September 13, 2003

We've moved HERE 

Thanks to those of you who gave us advice about improving the blog. After considering all the options, I decided to move to TypePad. You can find the new blog --same name, same content -- HERE. If you've added me to your blog roll, please consider updating the link. Thanks!

tasting note  

Provenance 2000 Rutherford cabernet sauvignon (WS 90). It was infanticide — nowhere near ready to drink — but with promise for the future. Firm with smooth tannins, deep color, but almost no nose. The flavor profile included currants and cassis, leathery beef, and oriental spices; not much Rutherford dust. Needs time. Interestingly, Provenance is run by Duckhorn’s longtime winemaker Tom Rinaldi. At Provenance he is pursuing the same blending philosophy he championed at Duckhron. This wine, for example, is 15% merlot.

acton institute 

As a Catholic Tory with professional interests in law, policy, economics, and business, I have found few better resources than the Acton Institute:
The Acton Institute organizes seminars aimed at educating religious leaders of all denominations, business executives, entrepreneurs, university professors, and academic researchers in economics principles, and in the connection that can exist between virtue and economic thinking. We exhort religious leaders to embrace the principles of economics as analytic tools in the consideration of economic issues that arise in their ministry, on the one hand, and, on the other, we exhort business executives and entrepreneurs, to integrate their faith more fully into their professional lives, to give of themselves more unselfishly in their communities, and to strive after higher standards of ethical conduct in their work. Our conferences are held primarily in the United States, but we also conduct some conferences in Europe and Latin America. More information on these seminars can be obtained at from Acton programs.
Their web site has a wealth of resources for like-minded folks (but non-liked minded folks would benefit even more!).

September 12, 2003

blog improvement bleg 

I want to add a browse by category function to the sidebar, but how? Blogger's help section doesn't have an answer and a series of google searches didn't turn up an answer. Anybody know how? If so, PLEASE email me.

The Bureau of Corporate Allegory 

Most people visit James Lilek's site to read his daily bleat, as well they should. For us corporate geeks, however, the best part of his site is The Bureau of Corporate Allegory. Lileks explains:
The other day the dealer pulled out a sheaf of old stock certificates, and with dismay I realized I'll probably end up collecting these, too. And they're worthless.
But. Each has an engraving of some allegorical figure, etched with the same care you find on money, but depicting scenes of surreal Olympian figures designed as a metaphor for business. Bouffant-haired women in gravity-confounding dresses similar to Leslie Parrish's in the Star Trek episode ('Who Will Mourn for Adonis') with electrical devices at their feet; 'Green Acres' era Park Avenue matrons in classical garb rolling the world around their penthouse balcony; salacious-faced gods with a test-tube in one hand.
The images were too peculiar to pass up. I bought a batch, scanned them in, and voila: the Bureau of Corporate Allegory.
Its a fabulous collection, with a highly professional web appearance (except that while browsing the collection clicking the next button takes you back and clicking the back button takes you forward; but hey I type with three fingers).

Apropos of the prior post 

Advice for aspiring scholars (as well as those of us who have been at it a while):
Let school-masters puzzle their brain. With grammar, and nonsense, and learning; Good liquor, I stoutly maintain, Gives genius a better discerning.
17th Century Irish playwright and poet Oliver Goldsmith.

Last night's wine 

Denise Howell of the Bag and Baggage blog gave us a very nice pointer. She writes: "Professor Bainbridge blames his blog on Hugh Hewitt, who wants 'less corp law, more politics;' I'll chime in with my own typical request for 'more wine!'" Your wish, etc....
Estancia Meritage Alexander Valley 1999 (WS 87). A cabernet/merlot blend. A modest nose that is, unfortunately, reminiscent of cherry-flavored cough syrup. Tannic and acidic on the palate, with notes of red cherries and mocha java. I wonder if they acidified it, although I don’t think they used citric acid the way some cheapskates do (the lemon flavor usually gives it away in reds). Not bad for a mid-week wine, albeit a bit pricey for that purpose (MSRP $30, although I paid a lot less), but not one I would buy again. On the other hand, the other bottle in the cellar will get drunk rather than just going into the stock pot. And, I should note, the good wife liked it better than I did. My main problem with this wine is that it’s not really ready to drink, but I’m also not sure it will age that well. I’ll cross my fingers, give the other bottle a couple of years, and report back (assuming I’m still doing this then).

Catholic Blogs? 

A couple of readers have asked why my blog roll includes a section for Catholic blogs. The short answer is that while I’m not a Catholic blogger in the sense of blogging regularly about Catholicism, I am a Catholic who blogs. The long answer (you knew I’d have one, didn’t you?) is that one of my principal scholarly interests is Catholic social teaching on corporations and the economy.

In fact, I am the only person I know who came to Catholicism through economic analysis of corporate governance. A couple of years ago I wrote a series of law review articles about participatory management – i.e., employee involvement in corporate governance. One of the questions in which I got interested was whether employees have a right to participate in corporate decisionmaking, which lead to an inquiry into natural law, which in turn stimulated an interest in faith-based analyses of corporate governance. At the time, I was an evangelical disgruntled with the state of evangelical scholarship (Mark Noll, who I regard as the doyen of evangelical scholars and church historians, wrote a great book on this problem: The Scandal of the Evangelical Mind, which I’ll review soon). Catholic social teaching struck me as the only well-developed faith-based account around. I relied on it in writing Corporate Decisionmaking and the Moral Rights of Employees: Participatory Management and Natural Law, 43 Villanova Law Review 741 (1998). Reading the papal encyclicals on the economy, especially John Paul II’s Centesimus Annus, and Michael Novak’s books, especially Toward a Theology of the Corporation (which I’ll also review soon), in doing the research on that project got me interested in Catholicism. (I’m also a longtime reader of the fabulous magazine First Things, which probably lay the groundwork.) One thing lead to another—i.e., RCIA–and my wife and I eventually were received into the Catholic church.

My first post-conversion attempt at merging my interest in Catholic social teaching and corporate governance was The Bishops and the Corporate Stakeholder Debate, 4 Villanova Journal of Law and Investment Management 3 (2002). That essay critiqued Catholic social teaching on corporate social responsibility. Specifically, it focused on one of the policy recommendations made by the U.S. Bishops in their pastoral letter on economic justice, Economic Justice for All: Pastoral Letter on Catholic Social Teaching and the U.S. Economy. In that document, the Bishops addressed the long-running stakeholder debate; i.e., they claimed that decisionmaking by directors of public corporations should take into account the interests of corporate constituencies other than shareholders. My article evaluated three ways in which the Bishops’ position might be translated into public policy: (1) directors could be given nonreviewable discretion to make trade-offs between shareholder and stakeholder interests; (2) directors could be given reviewable discretion to make such trade-offs; or (3) directors could be required to make such trade-offs subject to judicial (or regulatory) oversight. None of these approaches, I argued, is an improvement on current law; to the contrary, all are worse. The first approach would be toothless, the second would increase agency costs, and the third would either prove unworkable or pose an unwarranted threat to economic liberty (or both).

It might seem somewhat churlish to have dissented so soon after switching sides. In my view, however, it is the task of Catholic intellectuals to exercise critical reflective judgment with respect to society, the Church, and the relationship between the two. Of course, I recognize that there is a fine line between the exercise of critical evaluative judgment and illegitimate dissent. With respect to the stuff I write about, however, I don’t think this is a problem. When it comes to issues such as the degree of state intervention in the economy, the Church outlines basic principles but recognizes substantial latitude with respect to their translation into public policy. Nowhere, for example, does the Church state what percentage of the economy should by controlled by the state, which leaves a great deal of room for prudential judgment by the Catholic laity. In promulgating their pastoral letter, moreover, the Bishops expressly acknowledged that their “prudential judgments” about specific policy recommendations were not made “with the same kind of authority that marks our declarations of principle.” (xii.) More to the point, perhaps, in Centesimus Annus (para. 43), the Pope reminded us that the Catholic “church has no models to present.”

Anyway, since one of the main purposes of this blog (besides relentless self-promotion) is writing up ideas that I don’t want to write a 50+ page law review article about, you can expect the occasional posting about Catholic social teaching on corporate governance.

Is President Bush (43) really a conservative? 

Several bloggers (e.g., Sullivan) and commentators (e.g., Barnes) have noted that despite President Bush’s reputation as a conservative the federal government has grown dramatically during his tenure in office, not all of which can be explained by post-Sept. 11 homeland security initiatives. As a corporate law guy, I would add to this set of reservations President Bush’s seemingly approving comment that Sarbanes-Oxley enacted “the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt.” Odd praise, indeed, coming from a purportedly conservative President. Especially odd praise coming from a former state governor with a track record of stated respect for basic federalism principles, because, taken together, Sarbanes-Oxley’s various provisions constitute the most dramatic expansion of federal regulatory power over corporate governance since the New Deal. UPDATE: HERE.

I did not know this 

But my colleague (and friend) Lynn Stout has a website devoted to her big idea:
This website explores Team Production, a new framework for analyzing corporate law and corporate governance, developed initially by Dr. Margaret Blair and Prof. Lynn Stout.
Team Production explains why corporate law has historically protected the broad discretion of corporate boards and managers to balance the sometimes competing interests of all "team members," which may include key employees, suppliers, customers and creditors as well as shareholders. Further, it explains why such discretion should be maintained over the objections of those who have called for its restriction.
Team Production provides a counterpoint to "shareholder primacy," a view promoted by academics and legal practitioners in recent years.
If your policy preferences on corporate governance/accountability run to the more "progressive" side than do mine, you'll find Lynn's work especially interesting. For my critique of the team production model, see Director Primacy: The Means and Ends of Corporate Governance, 97 Northwestern University Law Review 547, 592-605 (2003).

Academic pomposity 

Critical Mass blogs:
This week's Chronicle of Higher Education features a long and insightful piece by University of Michigan law professor William Ian Miller. Miller's subject is academic pomposity, and his article is an excerpt from his promisingly titled forthcoming book, Faking It. You need a subscription to read the whole article, alas. But here are some excerpts that give the general gist and tone of the piece....
Perhaps it says something about me that I found Miller's attempts to place professorial pretension in a historical and philosophical context less interesting and compelling than I did his rare willingness to simply come right out and say that the professoriate is by nature and by culture a deeply self-impressed, troublingly pedantic lot....
OUCH! Not, of course, that I know any pompous academics ... or that I look at one in the mirror every morning.

How Appealing's Pointer 

Howard Bashman of the always worth reading How Appealing blog sent a nice pointer my way (thanks!), noting from my bio that I was "born in Doylestown, Pennsylvania, which isn't too far away from where I [i.e., Howard] reside." Small world. But I don't think I've been to Doylestown since I was about a month old. My dad was stationed at Carlisle Barracks when I was born and we shipped out for Germany shortly thereafter.

Why the problem at the NYSE is the same as the Problem at Freddie and Fannie 

The Wall Street Journal editorializes today (subscription required) on Treasury Sec'y Snow's testimony yesterday on Freddie Mac and Fannie Mae:
Arguing that publicly traded companies should have only private directors, he suggested the time had come for Fan and Fred to eliminate the directors on their boards who are now appointed by the President. Good corporate governance, he crisply noted, requires that the people who are running companies serve the stockholders.
Apropos of that point, a reader writes:
My opinion is that Freddie Mac's board [mild expletive deleted] its shareholders by ordering an investigative law firm to try to pin blame on senior management (and therefore not on the Board) for an accounting scandal. The result may have covered the board's posterior, but it damaged the company both internally and externally. Is there any solution for this in terms of corporate governance? My guess is that shareholder lawsuits are a lousy tool for creating Board accountability, but is there a better tool that would not have the side effect of giving board such a strong incentive to cover itself that it hires a hit squad investigator to go after management and trash the entire company?
How does this tie into the on-going Grasso pay imbroglio? The trouble with all three entities is that they are neither fish nor fowl. Their government connections insulate them from discipline by markets and investors. The NYSE is part of a trading market oligopoly with very high barriers to entry, some of which are attributable to SEC rules. (The SEC, for example, long let the NYSE get away with listing standards making it almost impossible for a firm to de-list.) In the case of Freddie and Fannie, though, its even worse: the markets believe (with some justification) that the federal government has (implicitly) guaranteed their debts, which allows them to avoid by market discipline by borrowing at below-market rates. Moreover, because their board includes political appointees, both are further insulated from investor discipline. The solution for all three is privatization. Let them run as for-profit corporations in competitive markets, with full disclosure (none of them are very transparent as to either governance or finances).

UPDATE: Broc on Grasso:
And don't get me started about the NYSE's governance structure. True, its not a public company but it does have all the earmarkings of a poster child for bad governance. A CEO who handpicks the board - and the compensation committee. A compensation committee who approves CEO compensation arrangements that it doesn't understand. A compensation committee comprised of CEOs from companies that have inherent conflicts of interest with the CEO by virtue of him being their regulator.

UPDATE: Gregg Easterbrook blogs:
Turns out the compensation board that approved Grasso's grotesque bonus contained executives from big companies that had a keen interest in insuring that the NYSE did not act against stock-market manipulation. Citigroup, Morgan Stanley and Merrill Lynch--the key offenders who admitted in the recent $1.4 billion Securities and Exchange Commission settlement that they deliberately misled investors--all had seats on the committee setting Grasso's pay. So did AOL Time Warner which, during the period Grasso was being assigned the grotesque bonuses, was engaged in the most determined campaign to wipe out shareholder value in American business history. These tainted companies were in effect offering Grasso huge amounts of money if he played along and made sure the NYSE did nothing to expose them--and Grasso, a faithful water-carrier, made sure the NYSE did absolutely nothing. There's a word for all this, and the word is "corruption."
Check again.

I don't know how I missed this, but: 

As every corporate lawyer and law student knows, little Delaware is THE corporate law giant. Its courts are to corporate law what the US Supreme Court is to constitutional law. Jack Jacobs was a Vice Chancellor of the Delaware Chancery Court for many years. He has written many important corporate law opinions, a number of which can be found in the business associations casebook I co-author. I have had the pleasure of meeting Jack on several occasions and have always found him to be as warm, generous, and caring as he is intelligent and thoughtful. I admire him a lot, even if he has never cited me! (Hint, hint.) So it was with no small amount of embarrassment that I only recently discovered that he has been elevated to the Delaware Supreme Court, but better late than never:
Before his appointment to the Supreme Court, Jack B. Jacobs served as Vice Chancellor of the Delaware Court of Chancery since October, 1985, after having practiced corporate and business litigation in Wilmington, Delaware since 1968. Justice Jacobs holds an undergraduate degree from the University of Chicago (B.A., 1964, Phi Beta Kappa) and a law degree from Harvard University (LLB., 1967).
Jacobs' appointment is very good news for the Delaware supreme court. Jack's strong knowledge of corporate law and good judgment should help prevent future examples of the sort of boners the court has pulled lately (see, e.g., Omnicare).

why hasn't google indexed my blog? 

Grumble, grumble ....

UPDATE: The new blog hasn;t been index either!

NRO's Jonah Goldberg on Grasso 

Jonah blogs:
I'm willing to defend income inequality, sweat shops, child labor, tax cuts and the like, if the merits are there. I'd privatize everything but the army and maybe four other things if I had my way. In other words, I'm no softy on these issues. But am I the only one in the corner offended by Dick Grasso's 9/11 bonus? I mean at a time when everyone was talking about sacrifice and loss, when we were touting the resumption of our normal lives as a patriotic counter-strike to the terrorist menace, Dick Grasso get's a five million dollar bonus on top of his enormous salary because the stock market re-opened? I despise financial populism of any kind, but this just strikes me as galling.
Yep. Me too.

UPDATE: Later on, Jonah further blogged:
Hollywood salaries make so much more sense to me than this Grasso thing. That Adam Sandler makes so much money is almost a pure market function. He is a meat prop. If millions of people wanted to look at a lamp or a dog the owner of said lamp or dog could charge huge sums of money to Hollywood studies to put these objects on display on the big screen. Sandler's talent or lack thereof is meaningless (though I have liked a couple Sandler movies), the market supports what he makes. Sure it's unfair that Sandler makes so much money, but it's not unfair that investors have the opportunity to place their bets on him. What market mechanism justifies Grasso's bonus? It strikes me this was simply a case of buddies and cronies rewarding somebody with little to no justification. If Grasso were making $300K a year I could see getting a huge bonus. But he was already making $500K a week.
Yep to that too.

September 11, 2003

Another pointer 

My colleage Victor Fleischer sent a nice pointer my way:
Steve is best known (I think) for supporting the race-to-the-top thesis in the corporate law debate. Steve's spin, as I recall, is that corporate law benefits from having 50 regulators instead of one (federal) regulator -- if one state gets out of hand and excessively regulates, managers will learn to incorporate elsewhere.
Actually, I would rank that theme fourth in my scholarship. Ahead of it, I would rank: the director primacy theory of corporate governance, the property rights approach to insider trading, and a fierce loyalty to the shareholder wealth maximization norm. As Gordon Smith of Venturpreneur once wrote:
The most frequent defender of the shareholder primacy norm in recent scholarship has been Stephen Bainbridge. In an article-length analysis of the normative implications of shareholder primacy, Bainbridge began with a descriptive assertion about the place of shareholder primacy in corporate law: "Despite a smattering of evidence to the contrary, the mainstream of corporate law remains committed to the principles espoused by the Dodge court." In a later article, Bainbridge made the link between the legal norm and business practice explicit, asserting that "the shareholder wealth maximization norm ... has been fully internalized by American managers." In fairness, Bainbridge recognizes that directors are not hell-bent on shareholder wealth maximization and sometimes consider the interests of other corporate constituencies. However, in Bainbridge's opinion, that the shareholder primacy norm "matters" seems beyond question.
Yet, even more than the wealth maximization norm, at least of late, my work has emphasized the notion of director primacy. University of Florida law professor Wayne Hanewicz writes:
[T]his Article will also evaluate the "director primacy" model of corporate governance that Professor Stephen Bainbridge has advocated for in a series of recent articles. Director primacy is (for the most part) descriptively accurate and offers a compelling normative justification for why the board and not the shareholders or the courts should be the institution that gets to decide what a corporation does. Director primacy views the board as a "Platonic guardian" with "essentially nonreviewable" decisionmaking authority. Although director primacy places some limits on director authority, these limits are derived solely from the need for the board to be held accountable for the shareholder wealth maximization norm and from balancing this need for accountability with the benefits of granting the board wide-ranging authority. Further, Bainbridge explicitly disclaims that this balancing should shift decisionmaking authority from the board to some other institution (e.g., shareholders, courts). As I explain below, there is much to like about director primacy, including its justification for vesting decisionmaking authority in the board.
There is a but coming, of course, but that's an issue for another day. In the meanwhile, its time to quit! Cheers.

Shareholder Empowerment 

The 10b-5 Daily reports:
At the Council of Institutional Investors fall meeting last week, New York State Comptroller Alan Hevesi proposed the formation of an activist group dedicated to promoting corporate governance reforms, regulation, and legislation. The group will be called the National Coalition of Corporate Reform (NCCR) and there are plans to have an organizing meeting in October. Other public institutions, along with the president of the AFL-CIO, have expressed their support for the proposed group.
This goes to my planned post on John Edwards' corporate accountability position paper, so I'll be blogging on this issue soon. Meanwhile, Lyle has the details.

Recall in trouble 

Rick Hasen, the widely read election law blogger (and a law professor at another school here in the City of Angels) attended the 9th Circuit's hearing today on the ACLU's lawsuit to block the California recall. He reports that the "case was heard before three judges: Pregerson, Paez, and Thomas. All are generally seen as liberal judges appointed by Democrats." In his view, "the judges seemed receptive to the ACLU's argument equal protection argument." Hasen doesn't come right out and say it, but it seems pretty clear he thinks the court is likely to postpone the recall. The California Insider reports that that is also the wire service take.

corporate governance and presidential politics 

Being a corporate law kind of guy, I decided to check whether the main presidential candidates had said anything about corporate governance in their web sites. As far as I can tell, so far only Kucinich (see below) and John Edwards have done so. Edward's position paper has a lot more detail than did Kucinich's, with more action items. Kucinich was also easier, because competitive federalism is something I've written a lot about, so there was plenty of stuff in the file to adapt for that post. I'll get back to you on Edwards, probably over the weekend.

In the interests of equal time, I should note that Bush's official site apparently doesn't have a position paper on corporate governance issues either. Nor, for that matter, do any of the California recall gubernatorial candidates. (Does Bustamante have a campaign web site? I couldn't find one for the recall campaign -- just his official state site and Lt. Gov. campaign site, the latter of which seemed to be down.)

Anyway, blogging about presidential candidates should generate some hate mail, if nothing else does. (I don't plan on blogging about "you know who" though. I don't need that much hate mail.)

Kucinich for Federal Law of Corporations 

Democratic presidential candidate Dennis Kucinich is advocating a federal law of corporations:
We need a new relationship between corporations and our society. Just as our founders understood the need for separation of church and state, we need to institutionalize the separation of corporations and the state. This begins with government taking the responsibility to establish the conditions under which corporations may do business in the United States, including the establishment of a federal corporate charter which describes corporate rights and responsibilities.
Federal incorporation is a perfectly legitimate idea, with a distinguished intellectual pedigree. Personally, however, I'm a competitive federalism kind of guy. In my view, the state-based system of regulating corporate governance is one of the main strengths of the U.S. capital markets -- as Professor Roberta Romano famously claimed, state regulation and the resulting regulatory competition between jurisdictions is the “genius of American corporate law.”

The basic case for federalizing corporate law rests on the so-called “race to the bottom” hypothesis. States compete in granting corporate charters. After all, the more charters the state grants, the more franchise and other taxes it collects. According to the race to the bottom theory, because it is corporate managers who decide on the state of incorporation, states compete by adopting statutes allowing corporate managers to exploit shareholders. As the clear winner in this state competition, Delaware is usually the poster-child for bad corporate governance. Interestingly, the two main poster-children for reform, Enron and WorldCom, were not Delaware corporations. (They were incorporated in Oregon and Georgia, respectively.)

Basic economic common sense tells us that investors will not purchase, or at least not pay as much for, securities of firms incorporated in states that cater too excessively to management. Lenders will not lend to such firms without compensation for the risks posed by management’s lack of accountability. As a result, those firms’ cost of capital will rise, while their earnings will fall. Among other things, such firms thereby become more vulnerable to a hostile takeover and subsequent management purges. Corporate managers therefore have strong incentives to incorporate the business in a state offering rules preferred by investors. Competition for corporate charters thus should deter states from adopting excessively pro management statutes. The empirical research bears out this view of state competition, suggesting that efficient solutions to corporate law problems win out over time.

But even if you could prove that state competition is a race to the bottom, basic federalism principles would still counsel against federal preemption of corporate law. The corporation is a creature of the state, “whose very existence and attributes are a product of state law.” States have an interest in overseeing the firms they create. States also have an interest in protecting the shareholders of their corporations. Finally, a state has a legitimate “interest in promoting stable relationships among parties involved in the corporations it charters, as well as in ensuring that investors in such corporations have an effective voice in corporate affairs.” In other words, state regulation not only protects shareholders, but also protects investor and entrepreneurial confidence in the fairness and effectiveness of the state corporation law. (The quotations are from CTS Corp. v. Dynamics Corp., 481 U.S. 69, 91 (1987))

According to the Supreme Court’s CTS decision, the country as a whole benefits from state regulation in this area, as well. As Justice Powell explained in that case, the markets that facilitate national and international participation in ownership of corporations are essential for providing capital not only for new enterprises but also for established companies that need to expand their businesses. This beneficial free market system depends at its core upon the fact that corporations generally are organized under, and governed by, the law of the state of their incorporation. This is so in large part because ousting the states from their traditional role as the primary regulators of corporate governance would eliminate a valuable opportunity for experimentation with alternative solutions to the many difficult regulatory problems that arise in corporate law. As Justice Brandeis pointed out many years ago, “It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of country.” (New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting)) So long as state legislation is limited to regulation of firms incorporated within the state, as it generally is, there is no risk of conflicting rules applying to the same corporation. Experimentation thus does not result in confusion, but instead may lead to more efficient corporate law rules.

In contrast, a uniform federal law would preclude experimentation with differing modes of regulation. As such, there would be no opportunity for new and better regulatory ideas to be developed—no “laboratory” of federalism. Instead, we would be stuck with rules that may well be wrong from the outset and, in any case, may quickly become obsolete.

The point is not merely to restate the race to the top argument. Competitive federalism promotes liberty as well as shareholder wealth. When firms may freely select among multiple competing regulators, oppressive regulation becomes impractical. if one regulator overreaches, firms will exit its jurisdiction and move to one that is more laissez-faire. In contrast, when there is but a single regulator, such that exit by the regulated is no longer an option, an essential check on excessive regulation is lost.

How I square all of this with my earlier post on Spitzer will be the subject of a future post, tentatively entitled "Can you Be a Competitive Federalist and Still Want Spitzer to Shut the %!*# Up?" Stay tuned.

I've really got to get some work done sometime today 

Eugene Volokh's kind link to my humble site was much appreciated. I know he gets lots of requests for links, so I was especially pleased that he did it without being asked (well, in truth, I did drop a pretty big hint). It drove traffic through the (admittedly low) roof. Now all I need is a link from Glenn Reynolds and I'm set.

A reader who came via the Volokh Conspiracy gently chastised me for not having a comments section. Hey, neither do Eugene or Glenn! Seriously, I want to work up a comments section. From reading other blogs, however, it seems like a lot of the comment section providers have steady problems. (Father Rob just moved his, for example, after repeated problems.) But I'll work on it.

UPDATE: Another Volokh-directed reader emails (maybe I should haven't have made that hint quite so big!) to ask whether I am going to be setting up a RSS feed anytime soon. To which my initial response was "huh?" The response to the blog has been pretty favorable -- still no hate mail -- so I'm planning to upgrade to Blogger Pro, maybe by the weekend, which will let me add the RSS feed. Stay tuned.

UPDATE 2: I wish Blogger had a spell-checker. I plan to correct spelling errors freely. For substantive errors, however, I'll leave the original post intact and use updates to correct.

UPDATE 3: Yet another Volokh-directed reader suggests I solve the RSS question by getting a "real" blog-hosting service. Does that count as my first hate mail? Hey, I'm just a poor law professor who types with three fingers and learned everything he knows about HTML from Dilbert. Gimme a break!

grasso revisited 

Just to be clear, my post yesterday was not intended to defend Grasso's compensation package. Dan Ackman at Forbes.com reports:
Even members of the board's compensation committee were apparently surprised by the news that Grasso's pay was considerably higher than that of executives at financial services companies and that his pension benefits were almost six times the size of theirs. Ever since 1999, Grasso has been paid at least $11 million per year. In 2001, his best year, he was paid $25.5 million, not counting a 'separate' payment of $5 million. Such pay placed him in the top ranks of Wall Street and off the charts for regulators and managers of even the largest and most prosperous nonprofit institutions of which the NYSE was one.
Yikes! Given the holier-than-thou attitude the NYSE took in adopting its new corporate governance standards, the breakdown of corporate governance at the NYSE is appalling. My only point was that its unfair to compare SEC Chairman Donaldson's salary as a regulator and Grasso's salary as the head of a major financial institution.

While we're on the subject (or, at least, in the vicinity) of the NYSE's new corporate governance listing standards, and in the spirit of relentless self-promotion, you can get my take on the director independence component of those standards HERE.

Blogging pace 

Apropos of Broc's comment yesterday, a reader writes: "I don't know where you find the time to keep it all updated." Well, the pace will probably slow as the novelty wears off, but for right now the short answer is: I don't have kids or a life, but I do have tenure.

Student Evaluations 

Marginal Revolution is blogging on the question of whether student evaluations are a good idea. Tyler cites a study, which concludes (among other things) that: "Cosmetic factors such as appearance have a big influence on evaluations." This reminded me of my all-time favorite student evaluation: "Professor Bainbridge is my favorite professor. Please tell him to go on a diet, because right now he's heading for an early heart attack." I thought about that one for a while, ordered a pizza, opened a bottle of Chianti, and lit a cigar.

Federalist Society Corporate Governance Conference 

The Federalist Society will hold its 7th Annual Annual Corporate Governance Conference on Wednesday, September 24, 2003, at the New York Athletic Club in NYC. I was on the planning committee and had hoped to attend. Unfortunately, class and personal commitments will keep me here on the Left Coast that day. It should be a great conference, however. There will be two panels, with the morning panel discussing executive compensation and the afternoon session discussing director independence requirements. In between, there will be a debate on federalizing corporate law and a keynote address by Timothy Flanigan, former Deputy White House Counsel. The confirmed speakers include leading academics, prominent practitioners, and former SEC muckety mucks. You can register HERE.

A "job-less recovery"? maybe not 

Cato senior fellow Alan Reynolds explains:
When it comes to predicting presidential elections, the pace of economic growth clearly matters. The stock market matters. Inflation matters. Local economic conditions matter. Incumbency matters. War matters. But statistics on payroll employment and income inequality matter only to guilt-ridden multimillionaires, partisan journalists and political speechwriters.
Read the whole thing.

McKesson HBOC, Inc. v. New York State Common Retirement Fund, Inc. 

2003 WL 21920240 (9th Cir. 2003):
The corporate form protects shareholders by limiting their liability and their direct control over the corporation. See Japan Petroleum Co. (Nigeria) Ltd. v. Ashland Oil, Inc., 456 F.Supp. 831, 838 (D.Del.1978) ('One of the major features of the corporate form of organization is that it insulates shareholders from personal liability for the debts of the corporation.'); see also Stephen M. Bainbridge, Abolishing Veil Piercing, 26 J. Corp. L. 479, 482 (2001) ('Shareholders of public corporations are effectively immune from veil piercing claims.').

we remember 

Two years ago today, I was on sabbatical and therefore sleeping in late. My wife woke me up to see the horrible pictures of the WTC. Reflecting on that memory this morning, while surfing the blogosphere, I was especially moved by Hugh Hewitt's eloquent comments:
The first two years of the war have gone well, with major objectives reached and the power and flexibility of the United States military on display for the entire world and especially our enemies to see. Casualties among the soldiers, sailors, airmen and Marines have been relatively few though each one an enormous loss. The support of the American people for the war has also been high and very consistent. Some of our enemies are elusive, and their are millions more who would kill as many of us as possible. Still, we are far less likely to suffer a devastating, city-destroying attack as we were on Septemeber 11, 2001.
Our only significant weakness continues to be the fecklessness of politicians and punditry. The refusal to come to grips with the nature and scale of the war is very dangerous. It is inevitable that a war like this would be open to political attack by self-serving would-be electeds and the suddenly irrelevant media. The predictable carping has followed.
Sounds about right to me.

Blog topics and a wine note 

An email from Hugh Hewitt urges "less corp law, more politics." Actually, it's Hugh's fault that I took up blogging. I've been reading blogs for a long time, but figured that starting one now would be like jumping on the bandwagon after the barn burned down (to mix metaphors more than just a bit). After all, there is Glenn Reynolds with his huge first mover advantage and my colleague Eugene Volokh with his inexhaustible energy and a cast of thousands to back him up. But Hugh helped convince me that there was still room in the blogosphere. His encouragement was the straw that broke the camel's back. Yet, with all due deference, I suspect my niche will be to focus mainly on what I do for a living (corporate and business law) and talk about politics mainly as it intersects my vocational topics. On the other hand, some days the LA Times makes me so mad I may not be able to restrain myself.

Anyway, I met Hugh a couple of weeks ago at a dinner hosted by a mutual friend. In person, Hugh is just as you would expect from seeing him on TV or reading his columns: warm, friendly, sociable, highly intelligent, stupendously well-read and well-informed, a great listener, as well as a fascinating speaker. He is the gold standard of true conservative voices on the internet (as opposed to libertarians and, even worse, mere anti-idiotarians). I read his blog and Weekly Standard columns religiously.

At the dinner, the friend opened a bottle of 1978 Louis M. Martini cabernet sauvignon. Until a downturn in the 1980s, Martini was one of the Big 5 Napa Valley producers, known for producing wines of gentle grace but with the ability to age. Candidly, however, I was not expecting much, since my impression was that the bottle had had less than ideal storage conditions, but I was very pleasantly surprised -- it had held up quite well and was quite good. I don't make tasting notes in mixed company (i.e., around non-wine geeks), but my recollection is quite strong. To be sure, the cab showed signs of oxidation. Indeed, were maderized not a term mainly applied to whites and roses, it would be the mot juste. Yet, despite what some purists might term a fault, it was eminently drinkable -- indeed, quite tasty . The flavor profile was that of a tawny port: mostly nuts and dried fruits -- prunes, figs and dried apricots -- on a caramel base. It was an honor and a privilege to have been invited to share in this taste of California's rich viticultural heritage.

Publish or Perish 

My article The Business Judgment Rule as Abstention Doctrine has been accepted for publication by the Vanderbilt Law Review. Anyway, in this article, I observe that the business judgment rule is corporate law's central doctrine, pervasively affecting the roles of directors, officers, and controlling shareholders. Increasingly, moreover, versions of the business judgment rule are found in the law governing the other types of business organizations, ranging from such common forms as the general partnership to such unusual ones as the reciprocal insurance exchange. Yet, curiously, there is relatively little agreement as to either the theoretical underpinnings of or policy justification for the rule. This gap in our understanding has important doctrinal implications. As this paper demonstrates, a string of recent decisions by the Delaware supreme court based on a misconception of the business judgment rule's role in corporate governance has taken the law in a highly undesirable direction.

Two conceptions of the business judgment rule compete in the case law. One views the business judgment rule as a standard of liability under which courts undertake some objective review of the merits of board decisions. This view is increasingly widely accepted, especially by some members of the Delaware supreme court. The other conception treats the rule not as a standard of review but as a doctrine of abstention, pursuant to which courts simply decline to review board decisions. The distinction between these conceptions matters a great deal. Under the former, for example, it is far more likely that claims against the board of directors will survive through the summary judgment phase of litigation, which at the very least raises the settlement value of shareholder litigation and even can have outcome-determinative effects.

Like many recent corporate law developments, the standard of review conception of the business judgment rule is based on a shareholder primacy-based theory of the corporation. This article extends my recent work on a competing theory of the firm, known as director primacy, pursuant to which the board of directors is viewed as the nexus of the set of contracts that makes up the firm. In this model, the defining tension of corporate law is that between authority and accountability. (See HERE, HERE, HERE, and especially HERE.) Because one cannot make directors more accountable without infringing on their exercise of authority, courts must be reluctant to review the director decisions absent evidence of the sort of self-dealing that raises very serious accountability concerns. In this article, I argue that only the abstention version of the business judgment rule properly operationalizes this approach.

The article will not be out in print for several months, at the very least, but you can download my final draft HERE. (Scroll down to the download buttons.)

UPDATE: I know I said I would not make substative edits of my posts. But every rule has an exception. Apparently somebody's tender sensibilities were offended, so I've edited out a snide remark about another law review in an earlier version of this post.

September 10, 2003

The recall and the economy 

Jill Stewart has a vociferous column on the phony worker's compensation bill pending in Sacramento. She also pans SB 2, which will force "California's hard-hit small and medium-sized businesses, with 20 or more employees, to pay 80 percent of employees' health coverage." (Link via Hugh Hewitt.) Grace-Marie Turner is also blasting SB 2, at even greater length, over at NRO: "It would create a huge new tax on employers to fund a massive new program in a state that already has one of the most-unfriendly business climates in the country. The Tax Foundation of Washington, D.C., ranks California 49th in its State Business Climate Tax Index."

UPDATE: Read the National Center for Policy Analysis' press release detailing the costs to business of SB 2 HERE.

Donaldson gets a clue 

SEC Chairman Donaldson told the Senate Banking Committee: "there's been a politicization, if you will, of enforcement in some areas of the country." About time. I believe in competitive federalism about as much as the next guy, unless the next guy is Lucian Bebchuk, but Spitzer is out of control.

Donaldson tells Congress action on shareholder access to proxy coming soon 

Reuters is reporting that:
U.S. Securities and Exchange Commission Chairman William Donaldson told lawmakers on Tuesday that the agency will consider, as early as this month, proposals to give shareholders access to proxy statements. The commission has been moving toward adopting a rule to allow shareholders to nominate some company directors using the corporate proxy statement, a pamphlet distributed to shareholders annually.
Mike O'Sullivan has been blogging at Corp Law Blog about why this is such a bad idea. I tend to agree with him on the merits, and will post later explaining why.

Tonight I'm commenting solely on whether the SEC has authority to adopt this rule. I am leaning towards concluding (albeit reluctantly) that the SEC probably has authority to do most of what they are talking about. In particular, consider the distinction the Business Roundtable court drew between rule 19c-4 and rule 14a-4(b)(2)'s requirement that proxies give shareholders an opportunity to withhold authority to vote for individual director nominees. Business Roundtable v. SEC, 905 F.2d 406 (DC Cir. 1990). In the court's view, the latter "bars a kind of electoral tying arrangement, and thus may be supportable as a control over management's power to set the voting agenda, or, slightly more broadly, voting procedures," while "Rule 19c-4 much more directly interferes with the substance of what shareholders may enact." In an article I wrote on 19c-4, I concluded that the shareholder proposal rule would pass muster under the Business Roundtable approach. Absent rule 14a-8, shareholders have no practical means of initiating action in the voting process or otherwise affecting the agenda. As such, rule 14a-8 presumably is supportable "as a control over management's power to set the voting agenda." Director nomination rules would seem to fall into that category as well.

First fan mail 

I got my first fan mail today from a reader who writes: "you will kill yourself at that pace," but advises "drink more wine." Hard to quibble with either part. Anyway, now that I've snagged my first blogosphere notice and my first fan mail, all I need now is my first hate mail.

Perp walk update 

At lunch the other day, one of my colleagues asserted that none of the corporate "crooks" has gone to jail, and predicted none will until right before President Bush is up for re-election. I don't know if any of them are in jail yet, but along with the Gilsan sentence noted below, this report states that 11 executives of HealthSouth alone have pleaded guilty and are cooperating with the on-going investigation (presumably in return for a lesser sentence).

UPDATE: Reuters is reporting that: "The U.S. Securities and Exchange Commission said on Thursday that it has sued two former chief financial officers of healthcare services group HealthSouth Corp. Michael Martin and Malcolm McVay were accused by the SEC of taking part in 'the massive accounting fraud at HealthSouth by signing reports filed with the commission that they knew contained materially false financial statements.'"

A review of "The Company" 

The Company: A Short History of a Revolutionary Idea. John Micklethwait & Adrian Wooldridge. New York, The Modern Library, 2003. Although I recommend this text to generalist readers seeking a (remarkably) concise introduction to history of the business corporation, personally I came away somewhat disappointed. There is little doubt Micklethwait and Wooldridge are correct in their claim that the corporation is now the key economic institution in Western nations. Yet, it did not have to turn out that way. As Micklethwait and Wooldridge usefully remind us, two centuries ago, leading business and economic thinkers (including the great Adam Smith) derided the joint stock company. 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?

Micklethwait and Wooldridge offer a fairly conventional answer to that question, based largely on 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. Readers familiar with the work of business historian Alfred Chandler will find relatively little new in this part of the story, although Micklethwait and Woolridge's treatment has the advantage for generalist readers of being considerably more accessible than is most of Chandler's work. Instead of offering any novel historical analysis, Micklethwait and Wooldridge's principal potential contribution (albeit one they failed adequately to realize) is the normative thesis to be derived from the historical account.

In their introduction, Micklethwait and Wooldridge lay out a claim that will be familiar to readers of Michael Novak's work (surprisingly, however, they seem unaware of his seminal work). Like Novak, Micklethwait and Wooldridge argue not only that the corporation is one of the West's great competitive advantages, but also that the number of private-sector corporations a country boasts is a relatively good guide to the degree of political freedom it provides its citizens. Unfortunately, this insight goes nowhere.

The normative claim is entirely plausible. The rise of modern corporations did more than just expand the economic pie. The legal system that facilitated their rise necessarily allowed individuals freedom to pursue the accumulation of wealth. Economic liberty, in turn, proved a necessary concomitant of personal liberty -- the two have almost always marched hand in hand. In turn, the modern public corporation has turned out to be a powerful engine for focusing the efforts of individuals to maintain the requisite sphere of economic liberty. Those whose livelihood depends on corporate enterprise cannot be neutral about political systems. Only democratic capitalist societies permit voluntary formation of private corporations and allot them a sphere of economic liberty within which to function, which gives those who value such enterprises a powerful incentive to resist both statism and socialism. As Michael Novak has observed, private property and freedom of contract were indispensable if private business corporations were to come into existence. In turn, the corporation gave liberty economic substance over and against the state. Regrettably, after laying it out, Micklethwait and Wooldridge fail to pursue this thesis. Instead, their book lapses into mere narrative history.

Having said that, however, it is exceptional narrative history. As journalists for the Economist, which I regard as the best-written magazine around, they write clearly yet powerfully. There are numerous insights, cleverly turned phrases, and interesting anecdotes. All of which makes for a compelling read, if not a compelling normative argument.

Ex-Treasurer of Enron Is Sentenced to 5 Years in Prison 

Yahoo! News: Ben F. Glisan Jr., the former treasurer of the Enron Corporation, pleaded guilty this morning to a federal charge that he committed securities and wire fraud. He becomes the highest-ranking former Enron executive to admit wrongdoing in the accounting scandal that drove the energy company into bankruptcy.
UPDATE: My colleague Victor Fleischer notes that Glisan agreed both to disgorge $1 million in fraud profits and not to seek a refund of the $412,000 that he paid in taxes on those profits, which Victor calls the "Wrong tax result, but good for justice." This got me to wondering about disgorgement of insider trading profits. When somebody agrees with the SEC to resolve civil insider trading allegations by disgorging his/her trading profits, would the insider be able to get a refund of the taxes paid on those profits? I don't know the answer and a quick Google search was uninformative. If anybody out there knows, let me know.

Sarbanes-Oxley ethics codes 

Kansas city corporate attorney Arthur Chaykin sends along the following observations:

I had been hopeful that the Sarbanes-Oxley Act would have one saving virtue: I thought, perhaps, that CEO's would do what they could to improve business decision making in their companies if only to avoid immediate disclosure through anonymous "hotline" directly to the Board. I reasoned that such calls could, at the very least, become an annoyance for CEO's and, at worst, could give the Board the impression that the CEO did not know how to run the company. Therefore, I thought it was at least possible that CEO's would "pump up" corporate ethics codes and programs in an earnest attempt to reduce the number of "bad acts" within the company.
However, on further reflection, I am concerned that the Sarbanes-Oxley Act may have the exact opposite impact. As you know, the Act requires an ethics code, at least for financial officers, or an explanation as to why no ethics code is presented (and no company will want to explain that). Furthermore, the Act requires a company to explain any "deviation" from its ethics code. As I read it, that means that anytime a company decides to make a reasonable exception to a conflict of interest policy, it has to do a public filing. In order to avoid that, I am sure companies will try to (a) obfuscate their codes so that it will be hard to know whether a violation has occurred or not (thus defeating the entire purpose) or (b) attempt to reserve discretion in some body within the corporation so that they do not have to report the exception as a deviation (but it is not clear that will work). So, I expect a lot of companies to select (a). I have had one general counsel indicate that she had just written the new code and made sure that it only did the bare minimum because she did not want to incur additional disclosure obligations.
Can you believe it?
Yes, I can believe it. Arthur is exactly right that no company in its right mind will want to explain the absence of an ethics code (in the trade we call this therapeutic disclosure, about which I will be posting soon). He's also exactly right that no company will want to be put in the position of disclosing deviations from the code. Hence, we're going to get bare bones ethics codes, which is exactly what seems to be happening.

New article on Sarbanes-Oxley Section 307 

The Social Science Research Network is a site for legal, economic, management, and accounting scholars to post working papers before they are formally published in a professional journal. All of my articles since 1998 are collected there, along with most of the ones published before that date. SSRN just released to its data base my newest article, co-written with UCLA grad Christina Johnson, entitled "Managerialiam, Legal Ethics, and Sarbanes-Oxley Section 307. The abstract states:

Prepared for a conference on the Sarbanes-Oxley Act (a.k.a. the 'Public Company Accounting Reform and Investor Protection Act' of 2002), this Article focuses on the professional responsibility rules promulgated by the Securities and Exchange Commission under Section 307 of the Act. According to the theoretical model of corporate governance espoused by all business corporation statutes, a corporation is to be run by its board of directors for the benefit of its shareholders. In practice, however, corporations frequently are run by their top managers for the benefit of those managers.
A number of recent trends have empowered boards of directors vis-a-vis management. As this Article's review of the statutory text and its legislative history demonstrates, Congress intended the Sarbanes-Oxley Act to further that trend. We further demonstrate that Section 307 should be understood as part of the Act's overall anti-managerialist intent. Congress sought to enlist legal counsel in strengthening the board. Specifically, Congress directed the SEC to create an up the ladder reporting requirement pursuant to which a firm's legal counsel would report evidence of misconduct to the board of directors, thereby redressing one of the information asymmetries between boards and managers.
This Article argues that, as a normative matter, Sarbanes-Oxley Section 307 was well-intentioned. As a practical matter, however, Section 307 seems unlikely to effect significant changes in corporate governance. In our view, the nature of legal practice, the largely unchanged relationship between lawyers and managers, and the problematic approach taken by the SEC to implementing Section 307 suggest that the new legal regime is unlikely to result in significantly better information flows within the corporate hierarchy.
You can download the full paper HERE.:

My first Blogosphere notice 

Mike O'Sullivan at Corp Law Blog has graciously welcomed me to the blogosphere:

Professor Stephen M. Bainbridge of UCLA Law School recently launched the Corporation Law and Economics blog, billed as 'a corporate governance and law blog, with notes on politics and wine.' The wine part is included because 'most corporate lawyers I know also have a healthy interest in wine.' Professor Bainbridge has already exhibited a healthy interest in corporate law issues and I look forward to reading his thoughts.
Mike's blog sets a very high standard for any aspiring corporate law blogger to meet. UPDATE: Mike was also the first person to note my new blog at ProfessorBainbridge.com.

Political Profile 

I just finished taking an interesting internet political profile on distributive justice (link via The Yin Blog). I tested out as a "right libertarian," which they describe as:

Right Libertarianism: "Theory that defends unlimited laissez-faire capitalism as the only morally justified regime. The main assumptions of this doctrine are twofold: the right of every individual to unlimited utilisation of his own person (self-ownership); and the right to unrestricted, or relatively mildly limited, appropriation of external resources. The first means that an individual has exclusive right to all the goods that are product of use of his talents and efforts. The second means that he has either the right to appropriate all natural resources which he finds and takes before others, or that such an appropriation is limited only by the fact that he must not put others in the position which is worse than the one in which they were before his acquisition of the resources. Furthermore, everything that an individual acquires with the help of his abilities, efforts, and use of thus appropriated resources, he can also freely exchange for the goods of others. If such a trade was voluntary, its results are just. This theory is interested only in this that the above procedures are satisfied and that nobody has used violence to take some goods from others. If things go that way, a distribution of resources is just regardless of its outcome, i.e. it is morally right no matter how much someone possesses at the end, and even if somebody does not have anything at all. Forceful intervention of the state for the sake of helping the poor is not allowed. The main representatives of this position are: F.A. Hayek, Jan Narveson, Robert Nozick."
Just so you know what you're dealing with here!

Actually, the problem with this profile is that they don't have a category for American Tory, which is how I would describe my own political profile. More on what that means later.

The California recall becomes even more edifying 

NewsMax.com: Inside Cover Story: "California's Democrat-run Senate says Democrat Gov. Gray Davis should apologize to GOP rival Arnold Schwarzenegger for an ethnic slur.
The measure passed 19-2 Tuesday. Four Democrats joined the chamber's 15 Republicans in favor. Nineteen Democrats failed to vote at all."
I think there is something in the water out here. On a serious note, California's economy is in the tank, largely due to its increasingly hostile atmosphere for business. Over the weekend, I plan to work up a major post sorting through the major candidates' positions on key business and legal issues. Stay tuned.

UPDATE: The good news both for Arnold and me is that Ueberroth has dropped out. I think its good news for Arnold, because Ueberroth fans probably will migrate more towards Arnold than McClintock.Its good news for me because it is one less candidate's positions to sort through!

Grasso give-back 

CNN Money reports:
NYSE Chairman Grasso to give up $48M in additional pay - Sep. 9, 2003: New York Stock Exchange Chairman Richard Grasso said Tuesday he will forgo $48 million in additional compensation but defended his recently announced $140 million pay package, which had sparked an outcry from critics who claimed it was too hefty.
The key issue here, which Corp Law Blog spotted a while back, is whether you think the NYSE is more like a private corporation (e.g., a big Wall Street investment bank), in which case Grasso's compensation is in line with what comparable CEOs are paid, or a regulator, like SEC Chairman Donaldson who gets paid a whopping $142,000 per year. Nell Minow of thecorporatelibrary.com chimed in on the latter side:

He is not the chairman of a public corporation. He doesn't create shareholder value. He is essentially a regulator, and he is running an unregulated monopoly in a way.
As usual, I come down on the other side from Minow. First, the NYSE is not a monopoly -- at best (worst?), its part of an oligopoly. Second, it is hardly unregulated; rather, despite being called a "sef-regulatory organization" (SRO), the exchange is the subject of extensive SEC regulation. Third, although the NYSE technically is a nonprofit corporation, it is owned by its members who benefit, as the NYSE's White Paper explained: "through the right to trade on the Exchange and through their collective self-regulation via the Exchange, not by receiving dividends from the Exchange or by appreciation of their equity. That trading right becomes more valuable when the Exchange attracts more liquidity and trading to the floor." Finally, while the NYSE unquestionably has a quasi-regulatory role as a self-regulatory organization, the old Gordon case (422 US 659) held that the SROs are only exempt from the antitrust laws -- i.e., to be treated as public agencies -- when they act under SEC oversight. Otherwise, they are to be treated as private institutions. In sum, because nothing in the 34 Act remotely gives the SEC oversight over Grasso's pay, I don't see how Donaldson can treat the NYSE as a quasi-public entity for this purpose.

September 09, 2003

Corporate governance reform rant 

Mike O'Sullivan at Corp Law Blog has a great post -- nay, rant -- on the on-going saga of corporate governance reform. Money quote:

"Any corporate governance reform looks great when viewed through an Enron or WorldCom lens. Many of these reforms look less attractive when viewed through a GE lens, a Berkshire Hathaway lens or a [FILL IN YOUR FAVORITE PUBLIC COMPANY] lens. Instead of asking "Would this reform stick it to Ken Lay?" you should ask "Would this reform hobble Jeffrey Immelt, Warren Buffett or [FILL IN YOUR FAVORITE CEO]?"
Exactly! Go read the whole thing. After which, you might want to read my article on the federalism implications of corporate governance reform. In it, I note that there has been a creeping - but steady - federalization of corporate governance law. Taken together, these developments constitute the most dramatic expansion of federal regulatory power over corporate governance since the New Deal.

No one seriously doubts that Congress has the power under the Commerce Clause to create a federal law of corporations if it chooses. The question of who gets to regulate public corporations thus is not one of constitutional law but rather of prudence and federalism. In this essay, I advance both economic and non-economic arguments against federal preemption of state corporation law. Competitive federalism promotes liberty as well as shareholder wealth. When firms may freely select among multiple competing regulators, oppressive regulation becomes impractical. If one regulator overreaches, firms will exit its jurisdiction and move to one that is more laissez-faire. In contrast, when there is but a single regulator, exit is no longer an option and an essential check on excessive regulation is lost.

A review 

PROF UNTANGLES CORPORATE WEB WITH LAW AND ECONOMICS: "Lawyers who have no recollection of hearing or seeing the words 'law' and 'economics' in the same sentence at any time during law school might have a vague notion that 'law and economics' is something the 7th U.S. Circuit Court of Appeals does when Judge Richard A. Posner or Judge Frank H. Easterbrook is on the panel.
This veil of ignorance is pierced by a new article on piercing the veil. Using law and economics analysis, Stephen Bainbridge (a professor at UCLA Law School and visiting professor at Harvard) concludes that courts should abolish veil piercing when it comes to holding individual shareholders liable for corporate debts. Yet Bainbridge also believes courts should keep a variation of veil piercing for use against affiliated corporations. Stephen M. Bainbridge, 'Abolishing Veil Piercing,' 26 Journal of Corporation Law 479."
It's actually a very good summary of both the law and economics methodology and the doctrinal analysis used in that article. As they correctly summarize my conclusion: "So law and economics analysis condemns veil piercing against individuals but -- on what Bainbridge considers a "close question" -- blesses the remedy in appropriate cases against affiliated corporations."

What I've been drinking 

Last weekend we held a small horizontal tasting of the 1993 Silver Oak cabernets. The Napa Valley (WS 88; RMP 90) was big, rich, and still quite tannic. For most of the tasters, this was their favorite. On the nose, one got a good blast of cedar, earth, and dark fruits. On the palate, the wine is surprisingly reticient for a 10-year old California cabernet, especially for Silver Oak, which is usually quite forward. I'm worried it will dry out before it's really ready. In contrast, the Alexander Valley (WS 90; RMP 90) was clearly my favorite of the two. The Alex has an immense nose of lead pencil, herbs, chocolate, and spicy fruit. The Lafite-like bouquet filled the room! (Not that I have all that much experience with Lafite, to be sure, but dropping the Lafite name seems to be the first rule of wine blogging.) On the palate, the Alex shows dill, currant, and cassis, with a long finish. The wine is mature, but still has a lot left -- I'd guess at least 5 more years.

Venturpreneur on Blogs as a marketing tool for lawyers 

Gordon Smith, a University of Wisconsin law professor who runs the excellent Venturpreneur blog, offers the following observations on lawyers who use a blog as a marketing tool:

Venturpreneur: "I just received a call from Jan Pribeck, who is writing a story about blogging for the Wisconsin Law Journal, a practitioner's journal here in the Badger state. I have noticed a fair degree of interest in blogging among practicing lawyers. The promise of blogging is that it can promote the lawyer or law firm to a large potential audience. The obstacles, however, are many. In particular, blogging is a time consuming enterprise, and it is a pretty indirect method of reaching potential customers. Lawyers complain often about their stressful schedules. Add blogging to an already stressed life, and you are not going to like the results. More importantly, perhaps, the best blogs have a point of view. An attitude. Many lawyers are rightly skeptical of taking firm public positions, not only because they may drive away potential clients, but because they find those positions used against them in litigation or negotiations. Blogging can be a fairly effective marketing tool for personalities -- how many of you would know Glenn Reynolds from his law review articles? -- but most lawyers are not selling their personalities. Quite the opposite, in fact, they are often selling their ability to assume a client's personality (or at least embrace a client's cause). In that context, blogging sends the wrong message."
I suspect he's right. A former colleague of mine (from back when I was teaching at Illinois) once described being a law professor as a "loophole on life." The academic lifestyle thus lends itself to blogging a way that practice does not. Law professors have time to blog and, moreover, already get paid for having an ax to grind. Or, at least, so I hope. My scholarship has a definite point of view, which is reflected in the title of this blog, and this blog is an alternative way of getting that point of view out there for public consumption.

My colleague Victor Fleischer, one of the authors of the group blog "A Taxing Blog," has co-authored an interesting essay on academic blogging, in which he observes:
As bloggers, we enjoy an excuse to keep up on what’s current in the tax world and to read more widely than we might otherwise. We also hope to make a connection with an audience that we might not otherwise reach with traditional legal scholarship. ... [W]e think of blogging as a supplement to – not a substitute for – our more traditional scholarship. And blogging might even enhance our scholarship by giving us access to and feedback from a broader, more diverse audience than, say, the readers of the Harvard Law Review. Moreover, as shameless tax nerds, we feel a right – nay, a solemn duty – to introduce the world of tax policy to the blogosphere.
Substitute corporate law for tax in the foregoing and that roughly captures what I'm trying to do in "Corporation Law and Economics."


I've spent the last hour or so playing around with the template, but I'm still not happy with it. Advice? Fonts, colors, etc???

Shamelessly self-serving plug 

My new book Mergers and Acquisitions is now available at Amazon, but unfortunately as a special order with a 1 to 3 week shipping delay. It can be ordered directly from the publisher, Foundation Press. A summary table of contents is available here. The publisher's blurb reads as follows: "This law school textbook is designed for advanced business law courses, such as Mergers & Acquisitions or Corporate Finance, with a primary emphasis on corporate and securities law issues. The text has a strong emphasis on the doctrinal issues taught in today's Mergers & Acquisitions classes, and also places significant emphasis on an economic analysis of the major issues in such a course." Doesn't make it sound like a John Grisham novel does it? But, as I said in the preface, while the primary audience for this text is law students taking an advanced corporation law course, I hope that judges and lawyers will also find it helpful.


The Director Primacy blog's main focus is U.S. corporation law and corporate governance. I'll also be posting my wine tasting notes, since most corporate lawyers I know also have a healthy interest in wine. (By "healthy interest" I mean anything up to, but not including, the English Lord to whom it was said: "My Lord, I understand you drank three bottles of Port last night unassisted." The Lord responded: "My dear sir. That is a lie. I had the assistance of a bottle of Madeira.") I'll probably touch on politics and general news occasionally, although this is definitely not a war blog, but mainly when the news relates to business.

When not working on the blog, I teach corporate law at UCLA. On the side, I write books and articles about corporate law. Indeed, one of the main functions of this blog is to disseminate the ideas in my books and articles to another audience.

And now for the fine print: This web site is not intended to be, and you should not rely on any materials on this blog as, a source of legal advice. Postings to this web site have been prepared for informational purposes only. Transmission or receipt of information contained in this web site does not create an attorney-client relationship. No assurance is given that any correspondence, via e-mail or otherwise, between you and the author of this blog resulting from your receipt of information from this web site will be secure or treated as confidential or privileged. The transmission or delivery of any correspondence will not create an attorney-client relationship between you and the author of this blog. Please do not send the author any confidential information. Legal advice must be tailored to the specific circumstances of each situation, so nothing in this blog should be used as a substitute for the advice of qualified legal counsel familiar with your particular situation.

The author assumes no responsibility for the accuracy or timeliness of any information contained in this web site.

This blog is not intended to serve as an advertisement or solicitation of legal or any other business. In particular, the author does not intend or desire to wishes to solicit through this blog the business of anyone in any state or other jurisdiction where this web site, or the use thereof, may not be in compliance with any law or ethical rule.

I am not a practicing lawyer. I cannot and will not represent you or provide legal advice. I also am not a legal referral service. I cannot and will not refer you to legal counsel.

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