ProfessorBainbridge.com

Watch for the coming flood of global warming litigation

My Examiner column:

Let's assume, for the sake of argument, that the climate change phenomenon commonly called "global warming" exists and is being caused, at least in part, by human activity. Who is responsible? The only sensible answer is, everybody. We all contribute to the release of greenhouse gasses, as did our ancestors going back at least to the beginning of the Industrial Revolution.

One would therefore think litigation is no more an appropriate response to global warming than litigation would be to any so-called "act of god." One would be wrong.

Earlier this year, Texas trial lawyer Stephen Susman told the Dallas Morning News that "You're going to see some really serious exposure on the part of companies that are emitting CO2." He added, for good measure, that "I can't say for sure it's going to be as big as the tobacco settlements, but then again it may even be bigger."

Indeed, trial lawyers are gearing up to turn global warming into their next pot of gold. A coalition of environmental groups and cities are suing the Overseas Private Investment Corporation and the Export-Import Bank of the United States for making loans to finance oil pipelines, oil drilling, and similar projects that supposedly result in a net emission of billions of tons of carbon dioxide. After Hurricane Katrina, New Orleans trial lawyers Gerald Mapes and Timothy Porter sued dozens of energy companies, claiming they had contributed to global warming.

Last year, Business Week reported that there were 16 pending global warming cases of these sorts pending around the country. More are surely in the pipeline, so to speak.

Indeed, the prospect of a boom in global warming litigation is prompting law firms to begin setting up units specializing in climate change issues. According to the Dallas Morning News, for example, Dallas law firms Vinson & Elkins and Thompson & Knight have set up global warming units with 41 and 26 lawyers, respectively.

If it weren't for the precedents set by tobacco, alcohol, and obesity lawsuits, one might be tempted to dismiss climate change litigation out of hand. After all, the law typically requires a showing of causation. Before you can hold me liable, you must show that but for my conduct you would not have been injured. Typically, you also must show that my conduct was the proximate cause of your injury.

How can one firm—or even one industry—be blamed for a global phenomenon that took decades to arise? Making causality findings and apportioning responsibility in this context is ludicrous. Yet, what might a New Orleans jury still smarting over Katrina do if they got the chance to decide Mapes and Porter's suit?

This is a classic example of why tort reform is a pressing need. The Institute for Legal Reform offers some chilling statistics: "America's civil justice system is the world's most expensive, with a direct cost in 2005 of $261 billion, or 2.09 percent of GDP.

"Tort costs were $880 per U.S. citizen in 2005, meaning the average American family of four paid a 'litigation tax' of more than $3,500 due to increased costs from lawsuits and other liability expenses that force businesses to raise the price of products and services. That cost is equivalent to nearly an 8 percent tax on wages."

These costs are having a dramatic impact on the US economy. A nonpartisan report prepared for New York Senator Charles Schumer and New York City Mayor Michael Bloomberg, found that the "propensity toward litigation" in the United States is "driving growing international concerns about participating in US financial markets."

Along with regulatory excesses like the Sarbanes-Oxley Act, the litigation industry in this country is making our capital markets and our economy as a whole less competitive.

It's time for Congress and the president to step up with legislation that take the question of global warming out of the arena of ad hoc judicial decision making and put it into the hands of our elected officials. Both fairness and efficiency demand it.

Paying a Premium for Supermajority Voting Shares

Larry Ribstein's got a nice analysis of the legal questions raised by the prospect that Rupert Murdoch might pay more for the supermajority voting shares owned by the various Bancroft holders than for the regular voting shares held by everybody else. Some will argue that, since both classes of shares have essentially the same economic rights, they should have the same value in a sale. Yet, as Larry points out:

Not permitting [a controlling] shareholder to reap the premium may stop the sale because he may not want to sell unless he can get some gelt to salve the pain of losing control. That may well be a consideration in the DJ situation, since the Bancrofts obviously derive status and satisfaction from their power.

"Steve" (not your truly) left a comment on Larry's post arguing that under Delaware law (is Dow Jones a Delaware corporation?) there would be no real obstacle to the Bancroft entities getting a premium.

As "Steve" notes, the chief problem case is In re Tele-Communications, Inc. Shareholders Litigation, 2005 WL 3642727 (Del.Ch. 2005), in which Chancellor William Chandler indicated that the entire fairness standard would be applied where the supermajority voting shares got a premium. In that case, however, a substantial percentage of the supermajority were held by directors. The deal was thus more closely akin to an interested director transaction than one involving a controlling shareholder. Chandler wrote: "no single shareholder possessed more than 50% of the vote, but the financial interests of a number of directors holding large amounts of TCOMB shares significantly diverged from the interests of their constituent shareholders.  ... Alternatively, evidence in the record suggests that a majority of the board of directors were interested in the transaction, requiring an entire fairness analysis."

TCI thus could be distinguished on grounds that the Bancrofts are mere shareholders, whose fiduciary duties have always been regarded as less demanding than those of directors. Conversely, however, if entire fairness is the test, Chandler's opinion indicates that paying a premium to the supermajority voting shares could constitute an unfair price to the non-controlling shareholders. More precisely, he said it presented a "triable issue of fact." Unfortunately, the case was settled without resolution of that issue.

Broc Romanek opined that "many commentators will criticize the court's apparent focus on the historical relative trading prices of a liquid low vote stock and an illiquid high vote stock and the numerous precedent transactions in which holders of high vote stock had foregone a premium even though they may have been legally and economically entitled to one (e.g., the fact that holders of high vote stock may be willing to forego a control premium to avoid litigation is not much help or particularly relevant when negotiating with a large holder of high vote stock like John Malone who adamantly insists on extracting a premium to which he is legally entitled)."

McDermott Will & Emery complained that Chandler thought "that the special committee should have requested a “relative fairness” opinion from its financial advisor (i.e., an opinion as to whether the transaction was fair to the holders of shares of the TCI Group’s low-vote stock in light of the preferential payment being made to holders of the high-vote stock)." As MWE explained, however: "Given that allocating consideration among different classes of capital stock could require a financial advisor to draw legal conclusions, financial advisors often refuse to deliver opinions in respect of such types of allocations."

A Cleary Gottleib M&A newsletter argued that Chandler improperly relied on cases involving recapitalizations:

A recapitalization is, in effect, a reshuffling of the interests of a corporation’s security-holders and is, in that sense, a zero-sum game in which any gain by one constituency necessarily comes at the expense of another constituency. Such a transaction can be “fair” to a constituency only if it does not unduly diminish that constituency’s interest in the corporation, and therefore a fairness analysis should include an examination of the allocation of the post-recapitalization pie. A third-party acquisition, by contrast, is not a zero-sum game as to the separate classes of target stock; since an acquiror often pays a premium above the market value of the target corporation, it is possible for all stockholders to receive a fair and attractive price even if some stockholders receive a greater portion of the total consideration.

That makes sense. It also suggests that it would be okay to pay a control premium to the Bancrofts.

Cleary's analysis also suggests that Chandler may have overlooked the point Larry makes above:

if a transaction promises to deliver a fair price to all stockholders, are directors nevertheless precluded from approving the transaction because it also involves what might be viewed as an unduly generous payment to controlling stockholders who refuse to sell on lesser terms? The TCI court’s approach implies that a board should reject a transaction, even though it “unlocks” premium value for all stockholders, simply because the controlling stockholder insists that he will not approve the transaction (which, it is clear, he has no obligation to do) unless he receives what may be seen by a court as an excessive payment.

As I read TCI, two conclusions may be drawn. First, a review of Chandler's opinion demonstrates that most of his concern seems to have been with the process by which the merger was negotiated. Basically, the special committee of directors that negotiated on behalf of the target was uninformed and less than vigorous. A decision to pay a control premium to the supermajority voting shares reached after an adequate decisionmaking process likely would have received somewhat greater deference. Murdoch and the Bancrofts can afford really good lawyers. There's no excuse for process inadequacies, especially in a deal that is this high profile.

Second, TCI left open an interesting question: Is it proper to pay a control premium to a supervoting class of shares or only to a controlling shareholder. TCI's Class B shares (which had the super voting rights) were owned by a number of investors. It was not the Class B holders as a cohesive group that controlled TCI, however. Instead, TCI was controlled by John Malone by virtue of Malone's holdings of both Class A and Class B stock. Although Malone wanted a premium for the Class B shares, maybe Malone should have gotten a premium for his shares of either class. Malone's lawyers argued it would have been improper for the board to discriminate amongst shareholders in this way. Given that Delaware (unlike some other states, including New York) approved the idea of poison pills that discriminate against specified shareholders, perhaps Delaware would allow allocation of merger premia discrimination in favor of certain shareholders? (Obvious, we're not talking about any form of invidious discrimination here.) On that issue, Cleary makes an interesting argument:

The TCI decision also fails directly to confront the defendants’ argument that the 10% premium paid to holders of TCOMB shares was a legitimate control premium. In advancing this argument, they relied on the well-established principle that a controlling stockholder is entitled to sell his shares at a price that reflects a control premium. Given that entitlement, AT&T could have purchased Malone’s shares at one price, and then offered to purchase the remaining shares of TCI at a lower price. Or, Malone himself could have taken TCI private (at a price per share that was fair, but less than the price per share that a third party might be willing to pay for all of the shares of TCI), and subsequently sold the entire company to AT&T at a higher price per share. In either situation, the TCI directors’ fiduciary duties would not require them to reject the transaction in which the noncontrolling TCI stockholders’ shares would be acquired merely because the price offered in that transaction was lower than the price obtained (or that could be obtained) by Malone for his shares. We do not believe that a controlling stockholder should be any less entitled to obtain a control premium simply because the entire company is sold in a one step transaction.

Ultimately, however, I don't find this argument persuasive. A control premium is paid to the person(s) who have control in order to persuade them to allow the deal to happen. Paying a control premium to some non-controlling shareholders (who hold Class B shares) and not to others (Class A holders) does start to look a fiduciary duty problem.

All of which leads to the question of whether controlling shareholders ought to be allowed to get a premium for their shares. My answer: It depends.

Courts have not imposed a general obligation for controlling shareholders to share a control premium with the minority. The conventional explanation given by the courts is that it is not per se wrong for a controlling shareholder to sell at a price significantly higher than that available to noncontrolling shareholders. It becomes wrong only under special circumstances, such as sale to a looter, sale of office, or taking of a corporate opportunity. In contrast, many scholars have argued for some sort of sharing or equal opportunity rule. Should we adopt such a rule? In short, no.

One of the risks minority shareholders assume when they acquire stock in a corporation with a controlling shareholder is that the latter may sell at a premium without giving the minority an opportunity to participate. If the control block existed when the minority shareholder invested, the minority shareholder presumably paid a lower per share price than he would have paid in the absence of a controlling shareholder. In other words, assuming full disclosure, the minority became shareholders having accepted as adequate whatever trade-off was offered in recompense. Even if the control block was assembled after the minority shareholder invested, moreover, the possibility that such a block would be assembled is one of those risks of which a rational shareholder should be aware in making pricing decisions.

Bounded rationality and other transaction cost obstacles to complete contracting, of course, somewhat weaken the foregoing argument’s force. Even if the pricing mechanism does not adequately protect minority shareholders, however, there are still efficiency arguments in favor of a no sharing rule. If we believe corporate takeovers promote economic efficiency by displacing inefficient incumbent managers, for example, controlling shareholders generally should be allowed to keep their premiums. Unequal distribution lowers the cost of doing takeovers, because the new controlling shareholder only needs to buy the control block, which should result in more takeovers. Giving the controlling shareholders a special premium, moreover, essentially bribes them to quit. Consequently, a no sharing rule should facilitate replacement of inefficient incumbents.

The Sinclair Oil case provides the right analogy. As long as the controlling shareholder does nothing to leave the minority worse off, it should be allowed to sell on whatever terms the market will bear. Doing so is consistent with the reasonable expectations of minority shareholders and promotes efficient changes in control. If controlling shareholders could engage in transactions that affirmatively injure the minority, however, the latter doubtless would take precautions to prevent such transactions. By providing a coercive backstop preventing such transactions, the Sinclair Oil-based default rule minimizes bargaining and enforcement costs.

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COMMENT:

AUTHOR: Steve (not Bainbridge)

DATE: 08/03/2007 06:10:04 AM

You wrote:  "Second, TCI left open an interesting question: Is it proper to pay a control premium to a supervoting class of shares or only to a controlling shareholder." 

You hit the nail on the head.  Luigi Zingales at Chicago has done some interesting work on this, but he didn't look at mergers.  I believe that his work shows (perhaps intuitively) that a buyer will not pay in open market purchases a premium for any shares beyond majority voting power because there is little incremental benefit beyond that point.  If you look at empirical evidence for mergers, however, whenever the high-vote class receives a premium, then in almost all situations the entire high-vote holders get it (i.e., no price differentiation within the class, only class-to-class).  It bears noting that price discrimination (which you noted was permitted in the context of poison pills) is also permissible as a general matter in mergers.  As Bill Allen explained, “So if the law were to be unyielding that there never could be discrimination between shareholders holding the same security, then you might encounter situations in which no transaction could be done at all.  And it is not in the social interest… to have a rule that prevents efficient transactions….”  In re Times Mirror Co. S’holders Litig., 1994 WL 1753202, at *2.

 

As you note, the board is in an interesting situation if they are asked to pay a control premium to the controlling stockholder AND the other non-controlling high-vote holders.  Should Dow Jones's board have agreed to a control premium for the Bancrofts paid pro rata to them only up to a majority of their voting power?  What if, as was alleged in TCI, the controlling stockholder demanded that the only way he'd vote for the deal was that if all high-vote holders received the same premium shares?  Does the board breach its duties by granting the controller's demands, notwithstanding it's still a great deal for all stockholders?  Or has the controller somehow breached its fiduciary duties by making such a demand?  All interesting questions that didn't get the treatment they deserved in TCI. 

I agree completely that TCI was complicated by the interested-director aspect.  In particular, the decision points out the difficulty in taking off one's director hat and just wearing a controlling stockholder hat to vote out of "whim or caprice," as the Delaware courts like to say. 

Interesting point regarding Sinclair.  It would seem to work in a straight-forward sale of control and other going concern transactions.  But in a merger, I think minority stockholders would argue that any control premium was a benefit to the controller at their expense (i.e., lower per share consideration).  I think the courts would assume a premium is permissible, so they'd then have to determine whether the actual premium paid was excessive.... At the point, you lose the benefit of Sinclair's bright-line rule b/c the situation becomes very fact intensive. 

Cook's "The Corporation Problem": There is Nothing New Under the Corporate Law Sun

Adolf Berle and Gardiner Means are commonly credited with having identified the separation of ownership and control in public corporations as the central problem of corporate governance. See The Modern Corporation and Private Property (1932). Dalia Tsuk, by the way, has a very interesting recent piece on how our understanding of Berle and Means' work has evolved over time. I recommend it. From Pluralism to Individualism: Berle and Means and 20th-Century American Legal Thought.

In fact, however, Berle and Means were not the first to document the phenomenon of separation of ownership and control. Herbert Hovenkamp, in his wonderful book Enterprise and American Law: 1836-1937 (1991), shows that Alfred Marshall had made the same point in 1890, as had William W. Cook in 1891.

All of which comes as preface to the fact that I have found an online version of William Cook's philippic The Corporation Problem: The Public Phases of Corporations, Their Uses, Abuses, Benefits, Dangers, Wealth, and Power, With a Discussion of the Social, Industrial, Economic, and Political Questions to Which They Have Given Rise. Cook writes:

Without corporations America would be a different nation and have had a different history. The Civil War would have been more dangerous to the Republic. The present railroad system could not have been built, and the Pacific Coast and the Eastern States would not have been bound by ligaments of steel to a common interest. ...

And yet notwithstanding all the advantages, material, intellectual, and moral, which have been derived from corporations, there is much to be said against them. And they have two peculiarities which have led to these abuses. These are, first, the ease with which all responsibility for bad acts is placed upon the corporation itself, while the real perpetrators are concealed; second, the separation of the stockholders from the corporate agents, of the investor from the investment, of the principal from the agent, with the expectation on the part of the investor, the principal, the stockholder, that profits will be made, honestly if possible, but that profits will be made.

What's fascinating to me is how strongly that passage confirms the relevance of Ecclesiastes 1:9 to the study of corporate governance. These are precisely the same problems with which we continue to struggle today.

Anyway, I'm about a third of the way into the monograph and may report back as needed.

Ribstein on SOX at 5

Larry writes:

Five years ago today President Bush signed SOX. The journalistic celebration of this event seems to resemble the birthday party of any five year old: he?s a real bundle of trouble, but still growing, and so much fun to have around. More precisely: we?re better off than when SOX was passed; SOX isn?t completely to blame for all the woes that have been laid at its doorstep; companies and regulators are adjusting. See, for example, this view from across the pond, which has the virtue of advertising my t-shirt, this Economist story, which has the virtue of highlighting the scholarly empirical work on SOX, and this story in today?s WSJ.

I?ll have much more to say about all this as I gear up for my debate with Lynn Turner at the AAA meeting next Monday. In the meantime, let me offer a couple of thoughts:

• It would not be at all surprising if SOX has had some benefits. If we lowered the speed limit to 40 mph and put billions into traffic enforcement, lives would surely be saved, and this would be a much more important benefit than avoiding financial harm. The question is whether the cost would be one we?d find worth paying. Cost is similarly the key to the case against SOX.
• My arguments on the costs of SOX are summarized in my book with Butler, The Sarbanes-Oxley Debacle. Ample data, particularly over the last year, supports these arguments, as indicated by papers discussed in my Sarbanes-Oxley archive.
• As for the argument that the costs are declining, they are doing so from a very high level.  And we haven?t yet seen the real deluge, which will occur when the first down market (now?) triggers the ?litigation time bomb? lurking in SOX.
• More importantly, as Butler and I discuss, there?s a strong argument that markets, given the opportunity, would have produced many, if not all, of the benefits attributed to SOX, but at lower cost.

All of which strikes me as about right. Except for the minor quibble that he forgot to mention The Complete Guide to Sarbanes-Oxley.

Hewitt and Reynolds on Steyn on Black with Strine in the Wings

Hugh Hewitt recently linked Mark Steyn's wrap up column on the Conrad Black trial, in which Steyn opined:

Lord Black of Crossharbour is now a convicted felon. And those of us who believe he's innocent of any crime have to acknowledge that reality.

Hugh concludes: "Steyn is so skilled at his craft, he could have made TimesSelect work."

Glenn Reynolds links to Steyn's blog covering the Black trial, in which Steyn launches a blistering attack on the fairness of US criminal justice. On that blog, we also find such gems of objective journalism as the following:

Conrad Black is only in his present predicament because of his love of America and therefore, when his tribulations began four years ago, an undue faith in the integrity of its judicial process. Were it not for his excessive respect for the US justice system, Conrad would have done a Garth Drabinsky or a Marc Rich and been holed up far away somewhere. After all, it's hard to see, say, Switzerland extraditing to the US for something that wouldn't even be a criminal case in Geneva or Lucerne, never mind one commanding a century in jail. It is because of a touching and naive love for America, its law and even the SEC (see his Roosevelt book) that Conrad stands right now in the well of Judge Amy's courtroom and faces the prospect of never seeing his home in Toronto again.

About that Roosevelt book Steyn mentions, I once blogged:

Black also is the author of a recent biography of Franklin Delano Roosevelt. Interestingly, one of the charges against Black is that he caused Hollinger to spend $8 million to buy FDR historical papers, which he presumably then used in writing his FDR biography. For a critique of Black's analysis of FDR's economic policies, see Jim Powell's review, which Alex Tabarrok of Marginal Revolution strongly endorsed.

In other words, even when it came to writing that book, Black used company funds rather than his own money.

In any case, I haven't been paying much attention to Steyn's coverage of the Black trial, since it became obvious so early on that Steyn was intent on providing a whitewash for his former employer. (From Wikipedia: "Steyn became a close ally of former Canadian and Hollinger chief Conrad Black, and subsequently wrote for many of Black's newspapers.")

Let's put Steyn's hagiography in perspective by going to Delaware Vice Chancellor Leo Strine's opinion in Hollinger Intern., Inc. v. Black, 844 A.2d 1022 (Del. Ch. 2004), in which Strine made the following findings of fact:

• "Conrad M. Black, the ultimate controlling stockholder of Hollinger International, Inc. (“International”), a Delaware public company, has repeatedly behaved in a manner inconsistent with the duty of loyalty he owed the company." (1028-29)
• "During the course of his dealings, Black misrepresented facts to the International board, used confidential company information for his own purposes without permission, and made threats, as he would put it, of “multifaceted dimensions” towards International's independent directors." (1029)
• "By late October 2003, the Special Committee had come to a troubling conclusion; namely, that $15.6 million in so-called “non-competition” payments had been made by International to Black, Radler, Atkinson, and Boultbee-i.e., the International management team-without proper authorization. Furthermore, another $16.55 million in “non-competition” payments had been made by International to Inc.-even though Inc. had no operational capacity to compete with anyone. Of these amounts, Black had received $7.2 million personally, as had Radler." (1036) In other words, Black paid himself $7.2 million of the shareholders' money (remember that his economic stake was only 15%) with no - nada, zilch, nil - independent authorization. Hollinger was not Black's personal piggybank, but he treated it as such.
• "After performing its own inquiry into the non-compete payments, the [Hollinger] Inc. audit committee presented a report to the full Inc. board on November 19, 2003 that included various recommendations. Among other things, the Inc. audit committee recommended that Black, Radler, and Boultbee immediately resign from their management positions at Inc., and that Atkinson, Boultbee, and Radler resign from Inc.'s board of directors. On November 21, 2003, the five non-independent directors voted against taking these actions, over the objection of all four independent directors. The independent directors promptly resigned from the Inc. board." (1044)
• In violation of contractual obligations he had undertaken, Black interfered extensively with efforts to undertake a financial restructuring of Hollinger. (1045ff)
• "In late December, Black was questioned by the SEC about matters within the scope of the Special Committee's investigation, including the non-competes. He invoked the Federal Constitution's privilege against self-incrimination and refused to cooperate. Specifically, Black refused to answer any questions regarding the non-competes on the ground that his answers might incriminate him. By doing so, he denied the SEC the full cooperation of International that had been promised when the Restructuring Proposal was announced in November." (1049)
• "Black also began steps to repudiate his commitment to repay the monies due back to International under the Restructuring Proposal." (1049)

Strine concludes: "First, having had a three-day evidentiary hearing, I am in a good position to make certain credibility determinations and have done so. ... As to Black himself, it became impossible for me to credit his word, after considering his trial testimony in light of the overwhelming evidence of his less-than-candid conduct towards his fellow directors. In some ways Black was feistily direct, flat-out admitting that he viewed himself as having no obligation to spend time on the Strategic Process after his removal as CEO, despite ¶ 6 of the Restructuring Proposal. Black also vigorously defended his failure to inform the International board of his discussions with the Barclays. But then again, he could hardly deny these facts. On more debatable points, I found Black evasive and unreliable. His explanations of key events and of his own motivations do not have the ring of truth. I find it regrettable to say so but it is the inescapable, and highly relevant, conclusion I reach."

In contrast, as the Independent observed after the criminal trial:

For Black's defence to be believed, the jurors would have had to conclude not only that [David Radler, Black's business partner since 1969, who decided to admit his part in the crime and become a government witness in September 2005] was a liar, but also that the board directors of Hollinger who gave evidence for the prosecution, including a former US ambassador, a former governor of Illinois, and Marie-Josée Kravis, who has served on the boards of several public companies, were also inveterate liars.

Given their longstanding personal and professional ties, it is perhaps understandable that Steyn would wish to see the best in his former boss. (But see The Independent, which called Steyn "Black's indefatigable supporter and – some would say – useful idiot....")

As for me, I've never met Steyn and read him only rarely. In contrast, as a corporate law professor, I read Leo Strine's opinions routinely. And I agree completely with Len Costa:

IN THE POST-ENRON WORLD, many fallen moguls have had their transgressions laid bare in court. But in February 2004, newspaper baron Lord Conrad Black of Crossharbour received an unusually explicit judicial whipping. That was the day Black's bad behavior ignited the pen of a sharp-tongued young Delaware Chancery Court judge named Leo Strine. Strine, who was confirmed to the court in November 1998 at the age of 33, has emerged as the hardest-working, wittiest, and most outspoken judge on the world's most important court dealing with corporate law. More than 60 percent of Fortune 500 companies are incorporated in his tiny home state, drawn by a lax corporation law and the court's propensity not to second-guess decisions made by businessmen. ...

Strine's record is enviable. Since his confirmation to the bench in 1998, he has written more than 100 business law decisions. Only a handful have been reversed. "They are extremely well crafted legally," says Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.

It may be that the Black trial is yet another example of the criminalization of agency costs, a trend I have criticized. It may be the case, as I speculated, that the verdict was a compromise. But let's not kid ourselves. In my opinion, Conrad Black was the worst example of the Imperial CEO who repeatedly plundered and pillaged his shareholders for his own personal gain. (I emphasize that this is just my opinion in light of Black's reported use of libel suits "to neuter coverage of his activities.") As the Toronto Star reminds us:

Richard Breeden, a former SEC chair recruited by Hollinger International to examine the firm's Black-era compensation practices, issued a report accusing Black and associates of operating the firm as a "corporate kleptocracy," diverting some $400 million (U.S.), or 95 per cent of Hollinger International's adjusted net income between 1997 to 2003, to themselves and holding companies controlled by Black.

Again, from the Independent:

According to their (very unofficial) biographer Tom Bower, Conrad Black and Barbara Amiel were millionaires who behaved as if they were billionaires, desperate to keep up with the Kravises, Manhattan's pre-eminent power couple, who definitely are billionaires. Ms Amiel envied the Kravises their two private jets and encouraged Black to acquire two corporate jets for Hollinger. Once, when her Concorde flight was delayed, she tried to reach Lord King, the British Airways chairman and a Hollinger director. Instead she had to pass on a message for him via a Telegraph journalist: "Tell Lord King that I'll never fly commercial again. I'm finished with British Airways, public transport and the lot of them."

It was Black's arrogant refusal to abide by a November 2003 agreement to pay back $7.2m in non-compete fees and admit that they were "not properly authorised on behalf of the company" and his underhand attempt to sell the Telegraph Group to the Barclay twins that proved his undoing. What followed was an investigation by the Securities and Exchange Commission, the Delaware court case in February 2004, at which Judge Leo Strine characterised Black as an "evasive and unreliable witness", and Hollinger's May 2004 $1.25bn lawsuit against the Blacks, culminating in the seizure of their principal assets and the indictment against him in the autumn of 2005.

Plurality Voting for Directors and the Withhold Authority Option

The email brought the following question from a reader who works for a government agency:

I am looking into the rationale for the option to "withhold" one's vote (instead of an "against" option) in the election of directors. There does not seem to be much literature on this aspect of director elections. Any insight would be much appreciated.

I replied as follows:

I have always assumed that the withhold authority option was created by the SEC to deal with the prevailing rule of electing directors by plurality.

Until quite recently, under plurality voting rules in most states, a vote "against" a director candidate had no legal effect.

My reply continued:

SEC Release No. 16356, which was the adopting release for the relevant language, states:

Rule 14a-4(b)(2), as proposed, would have required that a form of proxy relating to the election of directors list the nominees individually. It also would have permitted shareholders to vote for or against each nominee, individually, by marking a box or by other similar means. A mechanism for shareholders to vote in favor of the entire slate of nominees by marking a single box, rather than by marking boxes for each of the nominees, also would have been permitted provided that there was a similar means for the security holder to vote against the entire slate. …

Virtually all of the commentators addressed themselves to questions concerning the feasibility of structuring a proxy card to allow individual voting and the costs necessary for implementation. The corporate commentators generally expressed opposition to the proposal based on cost estimates included in their comments. Most of these commentators, including corporate transfer agents, asserted that this proposal would make the current vote tabulation system obsolete, thereby requiring new data handling systems in order to tabulate the expanded number of proposals. It was further argued that the proposal would not only reduce the accuracy and efficiency of the tabulation process, but also would overly complicate the process of voting on a proxy card, thereby fostering shareholder disinterest and confusion.

A number of legal commentators questioned the treatment of an “against” vote under state law, most arguing that it normally would have no effect in an election. They also expressed the concern that shareholders might be misled into thinking that their against votes would have an effect when, as a matter of substantive law, such is not the case since such votes are treated simply as abstentions. …

The Commission has carefully considered the comments and recognizes that, given the present state of proxy tabulation procedures, the rule, as proposed, could be burdensome to some companies and that there may be other ways to achieve similar benefits without the economic and practical difficulties presented by the proposed rule. Therefore, as adopted, rule 14a-4(b)(2) has been revised to delete the specific requirement of a for and against vote for individual nominees. Instead, the rule provides that the form of proxy shall clearly provide one of several designated methods for security holders to withhold authority to vote for each nominee. It is contemplated that the rule will allow issuers to provide shareholders the opportunity to express themselves in the most economic and practical manner. The Commission intends to monitor the workings of the rule and will consider appropriate revisions as deemed necessary to facilitate shareholder participation in the corporate electoral process.

Rule 14a-4(b)(2), as revised, requires that the names of the persons nominated to the board shall be set forth on the form of proxy. This requirement will provide shareholders with the readily accessible information upon which to withhold authority from individual nominees if such is their desire. It is contemplated that a horizontal listing of the nominees could be set forth in the space available on the form of proxy.

Robert Todd Lang explains in 1486 PLI/Corp 1115:

The SEC Adopting Release clearly indicates that the SEC knew that the effect, under state corporate law, of executing a proxy in this manner, whatever it was called, would be equivalent to an abstention, and would not count toward the vote required under the prevailing plurality requirement, concluding that the term “withhold authority” more accurately conveyed the concept to shareholders. Consequently, it seems that the SEC's creation of the “withhold authority” proxy option represented the creation of a unique form of abstention for the election of directors which could be affirmatively selected on the proxy card by shareholders. Underlying this affirmative ability to abstain was the idea that withholding authority represented an expression of dissatisfaction with the particular candidate, a different means of implementing the proposed rule's “against” voting mechanism. Indeed, the rule provides in an instruction that a means to “vote against” should instead be provided on the proxy card where legally effective under state law. Accordingly, both the “vote against” proposed by the SEC and the “vote withheld” it adopted provided a means for shareholders to express dissatisfaction with nominees, but without having a direct effect on the election. In serving primarily as a shareholder communication mechanism, the withheld vote was largely the same in purpose as a precatory proposal required to be included in company proxy material under Rule 14a-8. Based on the federal regulatory history, the withheld vote in the case of plurality voting may be considered a form of abstention for reasons of dissatisfaction with respect to the election of one or more nominees, but the legal effect is primarily dependent on state law and each corporation's charter and bylaws. Accordingly, the meaning to shareholders may not be entirely clear, particularly since shareholders are likely to have different reasons for withholding their votes. …

Under the plurality voting system used for the election of directors, a vote is cast for each nominee or it is not cast at all, since there is no vote against. This inability to dissent means that a nominee can be elected to the board if at least one share is voted in his or her favor, as long as no nominee receives a greater number of affirmative votes and a quorum is present. The number of shares actually voted in the election are irrelevant once a quorum is established.

Might I ask why you’re interested?

No answer to that last query so far.

Interestingly, I today came across a new paper on SSRN entitled Are Uncontested Director Elections Meaningful?

Abstract: Almost all company directors are routinely approved in uncontested elections; that is, no outside group contests director nominees via a vote-no campaign or a proxy fight. Because of plurality voting rules, such elections are meaningless, in the sense that the director nominees are almost surely elected. We hand collect over 10,000 individual director vote tallies from these meaningless elections and assess whether they serve as an aggregator of investor perceptions regarding firm management. We document that vote approval is extremely high for almost all nominees in uncontested elections, with the lowest quintile of vote approval still having a mean of 90%.

Nonetheless, we provide evidence that uncontested elections serve as meaningful aggregators of investor perceptions by documenting that (1) vote approval is associated with prior-year stock return and prior-year return on assets, and (2) vote approval predicts stock price reactions to subsequent announcements of management turnovers. In addition, we provide evidence that boards are responsive to the sentiment captured in the uncontested vote by documenting that vote approval predicts forced CEO turnover in the twelve months after the annual meeting. Furthermore, we show that other statistics that determine or reflect investor perceptions (i.e., prior stock returns, prior return on assets, and change in institutional ownership) do not subsume the information content in vote approval, which suggests that it captures some unique aspects of investor perceptions. Finally, we document that both the change in institutional ownership, which captures institutions voting with their feet, and the vote approval measure both have predictive value in identifying forced turnovers, which suggests that each type of voting captures different investor perceptions. We conclude that while director do not directly determine who sits on boards, they do reflect investor perceptions regarding board performance and the board appears to be responsive to those perceptions.

There's a glitch in that last sentence, but I take the finding "that uncontested elections serve as meaningful aggregators of investor perceptions" as suggesting that the SEC's imposition of a requirement that the form of proxy provide a "withhold authority" option actually has had informational value for firms. The finding that the vote is associated with "forced CEO turnover," moreover, suggests that the requirement may also have positive governance effects.

Independent Director Access to Information

It's long been assumed that the mushroom is a good analogy for how management funnels information to independent directors: the latter are kept in the dark and fed manure. An interesting recent paper, however, found that:

... independent directors earn positive and substantial abnormal returns when they purchase their company stock, and that the difference with the same firm's officers is relatively small at most horizons. The results are robust to controlling for firm fixed effects and to using a variety of alternative specifications. Executive officers and independent directors make higher returns in firms with weaker governance and the gap between these two groups widens in such firms. Independent directors who sit in audit committees earn higher return than other independent directors at the same firm. Finally, independent directors earn significantly higher returns than the market when they sell the company stock in a window before bad news and around a restatement announcement.

This suggests that independent directors may have almost as good access to information as executive officers, at least at firms with strong corporate governance. It further suggests that information asymmetries are no longer as significant a barrier to director primacy as they once were.

Journalism's "Public Function"

Journalists seem to have convinced themselves that they aren't part of a business. Case in point, James Fallows:

... as is obvious as soon as you think about it, the press has cultural, social, and political effects beyond the purely commercial. But its managers are being forced to make decisions on the same focused quarterly-returns basis that guides choices at Merrill Lynch or General Motors. Sometimes those pressures for maximized return (and rising stock price) make news organizations more efficient. But in general they weaken or destroy the parts of news systems that affect people in any role other than as shareholders - that is, as readers, viewers, voters, citizens.

Whining about Rupert Murdoch's pending takeover of the Wall Street Journal follows at length. (HT: Andrew Sullivan)

This is precisely the sort of hubris that leads journalists to think of themselves as some sort of fourth branch of government, with a mandate to act as an ombudsman for society. It would be silly, if it were not so pernicious.

Economist Michael Jensen takes a much more sensible approach, writing:

I assert that most of the demand for the product of the various “news” services derives, not from the individuals’ demands for “information,” but rather from their demands for entertainment. In that sense, the news media are in competition with drama, soap operas, situation comedies, fictional writing, sports events, and so on. Observing the almost overwhelming devotion of the news media to political events, quasi events and non-events, it is easy to delude oneself into believing that people have a demand for information about the political sector. Downs, in his classic book on democracy, argues persuasively, however, “that for a great many citizens in a democracy, rational behavior excludes any investment whatever in political information per se.” ...

Go read the whole thing, it's a brilliant essay. For present purposes, however, the main point is that journalists have precisely the same public function as the guys that produce such dreck as Jackass or Girls Gone Wild.

Quoted by The Economist on SOX at 5

The Economist offers up a briefing paper on the Sarbanes-Oxley Act, which recently turned 5. The Economist thinks "Sarbanes-Oxley is not as bad as it's cracked up to be." The Economist is wrong. But at least they still know where to go for a quote:

Better still, under pressure from the SEC, the Public Company Accounting Oversight Board has changed its guidance on how to implement section 404. Until now, auditors have been encouraged to be zealous with internal controls, replicating much or all of the work of a firm's internal auditors, and testing the robustness of internal controls against every imaginable risk. The new audit standard, which was approved by the SEC this week, allows a more pragmatic, commonsense approach. Some estimates suggest that compliance fees could fall by as much as half.

Yet, as seems to be the way with SOX, not everyone welcomes this reform. Stephen Bainbridge, the author of “The Complete Guide to Sarbanes-Oxley”, argues that “nothing the SEC has done or plans to do will change the existing incentive-structure for officers and directors. The firm's top management will still have plenty of incentives to spend shareholder money on protecting themselves from SOX liability.”

Eliot Spitzer is a Thug

The NYT repo rts:

Gov. Eliot Spitzer vowed on Wednesday to fight any State Senate inquiry into his administration?s internal operations, even as Republican senators were laying the groundwork for an investigation that could lead to subpoenas of top officials. ... The governor has maintained that he was misled by his staff and knew nothing about the effort to discredit Mr. Bruno. But two of his closest aides refused to be interviewed by the attorney general?s investigators, intensifying suspicion, especially among the governor?s critics, that Mr. Spitzer and his staff had not been forthright. ...

?The governor?s people refused, people at the highest level, they refused to sit and answer questions,? [Bruno] said. ?What did they do? They made a little statement. And these are the people who are the closest to the governor, who are governing the state.?

Can you imagine what Attorney General Spitzer would have done to a corporate CEO who told two of his executives to stonewall and who tried to fight off an investigation? Actually, we know exactly what Spitzer would have done:

Former Goldman Sachs Chairman John Whitehead said Thursday that New York Attorney General Eliot Spitzer threatened him during an April phone call for writing an open letter critical of Spitzer's attacks on prominent insurance executive Maurice "Hank" Greenberg. ...

"Mr. Whitehead, it's now a war between us and you've fired the first shot," Whitehead quoted Spitzer as saying. "I will be coming after you. You will pay the price. This is only the beginning and you will pay dearly for what you have done. You will wish you had never written that letter," Whitehead claimed Spitzer said.

Spitzer is a Nixon-like thug.

The Debt Crunch and Private Equity

Scott Sperling comments on whether it will impact deal pace and pricing (probably). Dana Cimilluca notes the particular problems Citibank is having as a result of "having been involved in a lot of the buyout loans that have soured lately." Serena Ng reports that the investment banks are going to have to eat about $12 billion of debt that they couldn't sell in the Chrysler buyout. A correction or a major downturn?

Dana Cimilluca suggests one result may be that cash flush and/or high stock valued operating companies may now be better positioned to do deals than private equity firms, poising to Siemens acquisition of "U.S. medical-diagnostic firm Dade Behring." She goes on:

That is why the credit-market headaches the private-equity firms are suffering ? and their diminished ability to pay for more deals ? is music to the ears of such companies as Siemens. The German company has an investment-grade credit rating, a market cap of more than $100 billion and more than $10 billion in cash, so it can fairly well pay whatever it wants for a company like Dade.

As one investment banker recently said about the woes private-equity firms are currently experiencing: ?Strategics are thrilled.?

Spitzer

The W$J reports:

With the disclosure this week that close aides misused state police in an effort to damage a Republican rival, [NY Governor Eliot] Spitzer is facing the same kind of high-profile scrutiny that he was famous for inflicting upon others -- from Wall Street executives to radio conglomerates -- as New York's attorney general. In a role reversal, the aggressive Mr. Spitzer now is on the defensive and vowing to make amends. ...

While the report by [Democratic] Attorney General Andrew Cuomo found that no laws had been broken, it found that a close Spitzer aide schemed to create and give detailed reports to the media showing that Mr. Bruno had been using state aircraft to attend fund-raisers and other political events, rather than for state business as Mr. Bruno had certified. ...

The report found that the governor's communications director, Darren Dopp, and his top liaison to the state police pressured the state police to create, and in some instances re-create, records of Mr. Bruno's use of state aircraft and police escorts.

The report also suggested that the governor's staff gave a false story to investigators to explain why the information was being gathered, saying they were acting on a Freedom of Information Act request from a newspaper.

How can it possibly be the case that lying to investigators and pressuring police to falsify records broke no laws? Does NY have no equivalent of the federal provision in 18 USC 1001 that criminally penalizes, by up to five years in prison, any person who "knowingly and willfully— ... (2) makes any materially false, fictitious, or fraudulent statement or representation; or (3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry." I'm no fan of 18 USC 1001, but it's just the sort of statute Spitzer would have loved back when he was NY Attorney General.

Ideology and Fictitious Evil Overlords

In what will be the first of a number of posts on Harry Potter and the Deathly Hallows, I want to comment on Ilya Somin's complaint that:

The most important shortcoming of the Harry Potter series is its often unconvincing depiction of evil. Creating a plausible ideology for the "bad guys" in a fantasy series is an important challenge that many writers try to sidestep. There are all too many fantasy books that include a "Dark Lord" who seems to be evil for evil's sake, without any justifying ideology that might actually appeal to anyone. This is an important weakness of many works in the genre, and J.K. Rowling unfortunately falls into this trap in the Potter books.

I don't think this post has any spoilers, but I'll put the rest below the fold just in case.

I want to make three distinct arguments:

1. Voldemort does not need an ideology to succeed in the context of the wizarding world of Harry Potter.
2. Voldemort has an ideology.
3. In most cases, ideology is part of the backstory and rarely will be developed as explicitly as Somin apparently desires.

Some of these arguments may seem inconsistent, but one of the first things I learned in law school is that lawyers need to be able to make the famous kettle argument with a straight face. (In the “Case of the Kettle,” the plaintiff sought damages for a kettle that he claimed the defendant had borrowed and returned cracked. The defendant's counsel responded with three distinct defenses: (1) Defendant did not borrow the kettle. (2) The kettle is not now and never was cracked. (3) The kettle was cracked when the defendant borrowed it.)

The Non-Necessity of Ideology

Somin contends:

Rowling ... is much less convincing in her depiction of the more radical evil represented by Lord Voldemort and his followers. The problem here is the absence of ideology. Voldemort seems to be motivated almost solely by his desire for power and immortality. His followers seem driven either by fear of his power (the Malfoys) or personal loyalty (Bellatrix LeStrange).

Real-world evil political movements simply aren't like that, at least not exclusively so. They always have an ideology that justifies their policies, usually a quite elaborate one. Think of the Nazis, the Communists, Al Qaeda, and so on. Each of these groups had a detailed ideology that purported to explain why their policies were right, just, and necessary for reasons that go beyond the narrow self-interest of the movement's leaders. Even if the leaders themselves didn't always believe in the ideology, it played a key role in motivating and indoctrinating the followers.

I agree that a motivating ideology probably is helpful in mass movements, so as to persuade people that they are fighting for a good cause. But is it as essential as Somin suggests? In the Civil War, the South had an ideology of states rights and property rights that it invoked to justify defending the evil system of slavery. Yet, the most famous exchange about the motivation of Confederate soldiers was entirely non-ideological: A Union soldier asked a captive Confederate soldier, "why are you fighting?" The Confederate responded, "I'm fighting because you're down here."

The literature on social norms and behavioral economics, moreover, suggests that small groups often find common cause based not on the basis of reasoned arguments (such as a political ideology) but on the basis of emotional responses like trust, friendship, and loyalty.

Rowling has estimated that there are only 3000 wizards in Great Britain (some estimates claim it has to be more like 8,000 to 10,000). We know from all the books (including Harry Potter and the Deathly Hallows) that the bulk of the wizardly population is sitting on the sidelines hoping to get by. The number of active combatants on either side is probably less than a couple of hundred. Fear, personal loyalty, the glamor of evil, the attraction of secret knowledge, the prospect of being allowed to share in Voldemort's immortality (why else would he call his followers "Death Eaters"?), plus the power of the Imperio curse collectively explain Voldemort's hold on his followers without the need for a mass ideology.

A somewhat different perspective on this question, which reaches the same result as to the necessity of ideology, is provided by an examination of Rowling's understanding of evil:

Another aspect of evil is that it is chosen. Both Tom Riddle and Harry Potter had similar childhoods. Both suffered rejection. Riddle's mortal father and even his own wizard family rejected him and Potter was forced to endure the neglect and mistreatment of the Dursley's. Uncle Vernon was forever afflicting all sorts of punishment upon Harry and spoiling his own son, Dudley. Yet Potter reached out to the good in others and Riddle turned into Lord Voldemort and evil.

In the book 1984, Big Brother is only about Power. George Orwell made it clear that the Party was not interested in creating a new society or propagating a new ideology. The Party dispensed with the notion of right or wrong, and simply settled for wrong. Lord Voldemort is J.K. Rowling's version of Big Brother as he attracts loyal followers, but as Dumbledore notes, he is not interested even in his followers and no one is really close to him. He is the definition of narcissism.

Voldemort has an Ideology

Somin contends that:

Rowling takes a small step in the right direction in her emphasis on Voldemort's and the Death Eaters' hostility to Muggle-born ("Mudblood") wizards. The obvious analogy is to real-world racism. However, she never really explains why the Death Eaters hate Muggle-borns so much, which makes the hostility seem unmotivated and pointless. In the real world, racism and anti-Semitism were justified by elaborate theories of either the inferiority or the malignant nature of the despised group. Often there are also real or imagined historical grievances. We see none of this in the Potter series (at least not on the part of Voldemort and his followers; groups such as the goblins and centaurs do have historical grievances against wizards). This gives a misleading image of the true nature of racism, feeding the modern conceit that it is just the result of "hatred" or intolerance. In reality, the hatred and intolerance are usually the consequences of racist ideology, not its causes. The core of anti-Semitism, for example, is not hatred of Jews in and of itself, but the list of reasons why Jews supposedly deserve to be hated.

In Book 7, Rowling belatedly recognizes this problem, and has the Death Eaters justify their hatred of Muggle-borns by claiming that they supposedly "stole" their magic from "pureblood" wizards by taking wands from them. However, this claim seems utterly implausible as a basis for Death Eater ideology because it is too easily falsified by everyday experience in the wizarding world. As was established early in the series, virtually all wizards know that the ability to do magic is innate, and cannot be acquired simply by taking a wizard's wand. Real-world ideologies, however absurd in their ultimate conclusions, have to be sophisticated enough to avoid falsification by the basic facts of everyday life. An effective ideology must have at least some plausibility.

Here Somin errs. The business about Muggle-borns stealing wands is described as Death Eater propaganda, not as a core part of Voldemort's ideology, and is dismissed by Rowling's characters as not very persuasive  propaganda. They know it's false.

Instead, Voldemort's ideology may arise out of the genetics of magic:

It seems likely that magic is inherited genetically. If there is only one gene for the ability to do magic, it could be either recessive or dominant. However, the theory that magic is a dominant trait seems more likely since the prevalence of pure-blood elitism may very well have its genesis in a rational desire to preserve the magic gene in the wizarding population. If magic was recessive, then Muggle-borns and half-bloods would pose no threat to the wizarding gene pool. However, if magic is a dominant trait, Muggle heritage may indeed result in more Squibs in the community after some generations of intermarriage.

In other words the seemingly racist, unethical and irrational ideology of Voldemort and the pure-blood elitists may have a grain of sense in it after all, considered as a means of preserving the genetic heritage of wizardkind. This explains why Voldemort gains support among so many people — and also explains why he doesn’t. Harry Potter and his non-pure-blood school chums, simply have no context for understanding what is going on and why.

If interbreeding with Muggles in fact poses a genetic threat to the wizarding community, the parallel between Voldemort and Hitler becomes obvious. In Mein Kampf, Hitler wrote:

Dr. Lueger was the opposite of Schönerer. His profound knowledge of human nature enabled him to form a correct estimate of the various social forces and it saved him from under-rating the power of existing institutions. And it was perhaps this very quality which enabled him to utilize those institutions as a means to serve the purposes of his policy.

He saw only too clearly that, in our epoch, the political fighting power of the upper classes is quite insignificant and not at all capable of fighting for a great new movement until the triumph of that movement be secured. Thus he devoted the greatest part of his political activity to the task of winning over those sections of the population whose existence was in danger and fostering the militant spirit in them rather than attempting to paralyse it. He was also quick to adopt all available means for winning the support of long-established institutions, so as to be able to derive the greatest possible advantage for his movement from those old sources of power.

Thus it was that, first of all, he chose as the social basis of his new Party that middle class which was threatened with extinction. In this way he secured a solid following which was willing to make great sacrifices and had good fighting stamina.

Likewise, Voldemort has identified a class that may believe itself to be threatened with extinction. Indeed, we are repeatedly told by Rowling that the old pureblood families are dying out. (There may also be non-genetic risks of class extinction, such as economic challenges by Muggle-borns to the old pure families.)

It is thus suggested that "Rowling combines realpolitik thinking with the romantic":

Over the first six books, Rowling introduced a wizard world that is divided by class and blood. There is the conflict between the full-blooded wizards and wizards marked by human heritage, the mud-bloods. There is also the class warfare symbolized by the conflict between the Malfoys and Weasleys. The interesting aspect is how many of the full-bloods are perfectly willing to follow a mud-blood like Voldemort. Voldemort takes advantage of prejudices of some in the wizard community to garner his own power base.

Contra Somin, Voldemort and his followers do seem to have "elaborate theories of either the inferiority or the malignant nature of the despised group."

Finally, I take issue with Somin's claim that "hatred and intolerance are usually the consequences of racist ideology, not its causes." This strikes me as exactly backwards. In Mein Kampf, Hitler develops a pastiche of half-naked half-baked theories that form the basis of Nazi ideology. Yet, the OSS study of Hitler's psychology contends that:

Many writers have expressed the opinion that Hitler's anti-Semitism is motivated primarily by its great propaganda value. Undoubtedly, anti-Semitism is the most powerful weapon in his propaganda arsenal and Hitler is well aware of it. ... All our informants who knew him well, however, agree that this is superficial and that underneath he has a sincere hatred for the Jews and everything Jewish. This is in complete agreement with our hypothesis. We do not deny that he often uses anti-Semitism porpagandistically when it suits his purpose. We do maintain, however, that behind this superficial motivation is a much deeper one which is largely unconscious.

Put another way, ideologies of evil are usually ex post rationalizations for prior irrational prejudices. Put another way, all conceptions of the good (even those of Hitler or Voldemort) necessarily rest on fundamental, non-derivable beliefs.

Leave it in the Backstory

In the Lord of the Rings, Tolkien hints that Saruman used the sort of arguments Somin presumably would call ideological to motivate the Dunlendings to support his war on Rohan. During the Second Age, the Dunlendings' land had been raided by the Númenóreans for timber and other resources, which resulted in many wars between them. In the Third Age, the Dunlendings had been displaced from their historic homelands by the coming of the Rohirrim. Here we have an example of the "real or imagined historical grievances" Somin wants.

Yet, Tolkien leaves most of this history to the backstory (indeed, I think the extended DVD version of the Two Towers movie is much more explicit on this point, if memory serves). Why not bring it to the forefront?

I think there's an inherent tension here. Somin wants evil overlords to have a plausible ideology. But how to lay out that ideology without extensive exposition? Consider one of the most blatantly ideological science fiction novels of all time, Robert Heinlein's Starship Troopers. Most of the middle of the book is devoted to Johnny Rico's time at Officer Candidate School, most of which is devoted to thinly disguised political essays. They're it's slow, pretentious, and boring. They break up the flow of the action.

Personally, I think Rowling sometimes erred on the side of putting in too little of the backstory. In her defense, however, let it be noted that she is telling a story for children (that a lot of us adults ended up liking) in which probably 99% of the pages are told from the point of view of a young adult who is not part of Voldemort's army and has had almost no exposure to Voldemort's ideological pretensions. So it's highly unlikely we'd get much in the way of expositional narrative lying out Voldemort's beliefs.

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COMMENT:

AUTHOR: Kevin Baker

URL: http://smallestminority.blogspot.com

DATE: 07/23/2007 07:05:31 PM

Interesting piece.  One quibble:  As a reader of Starship Troopers in adolescence, and many times since, I never found those "thinly disguised political essays" slow, pretentious or boring.  They were thought-provoking, crucial to the purpose of the novel, and the part I took from the book over everything else.  That novel was a delivery system for those essays, and Heinlein did a far sight better job of delivering his essays in novel form than Ayn Rand ever thought about.

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COMMENT:

AUTHOR: Hartley

URL: http://profile.typekey.com/Hartley/

DATE: 07/23/2007 07:28:20 PM

 I think the final paragraph of your essay, Professor, has much to do with it - Ms. Rowling was writing a juvenile fiction book, and I suspect she may have worried that giving Voldemort and his "movement" any sort of identifiable ideology might risk creating "followers" among her more susceptible readers.  The other danger, of course, is that such an ideology might be determined to be analogous to one of today's real movements - and she did NOT want any of that distracting from the book - and  also risking their primary, juvenile audience.  Better, I think, that Voldemort remain a caricature of evil, rather like the Dursleys of obnoxiousness or the Ministry of incompetent government.\

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COMMENT:

AUTHOR: DWPittelli

URL: http://woodedpaths.blogspot.com/

DATE: 07/23/2007 07:28:02 PM

Magical powers would have to be recessive, in order for Muggles to ever give birth to Wizards.

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COMMENT:

AUTHOR: Brent Michael Krupp

URL:

DATE: 07/23/2007 07:50:18 PM

Magical power can easily be dominant and simply have a small chance of spontaneously arising through mutation. That explains where wizard children of 2 Muggle parents come from.

Of course, like most real traits (eye color, intelligence, etc.) it's probably the result of a bunch of different genes interacting in a complex fashion.

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COMMENT:

AUTHOR: Assistant Village Idiot

URL: http://assistantvillageidiot.blogspot.com

DATE: 07/23/2007 08:48:10 PM

Every writer of a fantasy series must eventually come up against the question of what she believes hell or evil actually is.  Piers Anthony makes up a demonology at the beginning of Xanth that purports to do this, but he himself is unconvinced by it.  The fourth and fifth books of the series illustrate better the nonexistence and impotence that is closer to Anthony's real fear.

 

It is not merely poor storytelling to refrain from describing the villain's motivations in depth.  The author's point is often that there is no real justification, just rationalization.  Good characters gone bad, such as Denethor or Anakin, require explanation.  For Sauron, Voldemort, or Arawn, narcissism is enough.  Their followers usually do require some trumped-up or imagined grievance to activate them, but the projecting of their own jealous and vengeful natures onto the good guys is usually enough to keep things going. 

(Change sets) The correct order is Narcissism, Paranoia, Ideology, with the caveat that the ideology is usually based on something already present in the individual's thinking.  In the psychotic disorders of definitely biological base such as schizophrenia, the narcissism results rather innocently from the "special" impressions or voices that the sufferer apprehends and others do not.  (When I started in the field in the 1970's new-onset paranoids were often worried about the CIA.  When the Godfather movies came out, new cases picked up on mafia paranoia.  These days it's satellites and computers doing the evil.  And through it all, many religious persons find spiritual paranoias, political people gravitate to political explanations, etc.) These unusual perceptions lead to the internally logical conclusion that the subject must have special powers, or be especially chosen in some way.  In the personality disorders the causes of the narcissism are less well understood - there may be a host of interactive genetic, prenatal, and environmental factors.  But the order is the same: Narcissism, Paranoia, Ideology.  As before, the ideology is not created ex nihilo, but is based on something previously present.

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COMMENT:

AUTHOR: aidan

URL: http://aidanmaconachyblog.blogspot.com/

DATE: 07/23/2007 08:50:14 PM

I second Somin's complaint.

 

The backstory may indeed gild the plot with some legitimacy but it doesn't shed light on the source of our presumption. In our culture in 9 cases out of 10 we presume good will triumph over evil, and indeed in the world of fantasy it invariably does.

 

As children Disney taught us this subliminal lesson. With some rare exceptions, fairy tales, Graeco-Roman and Christian myths taught us this also. It is perhaps our greatest conceit - that the good guy will, has to, must ... triumph. This is why Iraq is such a devastating blow to believers in this article-of-faith. Evil appears to be flourishing and even winning in that theater-of-the-unpredictable, in which no presumption can ever be relied upon.   

My main objection to evil overlords in fiction, on the silver screen ... in video gaming and pro-wrestling culture ... is that they are a joke, even with scads of ideological trapping. They are a joke because they personify an essential falsehood. This fictional rendering of the dark side may be great fun, but it deceives our children about the true nature of reality. Rowling and Tolkien set up their dark 'straw' powers more convincingly than most, and yet still they are set up to fall. Even as we watch their exercise of seemingly invincible power, we know deep down they are hollow men and women who posture and threaten in vain because they are fore-ordained to lose before the all-conquering power of the good. 

Hollywood routinely dishes up this scenario in one form or another. The belief, almost amounting to an article of faith that the good guy - simple, self-effacing, hard working - will win out in the end despite a sea of troubles, has been woven into our common psyche. For every good guy who fits this profile, there are perhaps a million who have been denied justice and who have been royally screwed by destiny that is nothing if it isn't loftily disinterested when it comes to the fate of Joe Average. 

Clark Kent took the righteous protagonist a step further. Not only would simple integrity and decency win out over evil in conformity with 'higher design'  - but the retiring hero himself assumed the role of 'vanquisher of evil' and we are seduced into believing that his morality can survive this make-over. We believe in his mission even when it becomes unbalanced, overly zealous and at times absurd. In the eyes of believers the superhero remains forever incorruptible even as he exacts terrible retribution and devastates his enemies with specialized 'smart' weaponry. 

The greatest lie of all is that good will out. It doesn't always. It didn't in the killing fields of Pol Pot. It didn't in Rwanda. It doesn't in many a family and in many a relationship. It doesn't in many a church. Not even in the White House. Yet none of this dints our inherent sense of righteousness. The irony that 'evil' grows exponentially even as we evoke authority to defeat it, is never fully examined. The prospect that there may be some other approach to the problem of 'evil' seems beyond our philosophical grasp as a culture. 

Darkness and light are not distinct and mutually exclusive states of being. There are no 'good' guys. There are no 'bad' guys. The darkness we see in others is the darkness within ourselves and even our worst enemy has redeeming characteristics that we ignore at our peril. When we assume the right to wield the sword of righteousness in an absolute sense we risk becoming the bigger villain. Understanding that truth is the beginning of wisdom.

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COMMENT:

AUTHOR: George Atkisson

URL: http://profile.typekey.com/GeorgeAtkisson/

DATE: 07/23/2007 10:08:44 PM

For Aidan:

 

For most of your article, you were illustrating the fact that evil does in fact seem to triumph quite often. It is a difficult question as to why we wish to believe that good will triumph. You were quite clear that evil is real and sometimes

prevails.

 

Then in the last paragraph you go postmodern and deny that any of the evil you rail against exists. There is suddenly no objective difference between the suicide bomber and the passerby who wrestles him to the ground to protect others, knowing he will die.

 

That is not the beginning of wisdom. It is the death of wisdom to surrender any knowledge of good and evil and thus to consciously choose between them.

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COMMENT:

AUTHOR: aidan

URL: http://aidanmaconanchyblog.blogspot.com/

DATE: 07/24/2007 01:04:38 AM

"Then in the last paragraph you go postmodern and deny that any of the evil you rail against exists."

 

I wasn't in fact implying that evil (capital E) exists in the earlier part of the post either. I was going along with cultural/religious assumptions that it does, so used the term. The objectification of 'evil' courtesy of religious belief systems is in fact a large part of the problem.

 

"There is suddenly no objective difference between the suicide bomber and the passerby who wrestles him to the ground to protect others, knowing he will die."

 

You can't go from the presumption of an alleged "postmodern" view of evil to the assumption that a person is therefore bereft of ethics or devoid of a fundamental sense of right and wrong when it comes to harming others. One makes choices all the time. However if thinking is pre-configured along ideological/theological lines, chances are you may not be seeing the situation clearly. The biggest problem is the imposition of this good/evil paradigm in terms of how we view life. The absence of preconditioned thinking along these lines, certainly doesn't imply that a person is therefore amoral, immoral or less equipped to act in the instance of your suicide bomber example.

 

"That is not the beginning of wisdom. It is the death of wisdom to surrender any knowledge of good and evil and thus to consciously choose between them."

 

Well tell that to a Taoist. You presuppose that 'knowledge' derives from that which is imparted, and that if a person isn't privy to knowledge systems of the didactic sort they are ill-equipped to choose between 'good' and 'evil' (I use the words in a qualified sense because in real terms there are many shades between black and white). A look at historical periods when good and evil was objectified in the form of crusades, inquisitions and all manner of bizarre psycho-dramas enacted by the faithful doesn't lead me to the view that knowledge of this sort is beyond being perverted. There are different ways of knowing.

 

Global Warming Lawsuits

Overlawyered reports on the potential for mass tort litigation against US (and, I suppose, foreign) corporations based on global warming claims. The post concludes:

All of which proves nothing at all about the actual causes or dangers of global warming. It’s just more evidence of a climate of greed and opportunism in the trial bar. And that’s one climate that never changes.

These sort of attacks on US business have a strongly negative impact on the US economy, especially the competitiveness of our capital markets. The bipartisam Schumer-Bloomberg report stated:

Survey respondents said that a fair and predictable legal environment was the second most important criterion determining a financial center’s competitiveness. In this regard, they felt that the United States was at a competitive disadvantage to the United Kingdom. They attribute this US disadvantage to a propensity toward litigation and concerns that the US legal environment is less fair and less predictable than the UK environment. Empirical evidence certainly suggests that litigation has become an important issue: 2005 set a new high for the number of securities class-action settlements in the US, and for the overall value of these settlements. Of course, many of these cases addressed the legitimate claims of investors and consumers in situations of notable corporate wrongdoing. However, in aggregate, some of the unique characteristics of the US legal environment are driving growing international concerns about participating in US financial markets – concerns heightened by recent cases of perceived extraterritorial application of US law.

How to be an Evil Overlord for Dummies

Ilya Somin points to a list of The Top 100 Things I'd Do If I Ever Became An Evil Overlord, which is premised the observation that "on every Evil Overlord I've read about in books or seen in movies invariably gets overthrown and destroyed in the end. I've noticed that no matter whether they are barbarian lords, deranged wizards, mad scientists or alien invaders, they always seem to make the same basic mistakes every single time."

The whole list rewards reading, but here are few personal faves:

• When I've captured my adversary and he says, "Look, before you kill me, will you at least tell me what this is all about?" I'll say, "No." and shoot him. No, on second thought I'll shoot him then say "No."
• One of my advisors will be an average five-year-old child. Any flaws in my plan that he is able to spot will be corrected before implementation.
• My Legions of Terror will be trained in basic marksmanship. Any who cannot learn to hit a man-sized target at 10 meters will be used for target practice. (PB: Did an Imperial Stormtrooper ever hit anybody in Star Wars IV through VI? Once?)

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COMMENT:

AUTHOR: M. Hodak

URL: http://www.hodakvalue.com/blog

DATE: 07/23/2007 04:57:10 PM

Very funny list.  My three favs: 

1. My Legions of Terror will have helmets with clear plexiglass visors, not face-concealing ones.

 15. I will never employ any device with a digital countdown. If I find that such a device is absolutely unavoidable, I will set it to activate when the counter reaches 117 and the hero is just putting his plan into operation.

 98. If an attractive young couple enters my realm, I will carefully monitor their activities. If I find they are happy and affectionate, I will ignore them. However if circumstance have forced them together against their will and they spend all their time bickering and criticizing each other except during the intermittent occasions when they are saving each others' lives at which point there are hints of sexual tension, I will immediately order their execution.