ProfessorBainbridge.com

What if CEOs can't be shamed about their salaries? The possible failure of pay ratio disclosure

Matthew Nemeth writes:

The S.E.C recently provoked a storm of controversy when it voted to amend the executive compensation reporting requirements for public companies under the Dodd Frank Act. ...

Under the proposed rule, a company would be required to report not only the amount of compensation that the Chief Executive receives, but also the median compensation that the rest of that company’s employees receive. The company is then required to report the ratio between those two figures as a measure of the gap between executive and employee compensation at that company. The 3-2 vote approving this proposed rule split down party lines, with the three Democrats voting for the rule, and the two Republicans voting against.

While this new requirement is fairly simple and seemingly straightforward on its face, many in the business community are concerned about the potential for any of these statistics to be twisted and misconstrued. The rule’s Republican opponents on the Commission suggested that “the proposal is an attempt to shame corporations into reining in executive pay by forcing companies to calculate compensation in a way that is designed to yield eye-popping results.”

I wonder, however, whether pay ratio disclosure may end up backfiring on its proponents. David Brooks  observed that "When newspapers started publishing outsized CEO compensation, they expected the exposure would cause the CEOs to ask for less. It didn’t work." (I note in passing the arrogance of the mainstream media implicit in Broks' comment. Journalists really think they are engaged in social engineering.)

Instead, experience has taught that increased disclosure leads to higher levels of executive compensation. Why? First, shaming doesn't work -- or at least not very well -- in this context. Second, the more information is available about what other companies' CEOs are paid, the stronger the Lake Wobegon effect becomes. Third, if greater disclosure leads to more effective monitoring that threatens to adversely affect managers, managerial compensation will rise to compensate them for that risk.

It will be amusing if pay ratio disclosure blows up in its proponents' faces, as have prior efforts to rein in CEO pay. Will they ever learn?

Related articles

Embracing the S.E.C.'s New Executive Compensation Disclosure Rule

Unfortunately, even if SCOTUS does away with fraud on the market, plaintiff lawyers will still bring omission cases

Alison Frankel reminds us that Affiliated Ute would survive even if the Supreme Court strikes down the fraud on the market theory in the pending Halliburton case:

 “It is no answer to urge that, as to some of the petitioners, these defendants may have made no positive representation or recommendation,” the opinion said. “Under the circumstances of this case, involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of this decision.”

The Affiliated Ute precedent thus draws a line between securities fraud claims involving misrepresentations and those involving omissions. ...

It’s widely accepted that if the Supreme Court reverses Basic and does away with fraud-on-the-market reliance, class actions based on misrepresentations will be decimated. But not cases based on omissions, thanks to Affiliated Ute.

Which is why the Supreme Court needs to take the ultimate step and disimply Rule 10b-5.

SOX 404 compliance: Do executives disclose material weaknesses?

A new paper suggests that the internal controls disclosure may not properly incentivize corporate executives:

This study investigates the impact of internal controls over financial reporting requirements (ICFR) enacted as part of the Sarbanes-Oxley Act of 2002 on the judgment and decision making of corporate tax executives. Prior research indicates that companies with disclosed material weaknesses in internal controls face significant capital-markets based consequences (Ashbaugh-Skaife et al. 2009; Hammersley et al. 2008; Cheng et al. 2006). However, prior research has not examined whether these consequences impact the decision making of corporate executives. The current study examines the decisions of corporate tax executives to amend or not amend a prior year tax return when the cause of a discovered error will be classified as either a significant deficiency or a material weakness. Although the overall likelihood to amend the tax return is high, we find that tax executives are less likely to amend a prior year tax return when the cause of the discovered error will be classified as a material weakness than when the cause will be classified as a significant deficiency. In addition, when facing a material weakness classification, 16.7% of tax executives would not disclose the error (not amend the prior year tax return). These results indicate that the required ICFR disclosure rules have unintended consequences; impacting the decision making of company executives. In addition, if executives are willing to hide or not disclose an internal control deficiency, the overall reliability of the reporting on ICFR may be limited.

Hansen, Victoria and White, Richard A., Unintended Consequences of Internal Controls Over Financial Reporting (November 14, 2013). Available at SSRN: http://ssrn.com/abstract=2354497

Obama and the end of empire

I wonder if Americans will look back on the Obama era the way Brits look back at the 1960s: The end of an empire? For better or worse, it seems like US power and influence are eroding fast on his watch.

Supreme Court grants cert in contraception mandate cases: Religious freedom and for profit corporations

SCOTUS Blog reports that:

Two of the cases [on which the Court granted cert] –Sebelius v. Hobby Lobby Stores, Inc., and Conestoga Wood Specialties Store v. Sebelius – were consolidated for one hour of oral argument, during which the Court will consider challenges to the Affordable Care Act’s requirement that employers provide their employees with health insurance that includes access to birth control.  ...  Lyle covered all four grants for this blog yesterday; Matthew Porny did the same for JURIST. Coverage focused on the grants in the contraceptive mandate cases came from Nina Totenberg of NPR, Jess Bravin of The Wall Street Journal, Bill Mears of CNN, and Richard Wolf of USA Today.  In an op-ed for CNN, Elizabeth Wydra urges the Court to uphold the mandate, arguing that the lower courts’ decisions striking it down turn “first principles of religious freedom, as well as fundamental tenets of corporate law, on their head.”  And at Federal Regulations Advisor, Leland Beck predicts that, although the Court “can reach the constitutional issue of whether Obamacare is inconsistent with the First Amendment,” the cases are “more likely to be decided on narrow regulatory and statutory grounds.”

Which seems to me to be a perfectly good reason for reminding folks that I have offer a different approach to the problem, which modesty prevents me from suggesting that the Supreme Court should adopt, in my article Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers, 16 Green Bag 2d 235 (2013):

Reverse veil piercing (RVP) is a corporate law doctrine pursuant to which a court disregards the corporation’s separate legal personality, allowing the shareholder to claim benefits otherwise available only to individuals. The thesis of this article is that RVP provides the correct analytical framework for vindicating certain constitutional rights.

Assume that sole proprietors with religious objections to abortion or contraception are protected by the free exercise clause of the First Amendment and the Religious Freedom Restoration Act (RFRA) from being obliged to comply with the government mandate that employers provide employees with health care plans that cover sterilizations, contraceptives and abortion-inducing drugs. Further assume that incorporated employers are not so protected. This article analyzes whether the shareholders of such employers can invoke RVP so as to vindicate their rights.

At least one court has recognized the potential for using RVP in the mandate cases, opining that these cases “pose difficult questions of first impression, including whether it is “possible to ‘pierce the veil’ and disregard the corporate form in this context.” The court further opined that that question, among others, merited “more deliberate investigation.” This article undertakes precisely that investigation.

Invoking RVP in the mandate cases would not be outcome determinative. Instead, it would simply provide a coherent doctrinal framework for determining whether the corporation is so intertwined with the religious beliefs of its shareholders that the corporation should be allowed standing to bring the case. Whatever demerits RVP may have, it provides a better solution than the courts’ current practice of deciding the issue by mere fiat.

 

Pascal-Emmanuel Gobry on Pope Francis on the Economy and the State

I continue to reflect on the portions of the Apostolic Exhortation of the Holy Father Francis to the Bishops, Clergy, Consecrated Persons and the Lay Faithful on the Proclamation of the Gospel in Today’s World that deal with capitalism and the state. I'm not ready yet to discuss my conclusions, mostly because I haven't reached any. In the meanwhile, however, I found Gobry's commentary worth keeping in mind:

To be a Christian is to be willing to be challenged, all the time, and to have the humility to let yourself be challenged—including, for Catholics, by the Church.

As people with strongly held economic views who take part in the public debate, we have acquired a certain toughening of the hide. We have become accustomed to thinking of ourselves as being part of a team, and to responding reflexively when we hear the rhetoric of the other team.

What the Church asks of us is to let go of our defenses and make ourselves open to her magisterium. Without abdicating discernment, we also have to force ourselves to open our hearts and let ourselves be challenged by Pope Francis’ words.

When Pope Francis describes inequality and exclusion as very grave moral sins, we must let ourselves be challenged, and we must open our hearts. ...

Pope Francis’ call is not a governing agenda. We must, however, let it be a wake up call. We must look first at the impact of the policies we promote on the poor and the marginalized, and keep their interests in line first. And this is something Milton Friedman would agree with, by the way.

Kindly go read the whole thing.

"The Case for Repealing Dodd-Frank"

At a time when there is open talk in the media about the possibility of a repeal of ObamaCare, Peter Wallison's case for repeal of Dodd-Frank seems somewhat less fanciful than it did a year ago.

Pope Francis on Religion in the Public Square

In his classic 1984 book, The Naked Public Square: Religion and Democracy in America, Father Richard John Neuhaus argued that:

The secularism of late modernity (and, now, post-modernity) would not be neutral, civil, and tolerant, but aggressive, rude, and hegemonic. It would demand, not a civil public square in which the sources of all moral convictions would be in play in a robust debate, but a naked public square — a public square in which secularism would be de facto established as the national creed (or, perhaps better, national moral grammar). The new secularism would not be content to live and let live; it was determined to push, not only religion, but religiously informed moral argument, out of public life, and to do so on the ground that religious conviction is inherently irrational. And of course it would be but a short step from there to the claim that religious conviction is irrational bigotry ....

His warning, of course, has proven highly prescient. We live in a culture increasingly hostile to religious principles being advocated in the public square. In his Apostolic Exhortation of the Holy Father Francis to the Bishops, Clergy, Consecrated Persons and the Lay Faithful on the Proclamation of the Gospel in Today’s World, Pope Francis emphatically insists that religion has a proper place in the public square:

The Church’s pastors, taking into account the contributions of the different sciences, have the right to offer opinions on all that affects people’s lives, since the task of evangelization implies and demands the integral promotion of each human being. It is no longer possible to claim that religion should be restricted to the private sphere and that it exists only to prepare souls for heaven. We know that God wants his children to be happy in this world too, even though they are called to fulfilment in eternity, for he has created all things “for our enjoyment” (1 Tim 6:17), the enjoyment of everyone. It follows that Christian conversion demands reviewing especially those areas and aspects of life “related to the social order and the pursuit of the common good”. 

Consequently, no one can demand that religion should be relegated to the inner sanctum of personal life, without influence on societal and national life, without concern for the soundness of civil institutions, without a right to offer an opinion on events affecting society. Who would claim to lock up in a church and silence the message of Saint Francis of Assisi or Blessed Teresa ofCalcutta? Theythemselveswouldhavefound this unacceptable. An authentic faith – which is never comfortable or completely personal – always involves a deep desire to change the world, to transmit values, to leave this earth somehow better that we found it. We love this magnificent planet on which God has put us, and we love the human family which dwells here, with all its tragedies and struggles, its hopes and aspirations, its strengths and weaknesses. The earth is our common home and all of us are brothers and sisters. If indeed “the just ordering of society and of the state is a central responsibility of politics”, the Church “cannot and must not remain on the sidelines in the fight for justice”. 

I'm confident Father Neuhaus would agree that this is a magnificent statement of the role of religion in the public square.

Pope Francis on the proper nature of Confession and Reconciliation

I have been reading the Apostolic Exhortation of the Holy Father Francis to the Bishops, Clergy, Consecrated Persons and the Lay Faithful on the Proclamation of the Gospel in Today’s World mainly because it's being billed by liberals inside and outside the Church as an attack on capitalism. More on that to come, as there's a lot here to parse. In the meanwhile, some notes from time to time on other aspects of the exhortation. 

As an adult convert to Catholicism, coming to terms with the Sacrament of Reconciliation has been one of my greatest challenges. I'm okay with the theology behind the Sacrament. But putting the theology into practice is tough. Confession is hard and painful. You come to grips with the parts of yourself you like least and then have to tell another about them, all the while fearing his judgment or condemnation (even though that's pretty rare these days).

So I was struck by what Pope Francis had to say on the subject:

I want to remind priests that the confessional must not be a torture chamber but rather an encounter with the Lord’s mercy which spurs us on to do our best. A small step, in the midst of great human limitations, can be more pleasing to God than a life which appears outwardly in order but moves through the day without confronting great difficulties. Everyone needs to be touched by the comfort and attraction of God’s saving love, which is mysteriously at work in each person, above and beyond their faults and failings. 

Let's hope that sinks in.

The fact that Charles Ergen is an ass does't mean that plaintiff lawyers aren't greedy sharks

Alison Frankel sarcastically summarizes Dish Network's latest filing in the ongoing saga of whetrher CEO and dominant shareholder Charlie Ergen should have any role in Dish' takeover bid for LightSquared, concluding:

So why are these lawyers, who purport to represent the interests of Dish minority shareholders, meddling with the company’s prospects of winning the LightSquared licenses? For the money, of course. You know how this racket works. They file their shareholder derivative suit, litigate for long enough to make themselves a nuisance, then agree to settle for some paltry consideration and a nice chunk of dough.

Or so says Dish, in briefs filed Thursday night by Dish’s board, Ergen and a special litigation committee the board appointed right before a hearing last month in Las Vegas state court on the minority shareholders’ request for expedited discovery.

I think we can all agree by now that (a) Ergen and Dish seriously breached a lot of corporate governance norms of best practice both in connection with this deal and, perhaps, other aspects of his tenure at Dish and (b) aspects of this deal stink to high heaven. But that's no reason to give the plaintiff class' sharks lawyers a free pass. Indeed, I literally laughed out loud when I read this gem in Frankel's article:

Minority shareholder counsel Mark Lebovitch of Bernstein Litowitz told me in an email that Dish’s attempt in the new briefs to shift attention to plaintiffs lawyers is mere tactics. “It’s not surprising that people struggling to justify Ergen’s and his board’s alleged breaches of the duty of loyalty are trying to change the subject,” his email said. “The fact of the matter is that we have one goal – to remedy what the former chairman of the SEC described as the Dish Board’s appalling disregard for the most basic of corporate governance norms.”

Bullshit. In fact, I think these guys ably summarized my view of that claim:

In fact, Lebovitch's main goal doubtless is to make money for himself and his firm, which will be spent to buy Democrat politicians who will block class action and securities fraud reform, so that the sharks can continue to feed on corporate America. Or has he taken this case on pro bono?

 

Study aids for corporations, business associations, and agency & partnership law school courses

Bainbridge on Agency, Partnerships & LLCs:

The emergence of the limited liability company has kindled renewed interest in unincorporated business associations among legal scholars. This revival was further stimulated by the multiple revisions made to the Uniform Partnership Act in the 1990s. By lending new intellectual respectability to the study of unincorporated business associations, these developments stimulated the supply side of the curricular equilibrium. Courses on unincorporated business associations have thus sprung up at many law schools. A number of very fine casebooks compete for that market, including one co-edited by the author of this volume. This text is intended to provide students taking a course in unincorporated business associations with a reader-friendly, highly accessible overview of the law and economics of unincorporated business associations. In addition, students taking a basic course in corporations or business associations may find this volume helpful as a more expansive treatment of the law of agency, partnership, and limited liability companies. The text does not shy away from bringing theory to bear on doctrine. While the text has a strong emphasis on the doctrinal issues taught in today’s unincorporated business associations classes, it also places significant emphasis on providing an economic analysis of the major issues in that course. Agency, Partnership and Limited Liability Companies thus offers not only with an overview of the black letter law of unincorporated business associations, but also a unifying method of thinking about the subject. Using a few basic tools of law and economics — such as price theory, game theory, and the theory of the firm literature — the reader will come to see the law in this area as the proverbial “seamless web.”

Bainbridge on Corporation Law:

Corporations classes present students with two related problems: First, many students have trouble understanding the cases studied because they do not understand the transactions giving rise to those cases. Second, Corporations classes at many law schools are taught from a law and economics perspective, which many students find unfamiliar and/or daunting. Yet, with few exceptions, corporate law treatises and other study aids have essentially ignored the law and economics revolution. 

This book is intended to remedy these difficulties. The pedagogy is up-to - date, with a strong emphasis on the doctrinal issues taught in today’s Corporations classes and, equally important, a mainstream economic analysis of the major issues in the course. As such, the text is coherent and cohesive: It provides students not only with an overview of the course, but also (and more importantly) with a unifying method of thinking about the course. Using a few basic tools of law and economics-price theory, game theory, and the theory of the firm literature-students will come to see corporate law as the proverbial “seamless web.” Finally, the text is highly readable: The style is simple, direct, and reader- friendly. Even when dealing with complicated economic or financial issues, the text seeks to make those issues readily accessible.

 

Swiss voters agree w/ yours truly that capping CEO pay is not the way to solve income inequality

A while back I urged Swiss voters not to use a cap on CEO pay to solve their country's income inequality. In the vote just held, they rejected doing so:

Swiss voters have rejected a proposal limiting the salaries of top executives. About two-thirds of voters said no to the Young Socialists' plan. The aim was to reduce the salary gap to a 1:12 ratio – in other words to limit the salaries of top executives based on the annual minimum wage of the lowest paid employee within the same company.

The vote brings to an end to more than six months of intense campaigning by the youth wing of the centre-left Social Democrats who were backed by trade unions. ...

In the few weeks leading up to the vote, opponents - led by the business community, the government and most political parties - mounted a strong defence of the current wage system.
 
They warned that approval of the initiative would undermine Switzerland’s competitive edge, result in a shortfall in state revenue and impose unnecessary restrictions on relations between employers and employees in a liberal market economy.

Who are tomorrow's Science Fiction Grand Master writers?

The Guardian's book blog asks:

The term "grand master of science fiction" summons up, for me at least, the image of a venerable, white-haired author who was speculating upon mankind's future when the idea of putting a human on the moon was still a pipe dream.

But the appellation is a distinct honour, awarded by the Science Fiction and Fantasy Writers of America to a living author who is announced, towards the end of the year, to be the recipient of the Damon Knight Memorial Grand Master award. ...

As worthy as all the past winners of the Grand Master award undoubtedly are … what of the next generation? Is it feasible to now cast the grand master net wider, perhaps consider those writers born in the 1950s, or the 1960s? Even someone born as relatively recently as the 1970s could now be in their 40s. Who from that crop would be worthy of the honour?

For me that's easy: John Scalzi and Charles Stross. Between them they have 8 Hugo Best Novel nominations in the last 8 years.

Kevin LaCroix on Halliburton and the challenge to the fraud on the market theory

A typically excellent and detailed analysis.

Walter Olson: Nomination filibusters and the Senate "nuclear option"

Comments from my Cato Institute colleagues Roger Pilon and Ilya Shapiro, as well as CEI’s Hans Bader. A “totally risk-free strategy for Democrats, as long as they are never again in the minority.” [Lowering the Bar] Patterico on the elegant consistency of the New York Times editorial page over the years (it is consistent, once you know to look for the pattern) and an unheeded 2005 prayer (YouTube, auto-plays) from then-Sen. Joseph Biden (D-Del.). And some further observations from Jonathan Adler.

via overlawyered.com