ProfessorBainbridge.com

Context matters

Overlawyered:

“Second Circuit: Repeated Use of ‘Bitch’ May Be Enough to Create Hostile Work Environment”

But what if you work in a veterinarian's office? Or a radio station that decides to have a 24 hour marathon of Elton John's "The Bitch is Back"?

Climate Change Disclosures

James McRitchie comments on recent trends in climate change disclosures, citing this piece of creative writing from Molson Coors' latest 10-Q:

While warmer weather has historically been associated with increased sales of beer, changing weather patterns could result in decreased agricultural productivity in certain regions which may limit availability or increase the cost of key agricultural commodities, such as hops, barley and other cereal grains … Increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our supply chain or impact demand for our products. Climate change may also cause water scarcity…

If you were a Molson Coors investor, would you feel better informed after reading that?

We discussed climate change disclosure here at PB.com a while back when the SEC announced a new initiative in this area. We recommend going over and reading that whole post. For those that want to stay here, however, suffice it to say that I see the Molson Coors 10-Q as confirmation that SEC Commissioner Troy Paredes was right when he opined that:

There is a notable risk that the interpretive release will encourage disclosures that are unlikely to improve investor decision making and may actually distract investors from focusing on more important information. Here, it is worth recalling that, in rejecting the view that a fact is "material" if an investor "might" find it important, Justice Marshall, writing for the Supreme Court in TSC Industries, warned that "management's fear of exposing itself to substantial liability may cause it simply to bury the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decisionmaking."

I also take it as confirmation that I was right when I opined that:

Investors don't get much of value from disclosures as they were being made before this announcement and the most likely scenario is that the disclosures will become less rather than more valuable.

Quack Corporate Governance: Dodd-Frank's Executive Comp Disclosure Rule

Roberta Romano famously referred to Sarbanes-Oxley as "quack corporate governance." Much the same can be said of the new Dodd-Frank bill, as well.

Case in point: Section 953 requires that each reporting company’s annual proxy statement must contain a clear exposition of the relationship between executive compensation and the issuer’s financial performance. It further requires disclosure of “the median of the annual total compensation of all employees of the issuer,” except the CEO, the CEO’s annual total compensation, and the ratio of the two amounts.

The cognoscenti have known for some time that this requirement will be hugely burdensome:

[It] means that for every employee, the company would have to calculate his or her salary, bonus, stock awards, option awards, nonequity incentive plan compensation, change in pension value and nonqualified deferred compensation earnings, and all other compensation (e.g., perquisites). This information would undoubtedly be extremely time-consuming to collect and analyze, making it virtually impossible for a company with thousands of employees to comply with this section of the Act.

Now the word is getting out more generally. Today's Financial Times relates that:

US companies face a “logistical nightmare” from a new rule forcing them to disclose the ratio between their chief executive’s pay package and that of the typical employee, lawyers have warned.

The mandatory disclosure will provide ammunition for activists seeking to target perceived examples of excessive pay and perks. The law taps into public anger at the increasing disparity between the faltering incomes of middle America and the largely recession-proof multimillion-dollar remuneration of the typical corporate chief. ...

The rules’ complexity means multinationals face a “logistical nightmare” in calculating the ratio, which has to be based on the median annual total compensation for all employees, warned Richard Susko, partner at law firm Cleary Gottlieb. “It’s just not do-able for a large company with tens of thousands of employees worldwide.”

Disclosure is not free. The question always must be whether a dollar of corporate expense in generating the disclosure produces more than a dollar in value to investors. Section 953's costs will be enormous. The benefits to investors seem slight. Instead, as with so much of Dodd-Frank, the many benefits will flow to anti-corporate social activists who want to use the data for their own purposes.

Update: Usha Rodrigues comments:

Brandeis' sunlight works best when it's pretty clear that the darkness is hiding something. The classic example is related party transactions: if a company has to disclose whenever it engages in a transaction with its executives, the market will either punish it for engaging in management-enriching activity at the expense of the shareholders, or it will be less likely to engage in that activity in the first instance.

It's not at all clear that disclosure of CEO/average employee pay ratios will trigger the same reaction. On the contrary, the history of executive comp regulation by disclosure has taught us that disclosure can result in an arms race as executives demand pay packages at least as good or better than that of their peers. Even the most populist of shareholders will generally agree that you have to pay CEOs more than the average employee, and the intrafirm ratio seems like an odd metric for determining how much is too much. If a company has low-wage employees (e.g., Wal-Mart) the ratio will be higher than if it's a company with high-wage employees (a bio tech firm); does that mean the Wal-Mart CEO is being paid "too much"? Even more problematic for populist reformers, the FT article points out an unintended consequence of the new regulation: it favors companies that outsource or even off-shore jobs, since those low-wage earners won't be counted in the median employee pay numbers. Ooops.

When I was a kid, we didn't get any stinking $150 cab rides

Conor Friedersdorf is a guest blogger at Andrew Sullivan's place. He opines that:

The details of how elite law and business consulting firms recruit astonish me every time I hear them. Even getting an interview often requires attending an Ivy League professional school or a very few top tier equivalents. Folks who succeed in that round are invited to spend a summer working at the firm, the most sane aspect of the process.

But subsequently, they participate in sell events where they're plied with food and alcohol in the most lavish settings imaginable: five star resort hotels, fine cigar bars, the priciest restaurants. A fancy dinner will be scheduled in a faraway city. Summer associates will fly there that evening, spend several hundred dollars on the meal, spend the night in a hotel, and fly back the next morning in time for a 10 am client meeting. They'll expense steak dinners or $150 cab rides without a second thought. The whole process is designed to appeal to their status conscious side, to accustom them to a kind of luxury that requires them to retain highly paying jobs, and to keep them busy enough during their summer tryout that anyone unable to commit their whole lives to the firm won't stick around.

It wasn't that way when I was a summer associate or a practicing lawyer, but then again those were back in the days when the world was still in black-and-white. We actually used things called Wang workstations instead of PCs and phones were plausible instruments of homicide instead of minicomputers. Plus, we had to walk to work in the snow. Uphill. Both ways.

But maybe I just worked at the wrong firms. Or maybe the world has changed. Because over at Above the Law we learn that for some folks the 2010 summer associate program was pretty plush:

• Summer associates at this litigation powerhouse brag that their “workload is super light,” completing one to five assignments over the course of the 12-week summer program, and typically spending about five hours a day on billable work.  Just don’t expect to be making the lunch rounds at the city’s trendiest restaurants.  Summers eat in at the firm’s dining room, which serves free but “excellent” lunch daily.
• It certainly pays to have high-profile clients at this firm, which treats its summer associates to unique social events like the Tony Awards and the NBA Draft.
• The line between summer and full-time associates is blurred at this firm, with summers “put[ting] in well over 80 hours” during some weeks to complete 15 or more assignments during the eight-week summer program.  Despite their high work demands, these summer associates still find the time to be do-gooders by volunteering to cook at the Ronald McDonald House for kids and their families.
• The good old days never left this firm.  Summer associates typically bill about four hours a day on assignments, leave at 5:30 p.m., play softball at Fenway Park, and still get 100% offers. But you might want to think about taking an extended post-bar trip, since you might not start work on time as a first-year associate.
• No complaints at this firm, which gives summer associates “exactly the work that they want” and still provides a “very generous” $65 lunch budget in New York.  Be sure to brush up on your foreign language skills; one-third of the summer class gets to spend up to three weeks working in one of the firm’s overseas offices

WTF? Why didn't White & Case send me to the NBA draft? Arnold & Porter never let us play softball at RFK stadium either. I wuz robbed.

On a serious note, I find it puzzling that some summer associate programs were so plush in this job market. One would think things are so tight that firms could feed associates bread and water and still have the associates walk on hot coals to get an offer.

Thoughts? Comments? (Trolls from the O'Donnell post will be banished.)

Ribstein on Access

Larry decides to be as charitable as possible and still comes out against new Rule 14a-11:

Let’s start out with the heroic assumption that more shareholder proxy access might be a good thing to offset excessive managerial power under state law. I don’t believe that, but I’m assuming it for the sake of getting to the nub of the problem. Based on this assumption, the SEC’s amendment to Rule 14a-8 clarifying that shareholders may use the rule to propose proxy access makes sense.

I will go further and assume for the sake of argument that it was constructive for the SEC to provide in Rule 14a-11 for its own version of proxy access for 3%-3-year shareholders. I am very sympathetic with the argument of former SEC Commissioner Paul Atkins and in a WSJ editorial that this rule was designed to, and does, favor unions, who are uniquely able to maintain such substantial holdings for this period, and to disfavor hedge funds, which cannot. Indeed, I would go further and say that there may be many reasons why this rule perversely unbalances corporate governance. But I suppose that one might make similar arguments against any version of SEC-imposed proxy access, and I’m going to be as charitable as possible.

The real problem is that the SEC has barred any possibility for the shareholders or state law to provide for less proxy access than under the new rule. How can a rule that bars shareholders from making certain types of governance rules, either directly or by choosing the state of incorporation, increase shareholder participation in governance?

Perhaps the answer is that shareholders shouldn’t participate in governance because they are too easily manipulated and misled and simply don’t know what’s good for them. Rather, the SEC knows best.

But as dissenting Commissioner Paredes points out, this is inconsistent with the whole point of proxy access and with the SEC’s stated intent to “facilitate the effective exercise of shareholders’ traditional state law rights.” Dissenting Commissioner Casey also said:

[T]he adopting release goes through a jiu-jitsu exercise of purporting to give deference to state law and to increase shareholder choices under state law, when in fact the rules do exactly the opposite. As a result, the logic does violence to our historical understanding of the roles of federal securities law, state law, shareholder suffrage and private ordering, with potentially far-reaching implications. * * *

Consider the most obvious anomalies: If the shareholders can’t be trusted to decrease proxy access, why should they be trusted to increase it? If we fear that managers, even with the new proxy rule, can still manipulate shareholders, then why trust the shareholders to do anything? And if the shareholders can’t be trusted, why should the securities laws force firms, at great cost, to inform shareholders so they can participate in the proxy process? In other words, the rule is fundamentally inconsistent with the whole point of the securities laws to provide the disclosure necessary to enable the shareholder to be effective governors of their firms.

Proxy "Rules for Radicals"

Great editorial in today's WSJ on proxy access:

The Reaganites who came to Washington in 1981 used to say that "personnel is policy." Flash forward to 2009 at the Securities and Exchange Commission, where Chairman Mary Schapiro handed senior roles to former union pension fund officials and last week rewarded such funds with more influence over corporate America.

With another of her patented 3-2 party-line votes, Ms. Schapiro has given the big pension funds a power they have never had—the ability to force their preferred candidates for board directors on the proxy ballots that public companies must send to shareholders. ...

Sold in the name of "shareholder democracy," this new rule will mainly be used not by mom and pop investors, but by union funds and other politically motivated organizations seeking to force mom and pop to support causes they otherwise would not. ...

Chairman Schapiro's new proxy rule is a weapon to extract political concessions unknowingly underwritten by shareholders. Activist groups and union-led pension funds will come knocking on a corporation's door threatening to run opposition candidates if, for example, the firm doesn't endorse ObamaCare, or won't stop supporting the U.S. Chamber of Commerce. ...

Former SEC general counsel Brian Cartwright, now at Latham & Watkins, notes that the new SEC rule is right out of the famous playbook of community activists, Saul Alinsky's "Rules for Radicals." He quotes Alinksy reflecting that until a campaign against Eastman Kodak in the 1960s, '[n]o one had ever organized a campaign to use proxies for social and political purposes.'"

Mr. Cartwright adds that, "Alinsky was so excited by his new idea that he trumpeted the proxy tactic as 'one of the single most important breakthroughs in the revolutions of our times.'" Coming from a different point of view, the late, great Peter Drucker once warned in a famous essay about "Pension-Fund Socialism."

Says Mr. Cartwright, "At a moment when our economy is tottering, millions are unemployed with little hope of relief, and American economic dominance is challenged by aggressive new competitors in Asia, a bare party-line majority of the SEC has embarked on a grand experiment in politicizing the leadership of our businesses."

And so the successors of Jimmy Hoffa and Tammany Hall join hands with the acolytes of Saul Alinsky. The things that go bump in the night are real. Somebody needs to star bumping back.

Why Proxy Access is not a Valid Response to the Financial Crisis

Christopher Bruner nails it:

In its overview of the amendments (the opening paragraph, in fact), the Commission notes that when it proposed proxy access last year, it “recognized at that time that the financial crisis … heightened the serious concerns of many shareholders about the accountability and responsiveness of some companies and boards of directors to shareholder interests,” raising “questions about whether boards … were appropriately focused on shareholder interests, and whether boards need to be more accountable for their decisions regarding issues such as compensation structures and risk management” (at 7). Proxy access, it is suggested, “will significantly enhance the confidence of shareholders who link the recent financial crisis to a lack of responsiveness of some boards to shareholder interests” (p. 10).

Offering up proxy access and other forms of shareholder empowerment as a response to corporate governance problems precipitating the financial crisis is absurd. To the extent that excessive risk-taking led to the crisis, reforms like proxy access – aiming to empower the corporate constituency whose incentives are most skewed toward greater risk – simply don’t add up. As I discuss in a recent paper examining U.S. and U.K. corporate governance crisis responses, the fact that the far greater governance power of U.K. shareholders appears to have done little to mitigate the (very similar) crisis over there ought to give pause to those suggesting that augmenting shareholder powers will prevent future crises over here. Moreover, even if shareholder empowerment made sense in financial firms, it remains unclear why this would justify altering the balance of power between boards and shareholders across the universe of public companies. Perhaps recognizing the weakness of the crisis rationale, the SEC places it in the shareholders’ mouths by styling it a matter of investor confidence. But this doesn’t alter the flaws in the argument itself.

Alan Simpson Didn't Need to Apologize

You probably heard that Alan Simpson compared social security to "milk cow with 310 million teats" (some accounts have him using the word tits). Many idiots are offended. They range from the professional victim crowd to liberals who are cynically using it as an excuse to get a deficit hawk off the Obama deficit reduction commission.

Reportedly, Simpson has apologized. He should have just told his critics to go f*ck themselves. The image of special interest groups (even ones with millions of members) suckling at the government teat is an old and honorable metaphor in American politics.

Thwarting Proxy Access

With the SEC having adopted proxy access, JW Verret has released to SSRN a very timely article entitled Defending Against Shareholder Proxy Access: Delaware's Future Reviewing Company Defenses in the Era of Dodd-Frank. Here's the abstract:

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 has ensured that a shareholder’s ability to place nominees to the board onto the corporate ballot, an objective long advocated by the institutional investor community, will soon be implemented by the Securities and Exchange Commission. Advocates of proxy access urge that it will help hold Boards of Directors accountable to their owners. Critics argue that it will give conflicted shareholders, like unions and state pensions, power they will use to facilitate their political objectives at the expense of ordinary shareholders. The shareholder primacy and director primacy theories of corporate law have framed an extensive debate in the literature. Regardless of which theory holds force, we can expect Boards to implement defensive strategies in the wake of proxy access to limit shareholder power, in the same way that Boards implemented defensive tactics in response to the hostile takeovers of the mid-1980s. Delaware’s review of Board proxy access defenses will shape its role in the foreseeable future in much the same way review of Board takeover defenses shaped its role over the last 20 years.

This article in part considers what strategies may be useful for boards defending against proxy access and designs novel methods boards might consider. It also examines how Delaware judges are likely to review those defenses under a vast body of jurisprudence protecting the shareholder franchise, also known as the Blasius line of cases. Though the Blasius cases protect the shareholder franchise, they do not necessarily prohibit board policies, bylaws, or charter amendments with an incidental effect on the shareholder’s federal nomination right. Finally, this article considers whether the defenses considered are likely to be struck down as pre-empted by federal law or prohibited by the federal securities laws or stock exchange listing requirements. The article offers a roadmap for how boards are likely to respond to proxy access and how Delaware’s role as arbiter of the shareholder/manager relationship is likely to evolve in the new environment.

A highly timely and most commendable project. Kudos to Verret.

Proxy access: Who'll Use it?

Jay Brown sends out a sarcastic thank you to opponents of proxy access for having created an environment without which, he claims, "we would not be where we are today.  We would be dealing with a far less acceptable provision, one likely compromised by the need to compromise."

Let's pause, for a moment, to think about who really pushed proxy access and is most likely to make use of the new rule. As I wrote in Pension Funds Play Politics:

... activism is principally the province of a very limited group of institutions. Almost exclusively, the activists are union and state employee pension funds. They are the ones using shareholder proposals to pressure management. They are the ones most likely to seek board representation.

I then asked:

One might reasonably wonder what a public employee union knows about running business corporations. Might they have another agenda for board representation?

The interests of large and small investors often differ. As management becomes more beholden to the interests of large shareholders, it may become less concerned with the welfare of smaller investors. If the large shareholders with the most influence are unions or state pensions, however, the problem is exacerbated.

The interests of unions as investors differ radically from those of ordinary investors. The pension fund of the union representing Safeway workers, for example, is trying to oust directors who stood up to the union in collective bargaining negotiations. Union pension funds have used shareholder proposals to obtain employee benefits they couldn't get through bargaining (although the SEC usually doesn't allow these proposals onto the proxy statement). AFSCME's involvement especially worries me; the public sector employee union is highly politicized and seems especially likely to use its pension funds as a vehicle for advancing political/social goals unrelated to shareholder interests generally.

Public pension funds are even more likely to do so. Indeed, the LA Times recently reported that CalPers' renewed activism is being "fueled partly by the political ambitions of Phil Angelides, California's state treasurer and a Calpers board member, who is considering running for governor of California in 2006." In other words, Angelides is using the retirement savings of California's public employees to further his own political ends.

Such abuse of public pension funds by incumbent politicians is unfair to their political opponents, other investors, and especially the retirees who depend on those funds. Studies have consistently shown that the greater the extent to which a public pension fund is subject to direct political control, the worse its investment returns.

More than half of Americans are now stock investors. Yet, only a select self-appointed few have become activists. All too often, their activism is directed at selfish interests inconsistent with those of investors at large. It's long past time for the SEC and Congress to recognize that empowering these shareholders with expanded access to the proxy statement and the boardroom is the worst sort of special interest legislation. (Then again, maybe they already know that.)

This is, of course, precisely the point SEC Commissioner Kathleen Casey made in her dissent from yesterday's adoption of the new access regime:

I believe many activists will concede that their interests in proxy access do not lie solely in the ability to successfully place a nominee on a company’s board of directors; instead, the proxy access right is also an important means of obtaining leverage to seek outcomes outside of the boardroom that may otherwise not be achievable — outcomes that are often unrelated to shareholder value maximization.

So if you want to know who to thank for proxy access, thank the successors of Jimmy Hoffa and Tammany Hall.

Private ordering of corporate governance

Lisa Fairfax points out that the SEC's new proxy access rule "rejected the private ordering arguments that arose in several contexts" and picks up a pertinent quote from the adopting release:

"Corporate governance is not merely a matter a private ordering.  Rights, including shareholder rights, are artifacts of law, and in the realm of corporate governance some rights cannot be bargained away but rather are imposed by statute.  There is nothing novel about mandated limitations on private ordering in corporate governance."

I, of course, believe that the corporation is properly understood as a nexus of contracts. In my book om corporation law and economics, I addressed arguments such as those made by the SEC:

Contractarians model the firm not as an entity, but as an aggregate of various inputs acting together to produce goods or services. Employees provide labor. Creditors provide debt capital. Shareholders initially provide equity capital and subsequently bear the risk of losses and monitor the performance of management. Management monitors the performance of employees and coordinates the activities of all the firm’s inputs. The firm is a legal fiction representing the complex set of contractual relationships between these inputs. In other words, the firm is not a thing, but rather a nexus or web of explicit and implicit contracts establishing rights and obligations among the various inputs making up the firm. ...

Some reject the positive contractarian story on grounds that corporate law is pervaded by mandatory rules. But this objection is far from fatal. In the first instance, many mandatory corporate law rules are in fact trivial, in the sense that they are subject to evasion through choice of form or jurisdiction, or to the extent that some rules appear across the spectrum of possible organizational forms, they are rules almost everyone would reach in the event of actual bargaining.

In the second, most contractarians probably regard the normative story as being the more important of the two. As such, we cheerfully concede the existence of mandatory rules, while deploring that unfortunate fact. Contractarians assume that default rules are preferable to mandatory rules in most settings. So long as the default rule is properly chosen, of course, most parties will be spared the need to reach a private agreement on the issue in question. Default rules in this sense provide cost savings comparable to those provided by standard form contracts, because both can be accepted without the need for costly negotiation. At the same time, however, because the default rule can be modified by contrary agreement, idiosyncratic parties wishing a different rule can be accommodated. Given these advantages, a fairly compelling case ought to be required before we impose a mandatory rule. Mandatory rules are justifiable only if a default rule would demonstrably create significant negative externalities or, perhaps, if one of the contracting parties is demonstrably unable to protect itself through bargaining.

Given that state law has already moved to facilitate private ordering of proxy access, neither of the conditions for a mandatory rule was satisfied. Hence, all the SEC needed to do was to create an opt-in regime by amending Rule 14a-8 to allow shareholder proposals to put forward proxy access bylaws. The SEC's failure to go this route makes a rather curious statement. They trust shareholders to nominate directors, but they don't trust shareholders to decide whether they want to have the right to nominate directors.

When you understand that proxy access isn't really about shareholders as a whole, but rather is a political payoff by the Democrats in Congress and at the SEC for their buddies at union and state and local government pension funds, of course, the mystery is solved.

Anyway, Lisa's post offers a nice, concise summary of the new rule. Check it out. In a second post, Lisa offers five preliminary reactions to the new rule. It's a good read, as well.

Replacing Casebooks with Study Guides

Stefan Padfield writes:

I've been toying with the idea of replacing casebooks with the popular "Examples & Explanations" study guides in at least a few of my classes.  Why?  Because the study guides are significantly less expensive and more likely to be used in practice, and I believe they would allow me to cover more black letter law in less time--thereby allowing me to try "alternative" teaching and assessment methods that I would otherwise not have the time to implement.

It's an idea with which I've toyed too. Of course, I have a rather different set of study guides in mind:

I know several faculty who have successfully used the Mergers book as the main text for a course in Mergers and Acquisitions. A number use the Corporations or Agency book as a supplemental text.

SEC Adopts Proxy Access

Press release:

The new rules require companies to include the nominees of significant, long-term shareholders in their proxy materials, alongside the nominees of management. This "proxy access" is designed to facilitate the ability of shareholders to exercise their traditional rights under state law to nominate and elect members to company boards of directors.

Under the rules, shareholders will be eligible to have their nominees included in the proxy materials if they own at least 3 percent of the company's shares continuously for at least the prior three years.

It could have been worse. The ownership requirement will deter short term activists from making use of the rule. At the same time, however, proxy access has never been a good idea. See my essay on the SEC's earlier version, Bainbridge, Stephen M., A Comment on the SEC Shareholder Access Proposal (November 14, 2003). UCLA School of Law, Law & Econ. Research Paper No. 03-22. Available at SSRN: http://ssrn.com/abstract=470121

SEC Chair Mary Shapiro trotted out her usual BS:

First, as a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own — candidates that all shareholder-voters may then consider alongside those who are nominated by the incumbent board.

How does fairness come into it? As for accountability, as I have argued elsewhere, shareholder voting is atool of limited utility. Bainbridge, Stephen M., The Case for Limited Shareholder Voting Rights. UCLA Law Review, Vol. 53, pp. 601-636, 2006; UCLA School of Law, Law-Econ Research Paper No. 06-07. Available at SSRN: http://ssrn.com/abstract=887789. As for state law, it has never given shareholders a right to use the company's proxy statement.

More from Shapiro:

Second, the company’s proxy materials offer the best, readily available tool for ensuring that the nominees of long-term and significant shareholders are presented to the electorate in a way that facilitates shareholders’ traditional state law voting and nomination rights.

Proxy access foes not facilitate state law rights, it preempts them. Under state law, the only right shareholders have is to conduct a proxy contest. So much for truthful disclosure.

Predictably, Lucian Bebchuk is pleased. Wrong, but pleased.

SEC Commissioner Troy Paredes issued a powerful and compelling dissent.

The tradition of state corporate law has been not to regulate by mandate. To the contrary, in regulating the internal affairs of corporations, states have adhered to a so-called “enabling” approach as opposed to a “mandatory” approach.

Mandatory corporate law forces a universal governance scheme on all firms without permitting an enterprise to adapt its approach to governance and corporate accountability to its distinct circumstances, as mandatory corporate law forces each firm into the same governance box without regard to what may be best for the enterprise and its shareholders. Recognizing that one-size-fits-all mandates are inappropriate for many businesses, the enabling approach defers to private ordering to determine how each firm should be organized to advance its particular needs and interests most effectively. Enabling corporate law allows the internal affairs of each corporation to be tailored to the firm’s unique attributes and qualities.

The countless characteristics that differentiate thousands of public companies from each other underscore why a mandatory approach to corporate governance is ill-advised. The risk that uniform dictates will be counterproductive is heightened when the dictates are imposed, without variation and without room for innovation, across an expanse of diverse and evolving enterprises and constituencies. Instead of being subject to the constraints of mandates, companies should be permitted to follow different paths in achieving the best results for the enterprise. Stated more directly, Rule 14a-11’s principal flaw is that it imposes a minimum right of proxy access, even when shareholders may prefer a more limited right of access or no proxy access at all.

Exactly right.

Rule 14a-11’s immutability conflicts with state law. Rule 14a-11 is not limited to facilitating the ability of shareholders to exercise their state law rights, but instead confers upon shareholders a new substantive federal right that in many respects runs counter to what state corporate law otherwise provides. Modifying the phrase “state law rights” with the word “traditional,” as the adopting release does, does not change the reality that Rule 14a-11 is at odds with state law.

Exactly right.

To my mind, the adopting release’s treatment of the economic studies is not evenhanded. The release goes to some length in questioning studies that call the benefits of proxy access into doubt — critiquing the authors’ methodologies, noting that the studies’ results are open to interpretation, and cautioning against drawing “sharp inferences” from the data. By way of contrast, the release too readily embraces and extrapolates from the studies it characterizes as supporting the rulemaking, as if these studies were on point and above critique when in fact they are not.

Even with the adopting release’s unbalanced presentation of the economic data, the most the Commission can justifiably claim is that proxy access may improve a company’s performance. This empirical basis is too infirm to support the Commission’s decision to adopt Rule 14a-11. Rather, the varied economic findings are consistent with the view that different governance arrangements are optimal for different companies. Given this, the Commission should amend Rule 14a-8 to facilitate private ordering but should not adopt Rule 14a-11’s mandates.

Exactly right. Based on skimming the adopting release, it looks like a brief, not a neutral analysis.

SEC Commissioner Kathleen Casey's dissent is also well worth reading:

Unfortunately, the adopting release goes through a jiu-jitsu exercise of purporting to give deference to state law and to increase shareholder choices under state law, when in fact the rules do exactly the opposite. As a result, the logic does violence to our historical understanding of the roles of federal securities law, state law, shareholder suffrage and private ordering, with potentially far-reaching implications. The consequences of this exercise include a series of arbitrary choices that are not tethered to empirical data and a number of internal inconsistencies that make the rules difficult to defend. Furthermore, the rules continue a disturbing trend of empowering institutional shareholders to the detriment of individual shareholders. Finally, the policy objectives underlying the rule are unsupported by serious analytical rigor, and the release fails to fairly and adequately consider the costs and impact of these rules. In this regard, I believe these rules are likely to result in significant harm to our economy and capital markets. ...

Rather than presuming, as corporate law does, that companies and their shareholders are generally capable of privately ordering their affairs based on their unique individual circumstances, the rules presume that shareholders are incapable of determining the director election procedures that are in their best interests.

Rather than presuming, as corporate law does, that directors, who are bound by their fiduciary duties and charged with maximizing shareholder value, will in fact act in the best interests of shareholders, the rule seems to presume that the relationship between directors and shareholders is fundamentally an adversarial power struggle.

The paradigm of a power struggle between directors and shareholders is one that activist, largely institutional, investors assiduously promote, and this rule illustrates a troubling trend in our recent and ongoing rulemaking in favor of empowering these shareholders through, among other things, increasingly federalized corporate governance requirements. Yet, these shareholders do not necessarily represent the interests of all shareholders, and the Commission betrays its mission when it treats these investors as a proxy for all shareholders. I believe many activists will concede that their interests in proxy access do not lie solely in the ability to successfully place a nominee on a company’s board of directors; instead, the proxy access right is also an important means of obtaining leverage to seek outcomes outside of the boardroom that may otherwise not be achievable — outcomes that are often unrelated to shareholder value maximization.

The Wrong Stuff: What Law Schools Value in Law Prof Candidates

Via Paul Caron, comes this rant from Brent E. Newton (Adjunct Professor, Georgetown; Deputy Staff Director, U.S. Sentencing Commission):

Especially at law schools in the upper echelons of the U.S. News & World Report rankings, the core of the faculties seem indifferent or even hostile to the concept of law school as a professional school with the primary mission of producing competent practitioners. ... Regardless whether they possess a Ph.D., a vastly disproportionate number of new law professors graduated from so-called “elite” law schools, which not coincidentally employ the largest percentage of impractical faculty. “Law professors are a self-perpetuating elite, chosen in overwhelming part for a single skill: the ability to do well consistently on law school examinations, primarily those taken as 1L‟s, and preferably ones taken at elite „national‟ law schools.”

Maybe 20 years ago law schools valued things like high grades, law review membership, and prestigious clerkships. Not any more, however. As far as I can tell, what is valued these days are:

• Ability to network with people you knew in graduate school that got hired last year
• Having a PhD
• Having multiple publications, even if they demonstrate the author's utter lack of doctrinal knowledge or inability to do basic legal research
• Knowing what Rawls (or Dworkin) would think of X
• Being able to run linear regressions
• Being able to run regressions about what Rawls would think about X

Not that any of this has a goddamn thing to do with the practice of law. Hence, while I disagree with the factual claim, it's hard for me to disagree with the next part of Newton's rant:

Could [a typical law school] professor whose primary scholarly interest is criminal law and procedure effectively prosecute or represent a criminal defendant at a felony trial? Could such a professor who writes law review articles about the First Amendment effectively represent a client in a civil rights litigation? Could such a professor whose expertise is securities regulation effectively represent a client or the government in an S.E.C. enforcement action? Imagine such professors being first-chair counsel in a complex civil or criminal litigation who must interview potential witnesses, take depositions and engage in electronic discovery, file and respond to summary judgment motions, conduct voir dire, present the testimony of an expert witness, cross-examine (and impeach) hostile witnesses, and make closing arguments to a jury. There are some full-time non-clinical law professors capable of competently representing clients in real cases, but they are the exception, not the rule, particularly among professors hired in recent years at highly-ranked law schools.

How can we expect law students to become competent practitioners if the core of full-time law faculties, notwithstanding their scholarly prowess, do not themselves possess even the basic skills required to practice the type of law about which they teach and write? How can we expect law students to become competent and ethical practitioners when the faculty members best suited to teach them the necessary practical skills and ethical lessons from real-world cases – clinicians, LRW professors, and adjuncts – are marginalized and even openly held in disdain by some members of the “main” faculty?

One good thing about UCLA, I think, is that we don't treat clinicians differently than other faculty. And we have some great ones. I can think of several of our clinical faculty whom I would be delighted to have defend me in a lawsuit or criminal case. On our non-clinical faculty, moreover, I can think of maybe three of my colleagues who I would want to represent me in a transactional or other negotiation setting.

Even so, I take Newton's point. Indeed, in the spirit of Matthew 7:3-5, let's admit straight up that I would be a disaster in the courtroom. And so, I suspect, would a lot of my other colleagues.

Indeed, I think Newton understates the problem. He focuses on litigation. If you think about transactional lawyering, however, law school does an even worse job. What part of the case method gets somebody ready to handle a complex leveraged lease?

To my way of thinking, whatever flaws the old criteria may have had, at least they valued basic legal skills, something the new criteria utterly ignore.

The big question is whether the collapse of the legal hiring market will eventually lead to a backlash that finally forces law schools to think seriously about hiring criteria.

PS: I don't use rant pejoratively. A good rant is a thing of beauty.

Update: I highly recommend Why Can't Johnny Research Practice Law? Or, would you hire a law prof to represent you?, a long post that basically supports Newton's argument and provides lots of useful background.

The WSJ's Case Against Corporate Social Responsibility

In today's WSJ, Aneel Karnani makes a case against corporate social responsibility. There's niot a ton that's new or novel here, but it's reasonably well done. His core argument is that:

Very simply, in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare. In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against shareholder interests.

Actually, it's not at all obvious to me that "executives are unlikely to act voluntarily in the public interest  and against shareholder interests." To the contrary, executive pursuit of corporate social responsibility is both a chief source of agency costs and a chief way of camouflaging those costs. As Karnani explains:

Managers who sacrifice profit for the common good ... are in effect imposing a tax on their shareholders and arbitrarily deciding how that money should be spent.

Ordinarily, we would expect the market to discipline such managers:

Executives are hired to maximize profits; that is their responsibility to their company's shareholders. Even if executives wanted to forgo some profit to benefit society, they could expect to lose their jobs if they tried—and be replaced by managers who would restore profit as the top priority.

But CSR provides camouflage and cover for them:

The movement for corporate social responsibility is in direct opposition, in such cases, to the movement for better corporate governance, which demands that managers fulfill their fiduciary duty to act in the shareholders' interest or be relieved of their responsibilities. That's one reason so many companies talk a great deal about social responsibility but do nothing—a tactic known as greenwashing.

I've written a lot about CSR, see, e.g.:

• Bainbridge, Stephen M., In Defense of the Shareholder Wealth Maximization Norm. Washington & Lee Law Review, Vol. 50, 1993. Available at SSRN: http://ssrn.com/abstract=303780
  
• Bainbridge, Stephen M., The Bishops and the Corporate Stakeholder Debate (April 2002). Villanova Journal of Law and Investment Management. Available at SSRN: http://ssrn.com/abstract=308604
  
• Bainbridge, Stephen M., Catholic Social Thought and the Corporation (October 22, 2003). UCLA, School of Law Research Paper No. 03-20. Available at SSRN: http://ssrn.com/abstract=461100