Business Law Prof Blog

The question that won't go away: Are boards simply not up to the task?

It often strikes me as somewhat of an emperor-has-no-clothes moment when I explain to my students that, in this era of too-big-to-fail, we continue to entrust oversight of institutions that have the potential to cripple the entire global economic system to folks who are doing so on very much of a part-time basis, and with some minor distractions to boot (like running their own TBTF enterprise as CEO).  I was reminded of this when I read Steven Davidoff's post, A Board Complicit in MF Global’s Bets, and Its Demise.  After pointing out that the failure of oversight in this case was not due to lack of expertise or knowledge, Davidoff suggests that perhaps "boards are inherently unable to do the job we want of them: to oversee the company and counteract the influence of its chief executive."  As a possible solution, Davidoff suggests that "[i]f the board members were to be penalized for their failures through forfeiture of their own compensation, perhaps directors would [be more] focused on creating a stronger risk management culture."  I have my doubts that we could ever implement any such system that wouldn't be left as anything other than a shell after Delaware got done with it.  Perhaps the answer lies in part in doing more of what some have suggested we do in the area of Securities Regulation--that is, stop pretending we have more oversight than we actually do and let the capital market discounting begin.

SJP

NFL Pundits Show Why We Need the Business Judgment Rule

The Atlanta Falcons lost to the New Orleans Saints in overtime in Sunday.  The Falcons failed in a fourth-down attempt in their own territory, leading to a lot of second guessing on the NFL post-game shows. Here's the breakdown from Slate & Deadspin's NFL roundtable:

So arbitrary formulas aren't always the thing. But pure probabilities? Everyone's an expert today, thanks to the Falcons' decision to go for it in overtime on fourth and inches from their own 29-yard line. They were stuffed by the Saints, who slotted home a gimme field goal for a big division win. Here is a comprehensive list of every reason why Mike Smith's decision is being criticized: because it didn't happen to work.

. . . . A fourth-and-a-yard succeeds 74 percent of the time, and Michael Turner was not a yard away. . . . .

Brian Burke at Advanced NFL Stats has picked the perfect day to unveil the Fourthdownulator, a handy little application that allows you to plug in the situation and decide whether going for it makes statistical sense. Before running the fourth-down play, the Falcons' win probability stood at 47 percent (it would've risen to 57 percent if they had picked up the first down). Had they chosen to punt, that figure would've dropped to 42 percent. The difference is slight but undeniable, and becomes starker when you take into account both the Falcons' success at running the ball all day and the threat presented by the Saints' offense with decent field position.

. . .  Maybe this is why coaches are so hesitant to go for it on fourth down: not because they might be unsuccessful, but because everyone's going to break down why.

Clearly, NFL pundits are paid to second-guess coaches and say what should have happened.  That's their job.  But notice that (in my highly unscientific and unreliable review of NFL commentators) no one seems to have thought it was the right call.  [Update: Via the comment below (thanks), I know there's at least one who thinks the choice, if not the play call, was right.] If the numbers indicate it was a good call -- or even a reasonable call -- it would seem that 50% of the commentators would agree with the coach. But when we know how the decision turned out, that's highly unlikely to happen.  

This is one key reason we have the business judgment rule (BJR) for corporate directors.  That rule states that absent fraud, self-dealing or illegality, directors decisions cannot be judged. "Courts do not measure, weigh or quantify directors’ judgments. We do not even decide if they are reasonable in this context. Due care in the decisionmaking context is process due care only. Irrationality is the outer limit of the business judgment rule. " Brehm v Eisner, 746 A.2d 244 (Del. 2000)(emphasis added)(footnote omitted).  As Smith v. Van Gorkom further explained, "The business judgment rule exists to protect and promote the full and free exercise of the managerial power granted to Delaware directors." 488 A.2d 858 (Del. 1985) Although there are times when the BJR seems to protect stupidity (and it does), the BJR or some similar rule is necessary to allow directors to take chances.  

I realize that the comparison to NFL pundits and judicial review is a stretch given that both the charge and the authority of the judges is very different than that of NFL commentators. Still, I think that the inability to make rational post hoc assessments of decisions that turn out wrong is illustrative. As such, I am becoming more firmly convinced that Professor Bainbridge has it right when he says that the BJR is an abstenstion doctrine, and not a standard of review. As the good professor argues: "[C]orporate decisionmaking efficiency can be ensured only by preventing the board’s decisionmaking authority from being trumped by courts under the guise of judicial review."  

The New York Times says Falcons' Coach Mike Smith's decision "backfired horribly and handed the New Orleans Saints a 26-23 overtime victory over the Falcons at the Georgia Dome."  That's not what the numbers say. The numbers say he made a reasonable call, and it didn't turn out well. There was no "handing" the game to anyone.  If I'm a Falcons fan (and I'm not), I'd hope my coach is making his decisions based on his own judgment and assessment of the situation, and not external noise.  That's what he's been hired to do.  Just like the members of a board of directors.

--JPF 

 

In Search of the Grand Unified Theory of Economic Policy

The Wall Street Journal reports (here) that:

(1) More than three-quarters of the country says the nation's economic structure is out of balance and favors a very small proportion of the rich over the rest of the country. They say America needs to reduce the power of major banks and corporations, as well as end tax breaks for the affluent and corporations. Sixty percent say they strongly agree with such sentiments.

(2) 53% of the country believes—and 33% believe strongly—that the national debt and the size of government must be cut significantly, that regulations on business should be pared back, and that taxes shouldn't be raised on anybody.

While the WSJ story is entitled "Poll Finds Voters Deeply Torn," there is nothing necessarily contradictory in these two sets of goals.  So, if anyone is looking for a winning platform for the upcoming election ....

SJP

Work-Life Balance: Meditation & Music

A couple of recent articles in the Wall Street Journal caught my eye.  The first, "Feeling Transcendent in 10 Minutes or Less," reviewed "a wave of classes … culling down the ancient tradition of meditation into fast and easy-to-follow lessons…. The simple exercises are typically 10-minutes long and are easy to fit into a hectic schedule."  I have been meditating on-and-off for about 20 years and am both convinced that developing a meditation practice can be very beneficial, and that one of the biggest obstacles to doing so is the belief that only 30-minutes sitting cross-legged in an incense-filled temple will suffice.  If you don't believe me, just close your eyes right now, sit up straight in your chair, and count 10 inhalations/exhalations (i.e., "in ... out ... 1").  I'd be surprised if you didn't feel just a little bit better after.  And because nothing goes together like meditation and shameless self-promotion, you can find my edited collection of my Zen instructer's dharma talks here, as well as an accompanying photobook here (none of the author's make a penny on any of these books, we offer them all at cost).  I have found the photobook to be particularly soothing in and of itself.

The second article, entitled "Cranking Up Your Private Pep Rally," notes that:

Stirring music may trigger a beneficial hormone boost in the brain .... Studies over the past decade have shown music is associated with a shift in dopamine levels .... Dopamine ... not only makes us feel good, it also helps improve concentration, say experts. The timely arrival of a favorite song can help a person's task-oriented frontal cortex to fire more efficiently and aid performance, says Daniel J. Levitin, a psychology professor at McGill University ....

Again, I am a firm believer in the beneficial power of music.  In fact, sometimes I'll go through stretches where I don't listen to music for whatever reason, and when I get back to it I am amazed that I ever let myself go without it.  Keith Jarrett's "Koln Concert" got me through more assignments in college than I can count.  And today, few things help me keep things in perspective and remember to enjoy my life than House Music.  What's your musical fix?

SJP

NFL, Supreme Court Share View on Message Control

The Wall Street Journal has an interesting article about a unique-angle NFL video coverage that is shared on a very limited basis.  The video, known as "All-22," shows the whole field and every player.  The angle thus allows viewers to see everything, from defensive and offensive alignments to each player's actions during a play.  

The NFL apparently considered sharing the video (or otherwise selling it), but many football people objected to it.  According to the article: 

Charley Casserly, a former general manager who was a member of the NFL's competition committee, says he voted against releasing All-22 footage because he worried that if fans had access, it would open players and teams up to a level of criticism far beyond the current hum of talk radio. Casserly believed fans would jump to conclusions after watching one or two games in the All 22, without knowing the full story.

"I was concerned about misinformation being spread about players and coaches and their ability to do their job," he said. "It becomes a distraction that you have to deal with." Now an analyst for CBS, Casserly takes an hour-and-a-half train once a week to NFL Films headquarters in Mt. Laurel, N.J. just to watch the All-22 film.

I suppose he could be right that there could be more criticisms of coaches and players if the video were released, but I'm not convinced.  And, more important, it appears that with the All-22 video, the criticisms would be more accurate than they are currently.  In fact, the article gives an example of a TV producer with access to the All-22 video who explained how an in-game analyst was wrong to blame a player for being "late" on a play, because the player was doing his job in the defensive scheme. The play call was right to beat the defensive scheme, and the offense executed the play.

Certainly, there might be a learning curve. Fans would need to understand that players and coaches make mistakes in every game and that one or two plays may not be a fair representation of the body of their work.  But that's already true today.  For every player or coach who might take unfair criticism, the All-22 video is likely to exonerate another (or provide credit where credit was actually due).

In some ways, I suppose this is like the the question of whether video cameras should be allowed in the United States Supreme Court.  After all, in that case, people would be provided access to something they don't fully understand, and it might lead to unfair criticism of the Justices, lawyers, and the legal system. Still, regardless of your view of cameras at the Supreme Court, there is one big difference here: football is a game; it is, at it's core, entertainment. 

So, NFL, entertain us. Let's see the All-22. 

--JPF

Banking Fees and "the Market"

We often hear that the "market works" (and I happen to believe that, at least most of the time), but I think we often forget what that means.  I've been thinking about this a lot in connection with some of the proposed bank fees, like those from Bank of America and other banks that have gotten a lot of press lately.  

I have tried to bank with my college credit union and other small banks as I have moved around the country, and my current bank was a savings and loan that survived that crisis in the 1980s.  They don't charge crazy fees, and they even reimburse all ATM fees from any bank when I use other machines.  So I'm loyal to my small bank, and it's why I switched to them from my large bank when we moved here.

As Erik Gerding notes here, the idea that smaller banks or credit unions treat their customers better is not new.  Ryan Bubb (NYU Law) and Alex Kaufman (Board of Governors of the Federal Reserve System (FRB)) have a paper that suggests credit unions do treat their customers better.  At a presentation of the paper, Professor Gerding explains: 

One of the questions I had then was why credit unions can't win customers by sending a credible signal that, to put it colloquially, "we'll screw you less."  This Bank of America episode provides an interesting answer that perhaps customers are starting to recognize hidden fees and market choices.

My question is why people tolerate annoying banking practices at all. If literally all banks start charging high fees for debit cards and other transactions, of course there is no value in switching, and there is not consumer choice.  But that has hardly been the case.  There are options for smaller banks that provide many of the same services as big banks, often at better rates.  Yet people have been reluctant to change in any significant way, at least until November 5th's Dump Your Bank Day. 

Ultimately, the reason banks have continued to impose fees that seem like they would make people mad is because the banks have largely gotten away with it. It's one thing for people to complain about high fees.  It's quite another for people to go to the trouble to change their direct deposit, automatic bill pay, and other banking services.  When you push too far, though, the market will tell you, as Bank of America seems to be learning.  Until then, the market doesn't really care, and that's why banks, cable companies, wireless companies, etc., act like they do: either we really do not have a choice or we don't really care that much (and the truth is, on a large scale, it's usually the latter).   Even where choice is limited (like my cable tv market), we often fail to make choices when we can.  And I have 48 movie channels I don't really need or want to prove it.  

--JPF

Poker as Sport

The World Series of Poker Main Event Final Table is underway.

There is an arena ... there are fans ... and they are rowdy.

SJP

Wall Street Speaks

A friend sent me the "We are Wall Street" email that's apparently been going viral.  Here's a taste:

Go ahead and continue to take us down, but you’re only going to hurt yourselves. What’s going to happen when we can’t find jobs on the Street anymore? Guess what: We’re going to take yours. We get up at 5am & work till 10pm or later. We’re used to not getting up to pee when we have a position. We don’t take an hour or more for a lunch break. We don’t demand a union. We don’t retire at 50 with a pension. We eat what we kill, and when the only thing left to eat is on your dinner plates, we’ll eat that.

You can read the full letter here.  My friend thought I'd hate it, but I think it's terrific.  The issue of whether capitalism is indeed the least worst system (or, perhaps more importantly, how to best leverage capitalism so as to lift the most ships and provide some floor of subsistence to distinguish us from barbarians, while at the same time incentivizing the "frontrunners" maximally) is a complicated one.  I am not inclined to dismiss the Occupy protesters because I believe they represent a meaningful discontentment with what many perceive to be a corrupt system rigged to benefit the few at the expense of the many.  At the same time, I'm not going to dismiss the ideas represented in this letter either because I believe there is a great deal of truth represented therein as well.

SJP

More Readings on Capitalism

Steve recently put up a helpful list of "Readings on Capitalism."  Since I am agnostic when it comes to the assertion that capitalism is the least worst system possible, and because I believe that even if we all agreed on that point we'd still have much to debate about as to the details, I asked Frank Pasquale and Kent Greenfield for a quick list of books identifying some of the shortcomings of capitalism.  Here it is:

• 23 Things They Don't Tell You About Capitalism (Pasquale: "Ha-Joon Chang's LSE and RSA podcasts are on iTunes; highly recommended")

• The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too

• The Illusion of Free Markets: Punishment and the Myth of Natural Order

• The Fifteen Biggest Lies about the Economy: And Everything Else the Right Doesn't Want You to Know about Taxes, Jobs, and Corporate America

• Wealth and Democracy: A Political History of the American Rich

• The Spectre at the Feast: Capitalist Crisis and the Politics of Recession

• New Capitalism

• The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression

• Zombie Economics: How Dead Ideas Still Walk among Us

• Business as Usual: The Roots of the Global Financial Meltdown (Possible Futures)

• Wall Street at War: The Secret Struggle for the Global Economy (Pasquale: "particularly valuable as a testament to the ways in which finance capital has undermined productive enterprise")

SJP

The Legality of the Declaration of Independence--and How to Determine Legality

This is a little off the business law track, so please indulge me. American and British lawyers recently debated the legality of the U.S. Declaration of Independence. The BBC News story, which excerpts some of the arguments is here and a story in the Wall Street Journal’s Law Blog is here.

The Wall Street Journal concludes “A vote at the end of the debate, held at Benjamin Franklin Hall, reaffirmed the legality of the insurrection.” Two things strike me as wrong about that comment.

First, the debate was held in Philadelphia. It’s hardly surprising that an American audience supported the Declaration of Independence. For a slighlty less biased reaction, check out the comments to the BBC story. I like the comment which states that the Declaration was completely illegal and its signers were traitors, then concludes “and it was the most wonderful event which ever happened in the history of the New World Colonies and for the American people.”

But what really bothers me about the Journal’s conclusion is the idea that a popular vote can determine whether something is legal. I’ve noted a disturbing trend, particularly in discussions of constitutional law, to equate majority opinion with legality. One reason we have the rule of law is to protect the minority from majority rule. An action that violates the law does not become legal just because the public approves. And an action within the law does not become illegal just because the public disapproves.

The Declaration of Independence was a wonderful action and it may have been legal, but no popular vote can ever make it so. And I suspect the Founders would agree with me.

-Steve Bradford

Defining the Rights and Responsibilities of Corporations

The Supreme Court has agreed to hear the appeal of KIOBEL V. ROYAL DUTCH PETROLEUM, 621 F.3d 111 (2d Cir. 2010).  One of the questions presented is as follows:

Whether corporations are immune from tort liability for violations of the law of nations such as torture, extrajudicial executions or genocide, as the court of appeals decisions provides, or if corporations may be sued in the same manner as any other private party defendant under the ATS for such egregious violations, as the Eleventh Circuit has explicitly held.

Over at the Huffington Post, Mike Saks opines:

[I]t would ... be quite odd for the Court, which found in Citizens United that the Framers intended the First Amendment to apply to corporate persons, to reject the concept when it comes to corporate liability for crimes against humanity under a Founding-era statute.

SJP

Readings on Capitalism

I’m a fan of capitalism, but I think it’s been so long since we’ve tried it that few in the United States remember what it is. Capitalism is not the same as government support of business. Far from it, true capitalism requires government to remain neutral and not try to determine the winners and losers. Subsidies and government bailouts are as far from capitalism as one can get, notwithstanding the recent claims in the media that “capitalism” caused the recent economic collapse.

So what is capitalism and what are its advantages? That topic is much too complicated for a blog post and, as a law professor, I’m not the most qualified person to expound on the subject anyway. I can, however, suggest a few resources for those who really want to know more about capitalism. I would start with the following three books. Each is very well written and none of them demand any technical expertise of the reader.

1. Milton Friedman, Capitalism and Freedom

2. Arthur Seldon, Capitalism (Unfortunately, this book doesn’t appear to be available for purchase by itself anymore, but you might find it in your local library. Otherwise, you will have to buy this.)

3. F. A. Hayek, The Road to Serfdom

Two other books worth reading if you’re interested in cutting through some of the nonsense that passes for political debate about economics are:

1. David R. Henderson, The Joy of Freedom: An Economist’s Odyssey

2. Henry Hazlitt, Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics

And, if you really want to burrow deeply, I suggest Ludwig von Mises, Human Action: A Treatise on Economics. But don’t go there unless you have a lot of time and are willing to work. It’s not an especially easy read.

-Steve Bradford

"Poker for Law Students" Course Update

I've previously written about my desire to teach a "Poker for Law Students" course (here).  To that end, I am always on the lookout for supporting documentation and course materials (as I've also previously blogged about here).  So, just in case this sort of thing interests you I thought I'd pass on a couple of additional items I've come across recently:

1. A PokerNews item on "Poker Players and Entrepreneurs: A Compatible Match"

2. A Texas Hold'Em Guide to Winning in Business

Somewhat relatedly, the American Gaming Association recently released a white paper that many feel is the best articulation yet of why and how the U.S. should legalize and regulate online poker.

SJP

How North Dakota Became Saudi Arabia & How to Keep It That Way

The Wall Street Journal's recent Weekend Interview was of particular interest to me, and I thought it worth mentioning.  The article was titled, How North Dakota Became Saudi Arabia: Harold Hamm, discoverer of the Bakken fields of the northern Great Plains, on America's oil future and why OPEC's days are numbered.

It's an interesting interview with Harold Hamm, who is the founder and CEO of Continental Resources. Mr. Hamm is certainly a leader in the U.S. oil resurgence, and his views carry a lot of weight in many circles. His facts are hard to refute, though I might put a little different spin on it.  Here's a key part of the article:

One reason for the [U.S. oil industry] renaissance has been OPEC's erosion of market power. "For nearly 50 years in this country nobody looked for oil here and drilling was in steady decline. Every time the domestic industry picked itself up, the Saudis would open the taps and drown us with cheap oil," he recalls. "They had unlimited production capacity, and company after company would go bust."

This is certainly true. OPEC cannot dictate the market in the same way as they once could, because the market for oil has increased so dramatically, especially in India and China. As such, increased production will simply lead to modestly lower prices, as emerging markets take all the oil the market is willing sell. The article continues: 

Today OPEC's market share is falling and no longer dictates the world price. This is huge, Mr. Hamm says. "Finally we have an opportunity to go out and explore for oil and drill without fear of price collapse." When OPEC was at its peak in the 1990s, the U.S. imported about two-thirds of its oil. Now we import less than half of it, and about 40% of what we do import comes from Mexico and Canada. That's why Mr. Hamm thinks North America can achieve oil independence.

This is true, too, although there is an implication here that OPEC is no longer a factor.  That's not true, just because their market share had dropped. Most certainly, OPEC's ability to impact price in the ways it did in the 1970s, 1980s, and 1990s, has been diminished.  Still, OPEC is a power player, and the revenues U.S. oil companies are seeing are coming into OPEC, too.  After all, it's nice to have 80% market share of a $1 million industry, but it's better to have 20% of $10 million market.  Of course, here were talking about a lot more zeroes than that.  

Further, oil independence has its appeal, certainly, but it's not all it might seem.  In this instance, the only reason we might be able to achieve independence from foreign-sourced oil is because oil prices are so high.  Are we really better off being energy independent with oil at $90 per barrel, or would the U.S. economy be better served with Saudi oil at $25 per barrel?  At $25 or even $50 per barrel, the broad-scale U.S. oil industry can't compete with other world producers.  

But the market has changed. Mr. Hamm is right that the U.S. oil industry doesn't need to worry about the boom-and-bust cycle of years past because the price is not going back to $25 per barrel.  The new market is great for him, great for those with new jobs, and great for those cashing royalty checks. And it's been great for many parts of North Dakota. I appreciate all of that, and I think regulators, politicians, and citizens should be looking at these facts as they consider energy and other economic policy.

Mr. Hamm finally argues that taxes are likely to stop drilling.  He explains:

The White House proposal to raise $40 billion of taxes on oil and gas—by excluding those industries from credits that go to all domestic manufacturers—is also a major hindrance to exploration and drilling. "That just stops the drilling," Mr. Hamm believes. "I've seen these things come about before, like [Jimmy] Carter's windfall profits tax." He says America's rig count on active wells went from 4,500 to less than 55 in a matter of months. "That was a dumb idea. Thank God, Reagan got rid of that."

Here's where we diverge. I am not arguing that President Carter's windfall profits tax had an impact -- it was not good policy at the time.  But that was in part because of OPEC's market power.  The U.S. oil industry was operating in the zone where the profit margin was such that the tax rate could impact drilling.  From what I understand, most North Dakota oil drilling is profitable with oil at about $65-$70 per barrel. Thus, at $85 per barrel, there's a lot of room to increase taxes without having an impact on the drilling. I'm not suggesting that a large new tax would be a great move, but it's not likely to have the dire consequences it could have had in years past. I'm at least okay with the status quo here. Perhaps we would get more drilling if we added more incentives to oil exploration, but my suspicion is that we would be rewarding people for doing what they were going to do anyway. 

I think the energy industry, including traditional resources, is vital to U.S. economic interests, and I think our policies should support the current growing and evolving oil and gas industry. I happen to think there is room for everyone.  My biggest worry for the oil and gas industry is that someone gets careless with their new drilling methods and causes a major environmental disaster. The harm to the environment would be a major concern, of course, but I think most people want that protected.  This is not news.

The greater harm to the industry, and the economy, though, of such a disaster is often missed.  The economic key to this oil and gas boom is to keep it going -- and the biggest threats are no longer OPEC, taxes, or the electric car.  It's an environmental disaster that leads to a large-scale shutdown.  That would be the ultimate lose-lose situation. 

--JPF

The Failure to Regulate as Success

H.R. 2308, the “SEC Regulatory Accountability Act,” would establish a significant number of additional specific standards for cost-benefit analyses for Commission rules and orders.  Said SEC Chairperson Mary Shapiro:

My fear about this legislation is that it layers so much analysis on top of what we already do that we’re set up to fail.  There is no way this agency or any other agency could do all of these things, some of which conflict.

Well, perhaps not so much “fail” as “fail to regulate.”  To some that’s failure, to others that’s success.

SJP

If you love corporations, you might want to start taking the protesters a bit more seriously.

Yesterday, Stephen Bainbridge explained why he loves corporations.  In the course of his post he referenced "The Company," by John Micklethwait and Adrian Wooldridge.  I, too, am a fan of that book--though not because (as Bainbridge notes) the authors identify the corporation as "the best hope for the future of the rest of the world."  (I am at best agnostic on that point.)  Rather, my recollection of the book (which I admit may well be distorted by the passage of years since I last read it) is that the authors did a decent of job of acknowledging that the history of corporations is marked by evil as well as goodness, including "imperialism and speculation, appalling rip-offs and even massacres" (p. xx).  Of course, the authors do note that corporations "pillage the Third World less than they used to" (p. 188).

What I liked about the book is that the authors recognized that "[t]o keep on doing business, the modern company still needs a franchise from society, and the terms of that franchise still matter enormously" (p. 186).  Furthermore, they acknowledged that "[t]here is a widespread feeling that companies have not fulfilled their part of the social contract: people have been sacked or fear that they are about to be sacked; they work longer hours, see less of their families--all for institutions that Edward Coke castigated four hundred years ago for having no souls" (p. 188).  (Note that these are all pre-financial crisis quotes.)

All of which leads me to conclude that if you love corporations you might want to start taking the "Occupy" protesters a little more seriously.  You may think they are "illiterates," silly and absurd--but they are growing in number and they may well end up having something to say about the nature of the franchise corporations need in order to survive.

SJP

Lions, and Tigers, and Bears

As a life-long Detroit sports fan, this has been a good fall.  The historically woeful Detroit Lions are 4-0, and the Detroit Tigers, after ousting the loaded New York Yankees last night, will play for the American League pennant.  These are good things, at least from my perspective.

Bears, on the other hand, less so.  The Wall Street Journal reports: Market Nears Bear Territory: U.S. Stocks Down Almost 17% Since April High on Europe, Economic Concerns.  The report explains:

By midday Tuesday in Asia, Japan's Nikkei average fell 1.6%, South Korea's Kospi fell 4.6% and Hong Kong's Heng Seng slipped 0.2%.

Investors blamed the drop on continuing fears of European debt defaults, which are sowing fears of a global recession. They pointed to a warning from Greece that it would fail to meet its government-deficit targets this year, which reinforced a widespread concern that Greece would default.

A global manufacturing index compiled by J.P. Morgan showed the manufacturing sector contracting for the first time in more than two years as indexes of industrial activity in Europe, Japan and Brazil all showed output falling.

That report trumped somewhat positive U.S. economic news. September manufacturing activity and vehicle sales were slightly better than expected, as was August construction data, although all three remain soft.

What do these "animals" have in common?  Well, the question to me is whether the bear market is paralleling the Lions' struggles, which culminated in the first-ever 0-16 season in 2008 or is more like the Tigers of 2009. In 2009, the Tigers had a epic collapse to end the season (though less epic, perhaps, than this year's Red Sox), when they missed the playoffs, losing to the Twins in a 163rd and deciding game.

The 2008 Lions were just bad.  They lacked the talent and ability to do what was necessary.  The 2009 Tigers had some talent, had the ability, but lacked the belief they could do what was necessary.  My view of the market is that it is closer to the 2009 Tigers.  There's some good things happening, but no one believes in those good things enough to turn the corner.  But maybe I'm wrong; maybe the market is the 2008 Lions.  Either way, as the Journal points out, it looks like it's going to be a Bear.

--JPF

Athletic Conference Exit Fees and the Law of Liquidated Damages

Thinking about college football today, and, yes, this does have a business law tie.

Intercollegiate athletic conferences have been plagued lately by a string of defections. The Big 12 alone has lost three members in a little more than a year: Colorado to the Pac 12, Nebraska to the Big Ten, and, most recently, Texas A&M to the Southeastern Conference. Pittsburgh and Syracuse recently announced that they are exiting the Big East conference to join the ACC.

One way to stem such departures is to increase the exit fee a school has to pay when it leaves. The higher the exit fee, the better the deal the new conference has to offer to make a change worthwhile. Shortly before it lured Pitt and Syracuse from the Big East, the ACC reportedly raised its exit fee from between $10-13 million to $20 million. This has led some sports commentators to call on other conferences to increase their fees, to prevent further defections. For example, Kirk Bohls, a writer for the Austin American-Statesman, calls for the Big 12 to hike its exit fees: “Exit fees must be beefed up. Write in language that states the very minute a Big 12 team announces it has accepted an invitation to a new conference, it has to write a check for $20 million to the Big 12. No out clauses, no exceptions.”

It’s important to keep in mind that these exit fees are, in essence, liquidated damages. Conference members pay the exit fee only when they breach their agreement to remain in the conference. Liquidated damages clauses like this are enforceable only if they are genuine attempts to estimate uncertain damages and not if they are penal in nature. That’s why the ACC can’t establish an exit fee of $500 million. No one would consider that a reasonable forecast of the damage the conference would suffer if one of its members left. Courts would treat it as a penalty and strike it down.

That raises two interesting questions:

1. When the conferences set exit fees in the first place, how well are they documenting their status as forecasts of actual damages? Is there a full discussion of the likely damages if a member leaves, or do they just throw out some number they think will keep schools from leaving?

2. Don’t conferences that raise their fees have an even tougher burden, particularly if the original fees were set not too long ago? Presumably, the original fee was a reasonable attempt to approximate damages. If nothing has changed to increase the likely damages, is the increase just a penalty? Without a doubt, the risk that schools will leave conferences has risen in recent weeks, but that’s not the issue. An increase is justified only if the damages when they do leave has increased. That’s much less clear.

-Steve Bradford

Want a Raise? Be Disagreeable.

That's the conclusion of a study by Timothy A. Judge (Mendoza College of Business, University of Notre Dame), Beth A. Livingston (School of Industrial and Labor Relations,Cornell University, and Charlice Hurst (Richard Ivey School of Business, University of Western Ontario).  The study, Do Nice Guys – and Gals – Really Finish Last? The Joint Effects of Sex and Agreeableness on Income, is to appear in the Journal of Personality and Social Psychology, and a pdf of the paper is here.

The was reported in a number of venues in August, but I am just getting to it now. Here's the abstract:

Sex and agreeableness were hypothesized to affect income, such that women and agreeable individuals were hypothesized to earn less than men and less agreeable individuals. Because agreeable men disconfirm (and disagreeable men confirm) conventional gender roles, agreeableness was expected to be more negatively related to income for men (i.e., the pay gap between agreeable men and agreeable women would be smaller than the gap between disagreeable men and disagreeable women). The hypotheses were supported across four studies. Study 1 confirmed the effects of sex and agreeableness on income and that the agreeableness – income relationship was significantly more negative for men than for women. Study 2 replicated these results, controlling for each of the other Big Five traits. Study 3 also replicated the interaction, and explored explanations and paradoxes of the relationship. A fourth study, using an experimental design, yielded evidence for the argument that the joint effects of agreeableness and gender are due to backlash against agreeable men. 

This excerpt from the study was especially interesting to me:   

Although being disagreeable does not mean that one is more competent or agentic—communion and agency are not opposite ends of the same construct (Wiggins, 1991)—it may imply as much in the minds of employers. People who are low in agreeableness may be perceived as more competent by virtue of their lack of warmth (Benyus, Bremmer, Pujadas, Christakis, Collier, & Warholz, 2009). Amabile and Glazebrook (1982) found that people who were highly critical of others were rated as more competent than those offering favorable evaluations. Furthermore, in an experimental study, Tieden (2001) found that people recommended a higher-status position and higher pay for job applicants who expressed anger—a display that is more likely among disagreeable people (Jensen-Campbell, Knack, Waldrip, & Campbell, 2007; Meier & Robinson, 2004). 

I'm hoping this knowledge helps me to think a little more consciously (and carefully) about how I assess current or potential new colleagues.

--JPF

Is our current system "benefiting the few instead of the many"?

A Reuters column by Peter Apps (here) identifies the widening wealth gap as central to growing discontentment and possible increased political instability.  He quotes U.S. counterinsurgency specialist Patricia DeGennaro, a senior fellow at the World Policy Institute and professor at New York University, as seeing a wider "global uprising" or "worldwide insurgency," with the rising wealth gap as key:

"That is at the root of the insurgency.  In essence, people are tired of how the system is benefiting the few instead of the many ….”

William Galston, a former policy adviser to President Bill Clinton and now a senior fellow at the Brookings Institution in Washington, is also quoted:

“[W]hen you have a large middle class that is shrinking and where you have alarm and despondency over the future, that is where politics can become very volatile and even dangerous. That's what we saw in Europe in the 1930s.”

Apps cites the rise of the right-wing Tea Party as being “widely seen as part of a trend toward extremes and volatility.”

As I've noted recently (here), whatever rising tide there is left--it appears to no longer be lifting all boats.  And, as I've also noted previously (here), it has been written that: "REVOLUTIONS arise from inequalities . . . ." 

SJP