Friday, December 19, 2014
In each of the classes I have taught I have offered extra credit for a reflection paper on how the media portrays the particular subject because most Americans, including law students, form their opinions about legal issues from television and the movies. Sometimes the media does a great job. I’m told by my friends who teach and practice criminal law that The Wire gets it right. Although I have never practiced criminal law, I assume that ABC’s How to Get Away With Murder, in which first-year students skip their other classes to both solve and commit murders, is probably less accurate. I do have some students who now watch CNBC because I show relevant clips in class. After a particularly heated on-air debate, one student called the network “the ESPN for business people.”
I’m looking for new fiction movies or TV shows to suggest to my students next semester. In addition to the standard business movies and documentaries, what makes your list of high-quality business-related shows? Friends, colleagues, and students have suggested the following traditional and nontraditional must-sees:
1) Game of Thrones (one student wrote about it in the partnership context)
2) House of Cards (not purely business, but shows how business and politics intersect)
3) House of Lies (a look at the world of management consulting)
4) Silicon Valley (one episode I saw talked about entity selection)
5) The Newsroom (during the last season writers tackled insider trading, hostile takeovers, and white knights)
6) Sons of Anarchy (I don’t watch this one so I can’t judge)
7) Shark Tank (not always a complete or accurate depiction but entertaining)
I look forward to your suggestions and to some binge-watching over the holidays.
Tuesday, December 16, 2014
In September, Myles Udland wrote an article citing Burton G. Malkiel and his book, A Random Walk Down Wall Street, noting, "The past history of stock prices cannot be used to predict the future in any meaningful way." This is a great point.
I also saw Udland's article from today, which notes oil prices (and stock prices) have gone bonkers. Both prices have fluctuated wildly, and oil has been mostly trending mostly downward. As I have said before, I don't expect prices to stay low (sub-$70 per barrel) for long, but time will tell.
Low oil and gas prices are certainly having an impact on markets and economies. The big one right now is Russia, which is struggling, in major part because of low oil prices. The ruble has taken a beating, and the nation's central bank raised interest rates from 10.5 to 17 percent. Wow.
The bulk of U.S. oil production appears safe well in the low- to mid-$40 per barrel price range, and I don't think it will stay below $55 for long. Then again, as much as I follow all of this, I am still a law professor, and not a financial analyst, so keep that in mind.
Anyway, having read all of this, I was reminded that people are sometimes inclined to view stock prices and commodities markets similarly. That would be wrong. Despite my views that oil is likely to go back up, at least some, it's also worth noting that using history as a predictor of markets is a dangerous game. It's reasonable to assume that, eventually, a market will go up, but whether it will take three weeks, three months, or three years (or more) is hard to say.
One recent report notes that oil price histories suggest we're near the bottom, and that (on average) prices should rebound significantly. The timing here is unpredictable, too, but the history of oil prices do suggest a rebound will happen sooner rather than later, even with global markets struggling.
Uland's articles keep the issues separate, but still, lest anyone get confused (and history suggest they might), it is worth noting that charting commodity markets is different than charting stock prices. As Professor Bainbridge's Safety Tip of the Day: Charting Doesn't Work from ten years ago notes, "Consistently, empirical studies have demonstrated that securities prices move randomly and, moreover, have shown that charting is not a long term profitable trading strategy." Bainbridge similarly cites Burton G. Malkiel, A Random Walk Down Wall Street (1996) in that post, and in an earlier one from 2003, Random stock traders and the ECMH; with a review of Malkiel's Random Walk.
I learned a lot about stock markets (and Business Organizations) from reading the good professor's writing, and I thought it worthwhile to continue to spread the message: Even though some people like to think that stock prices will follow historical trends and that stocks are like commodities and currencies, you follow their lead at your own peril.
Monday, December 15, 2014
. . . here's a relatively new Dodge Challenger commercial (part of a series) that you may find amusing. I saw it during Saturday Night Live the other night and just had to go find it on YouTube. It, together with the other commercials in the series, commemorate the Dodge brand's 100-year anniversary. "They believed in more than the assembly line . . . ." Indeed!
You also may enjoy (but may already have read) this engaging and useful essay written by Todd Henderson on the case. The essay provides significant background information about and commentary on the court's opinion. It is a great example of how an informed observer can use the facts of and underlying a transactional business case to help others better understand the law of the case and see broader connections to transactional business law generally. Great stuff.
On December 10, the press reported the Second Circuit's decision in the insider trading prosecution of Todd Newman and Anthony Chiasson (two of multiple defendants in the original case). In its opinion, the court reaffirms that tippee liability for insider trading is predicated on a breach of fiduciary duty based on the receipt of a personal benefit by the tipper and clarifies that insider trading liability will not result unless the tippee has knowledge of the facts constituting the breach (i.e., "knew that the insider disclosed confidential information in exchange for a personal benefit"). The court summarized its opinion, which addresses these matters in the context of the Newman case, a criminal case, as follows:
[W]e conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit. Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government’s evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.
Thursday, December 11, 2014
In many companies, executives and employees alike will give a blank stare if you discuss “human rights.” They understand the terms “supply chain” and “labor” but don’t always make the leap to the potentially loaded term “human rights.” But business and human rights is all encompassing and leads to a number of uncomfortable questions for firms. When an extractive company wants to get to the coal, the minerals, or the oil, what rights do the indigenous peoples have to their land? If there is a human right to “water” or “food,” do Kellogg’s, Coca Cola, and General Mills have a special duty to protect the environment and safeguard the rights of women, children and human rights defenders? Oxfam’s Behind the Brands Campaign says yes, and provides a scorecard. How should companies operating in dangerous lands provide security for their property and personnel? Are they responsible if the host country’s security forces commit massacres while protecting their corporate property? What actions make companies complicit with state abuses and not merely bystanders? What about the digital domain and state surveillance? What rights should companies protect and how do they balance those with government requests for information?
The disconnect between “business” and “human rights” has been slowly eroding over the past few years, and especially since the 2011 release of the UN Guiding Principles on Business and Human Rights. Businesses, law firms, and financial institutions have started to pay attention in part because of the Principles but also because of NGO pressures to act. The Principles operationalize a "protect, respect, and remedy" framework, which indicates that: (i) states have a duty to protect against human rights abuses by third parties, including businesses; (ii) businesses have a responsibility to comply with applicable laws and respect human rights; and (iii) victims of human rights abuses should have access to judicial and non-judicial grievance mechanisms from both the state and businesses.
Many think that the states aren’t acting quickly enough in their obligations to create National Action Plans to address their duty to protect human rights, and that in fact businesses are doing most of the legwork (albeit very slowly themselves). The UK, Netherlands, Spain, Italy and Denmark have already started and the US announced its intentions to create its Plan in September 2014. A number of other states announced that they too will work on National Action Plans at the recent UN Forum on Business and Human Rights that I attended in Geneva in early December. For a great blog post on the event see ICAR director Amol Mehra's Huffington Post piece.
What would a US National Action plan contain? Some believe that it would involve more disclosure regulation similar to the Dodd-Frank Conflict Minerals Rule, the Ending Trafficking in Government Contracting Act, Trafficking Victims Protection Act, the Burma Reporting Requirements on Responsible Investment, and others. Some hope that it will provide additional redress mechanisms after the Supreme Court’s decision in Kiobel significantly limited access to US courts on jurisdictional grounds for foreign human rights litigants suing foreign companies for actions that took place outside of the United States.
But what about the role of business? Here are five observations from my trip to Geneva:
1) It's not all about large Western multinationals: As the Chair of the Forum Mo Ibrahim pointed out, it was fantastic to hear from the CEOs of Nestle and Unilever, but the vast majority of people in China, Sudan and Latin American countries with human rights abuses don’t work for large multinationals. John Ruggie, the architect of the Principles reminded the audience that most of the largest companies in the world right now aren’t even from Western nations. These include Saudi Aromco (world’s largest oil company), Foxconn (largest electronics company), and India’s Tata Group (the UK’s largest manufacturing company).
2) It’s not all about maximization of shareholder value: Unilever CEO Paul Pollman gave an impassioned speech about the need for businesses to do their part to protect human rights. He was followed by the CEO of Nestle. (The opening session with both speeches as well as others from labor and civil society was approximately two hours long and is here). In separate sessions, representatives from Michelin, Chevron, Heinekin, Statoil, Rio Tinto, Barrick, and dozens of other businesses discussed how they are implementing human rights due diligence and practices into their operations and metrics, often working with the NGOs that in the past have been their largest critics such as Amnesty International, Human Rights Watch and Oxfam. The US Council for International Business, USCIB, also played a prominent role speaking on behalf of US and international business interests.
3) Investors and lenders are watching: Calvert; the Office of Investment Policy at OPIC, the US government’s development finance institution; the Peruvian Financial Authority; the Supervision Office of the Banco Central do Brasil; the Vice Chair of the Banking Association of Colombia; the European Investment Bank; and Swedfund, among others discussed how and why financial institutions are scrutinizing human rights practices and monitoring them as contractual terms. This has real world impact as development institutions weigh choices about whether to lend to a company in a country that does not allow women to own land, but that will provide other economic opportunities to those women (the lender made the investment). OPIC, which has an 18 billion dollar portfolio in 100 countries, indicated that they see a large trend in impact investing.
4) Integrated reporting is here to stay: Among other things, Calvert, which manages 14 billion in 40 mutual funds, focused on their commitment to companies with solid track records on environmental, social, and governance factors and discussed the benefits of stand alone or integrated reporting. Lawyers from some of the largest law firms in the world indicated that they are working with their clients to prepare for additional non-financial reporting, in part because of countries like the UK that will mandate more in 2016, and an EU disclosure directive that will affect 6,000 firms.
5) Is an International Arbitration Tribunal on the way?: A number of prominent lawyers, retired judges and academics from around the world are working on a proposal for an international arbitration tribunal for human rights abuses. Spearheaded by lawyers for better business, this would either supplement or possibly replace in some people’s view a binding treaty on business and human rights. Having served as a compliance officer who dealt extensively with global supply chains, I have doubts as to how many suppliers will willingly contract to appear before an international tribunal when their workers or members of indigenous communities are harmed. I also wonder about the incentives for corporations, the governing law, the consent of third parties, and a host of other sticking points. Some raised valid concerns about whether privatizing remedies takes the pressure off of states to do their part. But it’s a start down an inevitable road as companies operate around the world and want some level of certainty as to their rights and obligations.
On another note, I attended several panels in which business executives, law firm partners, and members of NGOs decried the lack of training on business and human rights in law schools. Even though professors struggle to cover the required content, I see this area as akin to the compliance conversations that are happening now in law schools. There is legal work in this field and there will be more. I look forward to integrating some of this information into an upcoming seminar.
In the meantime, I tried to include some observations that might be of interest to this audience. If you want to learn more about the conference generally you can look to the twitter feed on #bizhumanrights or #unforumwatch, which has great links. I also recommend the newly released Top 10 Business and Human Rights Issues Whitepaper.
December 11, 2014 in Business Associations, Conferences, Corporate Finance, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, International Business, Jobs, Law School, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (0)
Tuesday, December 9, 2014
The New York Times reports that LLCs have the ability to do things in New York politics that corporations cannot do:
For powerful politicians and the big businesses they court, getting around New York’s campaign donation limits is easy.
. . .
Corporations like Glenwood are permitted to make a total of no more than $5,000 a year in political donations. But New York’s “LLC loophole” treats limited-liability companies as people, not corporations, allowing them to donate up to $60,800 to a statewide candidate per election cycle. So when Mr. Cuomo’s campaign wanted to nail down what became a $1 million multiyear commitment — and suggested “breaking it down into biannual installments” — the company complied by dividing each payment into permissible amounts and contributing those through some of the many opaquely named limited-liability companies it controlled, like Tribeca North End LLC.
It may appear unseemly to allow LLCs to do things corporations cannot do, but (as usual) I bristle at the implication that LLCs should be treated like corporations just because they are limited-liability entities. Perhaps LLCs and corporations should be treated the same for campaign purposes (and I am inclined to think they should be), but there are lots of reasons to treat LLCs differently than corporations, and it is not inherently "a loophole" when they are treated differently.
A loophole is an ambiguity or inadequacy in the law. Here, the different treatment is not an ambiguity, though it is inadequate to limit funding in campaigns. However, it is not at all clear that the intent was to limit funding through LLCs. The law was likely passed so that the legislature could say it did something to reform finance. It did -- it closed the door for corporations and opened the door for LLCs. Playing entity favorites is permissible, even if it's not sensible.
LLCs and corporations are different entities, and different rules for different entities often makes a whole lot of sense. And even when it doesn't make sense, the idea that different entities should have different rules still does. Let's not conflate the two concepts, even when decrying the impact.
Thursday, November 27, 2014
As regular readers know, I research and write on business and human rights. For this reason, I really enjoyed the post about corporate citizenship on Thanksgiving by Ann Lipton, and Haskell Murray’s post about the social enterprise and strategic considerations behind a “values” message for Whole Foods, in contrast to the low price mantra for Wal-Mart. Both posts garnered a number of insightful comments.
As I write this on Thanksgiving Day, I’m working on a law review article, refining final exam questions, and meeting with students who have finals starting next week (being on campus is a great way to avoid holiday cooking, by the way). Fortunately, I gladly do all of this without complaint, but many workers are in stores setting up for “door-buster” sales that now start at Wal-Mart, JC Penney, Best Buy, and Toys R Us shortly after families clear the table on Thanksgiving, if not before. As Ann pointed out, a number of protestors have targeted these purportedly “anti-family” businesses and touted the “values” of those businesses that plan to stick to the now “normal” crack of dawn opening time on Friday (which of course requires workers to arrive in the middle of the night). The United Auto Workers plans to hold a series of protests at Wal-Mart in solidarity with the workers, and more are planned around the country.
I’m not sure what effect these protests will have on the bottom line, and I hope that someone does some good empirical research on this issue. On the one hand, boycotts can be a powerful motivator for firms to change behavior. Consumer boycotts have become an American tradition, dating back to the Boston Tea Party. But while boycotts can garner attention, my initial research reveals that most boycotts fail to have any noticeable impact for companies, although admittedly the negative media coverage that boycotts generate often makes it harder for a companies to control the messages they send out to the public. In order for boycotts to succeed there needs to be widespread support and consumers must be passionate about the issue.
In this age of “hashtag activism” or “slacktivism,” I’m not sure that a large number of people will sustain these boycotts. Furthermore, even when consumers vocalize their passion, it has not always translated to impact to lower revenue. For example, the CEO of Chick-Fil-A’s comments on gay marriage triggered a consumer boycott that opened up a platform to further political and social goals, although it did little to hurt the company’s bottom line and in fact led proponents of the CEO’s views to develop a campaign to counteract the boycott.
Similarly, I’m also not sure of the effect that socially responsible investors can have as it relates to these labor issues. In 2006, the Norwegian Pension Fund divested its $400 million position (over 14 million shares in the US and Mexico operations) in Wal-Mart. In fact, Wal-Mart constitutes two of the three companies excluded for “serious of systematic” human rights violations. Pension funds in Sweden and the Netherlands followed the Fund’s lead after determining that Wal-Mart had not done enough to change after meetings on its labor practices. In a similar decision, Portland has become the first major city to divest its Wal-Mart holdings. City Commissioner Steve Novick cited the company’s labor, wage and hour practices, and recent bribery scandal as significant factors in the decision. Yet, the allegations about Wal-Mart’s labor practices persist, notwithstanding a strong corporate social responsibility campaign to blunt the effects of the bad publicity. Perhaps more important to the Walton family, the company is doing just fine financially, trading near its 52-week high as of the time of this writing.
I will be thinking of these issues as I head to Geneva on Saturday for the third annual UN Forum on Business and Human Rights, which had over 1700 companies, NGOs, academics, state representatives, and civil society organizations in attendance last year. I am particularly interested in the sessions on the financial sector and human rights, where banking executives and others will discuss incorporation of the UN Guiding Principles on Business and Human Rights into the human rights policies of major banks, as well as the role of the socially responsible investing community. Another panel that I will attend with interest relates to the human rights impacts in supply chains. A group of large law firm partners and professors will also present on a proposal for an international tribunal to adjudicate business and human rights issues. I will blog about these panels and others that may be of interest to the business community next Thursday. Until then enjoy your holiday and if you participate in or see any protests, send me a picture.
November 27, 2014 in Ann Lipton, Conferences, Corporate Finance, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Haskell Murray, International Business, Marcia Narine, Securities Regulation, Social Enterprise | Permalink | Comments (0)
Tuesday, November 25, 2014
We want the best for both of our kids, and we are working to help them learn as much as they can about being good people and successful people. We're fortunate that we have a (relatively) stable life, we've had good health, and we're able to provide our children a lot of opportunities. For my daughter, as I have noted before, I do worry about institutional limits that are placed on her in many contexts.
She's in first grade, but expectations are already being set. On her homework last week: a little boy in her reading comprehension story builds a tower with sticks and bricks and stones. Next story: a little girl gets fancy bows in her hair instead of her usual ponytails. I wish I were making this up.
This is more pervasive than I think many people appreciate. Take, for example, the Barbie computer science book that had people raising their eyebrows (and cursing). NPR has a report explaining the basic issues here. The basics:
A book called Barbie: I Can Be A Computer Engineer was originally published in 2010. Author and Disney screenwriter Pamela Ribon discovered the book at a friend's house and was initially excited at the book's prospects, she tells guest host Tess Vigeland.
But then she continued reading.
"It starts so promising; Barbie is designing a game to show kids how computers work," Ribon says. "She's going to make a robot puppy do cute tricks by matching up colored blocks."
But then Barbie's friend Skipper asks if she can play it, and the book continues:
" 'I'm only creating the design ideas,' Barbie says, laughing. 'I'll need Steven's and Brian's help to turn it into a real game.' "
Harvard Business Review recently published a piece, Research: How Female CEOs Actually Get to the Top, that offers some insights. It's a good read, and is shows that success at the highest levels is often limited to women pursuing a different path and in companies with a particular culture. At a minimum, the article suggest that the advice we give women about how to get ahead may not be useful. (Not shocking given that the advice is often coming from men.) Here's an excerpt with my biggest takeaways, but I recommend the whole things (it's a short read):
The consistent theme in the data is that steady focus wins the day. The median long stint for these women CEOs is 23 years spent at a single company in one stretch before becoming the CEO. To understand whether this was the norm, we pulled a random sample of their male Fortune 500 CEO counterparts. For the men in the sample, the median long stint is 15 years. This means that for women, the long climb is over 50% longer than for their male peers. Moreover, 71% of the female CEOs were promoted as long-term insiders versus only 48% of the male CEOs. This doesn’t leave a lot of time for hopscotch early in women’s careers.
* * *
It may be that the playbook for advising young women with their sights set on leading large companies needs to be revised. Just as important, there is something inspiring for young women in the stories of these female CEOs: the notion that regardless of background, you can commit to a company, work hard, prove yourself in multiple roles, and ultimately ascend to top leadership. These female CEOs didn’t have to go to the best schools or get the most prestigious jobs. But they did have to find a good place to climb.
To be clear, I am thankful things have progressed to the point that my daughter really does have a legitimate shot at the same success as my son. Things are better than they were, and I see that. I'm just not satisfied that we're where we need to be, because her access to opportunities do not mean she has the same likelihood of success. We'll keep working on it, as I'd like to think we all should.
Friday, November 21, 2014
Whole Foods recently launched its first national advertising campaign around the theme “Values Matter.” Some outlets claim that the campaign is a response to weak comparable store sales. Supposedly, Whole Foods is spending between $15 million and $20 million on this campaign in an attempt to convince customers that “value and values go hand in hand.” You can see some of the videos here.
Whole Foods has long been known for its high prices and healthy food. Whole Foods has been actively fighting the high price reputation, but at least in the places I have lived, Whole Foods is usually close to the richest neighborhoods, is entirely absent in less affluent areas, and still seems to have higher prices than most competitors. Whole Foods seems to use a premium product, sold mostly to the upper-class, to fund its commitment to employees, its purchasing from smaller local vendors, and its care for the environment.
Whole Foods seems to focus on impacting society and the environment mostly through the process by which they sell their products and distribute the profits to stakeholders.
Walmart seems to have a very different model. Walmart seems to care much more about low prices than about treating their non-customer stakeholders well. Walmart’s extreme pressuring of suppliers, often contentious relationships with the communities around its stores, and low wages/limited benefits for many of its employees [updated] has been widely reported. Walmart seems to be trying to fight its reputation, and it has certainly engaged in some positive activities for society, but its reputation remains.
In contrast to Whole Foods, Walmarts can be found in rural and less affluent areas, and Super-Walmarts are bringing fresh produce to former food deserts at prices that appear to be more affordable. Walmart could argue that it makes a positive impact on society through its low prices.
In short, Whole Food’s strategy seems to be – proper process, high prices – while Walmart may allow a poor process to obtain low prices.
Should corporate law, especially social enterprise law such as the recent benefit corporation law, encourage one strategy over the other? The benefit corporation laws appear flexible enough to embrace either, though a more traditional understanding of social enterprise might exclude both on the ground that the companies’ primary purpose does not seem to be producing products that serve the disadvantaged. Social enterprise’s definition, however, has become much broader over time, though there is currently no consensus.
This struggle with process and prices can be a difficult one, and I am just glad more companies are attempting to find appropriate solutions.
Thursday, November 20, 2014
The DC Circuit will once again rule on the conflicts minerals legislation. I have criticized the rule in an amicus brief, here, here, here, and here, and in other posts. I believe the rule is: (1) well-intentioned but inappropriate and impractical for the SEC to administer; (2) sets a bad example for other environmental, social, and governance disclosure legislation; and (3) has had little effect on the violence in the Democratic Republic of Congo. Indeed just two days ago, the UN warned of a human rights catastrophe in one of the most mineral-rich parts of the country, where more than 71,000 people have fled their homes in just the past three months.
The SEC and business groups will now argue before the court about the First Amendment ramifications of the “name and shame” rule that required (until the DC Circuit ruling earlier this year), that businesses state whether their products were “DRC-Conflict Free” based upon a lengthy and expensive due diligence process.
The court originally ruled that such a statement could force a company to proclaim that it has “blood on its hands.” Now, upon the request of the SEC and Amnesty International, the court will reconsider its ruling and seeks briefing on the following questions after its recent ruling in the American Meat case:
(1) What effect, if any, does this court’s ruling in American Meat Institute v. U.S. Department of Agriculture … have on the First Amendment issue in this case regarding the conflict mineral disclosure requirement?
(2) What is the meaning of “purely factual and uncontroversial information” as used in Zauderer v. Office of Disciplinary Counsel, … and American Meat Institute v. U.S. Department of Agriculture?
(3) Is the determination of what is “uncontroversial information” a question of fact?
Across the pond, the EU Parliament is facing increasing pressure from NGOs and some clergy in Congo to move away from voluntary self-certifications on conflict minerals, and began holding hearings earlier this month. Although the constitutional issues would not be relevant in the EU, legislators there have followed the developments of the US law with interest. I will report back on both the US case and the EU hearings.
In the meantime, I wonder how many parents shopping for video games for their kids over the holiday will take the time to read Nintendo's conflict minerals policy.
Tuesday, November 18, 2014
In my post yesterday on intellectual property law and The University of Tennessee's rebranding exercise, I noted my opposition to the abandonment of the Lady Volunteer brand. Some have questioned my stand on this issue as (although not using these words) old fashioned, anti-feminist, etc. Even my husband questioned me on the matter, asking: "How would you have felt if, in playing field hockey at Brown, the team was referred to as the Lady Bears?" Of course, some team names are not meant to "go with" the moniker "Lady," in any event . . . . :>)
Some do see this as a simple issue of shedding the "separate and unequal" status of women's athletics at The University of Tennessee. I can see how an outsider might see things that way. But the merger of the Knoxville men's and women's athletic departments two years ago (I will spare you the details) was accomplished in a way that is seen by some as sweeping inequality under the rug through homogenization that falsely signals equality to the outside world. Suffice it to say, I am not persuaded that the issue is this simple.
Others have contacted me on Facebook and in private communications to point out additional aspects of the rebranding matter that relate to the word "Lady" in the women's athletics branding at The University of Tennessee. On Sunday, Jack McElroy, the editor-in-chief of our local paper (whose son played soccer with my son back in the day) wrote an editorial [ed. note: this link is firewall protected and may only be available to subscribers] on this element of the branding controversy. In the editorial, he traces the history of the word "lady" in reference to women--from a 25-year-old study finding its use demeaning to female athletes to its resurgence as "a comfortable term by which 21st-century women can address themselves" (citing to feminist writer Ann Friedman). Today, I received an email noting this post by Bryan Garner, perhaps most well known to many of us as the editor of Black's Law Dictionary, on the "increasingly problematic" nature of the word "lady." (Hat tip to Bryan Cave partner Scott Killingsworth for that reference.) These writings also do not point to a simple resolution of issues relating to the continued usage or abandonment of the Lady Volunteer moniker or brand.
The branding issue is, in truth, complex, even in our post-Title IX world. Some of the complexities involve legal issues or have legal ramifications (as noted in my post yesterday); some do not. Among other things, branding involves psychological and emotional reactions that are contextual. Business lawyers involved in branding efforts will be of the most use to their clients if they take this complexity and context into account in engaging legal analysis and offering advice. How would you, for example, advise a firm like Airbnb about legal issues relating to its branding challenges? The possibility of legal claims emanating from the non-intellectual property aspects of branding is something I hadn't earlier considered but now see as real. I guess advising business clients on branding involves a lot more than trademark law . . . .
Monday, November 17, 2014
Readers who know me well understand that I am a die-hard fan of The University of Tennessee's athletics teams. As a former college athlete and continuing college sports fan, I embraced the Tennessee Volunteers and Lady Volunteers as if they were my own when I moved to Knoxville in 2000. I first became a Lady Volunteer basketball ticket holder. Then, I donated to the university and got myself in the queue for football tickets. Men's basketball followed once I began service as a member of the campus's athletics board.
A week ago, the campus administration announced that the university would be dropping the Lady Volunteer brand for all sports except women's basketball. The press release is not a model of good communication to the multiple interested constituencies that could be expected to read it. It manages to muddle the rationale for the change (citing to a campus rebranding effort, brand audits, and the campus's new allegiance with Nike), send mixed messages (citing a perceived need for consolidation, but leaving the women's basketball team out of the consolidation), and ignore the value of the Lady Volunteer brand to female athletes not playing on the basketball team (asserting that "[t]he Lady Vol logo . . . has long been the monogram of excellence and a tradition among our loyal basketball fans." (emphasis added))--somewhat denigrating those non-basketball Lady Volunteer athletes and their fans in the process. As my Facebook friends know, I am not happy about this change. I believe that university is effectively (but admittedly not totally) giving the shaft to a valuable brand--a brand that has taken many years to build--one that is distinctive and meaningful because of its association with empowered, successful female athletes in many sports.
Apart from my disagreement with the change, however, I wondered whether legal counsel had--or could or should have had--any involvement in this "brand transition." I suspect so. Among other things, I would expect that best practices would dictate that all press releases receive review from one of the university's lawyers in the General Counsel's office.
This realization led me to consider the possible role of trademark abandonment in the university's decision to keep the Lady Volunteer brand for the women's basketball team. The university concedes in its press release that the Lady Volunteer brand, which includes its trademarked logo (reproduced above) has value--although it limits that contention to women's basketball. Under the Lanham Act, if the university had determined to discontinue use of the Lady Volunteer logo without having an intent to resume its use, the logo would have become available for use by others after three years. By continuing use of the trademark for women's basketball, the university may (in part) be endeavoring to protect the logo from expropriation by an opportunistic entrepreneur.
But maybe I am giving the university and its legal counsel too much credit . . . ?
For another (perhaps more interesting?) take on intellectual property law issues stemming from the university's Power T rebranding campaign, see this post from one of our UT Law alums, Kevin Hartley (who practices at Stites & Harbison in Nashville).
Thursday, November 6, 2014
I have previously blogged about Institutional Shareholder Services’ policy survey and noted that a number of business groups, including the Chamber of Commerce, had significant concerns. In case you haven’t read Steve Bainbridge’s posts on the matter, he’s not a fan either.
Calling the ISS consultation period “a decision in search of a process,” the Chamber released its comment letter to ISS last week, and it cited Bainbridge's comment letter liberally. Some quotable quotes from the Chamber include:
Under ISS’ revised policy, according to the Consultation, “any single factor that may have previously resulted in a ‘For’ or ‘Against’ recommendation may be mitigated by other positive or negative aspects, respectively.” Of course, there is no delineation of what these “other positive or negative aspects” may be, how they would be weighted, or how they would be applied. This leaves public companies as well as ISS’ clients at sea as to what prompted a determination that previously would have seen ISS oppose more of these proposals. This is a change that would, if enacted, fly in the face of explicit SEC Staff Guidance on the obligations to verify the accuracy and current nature of information utilized in formulating voting recommendations.
The proposed new policy—as yet undefined and undisclosed—is also lacking in any foundation of empirical support… Indeed, a number of studies confirm that there is no empirical support for or against the proposition ISS seems eager to adopt.
[Regarding equity plan scorecards] there is no clear indication on the part of ISS as to what weight it will assign to each category of assessment—cost of plan, plan features, and company grant practices… this approach benefits ISS (and in particular its’ consulting operations), but does nothing to advance either corporate or shareholder interests or benefits. The Consultation also makes clear that, for all ISS’ purported interest in creating a more “nuanced” approach, in fact the proposed policy fosters a one-size-fits-all system that fails to take into account the different unique needs of companies and their investors.
Proxy votes cast in reliance on proxy voting policies based upon this Consultation cannot—by definition—be reasonably designed to further shareholder values.
ISS had a number of other recommendations but they didn’t raise the ire of Bainbridge and the Chamber. For the record, Steve is angry about the independent chair shareholder proposals, but please read his well-documented posts and judge for yourself whether ISS missed the mark. The ISS’ 2015 US Proxy Voting Guidelines were released today. Personally, I plan to raise some of the Guidelines discussing fee-shifting bylaws and exclusive venue provisions in both my Civil Procedure and Business Associations classes.
Let’s see how the Guidelines affect the next proxy season—the recommendations from the two-week comment period go into effect in February.
November 6, 2014 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (0)
Tuesday, November 4, 2014
Back in 2010, Art Durnev published a short paper, The Real Effects of Political Uncertainty: Elections and Investment Sensitivity to Stock Prices, available here. The article studies the interaction between national elections and corporate investment. Today is not a national election -- we get two more years before we have to choose our next president -- but it's still seems like an apt day to think about the role of elections on corporate activity.
The most interesting part of the article, to me anyway, is the test of the relationship between political uncertainty and firm performance. As the article explains,
If prices reflect future profitability of investment projects, investment-to-price sensitivity can be interpreted as a measure of the quality of capital allocation. This is because if capital is allocated efficiently, capital is withdrawn from sectors with poor prospects and invested in profitable sectors. Thus, if political uncertainty reduces investment efficiency, firm performance is likely to suffer. Consistent with this argument, we show that firms that experience a drop in investment-to-price sensitivity during election years perform worse over the two years following elections.
The conclusion: this signifies that political uncertainty significantly impacts real economic outcomes. Therefore, "political uncertainty can deteriorate company performance because of inferior capital allocation."
So, it's election day. Please vote, regardless of your views. Voting is a right, a privilege, and duty. And if you're in charge of a firm's investment decisions, consider this study. As we approach the next national election, you might want to be wary of dropping your investment-to-price sensitivity leading up to the next election. If you do, odds are your firm will do worse in the two years following the election.
And, while we're talking presidential politics, here's another study worth considering: Effects of Election Results on Stock Price Performance: Evidence from 1980 to 2008. Here's the abstract (and, please, go vote!):
We analyze whether the results of the 1980 to 2008 U.S. presidential elections influence the stock market performance of eight industries and we examine factors that are expected to affect firms’ stock returns around these elections. Our empirical analysis reflects firms’ exposure to government policies in two ways. First, to determine whether investors presume any Democratic or Republican favoritism towards or biases against certain industries we perform an event study for each of the eight industries around the eight elections. Second, we include the firms’ marginal tax rate as proxy for the firms’ exposure to uncertainty about fiscal policy in a regression analysis. We do not find a consistent pattern in industry returns when comparing the effect of Democratic versus Republican victories. However, the extent of the reaction differs among industries. The victory of a Democratic candidate rather negatively influences overall stock returns, while the results are rather mixed for Republican victories. Furthermore, a change in presidency from either a Democratic to a Republican candidate or from a Republican to a Democratic candidate causes stronger stock market effects than re-election or the election of a president from the same party. We also find that the firms’ marginal tax rate is positively correlated with abnormal stock price returns around the election day. The results are relevant for academics, investors and policy makers alike because they provide insight on the question whether stock market participants respond to expected changes in policy making as a result of presidential elections.
Thursday, October 30, 2014
This paper investigates the voting patterns of shareholders on the recently enacted “Say-On-Pay” (SOP) for publicly traded corporations, and the efficacy of vote outcomes on rationalizing executive compensation. We find that small shareholders are more likely than large shareholders to use the non-binding SOP vote to govern their companies: small shareholders are more likely to vote for a more frequent annual SOP vote, and more likely to vote “against” SOP (i.e., to disapprove executive compensation). Further, we find that low support for management in the SOP vote is more likely to be followed by a decrease in excess compensation, and by a more reasonable selection of peer companies for determining compensation, when ownership is more concentrated. Hence, the non-binding SOP vote offers a convenient mechanism for small shareholders to voice their opinions, yet, larger shareholders must be present to compel the Board to take action. Thus, diffuse shareholders are able to coordinate on the SOP vote to employ the threat that large shareholders represent to management.
Tuesday, October 28, 2014
Many financial industry analysts are bearish on the oil industry right now. I'm not sure they're right, as I note below, but I also think it's important to recognize that financial market impact of oil price fluctuations is not the only impact U.S. oil production has on markets generally.
One thing I want to make clear at the outset, though, is that I am not a financial analyst, or an economist (as I have previously noted). My comments here are reactions to things analysts are saying based on my experience researching U.S. shale oil markets and activity, as well as the U.S. transportation sector in recent years. My thoughts are related to my expectations for how I think the companies and people in the industry are likely to react, and reflect my hope that financial market changes don't negatively impact other essential planning, in areas related to health, safety, and the environment, the industry desperately needs.
Back to the market predictions: Goldman Sachs and some other analysts see the oil sector as over saturated and anticipate continued supply gluts to keep prices down. According to a report from Goldman analysts, U.S. price indicator West Texas Intermediate (WTI) crude will fall to $75 a barrel and Brent crude is expected to be at $85 a barrel in the first quarter of 2015. That would be a $15 per barrel discount from the last such report.
In accord is Jim Cramer, of MSNBC fame, who says, "This is uniquely a perfect storm against oil." Several others see an OPEC "price war" with some saying oil is teetering on the brink of collapse. I'm even less sure that's right, in part because of where Jim Cramer comes out on this. (I'm not a huge fan of his advice or style, but for those who don't know, I'll let Jon Stewart catch you up on that here.) I don't see a "perfect storm" or even much more than a "light shower" coming in the oil sector from pricing or demand problems.
I'm not alone. Others see this recent price dip as real, but short lived. Dan Dicker, president of money manager MercBloc, sees oil prices increasing within the next two years going up to $125 per barrel or even $140. Dicker called the pricing a "Mirage." (I think these predictions are a bit bold in the other direction, too, as I expect to some fluctuation but think prices will reside mostly north of $85-$90 barrel, then increase into the $100s. Again, though, remember this is a law professor's opinion.)
Though I am sure he is not alone, Jim Cramer is the one person I have seen suggesting that a U.S. oil slowdown is likely, at least if oil prices drop to $70 a barrel. Possible, but I still don't see it. As I have suggested elsewhere, I don't think the price of oil, which is largely a global price, will drop to a point where it is not profitable to oil companies. Obviously the price can (and will) fluctuate, and the reality is that oil demand increases and decreases, but it has a higher baseline than I think some people are appreciating.
For years we heard about Peak Oil and the end of oil, but what we were really seeing was the end of really cheap oil. As the recent shale boom has demonstrated, there's plenty of oil available at the right price. The current price dip, I think, just an indication that supply is more abundant than expected, but not that the oil market is about to crater. Thus, perhaps we will see a slowing of the rate of new drilling activity, but I don't see an actual slowdown in growth in the sector -- just in the rate of growth.
Historically, we've had other ways to deal with price drops, too. The Complete Idiot's Guide to Options And Futures, 2nd Edition, By Scott Barrie, repeats the old trader's adage, "the best cure for low prices is low prices," and "the best cure for high prices is high prices." Low oil prices in the 1990s helped lead the way for the boom of SUVs. Before that, in the 1970s, companies like Honda and Toyota made their way into the U.S. market with their fuel-efficient vehicles following the oil embargo and high gas prices. Unlike when those market changes occurred, though, we have a full complement of both SUV and hybrids available to take advantage of price changes in the relatively near term when gas prices change.
Ultimately, if stock price is why people care about oil prices and production in the United States, it's entirely possible the bears are right that company valuations will come down in the near term. In the mid to long term, though, oil production is going to at least stay steady. As such, regardless of the market impact of the oil boom, oil will continue to flow, which will mean it will continue to need transportation. Therefore, it's important that we assess safety risks for infrastructure improvements, such as oil and gas pipelines, that can improve safety in areas that like rail and trucking, which are currently being taxed by the current level of oil and gas development in the country. In addition, a potential slowing of growth rates does not mean that other environmental and social challenges will go away soon.
Of course it makes sense to plan for a financial future and predicting how oil will fare in the coming months is part of the analysis for some. But changes in market expectations don't quickly, or necessarily significantly, impact the real world experience for those in affected areas. Frankly, a slow down in growth rates likely would be welcome in many areas experiencing the oil boom, but a slow down doesn't mean the work necessary to maximize economic opportunity, minimize environmental harm, boost social conditions, and improve safety can come to an end. It might simply be a chance for impacted areas to catch up before the next boom begins (or this one continues). We shouldn't miss that chance.
Friday, October 24, 2014
I used to joke that my alma mater Columbia University’s core curriculum, which required students to study the history of art, music, literature, and philosophy (among other things) was designed solely to make sure that graduates could distinguish a Manet from a Monet and not embarrass the university at cocktail parties for wealthy donors. I have since tortured my son by dragging him through museums and ruins all over the world pointing spouting what I remember about chiaroscuro and Doric columns. He’s now a freshman at San Francisco Art Institute, and I’m sure that my now-fond memories of class helped to spark a love of art in him. I must confess though that as a college freshman I was less fond of Contemporary Civilization class, (“CC”) which took us through Plato, Aristotle, Herodotus, Hume, Hegel, and all of the usual suspects. At the time I thought it was boring and too high level for a student who planned to work in the gritty city counseling abused children and rape survivors.
Fast forward twenty years or so, and my job as a Compliance and Ethics Officer for a Fortune 500 company immersed me in many of the principles we discussed in CC, although we never spoke in the lofty terms that our teaching assistant used when we looked at bribery, money- laundering, conflicts of interest, terrorism threats, data protection, SEC regulations, discrimination, and other issues that keep ethics officers awake at night. We did speak of values versus rules based ethics and how to motivate people to "do the right thing."
Now that I am in academia I have chosen to research on the issues I dealt with in private life. Although I am brand new to the field of normative business ethics, I was pleased to have my paper accepted for a November workshop at Wharton's Zicklin Center for Business Ethics Research. Each session has two presenters who listen to and respond to feedback from attendees, who have read their papers in advance. Dr. Wayne Buck, who teaches business ethics at Eastern Connecticut State University, presented two weeks ago. He entitled his paper “Naming Names,” and using a case study on the BP Oil spill argued that the role of business ethics is not merely to promulgate norms around conduct, but also to judge individual businesspeople on moral grounds. Professor John Hasnas of Georgetown’s McDonough School of Business also presented his working paper “Why Don't Corporations Have the Right to Vote?” He argued that if we accept a theory of corporate moral agency, then that commits us to extending them the right to vote. (For the record, my understanding of his paper is that he doesn’t believe corporations should have the right.) Attendees from Johns Hopkins, the University of Connecticut, Pace and of course Wharton brought me right back to my days at Columbia with references to Rawls and Kant. My comments were probably less theoretical and more related to practical application, but that’s still my bent as a junior scholar.
In a few weeks, I present on my theory of the social contract as it relates to business and human rights. In brief, I argue that multinational corporations enter into social contracts with the states in which they operate (in large part to avoid regulation) and with stakeholders around them (the "social license to operate", as Professor John Ruggie describes it). Typically these contracts consist of the corporate social responsibility reports, voluntary codes of conduct, industry initiatives, and other public statements that dictate how they choose to act in society, such as the UN Global Compact. Many nations have voluntary and mandatory disclosure regimes, which have the side benefit of providing consumers and investors with the kinds of information that will help them determine whether the firm has “breached” the social contract by not living up to its promise. The majority of these proposals and disclosure regimes (such as Dodd-Frank conflict minerals) rest on the premise that armed with certain information, consumers and investors (other than socially responsible investors) will pressure corporations to change their behavior by either rewarding “ethical” behavior or by punishing firms who act unethically via a boycott or divestment.
I contend in my article that: (1) corporations generally respond to incentives and penalties, which can cause them to act “morally;” (2) states refuse to enter into a binding UN treaty on business and human rights and often do not uniformly enforce the laws, much less the social contracts; (3) consumers over-report their desire to buy goods and services from “ethical” companies; and (4) disclosure for the sake of transparency, without more, will not lead to meaningful change in the human rights arena. Instead, I prefer to focus on the kinds of questions that the board members, consumers, and investors who purport to care about these things should ask. I try to move past the fuzzy concept of corporate social responsibility to a stronger corporate accountability framework, at least where firms have the ability to directly or indirectly impact human rights.
As a compliance officer, I did not use terms like “deontological” and “teleological” principles, but some heavy hitters such as Norway's Government Pension Fund, with over five billion Kronos under management, do. The 2003 report that helped establish the Fund’s recommendations on ethical guidelines state in part:
One group of ethical theories asserts that we should primarily be concerned with the consequences of the choices we make. These theories are in other words forward-looking, focusing on the consequences of an action. The choice that is ethically correct influences the world in the best possible way, i.e. has the most favourable consequences. Every choice generates an infinite number of consequences and the decisive question is of course which of the consequences we should focus on. Again, a number of answers are possible. Some would assert that we should focus on individual welfare, and that the action that has the most favourable consequences for individual welfare is the best one. Others would claim that access to resources or the opportunities or rights of the individual are most important. However, common to all these answers is the view that the desire to influence the world in a favourable direction should govern our choices.
Another group of ethical theories focuses on avoiding breaching obligations by avoiding doing evil and fulfilling obligations by doing good. Whether the results are good or evil, and whether the cost of doing good is high, are in principle of no significance. This is often known as deontological ethics.
In relation to the Petroleum Fund, these two approaches will primarily influence choice in that deontological ethics will dictate that certain investments must be avoided under any circumstances, while teleological ethics will lead to the avoidance of investments that have less favourable consequences and the promotion of investments that have more favourable consequences.
Recently, NGOs have pressured firms to speak on out human rights abuses at mega-events and have published their responses. The US government has made a number of efforts, some unsuccessful, to push companies toward more proactive human rights initiatives. These issues are here to stay. As I formulate my recommendations, I am looking at the pension fund, some work by ethicists researching marketing principles, writings by political and business philosophers, and of course, my old friends Locke, Rousseau, Rawls and Kant for inspiration. If you have ideas of articles or authors I should consult, feel free to comment below or to email me at email@example.com. And if you will be in Philadelphia on November 14th, register for the session at Wharton and give me your feedback in person.
October 24, 2014 in Books, Business School, Call for Papers, Conferences, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Marcia Narine, Securities Regulation | Permalink | Comments (0)
Wednesday, October 22, 2014
Corporate Law Professors Comment on Proposed HHS Definition of "Eligible Organization" for Hobby Lobby Accommodation
In response to the Department of Health and Human Services' Proposed Regulation and Request for Comments regarding the definition of "eligible organization" (see earlier post here) at least two groups of law professors have weighed in on the issue.
The first comment letter, available here, was submitted by the U.C. Berkeley corporate law professors and encourages the Department to adopt a definition based upon the veil piercing theory. "We ... propose that for purposes of defining an “[W]e ... suggest that shareholders of a corporation should have to certify that they and the corporation have a unity in identity and interests, and therefore the corporation should be viewed as the shareholders’ alter ego." The comments argue that utilizing the veil-piercing theory avoids the consequences of a setting an arbitrary number of shareholders thus creating a rule that would be "seriously under-and-over-inclusive, capturing corporations that meet the numerical test but for which shareholders are not the alter egos of the corporation, as well as failing to capture corporations with a relatively large number of shareholders that are all united in their interests and are alter egos of one another."
The second comment letter on which I worked and was joined by some editors of this blog as signatories, is available here. This comment letter, signed by 43 corporate law professors, was produced through the coordinating efforts of the The Public Rights / Private Conscience Project at Columbia Law School headed by Katherine Franke, and the project's executive director, Kara Loewentheil. This letter too encourages the HHS to adopt an approach that requires an "identity of interests." These comments suggest a blueprint for establishing an identity of interest, namely a focus on "entities (1) with a limited number of equity holders/owners, (2) that demonstrate religious commitment, and (3) submit evidence of unanimous consent of equity holders to seek an accommodation on an annual basis." The comments provide additional criteria under each of these three elements to operationalize the holding in Hobby Lobby.
Thursday, October 16, 2014
I plan to write a more traditional blog post later if I have time, but I am in the midst of midterm grading hell. I was amused today in class when a student compared the drama of the Francis v. United Jersey Bank case with the bankruptcy, bank, and mortgage fraud convictions of husband and wife Joe and Teresa Guidice from the reality TV hit the Real Housewives of New Jersey.
I had provided some color commentary courtesy of Reinier Kraakman and Jay Kesten’s The Story of Francis v. United Jersey Bank: When a Good Story Makes Bad Law, and apparently Mrs. Pritchard’s defenses reminded the student of Teresa Guidice’s pleas of ignorance. Other than being stories about New Jersey fraudsters, there aren’t a lot of similarities between the cases. Based on my quick skim of the indictment I don’t think that Teresa served on the board of any of the companies at issue--Joe apparently had an LLC and was the sole member, and the vast majority of the counts against the couple relate to their individual criminal conduct. In addition, Teresa is also going to jail, and no one suffered that fate in United Jersey. But luckily, she may see a big payday from a purported book deal and reality TV show spinoff after she’s out, possibly disproving the adage that crime doesn’t pay.
Tuesday, October 14, 2014
To be clear, I'm not an economist. I do, however, have an interest in economics, economic theory, and especially behavioral economics. I incorporate basic concepts of economics into my courses, especially Business Organizations and Energy Law. This week's announcement of Jean Tirole as the 2014 Nobel Laureate in economics thus caught my eye.
I admit I did not much about Tirole before the announcement, and after just a little reading, it's clear to me that I need to know more. A nice summary of Tirole's work (written by Tyler Cowen) can be found here. Cowen introduces the announcement and Tirole this way:
A theory prize! A rigor prize! I would say it is about principal-agent theory and the increasing mathematization of formal propositions as a way of understanding economics. He has been a leading figure in formalizing propositions in many distinct areas of microeconomics, most of all industrial organization but also finance and financial regulation and behavioral economics and even some public choice too. He is a broader economist than many of his fans realize.
Tirole is a Frenchman, he teaches at Toulouse, and his key papers start in the 1980s. In industrial organization, you can think of him as extending the earlier work of Ronald Coase and Oliver Williamson with regard to opportunism and recontracting, but applying more sophisticated and more mathematical forms of game theory. Tirole also has been a central figure in procurement theory and optimal contracts when there is asymmetric information about costs. The idea of mechanism design runs throughout his papers in many different guises. Many of his papers show “it’s complicated,” rather than presenting easily summarizable, intuitive solutions which make for good blog posts. That is one reason why his ideas do not show up so often in blogs and the popular press, but they nonetheless have been extremely influential in the economics profession. He has shown a remarkable breadth and depth over the course of the last thirty or so years.
Cowen then summarizes (or at least introduces) much of Tirole's work. I am now working my through a paper Tirole wrote with Jean-Jacques Laffont that discusses when regulatory capture is likely to happen. (Cowen notes, " I have yet to see the insights of this paper incorporated into the rest of the literature adequately.")
The papers is called The Politics of Government Decision-Making: A Theory of Regulatory Capture. Two of my favorite lines:
- "The assumption that Congress is a benevolent maximizer of a social welfare function is clearly an oversimplification, as its members are themselves subject to interest-group influence."
- "In contrast with the conventional wisdom on interest-group politics, an interest group may be hurt by its own power."
Here's the abstract (paper available on JSTOR):
The paper develops an agency-theoretic approach to interest-group politics and shows the following: (1) the organizational response to the possibility of regulatory agency politics is to reduce the stakes interest groups have in regulation. (2) The threat of producer protection leads to low-powered incentive schemes for regulated firms. (3) Consumer politics may induce uniform pricing by a multiproduct firm. (4) An interest group has more power when its interest lies in inefficient rather than efficient regulation, where inefficiency is measured by the degree of informational asymmetry between the regulated industry and the political principal (Congress).
It's worth a read, even if the math part is a little beyond some of us.
H/T: Geoffrey Manne