ProfessorBainbridge.com

STOCK Act partially gutted

Yahoo Finance reports:

A year ago President Obama signed the so-called STOCK Act. The point of the act was to allow the public to see for themselves if members of Congress and their employees were trading on material, non-public information. "The STOCK Act: Bans Members of Congress from Insider Trading" was the bolded headline at the top of a lengthy and self-congratulatory press release.

Last Monday the White House website took the guts out of the STOCK Act in one run-on sentence under the headline "Statement by the Press Secretary on S. 76." Those so inclined are invited to read the memo themselves. The gist is that disclosures will no longer be practically available for all employees but only for the elected officials, which means staffers, lobbyists, employees, aides and anyone who works for or is close to a serving politician can do whatever they want. Corrupt officials could theoretically still dish insider info with little fear of discovery — it's just hard for them to trade off of the information themselves.

The idea of transparency is to remove doubt about conflicts of interest and malfeasance, real or imagined. When the rules are quietly changed to such a degree, it defeats the purpose entirely.

On the one hand, the STOCK Act's prohibition on insider trading remains intact, which is a good thing. On the other hand, I agree completely with the author that transparency via disclosure was essential. As Justice Brandeis that sunlight is the best disinfectant and electric light the best policeman.

The scandals and routine abuses Peter Schweizer exposed in Throw Them All Out cried out for reform. Congress was dragged kicking and screaming into reform, but now has started chopping back on it. Time to hold their feet to the fire yet again.

Email Bankruptcy, Inbox Zero

I’d like to begin this with an apology. If you sent me an email in the past four years or so and I didn’t respond, I’m sorry. It’s not that your message wasn’t important to me. It’s just that I didn’t read it. Or else I did read it but then I clicked “Mark Unread” to trick myself into thinking I didn’t read it.In fact, the more important your message, the more likely it is I handled it it this way. I wanted to give your email the thoughtful response it deserved, so I set it aside to deal with later. Then later became never....

This is no way to live. So, as of today, I’m not going to live this way anymore. I’m going Inbox Zero. The minute after I publish this post, I’m going to select all 28,487 messages in my inbox and archive them. Thereafter, I pledge that, at least once a day, I will clear my inbox of everything.

via www.forbes.com

Ditto. If you haven't heard from me within about 4 weeks, assume I've declared another e-mail bankruptcy and try a phone call.

Wall Street Journal Smashes Arguments for Corporate Political Spending Disclosure

In a brilliant editorial, the WSJ exposes the political agenda behind those who would mandate corporate disclosure of campaign contributions and other political spending and smashes their arguments. The editorial concludes:

The political left poses as shareholder champions to try to embarrass companies into giving up their free speech rights only to invoke the First Amendment to avoid disclosing which unions or liberal billionaires are financing its campaign of political intimidation. Shareholders who care about political freedom and the health of their businesses should tell corporate boards to fight back against this bullying.

Exactly right. Please go read the whole thing.

Another say on pay case bites the dust

Another Say-on-Pay Case Dismissed: AAR

Here is a blog by the team at Katten Muchin who worked at getting a say-on-pay case that was filed against AAR Corp. in Northern Illinois dismissed recently. In this blog, Jim Barrall parses the decision - and here is Wachtell Lipton's analysis.

via www.thecorporatecounsel.net

Problem No. 27 with Institutional Investor Activism: Politics

In Corporate Governance after the Financial Crisis, I explained that the risk of political interference with public pension funds is an important argument against empowering shareholder activists:

Public employee pension funds are vulnerable to being used as a vehicle for advancing political/social goals unrelated to shareholder interests generally. Mid-decade activism by CalPERS, for example, reportedly was “fueled partly by the political ambitions of Phil Angelides, California’s state treasurer and a CalPERS board member,” who planned on running for governor of California in 2006.  In other words, Angelides allegedly used the retirement savings of California’s public employees to further his own political ends.

Another CalPERS case in point:

In 1999, the legislature enacted SB 105 (Burton) which obligates CalPERS and CalSTRS to support, whenever feasible, shareholder resolutions at domestic and international corporations in which those funds have invested that are designed to encourage, among other things:

• Increased representation of individuals from underrepresented religious groups in the work force, including managerial, supervisory, administrative, clerical, and technical jobs; and
• Banning of provocative religious or political emblems from the workplace.

Cal. Gov’t Code Section 7513.5.  While this law is limited to operations in Northern Ireland, it is surprising to see that the California legislature actually mandated support for: (1) affirmative action based on religion; and (2) restraints on free speech.

It's a classic example of how activism by public pension funds can be counter to the interests of othger investors, coupled with an unusually blatant attack on free speech and freedom of association.

Who invented game theory?

In the UCLA news:

Is it John Nash, the Nobel Prize–winning mathematician portrayed in a 2001 Oscar-winning biopic? John von Neumann, game theory's founding father? Go back further, much further, urges a UCLA game theory expert and fan of 19th-century novelist Jane Austen.

"Austen's novels are game theory textbooks," Michael Suk-Young Chwe writes in Jane Austen, Game Theorist, which Princeton University Press published April 21. "She's trying to get readers to use their higher thinking skills and to think strategically."

At its most basic level, game theory assesses all the choices available to two (or more) people in a given situation and assigns a numerical value to the benefit each person reaps from each choice. Often, the choice that is most valuable to one player comes at the expense of the other; hence, game theory's best-known phrase — "zero-sum game." But just as frequently, there is a choice with unexpected benefits for both players.  

"In game theory, you make choices by anticipating the payoffs for others," Chwe explains.

Chwe argues that Austen explores this concept in all six of her novels, albeit with a different vocabulary than the one used by Nash, von Neumann and other game theory greats some 150 years later. In Austen's romantic fiction, this type of strategic thinking is described as "penetration," "foresight" or "a good scheme."

In "Pride and Prejudice," for instance, Mrs. Bennet, a mother eager to marry off her five daughters, sends her oldest, Jane, on horseback to a neighboring estate, even though she's aware a storm is on the way. "Mrs. Bennet knows full well that because of the rain, Jane's hosts will invite her to spend the night, thus maximizing face time with the eligible bachelor there, Charles Bingley, whom Jane eventually marries," Chwe said.

 

How Much Does Your Law Professor Make? And Should You Care?

David Lat from ATL:

Should we be troubled by high professor pay? I don’t think so, at least as long as the professor in question is doing her job and working reasonably hard. Law professors are some of the most brilliant minds in our profession, and many of them could be earning far more money in private practice (as some of them frequently remind people). Entering academia involved financial sacrifice for many.

But even if you dispute that — some professors don’t teach in areas that are amenable to lucrative private practice, and some professors wouldn’t want to bill 2000-plus hours a year — robust compensation for profs is still far from objectionable. I agree with my colleague Elie Mystal:

[Y]ou know who you shouldn’t blame [for the high cost of law school]? Law school faculty. That’s right — they might get fancy new buildings and make six-figure salaries, but it’s not really their fault that the cost of a legal education has outstripped its value. Who among us would not take more money and more perks for doing our same job?

…. [D]on’t blame the professors for maximizing their earning potential. You would do the same thing. Lord knows I would take a six-figure teaching job at UT Law, and if I didn’t want it, they could easily find a few thousand qualified individuals to fill the spot.

Sure, professors could do some things to help, but at the end of the day it’s not their fault. If you want to fix this, you need regulatory control.

If you have a problem with high-earning law professors, then don’t go to law school. Law faculty pay is a function of what the market will bear, and as long as thousands of students troop off to law school every year, professors have to be paid to teach them.

via abovethelaw.com

The Essays of Warren Buffett

I'm not a huge fan of Warren Buffett's politics or some of his corporate governance moves (e.g., his failure to do proper succession planning and the way he threw David Sokol under the bus), but his annual letters to the shareholders of Berkshire-Hathaway are legitimate milestones in American business thinking. Lawrence Cunningham has collected those letters and essays in a series of anthologies, the most recent of which is now available (it's the one on the far left).

Cunnigham lays out the importance of the essays in a post at Harvard's corporate governance blog:

The essays address some of the most important governance problems. The first is the importance of forthrightness and candor in communications by managers to shareholders. Buffett tells it like it is, or at least as he sees it, and laments that he is in the minority. Berkshire’s annual report is not glossy; Buffett prepares its contents using words and numbers people of average intelligence can understand; and all investors get the same information at the same time. Buffett and Berkshire avoid making predictions, a bad managerial habit that too often leads other managers to make up their financial reports.

Cunningham goes on to summarize the lessons he thinks we can learn from Buffett's letters.

Pamela Holmes reviewed the latest edition (the one on the far left above) for Conglomerate:

The first edition of The Essays of Warren Buffett: Lessons for Corporate America was the focus of a symposium held twenty years ago and was the standard textbook for a specialized course taught by the author, Professor Lawrence A. Cunningham of George Washington University Law School.  It has since been adopted by many law and business schools for study in investment, finance and accounting.  Investment firms have used this book in their staff and investor training programs.  However, the layman should not be put off by these credentials as the book is an approachable guide to understanding investment.  Buffett quotes Twain, Churchill and even Woody Allen.  If it's a matter of faith in Warren's wisdom, you may be reassured by the sprinkling of Biblical references used to illustrate his points.

A sampling of Buffett's sage advice to shareholders includes, "Beware of companies displaying weak accounting."  If you question what you see, "it is likely they are following a similar path behind the scenes.  There is seldom just one cockroach in the kitchen."  Berkshire Hathaway's board of directors do not receive company stock as part of their compensation, they "purchased their holdings in the market just as you did...I love such honest-to-God ownership.  After all, who ever washes a rental car?"  Another gem, "...lemmings as a class may be derided but never does an individual lemming get criticized."

Organized by topic rather than chronologically, the words of Mr. Buffett are the words of every man - there is extremely little corporate lingo and no baffling verbiage.  His plain-speak is valuable guidance to learning the history of investing in the U.S., the good and the bad, and to understanding how you can make an intelligent investment decision if effort is put into researching the integrity and focus of company and management behind the investment. ...

Kevin LaCroix writes that despite some quibbles:

The book itself is quite an accomplishment; it is that rare business book that is both worthwhile and enjoyable to read.

He also writes that:

The latest edition is updated to include excerpts from Buffett’s most recent letters. The book not only facilitates quick location of Buffett’s statements on specific topics, but it also affords an opportunity to see how Buffett has developed his themes over time, which unquestionably provides great insight into Buffett’s investment views.

 

How not to make the case against the sequester

The IRS announced today that it will close to the public for five days (May 24, June 14, July 5, July 22, and August 30) because of employee furloughs

via taxprof.typepad.com

Emerging Proxy Trends

Laura Finn at Boardmember.com:

I tried something new this week—podcasting. While you may have seen my face on one of the many video interviews housed on this website, I’d never before interviewed someone for a podcast. Then the team at ProxyMonitor.org released its early findings on proxy season 2013 and offered me the opportunity to sit down with James R. Copland, director, Center for Legal Policy, the Manhattan Institute, which runs ProxyMonitor. ProxyMonitor.org tracks all management and shareholder proposals filed by Fortune 250 companies and offers user-friendly tools to quickly find and sort proposals by type, proponent, or company.  While proxy season has just begun, proposals filed at 94 companies have been reviewed by ProxyMonitor and, as Jim and I discussed during the podcast, some trends have emerged:

via www.boardmember.com

Supreme Court rules there is a presumption against the extraterritorial applicability of the Alien Tort Statute

Anthony Arend reports that:

The Supreme Court issued its Opinion in Kiobel v. Royal Dutch Petroleum this morning. Chief Justice Roberts writing the Opinion of the Court:

We therefore conclude that the presumption against extraterritoriality applies to claims under the ATS, and that nothing in the statute rebuts that presumption.

.  .  .

On these facts, all the relevant conduct took place outside the United States. And even where the claims touch and concern the territory of the United States, they must do so with sufficient force to displace the presumption against extraterritorial application. See Morrison, 561 U. S. ___ (slip op. at 17–24). Corporations are often present  in many countries, and it would reach too far to say that mere corporate presence suffices. If Congress were to determine otherwise, a statute more specific than the ATS would be required.

The Wall St Journal informs that:

The court unanimously concluded that the allegations, which Shell denies, are too remote from the U.S. to provide federal-court jurisdiction. The only American connections are that the refugees received asylum in the U.S. and that Shell, an Anglo-Dutch company, does business in the U.S.

The justices split 5-4 along their conservative-liberal divide over how high a bar to raise against future lawsuits under the Alien Tort Statute, one of the earliest and most enigmatic federal laws still on the books.

The majority opinion, by Chief Justice John Roberts, presumes that the statute covers only violations of international law occurring within the U.S. Still, the majority opinion left open the theoretical possibility that some acts abroad could so significantly "touch and concern the territory of the United States" to "displace the presumption" against the statute's use. In a concurring opinion, Justice Anthony Kennedy emphasized that future cases could provide "further elaboration and explanation" of that exception.

The court's liberal wing, led by Justice Stephen Breyer, contended the law should remain available for violations that significantly affect U.S. interests, which he said included punishing torturers seeking refuge in the U.S. ...

Shell persuaded a federal appeals court in New York to dismiss the suit, on grounds that international law doesn't permit liability for corporations, as opposed to individuals. The Supreme Court heard the Nigerian refugees' appeal in February 2012, but instead of ruling on the corporate-liability question, ordered reargument over whether the statute applies at all to conduct outside the U.S.

I had retained slim hopes that the cort would address the corporate liability issue, about which I had blogged back when the Second Circuit ruling came down. As far as I can tell, however, the SCOTUS result leaves the Second Circuit ruling on that issue intact for possible adoption at a later date.

Defending Patagonia: Mergers & Acquisitions with Benefit Corporations

The growing legal acceptance of the benefit corporation concept, especially with the prospect of Delaware adopting a B Corp statute, makes this issue one of considerable import:

Abstract:     
Yvon Chouinard, founder of Patagonia, stated that "benefit corporation legislation creates the legal framework to enable mission-driven companies like Patagonia to stay mission-driven through succession, capital raises, and even changes in ownership." This article uses Patagonia, one of the most visible benefit corporations, in the article’s examination of Chouinard’s claim and in the article’s exploration of issues surrounding benefit corporations in the mergers and acquisitions context.

Of special interest are the seminal Delaware cases of Unocal and Revlon, and how, if at all, the tests created by those cases should be applied to benefit corporations. This article concludes that the Unocal test could be used to evaluate takeover defenses erected by benefit corporations, but argues that the test should be modified to more clearly allow directors to protect the mission of their benefit corporation, even if the mission "openly eschews shareholder wealth maximization." A more difficult issue arises when the break-up or sale of a benefit corporation becomes inevitable and the benefit corporation, incorporated in a state that follows Delaware law, enters "Revlon-mode." To provide a practical corporate governance framework, this article concludes that Revlon should remain relevant for benefit corporations that are incorporated in states following Delaware law, but proposes statutory amendments requiring a partial-asset lock and an annual charitable giving floor to ensure public benefit.

via papers.ssrn.com

Murray, J. Haskell , Defending Patagonia: Mergers & Acquisitions with Benefit Corporations (March 28, 2013). Hastings Business Law Journal, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2240885

Disclosure in a Post-Citizens United Real World

An important new paper from Bradley Smith:

Abstract:     
A primary political reaction to Citizens United v. Federal Election Commission has been a demand for new laws and regulations governing the disclosure of political spending and contributions. Proposed new regulations, however, have tended to overlook some serious practical problems of increased compulsory disclosure. The effort to mandate increased disclosure is also, at least in substantial measure, based on illegitimate intent and an incorrect understanding of the extent of compulsory disclosure laws both before and after Citizens United. The new disclosure sought threatens hard won constitutional rights that ought not be surrendered too easily. Ultimately, compulsory disclosure cannot bear the weight some now seek to place upon it, and in trying endangers other important political and social values.

via papers.ssrn.com

Smith, Bradley A., Disclosure in a Post-Citizens United Real World (March 26, 2013). 6 St. Thomas J. L. & Pol'y (2013, Forthcoming). Available at SSRN: http://ssrn.com/abstract=2240048

Time to regulate ISS and Glass Lewis

Steven Davidoff reports that:

The annual proxy season battle between shareholders and corporations appears to have reached a tipping point in favor of shareholders this year. ...

Activists owe part of their success to I.S.S. and a rival, Glass, Lewis & Company. I.S.S. in particular is followed by many mutual funds and other institutional investors, and studies have found that it can sway up to 10 percent of the vote and much more in highly public elections. And it often recommends in favor of the dissidents. 

I discuss ISS and Glass Lewis at some length in my Corporate Governance after the Financial Crisis. In it, I argue that ISS has gotten too powerful, has too many conflicts of interest, and is too biased against management. It's time for it to get reined in.

Why should we think shareholder activists have anything useful to say?

Steve Davidoff reports that:

The California teachers’ pension fund has joined forces with the investment firm Relational Investors to campaign for the breakup of the Timken Company into steel and bearing businesses.

This is, of course, the same CalSTRS of which it was said in 2012 that:

The folks running CalSTRS projected a 7.75% return on equity.  Then they changed it to 7.5%. In fact it was 1.8%.  And no one was fired.

Any yet these are the same idiots that people like Lucian Bebchuk want to empower to run corporate America.

My bottom line is that there is no reason to think portfolio managers will make good business decisions and that goes double for people who aren't even competent portfolio managers.