin Mass mainly by "younger people who want to pass on the faith and its true expression." One hopes Pope Benedict will not disappoint them.

The Rite Move

For hundreds of years, the Latin Mass was a potent symbol of the Church Universal, which transcended nationality, ethnicity, culture, and language.

The Latin Mass familiar to Catholics old enough to remember how worship was conducted before Vatican II was known as the Tridentine Rite because it had been codified by the Council of Trent. From 1570, when Pope Pius V's Quo Primum bull authorized the use of that rite, "without scruple of conscience or fear of penalty," until the post-Vatican II liturgical reforms of the 1960s and 1970s, the Tridentine Mass was the distinguishing characteristic of the Roman Church.

The Vatican II reformers pressed a broad liturgical modernization program, at the core of which was a move towards conducting the Mass in the local vernacular. Granted, there was a case to be made for de-emphasizing Latin. First, Christ's Great Commission commands Christians to "make disciples of all nations." The arcane elements of the Tridentine Mass and the use of a strange tongue supposedly made evangelism by Catholics nearly impossible. Second, many uneducated Catholics had only a limited understanding of the Mass and, as a result, lacked a meaningful worship experience. Indeed, among the least educated, the Tridentine Mass had magical and superstitious connotations. Third, even as to Catholics who fully understood what was happening in the Tridentine Rite and possessed a reasonable command of the Latin liturgy, the structure of the Tridentine Mass precluded the full and active participation of the laity in the ritual.

The Sacrosanctum Concilium (i.e., Constitution on the Sacred Liturgy) issued by the Second Vatican Council began a process of reform that culminated in the 1970 Missal and, to some extent, continues even today. Contrary to popular belief, Vatican II did not ban the use of Latin or the Tridentine Rite. Instead, the choice of whether to permit the use of the Tridentine Rite and/or Latin was left to the discretion of each diocesan bishop.

In the United States, the vast majority of diocesan bishops have sharply restricted the use of the Tridentine Rite. This remains the case even though Pope John Paul II's 1988 Ecclesia Deideclaration stated that "respect must everywhere be shown for the feelings of all those who are attached to the Latin liturgical tradition" and urged diocesan bishops to make "wide and generous application" of their power to authorize the use of that tradition. In the Archdiocese of Los Angeles, for example, Cardinal Mahoney reportedly insists that the Tridentine Mass should be available only to those were alive and actively attending Mass pre-1965. Those of us born into the Church (or, as in my case, who converted) after 1965 are denied access to the Tridentine Mass. (Fortunately, Mahoney's opposition to the Tridentine Rite does not preclude the use of Latin entirely. My parish, St. Victor Church in West Hollywood, has a lovely Sunday Vigil Mass in which extensive use is made of Gregorian chant.)

Almost since the beginning of Pope Benedict XVI's papacy, there has been rampant speculation that he will issue a universal indult that will bypass recalcitrant diocesan bishops like Cardinal Mahoney. The Times of London reported recently on the latest rumors out of the Vatican, which sound as though it is a done deal:

"Pope Benedict XVI is understood to have signed a universal indult — or permission — for priests to celebrate again the Mass used throughout the Church for nearly 1,500 years. The indult could be published in the next few weeks, sources told The Times. ... The new indult would permit any priest to introduce the Tridentine Mass to his church, anywhere in the world, unless his bishop has explicitly forbidden it in writing."

In other words, although the new indult will not ensure that the Tridentine Mass is universally available, it would reverse the presumption against the Tridentine Rite by requiring local bishops proactively to proscribe that Rite. It remains to be seen whether Vatican II diehards like Mahoney will accept the change with good grace or actively resist it with written proscriptions.

There is no guarantee that the rumors are true, of course. The Vatican remains very much a black box in this area, as in many others. Yet, we may nevertheless ponder the merits of the rumored indult.

The arguments for the vernacular mass are undoubtedly strong. In theory, at least, the Mass has become more accessible both to cradle Catholics and prospective converts. In practice, however, the post-Vatican II liturgy all too often has been trite or even embarrassing. As "liberal" Archbishop Rembert Weakland observed back in 1999, many priests "adopted a kind of colloquial style that was and is unbefitting the liturgical movement." And, of course, the music has been even worse. To again quote Weakland, "most of the new music created for the liturgy has been and continues to be trite in both musical form and text, more fit for the theatre and the pub than for church."

Archbishop Weakland argued that the post-Vatican II liturgical reforms have created serious theological shortcomings in Catholic practice by promoting "a diminution of respect for and belief in the real presence in the Eucharist". Among the problems Weakland identified are "the tendency to stand, not kneel," "the placement of the tabernacle in the church away from the central axis," and the demise of genuflections. Taken together, he argued, the reforms "have reduced the sense of the transcendent and an appreciation for God's presence and role in the liturgy."

Weakland's critique, of course, was a call for more and better liturgical reform rather than for a restoration of the Latin Tridentine Mass. Yet, given the repeated failures of the reform movement, and with the Tridentine Rite lying to hand as a long-proven alternative, why not at least make it widely available as an option?

Making the Tridentine Rite widely available in Latin would be an important signal to Catholics and all Christians that we are members of a universal Church. The Catholic Church is universal across both time and space. In temporal terms, it is a partnership between the living, those who have gone before us, and those who will come after us. Christians throughout history used the Latin Mass. When we use it today, we reaffirm our place in that history. It reminds us of the traditions of our faith and, as St. Paul put it, of the great cloud of witnesses before whom we run our race.

In spatial terms, the Church transcends national boundaries and linguistic barriers. The Latin Mass reminds us that we are just Americans but also Catholic Christians. Indeed, it reminds us that we are Christians first and Americans second. There is something very profound and moving in knowing that millions of people around the world, in dozens of countries, are saying precisely the same words that you are speaking.

Catholics around the world hunger for the return of the Latin Mass, not just quasi-schismatic traditionalists and sedevacantists. In Atlanta, for example, it is reported that the regularized Latin Mass mainly by "younger people who want to pass on the faith and its true expression." One hopes Pope Benedict will not disappoint them.

Stephen Bainbridge: Bush 43 has been a disaster for conservatives

My Washington Examiner Post

Although press reports suggest that President Bush and Karl Rove are predicting the GOP will experience minimal losses in the November election and, as a result, hold both the House and Senate, this optimism appears wholly misplaced.

It now seems clear that George W. Bush has permanently lost the confidence of the bulk of the American people. His approval ratings remain mired in the 30s and, unlike past election cycles, many Republican candidates are running away from Bush as fast as they can. As the Los Angeles Times noted in endorsing California Gov. Arnold Schwarzenegger for re-election: "He has distinguished himself from the Bush administration. …"

Bush was blessed with the opportunity to effect many long-term conservative goals. For most of his presidency, the GOP controlled the White House and Congress, as well as having a solid critical mass in the courts. Despite these advantages, however, what has Bush really accomplished?

Is government smaller? Have we hacked away at the nanny state? Are the unborn any more protected? Have we set the stage for a durable conservative majority?

To be blunt, no.

In foreign policy, Bush opted to treat terrorism as a war rather than a problem for police and intelligence agencies. This choice remains problematic. Even if he was right to do so, he has waged the war incompetently. Osama bin Laden remains at large to taunt America. Even if bin Laden is essentially powerless, he remains a potent symbol. And the Taliban threatens to make a comeback in Afghanistan, where we seemingly have far too few troops to maintain control.

As for Bush’s war of choice in Iraq, it is clear that the administration lacked a plan for succeeding with the occupation. We still don’t have a handle on the security problems in Iraq. Our feckless handling of the country looks likely to breed another generation of jihadists, and there is no sign that Bush has a viable exit plan. Worse yet, he created an American gulag: Abu Ghraib, Guantanamo, secret renditions, the use of water-boarding and other coercive interrogation techniques that are little short of torture.

As conservative icon Russell Kirk observed of George H.W. Bush’s Middle East policy, "devastating Iraq (and the rescued Kuwait) is an uncompromising way of opening an era of sweetness and light. Peoples so rescued from tyrants might cry, as did the boy whom Don Quixote de la Mancha had saved from beating by the muleteers but who was thrashed by them not long later, nevertheless — ‘In the name of God, Don Jorge de la Casablanca, don’t rescue me again!’ "

We can debate whether invading Iraq was a necessary step in the war on terrorism. What we can no longer debate is that the Iraq war has brought the larger conservative agenda to a crashing halt, wasting a moment for which many in the conservative movement have waited for decades. If public perceptions of the GOP don’t improve soon, they threaten to undermine the conservative realignment for which we have long hoped.

At home, Bush has done little to advance the conservative movement’s agenda. Taxes were cut, but the budget deficit has ballooned. Entitlement programs haven’t been cut; instead, Bush rammed through the biggest expansion of entitlement programs in decades when he pushed the Medicare prescription drug benefit. No Child Left Behind and Sarbanes-Oxley vastly expanded the reach of the federal government in education and corporate governance — areas traditionally regulated by the states. The Harriet Miers debacle culminated a series of appointments motivated by cronyism rather than merit and commitment to conservative values.

In short, Bush has been a disaster for conservatives. We’ve made little progress, while suffering major setbacks. Worse yet, Bush’s well-deserved unpopularity threatens to rub off on conservative policies and leaders.

Kirk once observed that the GOP "attracted public support by its appearance of practicality, its defense of private property and of a competitive economy, its reluctance — most of the time — to embark upon adventures abroad." Bush has disavowed these traditions. In turn, it is now time for the conservative movement to disavow Bush.

Instead of spending the next two years propping up a tottering presidency and a corrupt Congressional leadership, the conservative movement needs to cut the cord with Bush and start moving forward again.

SEC Delays Action on the Proxy Rules

Several years ago the SEC proposed a new rule (14a-11), which would have allowed shareholders to put nominees for the board of directors on the company's proxy statement. I opposed that proposal for the reasons set out in my article A Comment on the SEC Shareholder Access Proposal. Wisely, the SEC deicded to let the rule quietly die rather than adopt it.

A bunch of insitutional investors have decided to try using the SEC shareholder proposal rule (14a-8) to end run the SEC's inaction. Under that rule, shareholders can put certain types of proposals on the agenda for a shareholder meeting. Some institutions (mostly public sector unions, which may tell you something) are trying to use shareholder proposals to impose a nomination process on the company and majority vote for directors via bylaw amendments.

A court case involving AFSCME ordered the SEC to let shareholders use the proposal rule in this way. In response, the SEC announced it would consider revising the proxy rules. Recently, however, the SEC announced that regulatory action would delayed at least until December:

"It was a can of worms then. It's a can of worms now. It was very divisive last time. They didn't reach a consensus," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. (Link)

Charles may be right about the SEC Commissioners' inability to reach consensus, but as a policy matter the issue really is pretty simple.

As I detail in The Short Life and Resurrection of SEC Rule 19c-4, the DC Circuit's seminal decision in Business Roundtable v SEC, the federal proxy rules were not intended to deal with the substantive aspects of shareholder voting rights. The federal proxy rules are properly concerned only with the need for full disclosure and fair solicitation procedures.

It is state corporation law that decides the rule of the game by which directors are elected. It is precisely for this reason that the exclusion of matters relating to election of directors created by Rule 14a-8(i)(8) needs to get an expansive interpretation. The logic of the Business Roundtable case is that deciding what issues are the proper subject of shareholder action is a matter of state law (which is also the logical interpretation of SEC Rule 14a-8(i)(1)'s exclusion of matters that are not a proper subject of shareholder action).

The Communitarian Connundrum

From my latest TCS column:

University of Chicago law professor Geoffrey Stone recently offered 10 tenets of modern liberalism, which included the following nugget:

It is liberals who maintain that a national community is like a family and that government exists in part to "promote the general welfare."

It is this communitarian aspect of modern liberalism, of course, which marks a principal difference between the modern version and classical liberalism. I suspect it is this over-broad understanding of what it means to be a community that is one of the things conservatives and libertarians steeped in the classical liberal tradition find most off-putting about modern liberalism.

The great moral difficulty with communitarianism is that, if taken to extremes, it treats individuals as though they were little more than cells of a larger organism. Just as when doctors kill cells to prevent cancer from spreading, communitarianism readily justifies state intrusion into the private sphere in the name of some communal good.

Worse yet, communitarian societies require a standard of behavior more demanding than most members of an unredeemed society are unable or unwilling to meet most of the time, and that all are unable to meet all of the time. Hence, it is hardly surprising that world history is littered with the failures of communitarian utopia. The communitarian agenda simply cannot be attained without invoking the state's monopoly on coercive force. Hence, as has been observed of the British (New) Labour Party's version of communitarianism, it amounts to "the nationalization of people instead of companies, as individuals are subsumed by their designated communities."

This is precisely why conservatives have always balanced the communitarian elements of our philosophy with a strong commitment to ordered liberty. Our goal is not some national "community" whose rules are enforced by the state, but rather the promotion of intermediating institutions that build what George Weigel calls "a citizenry regulating itself from within according to a shared public 'language of good and evil.'"

Conservatives believe that the state cannot build such a citizenry, because the state cannot make people virtuous. Virtue is an adaptive response to the instinctive human recognition of (and need for) a transcendent moral order codified in a body of natural law. People are most likely to act virtuously when they believe in an external power, higher and more permanent than the state, who is aware of their shortcomings and will punish them in the next life even if they escape retribution in this life.

Civic virtue also can be created by secular communities. As James Q. Wilson observes, "something in us makes it all but impossible to justify our acts as mere self-interest whenever those acts are seen by others as violating a moral principle." Rather, "[w]e want our actions to be seen by others—and by ourselves—as arising out of appropriate motives." Voluntary communities strengthen this instinct in two ways. First, they provide a network of reputational and other social sanctions that shape incentives. Virtuous communities will use those sanctions to encourage virtue among their members. Second, because people care more about how they are perceived by those close to them, communal life provides a cloud of witnesses about whom we care and whose good opinion we value. We hesitate to disappoint those people and thus strive to comport ourselves in accordance with communal norms.

The nanny state is a poor substitute, at best, for the virtue inculcating power of faith and voluntary community. We may fear the faceless bureaucrat, but he does not inspire us to virtue. Conduct that rises above the lowest common moral denominator thus cannot be created by state action. But while the state cannot make its citizens virtuous, it can destroy the intermediary institutions that do inculcate virtue. As Richard Epstein observes, "Communities can be destroyed from without; but they cannot be created from without; they must be built from within."

To be clear, I am not arguing for some libertarian utopia in which the state has no role beyond that of a night watchman. As Edmund Burke once observed, there is "a limit at which forbearance ceases to be a virtue." At that limit, the state properly steps in.

The Calvinist principle of sphere sovereignty offers one way of thinking about the line between legitimate and illegitimate uses of government power. Social institutions—including both the state and the corporation—are organized horizontally, none subordinated to the others, each having a sphere of authority governed by its own ordering principles. Expansion of any social institution beyond its proper sphere necessarily results in social disorder and opens the door to tyranny. The trouble with the state thus is not its existence, but its expansion beyond those functions prescribed by custom and convention, which were legitimized by ancient usage, into the pervasive nanny state perpetually grasping at aspects of social life to drag into its slavering maw.

From a perspective founded on sphere sovereignty, the progressive communitarian's basic flaw is his willingness to invoke the coercive power of the state in ways that deny the right of mankind acting individually or collectively through voluntary associations to order society. In contrast, conservatives are unwilling to sacrifice ordered liberty at the altar of community. A conservative properly insists that individuals be left free to define for themselves what conduct shall be deemed trustworthy or honorable, rather than being forced to comply with, say, Geoffrey Stone's definition of what makes for a good community.

A Real Backdating Scandal

Whatever one makes of the option backdating scandal, it's hard to defend what Cablevisi on did:

Cablevision took it up a notch as it was revealed that they didn't just backdate options, they backdated a bunch so a dead executive could get the options while he was alive. Well, to be more specific, that his estate could get them.

Options are supposed to be used as incentive compensation, but it's hard to see how you incentivize a dead man.

W$J On Regulating Executive Compensation

There's a great article in today's W$J on the persistent failures by government efforts to regulate the compensation of corporate executives. One of the key claims by the article is that disclosure actually tends to push pay up, arguing that "disclosure rules allowed CEOs to see what others were getting, encouraging a competitive spiral." There is a very interesting paper< /a> by Swan and Zhou, however, which was recently posted to SSRN, which argues to the contrary: "We provide evidence contrary to both theories using data on pay levels and incentives pre- and post- disclosure. Disclosure does not appear to alter pay levels but it does enhance incentives."

BLBP comments on the W$J article:

It makes the point that with each new law attempting to control executive pay came "unexpected consequences,"  executive pay increased.  Each law had exceptions for pay that the law makers felt was justified, and companies turned the exceptions into uniform practice, increasing pay.

IN 1984, Congress taxed golden parachutes if over three times salary.  Parachutes, rare before 1984, became the norm after 1984 for all companies at -- you guessed it -- three times salary.  Now they are over three times salary and the companies pay the tax (gross up provisions).  In 1992, the SEC forces companies to disclose more on pay packages; after 1992 salaries skyrocket as CEOs now know what each other make and all demand to be in the "top half", ratcheting up the pay scale.  In 1993 Congress caps the deduction for cash salary at $1 million and exempts some kinds of "performance based" compensatory stock options.  Before 1993 most executives did not get $1 million in cash, after 1994, all CEO salaries were at $1 million in cash.  Now cash salaries over $1 million are common; companies do not worry about the deduction. Compensatory stock option grants soared.  By 2001 Larry Ellison took home $706 million in a single year.  When FASB finally required the expensing of stock options in 2003, companies began to distribute "restricted stock."  Severance payments have soared and golden parachutes, a version of severance payments, are up.  Kilts, from Gillette, took home $185 million when he sold Gillette to Proctor & Gamble (and was indignant when anyone suggested that it was too much).  Indignant.  There is the guts of the problem. The man should be ashamed, or at the very least a wee bit guilty (and thankful for his undeserved good fortune). 

Ditto Ideoblog:

The article doesn't mention the effect of changes in takeover regulation, and gives short shrift to the ultimate question of whether executive pay, though rising, is excessive.

My own take is that attempting to regulate agency costs, including pay, within the current corporate form is a losing game because this form inherently gives significant discretion to managers. See Accountability and Responsibility in Corporate Governance, 81 Notre Dame Law Review 1431 (2006). This doesn't mean, however, that pay would be, or should be, lower in alternative business forms that make managers more responsive to markets.  Consider, for example, the compensation of hedge fund managers.

Delaware's Dominance

By any reasonable measure, Delaware dominates corporate governance. More than half a million business entities have their legal home in Delaware including more than 50% of all U.S. publicly-traded companies and 60% of the Fortune 500. Because of a conflict of laws rule called the internal affairs doctrine, "the internal affairs of a corporation are governed by the law of that entity's state of incorporation." As such, Delaware law governs the corporate governance of most important US corporations.

Why Delaware dominates is a complex and controversial question. In an interesting new article, Larry Hamermesh suggests "that the following considerations are dominant: (1) enhancing flexibility to engage in private ordering, (2) deferring to case-by-case development of the law, and avoiding legislation that is prescriptive and proscriptive, (3) avoiding impairment of preexisting contractual relationships and expectations, and (4) most importantly, avoiding legislative change in the absence of clear and specific practical benefits."

What Should Patricia Dunn Have Done?

There's a very interesting article in today's W$J, which recaps the whole HP board spying mess. The author opines:

From Ms. Dunn's testimony, emails and indirect comments, it's possible to piece together an explanation for how a well-regarded chairman could go so catastrophically off course. Adamant in her desire to "fix" the leak problem, she succumbed to tunnel vision.

She had begun to see stopping leaks as one of the most crucial tasks in her chairmanship. In doing so, she neglected issues such as prudence, fairness and the potential impact on H-P's reputation. Even the extent to which the company had analyzed the legal issues or just glossed over them wasn't considered.

What should Dunn have done?

Clearly, I don't think Dunn could ignore the leaks. Boards ought to be high trust organizations, in which members have confidence in one another. Few things can be more desctructive to intra-group trust than leaks, which may be perceived as inherently a breach of confidentiality but also as attempts to litigate disputes in the media instead of in the boardroom. Indeed, if the W$J is to be believed, the leaks had negatively affected intra-board relations at HP.

With the benefit of hindsight, I think I would have advised Dunn to hire the best outside security experts she could find (instead of trying a jerry-rigged combination of in-house and outsourced resources). She then takes the experts before the board. The experts tell the board: Here's what we need to do to investigate the identity of the leaker. Dunn then asks the board to approve the investigation, making clear that the board members will be investigated. Anybody who balks should be asked to resign from the board. Leaker Keyworth thus would have been faced with the unpalatable choice of approving an investigation he now knows will include access to his phone records and so on or essentially admitting that he was the leaker by refusing to go along.

Disclosure via Blog

From the NYT:

The chief executive of Sun Microsystems. Jonathan I. Schwartz, has asked the Securities and Exchange Commission to allow companies to disclose significant financial information through their blogs. ...

The S.E.C. currently allows blogs to be used to disseminate a company's financial information, but the blog must reach a broad audience. ...

An S.E.C. spokesman, John Nester, said that agency regulations contemplate ''Web-based disclosure, and that's why the rule does not proscribe any particular method of dissemination -- so long as it is broad and nonexclusionary.''

GM's Boardroom Fight

The W$J offers a fascinating account of the fight in GM's boardroom between director Jerry York, who was appointed to the board to represent the interests of 9.9% GM shareholder Kirk Kerkorian, and the rest of the board who supported GM CEO Rich Wagonner's decision to terminate negotiations over a possible alliance between Renault-Nissan and GM. As a corporate governance and car guy, I'm no fan of GM management. But I never thought the Renault-Nissan alliance made much sense, given that GM's chief problem is gold-plated union contracts that impose huge legacy health care costs on GM.

In any case, I was struck by this comment in the article:

Mr. York ... began thinking he should quit the board because he concluded he couldn't have influence there. Moreover, he thought he could be more effective as Mr. Kerkorian's representative without legal constraints as a director. When Mr. York advised Mr. Kerkorian during the Chrysler saga, he remained an outsider.

Why? Remember when the SEC was considering a proposal to allow shareholders direct access to the company's proxy statement to nominate directors? In my article A Comment on the SEC Shareholder Access Proposal, I argued that:

If adopted, the short list proposal would significantly increase the prospect of a divided board of directors. As with all minority representation schemes, such as cumulative voting or codetermination, the resulting divisions within the board of directors will significantly reduce the board’s effectiveness.

Granted, some firms might benefit from the presence of skeptical outsider viewpoints. It is well-accepted, however, that cumulative voting tends to promote adversarial relations between the majority and the minority representative. The likelihood that cumulative voting will result in affectional conflict rather than cognitive conflict thus leaves one doubtful as to whether firms actually benefit from minority board blocks.

I take the GM fight as evidence I was right.

Lockyer's Global Warming Suit

Walter Olson pulls together the growing criticism of CA AG Bill Lockyer's global warming lawsuit:

It's "kooky" and "trivializes a serious problem", editorializes the Los Angeles Times: "California shouldn't be in the business of filing meritless suits to gain leverage in other cases". "It's not his job to make law through frivolous lawsuits," opines the San Jose Mercury News (via Wilson). It's "reprehensible... little more than a political stunt," adds the Orange County Register. Veteran political columnist Dan Walters of the Sacramento Bee terms the suit "Lockyer's bid to become the champion of cheesiness". One who does like the suit, curiously enough: an environmental adviser to Gov. Schwarzenegger named Terry Tamminen. And the San Francisco Chronicle investigates: what do state lawmakers drive?

Imperium

While I was on hiatus last week, I read Robert Harris' Imperium. Brilliant. Highly recommended. It transports you into the life of a pivotal figure in one of history's most consequential turning points: Cicero's rise to the consulship during the last days of the Roman Republic. Told from the perspective of Cicrero's slave/secretary Tiro (whom we know actually did write a lost biography of Cicero), it traces Cicero's courtroom triumphs in passages worthy of the best legal thriller and Cicero's political maneuverings in passages worthy of the best Washington roman à clef. It's the best book I've read in months. My only complaint is that the cliffhanger ending demands a sequel (or two or three, given how action-packed Cicero's life and times were).

Outsourcing and Agency Costs

As long as we're blogging about agency costs, let me point you at George Geis' article Business Outsourcing and the Agency Cost Problem, which argues that:

Why has business outsourcing increased so rapidly over the past decade? ... [B]usiness outsourcing has thrived in recent years not only because globalization has unlocked inexpensive production markets, but also because it is becoming easier for firms to monitor and prevent the agency costs of outsourcing. Drawing upon a detailed analysis of outsourcing contracts, it explores several strategies to minimize agency costs - shedding new light on the structure and terms of a typical outsourcing project. It then contends that the same forces that are opening new markets are also making it economical for firms to mitigate outsourcing agency risk. Taken together, this work adds another important, but previously neglected, context for understanding the essential tradeoffs that arise when economic ownership is divorced from control.

Cutting Managers in on the Toke: An Agency Cost Perspective

Las Vegas casino card dealers make a considerable part of their income from tips (the "toke," which is supposedly short for token of appreciation). The customary practice is to pool all dealers tips and divide them up pro rata. According to the W$J, Steve Wynn has changed the practice at his eponymous casino:

In August, Steve Wynn, the CEO of Wynn Resorts Ltd., decreed that, in the case of dealers, the coveted tip pool will now be expanded to include about 220 of their supervisors. The move, the company says, is meant to correct a strange inequity in the casino workplace: Thanks to tips, dealers make thousands of dollars more than some of their bosses do. ...

Bringing supervisors into the tip pool means that dealers' income will drop, though it isn't clear how much. Wynn Resorts says the drop would be 10%, while dealers contend it will be closer to 15% or 20%. Managers would see their pay jump to about $95,000 annually with new tip income factored in, the company says.

The 64-year-old Mr. Wynn and his lieutenants have said the change was necessary to hire and retain casino supervisors. Andrew Pascal, Wynn Las Vegas's president and Mr. Wynn's nephew, said in an interview that there is little incentive for supervisors to stick to a management career track, "when they look at the people they're managing and realize how much more they're making."

From an economic perspective, this change doesn't seem to make much sense.

Economists use the phrase “agency costs” when talking about the risk that employees will shirk or cheat. In economic lingo, a sole proprietor with no employees—i.e., agents—will internalize all costs of shirking, because the proprietor’s optimal trade-off between labor and leisure is, by definition, the same as the firm’s optimal trade-off.

In everyday language, if you own a business, you’ll decide whether you’d rather make an extra buck by staying open longer or go home to watch American Idol. You’ll make the trade-off between work and leisure that makes you happiest.

Agents of a firm, however, do not internalize all of the costs of shirking: the principal reaps part of the value of hard work by the agent, but the agent receives all of the value of shirking. If I’m making $10 an hour, I’ll make $80 per day no matter how hard I work, so I’ll be tempted to work just hard enough to keep you from firing me. I’ll enjoy goofing when I’m supposed to be working, maybe by surfing the internet, while you make less money, which is what economists call shirking.

Accordingly, an essential economic function of management is monitoring employees—management meters the marginal productivity of each employee and then takes steps to reduce shirking.

Tipping is an efficient solution to the principal-agent problem in some service industries, as Eric Posner explains using restaurants as an example:

Waiters earn a lot of money from tips; at the same time they are paid a flat wage by the restaurant. This is exactly the sort of mixed contract that the agency model predicts. The flat wage protects the waiter from slow nights and miserly customers; the tips give the waiter an incentive to do a good job. But there is a twist to this story. Waiters often pool their tips and divide them evenly; other times, the managers require them to pool their tips and divide them evenly. Notice that this increases insurance against bad tippers, but reduces the incentive to provide good service. Part of the reason for pooling from the manager’s perspective comes from the multiple agent problem: when waiters depend heavily on tips, they have no incentive to cooperate with each other. This is why a waiter who does not serve your table will sometimes be rude or impatient when you ask him for some help. To enhance cooperation, the manager requires pooling of tips. And the waiters might not object. From their perspective, pooling allows them to insure against the chance that on a given shift all one’s customers are bad tippers.

Notice how including managers in the toke pool introduces at least two sources of inefficiency. First, as long as everyone in the pool is a waiter (or a casino dealer), the potential for reduced incentives resulting from pooling is minimized because: (1) pool members understand that things come out in the wash, some nights nights they won't benefit from pooling (they were at a $1000 table with a lavish tipper) but sometimes they'll benefit (they were at a $5 table), so they'll be willing to work hard anyway; (2) social norms and peer pressure within the pool participants discourage shirking and free riding.

Once managers are included in the toke pool, the insurance aspect of pooling is diminished. After all, presumably the managers are not interacting with customers and therefore are not generating tips. There is no benefit to the dealers from including the managers in the pool; only costs.

In addition, because managers and dealers are in a hierarchial relationship, including them in the toke pool makes social effort norms less potent. Norms are strongest among homogenous groups, so introducing heterogeneity tends to weaken them.

Finally, including middle management in the toke pool may change the incentives of those managers to monitor dealers. They may focus on maximizing the size of the toke pool instead of focusing on maximizing casino profit.

All in all, it looks like an economically unsound idea.