Friday, August 1, 2014
This year, I will be teaching undergraduate, MBA, and law students at Belmont University. As an undergraduate professor, I often advise students considering law school.
I focus on helping prospective law students make an informed decision. Formally or informally, I usually walk the students through a simple cost/benefit analysis. Even with all the information about law schools out there now, most students still need some help navigating.
Usually, I ask prospective law students a lot of questions, including at least some of the ones below.
If readers have constructive additions to my list, please e-mail me or leave a comment. I am always trying to improve my advising.
- Why do you want to go to law school? (The student’s answer can be illuminating. Answers that are essentially – to please my parents or because I don’t know what else to do or because I want to get rich – should cause the student to think a bit harder. I think there is now enough data out there that students can see that there are much better avenues to getting rich than going to law school.)
- Do you understand the total financial cost of going to law school? (See Law School Transparency).
- Do you understand the opportunity cost of going to law school? (There has been a lot written about the financial cost of law school, but the opportunity cost of law school is worthy of more attention. Even if a student receives a full scholarship, they are often giving up $120,000 or more in income over the three years of law school. Also, if the student does not enjoy law school (I enjoyed it, but many don't) then they need to factor in the cost of three painful years.)
- Do you understand the demands of the law school curriculum? (Some weak students are simply not well prepared for the rigors of law school.)
- Do you understand the educational benefits of law school? (While the value of learning to “think like a lawyer” has been called into question by some, critical thinking and writing skills are clearly useful. Whether the benefits are worth the costs is a more difficult question.)
- Do you understand the various career paths of a law graduate? (A number of the career paths taken by law graduates are possible without the costs of a law degree. (E.g., certain government work and many business positions.)
- Do you understand what different types of lawyers do on a daily basis? (Interning for a legal organization (if possible in this economic environment), or at least meeting with a handful of lawyers, can help students better understand what a career in law is actually like. Far too many students get their thoughts on the life of a lawyer from TV shows and movies.)
- Do you understand the bi-modal distribution of entry level lawyer salaries? (Surprisingly, despite some valiant efforts of many, quite a few prospective law students are still not aware of the distribution of law graduate salaries).
- Do you know the median salary of graduates of the schools you are looking at and what percentage of graduates actually land jobs as lawyers? (See school's ABA disclosures, e.g., Berkeley Law).
The list is a bit over-focused on the financial side of law school and law practice. Personally, I think finding a career that allows autonomy, mastery, and purpose is more important than finding a career that pays well, but finances should not be overlooked.
These questions are for students who are still not 100% certain they want to go to law school. Once they are informed, and decide that they do want to attend law school, I walk them through things like a proper understanding of the US News Rankings and the strengths and weaknesses of the schools they are considering.
Thursday, July 31, 2014
Warning- do not click on the first link if you do not want to see nudity.
Dov Charney founded retailer American Apparel in 1998 and it became an instant sensation with its 20-something year old consumer base. He mixed a "made in America- sweatshop free" CSR focus with a very sexy/sexual set of ads (hence the warning- - when I first created the link, the slideshow went from a topless “Eugenia in disco pants in menthe” (seriously) to a shot of adorable children’s clothing in about 10 seconds). No wonder my 18-year old son, who leaves for art school in two weeks, appreciates the ad campaigns. Most of his friends do too- both the males and females. In fact, he indicated that although they all know about the “sweatshop free” ethos, because “it’s in your face when you walk in the stores,” that’s not what draws them to the clothes. As a person who blogs and writes about human rights and supply chains, I almost wish he had lied to me. But he’s no different than many consumers who over-report their interest in ethical sourcing, but then tend to buy based on quality, price and convenience. I am still researching this issue for my upcoming article on CSR, disclosure regimes and human rights but see here, here, here and here for some sources I have used in the past. My son’s friends--the retailer’s target demographic-- appreciate that the clothes are “sweatshop free” but don’t make their buying decisions because of it. They buy because of the clothes and to a lesser extent, the ads.
The first time I ever really thought about the store was after a 2005 20/20 expose about Charney, who was accused of, among other things, sexually harassing and intimidating numerous employees. At the time I was a management-side employment lawyer and corporate compliance officer and thought to myself “what a nightmare for whomever has to defend him.” It’s pretty hard to shock an employment lawyer, but the allegations, which continued until his ouster last month, were pretty egregious. After over 10 years of lawsuits, the company terminated him for breaching his fiduciary duty, violating company policy, and misusing corporate assets.
Recently, American Apparel’s employment practices liability insurance rose from $350,000 to $1 million, I can only assume, because of his actions and not due to the other 10,000 company employees. The company has been sued repeatedly by the EEOC and not just for sexual allegations. Purportedly, the company, which has never traded above $7.00 a share and today is a steal at $.97, could not get financing from some sources as long as Charney was at the helm.
My son and his friends did not know about the termination or the harassment allegations over the years, but he says that the nature of the allegations could have caused some of his friends to stop and think about whether they wanted to patronize the stores. I have some 30-something friends who refuse to shop there. Could this be why the store chose to add a female director? As I explained to a reporter last week, the company shouldn’t need a female perspective to realize that the founder is, to put it mildly, a risk. And in fact, as studies cited by my co-blogger Josh Fershee noted earlier this week, being the “woman’s voice” may minimize her perceived effectiveness. Yes, it’s true that American Apparel took more decisive action than the NFL last week, as Joan Heminway observed, but what took them so long? Is it too little too late? Where was the general counsel when Charney allegedly refused to take his sexual harassment training, which is required by law in California every two years? Where were the other board members who allowed the settlement of case after case involving Charney? I have often found that some of the most vigilant supporters of women in the workplace, especially in harassment matters, are older males who have daughters and wives and who know what it’s like for them. When did the board worry about whether the CEO's well-publicized alleged attacks on employees contradicted the heavy corporate responsibility branding? Did the board meet its Caremark duties?
Ironically, the company’s 10-K filed two months before his termination indicated that, “In particular, we believe we have benefited substantially from the leadership and strategic guidance of Dov Charney. The loss of Dov Charney would be particularly harmful as he is considered intimately connected to our brand identity and is the principal driving force behind our core concepts, designs and growth strategy.”
So at what point between April and June did Charney’s actions go off the scale on the enterprise risk management heat map? COSO, the standard bearer for ERM, encourages boards to focus on: what the firm is willing to accept as it pursues shareholder value; a knowledge of management’s risk management processes that have identified and assessed the most significant enterprise-wide risks; a review of the risk portfolio compared to the risk appetite; and whether management is properly responding to the most significant risks and apprising the board of those risks. Could such an objective risk assessment have even occurred with Charney (the risk) in the room? How could the company have the right tone at the top when the founder/CEO failed to comply with Code of Ethics Rule #2 --“service to the Company never should be subordinated to personal gain and advantage”? The stock price has been falling for years and the company has been struggling. Did the high rates to insure Charney’s conduct finally become too hot to handle? On the other hand, would the directors have made the same decision if the shares were trading at $97 instead of .97? Some shareholders are raising concerns too about why any of the original board members remain given the appalling financial performance.
The board now has a “suitability committee,” which will review the results of an independent investigation into Charney’s actions. Even if the report clears Charney and he’s brought back, the new independent directors will have a lot of questions to answer. The question of whether there is a woman on the board seems to be almost irrelevant given the history. For the record, even though the literature is mixed on the financial benefits of gender and racial diversity, I am a strong proponent of the diversity of viewpoints, particularly those that the underrepresented can bring to the table.
But this board needs to re-establish trust among its investors and funders and then focus on what any retailer should- potential supply chain disruptions, the impact of any immigration reform, currency fluctuations, and keeping their customer base happy and out of competitors H & M and Forever 21. The last thing they need to worry about is how to pay off the victims of their founder’s latest escapades.
A few weeks ago a group of CEOs, business execs, policy-makers, academics and spiritual guides converged for a three-day symposium in Switzerland to discuss specific pathways for blending "inspiration," "innovation," and "investment". Indeed, the title and central theme of this year's symposium was "Daring for Big Impact -- Blending Inspiration, Innovation and Investment" and I was humbled to be invited to present my work on Shareholder Cultivation and New Governance. I left feeling inspired and with a renewed sense of purpose, and recently posted a summary of the discussions on the HuffPo. A link to that piece is available here.
Wednesday, July 30, 2014
There is a new face on an old problem — American companies “moving” overseas in part to avoid U.S. taxes — that has increased in popularity in the last several years and recently gained political attention. Last week President Obama and Treasury Secretary Jacob J. Lew called for tax reform to encourage economic patriotism and to deter corporate defectors, calling the overseas moves legal, but immoral.
Two structural features of the U.S. tax code incentivize corporations to move abroad. The U.S. corporate tax rate, at 35 percent, is high compared to the average Organization for Economic Cooperation and Development (OECD) rate of 25 percent, and the average European Union rate of 21 percent. Many corporations effectively pay much less than 35 percent, after factoring in loopholes and deductions, policies that cost approximately $150 billion in untaxed revenue last year. But the reported tax rate is high compared to other jurisdictions and the complexity required to reduce that rate in practice also is a deterrent.
Second, other countries like the United Kingdom become attractive foreign tax locations because they operate under a territorial system that does not tax profits earned outside of the home country. Under the U.S. system, however, returning foreign-earned corporate profits home is a taxable event at high corporate tax rates. As a result, it is estimated that $2 trillion in foreign-earned profits of U.S. corporations sit in foreign bank accounts unavailable for use absent paying taxes.
There are two main ways to achieve an overseas move. A transaction called an inversion where a U.S. company reincorporates overseas becoming, say, a Bermuda corporation, which was popular in the 2000s. Inversions also can happen when a U.S. company forms an overseas affiliate and the original company becomes a subsidiary of the foreign affiliate. The 2004 American Jobs Creation Act prevented companies pursuing inversions from reaping tax benefits of the transactions if the original stockholders retained 80 percent or more of the new company or if there was not substantial business operation in the new location. Treasury regulations have defined “substantial business operations” as meaning 25 percent of corporate activity thus effectively stopping these so-called “naked” inversions as a means to transfer corporate profits overseas.
Another vehicle to move a U.S. company overseas is through a merger with a foreign company, and this is where the recent uptick has occurred. If a larger foreign company buys the U.S. one then both profits and control effectively move overseas in the newly combined company. If, however, a larger U.S. company buys a smaller overseas one, then control may stay effectively in the United States, with only the profits moved overseas.
For example, in 2012 Cleveland-based Eaton purchased Cooper Industries PLC in an $11.8 billion merger. After the merger, the new company Eaton Corporation PLC, incorporated in Ireland and headquartered in Cleveland, projected savings of $160 million a year as a result of not being subject to U.S. corporate taxes. So far this year, there have been more than a dozen of similar tax-motivated foreign mergers announced including companies like Chiquita, Pfizer and even some interest behind the drug-store chain Walgreens moving to the United Kingdom.
See the following discussion of foreign mergers in the DealBook earlier this month following the announcement of two multibillion dollar health care mergers:
“With a[n]…. offer worth $53 billion, AbbVie, a big Chicago-based pharmaceutical company, has succeeded in winning tentative approval to buy the Irish drug maker Shire . If completed, it would be the biggest deal of the year. Also on Monday, Mylan Laboratories, based in Canonsburg, Pa., said it would acquire the international generic drug business from Abbott Laboratories in an all-stock deal valued at $5.3 billion and reincorporate in the Netherlands.”
Solutions to curb corporate flight include lowering corporate taxes to a more competitive rate, decreasing the ownership thresholds for inversions from 80 percent to 50 percent, and excluding tax benefits for foreign-based mergers. Congressional Democrats have circulated several proposals, but Republicans have not expressed interest without comprehensive tax reform. Obama included proposals targeted at foreign mergers in his proposed 2015 budget, which includes decreasing the corporate tax rate, decreasing the ownership threshold for inversions and closing some corporate tax loopholes. While congressional action before the end of the year is unlikely, the strong rhetoric of economic patriotism and corporate defectors has the issue primed for the 2014 election debates.
For a great summary on the issue, see the following report issued earlier this summer by the congressional research service.
While I will miss my friends at the wonderful SEALS conference, I am excited to be attending and presenting at the Academy of Legal Studies in Business (ALSB) conference in Seattle next week.
For the ALSB conference, the organizers have set up a Guidebook App. I am just now exploring all the features, but it looks like an impressive and useful tool.
The App includes:
- The conference program.
- The conference schedule.
- Your schedule. You create your own schedule and can have reminders send to your phone.
- Full text of all the conference papers, organized by subject, author, and title.
- An attendee list, where attendees can share their contact information.
- In-app social networking.
- Information about exhibitors.
- A survey.
- Information about Seattle (restaurants, attractions, etc.)
There is a free version of Guidebook, but it looks like this ALSB Conference App has features of the rather expensive paid plans. The free version is limited to 200 downloads and doesn't appear to allow inclusion of presentation materials. Given the textbook publisher listed at the bottom of the App, I am guessing that the textbook publisher paid at least part of the cost, though that is pure speculation on my part.
While pricey for the paid plans, this might be something for AALS, SEALS, and other large conference organizers to consider for future years. The free version may be useful for smaller conferences.
Tuesday, July 29, 2014
This week, two of my co-bloggers shared some great insights on the revamped American Apparel board of directors. See Marcia Narine quoted in The Guardian article American Apparel adds its first woman to revamped board of directors; Joan Heminway, American Apparel 1, NFL 0. For those not following the American Apparel saga, the New York Times recently reported:
The founder and chief executive of American Apparel, Dov Charney, was fired this week because an internal investigation found that he had misused company money and had allowed an employee to post naked photographs of a former female employee who had sued him, according to a person with knowledge of the investigation.
Beyond the public relations problems surrounding Charney’s departure, American Apparel is struggling financially as sales have dropped dramatically. As an initial step in trying start a turnaround, the company announced four new board members, including the company’s first female director, Colleen Birdnow Brown, former chief executive of Fisher Communications.
When I opened the Guardian article quoting Marcia, I had another article open in the tab next to it from the Washington Post’s On Leadership section: For women and minorities, advocating for diversity has a downside. That article explained:
In corporate America, diversity is about as controversial as motherhood and apple pie. CEOs love to tout the number of women in their upper ranks. Human resource departments like to trumpet their diversity programs in glossy reports.
But a new study finds that for female and minority executives, being seen as an advocate for diversity could actually have a downside. The researchers behind the study, which will be presented at the Academy of Management's annual conference in early August, found that women and minorities who were rated by their peers as being good at managing diverse groups or respecting gender or racial differences also tended to get lower performance ratings. That's because they may be viewed as "selfishly advancing the social standing of their own low-status demographic groups," the researchers write, a no-no when it comes to rating good managers.
Please click below to read more.
Monday, July 28, 2014
As many readers (and all of my friends) know, I am a bit of a sports fan. Having been a college athlete (field hockey, at Brown University, for trivia buffs), I focus most of my attention on college games. I even served on The University of Tennessee's Athletics Board for a few years. But my Dad and I used to watch professional football and baseball a lot together when I was a kid (still do, when we are in the same place at the right time), so I also maintain a casual interest in professional sports.
I also have an interest in fashion, especially women's fashion (maybe less well known, except by close friends). I have friends in the industry and find aspects of it truly fascinating. I even used to subscribe to Women's Wear Daily, the fashion industry trade rag. I am the faculty advisor to the College of Law's Fashion and Business (FAB) Law student organization.
This personal background is prelude to my interest in two current events stories that I see as parallels. I am trying to sort them through on a number of levels. Maybe you can help. Here are the top lines of each story.
- Last Thursday, the National Football League (NFL) suspended Baltimore Ravens running back Ray Rice for two games, fined him $58,000 dollars, and asked him to seek counseling after its investigation of an incident relating to a video in which Rice was depicted dragging his then-fiance, now wife, by her hair after punching her in the face (allegedly rendering her unconscious).
- The very same day, American Apparel (AA) announced a new slate of directors who will assume positions on the AA board in early August as a result of investor intervention and a boardroom blood bath following on lagging profits and continuing investigations of allegations of sexual misconduct (most of it, as I understand it, not new news) against AA's founder and former CEO and director, Dov Charney, whose management roles at the firm were suspended by the board back in June.
The new crowdfunding exemption in section 4(a)(6) of the Securities Act will, once the SEC adopts the rules required to implement it, allow ordinary investors to invest in unregistered securities offerings. Will those unsophisticated investors go down in flames or will they be able to make rational investment choices?
Some proponents of crowdfunding argue that crowdfunding benefits from the so-called “wisdom of the crowd": that the collective, consensus choice that results from crowdfunding is better than what any individual could do alone, and often as good as expert choices. A recent study seems to support that view.
Two business professors—Ethan R. Mollick at the Wharton School and Ramana Nanda at Harvard—looked at crowdfunding campaigns for theater projects. They submitted those projects to people with expertise in evaluating theater funding applications and compared the expert evaluations to the actual crowdfunding results.
Mollick and Nanda found a strong positive correlation between the projects funded by the crowd and those rated highly by the experts. In other words, crowds were more likely to fund the campaigns the experts preferred. In addition, projects funded by the crowd that were not rated highly by the experts did just as well as the projects chosen by the experts.
Of course, theater projects aren’t the same as securities, but this study should certainly be of interest to those following the securities crowdfunding debate. The full study (44 pages) is available here. If you don’t have time to read the full study, a summary is available here.
Sunday, July 27, 2014
An Updated Draft of “Corporate Social Responsibility & Concession Theory” and Some Further Thoughts on Hobby Lobby
I have posted an updated draft of my latest piece, “Corporate Social Responsibility & Concession Theory” (forthcoming __ Wm. & Mary Bus. L. Rev. __) on SSRN (here). Here is the abstract:
This Essay examines three related propositions: (1) Voluntary corporate social responsibility (CSR) fails to effectively advance the agenda of a meaningful segment of CSR proponents; (2) None of the three dominant corporate governance theories – director primacy, shareholder primacy, or team production theory – support mandatory CSR as a normative matter; and, (3) Corporate personality theory, specifically concession theory, can be a meaningful source of leverage in advancing mandatory CSR in the face of opposition from the three primary corporate governance theories. In examining these propositions, this Essay makes the additional claims that Citizens United: (A) supports the proposition that corporate personality theory matters; (B) undermines one of the key supports of the shareholder wealth maximization norm; and (C) highlights the political nature of this debate. Finally, I note that the Supreme Court’s recent Hobby Lobby decision does not undermine my CSR claims, contrary to the suggestions of some commentators.
I expect to have at least one more meaningful round of edits, so all comments are welcome and appreciated.
As to the last point of the abstract, let me explain why I don’t think Hobby Lobby has meaningfully expanded the ability of corporations to pursue socially responsible actions lacking in any colorable shareholder wealth justification, which, in light of the business judgment rule, is where I believe much of the interesting CSR action is taking place. I’ll first briefly go through my understanding of what the Court held in Hobby Lobby, and then see if anything new is added to our understanding of corporations’ ability to pursue CSR activities. My analysis proceeds roughly as follows:
1. Are corporations capable of exercising religion?
As a matter of statutory construction, determining whether corporations can exercise religion for purposes of the RFRA requires looking to the Dictionary Act, which includes corporations under the definition of "person" unless the context indicates otherwise. I agree with Justice Ginsburg that the context of exercising religion is one that properly excludes corporations. In addition, due to my view of the corporation as being fundamentally a creature of the state, I have Establishment Clause concerns about allowing the recipients of the state’s corporate subsidy to further religious ends via that grant. (I address some of the related unconstitutional conditions arguments here.) But in the end, the Court said corporations can exercise religion, so that’s likely the final word till a Justice retires.
2. Is the exercise of religion by corporations ultra vires?
Given that the Court has deemed corporations capable of exercising religion, the next question is whether they have been granted the power to do so by the state legislatures that created them. In other words, is the exercise of religion ultra vires? When Justice Alito says that “the laws … permit for-profit corporations to pursue ‘any lawful purpose’ or ‘act,’ including the pursuit of profit in conformity with the owners' religious principles,” I believe he is best understood as affirming that religious exercise, like charitable giving, is not ultra vires, nothing more.
3. Can corporations sacrifice shareholder wealth to further religious exercise?
So, corporations have the ability to exercise religion and it is not ultra vires for them to do so. None of that, however, should change the fact that if the religious exercise does not somehow advance shareholder wealth and any shareholder legitimately complains, then a viable waste or fiduciary duty claim has been asserted. Alito seems to recognize this point when he qualifies his conclusion about the viability of abandoning profit-maximization with: “So long as its owners agree ….” As Jay Brown put it (here), “this is a rule of unanimity…. it doesn't actually alter the board's legal duties.” In other words, I agree with my co-blogger Josh Fershee when he argues (here) that Hobby Lobby should not be read to create some new First Amendment defense for controlling shareholders or directors facing viable claims of waste of corporate assets or duty of loyalty violations.
Assuming all the foregoing is correct, I don’t see anything new in Hobby Lobby vis-à-vis a corporation’s ability to engage in CSR activities. Obviously, it doesn’t take much to satisfy the business judgment rule, but that’s not the issue. If there is any new ground here it should arguably create a defense where no rational business purpose is asserted (I don’t believe Hobby Lobby has redefined “business” for purposes of the waste doctrine). That’s precisely what makes benefit corporations special and necessary – they provide such a defense for corporations pursuing activities with a public benefit but open to the challenge that there is no concomitant shareholder wealth benefit. As Robert T. Esposito & Shawn Pelsinger put it (here), “the principal argument for social enterprise forms rests on the assumption that corporate law and its duty to maximize shareholder wealth could not accommodate for-profit, mission-driven entities.”
So, has Hobby Lobby somehow meaningfully shifted the playing field when it comes to CSR? I don’t think so.
Last year, when many law schools made no new hires, Alabama was one of the most active law schools on the market. Alabama hired a new dean and five new faculty members. It appears that Alabama is looking to hire again this year.
The University of Alabama School of Law is seeking applications from entry level or lateral candidates. They will accept applications from applicants in all subject areas, but have a particular interest in applicants that research and teach in one or more of the following areas:
business law (including enterprise, finance, and/or securities); administrative regulation (including the regulatory state and/or regulated industries or activities); intellectual property (specifically trademark and copyright); and criminal law (including substantive criminal law and/or criminal procedure).
(Emphasis added, for the benefit of our business law readers.)
More information is available here.
Saturday, July 26, 2014
One of the classic arguments against private securities liability – and in particular, Section 10(b) fraud-on-the-market liability, with its high potential damages – is that it overdeters issuers, thus stifling voluntary disclosures rather than encouraging them. This was in fact the theory behind the PSLRA’s safe harbor: the statute makes it particularly difficult for private plaintiffs to bring claims based on projections of future performance, in part because of Congress’s fear that expansive liability would dissuade issuers from making projections at all.
Two new empirical studies challenge this common wisdom.
The first, Private Litigation Costs and Voluntary Disclosure: Evidence from Foreign Cross-Listed Firms, by James P. Naughton et al., uses the Supreme Court’s decision in National Australia Bank v. Morrison as a natural experiment. That decision abruptly removed the specter of private Section 10(b) liability based on securities sold on a foreign exchange. The authors compare voluntary earnings guidance offered by firms whose securities are cross-listed in the US and abroad before and after Morrison to determine how the diminished threat of liability affects issuer behavior.
As it turns out, the authors found that earnings guidance decreased for those firms whose securities are cross-listed, as compared to counterparts whose securities are listed solely in the United States. The authors also found that the effect was stronger for firms whose home country had a weak regulatory structure – i.e., firms that did not expect that enforcement in their home country would fill the void left by Morrison. Finally, the authors found stronger effects for firms with a greater proportion of non-US listed shares – i.e., firms most affected by the Morrison decision.
The second study, Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors, by Karen K. Nelson and Adam C. Pritchard, analyzes “risk factor” disclosures. Under the PSLRA, issuers are insulated from liability for false projections of future performance if the projections are accompanied by sufficiently detailed “cautionary statements,” i.e., descriptions of the variables that could cause actual results to differ from the projections. In this study, the authors compared risk factor disclosures by firms with a high risk of litigation to firms with low litigation risk, and found that higher litigation risk was correlated with more detailed risk disclosures that were more frequently updated from year to year and were presented in more readable language. The effect was strongest prior to 2005, when risk disclosure was voluntary; after 2005, when the SEC made risk disclosure mandatory, the effect recedes, although higher risk firms continue to provide more risk factor disclosure. The authors also show that investors absorb this information: for higher risk firms, there is a correlation between risk factor disclosures and investors’ post-disclosure risk assessments.
These two studies together provide interesting evidence that firms react to the specter of private liability by increasing, rather than decreasing, disclosures. Moreover, the Nelson/Pritchard study in particular concludes that these increased disclosures are in fact meaningful to investors.
Friday, July 25, 2014
We welcome Eric Orts (Wharton) to the "blawgosphere." Professor Orts has begun blogging at Ortsian Thoughts and Theories. I have already added his blog to my favorites, and I am sure I will become a regular reader. His new book, Business Persons: A Legal Theory of the Firm should be in my mailbox soon, and I am looking forward to reading it as well. (H/T David Zaring at the Conglomerate).
This post started off as a comment to co-blogger Haskell Murray's post Modifying the Law Review Submission and Review Process, and is perhaps overkill, but at least a few of us, thanks in part to Steve Bradford's post, are finding the conversation fruitful, so here we go:
In response to my suspicion that widespread law review changes could impact promotion and tenure (P&T) processes, Haskell writes: "I am not sure why the expectations for P&T would have to change if law reviews instituted blind review. It seems that all blind review would do is make the selection process more fair."
Maybe he is right, but here's my thinking: I believe expectations for P&T would change because I believe that widespread blind review would increase the (already long) turnaround time for getting pieces accepted for publication. If I am right (an open question) that it would increase the review time, it would make it harder for some faculty to get their pieces accepted, which is often required for it to "count" in the review process. Perhaps this would be a good thing, but I would see it as a potentially significant change.
This could also impact higher ranked schools even more. That is, Haskell has noted, people visiting at higher-ranked schools often find that visiting submission to be their most successful submission. (I’ve never had a top-20 or even top-40 school with my name for a submission, so I can’t say for certain.) It is my sense that higher-ranked schools get a bump with law reviews, and that's not always (ever?) fair, but if that bias went away, it could make it even harder to get through the P&T process at those schools without some modifying my understanding of some assessment measures. This is where I agree with Steve Bradford that if schools are using law review rankings as a proxy for quality, they are shirking their duties, but I still think many schools (or at least some people in schools) do. Again, a change may lead to a good shift over all, but it would still be a shift.
I concede it’s possible that blind review could increase the quality of journals, but I think that would also need peer review to go along with it, which could, again, extend the reviewing timeframe. For the current system, I think one of the reasons we don’t have blind review is that the system is full of proxies. These proxies have perhaps been deemed desirable given that we have already ceded publication decisions to 2Ls and 3Ls, and open review gives those students more information. I do think it may be more desirable and more fair to use blind review, though I think there’s also more likely we’d be swapping one problem for another if we don't add more seasoned reviewers to the mix. In one of my earlier posts (linked in my recent one) other disciplines indicate peer review alone won't fix the problem, and I don't think just blind review will either.
I maintain that a faculty- and practitioner-assisted process (including blind reviews) would benefit law reviews and legal scholarship, but it means we’d all have to pitch in even more. (I support that, but it would need widespread buy in.) My sense is that law reviews are slowly responding to the concerns and that we will see a better process result. I think this whole discussion is a net positive, and I hope we’ll see more of an evolution. As I have noted in my other posts, though, because I see value in many parts of law reviews, I think the coming changes should be an evolution and not a revolution.
In short, I think the law review submission and review process could be improved by at least two modifications.
1. Blind Review.
Currently, law review editors see, and in fact require, not only the author’s name and employer, but also the author’s entire CV. This is quite unlike the article selection process in other disciplines where all identifying information is supposed to be stripped.
If blind-review were adopted by law reviews, Josh Fershee claimed that it might still be possible to find the identity of the author through self-citations. Authors, however, do not always cite themselves and even if they do, law review editors would have to read pretty carefully to figure out the idenity of the author. Currently, it is simply not possible for law review editors to read closely all article submitted, so stripping the author's name would, at the very least, require the editors to dig into each article. Also, Authors could be instructed to remove, during the review process, identifying phrases like “in previous work I argued…”
This call for blind review by a Harvard law student in 2009 cites the gender bias, nationality bias, and prestige bias that can result from a non-blind selection process. I believe a few of the elite law reviews have adopted blind review from outside experts (Stanford Law Review is one), but it is certainly not widespread among U.S. law reviews.
In the comments, Josh said he thought blind review could work for at least some law reviews, but that the “expectations for promotion and tenure, would have to change” if we altered the system. I am not sure why the expectations for P&T would have to change if law reviews instituted blind review. It seems that all blind review would do is make the selection process more fair.
2. Exclusive Submissions (or Submission Limits).
One of the problems with the law review submission and review process is that most decent law reviews get hundreds, if not thousands, of articles to review in each submission cycle. Even if the law review editors were able to overcome the biases mentioned above, they simply do not have time to give each article anything close to a thorough read. The editors have to eliminate blocks of articles on easily identified things such as the subject matter of the article, the catchy titles, and the prestige of the author’s school.
If law reviews required exclusive submissions, the editors would have time to give each article a hard read before extending an acceptance. Florida State and Pepperdine have done exactly this in adopting exclusive submission windows for certain slots in their journals. This seems like a sensible move and I think more law reviews should follow suit.
If the exclusive submission requirement is too dramatic of a shift, I suggest ExpressO limit each author to 10 journals (or some other reasonable number) per article, per submission cycle. This limit would cut down significantly on the reading load for law review editors and would allow them to do more thorough review of the article submitted.
I welcome any thoughts on these suggestions.
One of my younger brothers is a PHD Candidate in Literature at University of Alabama. One of my younger sisters majored in English at the University of Georgia and is working in the media industry. (Yes, I am a proud older brother, prone to brag about my siblings' many accomplishments).
Both siblings recently encouraged me to expand my summer reading beyond books about law. Due to the tall stack of legal books in my "need to read" pile, I usually don’t devote much time to "pleasure reading."
This summer, however, I am trying to read legal books and, at least some books, which have no noticeable connection to law. Rick Bragg’s All Over But the Shoutin’ falls into the latter category. I will let interested readers follow the link for a description of the book, but I only mention it here to say that Bragg writes beautifully. I finished the 329-page book in two, long, sittings.
Writer Pat Conroy said the following of the book and its author:
Rick Bragg writes like a man on fire. And All Over But the Shoutin' is a work of art. I thought of Melville, I thought of Faulkner. Because I love the English language, I knew I was reading one of the best books I've ever read.
My English-major sister recently used that phrase – “because I love the English language” – but in a different, law-related context. She told me that reading her employment contract made her cry, because she loves the English language. Presumably, the attorney managed to draft a contract that was painful to read.
Likewise, most of us in legal academia can slip into what Steve Bradford recently called “the usual turgid law-review prose.” Reading Bragg’s book has inspired me to strive for writing that is both clear and engaging.
Thursday, July 24, 2014
As many have celebrated or decried, Dodd-Frank turned four-years old this week. This is the law that Professor Stephen Bainbridge labeled "quack federal corporate governance round II" (round I was Sarbanes-Oxley, as labeled by Professor Roberta Romano). Some, like Professor Bainbridge, think the law has gone too far and has not only failed to meet its objectives but has actually caused more harm than good (see here, for example). Some think that the law has not gone far enough, or that the law as drafted will not prevent the next financial crisis (see here, for example). The Council on Foreign Relations discusses the law in an accessible manner with some good links here.
SEC Chair Mary Jo White has divided Dodd-Frank’s ninety-five mandates into eight categories. She released a statement last week touting the Volcker Rule, the new regulatory framework for municipal advisors, additional controls on broker-dealers that hold customer assets, reduced reliance on credit ratings, new rules for unregulated derivatives, additional executive compensation disclosures, and mechanisms to bar bad actors from securities offerings.
Notwithstanding all of these accomplishments, only a little over half of the law is actually in place. In fact, according to the monthly David Polk Dodd-Frank Progress Report:
As of July 18, 2014, a total of 280 Dodd-Frank rulemaking requirement deadlines have passed. Of these 280 passed deadlines, 127 (45.4%) have been missed and 153 (54.6%) have been met with finalized rules. In addition, 208 (52.3%) of the 398 total required rulemakings have been finalized, while 96 (24.1%) rulemaking requirements have not yet been proposed.
Many who were involved with the law’s passage or addressing the financial crisis bemoan the slow progress. The House Financial Services Committee wrote a 97-page report to call it a failure. So I have a few questions.
1) When Dodd-Frank turns five next year, how far behind will we still be, and will we have suffered another financial blip/setback/recession/crisis that supporters say could have been prevented by Dodd-Frank?
2) How will the results of the mid-term elections affect the funding of the agencies charged with implementing the law?
3) What will the SEC do to address the Dodd-Frank rules that have already been invalidated or rendered otherwise less effective after litigation from business groups such as §1502, Conflict Minerals Rule (see here for SEC response) or §1504, the Resource Extraction Rule (see here for court decision)?
4) Given the SEC's failure to appeal after the proxy access litigation and the success of the lawsuits mentioned above, will other Dodd-Frank mandates be vulnerable to legal challenge?
5) Will the whistleblower provision that provides 10-30% of any recovery over $1 million to qualified persons prevent the next Bernie Madoff scandal? I met with the SEC, members of Congress and testified about some of my concerns about that provision before entering academia, and I hope to be proved wrong.
Let's wait and see. I look forward to seeing how much Dodd-Frank has grown up this time next year.
As I explore the future of Berkshire Hathaway in my forthcoming book Berkshire Beyond Buffett: The Enduring Value of Values, one topic I address for Berkshire post Buffett is whether the company should remain public or be taken private.
After all, once Bufffett is gone, you might expect activist shareholders to urge liberalizing its dividend policy (hasn't paid a dividend in fifty years), divest weaker subsidiaries (it has never sold a subsidiary in forty years), and break-up the diverse conglomerate (engages in hundreds of different lines of business).
Venture entrepreneurs and seasoned executives alike often weigh the pros and cons of a U.S. company being privately held or publicly listed. That goes for start-ups trying to decide to make an initial public offering as it does for listed companies trying to decide whether to go private.
Everyone considers the transaction costs of such a switch high because IPOs and going private transactions are complicated, requiring paying accountants, appraisers, lawyers and other professionals. They are also time-consuming.
So setting aside transaction costs, let’s highlight the usual pros and cons, to do an IPO or stay public:
● access to capital
● liquidity for shareholders
● a currency (stock) to pay managers or make acquisitions
● cache from the sign of business maturity or stature
● the public arena invites the threat of hostile takeovers via proxy battles or tender offers
● rigid governance requirements, especially board size, independence and oversight
● Wall Street analyst attention that drives focus on short-term results, not long-term prosperity
● required disclosure, posing direct administrative costs and potential indirect costs as to competitive matters
● exposure to securities lawsuits by disgruntled stockholders
Although disclosure may be a “con” to a company, from a social perspective, watchdogs value the transparency, especially as to matters of stewardship and corporate social responsibility of larger institutions.
Assuming such a list is roughly complete, how should you evaluate the situation for Berkshire Hathaway? Stipulate that it had good reasons for public company status in its early days, the 1970s and 1980s, even the 1990s. Is it still worth it today?
As to the usual advantages of being a U.S. public company, most are inapplicable to Berkshire or less valuable compared to other public companies:
● Berkshire is a net supplier of capital, generating oceans of it from 60+ insurance and non-insurance operations and investments in marketable securities
● if Berkshire needed or desired external capital, its decentralized structure would pinpoint the particular subsidiary of interest which could directly offer public debt to supply it, as its Mid-American Energy subsidiary does
● Berkshire shareholders, as a group and by self-selection, are long-term holders, the company boasting below-average share turnover, reducing the value of liquidity for existing holders and remitting the typical market liquidity value to aspiring shareholders
● Berkshire never uses its stock to compensate anyone
● Berkshire rarely uses its stock in acquisitions, strongly preferring cash to the associated dilutive effects, and limiting use to a component of consideration paid in very large acquisitions where it is valued such as for tax advantages (the $44 billion acquisition of BNSF rail is a good example)
● Berkshire does not need any cache from a public market listing (though it may have valued slightly being added to the S&P 500 in 2010 to replace BNSF after acquiring it)
As for cons, the threat of a hostile takeover effort at Berkshire is remote, either so long as Buffett (or The Gates Foundation succeeding him) remain controlling shareholder(s) or a concentrated group of Buffett-Berkshire traditionalists command majority voting power. (Built-in deterrence includes Berkshire’s ownership of large regulated subsidiaries in the fields of energy, insurance and rail.)
But other cons are more acute in Berkshire’s case than at most companies:
● part of its historic success is due to a board in place for several decades, a small, close-knit group of insiders, family members and friends, a structure made illegal by the Sarbanes-Oxley Act of 2002 which imposed rigid governance requirements on public company boards
●one of Berkshire’s most valuable traits is its long-term horizon (50 years by mandate of corporate headquarters), accepting quarterly and annual earnings swings that competitors avoid at the expense of long term value
Finally, even the watchdogs don’t get the usual payoff in disclosure quality, because so much of what happens at any subsidiary (even if highly material to any given one) is simply immaterial in the Berkshire context.
Among pros of a public listing that are peculiar to Berkshire: hundreds of thousands of shareholders available to attend Berkshire’s famous annual meeting, which would be reduced to fewer than 300 after a going private transaction.
But if such are the only reasons for a magnificent company such as Berkshire to stay public—stock for the occasional deal and a flock of holders—one moral is the need to reexamine our faith in rigid governance requirements and our allergies to earnings volatility.
Wednesday, July 23, 2014
As someone who teaches and researches both business law and energy law, I often focus on the overlap of the two areas, which I find to be significant. One of my most recent projects has been to write a new casebook, Energy Law: A Context and Practice Casebook, which will be available for courses taught this fall. I wrote a detailed description of the book in a guest post at the Energy Law Professor blog, but here I wanted to highlight the business aspects of the book.
The second chapter of my book is titled The Business of Energy Law. That chapter begins with some key vocabulary, and I then provide students with a client issue to frame the reading for the chapter. The issue:
Your firm has just taken on a new client who is a large shareholder in many companies. She is particularly concerned about her holdings in Energex, Inc., a publicly traded energy company. Energex was founded in 1977 by a oil and gas man from Louisiana who is still the CEO and a member of the board of directors. The client is concerned that the CEO is taking opportunities for himself that she thinks belong to Energex. As you read the following sections, consider: (1) What are the potential conflicts of interest the CEO might have? (2) Is it a conflict of interest if the activity is permitted under the CEO’s employment contract? (3) What kind of documents might be publicly available for review and where would you find them? (4) If it goes to litigation, what other information might you seek? From whom?
The first part of the chapter covers Business Organizations and Employment Law as Energy Law, including derivative suit and executive compensation contracts. The chapter also has the following sections: Antitrust as Energy Law, Mergers and Acquisitions, and Entity Structure and Fiduciary Duties.
Over the years, as I have taught my Energy Law Survey course and Business Organizations (as I do again this fall), I found that I can help make sense of things for students in each class when I borrow examples from the other class. My book helps make the connection concrete, and I hope it will help students understand more of the "why "to go along with the "what." As I often tell (preach to?) students, understanding business organizations is critical to all aspects of practice, regadless of where you intend to focus, whether it's energy law, environmental law, criminal law, or even family law.
This fall should be fun. For me, at least.
Steven Davidoff Solomon, a professor of law at the University of California, Berkeley, has an interesting article on antitrust in the DealBook today: Changing Old Antitrust Thinking for a New Gilded Age. Professor Solomon argues that a new wave of mergers in the tech and telecommunications industries mirror the consolidation wave of the Gilded Age a century ago which lead to our current antitrust laws. These mergers leave competition in tact, albeit among a few huge companies, and therefore facially meet the competition requirements under antitrust law. He argues that "[t]his calculus, however, excludes the political and other power that a concentrated industry can wield with government and regulators." Citing to industry-based nonprofits and the ability to participate in political spending in a post-Citizens United world, professor Solomon concludes that antitrust may become a question of power, not just competition.
"[R]ight now there is simply no real government ability to review the industry consolidation that is occurring today in which industries become dominated by a handful of major players. Yet it is becoming increasingly apparent that size and industry concentration affect American society even if competition still exists."
I think that this is an interesting lens through which to view, and teach, current market trends in mergers and acquisitions and related questions of antitrust law.