February 6, 2010
Tort Reform, Anyone?
Jeff Kingston, director of Asian Studies at Temple University Japan, has an interesting essay in today's Wall Street Journal on "Toyota's botched response" to its current recall crisis. What caught my attention was Kingston's recounting of Japanese pharmaceutical companies selling HIV-tainted blood products in the 1980s. According to Kingston, both the government and the companies knew about the problem but the sales continued so that the companies would not lose market share. Kingston attributes this and other acts of apparent callousness in part to a legal system where the "costs of such negligence are low" and "compensation for product liability claims is mostly derisory or non-existent."
February 5, 2010
Governance Exchange – An Online Community for Directors
In recent years, the requirements placed on board directors by shareholders, corporate management, regulators and financial market participants as a whole have significantly expanded. At the same time, shareholders are seeking a greater level of engagement with boards, both to understand better how board members exercise their oversight role and to encourage adoption of improved corporate governance policies.
RiskMetrics Group's Governance Exchange meets these needs through a unique, secure online community designed exclusively for directors, institutional investors and corporate executives. The industry's first platform to bring these stakeholders together, Governance Exchange provides online discussion forums to facilitate constructive dialogue on corporate governance issues. These forums enable community members to share and advance their own ideas and experiences, improving overall understanding of different perspectives on corporate governance.
As a members I have access to a diverse range of corporate governance viewpoints and critical information, including webcasts, white papers, surveys and expert analysis. While RiskMetrics Group will support member dialogue with data, content and objective research, they will not advance any particular agenda or definition of what constitutes good corporate governance.
For more information: http://www.riskmetrics.com/governance_exchange/directors
February 4, 2010
The Unnatural Separation of Liability and Control
Prof. Ribstein has put up an interesting post about the "series LLC" and the "protected cell company". His post made me think about a writing project that continues to gather dust in my "future projects" bin--"The Unnatural Separation of Liability and Control and Its Implications". I think one could fairly easily argue for a natural law of liability following control. In fact, one can view the corporation as operating in accordance with that law by separating ownership from control and thereby limiting the liability of the owners. But to the extent that one believes in such a natural law, we clearly trampled on it a long time ago and seem fascinated with coming up with better and better ways to crush it to dust. What I am curious about is what the theoretical justification for the separation of liability and control is. Obvious candidates include efficiency and the fattening of state budgets--but what are some others?
Turning Arms-Length Contracts Into Fiduciary Relationships
Prof. Bainbridge has put up a nice post analyzing the SEC's brief in its appeal of the Mark Cuban insider trading decision. His comment that "a fiduciary relationship requires more than just an arms-length contract" caught my attention. This statement is obviously correct, and elsewhere in his post Bainbridge notes that this "something else" can be the presence of "discretionary authority and dependency". But I think one could also argue that the something else is simple necessity. In other words, if it seems likely that the relationship as formally contracted would quickly fall apart absent the imposition of fiduciary duties, the law may well impose them if the form of relationship seems to, for example, spur economic efficiency. So, I imagine typical parties to an employment contract would consider that contract to be the result of arms-length negotiations. Yet, the agency problem (together with the cost of trying to contract around the problem in all its forms) could well eliminate the employer's incentive to enter into such relationships if the law did not subsequently impose fiduciary duties on the employee. Seen in this light, I think the question quickly becomes one of efficiency. And since it seems easy enough for those who grant access to confidential information in connection with an arms-length transaction to include a non-use provision, I think viewing the issue from that perspective favors Cuban in this case.
I will admit that I did not expect to end up with that conclusion.
February 3, 2010
Supreme Court's Campaign Finance Ruling on 1/21/10
We are in a time of sweeping decision making vis-à-vis the U.S. Government. The latest ruling will allow corporations and labor unions to spend freely from their treasuries on television ads and other forms of direct advocacy, for or against a candidate's election. In this break with precedent, the Court also overturned a prohibition on corporations and labor unions from airing what is described as "issue" ads which are commercials that do not expressly advocate for the election or defeat of a candidate and often air in the final weeks of a campaign. What's next could be a law proposed in Congress to require transparency and shareholder input on money that is spent under this change. While the practicalities of this rule change are yet to be seen, the possibilities for negative consequences on corporate spending in this area exist. Questions director's need to ask in their oversight role might include:
1.What are the business implications that any funding may have?
2.How might shareholder's interpret any campaign funding?
3.How can we demonstrate a leading practice around transparency?
4.Could funding in this area appear to conflict with our corporate values?
5.What has a competitor done successfully that we would not choose to do as a
matter of principle?
Carrasco on the Financial Crisis
Enrique R. Carrasco has posted The Global Financial Crisis and the Financial Stability Forum: The Awakening and Transformation of an International Body on SSRN with the following abstract:
This Article chronicles the awakening of the Financial Stability Forum (FSF) and its transformation into the Financial Stability Board (FSB). It describes the origins of the FSF and its relatively obscure work prior to the current crisis. It then chronicles the FSF’s significant rise in visibility throughout the crisis via its reports analyzing the crisis and setting forth recommendations relating to reforms of law and regulation of the financial markets. The FSF’s transformation into the FSB has given the FSF a more robust institutional grounding capable of coordinating its work with the IMF. The Article concludes that while the global financial crisis brought the FSF out of obscurity and resulted in its transformation into the FSB, it is still too early to tell whether the FSB will have a significant impact on global governance of international finance, especially with respect to the needs and interests of emerging economies.
Duhl on Consumer Financial Services Law
Gregory M. Duhl has posted International Developments in Consumer Financial Services Law 2007-2008 on SSRN with the following abstract:
This Survey reviews international consumer financial services law developments in 2007 and 2008 (through August 15, 2008) in the areas of payment systems, the European Convention of Human Rights, insolvency laws, and consumer privacy. This review makes the contrast between the European and U.S. approaches to consumer regulation apparent, in particular the EU preference for direct regulation as compared to the tradition of private remedies in the United States.
February 2, 2010
The economic crisis villain du jour...
...appears to be proprietary trading, prompting a call for a ban of the practice at firms that received deposit insurance payouts, further prompting the Senate Banking Committee leader to effectively say, "Now we're over-reaching."
How I long for the day of the blanket accusation. Like the The President's Working Group on Financial Markets, which boldly concluded in March 2008 that the blame resided with mortgage
underwriters, securitizers, credit rating agencies, investment banks,
broker-dealers (foreign and domestic), CDOs, settlement systems, the OTC
derivative market, Federal and State regulators, the Federal Reserve, existing
laws and non-existent policies. See “Policy Statement on Financial Market Developments,” March 2008, available at www.treas.gov/press/releases/hp871.htm .
Or even the more descriptive conclusions of the White House regulatory reform plan of June 2009, which summarized the meltdown causes as "complacency among financial intermediaries and investors...exaggerated expectations about the resilience of the financial markets...weak credit underwriting standards...lack of transparency and standards in markets for securitized loans," excessive reliance on credit rating agencies and "compensation practices that rewarded short term profits..." See http://www.financialstability.gov/docs/regs/FinalReport_web.pdf.
In a word, we've been conditioned for months to believe that the perfect storm had too many causes. Thus, this current business of picking one villain and proposing a corresponding ban is quite novel, and not likely to succeed in producing reform legislation in the short term (and almost definitely not by Super Bowl kickoff time of 6:31 p.m. on Sunday).
February 1, 2010
To damn with faint raise...
The White House's new budget allots a 12% increase for the SEC. The modest raise prompted the following lukewarm reception from the Commission chair:
"If enacted, the President's request will do a great deal to help us keep pace with the continuing growth of the markets and provide necessary resources to support important regulatory initiatives in 2011."
One doesn't have to parse the SEC spreadsheet to discern that the official statement translates to "Thanks. If it actually happens, the raise may help us - along with other resources - to start to consider possible unspecified changes next year. Or not."
But one certainly cannot blame the Commission for the lackluster gratitude. In the recent past, even more generous (and more realistic) budget increases have mysteriously shrunk between press release and final appropriation. Further, while a 12% hike does more than triple the annual budget increases of the Bush years, it hardly permits the type of expanded jurisdiction the public, press, and some pending Congressional Bills have called for (e.g., adding thousands of hedge funds to the examination schedule). Finally, it seems safe to conclude that the SEC's calls since late 2008 for self-funding have resolutely failed.
Which perhaps underscores the real message behind the budget raise: The White House could go either way when it comes to the SEC. The Obama Administration's Regulatory Reform plan of June 2009 both praised the Commission for certain of its regulatory efforts and criticized its consolidated entity supervision. Concurrently, the plan suggested continued Commission efforts at outlining rating agency duties but a diminished role in overseeing the net capital of the largest firms.
The choice seems to be simple. If the plan is to keep the SEC as chief securities regulator while augmenting its duties, then significantly increase its coffers. Otherwise, we may see more of what confounds us most about funding for the 76-year old agency - it allows staffers to do some things very well, others not so much, and some things not yet at all.
Six Steps to Restoring Trust in Corporate Governance From Former GE Executive
Ben W. Heineman Jr., General Electric's former senior vice president for law and public affairs, lays out six steps boards of directors should take to restore trust in corporate governance. They include:
1.A redefinition of the mission of the company.
2. A revamped internal leadership training process.
3. A refocused CEO selection process.
4. A restatement of fundamental but operational measurements for performance, risk and integrity.
5. A revision of compensation for the CEO and other senior executives.
6. A re-alignment of the board's fundamental oversight function.
For more information: http://www.wilmerhale.com/benjamin_heineman/
January 31, 2010
Oh yeah, about credit default swaps...
We still don't have meaningful regulation of the product blamed by so many for so much market grief. An article appearing in The New York Times online over the weekend focused on AIG's dabbling in the product in the states (in addition to the troubled London subsidiary previously receiving so much attention). But renewed interest in corporate CDS holdings succeed foremost in reviving the debate: Are swaps a form of insurance or not? And who's been watching them since the news broke that they warrant watching?
The Times article quotes experts on both sides of the jurisdiction debate. One view posits that the CDS most resembles a bank product. Alternatively, the contract (which often is judged in terms of the "premiums" it generates) equates to an insurance product. Others see the swaps as simply options.
On Tuesday, the Senate is set to take up H.R. 4173, the financial regulatory reform bill passed by the House in early December. That measure puts much faith in information gathering (to better enable state regulation) and entity regulation (e.g., requiring registration by "swaps dealers"). But a March 2008 Memorandum of Understanding between the SEC and CFTC (available at http://www.sec.gov/news/press/2008/2008-40.htm) promised review of novel derivatives by those two, existing agencies.
Have over-the-counter credit derivatives simply continued to grow throughout the crisis? Perhaps the first act of the Senate should be in assuring us all that a CDS moratorium - dictated by either market forces or otherwise - has taken place.
Gevurtz on the Financial Crisis
Franklin A. Gevurtz has posted The Role of Corporate Law in Preventing a Financial Crisis: Reflections on 'In Re Citigroup Inc. Shareholder Derivative Litigation' on SSRN with the following abstract:
This article uses recent events and litigation involving Citigroup to ask whether corporate law as created and enforced by state legislatures and courts - such as the legislature and courts of the State of Delaware - is capable of reducing the possibilities for a replay of the recent financial crisis. Specifically, after presenting the activities within Citigroup as a case study in excessive risk taking by financial institutions, this article outlines generally the tools available to the law to limit the sort of excessive risk taking that occurred at Citigroup and elsewhere. These tools include: regulation of business activities; capital requirements; rules for executive compensation; imposing liability on directors and officers for unreasonable risks; and rules governing the selection of directors and officers. This article then divides these tools into those addressed by banking law (regulation of business activities and capital requirements) and those for which state corporate law plays a role (compensation limits, personal liability for unreasonable risks, and director and officer selection). This article then uses the results in the recent Citigroup litigation as a case study in the limited willingness of state legislatures and courts to use the important tools allocated, at least in part, to corporate law to curb excessive risk taking by financial institutions. Specifically, the article contrasts the weaker standards and application for finding directors and officers liable for their inattention to risk in Citigroup with the probable analysis under a banking law or other regulatory regime. This article also explains why this result is inherent in a regime in which directors and shareholders select which state’s corporate law will govern. The article concludes with a discussion of normative implications.
Skalbeck on Law School Marketing
The website home page represents the virtual front door for any law school. It’s the place many prospective students start in the application process. Enrolled students, law
school faculty and other employees often start with the home page to
find classes, curricula and compensation plans. Home page content
changes constantly. Deciding which home pages are good is often very
subjective. Creating a ranking system for “good taste” is perhaps
The ranking report "Top 10 Law School Home Pages of 2009" includes a tabulation of fourteen objective design criteria to analyze and rank 195 law school home pages. The intent was to count only objective criteria to attempt to find the best sites. All law school home pages were ranked based on a weighted analysis of these criteria. Pictures of the ten best sites are included in the report, followed by a full tabulation of all schools evaluated for the report. The goal was to include elements that make websites easier to use for sighted as well as visually-impaired users. Most elements require no special design skills, sophisticated technology or significant expenses.