ProfessorBainbridge.com

Corporate Philanthropy

A blog comment over at Volokh's place asks what I think about corporate philanthropy. I addressed that issue in Corporation Law and Economics, where I wrote that:

Corporate charitable donations are subject to attack under two doctrines: ultra vires and breach of fiduciary duty. Neither is likely to succeed, so long as the amount in question is reasonable and some plausible corporate purpose may be asserted.

Virtually all states have adopted statutes specifically granting corporations the power to make charitable donations, which eliminates the ultra vires issue. Although these statutes typically contain no express limit on the size of permissible gifts, courts interpreting the statutes require corporate charitable donations to be reasonable both as to the amount and the purpose for which they are given. The federal corporate income tax code?s limits on the deductibility of corporate charitable giving are often used by analogy by courts seeking guidance on whether a gift was reasonable in amount.

As for breach of fiduciary duty claims, the principles announced in Dodge v. Ford Motor Co. arguably require that corporate philanthropy redound to the corporation?s benefit. As Shlensky v. Wrigley suggests, however, reasonable corporate donations should be protected by the business judgment rule. Consequently, Barlow?s discourse on corporate social responsibility properly is regarded as mere dicta.

Law professors worry a lot about corporate philanthropy?a small forest has died to print all the law review articles on the subject. Yet, the corporate law rules governing this subject are perfectly consistent with our theory of the firm. To be sure, corporate philanthropy poses a classic agency cost problem. Just as corporate managers may divert resources to perquisites for themselves, they likewise may divert resources to philanthropic giving from which they derive psychic utility. This suspicion is confirmed by Warren Buffet?s amusing anecdote:

I have a friend who is the chief fundraiser for a philanthropy. . . . All he wants is to take some other big shot with him who will sort of nod affirmatively while he meets with the CEO. He has found that what many big shots love is what I call elephant bumping. I mean they like to go to the places where other elephants are, because it reaffirms the fact when they look around the room and they see all these other elephants that they must be an elephant too, or why would they be there? . . . So my friend always takes an elephant with him when he goes to call on another elephant. And the soliciting elephant, as my friend goes through his little pitch, nods and the receiving elephant listens attentively, and as long as the visiting elephant is appropriately large, my friend gets his money. And it?s rather interesting, in the last five years he?s raised about 8 million dollars. He?s raised it from 60 corporations. It almost never fails if he has the right elephant. And in the process of raising this 8 million dollars from 60 corporations from people who nod and say it?s a marvelous idea, it?s pro-social, etc., not one CEO has reached in his pocket and pulled out 10 bucks of his own to give to this marvelous charity. They?ve given 8 million dollars collectively of other people?s money.

The identities of the typical beneficiaries of corporate philanthropy likewise confirm that it is driven more by managerial ego than corporate advantage. The charities supported by most corporations tend to be rich people?s charities: art, music, public television, and the like. One can but question how big a bang a company gets for its advertising buck in giving to those charities.

One can concede the agency cost story, however, without conceding that the legal system ought to regulate corporate charitable giving. In the first place, it seems unlikely that corporate charitable giving even remotely approaches a level that materially injures shareholders. Although estimates vary widely, it seems unlikely that corporate charitable giving amounts to more than a couple of billion dollars annually, an infinitesimally small portion of total corporate earnings.

More important, deference to corporate philanthropic decisions is consistent with?indeed, mandated by?[my theory of director primacy, as explained in detail in in my new book The New Corporate Governance in Theory and Practice]. The case for judicial and regulatory deference was developed in detail in our discussion of the business judgment rule. An abbreviated version is worth recalling here, however.

As noted, corporate charitable giving typically is defended on grounds that it produces good will and favorable publicity. In effect, charitable giving is simply another form of advertising. As such, it supposedly results in more business and higher profits. Who knows for sure if that is true? Maybe GM really does sell more luxury sport utility vehicles because it sponsors PBS programs?or maybe not. But that is not the right question. The right question is: who decides? The board of directors or the courts? That directors feel good about themselves for having made such a decision hardly seems like the kind of self-dealing that justifies heightened scrutiny.

Board discretion over issues like charitable giving is the inescapable side-effect of separating ownership and control. If there are good reasons for maintaining that separation, and there are, the board?s discretionary authority must be preserved. As we have repeatedly seen, holding directors accountable for their use of that discretionary authority inevitably limits that discretion. Consequently, deference to board decisions is always the appropriate null hypothesis.

There are cases where the board?s abuse of its discretionary authority warrants regulatory or judicial intervention. Breaches of the duty of loyalty spring to mind as the clearest example. As already noted, it seems doubtful that corporate philanthropy poses the sort of conflict of interest necessary to justify limiting board discretion. Yet, even if corporate philanthropy involved material sums, deference would still be appropriate. The theory of the second best holds that inefficiencies in one part of the system should be tolerated if ?fixing? them would create even greater inefficiencies elsewhere in the system as a whole. Even if we concede arguendo the case against board control over corporate giving, judicial oversight or regulatory intervention still would be inappropriate if it imposes costs in other parts of the corporate governance system. By restricting the board?s authority in this context, the various academic proposals to ?reform? corporate philanthropy impose just such costs by also restricting the board?s authority with respect to the everyday decisions upon which shareholder wealth principally depends. Slippery slope arguments are usually the last resort of those with no better argument, but one nonetheless must beware eviscerating exceptions that could swallow the general rule of deference. Once regulation of corporate philanthropy allows the camel?s nose in the tent, it becomes harder to justify resistance to further encroachments on board discretion.

Are Junior Professors Better teachers?

Via Paul Caron, I learned of Gregory Bowman's article The Comparative and Absolute Advantages of Junior Law Faculty: Implications for Teaching and the Future of American Law Schools, 2008 BYU Educ. & L.J. 171, in which Bowman argues:

In the ongoing debate about how to improve law school teaching, there is a general consensus that law schools should do more to train junior faculty members how to teach. While this may be the case, this consensus inadvertently leads to an implicit assumption that is not true -- that in all facets of law teaching, junior faculty are at a disadvantage compared to senior faculty. In fact, there are aspects of law teaching for which junior faculty can be better suited than their senior colleagues. This Article reviews scholarship concerning law teaching and identifies three teaching factors that generally favor junior law faculty: generational proximity to the law school student body; recency of law practice experience as junior practitioners; and lower susceptibility to the problem of conceptual condensation - extreme depth of subject matter knowledge that makes it difficult to see subjects from the students' perspective.

This Article employs the economic concepts of (a) economies of scale or productive efficiency and (b) absolute and comparative advantage to suggest how these junior faculty advantages could be harnessed to improve law school teaching. With respect to productive efficiency, it is suggested that greater intra-faculty dialogue can increase a law faculty's output of effective teaching. Currently, senior faculty members often provide assistance or advice to junior faculty in areas of senior faculty expertise or advantage -- such as depth of knowledge in a course's subject matter -- but this is largely a one-way flow of information. However, if junior faculty were also to provide insight and advice to senior faculty regarding areas of junior faculty advantage, the quality of law school teaching might be significantly enhanced. Junior-senior faculty dialogue might be promoted through a variety of means, including faculty workshops and even perhaps teaching reviews of senior faculty by junior faculty.

With respect to the concepts of absolute and comparative advantage, this Article suggests that law school teaching could be improved through the specialization of teaching functions. Instead of professors individually teaching separate courses, professors might coordinate their teaching (that is, team-teach) across a number of courses in the law school curriculum, as a means to more effectively harness the respective strengths (and minimize the respective weaknesses) of junior and senior faculty in the classroom. Through the leveraging of junior faculty advantages, overall law school teaching might be significantly improved. This Article concludes by discussing the implications of these recommendations for law school culture in general and for the legal profession as a whole.

The trouble is that I don't buy any of the alleged advantages Bowman says junior teachers possess. As for "generational proximity to the law school student body," it often translates into difficulty for the young teacher to gain respect from the students. Anyway, it seems more relevant to dating than teaching. As for "recency of law practice experience as junior practitioners," most law professors (at elite schools, anyway) come into practice with only a few years of practice experience. Being bottom man on a deal or litigation team fora couple of years doesn't translate into meaningful knowledge. At best, it gives you a few war stories. Personally, I've learned a lot more that I use in the classroom from consulting than I ever did in practice. Since sniors likely have more consulting opportunities than juniors, this is at best a wash. Finally, as for "lower susceptibility to the problem of conceptual condensation - extreme depth of subject matter knowledge that makes it difficult to see subjects from the students' perspective," I'd rather know too much then too little. When I was just starting out, I lived in dread of the student question for which I had no answer. Today, it almost never happens.

Properly Understanding the Relationship Between the BJR and CSR

Crooked Timberite Daniel posts on the shareholder wealth maximization norm, commenting in part that:

In real life, the business judgement rule protects more or less anything that the Creative Capitalism gang [a corporate social responsibility outfit] might want businesses to do. Even the paradigm example used by Posner ? of a corporate chief executive making charitable donations and specifically saying that they weren?t doing it for PR purposes and that they didn?t run the company in the interests of the shareholders ? doesn?t actually necessarily give rise to a situation which would fail the business judgement test, because that?s pretty much the story of Body Shop, and if the only way that a company can secure the services of a talented and energetic cosmetics executive like Anita Roddick is to give away money without regard for shareholders, then that?s in the interests of shareholders. There is, of course, a cottage industry in business school cases and the funnies pages of the Economist in proving that instances of corporate philanthropy are actually in the interests of shareholders in the long term.

He's mostly right, of course. As I explained in The Bishops and the Corporate Stakeholder Debate, however, it's important to understand why the business judgment rule does so:

[C]urrent law in fact allows boards of directors substantial discretion to consider the impact of their decisions on interests other than shareholder wealth maximization. This discretion, however, exists not as the outcome of conscious social policy but rather as an unintended consequence of the business judgment rule. To be sure, some scholars find an inconsistency between the business judgment rule and the shareholder wealth maximization norm. I concede that the business judgment rule sometimes has the effect of insulating a board of directors from liability when it puts the interests of nonshareholder constituencies ahead of those of shareholders, but deny that that is the rule?s intent. Instead, as the Delaware supreme court has explained:

Under Delaware law, the business judgment rule is the offspring of the fundamental principle, codified in [Delaware General Corporation Law] ? 141(a), the business and affairs of a Delaware corporation are managed by or under its board of directors.... The business judgment rule exists to protect and promote the full and free exercise of the managerial power granted to Delaware directors.

The business judgment rule thus operationalizes the intuition that fiat? i.e., centralization of decisionmaking authority?is the essential attribute of efficient corporate governance. As Nobel laureate economist Kenneth Arrow explains, however, authority and accountability cannot be reconciled:

[Accountability mechanisms] must be capable of correcting errors but should not be such as to destroy the genuine values of authority. Clearly, a sufficiently strict and continuous organ of [accountability] can easily amount to a denial of authority. If every decision of A is to be reviewed by B, then all we have really is a shift in the locus of authority from A to B and hence no solution to the original problem.

The business judgment rule prevents such a shift in the locus of decisionmaking authority from boards to judges. It does so by establishing a limited system for case-by-case oversight in which judicial review of the substantive merits of those decisions is avoided. The court begins with a presumption against review. It then reviews the facts to determine not the quality of the decision, but rather whether the decisionmaking process was tainted by self-dealing and the like. The questions asked are objective and straightforward: Did the board commit fraud? Did the board commit an illegal act? Did the board self-deal? Whether or not the board exercised reasonable care is irrelevant, as well it should be. The business judgment rule thus erects a prophylactic barrier by which courts pre-commit to resisting the temptation to review the merits of the board?s decision.

The business judgment rule, however, has no application where the board of directors is disabled by conflicted interests. In such cases, concern for director accountability trumps protection of their discretionary authority. In corporate takeovers, for example, a well-known conflict of interest taints target company director decisionmaking. Not surprisingly, therefore, the law denies directors discretion to consider the interests of nonshareholder constituencies in the takeover setting. To be sure, the interests of shareholders and nonshareholder may be consistent in takeover fights, just as they are in many settings. In light of the directors? conflict of interest, however, we can no longer trust them to make an unbiased assessment of those competing interests. The conflict between management and shareholder interests requires skepticism when management claims to be acting in the stakeholders? best interests. A board decision to resist a hostile offer may have been motivated by concern for potentially affected nonshareholder constituencies, but it may just as easily have been motivated by the directors? and managers? concern for their own positions and perquisites. Selfish decisions thus easily could be justified by an appropriate paper trail of tears over the employees? fate. Consequently, in the takeover setting, rigorous application of the shareholder wealth maximization norm properly becomes the standard of judicial review.

This then is the major failing of the Bishops? support for a multi-constituency conception of corporate directors? duties. ?Any social order that intends to endure must be based on a certain realism about human beings and, therefore, on a theory of sin and a praxis for dealing with it.? Here, the sin in question is that of self-interest. While the Bishops? proposal would empower honest directors to act in the best interests of all the corporation?s constituents, it also would empower dishonest directors to pursue their own self-interest. There is a very real risk that directors and managers given discretion to consider interests other than shareholder wealth maximization will use stakeholder interests as a cloak for actions taken to advance their own selfish interests.

Crooked Timberites on the Corporate Directors' Duties to Shareholders

John Quiggin of Crooked Timber:

The creative capitalism blog has been set up to examine the idea that corporations could do a job of promoting social goals like improving health in poor countries (that is, better than they do now and better, in at least some ways, than governments or NGOs). Richard Posner objects to this on the ground that corporate managers have a fiduciary obligation to maximise profits. I don?t find this convincing (reposted over the fold).

... I somehow doubt that, if US law were changed to remove any obligation to maximize profits, or even to create a positive obligation to pursue broader social goals, Posner?s objections to creative capitalism would be resolved.

It's an interesting post. What it ignores, I think, is that shareholders will view a director preference for other constituencies as a risk demanding compensatory returns. First, absent the shareholder wealth maximization norm, the board would lack a determinate metric for assessing options. Because stakeholder decisionmaking models necessarily create a two masters problem, such models inevitably lead to indeterminate results. Recall the XYZ hypothetical from the preceding section, in which the board of directors is considering closing an obsolete plant. Assume the closing will harm the plant?s workers and the local community, but will benefit shareholders, creditors, employees at a more modern plant to which the work previously performed at the old plant is transferred, and communities around the modern plant. Further assume that the latter groups cannot gain except at the former groups? expense. By what standard should the board make the decision? Shareholder wealth maximization provides a clear answer?close the plant. Once the directors are allowed to deviate from shareholder wealth maximization, however, they must inevitably turn to indeterminate balancing standards.

Second, any legal standards developed to review such decisions would operate mostly by virtue of hindsight. Such rules deprive directors of the critical ability to determine ex ante whether their behavior comports with the law?s demands, raising the transaction costs of corporate governance. The conflict of interest rules governing the legal profession provide a useful analogy. Despite many years of refinement, these rules are still widely viewed as inadequate, vague, and inconsistent?hardly the stuff of which certainty and predictability are made.

Finally, absent clear standards, directors will be tempted to pursue their own self-interest. One may celebrate the virtues of granting directors largely unfettered discretion to manage the business enterprise, as we have done throughout this text, without having to ignore the agency costs associated with such discretion. Discretion should not be allowed to camouflage self-interest.

Directors who are responsible to everyone are accountable to no one. In the foregoing hypothetical, for example, if the board?s interests favor keeping the plant open, we can expect the board to at least lean in that direction. The plant likely will stay open, with the decision being justified by reference to the impact of a closing on the plant?s workers and the local community. In contrast, if directors? interests are served by closing the plant, the plant will likely close, with the decision being justified by concern for the firm?s shareholders, creditors, and other benefited constituencies.

At best, stakeholder models give directors a license to reallocate wealth from shareholders to nonshareholder constituencies. Would investors be willing to invest their retirement savings in corporate stock if that approach became law? hence, there are good reasons to think that the shareholder wealth maximization norm is the appropriate standard of corporate decisionmaking.

Timberite Daniel picks up where John leaves off with the following comments:

I have a real bee in my bonnet about the claim made by Richard Posner that ? The managers of corporations have a fiduciary duty to maximize corporate profits?. It raises a whole load of topics relevant to plenty of my favourite economic hobby-horses as soon as you start to look remotely critically at what the seemingly simple phrase ?maximise corporate profits? actually means anyway.

Pretending not to understand the meanings of common English phrases is a stock tactic for creating the impression of profundity (cf philosophers, who are always pretending not to understand the meaning of words like ?is?, ?would? and ?must?). But sometimes you have to do it ? my view is that in any view of the world more complicated than a very elementary blackboard model, the phrase ?maximise profits? can?t be unpacked into a coherent decision rule which rules out any of the things which Posner talks as if it does.

Go read the whole thing.

My take on the definitional question is premised on the notion that boards of directors sometimes face decisions in which it is possible to make at least one corporate constituent better off without leaving any constituency worse off. In economic terms, such a decision is Pareto efficient?it moves the firm from a Pareto inferior position to the Pareto frontier. Other times, however, they face a decision that makes at least one constituency better off but leaves at least one worse off. The familiar concept of zero sum games is just the worst-case variation on this theme. Imagine a decision with a pay-off for one constituency of $150 that leaves another constituency worse off by $100. As a whole, the organization is better off by $50. In economic terms, this decision is Kaldor-Hicks efficient. With this background in mind, the shareholder wealth maximization norm can be described as a bargained-for term of the board-shareholder contract by which the directors agree not to make Kaldor-Hicks efficient decisions that leave shareholders worse-off.

A commonly used justification for adopting Kaldor-Hicks efficiency as a decisionmaking norm is the claim that everything comes out in the wash. With respect to one decision, you may be in the constituency that loses, but next time you will be in the constituency that gains. If the decisionmaking apparatus is systematically biased against a particular constituency, however, that justification fails. If shareholders suspect that their constituency would be systematically saddled with losses, they will insist on contract terms precluding directors from making Kaldor-Hicks decisions that leave shareholders worse off. As explained in the next section, shareholders in fact are the constituency most vulnerable to board misconduct and, by extension, to being on the losing end of Kaldor-Hicks efficient decisions. Hence, they predictably will bargain for something like the shareholder wealth maximization norm.

Batman: Broken Body, Broken Property, Broken Laws

A fun article in Scientific American sums up the physical toll being Batman would take on Bruce Wayne. Paul Zehr, an associate professor of kinesiology and neuroscience at the University of Victoria in British Columbia and a 26-year practitioner of Chito-Ryu karate-do, whose book, Becoming Batman: The Possibility of a Superhero, is due out in October, examines a number of issues. Such as:

What's most plausible about portrayals of Batman's skills?
You could train somebody to be a tremendous athlete and to have a significant martial arts background, and also to use some of the gear that he has, which requires a lot of physical prowess. Most of what you see there is feasible to the extent that somebody could be trained to that extreme. We're seeing that kind of thing in less than a month in the Olympics.

But the training regime is unrealistic and, moreover:

How would Batman get enough rest?
The difficulty for Batman is he's going to be trying to sleep during the day. He's going to be really tired, actually, unless he can shift himself over to just being up at night. If he were just a nocturnal guy, he would actually be a lot healthier and have a lot better sleep than if he were doing what he does now, which is getting some light here and there. That's going to mess up his sleep patterns and duration of sleep.

Wouldn't fighting Gotham's thugs every night take its toll?
The biggest unreal part of the way Batman's portrayed is the nature of his injuries. Most of the time, in the comics and in the movies, even when he wins, he usually winds up taking a pretty good beating. There's a real failure to show the cumulative effect of that. The next day he's shown out there doing the same thing again. He'd likely be quite tired and injured.

Great stuff. Go read the whole thing.

But I got to pondering: what about the cost to Gotham? Remember the main car chase in Batman Begins?

Just how many millions of dollars in property damage did Batman inflict on Gotham in that one night? And how are those poor property owners going to explain things to their insurance company?

Plus, if the mob runs the construction business and unions in Gotham, Batman's rooftop drives are helping subsidize organized crime.

And what if some of those crumnlig roofs had fallen through the ceiling of the top floor apartment and crushed some poor guy trying to get a good night's sleep?

It would probably be cheaper for Gotham to buy off the bad guys than let Batman run rampant.

And, as for Batman, he better hope his secret identity remains secret forever or Bruce Wayne is going to get sued into the poor house.

Update: John Carney notes that Batman/Bruce Wayne appears to be rampantly violating federal securities laws and state corporate fiduciary duty laws:

Wayne's criminality is exactly the sort readers of DealBreaker are all too familiar with. He seems to be a white-collar criminal, engaging in the kind of corporate crimes that attract our real-life two-faced prosecutors. He takes corporate resources to pursue his own interests, uses underhanded means to acquire a majority stake in Wayne Enterprises after encouraging an initial public offering, and intimidates a potential whistle-blower.

At the start of Batman Begins, Wayne Enterprises is a private corporation controlled by William Earle, who is portrayed a the typical evil corporate titan familiar to anyone who watches Hollywood movies about big businesses. In order to gain control of the company, Wayne encourages the company to go public. Wayne then uses probably illegal chicanery and subterfuge to buy up a majority stake in Wayne Enterprises and ousts the board and management. Already Wayne seems to be violating federal disclosure and anti-take over laws.

In The Dark Knight, Wayne is discovered by an M&A lawyer to be using corporate resources for his own purposes. Specifically, Bruce has converted the R&D division into a research program to create cool equipment for Batman. When the lawyer approaches Wayne's handpicked chief executive (played by Morgan Freeman) with his discoveries, the CEO intimidates him by pointing out that unmasking a guy who spends his nights beating people to a pulp is probably not a great idea.

Bruce Wayne seems to feel no guilt about exploiting the minority shareholders in Wayne Enterprises or pillaging the corporate treasury for his crusade. How serious is this? Remember that recently prosecutors and business reporters across the country went on a jihad against a minor corporate misdeed called "backdating." If the typical backdating CEO could be compared to a mafioso underboss, Bruce Wayne is the Joker

Viewed in this way, Wayne, his CEO and their buddies in law-enforcement are corporate baddies engaged in a war against street criminals. We can't help thinking that this gives a very different meaning to the Joker's idea that Gotham deserves a better class of criminal.

CA v. AFSCME: The Limits of Shareholder Power

Jay Brown laments that the Delaware supreme court's decision in CA v. AFSCME will limit shareholder power:

... the Court distinguished between procedural and substantive bylaws.

The process-creating function of bylaws provides a starting point to address the Bylaw at issue. It enables us to frame the issue in terms of whether the Bylaw is one that establishes or regulates a process for substantive director decision making, or one that mandates the decision itself.
Having framed the issue in that manner, the Court then agreed that the bylaw, although "infelicitously couched as a substantive-sounding mandate to expend corporate funds, has both the intent and the effect of regulating the process for electing directors of CA." It was, therefore, a proper subject for shareholders.

While AFSCME won the argument, shareholders lost the war. The need to have the bylaw involve process meant that any decision, no matter how small, that was not process oriented, would be invalid. Bylaws requiring boards to undertake steps to curb global warming, to disinvest from companies doing business with terrorists, or to withdraw poison pills would, under the Court's reasoning in this case, to be on their face invalid.

As well they should be, of course. Shareholders do not own the corporation. To the contrary, the corporation is a vehicle by which the board of directors hires capital by selling equity and debt securities to risk bearers with varying tastes for risk. The board of directors thus can be seen as a sort of Platonic guardian?a sui generis body serving as the nexus for the various contracts making up the corporation and whose powers flow not from shareholders alone but from the complete set of contracts constituting the firm. As a early New York decision put it, the board?s powers are ?original and undelegated.?

Shareholder involvement in corporate decisionmaking would disrupt the very mechanism that makes the modern public corporation practicable; namely, the centralization of essentially nonreviewable decisionmaking authority in the board of directors. The chief economic virtue of the public corporation is not that it permits the aggregation of large capital pools, as some have suggested, but rather that it provides a hierarchical decisionmaking structure well-suited to the problem of operating a large business enterprise with numerous employees, managers, shareholders, creditors, and other inputs. In such a firm, someone must be in charge, as Kenneth Arrow observed: ?Under conditions of widely dispersed information and the need for speed in decisions, authoritative control at the tactical level is essential for success.? Shareholder activism necessarily contemplates that institutions will review management decisions, step in when management performance falters, and exercise voting control to effect a change in policy or personnel. In a very real sense, giving shareholders this power of review differs little from giving them the power to make management decisions in the first place. As Arrow further observed, ?If every decision of A is to be reviewed by B, then all we have really is a shift in the locus of authority from A to B and hence no solution to the original problem? of allocating control under conditions of divergent interests and differing levels of information. Even though shareholders probably would not micromanage portfolio corporations, vesting them with the power to review major decisions inevitably shifts some portion of the board?s authority to them. Given the significant virtues of discretion, there needs to be a presumption in favor of preservation of board discretion. The separation of ownership and control mandated by U.S. corporate law has precisely that effect.

In contrast to both self and Brown, Larry Ribstein thinks the Delaware supreme court was careful to be neutral between directors and shareholders:

... the Delaware Supreme Court ?was careful to present itself as a pragmatic forum that would hear the shareholders out on a case by case basis.? This is important: the SEC gave Delaware an unprecedented chance to participate in the shareholder access debate, and the Court was determined not to blow it. It seized the opportunity by, in effect, emphasizing that it wasn't the defender of some general principle of director vs. shareholder power that the court will uphold whenever it?s asked. It?s about this particular contract, as set forth in the certificate, and how it applies to the particular issue of proxy expenses. Change the contract or the issue and you might get a different result. ...

This relates to Professor Bainbridge?s lament, ?We are not cited. We are depressed.? Indeed, if anybody deserves to be cited on the issues in this case it is Professor Bainbridge. But the court studiously avoided citing any academic except (in fn 8) to establish the unclarity in the law that the court had to unravel. This is part of the court?s avoiding taking a policy position that could be interpreted as inhospitable to insurgent rights, leaving it to the SEC to defend these rights.

It follows that the Professor is wrong ?to see a strong affirmation of the principle of director primacy.? The court is saying as clearly as it can, there is no principle, just the rule that happens to be expressed in the current version of DGCL Section 141(a). That is not necessarily to say that there is in fact no principle of director primacy that underlies Delaware decision-making, just that the court was doing what it could to keep it out of this case.

I'm not persuaded by Larry's last argument. In contrast, I agree with Broc that this decision is consistent with "Delaware?s historic model of director-centric governance." We see this in the way sec. 141(a) trumps sec. 109, for example. We also see it in the court's clear statement that ?it is well-established that stockholders of a corporation subject to the DGCL may not directly manage the business and affairs of the corporation, at least without specific authorization in either the statute or the certificate of incorporation.? This is a director primacy opinion.

CA v. AFSCME: Precommitments

In recent years, the Delaware supreme court (and, in fairness, the chancery court) has painted itself into something of a corner.

In Quickturn Design Sys., Inc. v. Mentor Graphics Corp., 721 A.2d 1281 (Del. 1998), the Delaware supreme court invalidated a so-called no hand poison pill. According to the court?s opinion, Delaware law ?requires that any limitation on the board?s authority be set out in the? articles of incorporation. The no hand pill limited a newly elected board?s authority by precluding redemption of the pill?and thereby precluding an acquisition of the corporation?for six months. Consequently, the no hand pill tended ?to limit in a substantial way the freedom of [newly elected] directors? decisions on matters of management policy.? Accordingly, it violated ?the duty of each [newly elected] director to exercise his own best judgment on matters coming before the board.? Absent express authorization of such a limitation in the articles, the no hand pill was invalid as beyond the board?s authority.

Notice that there are two distinct doctrines at play here. First, as in Quickturn, a claim that Delaware General Corporation Law section 141(a) ?requires that any limitation on the board?s authority be set out in the? articles of incorporation. Second, as implied in Quickturn and confirmed in Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003), the supreme court has imposed on directors "a continuing fiduciary obligation," in that case with respect to a sale of the company. Hence, the court explained, the board must ?discharge its fiduciary duties at all times? even ?as circumstances change.? In dissent, Justice Steele aptly criticized the majority for adopting ?proscriptive rules that invalidate or render unenforceable precommitment strategies negotiated between two parties to a contract who will presumably, in the absence of conflicted interest, bargain intensely over every meaningful provision of a contract after careful cost benefit analysis.?

As Steele's dissent points out, the Delaware court has made it tough for corporate directors to use precommitment strategies by which the board of directors commits in advance to a particular strategy.

The validity of precommitment strategies is a potential issue in the CA v. AFSCME case. The bylaw amendment proposed by AFSCME basically commits the board of directors and shareholders to reimburse a successful dissident who conducts a proxy contest.

Lisa Fairfax reports that the issue came up in oral argument:

... counsel for CA argued that the by-law provision improperly took away directors' discretion to determine whether the payment of expenses in any particular instance would be inconsistent with directors' fiduciary obligation. This conversation focused on the hypothetical situation of a successful candidate who runs exclusively for personal reasons. At one point there seemed to be some type of consensus building for the notion that payment of such a candidate's expenses would violate a director's fiduciary obligations, prompting justices to ask why it made sense to approve a by-law provision that could lead to a director violating her fiduciary duty. However, as the conversation evolved, two counter arguments were raised. First, counsel for AFSCME contended that since the by-law provision was mandatory, it did not implicate a director's fiduciary duty because it did not involve the exercise of any judgment. Second, it was suggested that the relevant inquiry for fiduciary duty purposes was not whether a particular payment violated a director's duty, but rather if a directors' rationale for approving the by-law itself comported with her fiduciary responsibilities. On this question, Justice Berger asked whether or not it would be appropriate for a director to decide that it was in the best interest of the corporation to reimburse proxy expenses because such a reimbursement could facilitate people running for the board. In addition, there was some discussion regarding the impact of the fact that any expenses paid had to be "reasonable." That is, could it be argued that a payment that would violate a director's fiduciary duty would not be reasonable? If so, then the fact that the by-law provision only mandated the payment of "reasonable" expenses may do away with any concerns regarding a director's fiduciary duty in making the payment.

I'm not a fan of this bylaw, but I think the Delaware court needs to take advantage of this case to clarify the extent to which boards of directors may use precommitment strategies. (See generally my article Precommitment Strategies in Corporate Law: The Case of Dead Hand and No Hand Pills, 29 Journal of Corporation Law 1 (2003).)

In The Odyssey, Homer tells a classic story of using a precommitment strategy to achieve a desired goal. Circe warned Odysseus that his course would lead him past the Sirens, whose song famously enchanted all who passed near them. Once trapped, the passerby would be warbled to death by the sweetness of their song. Following Crice?s advice, Odysseus adopted a plan by which he would be able to hear the Sirens? song but still escape their trap. Odysseus charged his men to lash him to the mast of their boat and not to release him until they were far beyond the Sirens. Odysseus then stopped up his sailor?s ears with beeswax, so they could hear nothing. As his ship passed the Sirens, their song overwhelmed Odysseus? will power and he tried desperately to get his men to approach the Sirens. Unable to hear the song, and thus being free of its enchantment, however, his men merely tied him even more tightly to the mast and sailed on. Only once they were safely past the Sirens did they release Odysseus.

Homer?s tale illustrates the use of a precommitment strategy to solve the problems known to behavioral economists as time inconsistent discount rates and multiple selves. The discount rate an individual applies when making net present value calculations often declines as the date of the reward recedes. Professors Korobkin and Ulen offer the following example: ?Suppose that an individual is to choose between Project A, which will mature in nine years, and Project B, which will mature in ten years. Suppose, further, that an individual who compares the two projects across all their different dimensions prefers Project B to A. Now suppose that we bring the dates of maturity of the two projects forward while maintaining the one-year difference in their maturity dates. Because discount rates increase as maturity dates get closer, it is possible that the individual?s preference will switch from Project B to Project A as the dates of maturity decline (but preserving the one-year difference).? One effect of time inconsistent discount rates is that people ?always consume more in the present than called for by their previous plans.?

The somewhat related multiple selves phenomenon posits that individuals do not have a single utility function, but rather multiple competing utility functions. Because each ?self? orders preferences differently, there is an ever-present risk that the self predominating at a given moment may make decisions not in the complete individual?s best interest. Again, Korobkin and Ulen explain: ?A stiff tax on cigarettes, to take an obvious example, can be viewed as aiding the future-oriented self in its battle with a more present-oriented self that values immediate gratification over long-term health. . . . Today?s self can attempt to make commitments that either will completely bind tomorrow?s self or, at least, raise the cost of taking action that today?s self wishes to avoid.? In Homer?s tale, Odysseus had himself lashed to the mast precisely so that his present-oriented self could not satisfy its desire to prolong exposure to the Sirens? song. Being lashed to the mast was a precommitment strategy by which he avoided making an unwise decision in the future. Hence, Odysseus privileged the desires of his farsighted ?planner? self, who was concerned with lifetime utility, over those of his myopic and selfish ?doer? self. Bank Christmas Clubs are predicated on the same idea. By prohibiting the withdrawal of funds until late November, Christmas Clubs prevent people from acting on hyperbolic discounting proclivities, and assure the future availability of funds to pay for Christmas presents. In general, precommitment strategies are desirable because they disempower the myopic ?doer? self. As such, ?people rationally chose to impose constraints on their own behavior.?

Accordingly, there are many situations in which both individuals and organizations make enforceable precommitments. Such precommitments are beneficial because they protect ourselves against passion and time inconsistency. In using contractual devices to make a precommitment, the incumbent board likewise binds itself?and future boards?to a particular strategy. In striking down the dead hand and no hand poison pills on authority grounds, the Delaware courts seemingly have limited the use of such precommitment strategies by adopting a broad principle that boards have an ongoing duty to constantly re-evaluate their decisions.

Boards commonly enter into contracts limiting their future authority to varying degrees. Bond indentures commit the board to long-term obligations that will continue to bind future boards for many years. To be sure, the constraint on the authority of future boards is relatively modest, as such boards could always choose to breach the contractual obligations imposed by the indenture, but it nevertheless remains the case that their authority has been constrained.

Merger agreements likewise commonly contain provisions by which the board of directors binds itself to particular courses of conduct. A best efforts clause, for example, obliges the target?s board to use its ?best efforts? to consummate the transaction. No shop clauses prohibit the target corporation from soliciting a competing offer from any other prospective bidders. The no negotiation covenant, a variant on the no shop theme, goes further to prohibits negotiations with unsolicited bidders.

Fair price shark repellents commonly include continuing director provisions. Like the dead hand pill, the continuing director provision of a fair price shark repellent allows a bid to go forward only if approved by those members of the board of directors who were on the board when the acquirer first triggered the defensive provision. If the fair price shark repellent was included in the articles of incorporation, rather than the bylaws, it might satisfy the supreme court?s view that ?any limitation on the board?s authority be set out in the? articles of incorporation. Query, however, whether a typical fair price provision would contain language explicitly authorizing a limitation of the board?s authority and whether the Delaware courts would require an explicit statement to that effect.

All such corporate actions would be vulnerable to an authority-based challenge if the supreme court?s reference to ?any limitation on the board?s authority? is to be taken literally. Yet, if the word ?any? is not to be taken literally, where is the firebreak between permissible and impermissible limitations? A better solution to the problem would begin with the sweeping grant of authority made by DGCL ? 141(a): ?The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors . . . .? To be sure, DGCL ? 141(a) authorizes such exceptions to the board?s authority as may set forth in the statute or the corporation?s articles of incorporation. But why read that authorization as a negative prohibition of self-imposed limitations?

In fact, the most plausible reading of DGCL ? 141(a) is that the statute simply does not address the problem at hand. In pertinent part, the statute provides: ?If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.? This language clearly reflects a concern with the special problems of close corporations, whose articles often include provisions allowing the corporation?s shareholders to run the firm as though it were a partnership. Taken as a whole, DGCL ? 141(a)?s language regarding exceptions to the board?s authority is concerned with ensuring the validity of such close corporation governance provisions. On its face, nothing in the statute compels a conclusion that the board cannot create self-imposed limitations on its authority.

As for the pernicious doctrine of a continuing fiduciary duty to constantly reassess prior commitments, it ought to be taken out in the courtyard and have a stake driven through its heart. Then the corpse ouught to be burnt and the ashes scattered to the wind. It simply makes no sense.

In Phelps Dodge Corp. v. Cyprus Amax Minerals Co., for example, Chancellor Chandler opined that no shop clauses ?are troubling precisely because they prevent a board from meeting its duty to make an informed judgment with respect to even considering whether to negotiate with a third party.? But this begs the question of why the board cannot make an informed decision to tie itself to the mast. Suppose the board of directors makes an informed decision that the merger proposal on the table is the best deal they are likely to get for their shareholders and that granting a no shop clause is necessary and appropriate to induce the prospective acquirer to make a formal bid. The board recognizes that a no shop clause will impede its ability to negotiate with any competing bidders who subsequently emerge, but the board decides to accept that risk and go forward. In doing so, the board relies on the old adage that a bird in the hand is worth two in the bush. So long as the decision to enter into the no shop clause was an informed one, why should a board of directors have an on-going fiduciary duty to constantly reevaluate its decision?

Grilled Boneless Leg of Lamb in Hoisin BBQ Sauce

For two good eaters.

• 2 pounds boneless leg of lamb
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• ¼ cup Hoisin sauce
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• 3 cloves garlic crushed
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• 1 tablespoon chili garlic sauce
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• 2 tablespoons sherry vinegar
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• 2 tablespoons low sodium soy sauce
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• 1 tablespoon honey
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• 1 tablespoon ketchup
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• ¼ teaspoon freshly ground black pepper
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• pinch sea salt
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• 2 cloves garlic sliced lengthwise thinly
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• salt and pepper

In a small bowl, combine Hoisin sauce, crushed garlic, chili garlic sauce, vinegar, soy sauce, honey, ketchup, salt and pepper. Mix well. With a sharp paring knife make small cuts all over lamb. Push garlic slices into holes. Season lamb with salt and pepper, rubbing in. Put lamb in a 1 gallon zip lock plastic bag and pour BBQ sauce over. Squeeze air out and put in refriegerator for 6-8 hours.

Make smoker pouch by combining 2 parts soaked pecan wood chips and 1 part dry pecan wood sawdust in foil, folding ends and sides over to make a pouch. Poke a few holes in pouch and place on the flavorizer bars of your grill. Turn heat on all burners to high. Let the grill heat until you smell smoke. Put lamb in the middle of the grill grate, meat side down. Sear for two minutes. Flip. Sear two minutes. Turn middle burner off. Close lid and cook 8 minutes. Flip lamb. Cook 8 more minutes. Check with instant read thermometer. You want the lamb around 125°, so that carry over will take it to perfectly medium-rare. Remove to cutting board, tent lightly with foil, allow to rest 10 minutes, slice thinly and serve with lentils and squash. Drink a California Cabernet Sauvignon with some age.

Lentils and Squash

• ¼ cup green lentils, picked over and rinsed
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• 1 tablespoon olive oil
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• 2 medium shallots, minced
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• 3 cloves garlic, minced
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• ½ teaspoon sea salt
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• ¼ teaspoon ground white pepper
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• ½ teaspoon garam masala
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• ¼ cup crushed pecans
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• 1 package frozen Cascadian Farms organic winter squash, thawed
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• ½ cup corn kernels
  
• juice of 1 lime

In a 2-qt saucier pan, bring 2 cups of water to a boil. Add lentils, reduce heat to a simmer, and cook 15 minutes. Drain and set lentils aside.

Give saucier pan a quick cleaning. Preheat pan over medium heat. Add olive oil. When oil is hot, add shallots and garlic. Cook 2 minutes, stirring often. Add salt, pepper, and garam masala. Cook 1 minute, stirring often. Add pecans. Cook 1 minute, stirring often. Add squash. Cook 2 minutes, stirring often. Add corn and lentils. Cook until heated through. Taste and adjust seasoning if necessary.

You can use frozen corn kernels if necessary, but I had grilled corn on the cob leftover from the night before and cut off the kernels for this purpose.

I did the whole thing outside, using the side burner of my gas grill for the lentils.