February 12, 2011
What If Winning Is More About Luck Than Merit?
Someone had to win the Super Bowl. It might have taken 12 overtimes, but one way or another that game was not going to end in a tie. And despite the fact that the teams might well have been perfectly evenly matched in every meaningful way, we would likely immediately rush out after the game to point out all the "attributes" of the winning team that led to them being deserving champions.
This phenomenon was best expressed to me a while back in terms of a coin-flipping example: If you fill a stadium with coin-flippers and eliminate those that toss tails every round you will eventually end up with one individual who has flipped heads an inordinate number of times (accounting for rules to deal with ties, of course). How hard is it to imagine that if we cared enough about the outcome of this "competition" we would start to look for reasons to explain the success of the few "great" coin flippers remaining as we neared the end of the contest? This example was cited to me in the course of a discussion about great stock pickers like Warren Buffett, in response to the suggestion that efficient market theories predicting that no one can beat the market must be bunk because if that were true you wouldn't see the repeated success of the likes of Warren Buffett.
What made me think about this today was an article in the Wall Street Journal written by Neil Strauss entitled "God at the Grammys: The Chosen Ones" wherein he points out how prevalent it is for major stars (apparently including adult video stars) to believe that God has preordained their tremendous success: "[W]hat's helping these stars is not so much religion as belief—specifically, the belief that God favors their own personal, temporal success over that of almost everyone else."
Strauss's point is that this sort of belief actually facilitates success. This may be true, but I also think this sort of belief helps assuage any doubt that might creep in as to whether any one individual actually deserves so much success in light of the insufferable conditions many in the world are living in, which is a point that, if true, may have some relevance to our business law. Here in the U.S. much of our legal system regulating business activity is rooted in beliefs about success, competition and merit that justify the "winners" retaining the greatest slice of the relevant pie. These beliefs are often as cherished (particularly by those who end up with the big slices) as many people's religious beliefs. But what if the winners were just lucky? Then we would likely say that the retention of this excessive wealth by a few was fundamentally unfair. But that sort of success can't possibly be primarily a function of anything remotely equating to luck . . . can it?
February 11, 2011
First Rwandan IPO: Beer
Not a bad place to start. The sale of 25% of the brewery Bralirwa marks the first IPO in Rwanda. Bralirwa is 75% owned by Heineken and holds "94% of the Rwanda beer market. It is also a licensed Coca-Cola bottler and has a virtual monopoly of the the local sparkling drinks market. It is also licensed by Diageo to brew Guinness."
Assuming a good number of people in Rwanda like beer, Coke, and sparkling drinks, this seems like a very wise place to start with IPOs. With $29.5m raised and an offering that was about three times oversubscribed, I'd say I'm not alone in that opinion.
Non-Law Training for Lawyers
The Wall Street Journal’s Law Blog reports that Milbank, Tweed is setting up a training program at Harvard to teach its associates about business issues—not just legal issues, but “accounting, economics, finance, and negotiation.” Scott Edelman, Millbank, Tweed’s vice chairman, says, “In the law-firm model today, most associates who join a firm don’t wind up staying to become partners—that goes without saying. We’re investing in them to make them better lawyers while they’re here, but also to prepare them for the outside world.”
I think this is a great idea, but it’s unfortunate that these associates didn’t get this training before they began practicing. Anyone who practices business law ought to have some grounding in all of the areas mentioned above. It always disheartens me to see how many of my Business Associations students, including many who go on to higher-level courses in the field, haven’t had any exposure to accounting at all. (I don’t ask about finance, but I assume the percentage is equally low.) You can be an adequate business lawyer without learning anything other than business law, but you can’t be a great business lawyer knowing the law and nothing else.
That doesn’t necessarily mean law schools should be teaching these things. I teach Accounting for Lawyers and I have taught Law and Economics in the past, but I have always thought that the real solution is not to have more law professors teaching non-law subjects, but to impose some serious prerequisites for admission to law school. And not just the subjects mentioned above, but political theory, inductive and deductive logic, basic philosophy, and a host of other things law students should be bringing to law school.
February 10, 2011
Ohio State Entrepreneurial Business Law Journal Symposium: Small Business Financing During the Great Recession
On March 10, 2011:
The Ohio State Entrepreneurial Business Law Journal in conjunction with the Columbus Bar Association is proud to present its 6th Annual Symposium to provide a platform for gathering information and perspectives to address the immediate and longer-term credit needs of small businesses. The Symposium will gather a national group of key decisionmakers to speak, including leaders from academic institutions, regulators, and community leaders.
February 9, 2011
Bad Ideas Are Renewable, Too
GOP legislators around the country are seeking to dismantle renewable portfolio standards (RPSs) in several states. RPSs require that covered electricity providers procure a specified percentage of their electricity from renewable sources. What consitutes "renewable" is defined by statute, but typically includes wind, solar, biomass, and incremental (as opposed to existing) hydro power.
Twenty-nine states and the District of Columbia have such mandates (for background, see here), and legislators in Montana, Colorado, Minnesota and Missouri are seeking to remove or reduce the requirements of their state RPSs. The Missiouri one strikes me as especially interesting, because in Novermber 2008 the state's voters directly, through a ballot initiaitve, repealed an existing non-binding renewable energy goal and replaced and expanded the goal with a mandatory RPS of 15% by 2021.
I am on record as supporting RPS laws, so of course I think repealing or weakening them is a bad idea. I am also on record as saying that change doesn't always make sense, even if we don't think the current state of affairs is ideal. Messing with these state RPS programs by removing or lowering the standards is wrong on both counts.
A reduction or removal of state RPS programs could have sigbnificant impacts on jobs, investment, and financial planning in one of the main areas of new U.S. manufacturing. It also impacts how utilities plan, and that can, in turn, impact consumers. Perhaps just as important, people generally like RPS programs. In June 2010, a Pew Research/National Journal Congressional Connection Poll indicated that 87% of those polled supported requiring "utilities to produce more energy from renewable sources." (emphasis added) The same poll indicated that 68% of the respondents favored expanded exploration for coal, gas, and oil.
What does that tell us? First, people recoginize how important energy is to the economy and their lives. Second, it shows that most people don't hate coal, gas, and oil. Third, it shows that people really like renewable energy sources.
Policiticans should start listening to their constituents and paying attention to reality. Both are saying the same thing: Renewable resources and traditional resources can (and do) peacefully coexist. It's time to start working on policies that recognize this reality instead of constantly pitting one source against another. For the next thirty to forty years, at least, this is not an either/or game. It's time we recognize that and try to make some real progress.
February 8, 2011
Typography for Lawyers
We all know that appearance matters but most of us, including me, pay little attention to issues of graphic design. After perusing the examples on the book’s web site and reading reviews of the book, I’m really excited to get a copy. It looks like a book anyone who thinks seriously about the effect of his or her words should have.
February 7, 2011
Bank Compensation and Derivatives
The modern world of derivatives is making it very difficult to regulate business behavior. Here’s the latest example, reported by the New York Times.
In response to regulatory pressure, many banks have shifted employee compensation more towards stock. The theory is simple—to align the interests of bank employees with the interests of investors. If the bank does well, its stock price increases, and the employees make more money. If the bank does poorly, its stock price falls, and the employees lose money (or, depending on the structure of the plan, at least don’t make any additional money).
But employees are limiting their risk by hedging, using call options and collars. These transactions allow bank employees to avoid the downside risk, usually at the cost of giving up some potential upside gain. Hedging thus allows employees to obtain something that, in terms of risk, looks much more like traditional non-stock compensation.
According to the story, most banks have not yet caught up to what their employees are doing. Hedging is prohibited by most banks only for executives at the very highest levels. Of course, banks may not really want to do anything about it, as long as regulators are satisfied.
Charleston School of Law Seeks Visiting Professors
The Charleston School of Law invites applications from potential visiting faculty members for one or both semesters of the 2011-12 academic year. Subject matter needs are varied but may include Criminal Law and Procedure, Constitutional Law, and commercial/business law subjects. CSOL anticipates that several of these visiting lines will become tenure-track and under CSOL policy visiting faculty are eligible to apply for tenure-track positions. The Charleston School of Law is provisionally approved by the American Bar Association and currently is seeking full ABA approval. The campus is located in the heart of Charleston’s vibrant historic district. Interested individuals should send a resume and application letter to Prof. Constance Anastopoulo, Charleston School of Law, 81 Mary St., Charleston, SC 29403; email: email@example.com.
SEC Reminds Investment Managers: Own Up to Mistakes or Owe Us, Too
Last week, the SEC charged AXA Rosenberg Group LLC (ARG), AXA Rosenberg Investment Management LLC (ARIM), and Barr Rosenberg Research Center LLC (BRRC) with securities fraud. The entities apparently concealed "a significant error in the computer code of the quantitative investment model that they use to manage client assets." The entities settled the charges by paying $217 million to the clients harmed by the error, along with a $25 million penalty to the SEC. The companies also agreed to hire an independent consultant to help the company with future compliance and disclosures.
According to the SEC Order (pdf here),
In late June 2009, a BRRC employee discovered an error in the Model’s computer code that was introduced in 2007 and effectively eliminated one of the key components in the Model for managing risk. This employee later discussed his finding in a meeting with senior ARG and BRRC officials and employees. A senior ARG and BRRC official (“Senior Official”) directed them to keep quiet about the error and to not inform others about it, and he directed that the error not be fixed at that time.
At least some members of the company seemed to understand the proper way to proceed; another employee finally told the CEO of ARG about the error in November 2009. ARG then "disclosed the error to Commission examination staff after Commission examination staff informed ARG of an impending examination of ARIM and BRRC" on late March of 2010. Clients got their notice of the error on tax day 2010.
So what did the companies "gain" by waiting? Well, they got to pay a $25 million penalty in addition to reimbursing clients for the harm. They have also earned distrust from both their primary regulators AND their customers. Maybe the company thought it was worth the risk to see if they could avoid both the fine and reimbursing their customers, but that's not how I'd run my company. In my view, there a much better ways to respond to mistakes, even big ones. Like this.
February 6, 2011
Income Gap Data
Akron law librarian Lynn Lenart has posted a nice collection of data on the widening income gap issue over at the Akron Law Cafe. Some lively discussion can be found in the comment section.