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PROXY MONITOR REPORT Fall 2012 A Report on Corporate Governance and Shareholder Activism

From the Manhattan Institute's Proxy Monitor project comes this assessment of the 2012 proxy season:

This report draws upon information in the Proxy Monitor database to assess the 2012 proxy season in historical context. Among its key findings:

• A small group of shareholders continue to sponsor the overwhelming majority of shareholder proposals. In 2012, 36 percent of all such proposals were sponsored by labor-union pension funds; 31 percent were sponsored by three individual investors and their relatives and family trusts; and 22 percent were sponsored by investors with a “socially responsible” investing purpose or express religious or public policy purpose. Only 10 percent of shareholder proposals were sponsored by individuals other than the three “corporate gadflies,” and only 1 percent by institutional investors unaffiliated with organized labor or a social, religious, or public policy purpose.
  
  
  • Public-employee pension funds played a heightened role in the 2012 proxy season, sponsoring 38 percent of all labor-backed proposals, as compared with 26 percent in the entire 2006–12 period.
  
  
  • Religious-affiliated investors were far less active in the 2012 proxy season: proposals backed by religious investors constituted only 15 percent of all proposals backed by social, religious, or policy groups, as compared with 42 percent in the full 2006–12 period. Notably, Catholic orders of nuns sponsored only two proposals at Fortune 200 companies in 2012, as compared with 11 in 2011 and 16 to 19 annually between 2006 and 2012.


• Shareholder proposals related to corporations’ political spending grew in number in 2012 but gained little traction. Proposals seeking to increase the disclosure of or to limit companies’ lobbying or spending on political purposes constituted a plurality of all proposals in 2012 and 45 percent of proposals with a social or policy-related purpose. The number of such proposals submitted per company in the Fortune 200 was 20 percent higher than in 2011, double that in 2010, and more than three times that in 2008. However, only 17 percent of shareholders, on average, supported these proposals in 2012, down from 22 percent in 2011 and lower than any other year in the 2006–12 period.


• Labor-union pension funds’ sponsorship of shareholder proposals appears to be unrelated to shareholder return and connected to union-organizing activities and other labor objectives. As is the case across the full 2006–12 period, labor pension funds’ shareholder proposals are concentrated in companies and industrial sectors targeted by union-organizing campaigns. Each of the companies facing more than two labor-sponsored shareholder proposals in 2012 had share returns that outperformed its peer group in 2011; each company, however, had been engaged in public disputes with labor unions or had played an active role in the political process against organized labor’s interests.


• The number of shareholder proposals receiving majority support fell in 2012, but this shift appears to be attributable to the types of proposals being introduced rather than a broader trend. Only 6 percent of shareholder proposals received majority backing at Fortune 200 companies in 2012, down from 7 percent in 2011, and below every other year in the full 2006–12 period. The average shareholder vote in 2012, however, was 25 percent, in line with the 2006–12 average. Econometric analysis of Proxy Monitor data shows that there is no statistically significant difference between 2012 shareholder voting and other years; the decrease in voting this year instead appears to be attributable mostly to shifts in the composition of shareholder proposals.


• The recommendations of the proxy advisory firm ISS significantly influence shareholder voting, though the firm’s recommendations are systematically more inclined to favor such proposals than are the majority of shareholders. The proxy advisory firm Institutional Shareholder Services (ISS) makes recommendations to institutional investors on shareholder voting and has a dominant market share position (61 percent). Econometric analysis of Proxy Monitor data shows that a positive recommendation from ISS increases voting support for a shareholder proposal by 15 percent, controlling for other factors. However, ISS consistently supports a much higher share of shareholder proposals (63 percent) than do shareholders overall (less than 8 percent).

Overall, empirical analysis of Proxy Monitor data, in 2012 and across the 2006–12 time span, challenges the efficacy of the shareholder-proposal process, at least from the perspective of the ordinary investor. The prominent role being played by a small number of investors, most prominently labor-union pension funds whose actions in this area appear to deviate from concern over share value, suggests that this process may be oriented toward influencing corporate behavior in a manner that generates private returns to a subset of investors while harming the average diversified investor. The significant influence of the proxy advisory firm ISS, along with its substantial deviation from shareholders’ observed preferences, amplifies concerns about whether shareholder voting on proxy ballot items is effectively working to improve share value.

 

The Montana Corporate Personhood Constitutional Amendment: Can a state constitution tell Congressmen what to do?

I blogged the other day about the corporate law aspects of Montana's pending state constitutional amendment that would " advance the philosophy that corporations are not human beings with constitutional rights." As I thought about it some more, however, a very interesting wrinkle struck me.

The amendment states, in pertinent part, that:

It is policy of the state of Montana that each elected and appointed official in Montana, whether acting on a state or federal level, advance the philosophy that corporations are not human beings with constitutional rights ...

The amendment further provides that:

(1) Montana’s congressional delegation is charged with proposing a joint resolution offering an amendment to the United States constitution that accomplishes the following:

(a) overturns the U.S. Supreme Court’s ruling in Citizens United v. Federal Election Commission;

(b) establishes that corporations are not human beings with constitutional rights;

(c) establishes that campaign contributions or expenditures by corporations, whether to candidates or ballot issues, may be prohibited by a political body at any level of government; and

(d) accomplishes the goals of Montanans in achieving a level playing field in election spending.

(2) Montana’s congressional delegation is charged to work diligently to bring such a joint resolution to a vote and passage, including use of discharge petitions, cloture, and every other procedural method to secure a vote and passage. 

What I know about state constitutions could be inscribed on the head of a very small pin, but this amendment intuitively strikes me as absurd. Setting aside its inconsistency with Edmund Burke's justly famous dictum -- "Your representative owes you, not his industry only, but his judgment; and he betrays, instead of serving you, if he sacrifices it to your opinion." -- on what possible basis can a state constitution bind officials acting on a "federal level" or "charge" a state's congressional delegation with doing anything?

After all, Burke also noted that "authoritative instructions; mandates issued, which the member is bound blindly and implicitly to obey, to vote, and to argue for, though contrary to the clearest conviction of his judgment and conscience,--these are things utterly unknown to the laws of this land, and which arise from a fundamental mistake of the whole order and tenor of our constitution." What was true of England surely is also true of our representatives.

On top of which, there is the whole question of federal supremacy. Didn't we settle back in 1864 that states can't tell the federal government what to do?

I'm going to forward this post to some friends with greater constitutional law expertise than that I possess in hopes that we might get some insights on this seemingly over the top proposal.

Update: Here's one of those friend's answer:

States can urge their elected officials to advocate for certain positions all they want.  It cannot be binding, and one attempt to tarnish the elected official with a "scarlet letter" in a subsequent election was held to be unconstitutional.  Arkansas (I think), after losing the Term Limits case, decided to pass an ordinance similar to Montana's, urging its representatives in Congress to push for a Term Limits amendment.  Those who did not were designated on the next ballot as "refused to support Term Limits Amendment". The Supreme Court held this to be unconstitutional.

Bias against conservatives at Harvard Human Rights Journal

David Lat reports:

Over the summer, the submissions team for the Harvard Law School Human Rights Journal created a Google Group for themselves. This allowed them to work together on submissions, despite being scattered to the four winds for the summer.

Alas, the Google Group for the Harvard Human Rights Journal (HHRJ) was not adequately secured. As a result, the messages circulated over it were accessible for a time by outsiders — and even crawled by Google in some cases. Some of the emails made their way around legal academic circles and among law professors. Eventually they came into the hands of yours truly.

Lat draws an analogy to the famous aphorism that you don't want to watch sausage being made. true enough, the editorial process disclosed in these messages often isn't pretty. But the least pretty aspect is the blatant bias against conservatives shown by at least a couple of editors:

Near the end of a lengthy email containing substantive comments, both positive and negative, about a submitted article, an HHRJ editor appended this coda:

In addition, I am a little concerned based upon [Author D]‘s CV. He is incredibly conservative, clerked for [Conservative Justice A], worked in the White House under Bush, questioned [Liberal Justice B] during her confirmation hearings in Congress, and has written critically on [Liberal Justice C] in the wall street journal. Maybe that background isn’t important to all of you and I understand the need to have HHRJ be open-minded buuuuuuut, yeah, doesn’t make me want to take this article.

I’m sure you’re open-minded, buuuuuuut, yeah, you probably shouldn’t have put that in writing.

Another editor responded to that message as follows:

ok i trust [Editor Y]‘s judgment — those all sound like major concerns and are enough to reject the article. i’m fine with rejection based on that — we really need to act quickly on all this. other thoughts?

The journal then rejected the article.

Lat notes some items in the Journal's defense, but concldues:

... significant liberal bias exists within the legal academy (as I have argued before). This bias is reflected not just in anecdotal evidence, but in more systematic studies of the topic. And this bias has harmful effects for the enterprise of legal education. So denizens of the legal academy, both law students and law professors, would do well to keep this in mind — and to push back against it, to the extent that they can. No ifs, ands, or buuuuuuuts about it.

It certainly makes me wonder how many placements my politics have cost me over the years.

Eugene Volokh comments:

What troubles me about the e-mail is that its focus is not on the ideology of the article, but the ideology of the author. That, I think, is much more troublesome in an academic publication, because it contradicts what should be a basic academic principle — evaluate the qualities of the argument (even if your sense of the qualities is colored by your politics), not the politics of the arguer. (There are some exceptions, for instance if you’re trying to put on a debate about the policies of Administration X and you want people who served both in Administration X and in the ideologically opposite Administration Y, but this doesn’t seem to be what happened here.)

That’s the way reasoned academic debate is supposed to go forward, it seems to me. And editors’ concerns about which Justice or President someone worked for strikes me as quite antithetical to that sort of reasoned debate — even if it’s not the “one factor alone” that drives the selection decision.

Exactly.

Even so, Ann Althouse is unimpressed and unsympathetic.

Josh Blackman speculates as to who the author in question might be and notes that:

... the author’s politics were considered “in addition” to other aspects of the article. That tells us that politics were considered as one of several factors. To clarify, what led me to write the post as I did was the last sentence of the excerpt: “Maybe that background isn’t important to all of you and I understand the need to have HHRJ be open-minded buuuuuuut, yeah, doesn’t make me want to take this article.” That is, notwithstanding these other positive aspects about the article that may make me want to accept it, the author’s background would be the main factor in rejecting it.  In other words, I’d consider taking it buuuuut the author is a conservative. However, we do not have the full record of what happened, and the fairest reading ... was that the article was rejected in part based on the author’s politics.

Fair enough. And bad enough.

The big question is how pervasive is this bias at Harvard and, of course, the rest of the law school community. My guess? Somewhere between not uncommon and pretty common, leaning towards the latter.

Memo to Montanans (sp?): Don't be stupid about corporate personhood

Polling data:

Montana's constitutional amendment setting it as state policy that 'corporations are not people' has a wide lead for passage right now with 53% of voters saying they support it to 24% who are opposed. Democrats (67/13) and independents (59/25) both stand strong behind the 'corporations are not people' movement, while Republicans are pretty evenly divided with 32% of them supporting it and 35% opposed.

Here's the text of the amendment and a link to a supporting statement:

(1) It is policy of the state of Montana that each elected and appointed official in Montana, whether acting on a state or federal level, advance the philosophy that corporations are not human beings with constitutional rights and that each such elected and appointed official is charged to act to prohibit, whenever possible, corporations from making contributions to or expenditures on the campaigns of candidates or ballot issues. As part of this policy, each such elected and appointed official in Montana is charged to promote actions that accomplish a level playing field in election spending.

(2) When carrying out the policy under subsection (1), Montana’s elected and appointed officials are generally directed as follows:

(a) that the people of Montana regard money as property, not speech;

(b) that the people of Montana regard the rights under the United States Constitution as rights of human beings, not rights of corporations;

(c) that the people of Montana regard the immense aggregation of wealth that is accumulated by corporations using advantages provided by the government to be corrosive and distorting when used to advance the political interests of corporations;

(d) that the people of Montana intend that there should be a level playing field in campaign spending that allows all individuals, regardless of wealth, to express their views to one another and their government; and

(e) that the people of Montana intend that a level playing field in campaign spending includes limits on overall campaign expenditures and limits on large contributions to or expenditures for the benefit of any campaign by any source, including corporations, individuals, or political committees. 

It is, of course, an even more deeply anti-capitalist statement than the usual versions of these amendments. But even setting that issue aside, it is deeply flawed. 

For most purposes the corporation is treated as though it were a legal person, having most of the rights and obligations of real people, and having an identity wholly apart from its constituents. Corporate law statutes, for example, typically give a corporation “the same powers as an individual to do all things necessary or convenient to carry out its business and affairs.”

Although the corporation’s legal personality obviously is a fiction, it is a very useful one. Consider a large forestry company, owning forest land in many states. If the corporation is not a legal person with the power to own land, who owns the land? Presumably the shareholders of the company. If the company were therefore required to list all of its shareholder on every deed recorded in every county in which it owned property, and also had to amend those filings every time a shareholder sold stock, there would be an intolerable burden not only on the firm but also on government agencies that deal with the firm. But did anybody in Boulder or Madison pause to consider that undesirable outcome of their proposal?

An even more useful feature of the corporation’s legal personality, however, is that it allows partitioning of business assets from the personal assets of shareholders, managers, and other corporate constituents.  This partitioning has two important aspects. On the one hand, asset partitioning creates a distinct pool of assets belonging to the firm on which the firm’s creditors have a claim that is prior to the claims of personal creditors of the corporation’s constituencies. By eliminating the risk that the firm will be affected by the financial difficulties of its constituencies, asset partitioning reduces the risks borne by creditors and thus enables the firm to raise capital at a lower cost. On the other hand, asset partitioning also protects the personal assets of the corporation’s constituencies from the vicissitudes of corporate life. The doctrine of limited liability means that creditors of the firm may not reach the personal assets of shareholders or other corporate constituents. Just how do the brilliant legal minds behind this movement propose to preserve this feature of corporate personhood if they succeed?

Maybe proponents of this amendment will argue that they're limiting their attack on corporate personhood to questions of constitutional law. The trouble with that is that corporations have constitutional rights beyond just political campaigns, as I note in my book Corporate Law:

As a legal person, a corporation has most of the constitutional rights possessed by natural persons. See, e.g., First Nat’l Bank of Boston v. Bellotti, 435 U.S. 765, 784 (1978) (corporation has First Amendment right of free speech); Hale v. Henkel, 201 U.S. 43 (1906) (corporation gets Fourth Amendment protection against unreasonable searches and seizures but not protected by Fifth Amendment privilege against self-incrimination); Blake v. McClung, 172 U.S. 239 (1898) (corporation not covered by the privileges and immunities clause of the Fourteenth Amendment or of the comity clause of Article IV); Minneapolis & St. Louis Ry. Co. v. Beckwith, 129 U.S. 26, 28 (1888) (corporation entitled to due process of law under the Fifth and Fourteenth Amendments); Santa Clara County v. Southern Pacific Railroad Co., 118 U.S. 394, 416 (1886) (corporation entitled to equal protection of the law under the Fourteenth Amendment).

If you want to exclude the corporation from having First Amendment rights, you've got to explain why the Corporation gets all these other rights. If you want to exclude the corporation from having any constitutional rights, you're engaged in a striking act of activism entailing overturning countless precedents handed down over many decades.

You're also depriving the people who make up corporations of essential protections. Government regulation of corporations obviously impacts the people for whose relationships the corporate serves as a nexus. (You see how hard it is to even talk about the corporation without reifying it?) It's useful to allow the corporation to provide those persons with a single voice when seeking constitutional protections. 

Indeed, doing so is not just useful, it is necessary to protect the rights of the parties to those various contracts. As Larry Ribstein explained in Corporate Political Speech, 49 Wash. & Lee L. Rev. 109, because "a corporation is a nexus of contracts, these contract rights should be constitutionally protected to the same extent as other contract rights. Thus, the state must show why intervention in the corporate contract is constitutionally justified given the availability of self-protection through private contracting." He continued: 

The Court must begin to base its decisions on well-developed modern economic theory rather than on unsupported assertions about corporations and the political process. It is particularly important to understand that any regulation of corporate speech or of the electoral process can have far-reaching consequences in terms of both the costs of governing the firm and the deadweight costs of effecting wealth transfers among interest groups. Until the Court understands these consequences, its decisions may be the proverbial bull in the china shop, particularly as pressure builds for more extensive reform of campaign financing and of corporate political activity.

While it may be useful to allow the corporation "person" standing to assert collective rights, however, it is very important to remember that this is still a fiction that we embrace to facilitate protection of the rights of individuals. As Ribstein once blogged:

In a nutshell, viewing the corporation as an entity for First Amendment purposes actually serves to push the speech rights of owners and managers under a rug. Abandoning entity reasoning would focus on what matters for the First Amendment analysis. My article and blog post just linked show that once you do that, and put the arguments for limiting speech rights under an analytical spotlight, they look pretty weak.

Finally, let's look at the politics of the amendment. The proponents claim to be worked up about the Citizens United decision. But their left-liberal bias shows up in the fact that they're only worked up about half of the Citizens United case.

Unions were also freed by Citizens United to make independent political expenditures. Unions, however, are uniformly organized as unincorporated voluntary associations. The corporate peronhood proposal thus would leave unions unaffected. Which means a main source of the left's financing would remain free to spend on campaigns and political ads.

Having said that, however, the left is being mostly stupid here. Lots of pillars of the liberal political movement are limited liability entities with the status of legal persons. The NY Times is run by a corporation. Daily Kos is owned by a LLC. The Washington Post is a corporation. Moveon.org is a (nonprofit) corporation. And so on. If the goal of preclude corporations from having constitutional rights by denying them the status of legal persons were to succeed both politically and legally, all of these liberal stalwarts would lose -- among other things -- the First Amendment rights they presently enjoy.

Point of Law Piles on Posner

Veteran appellate judge Richard Posner recently took to the pages of The New Republic to trash - there's no other word for it - the new book by Justice Antonin Scalia and writing guru Bryan Garner: Reading Law: The Interpretation of Legal Texts.

Posner's critique generated exultation on the left - after all, here was Justice Scalia getting a public smack-down from a fellow conservative! Whether Posner can still be called a conservative - he recently refused the label in an interview with NPR's Nina Tottenberg - his criticisms consistently miss the point of Scalia's and Garner's book. But, to be fair to Posner, what he lacks in the way of analytical skill, he more than makes up for in gratuitous ad hominem attacks.

via www.pointoflaw.com

Go read the whole thing.

Kerr on Posner

I’ve mostly stayed out of the Posner v. Scalia spat involving alleged misrepresentations in the new Scalia/Garner book. The devil is in the details in this sort of disagreement, and I don’t have the book to know what Scalia & Garner say in order to know if Posner’s criticisms are accurate. But over at Walsh’s Law, lawprof Kevin C. Walsh takes a look at one of the alleged examples and reprints all the relevant texts. The case happens to be a favorite of mine, so I thought I would blog about it. I share Kevin’s conclusion that Scalia & Garner were fair in their description of this case, while Posner was not fair in his critique.

via www.volokh.com

Posner's losing it. sad.

Review of my Corporate Governance After the Financial Crisis

The new September 2012 issue of The Journal of the Delaware State Bar Association has a review by Richard Forsten of my book Corporate Governance after the Financial Crisis. The review is mostly descriptive, but is overall quite positive. E.g., "Professor Bainhridge persuasively demonstrates ...." or "As Bainbridge makes clear ...."

Download Review of Bainbridge Corporate Governance After the Financial Crisis.pdf (408.1K)

Break up fees: How high can you go?

We were talking about break-up fees in mergers and acquisitions letters of intent in class today, a subject to which we'll return in a future assignment dealing with exclusive merger agreements (best efforts, no shops, etc....) and still another dealing with Revlon duties.

I got back from class to discover a new post by David Fox on the Harvard corporate governance forum on the subject of break-up fees:

During the course of negotiations of every public company deal, inevitably the conversation will turn to the amount of the breakup fee payable by a target company to a buyer if the deal is terminated under certain circumstances. Because U.S. corporate law generally requires a target company to retain the ability to consider post-signing superior proposals, a breakup fee is an important element of the suite of deal protection devices (including “no-shop” restrictions, matching rights, etc.) that an initial buyer implements to seek to protect its position as the favored suitor.  ...

Unquestionably, precedent often informs the discussion, and there is a significant amount of statistical data to back up a general proposition that fees “usually” fall in the 3% to 4% range.

Speaking of precedent, I've always been rather fond of St. Jude Medical, Inc. v. Medtronic, Inc., 536 N.W.2d 24 (Minn. App. 1995):

In the corporate world, termination fees are a common and generally accepted method to “reimburse the prospective purchaser for expenditures incurred in pursuing the transaction.” Gray v. Zondervan Corp., 712 F.Supp. 1275, 1276-77 n. 1 (W.D.Mich.1988).

Cancellation fee provisions typically require the [seller] to pay the bidder a specified dollar amount. * * * [T]he fee ordinarily ranges from one to five percent of the proposed acquisition price. A cancellation fee reduces the risk of entering a negotiated merger by guaranteeing the initial bidder reimbursement for the out of pocket costs associated with making the offer and, in some instances, for the bidder's lost time and opportunities. Accordingly, they are increasingly common in negotiated acquisitions.

Stephen M. Bainbridge, Exclusive Merger Agreements and Lock-Ups in Negotiated Corporate Acquisitions, 75 Minn.L.Rev. 239, 246 (1990).

As Fox notes, however:

While the statistical data have some baseline value, not least because of their consistency over long periods of time, dealmakers should be cognizant that the Delaware courts have resisted providing a bright line or range test for reasonableness of breakup fees. 

He continues with a very useful analysis of the key deal points in negotiating break up fees.

 

Scalia versus Posner

A bibliography of the ever-growing feud. FWIW, these days I rank Posner right about the same level as the Dallas Cowboys.

A "Better" (?) Approach to Counting Citations

James Phillips and John Yoo sent along a link to their paper, The Cite Stuff: Inventing a Better Law Faculty Relevance Measure (September 3, 2012). I quote the abstract:

Citation rankings as a measure of scholarly quality are both controversial and popular. They provide a quantitative, albeit imperfect, measure of intellectual impact and productivity. But the number of times a scholar has been cited by his peers confers more than just bragging rights. They arguably help form the reputation of American legal scholars to the point that they have allegedly influenced faculty hiring decisions, and their collective impact may well shape the ranking of law schools themselves. 

Arguably, the most well-known such metric for legal scholarship is the method used by Brian Leiter of the University of Chicago Law School and posted on his website. Despite the methodological rigorousness of the Leiter system, it suffers from some well-recognized limitations. It is biased in favor of schools with older, smaller faculties, for example, and against schools that do not produce as much peer-reviewed scholarship. 

This study seeks to improve on earlier efforts by producing a more relevant and accurate citation-based ranking system. It produces a measure that explains 81 percent of the variation in the U.S. News academic peer rankings, implicitly revealing how schools could boost those rankings, and lists the most cited professors based on this new ranking methodology, both overall, amongst younger scholars, and in 20 areas of legal. This allows for the top school in each area of law to be calculated, which could be useful to aspiring JD students who desire to know the best school in the area(s) of law they are most interested in. Finally, this study proposes an alternative faculty ranking system focusing on the percentage of a law school faculty that are “All-Stars” (ranked in the top 10 in citations per year in an area of law). This alternative ranking system improves upon some of the weaknesses of previous faculty quality ranking methodologies and argues that citation-based studies do measure something important - relevance of scholarship.

What grabs me about the paper is that it is explicitly framed (albeing just in part) as a response to my blog posts on other citation counting systems:

This study thus reduces some of the problems in citation studies as identified by Professor Stephen Bainbridge:

• They reward longevity and prolificacy. An older author with 100 articles that have each been cited 10 times will have a higher count than an author who has published 1 article that has been cited 900 times. Yet, might one not fairly argue that the latter is the more influential?

• They disregard immediacy: An article that is being [cited] 500 times in the first year of its publication is probably more influential than an article that’s being [cited] 500 times over 20 years.

• They disregard the half-life of citation rates, which might be a very useful proxy for influence.

• They usually rely on one database, typically a legally oriented one, which limits measurement of interdisciplinary impact. [The accompanying footnote reads: "http://www.professorbainbridge.com/professorbainbridgecom/2010/05/ranking-faculty-quality.html."

And, of course, I was interested to note my ranking among the top corporate law scholars:

And also how UCLA did:

Meanwhile, speaking of Brian Leiter, here's an excerpt from his analysis of the new methodology:

The two most interesting things they do are consult citations in the "Web of Science" database (to pick up citations for interdisciplinary scholars--this database includes social science and humanities journals) and calculate a citations-per-year score for individual faculty.  A couple of caveats:  (1) they look at only the top 16 schools according to the U.S. News reputation data, so not all law schools, and not even a few dozen law schools; and (2) they make some contentious--bordering in some cases on absurd--choices about what "area" to count a faculty member for.  ...

... A couple of readers asked whether I thought, per the title of the Phillips & Yoo piece, that their citation study method was "better."  I guess I think it's neither better nor worse, just different, but having different metrics is good, as long as they're basically sensible, and this one certainly is.

In praise of the corporate form: A reply to Greenfield

Liberal law professor (yes, there are other kinds, albeit not many) Kent Greenfield writes that "progressives":

... need to focus on changing corporations themselves so that overturning Citizens United would be unnecessary. We should use this historical moment to nudge corporations closer to what the Supreme Court assumed they are in its Citizens United decision—“associations of citizens.” While the constitutional effort is defensive and palliative, a campaign to redesign the corporation itself would be affirmative and transformative. To cure Citizens United, we don’t have to amend the Constitution—we need to rethink corporations.

I could not disagree more. I stand with Nicholas Murray Butler, president of Columbia University in the first third of the last century and winner of the Nobel Peace Prize (1931), who wrote that: “The limited liability corporation is the greatest single discovery of modern times. Even steam and electricity are less important than the limited liability company.”

Likewise, I stand with John Micklethwait and Adrian Wooldridge, whose magnificent history, The Company, contends that the corporation is “the basis of the prosperity of the West and the best hope for the future of the rest of the world.”

As I explain in Reflections on Twenty Years of Law Teaching: Remarks at the Rutter Award Ceremony (April 2008):

There is no doubt that the corporation is now the key economic institution in Western nations. In the United States, for example, the corporation is the predominant form of business organization by every measure except sheer number of firms. According to recent census data, although corporations account for only about one fifth of all business organizations, they bring in almost 90% of all business receipts.

The corporation also has proven to be a powerful engine for focusing the efforts of individuals to maintain economic liberty. Because tyranny is far more likely to come from the public sector than the private, those who for selfish reasons strive to maintain both a democratic capitalist society and, of particular relevance to the present argument, a substantial sphere of economic liberty therein serve the public interest.  Put another way, private property and freedom of contract were “indispensable if private business corporations were to come into existence.”[1] In turn, by providing centers of power separate from government, corporations give “liberty economic substance over and against the state.”[2]

Yet, two centuries ago, leading business and economic thinkers – including the great Adam Smith – derided the joint stock company. Few businesses were organized as chartered companies. Each company’s charter required a special legislative act. In many places, legislatures granted charters only to quasi-public entities, such as railroads and canals. In most, legislatures rarely resisted the temptation to revise or even repeal existing charters arbitrarily. Even in the United States, where the Supreme Court’s famous Dartmouth College decision gave corporations substantial constitutional protections at a relatively early date, such legislative meddling remained commonplace.

And so I ask my students: What explains the relatively rapid development in the mid-19th century of a recognizably modern corporation and, in turn, that entity’s emergence as the dominant form of economic organization?

The answer has to do with new technologies – especially the railroad – requiring vast amounts of capital, the advantages such large firms derived from economies of scale, the emergence of limited liability that made it practicable to raise large sums from numerous passive investors, and the rise of professional management.

For the most part, these advantages remain true today. The corporation remains the engine of economic growth, both at the level of giants like Microsoft and garage-based start-ups.

The rise of the corporate form thus has “improved the living standards of millions of ordinary people, putting the luxuries of the rich within the reach of the man in the street.”[3] The rising prosperity made possible by the tremendous new wealth created by industrial corporations was a major factor in destroying arbitrary class distinctions, enhancing personal and social mobility. Many of the wealthiest businessman of the latter half of the 19th Century and the 20th Century began their careers as laborers rather than as scions of coupon-clipping plutocrats.

And so I put it to my students this way: You want to help make society a better place? You want to eliminate poverty? Become a corporate lawyer. Help businesses grow, so that they can create jobs and provide goods and services that make people’s lives better.

In sum, it is neither the corporate form nor Citizens United, that needs fixing. What needs fixing is the mind-set of the left who would subordinate the corporation to Leviathan and thus destroy both freedom and prosperity.

---

[1] Michael Novak, Toward a Theology of the Corporation 45 (rev. ed.1990). 

[2] Id.

[3] Micklethwait & Wooldridge, supra note 5, at 77. 

Kudos to pals

The estimable Josh Wright has been nominated to the Federal Trade Commission:

Josh is widely regarded as the top antitrust scholar of his generation.  He is the author of more than 50 scholarly articles and book chapters, including several that were released as ICLE White Papers.  He is a co-author of the most widely-used antitrust casebook, and co-editor of three books on topics ranging from Competition Policy and Intellectual Property Law to the Intellectual History of Law and Economics.  ....

Josh holds economics and law degrees from UCLA, and he is one of only a small handful of young antitrust scholars in the legal academy to hold both a PhD in economics as well as a JD.  If confirmed, he will also be only the fourth economist to serve as FTC Commissioner (following Jim Miller, George Douglas and Dennis Yao) and the first JD/PhD.

Josh’s scholarship and approach to antitrust are firmly grounded in the UCLA economics tradition, exemplified by the members of Josh’s dissertation committee — Armen Alchian, Harold Demsetz & Benjamin Klein.

And what better grounding could one have?

In other news, Orin Kerr has just been named the Fred C. Stevenson Research Professor at GW, which is as my friend and colleague Eugene Volkh observes "a very well-deserved honor."

 

Video of my Lecture on the Target Board of Directors' Duty to be Informed

Erna Schein "Fat Boy" (Napa Valley) 2007

Despite being a blend of Bordeaux red wine varieties (60% Cabernet Sauvignon, plus Merlot and Cabernet Franc), the 2007 Fat Boy is not a wine for the cellar. Instead, it a delicious, big, somewhat brawny wine suited for near term drinking (say through 2015 at the outside) with steak frites or something comparable.
Deep ruby in color. Big nose of cassis, black cherry, prunes, and mocha java. Smooth, sweet tannins do not interfere with current enjoyment, but merely scrub the palate before your next bite of unctuous beef. It has a remarkably long finish that perfumes one's senses.
In sum, I like it a lot.
Grade: A-

Are Corporate CEOs Overpaid?

Schumpeter reports that:

Steven Kaplan of Chicago’s Booth School of Business ... has now gathered his research together in a new paper (“Executive Compensation and Corporate Governance in the US: Perceptions, Facts and Challenges”). ... It is now impossible to talk sensibly about this subject without first grappling with Mr Kaplan.

The paper is available at SSRN: Kaplan, Steven N., Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts and Challenges (August 22, 2012). Chicago Booth Research Paper No. 12-42; Fama-Miller Working Paper. http://ssrn.com/abstract=2134208. The abstract follows:

In this paper, I consider the evidence for three common perceptions of U.S. CEO pay and corporate governance: (1) CEOs are overpaid and their pay keeps increasing; (2) CEOs are not paid for performance; and (3) boards do not penalize CEOs for poor performance. While average CEO pay increased substantially through the 1990s, it has declined since then. CEO pay levels relative to other highly paid groups today are comparable to their average levels in the early 1990s. In fact, the relative pay of large company CEOs is similar to its average level since the 1930s. The ratio of large company CEO pay to firm market value also has remained roughly constant since 1960. This suggests that similar forces, likely technology and scale, have played a meaningful role in driving CEO pay and the pay of others with top incomes. With regard to performance, CEOs are paid for performance and penalized for poor performance. Finally, boards do monitor CEOs. The rate of CEO turnover has increased in the 2000s compared to the 1980s and 1990s, and is significantly tied to poor stock performance. While corporate governance failures and pay outliers as well as the very high average pay levels relative to the typical household undoubtedly have contributed to the common perceptions, a meaningful part of CEO pay appears to be market determined and boards do appear to monitor their CEOs. Consistent with that, top executive pay policies at over 98% of S&P 500 and Russell 3000 companies received majority shareholder support in the Dodd-Frank mandated Say-On-Pay votes in 2011.

I've downloaded the paper and it is a tour de force. Compensation critics who do not engage his work will be exposed as pure cranks. But how will they rebut it?