Corporation Law and Economics

We've moved HERE

2003-09-13T12:42:00.000-07:00

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

2003-09-13T11:37:00.000-07:00

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

2003-09-13T11:23:00.000-07:00

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!).

blog improvement bleg

2003-09-12T18:02:00.000-07:00

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

2003-09-12T16:20:00.000-07:00

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

2003-09-12T13:55:00.001-07:00

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

2003-09-12T13:55:00.000-07:00

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?

2003-09-12T13:51:00.000-07:00

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?

2003-09-12T13:45:00.000-07:00

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

2003-09-12T13:25:00.000-07:00

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

2003-09-12T13:18:00.000-07:00

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

2003-09-12T11:08:00.000-07:00

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

2003-09-12T10:42:00.000-07:00

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.

Check.

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:

2003-09-12T10:21:00.000-07:00

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?

2003-09-12T06:22:00.000-07:00

Grumble, grumble ....

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

NRO's Jonah Goldberg on Grasso

2003-09-12T06:19:00.000-07:00

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.

Another pointer

2003-09-11T21:15:00.000-07:00

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

2003-09-11T20:53:00.000-07:00

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

2003-09-11T17:58:00.000-07:00

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

2003-09-11T17:36:00.000-07:00

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

2003-09-11T17:07:00.000-07:00

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

2003-09-11T14:52:00.000-07:00

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

2003-09-11T14:30:00.000-07:00

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

2003-09-11T14:11:00.000-07:00

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

2003-09-11T14:03:00.000-07:00

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.