Business Law Prof Blog

Democrats in Control of the House??

With the polls suggesting that Democrats will control the House and the Republicans will control the Senate, what will be the effect on new business regulation??  Rep. Barney Frank (Mass.) will get the chair of the House Financial Service Committee (Oxley has it now and is retiring; his Republicans successor would be either Baker of (La.) or Leach (Iowa).  It will be a disaster for the business community.  A Democratic House and a Republican Senate (Republican President) guarantees deadlock.  This would be wonderful if our regulatory rules were in good shape.  We would get no new silly rules. Unfortunately we are not in good shape now.  As the result of Sarbanes-Oxley Act of 2002 and a quixotic SEC, our regulatory rules are too heavy-handed (hurting the competitive position of the United States in the world financial markets) and now will look to stay that way.  If Frank does get legislation through it will be big on more, not less mandatory rules (look at his executive compensation bill introduced last year).  We need more options for business structure not less; business needs to compete based on their structure.  He is also big on increasing "average" worker pay and disabling Wal-Mart from offering a credit card.  Again, this is a disaster for business--no way to sugar coat it.

New York Times Woes

Stories of hypocrisy are so normal in the press that we have come to expect them.  The charismatic, crusading minister who 1) cheats on his wife, 2) buys drugs, and/or 3) embezzles funds.  Ho hum.  Here is another ho hum story in another genre.

The New York Times, with its two sanctimonious reporters Grethchen Morgenson and Joseph Nocera, have railed against excessive executive compensation, pushed the an extension of shareholder voting rights and applauded new regulatory initiatives aimed at corporate governance.  Their columns, after starting with good factual reporting, often conclude with over-the- top opinion -- indignant, sanctimonious and full of grand standing declarations.  Yet we know that the NY Times itself has a corporate governance structure that is a mess. I have discussed it here (in several earlier posts). 

The latest is a missive by a major NY Times shareholder, Morgan Stanley Investment Fund, complaining about the NY Times board.  The investment fund, owned by Morgan Stanley, is run out of London.  The fund owns 7.6% of the Class A shares.

A family trust, the Sulzberger family, owns Class B shares and elected 9 of 13 directors.  Class B shares are a .6% of the voting stock of the company!  Class A shares, the 99.4% of the rest of the shares are publicly-held and control only 4 of the 13 directors. [The family also holds 19% of the Class A.] The dual class voting structure has been in place since 1969, when the paper went public.  The structure can be reversed only if 6 out of 8 members of the family trust, including the Times CEO himself, choose to reverse it. The top executives, several of whom are family insiders, get paid too much given the performance of the paper.  Moreover the board has approved lavish new offices.  The papers circulation is failing like a rock with revenues down close to 40%.  The NY Times stock has lost one-half its value over the past four years.  Apparently the high, soft-left profile of the paper is not attracting new readers and is losing old readers. [The young use the Internet; the older readers who are left do not like the constant, dreary and obvious anti-Bush style, in my humble opinion.]

In a hoot, the board turned to the number one anti-shareholder guy in the country for "advice" -- Marty Lipton of Wachtell Lipton Rosen & Katz.  He issued a report stating that the structure was normal for the media and that the company, other than the dual class board, uses "state of the art" governance procedures. At some point this guy should have no credibility.

I eagerly await the next columns by Morgenson and Nocera on the New York Times governing structure.  Buy the way the Ted Haggard story, the cheating minister, made the front page of the New York Times today.

Grasso's Real Legacy

The press is focusing on Grasso's pay package dispute, which will last years unless Grasso gets wise and gives some back in order to retain what would still be an outrageous amount.  They are missing the real story.  Grasso fought and bullied opponents who wanted to modernize the exchange in the 90s to include more electronic trading.  He single handedly protected the prerogatives of the old guard on the trading floor.  The result is a NYSE now struggling to put in place a "hybrid" system -- in 2006.  With the new rules just in place, stock trading on just over 100 hundred NYSE listed stocks, has immediately cascaded into the electronic forum.  The NYSE trades over 2,500 stocks.  More stocks will be added to the system over time.  The delay is staggering.  I visited the Osaka stock exchange and the Istanbul stock exchange in 1998 and both had goon electronic -- the trading floors of both, while technically still open, were empty of traders and just accommodated visitors like me.  The NYSE is now struggled to maintain market share -- and it may -- but had the exchange modernized in the 90s there would have been no struggle.  [We now see, for example, a very liberal Demorcatic Senator from New York, Chuck Schumer, writing editorials in the Wall Street Journal worrying about the exchange's competitive position and sounding very Republican on the problems of heavy handed regulation.]  Grasso's real legacy is an enduring harmful delay of modernization that will threaten the exchanger's health for some time.  That is the real story.  He was the last of the old guard, using old methods, that delayed change for short- term success and hurt badly the long-term competitive postion of the exchange.   Where would the exchange have been had the 2006 changes taken place in the mid to late 90s, when technology was available and the winds of change were easy to see?

Delphi Prosecution

The Delphi prosecution is a classic illustration of the effects of "coerced cooperation."  Although not a criminal case (and thus not involving the controversial policies of the Thompson memo), the effect is similar.  Delphi settled with the SEC, did not admit to any illegality nor pay a fine, and helped the SEC gather information on its own employees.  The SEC filed civil fraud charges against nine former executives.

NYSE Changes

Two stories on the NYSE provide an odd juxtaposition.  First, the NYSE is closing one of its trade floors.  the NYSE has five trading rooms and will close one to consolidate to four -- the Main Room, the Garage, the Blue Room and the Extended Blue Room.  The "New Room" will close.  The closure is a direct reflection of the new volume lost to the physical trading floor as the result of a gradual increase in computerized trading.  As more stocks are added to the new "hybrid" system, the activity on the floor will continue to drop.  Eventually, I see the floor closing except for a nominal presence.  The second story deals with the fortress like security measures taken by the NYSE outside its building.  Other tenants in local buildings are complaining.  The two stories together remind me of the fragile fortresses built by the Frank crusaders in Palestine, as they built elaborate castles in a futile attempt to maintain week forces against superior a Turkish enemy.

New NYSE rule 452

The new NYSE Rule 452 disabling default proxies for brokers holding stock for clients has a broad reach.  The rule applies to all NYSE "members", most of the financial community, and applies to all listed and unlisted securities.  It includes stock not listed on the NYSE.  NASDAQ, for example, could have a different rule and it would not matter;  most NYSE members also trade on NASDAQ.  The mandatory nature of the rule and its scope is its problem.  The SEC should at the very least, limit the rule to NYSE listed stock.  It should also find a way to allow, at the minimum, sophisticated investors to opt out in arrangements with their brokers.  This rule is far to broad.