ProfessorBainbridge.com

John Eastman for Attorney General

My friend and UCLAW colleague Eugene Volokh has just endorsed our mutual friend John Eastman in the California Republican Attorney general primary:

I just contributed to Prof. John Eastman’s campaign for California Attorney General, and I urge others to do the same. John is extremely smart and accomplished — he has a Ph.D. in government, he clerked for Justice Clarence Thomas, he has written or cowritten over 20 law review articles, and he’s a law professor and law school dean. And he’s a solid and thoughtful conservative, who I think would make an excellent Attorney General. There are things I disagree with him on, of course, but that’s inevitable with any candidate; on balance, I’m sure he would do a first-rate job.

I've also given to the Eastman campaign and likewise encourage others to do the same. (Go here.) I've known John for a number of years. He's wicked smart. A person of high integrity. Best man for the job, IMHO.

An Overview of the Dodd Bill

The Federalist Society presents an analysis of the "Restoring American Financial Stability Act of 2010," better known as the Dodd financial services reform bill. With debate about to begin in the Senate, it's a very handy crib sheet.

GOP Caves on Dodd Bill

The GOP caved, allowing debate to begin on the Dodd financial reform bill. The pernicious corporate governance provisions in the bill, about which we've been blogging extensively (see archive), remain intact. Maybe the Delaware delegation can get their old leader Joe Biden to help stave off these provisions. If not, corporate governance is going to take a major turn for the worse.

Hodak on Compensation Myths

Marc Hodak:

 My newest article, published in Directorship, online version here.  The comment they chose to highlight in their printed version:

The explosive growth in CEO pay over the last 20 years coincides with a huge shift of power from management to boards.

Which, I believe, pretty much guts the managerial power thesis of rising CEO pay.

Mind Mapping Corporate Law

If you haven't seen the infamous PowerPoint slide some Pentagon numbnut drew to explain the war in Afghanistan, you have to check it out. After all:

'When we understand that slide, we'll have won the war,' General Stanley McChrystal, the US and NATO force commander, remarked wryly when confronted by the sprawling spaghetti diagram in a briefing.

Law professor Dave Hoffman has been using PowerPoint to teach his corporations law class this semester. He's of mixed minds:

On the one hand, I think I digressed less and covered the material in more depth. On the other, I’m not sure that I succeeded in using slides to provoke discussion.

Those are the tradeoffs. It's hard to do the Socratic Method well with PowerPoint (raising the question of whether one ought to use the Socratic Method at all, of course).

In any case, some of Dave's students presented him with a version of the Afghanistan War PowerPoint slide adapted so as to recap corporate law in a single slide. Setting aside the dubious spelling (and who am I to complain of bad spelling), it's kind of amusing.

Gazing upon both the original and the derivative works, it occurred to me that what we really have here are efforts to use PowerPoint as a mind mapping tool. Although I'm long been an avid PowerPoint user in class and other public speaking settings, I've been very impressed with what my UCLAW colleague Jerry Kang has done with mind mapping in both class and public speaking.

So I've decided to use my upcoming sabbatical year, in part, to experiment with mind mapping as a teaching, research, and drafting tool. I had my IT people install Mindjet MindManager 8 for Mac on my new Wall o' Macs (me still so happy).

In connection with a statutory drafting project I've undertaken, I've started creating a mind map of the corporation's key attributes (using Larry Ribstein's book The Rise of the Uncorporation as a starting point):

Constructive criticism and suggestions would be most welcome.

Ribstein et al on Broker's Fiduciary Duties

Larry:

Erik Gerding is right when he notes the importance of yesterday's hints by Senator Collins about imposing fiduciary duties on brokers. As Erik notes, "applying investment adviser-style fiduciary duties to broker dealers would be a sea change." Barbara Black discusses and criticizes recent Congressional moves in this direction.

Not only a sea change but, in my view, a misuse of the concept of fiduciary duties. As I've written, fiduciary duties properly apply only to situations involving the open-ended delegation of discretion and control over property. In this situation it is appropriate to depart from standards for arm's length dealings and impose a duty of unselfishness, as Justice Cardozo colorfully described it in Meinhard v. Salmon. In other contexts attempts to apply fiduciary duties result in mischief and confusion. Some broker-dealer relationships may be fiduciary in nature, but clearly not all of them, and even more clearly not the relationship between Goldman, IKB and ACA in the SEC's recent case.

He elaborates, with application to the recent Jones v. Harris mutual fund fee case.

Maybe Goldman Sachs Sold Some Rotten Eggs? So What?

Yesterday's senatorial inquisition of Goldman Sachs revealed a fundamental misunderstanding of the federal securities laws on the part of not Goldman's execs but US Senators. 

The WSJ reports that:

The senators recently completed their own 18-month investigation and came armed with emails, performance reviews and other internal Goldman documents exposing the inner workings of the bank's mortgage-related securities business.

Their conclusion (a rare bipartisan one, at that): Goldman hawked risky mortgage-backed securities even as it was quietly betting its own money that those securities would fail.

Before each witness waited a binder, half a foot thick, filled with investigative exhibits. Sen. Carl Levin (D., Mich.), the subcommittee chairman, read scornfully from one such email sent to Mr. Sparks about two Goldman bankers who nailed a particular deal. "They structured like mad and traveled the world, and worked their tails off to make some lemonade from some big old lemons," the email said.

Maybe Goldman sold investors some rotten eggs. Maybe not. So what? Goldman argues that it is being "railroaded by Congress for performing a normal market function—pricing risk and providing investment opportunities for grown-up investors," which strikes me as precisely right. It is a central tenet of the federal securities laws that you're allowed to sell rotten eggs, so long as you disclose that they're rotten. So long as Goldman fully disclosed all material facts, the fact that Goldman thought the securities being sold were "shitty," as one scatological email reference by an unwise trader put it, is not a breach of the securities laws.

Why the Personal Mandate to Buy Health Insurance Is Unconstitutional

In their essay Why the Personal Mandate to Buy Health Insurance Is Unprecedented and Unconstitutional, Randy Barnett, Nathaniel Stewart, and Todd Gaziano argue that:

A mandate requiring all individuals to purchase health insurance would be an unprecedented form of federal action. The government has never required people to buy any good or service as a condition of lawful residence in the United States. An individual mandate would have two features that, in combination, would make it unique. First, it would impose a duty on individuals as members of society. Second, it would require people to purchase a specific service that would be heavily regulated by the federal government.

They further argue that:

Nowhere in the Constitution is Congress given the power to mandate that an individual enter into a contract with a private party or purchase a good or service and, as this paper will explain, no decision or present doctrine of the Supreme Court justifies such a claim of power. Therefore, because this claim of power by Congress would literally be without precedent, it could only be upheld if the Supreme Court is willing to create a new constitutional doctrine.

They then go on to explain "why the two powers cited by supporters of this bill--the power of Congress to regulate interstate commerce and the power of Congress to tax--do not justify an individual mandate, even under the most expansive readings given these powers by the Supreme Court."

Who Would be Empowered by Obama's Corporate Governance Ideas?

At his recent Cooper Union speech on financial reform, President Obama claimed that "these Wall Street reforms will give shareholders new power in the financial system. They'll get a say on pay: a voice with respect to the salaries and bonuses awarded to top executives. And the SEC will have the authority to give shareholders more say in corporate elections, so that investors and pension holders have a stronger role in determining who manages the companies in which they've placed their savings."

Wrong.

As a recent corporate governance commentary by lawyers at Latham & Watkins explains:

Institutional voting of portfolio stocks,for the most part,is no longer in the hands of institutional money managers, except for votes with clear economic significance (such as mergers or election contests).

In their place,the vast majority of institutional investors has delegated voting decisions to a separate internal voting function or have outsourced voting decisions to third-party proxy advisory firms.

As a result,institutional investor votes are largely determined by one-size-fits-all voting policies based on perceived corporate governance best practices, without reference to the particulars of each company’s situation. While rare exceptions are made, the default position is determined by voting policies developed either internally by a specialized corporate governance function, or, in a large number of situations, externally by outside proxy advisory firms.

As documented elsewhere in this series of posts, the beneficiaries of Obama-Dodd-Frank financial reform will not be retail investors. Nor will it be institutional investors (such as pension or mutual funds). Instead, the prime beneficiary will the firms that provide proxy voting advice. Since RiskMetrics Group dominates that select group, it will be the main beneficiary of reform. But, as we've asked before, who holds RiskMetrics accountable?

Political Theory and Genesis

Geoffrey Miller is a law professor who has done some serious work on the intersection of law and religion. His latest paper is The Dark Age: How the Biblical Narratives Demonstrate the Necessity for Law and Government:

In earlier work I argue that the Garden of Eden story in the book of Genesis explores a basic question for political theory: why people have an obligation to obey the law. The narratives that follow describe a “Dark Age” in world history characterized by accelerating violence and ending in a catastrophic flood. These texts expand the analysis of the Eden narratives by asking whether human beings can achieve a good life in the absence of government and law. The narratives describe an experiment in which people interact strategically with one another in an environment where cooperation can generate a surplus but defection from cooperative arrangements is always possible. The message of the Dark Age texts is that, at least under the specified conditions of scarcity, self-interest, and character types, people will not achieve a good life in the absence of government and law.

The Dodd Bill's Proxy Access Provisions Must Go

Carter Wood:

In the Heritage Foundation's new webmemo, "Senator Dodd's Regulation Plan: 14 Fatal Flaws," the corporate governance language is Flaw 13:

Allows activist groups to use the corporate governance process for issues unrelated to the corporation or its shareholders. Section 972 of the bill authorizes the SEC to require firms to allow shareholders to nominate directors in proxy statement. Such proxy access turns corporate board elections from a process designed to ensure that each board has a good mix of skills and experience into a popularity contest where the long-term interests of the stockholders become secondary to political agendas or corporate raiders. The process can also be used by labor unions, politicians who manage public pension funds, and others to force corporations to respond to pet social or political causes.

Major business associations -- including my employers at the National Association of Manufacturers -- joined with free-market advocates to also register sharp objections to the proxy access language in an April 12 letter, warning it could unleash "an onslaught of activists trying to manipulate the proxy process to force corporate decisions that adversely impact shareholders as a whole in order to further their parochial social or political agenda." More broadly, why are we federalizing corporate law?

The approach, the letter argued, will create:

a "one-size-fits all" approach to the resolution of these issues that will deprive the American economy of diversity and innovation, impose an unwarranted burden on mid-sized and smaller companies, marginalize the state corporate law expertise that has been developed over decades and is better suited to address these issues, and undermine ongoing reforms undertaken by the State of Delaware and the "Model Business Corporation Act," which impacts 30 states.

Separately, free-market and conservative think tanks have signed a letter objecting to the financial regulation bill, including the corporate governance provisions. John Berlau of the Competitive Enterprise Institute reprints the letter at National Review Online's The Corner, "Dodd Bill: Bailouts, Taxes, and Overregulation.

Need Corporate and Securities Study Aids for Law School Exams?

I Wuz Robbed

The list of the The Top 10 Corporate and Securities Articles of 2009 has been released. In an unparalleled travesty of justice, none of my articles were selected. Mere egregious oversight or rank prejudice? In any event, kudos to my colleagues who were selected for their fine work.

Chris Dodd's Wall Street Reform Bill: A Video Parable

Don't let that happen to our economy. Tell your Senators to vote no. (Scroll down for lots of reasons.)

Dodd Bill Temporarily Stymied; No Corporate Governance Fix Coming?

Senator Ben Nelson (D-Neb) broke party ranks to vote with 41 Republicans against cloture on the Dodd financial services reform bill. Unfortunately, this looks like a temporary setback. Stephen Spruiell opines that DC insiders expect the Democrats will be able to "peel off eight to ten Republicans and get a bipartisan vote for this bill."

Of particular relevance to readers of this blog, while Spruiell recognizes that the corporate governance provisions of the Dodd bill "would give organized labor too much power over management decisions," as this blog has warned in recent days, he doesn't "see moderate Republicans making them their hill to die on."

It's now up to Senators from places like Delaware and Nevada, where they (bar Harry Reid) understand the value of competitive federalism and the state role in corporate governance.