ProfessorBainbridge.com

Farrell on Card's Empire

Henry writes:

Orson Scott Card’s new ‘American libruls start a new Civil War’ novel has been provoking well deserved hilarity. Scott Lemiuex quotes one of the choicer descriptions of the Evils of Leftist Professors.

He kept thinking, the first couple of semesters, that maybe his attitude toward them was just as short-sighted and bigoted and wrong as theirs was of him. But in class after class, seminar after seminar, he learned that far too many students were determined to remain ignorant of any real-world data that didn’t fit their preconceived notions. And even those who tried to remain genuinely open-minded simply did not realize the magnitude of the lies they had been told about history, about values, about religion, about everything. So they took the facts of history and averaged them with the dogmas of the leftist university professors and thought that the truth lay somewhere in the middle.

Not all of the professors in Card's Empire are cardboard cutouts of leftists. Excerpt:

"That's why there is no comparison between America and Rome," said Torrent. "Our empire can't fall because we aren't an empire. We have never passed from our republican stage to our imperial one. Right now we buy and sell and, occasionally, bully our way into other countries, but when they thumb their noses at us, we treat them as if they had a right, as if there were some equivalence between our nation and their puny weakness. Can you imagine what Rome would have done if an 'ally' treated them the way France and Germany have been treating the United States?"

The class laughed.

Reuben Malich did not laugh. "The fact that we don't act like Rome is one of the best things about America," he said.

"So isn't it ironic," said Torrent, "that we are vilified as if we were like Rome, precisely because we aren't? While if we did act like Rome, then they'd treat us with the respect we deserve?"

"My head a-splode," said one of the wittier students, and everyone laughed again. But Torrent pushed the point.

"America is at the end of its republic. Just as the Roman Senate and consuls became incapable of ruling their widespread holdings and fighting off their enemies, so America's antiquated Constitution is a joke. Bureaucrats and courts make most of the decisions, while the press decides which Presidents will have enough public support to govern. We lurch forward by inertia alone, but if America is to be an enduring polity, it can't continue this way."

Speaking through Torrent, Card's got a fair point about the state of the world, but as a work of literature Empire is far short of Ender's Game. The characterizations are thin, the style is unrefined, and the dialogue stilted. Just as Heinlein marred Starship Troopers by turning the middle third into a political treatise, Card is so intent on making political points that his usual facile style seems to have deserted him

Rick Sander on Affirmative Action by Law Firms

The NYT reports on a study by my UCLA law school colleague Rick Sander:

Thanks to vigorous recruiting and pressure from corporate clients, black lawyers are well represented now among new associates at the nation’s most prestigious law firms. But they remain far less likely to stay at the firms or to make partner than their white counterparts. A recent study says grades help explain the gap. To ensure diversity among new associates, the study found, elite law firms hire minority lawyers with, on average, much lower grades than white ones. That may, the study says, set them up to fail.

The study, which was prepared by Richard H. Sander, a law professor at the University of California, Los Angeles, and was published in The North Carolina Law Review in July, has given rise to fierce and growing criticism in law review articles and in the legal press.

Sander has done a great deal of work on affirmative action in law schools, you can access his various studies and reports here.

Impact of SOX on US Listings

From FEI's Section 404 Blog, which is a very useful resource for all thing Sarbanes- Oxley:

... a new study by Professor Luigi Zingales of the University of Chicago, who happens to be a member of the 'Paulson Committee," has found: "[the] premium for listing on both a U.S. and home-stock market has dropped sharply since 2002," from an average premium of 51% from 1997-2001, down to an avg. 31% between 2002-2005.

Professor Zingales determined the US cross-listing "premium" as the "difference between market value ... and book value ... If a cross-listed company traded at 150% of book value and a similar company from the same country listed only on their home market traded at 120% of book value, the "valuation premium" would be 30 percentage points," said the WSJ.

"We raised the cost of being public in the U.S.... These things have long-term consequences," the WSJ quotes Glenn Hubbard, dean of the Columbia University business school and co- chairman of the 'Paulson Committee," as saying in response to the Zingales study.

The Zingales study should be available here on Thursday, 11/30/2006.

Books on Investing

Jonathan Clements reviews 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.

Reforming the Supreme Court

Law profs Nelson Lund and Craig Lerner have four ideas for how Congress could reform the Supreme Court:

1. Take away their law clerks. Each justice now has a personal staff of several top law-school graduates who serve for one year. These intelligent, energetic, and intensely ambitious young people are itching to do the hard work of studying precedents and writing opinions. It should be no surprise that modern justices have frequently assumed the more pleasant role of dictating big thoughts and deep feelings to the clerks, and editing the drafts they write. ruly old-fashioned judges would study the precedents themselves, discuss the law with their colleagues instead of with their handpicked votaries, and write their own opinions. The Supreme Court once heard hundreds of cases each year, without law clerks to help. Today?s justices should be able to manage the 70 or 80 they consent to decide each term.

2. Force them to decide common-law cases. The Supreme Court, which today has virtually total discretion to choose which cases to hear, once had little or no choice at all. Using the freedom Congress has granted them, the justices focus on the most interesting constitutional and statutory issues arising from ?federal question? jurisdiction. Missing are the kind of common-law contract and tort cases that come under ?diversity? jurisdiction ? that is, disputes involving issues of state law between parties from different states. There are plenty of diversity cases in the lower federal courts, but the Supreme Court almost never agrees to hear one.

   We propose to leave the justices free to decide how many cases to hear, and which ones. But Congress should require them to hear at least one diversity case for every federal question case they accept for review. Still free to take all the cases they like on such stimulating topics as nude dancing, flag burning, and abortion, they should have energy left to decide an equal number of cases dealing with such matters as the common law of negligence and breach of contract.

3. Bring back circuit riding. Through the late nineteenth century, Congress required Supreme Court justices to serve part of their time on lower federal courts, ?riding circuit? around the country. Restoring this practice would expose the justices to the problems created by muddled Supreme Court decisions, and it would give them something healthier to do in the summer than hobnob with cosmopolites in Salzburg.

4. Eliminate signed opinions. Standard practice now is for judicial opinions to be signed by the justice who wrote the opinion (or hired the clerk who wrote it). Occasionally, the justices revert to an older practice of issuing opinions per curiam, or ?by the court.? Truly unpretentious judicial servants should have no need to put their personal stamp on the law, and the practice of doing so has contributed to a lot of muddiness in the Court?s work. We propose that Congress require that all Supreme Court opinions, including concurrences and dissents, be issued anonymously. If the justices could be shamed into complying in good faith, we would see fewer self- indulgent separate opinions, less flamboyant majority opinions, and more reason for future justices to treat the resulting precedents respectfully.

Do go read the whole thing.

Catholic Judges

Frank-Paul Sampino is a blogger, a member of the Class of 2007 at the University of Pennsylvania, and an assistant editor at online Catholic magazine Dappled Things. He is currently working as an intern at the U.S. Senate Judiciary Committee. His thoughtful essay on the moral obligations of Catholic judges is recommended.

Unions, Executive Pay, and Management Entrenchment

Unions have been among the most prominent critics of high executive compensation. The AFL-CIO, for example, has devoted an entire website - Executive PayWatch - to the issue. A casual observer might assume that union campaigning against executive pay is simply class warfare. In fact, however, I think something much more subtle is going on here.

We know that entrenched CEOs - i.e., executives of companies with strong takeover defenses and other forms of insulation from capital market and shareholder pressure - tend to get much higher salaries than non-entrenched CEOs. This makes sense, because if the latter's performance doesn't justify his pay, an unentrenched CEO is more vulnerable to a disciplinary termination.

Interestingly, however, a recent survey finds conclusive evidence that entrenched CEOs also pay their workers more!

Based on a two-million-observation panel dataset that matches public firms with detailed data on their employees, we find that entrenched managers pay their workers more. For example, our estimates show that CEOs with more control rights (votes) than all other blockholders together, pay their workers about 6%, or $2,200 per year, higher wages. Because cash flow rights ownership by the CEO and better corporate governance are found to mitigate such behaviour, we interpret the higher pay as evidence of agency problems between shareholders and managers affecting workers' pay. ... These results are consistent with an agency model in which managers pay high wages because they come with private benefits for the manager, such as lower-effort wage bargaining and better CEO-employee relations, and suggest more broadly an important link between the external corporate governance of large public firms and labour market outcomes.

So if high CEO salaries are correlated with management entrenchment, which is correlated with higher employee wages, why are the unions so upset?

In a very real sense, unions and managers compete to offer benefits to employees. If managers are voluntarily paying workers more, with concomitant "lower-effort wage bargaining and better CEO-employee relations," the firm's workers may be less likely to unionize. After all, under such conditions, they may perceive the benefits package offered by management to be superior to the package promised by the union. (Plus, of course, there would be a bird in the hand aspect to the decision.)

In sum, union opposition to high executive compensation may reflect a union recognition that highly compensated CEOs tend to be more effective competitors for worker loyalty. ... Or it could just be plain old class warfare after all.

Faith-Based Investing

Most mutual fund investors are familiar with the concept of socially responsible investing (a.k.a. values-based investing). A small chunk of that industry sector is comprised of faith-based investment funds, such as the Ave Maria funds that base their investment decisions on the social justice teachings of the Catholic Church. This sector has seen fairly rapid growth in recent years, even as the mutual fund industry itself has largely stagnated:

Although faith-based funds represent only a sliver of the mutual fund industry, the value of assets in religious-based funds has jumped from $2.37 billion in 2000 to $16.03 billion at the end of July, according to estimates by Morningstar Inc., a Chicago-based investment research provider.

As an investor, I'm skeptical. In the first place, actively managed funds tend to underperform the market over time. One reason for that performance gap is that high fees actively managed funds tend to charge. Another is that even star active managers make investment mistakes. In faith-based investing, you're adding additional expenses - to pay for the screening of investments to ensure consistency with your values - and you're blocking off whole industry sectors (e.g., defense or tobacco), which means your portfolio inherently will be less well-balanced and less well-diversified than a broad market index fund. Taken together, there's reason to think faith-based funds likely will underperform the market over time.

To be sure, many faith-based funds report high returns. But we don't know the portfolio betas of these funds. They may be skewed towards a higher than market level of risk and, as such, may be more vulnerable to a downturn than a broad market index.

As for whether persons of faith ought to suck it up and accept a lower rate of return in order to invest according to their beliefs and values, that's a post for another day.

The Blue Fund

Jane Galt evaluates the Blue Fund, "which invests only in companies that give the majority of their political contributions to Democratic candidates and adhere to progressive values" (CNN). Politics aside, both basic economic theory and tons of empirical evidence tell us that broad-based, passively-managed index funds do better than actively-managed funds. An actively-managed fund run by adherents of the anti-business party that invests only in companies loyal to the anti-business party doesn't strike me as a particularly good long-term business model. (Of course, given the GOP's lousy track record on the economy in recent years, I wouldn't invest in a Red Fund either.)

A new paper from my friend and UCLA colleague Lynn Stout, The Mythical Benefits of Shareholder Control, is a response to Lucian Bebchuk's paper The Myth of the Shareholder Franchise. In her response, Lynn argues:

Professor Lucian Bebchuk argues that the notion that shareholders in public corporations can remove directors is a myth. The same argument was made by Berle and Means in 1932. Not only is shareholder power to remove directors largely a myth in U.S. public companies, it has been widely recognized as a myth for three-quarters of a century.

What should we conclude from this? Professor Bebchuk concludes the time has come make shareholder power a reality. But there are many myths - vampires, alligators in the sewers - we would not want to make real. Part I of this Response to Professor Bebchuk's article argues that we should not want to make shareholder power to oust directors more real because, while board control worsens agency costs, it offers important economic benefits to shareholders as well. In particular, board control promotes efficient and informed decisionmaking; discourages intershareholder opportunism; and encourages valuable specific investment in corporate team production.

Because board control has costs and benefits, theory cannot tell us whether we should make it easier for shareholders to oust directors. We must look to the evidence. Part II concludes the evidence does not support Bebchuk's proposal. To the contrary, it suggests shareholders in public firms reap net benefits from board control.

Why then do so many observers believe shareholders need more power over boards? Part III argues that calls for shareholder democracy appeal to the media and many observers not because they are based on evidence, but because of emotion. The emotional appeal of shareholder power can be traced to three sources; the common but misleading metaphor that shareholders own corporations; the  opportunistic calls of activists seeking leverage over boards for self-interested reasons; and a strong but unfocused sense that something (anything!) should be done in the wake of recent corporate scandals. The result has been widespread propagation of a second myth - the myth that shareholder control of public companies benefits shareholders. The Response concludes by reminding readers of the dangers of policymaking based on myth rather than evidence, using the cautionary case of stock options.

Jonathan Adler notes:

Wine makers are pleased that evidence demonstrating the health benefits of moderate wine consumption continues to mount. Yet, ... wine makers can't tell you about it. ... Ann Althouse notes that winemakers have been reluctant to litigate in defense of positive wine labels or advertising.

Others have not been so passive. Several years ago, the Competitive Enterprise Institute sued the Bureau of Alcohol Tobacco and Firearms for its de facto ban on positive health claims about alcoholic beverages, arguing that consumers would benefit from learning more about the helath benefits of moderate consumption.. (See the details of their case here and here.) The case was dismissed as unripe, but I would not be surprised if CEI took another shot.

I'm no First Amendment scholar, but as an oenophile and quasi-libertarian I've long thought that government restrictions on advertising the health benefits of wine violate the spirit of the First Amendment. To be sure, the Supreme Court has allowed regulators greater freedom to regulate so-called commercial speech than other forms of speech. But why should wineries have less freedom of speech than publishers of virtual child porn?

Rob weighs in with a long essay on the wisdom of crowds versus experts:

There is a war against expertise on the web and in the business press. We are beginning to believe that crowds are the answer to our problems, and that experts will be confined to stodgy old companies that don't "get it." I confess, I too was taken with the "wisdom of crowds" when I first encountered the concept. The democracy, the egalitarianism, the anti-establishment aspects... it's a very sexy idea isn't it? After a lot of thought I have decided that I'm switching sides. Crowds have their place, but experts live in niches, and for businesses that is where the real value lies.

Crowds doubtless have their wisdom, but they also have their madness. I wonder if there has been research on whether prediction markets limited to experts in the field do better than prediction markets open to any and all comers.

I've generally been skepti cal of institutional investor activism in the US, but I was impressed by Chao Xi's demons tration that institutional investors in China have played an important role in raising "corporate governance standards in China." Interestingly, however, Chinese investors face the same basic problem as US institutions; namely, "legal rules designed to protect minority shareholders have the unintended effect of deterring institutional shareholders from owning stakes substantial enough to influence corporate decision-making."

Because I fancy myself something of a student of how groups make decisions, during meetings I devote much of my time not to the agenda but to observing how the group is behaving. As the owner of two dogs, I'm also necessarily something of a student of pack behavior and dominance rituals. Lately, I've been thinking about how the two lines of inquiry overlap. After all, effective boards of director meetings presumably promote effective corporate governance.

It is well-established that persons of higher stature within the group tend to talk more than persons of lower stature. Where the group is a new one, and status relations are undefined, however, the competition for speaking time becomes a critical part of the larger competition for dominance within the group. In turn, this leads to filibustering, cross-talk, and other dysfunctional behaviors that may prevent the meeting from accomplishing anything substantive.

You can usually identify the would-be alpha dogs pretty easily. They will start talking and simply not stop. Typically both their volume and speaking speed will be high. They will not meet anyone in the eye for an extended period and will ignore "I want to talk" body language. Anything said by anyone else will be immediately woven back into the filibustering speaker's line of argument, including express disagreement or even non sequiturs.

There are several ways of managing this sort of competition. One is to define a group hierarchy pre-meeting, perhaps by establishing a chairman as a presiding officer, who becomes the alpha dog by definition. An effective chairman can keep control of the agenda and keep the meeting on course. Unfortunately, just as a weak-minded owner invites his/her dog to compete for dominance, an ineffectual chairman can actually make the situation worse by inviting nominal subordinates to compete for control.

Alternatively, you can believe that people are not pack animals and hope to set up an egalitarian, non-hierarchical, consensus-building atmosphere. Personally, I don't believe it is possible to do so. Humans are pack animals. We are hard-wired by evolution to establish dominance relationships, which is probably one reason we were able to so successfully domesticate dogs. Stud ies of chimpanzees, for example, find that "high-ranking females were shown to have significantly higher infant survival, faster maturing daughters, and more rapid production of young." Our ancestors thus got a significant reproductive and genetic reward for successfully competing for dominance.

Competition for dominance, moreover, is arguably socially beneficial. Once a clear dominance hierarchy (pecking order) is established, aggression within the group becomes less likely, because less dominant individuals will not incur the high costs of challenging more dominant individuals. The resulting social stability facilitates subsequent cooperation between group members.

Hence, for effective meetings, it likely will be best if the group has a dominance hierarchy imposed on it from the outside at the outset or collectively establishes one at the earliest opportunity, so as to minimize the amount of time spent on non-constructive dominance rituals. (The benefits of such competition, after all, follow mainly from the establishment of the hierarchy rather than the competition itself.)

(Or, you can do what I often do, which is to slip out the back door and go for a drive.)

If I'm right about the way dominance rituals affect group decision making in meetings, it suggests that one function of the board of directors is providing a set of status equals for top managers. We know, for example, that higher status group members are more inclined to propound initiatives and exercise greater influence over the group?s ultimate decision. As such, corporate law?s insistence on the superiority of the board to management begins to make sense. To the extent law shapes social norms, admittedly a contested proposition, corporate law may empower the board to constrain top management more effectively by creating a de jure status relationship favoring the board.

From a UCLA press release:

UCLA School of Law has chosen Professor Stephen Bainbridge as the William D. Warren Professor of Law. The William D. Warren Endowed Chair in Law was created through the kindness of many donors, including several UCLA Law alumni, in honor and recognition of former UCLA School of Law Dean William Warren, whose academic expertise was in the areas of commercial, consumer, real estate and bankruptcy law.

“We’re enormously pleased to have a scholar of Stephen Bainbridge’s intellectual caliber fill this chair, which honors one of UCLA Law’s most beloved deans, William Warren,” said UCLA Law Dean Michael Schill. “Professor Bainbridge is not only one of the country’s most productive scholars, but also one of its most influential.”

Stout on Shareholder Control

A new paper from my friend and UCLA colleague Lynn Stout, The Mythical Benefits of Shareholder Control, is a response to Lucian Bebchuk's paper The Myth of the Shareholder Franchise. In her response, Lynn argues:

Professor Lucian Bebchuk argues that the notion that shareholders in public corporations can remove directors is a myth. The same argument was made by Berle and Means in 1932. Not only is shareholder power to remove directors largely a myth in U.S. public companies, it has been widely recognized as a myth for three-quarters of a century.

What should we conclude from this? Professor Bebchuk concludes the time has come make shareholder power a reality. But there are many myths - vampires, alligators in the sewers - we would not want to make real. Part I of this Response to Professor Bebchuk's article argues that we should not want to make shareholder power to oust directors more real because, while board control worsens agency costs, it offers important economic benefits to shareholders as well. In particular, board control promotes efficient and informed decisionmaking; discourages intershareholder opportunism; and encourages valuable specific investment in corporate team production.

Because board control has costs and benefits, theory cannot tell us whether we should make it easier for shareholders to oust directors. We must look to the evidence. Part II concludes the evidence does not support Bebchuk's proposal. To the contrary, it suggests shareholders in public firms reap net benefits from board control.

Why then do so many observers believe shareholders need more power over boards? Part III argues that calls for shareholder democracy appeal to the media and many observers not because they are based on evidence, but because of emotion. The emotional appeal of shareholder power can be traced to three sources; the common but misleading metaphor that shareholders own corporations; the  opportunistic calls of activists seeking leverage over boards for self-interested reasons; and a strong but unfocused sense that something (anything!) should be done in the wake of recent corporate scandals. The result has been widespread propagation of a second myth - the myth that shareholder control of public companies benefits shareholders. The Response concludes by reminding readers of the dangers of policymaking based on myth rather than evidence, using the cautionary case of stock options.

Wine, Health, Advertising, and the First Amendment

Jonathan Adler notes:

Wine makers are pleased that evidence demonstrating the health benefits of moderate wine consumption continues to mount. Yet, ... wine makers can't tell you about it. ... Ann Althouse notes that winemakers have been reluctant to litigate in defense of positive wine labels or advertising.

Others have not been so passive. Several years ago, the Competitive Enterprise Institute sued the Bureau of Alcohol Tobacco and Firearms for its de facto ban on positive health claims about alcoholic beverages, arguing that consumers would benefit from learning more about the helath benefits of moderate consumption.. (See the details of their case here and here.) The case was dismissed as unripe, but I would not be surprised if CEI took another shot.

I'm no First Amendment scholar, but as an oenophile and quasi-libertarian I've long thought that government restrictions on advertising the health benefits of wine violate the spirit of the First Amendment. To be sure, the Supreme Court has allowed regulators greater freedom to regulate so-called commercial speech than other forms of speech. But why should wineries have less freedom of speech than publishers of virtual child porn?

The Wisdom and Madness of Crowds

Rob weighs in with a long essay on the wisdom of crowds versus experts:

There is a war against expertise on the web and in the business press. We are beginning to believe that crowds are the answer to our problems, and that experts will be confined to stodgy old companies that don't "get it." I confess, I too was taken with the "wisdom of crowds" when I first encountered the concept. The democracy, the egalitarianism, the anti-establishment aspects... it's a very sexy idea isn't it? After a lot of thought I have decided that I'm switching sides. Crowds have their place, but experts live in niches, and for businesses that is where the real value lies.

Crowds doubtless have their wisdom, but they also have their madness. I wonder if there has been research on whether prediction markets limited to experts in the field do better than prediction markets open to any and all comers.

Institutional Investor Activism

I've generally been skepti cal of institutional investor activism in the US, but I was impressed by Chao Xi's demons tration that institutional investors in China have played an important role in raising "corporate governance standards in China." Interestingly, however, Chinese investors face the same basic problem as US institutions; namely, "legal rules designed to protect minority shareholders have the unintended effect of deterring institutional shareholders from owning stakes substantial enough to influence corporate decision-making."

Meetings and Dominance Rituals: Implications for Corporate

Because I fancy myself something of a student of how groups make decisions, during meetings I devote much of my time not to the agenda but to observing how the group is behaving. As the owner of two dogs, I'm also necessarily something of a student of pack behavior and dominance rituals. Lately, I've been thinking about how the two lines of inquiry overlap. After all, effective boards of director meetings presumably promote effective corporate governance.

It is well-established that persons of higher stature within the group tend to talk more than persons of lower stature. Where the group is a new one, and status relations are undefined, however, the competition for speaking time becomes a critical part of the larger competition for dominance within the group. In turn, this leads to filibustering, cross-talk, and other dysfunctional behaviors that may prevent the meeting from accomplishing anything substantive.

You can usually identify the would-be alpha dogs pretty easily. They will start talking and simply not stop. Typically both their volume and speaking speed will be high. They will not meet anyone in the eye for an extended period and will ignore "I want to talk" body language. Anything said by anyone else will be immediately woven back into the filibustering speaker's line of argument, including express disagreement or even non sequiturs.

There are several ways of managing this sort of competition. One is to define a group hierarchy pre-meeting, perhaps by establishing a chairman as a presiding officer, who becomes the alpha dog by definition. An effective chairman can keep control of the agenda and keep the meeting on course. Unfortunately, just as a weak-minded owner invites his/her dog to compete for dominance, an ineffectual chairman can actually make the situation worse by inviting nominal subordinates to compete for control.

Alternatively, you can believe that people are not pack animals and hope to set up an egalitarian, non-hierarchical, consensus-building atmosphere. Personally, I don't believe it is possible to do so. Humans are pack animals. We are hard-wired by evolution to establish dominance relationships, which is probably one reason we were able to so successfully domesticate dogs. Stud ies of chimpanzees, for example, find that "high-ranking females were shown to have significantly higher infant survival, faster maturing daughters, and more rapid production of young." Our ancestors thus got a significant reproductive and genetic reward for successfully competing for dominance.

Competition for dominance, moreover, is arguably socially beneficial. Once a clear dominance hierarchy (pecking order) is established, aggression within the group becomes less likely, because less dominant individuals will not incur the high costs of challenging more dominant individuals. The resulting social stability facilitates subsequent cooperation between group members.

Hence, for effective meetings, it likely will be best if the group has a dominance hierarchy imposed on it from the outside at the outset or collectively establishes one at the earliest opportunity, so as to minimize the amount of time spent on non-constructive dominance rituals. (The benefits of such competition, after all, follow mainly from the establishment of the hierarchy rather than the competition itself.)

(Or, you can do what I often do, which is to slip out the back door and go for a drive.)

If I'm right about the way dominance rituals affect group decision making in meetings, it suggests that one function of the board of directors is providing a set of status equals for top managers. We know, for example, that higher status group members are more inclined to propound initiatives and exercise greater influence over the group?s ultimate decision. As such, corporate law?s insistence on the superiority of the board to management begins to make sense. To the extent law shapes social norms, admittedly a contested proposition, corporate law may empower the board to constrain top management more effectively by creating a de jure status relationship favoring the board.

Bainbridge Appointed Warren Professor

From a UCLA press release:

UCLA School of Law has chosen Professor Stephen Bainbridge as the William D. Warren Professor of Law. The William D. Warren Endowed Chair in Law was created through the kindness of many donors, including several UCLA Law alumni, in honor and recognition of former UCLA School of Law Dean William Warren, whose academic expertise was in the areas of commercial, consumer, real estate and bankruptcy law.

“We’re enormously pleased to have a scholar of Stephen Bainbridge’s intellectual caliber fill this chair, which honors one of UCLA Law’s most beloved deans, William Warren,” said UCLA Law Dean Michael Schill. “Professor Bainbridge is not only one of the country’s most productive scholars, but also one of its most influential.”