Business Law Prof Blog

Slightly Delayed "Live-Blogging" From the AALS

Over at the Glom, Gordon Smith recounts some of the discussion from the recent Business Associations Section meeting at the AALS Annual Meeting this past Thursday.  Like Gordon, I was particularly struck by the remarks of Delaware Chancery Court Vice Chancellor J. Travis Laster on the issue of Say-on-Pay.  Here is some of Gordon's summary (you can find his entire post here):

[I]s there room for a Delaware claim on executive compensation in the wake of Say on Pay? Teasing the assembled law professors, Vice Chancellor Laster suggested that the Delaware courts could decide to review pay decisions with a form of enhanced scrutiny (because that standard of review applies to situations involving structural bias), but he rightly observed that such a move would be comparable to Smith v. Van Gorkom in 1985…. The more likely path to a claim is one already being pursued by a number of plaintiffs lawyers, namely, going after a board of directors for waste of the corporate assets…. If you couple such a claim with a bad vote on Say on Pay, you might have something.

One of the other things that struck me from Vice Chancellor Laster's remarks was his statement (according to my notes) that the Delaware judiciary is very aware of the "Zeitgeist." This means that while subjecting compensation decisions to enhanced scrutiny may constitute a "thermonuclear explosion" in corporate law, Delaware may nonetheless get there if the threat of further federalization of corporate law in this area becomes great enough.

For those of you not familiar with Vice Chancellor Laster, here is a short video wherein he mentions that his preferred theory of the corporation is "utilitarian":

 

SJP

Strict Criminal Liability, Regulation, and Ben Franklin

Long ago, Ben Franklin warned, "Laws too gentle are seldom obeyed; too severe, seldom executed." Unfortunately, following massive environmental disasters (and financial disasters) legislators and regulators tend to respond to public outcry by seeking better ways to "put the bums in jail" without assessing the real problems.  

Building on this point, I wrote my article, Choosing a Better Path: The Misguided Appeal of Increased Criminal Liability after Deepwater Horizon, which was just published in the William & Mary Environmental Law and Policy Review (available here). In the article, I argue that increased criminal liability for energy company employees is not likely to be effective in preventing disasters like the blowout of BP Macondo well in the Gulf of Mexico.  And increased liability is simply not the best way. The abstract:

Despite the potential appeal of dramatically increased liability and sentences in the wake of environmental disasters like the Deepwater Horizon oil blowout in the Gulf of Mexico, this Article argues that more aggressive criminal provisions and enforcement related to environmental harms, up to and including strict criminal liability, are not likely to protect the environment better or lead to safer work environments. This Article first considers the history and legality of, and the rationale behind, policies designed to make it easier to convict allegedly responsible parties and also discusses the pursuit of increased liability in relation to disaster-related and tragedy-related events in the financial and criminal sectors. The Article then discusses the use of reduced burdens and strict liability in environmental law in both civil and criminal contexts, and argues that the use of strict liability is less effective than a negligence standard because it tends to reduce penalties, which can limit the direct punishment to violators, as well as the prophylactic potential of the laws. Finally, the Article concludes that, rather than reducing mens rea standards and increasing criminal liability, U.S. energy and environmental law needs to focus on encouraging proper risk assessment and risk management to promote safe and effective energy extraction and production while encouraging and protecting both the environment and the economy.

What's all of this mean?  There are no easy answers, but here's my conclusion: 

One of the greatest risks to the continued economic success of energy-related activities is an environmental disaster. As such, disaster avoidance is a benefit to all stakeholders: lawmakers, regulators, oil companies, and people generally have reason to support a safer energy industry. The first step, then, is to adopt a proper mindset to help avoid disasters. Rather than pursuing with vigor penalties to punish a future perpetrator or seeking creative ways to use obscure laws that have a slight chance of success, efforts should look to ways to prevent the next disaster.

This means carefully assessing risk, then developing plans and programs to minimize that risk. This is not something that can happen in a vacuum. It requires coordinated efforts from industry, government, and the public. We all must understand and appreciate the risks before us, then be prepared to accept the costs of our decisions.

--JPF

The First Amendment Versus Corporate Law

The headline reads: Montana High Court Says 'Citizens United' Does Not Apply In Big Sky State.  I have not had a chance to read the entire 80-page decision, but I did want to share some thoughts that struck me when I read the headline--acknowledging that they may not be relevant to the particular dispute itself.

I have written here and here about my belief that Citizens United is more about corporate theory than the espoused First Amendment rights of listeners.  If nothing else, even if one gives great weight to the rights of listeners it seems difficult (if not impossible) to decide whether corporations fit within the narrow class of cases allowing for identity-based restrictions under the First Amendment without resolving the fervent corporate theory debate the majority and dissent in Citizens United engage in (all while claiming corporate theory is irrelevant).  In trying to unravel the mystery of this apparent inconsistency, I have noted that one explanation is the problems created by admitting corporate theory is dispositive--one of which is that this acknowledgement raises the very serious specter of these questions being more about state corporate law than First Amendment rights.  To that end, this quote from the [reluctant] dissent in the Montana case seems relevant: "Corporations are artificial creatures of law. As such, they should enjoy only those powers—not constitutional rights, but legislatively-conferred powers—that are concomitant with their legitimate function, that being limited liability investment vehicles for business."

SJP

15% Contingency Fee Award Spurs Discussion

The Wall Street Journal Law Blog discusses the $300 million plaintiffs’ attorneys’ fees awarded by a Delaware court in the Southern Peru Copper Corporation Shareholder Derivative Litigation here.  (Our own Josh Fershee previously commented on the merits of this case here.)  Stephen Bainbridge noted a few days ago that “there are a lot of folks in Delaware who are happily expecting this decision to encourage plaintiffs to come back to Delaware.”  He quotes Jonathan Macey and Geoffrey Miller as explaining that “in Delaware well-intentioned judges can be expected to devise legal rules requiring that Delaware lawyers be consulted when important decisions are to be made. Moreover, if Delaware judges believe that the state judicial system well serves Delaware corporations, they will be more likely to approve rules that stimulate litigation in the Delaware courts.”  But the Macey and Miller quote that caught my attention was this one: “The members of the Delaware Supreme Court are drawn predominantly from firms that represent corporations registered in Delaware.”  Just for the fun of it I decided to search for this quote in other law reviews on Westlaw.  Here’s what I found:

1. The inability of any province to fashion a provincial jurisprudence is also a function of the manner in which judges are appointed. In Delaware, as in other states, judges are state appointees. This ensures that the state can choose judges who will be sympathetic to corporate managers. As Macey & Miller (1986, p. 502) observe, “[t]he members of the Delaware Supreme Court are drawn predominantly from firms that represent corporations registered in Delaware. The bar and the judiciary are tied together through an intricate web of personal and professional contacts.” As a result, Delaware “judges are specialized in resolving corporate law disputes and as a consequence, the state can offer firms access to a system of corporate law rules that is stable, predictable and sophisticated relative to that of other states” (Macey & Miller, 1986, p. 500). Moreover, because judicial appointments are a state matter, the state can decline to renew the appointment of a judge who does not decide cases in a manner suitably sympathetic to corporate concerns.  Douglas J. Cumming & Jeffrey G. MacIntosh, The Role of Interjurisdictional Competition in Shaping Canadian Corporate Law, 20 Int'l Rev. L. & Econ. 141, 157 (2000).

2. Although judges obviously are more isolated from interest group influences than legislators, Delaware's justices are likely to reflect the interests of the corporate bar. The most obvious source of sympathy is the judicial selection process. As described earlier, the Delaware bar plays a central role in selecting justices, and it can be expected to recommend individuals who have a natural affinity to the corporate bar. This natural inclination is amply borne out by even a cursory look at who is ordinarily selected to sit on the supreme court. Nearly all of the justices, both currently and as a historical matter, were members of the Delaware bar before donning judicial robes.  David A. Skeel, Jr., The Unanimity Norm in Delaware Corporate Law, 83 Va. L. Rev. 127, 158 (1997) (quoting Macey & Miller in accompanying footnote).

Not exactly ringing endorsements of objectivity.

SJP

Davidoff on "how globalization increasingly allows companies to avoid United States taxes and regulation."

Over at DealBook, Steven Davidoff has posted "The Benefits of Incorporating Abroad in an Age of Globalization."  Davidoff uses Michael Kors Holdings as a case study demonstrating how companies are incentized to incorporate abroad in order to take advantage of tax savings, decreased regulatory burdens, and a decreased threat of shareholder litigation.  He notes further that this is not an isolated case, as "[p]rivate equity firms have been buying American companies with significant foreign operations and reorganizing them as foreign corporations."  To the extent that this creates problems for the U.S., he suggests that "[p]erhaps it is time for the United States to adopt a tax system more in line with the rest of the world."  What I found more interesting, however, was his suggestion that "American investors may be investing in Kors and other companies incorporated outside the United States without appreciating that they are not subject to the same United States laws that other publicly traded companies are."  This seems to me to be the crux of the debate about whether corporate regulation generally follows a race to the bottom or the top.  The greater the likelihood that signifcant portions of the investing community do not properly value the jurisdiction of incorporation, the greater the likelihood that the race is to the bottom rather than the top.

SJP

Sticks and stones may break my bones ....

In case you've missed the name-calling drama playing out in the legal scholar blogosphere, here's a recap:

1. Stephen Bainbridge takes issue with John Coffee calling him (and Larry Ribstein & Roberta Romano) names (here).

2. My first reaction to this was that it was somewhat of an odd response, given how many times Bainbridge has seen fit to call people idiots and other names on his blog.  Matt Bodie beat me to the punch, however, here.

3.  Bainbridge responds by claiming it's okay to call people names in blog posts (here).

Personally, I'm unclear as to how a lack of civility is ever really defensible.  Bainbridge quotes Brian Leiter as saying (here):

Some philosophers with Kantian intuitions think that civility is always a general requirement of respect for persons, an intuition that I do not share, and for which I can not think of any compelling arguments, and many objectionable counter-examples, like those in the text: treating Nazis in Weimar with civility seems to me a moral failing on the part of their opponents, not a requirement of respect. Such a demanding conception of civility would also be incompatible with derisive polemics (think H.L. Mencken), which often play an important role in political and social life.

My answer is simply that the moral failing in the Weimar case would be to not hold the Nazis accountable.  Using their behavior as an excuse to act in an uncivilized manner yourself strikes me as simply another form of moral failing.  And saying that derisive polemics have worked in the past is not the same thing as saying that they represent the best way to get things done.  That's sort of like saying we shouldn't strive to keep our anger in check because it can sometimes serve as a proxy for clarity.

We are currently struggling as a nation with competing ideologies that sometimes make it seem like we might be stuck in standoff mode for much longer than is good for anyone.  A lack of civility has been blamed for inflaming this standoff, and I believe we have a responsibility as law professors to not place our stamp of approval on that type of behavior--in our scholarship or our blogging.  Of course, even those of us who agree with this ideal will frequently fall short (particularly in blog posts and during live presentations) because we are ultimately all human and therefore, I believe, all greatly flawed by definition.  Nonetheless, I believe civility is a goal worth striving for in all our affairs.

SJP

ADDENDUM (12/22): In re-reading my post, I realized that I left out what I hope would be obvious but may nonetheless be better stated affirmatively: If sacrificing civility could be shown to be somehow necessary in order to stop the Nazis, then I agree it would be a moral failing to cling to civility.  However, I consider this to be a false dichotomy and believe that it is possible to effectively oppose evil without sacrificing civilized behavior.  Obviously, much of this turns on one's definition of civilized behavior.  However, I think it is fair to say that one need not spit on someone or insult them in order to, for example, justifiably lock them up or even kill them in self-defense.  I realize I've now drifted far afield of the issue regarding civility in scholarship versus blogging, but re-reading my post just left such a bad taste in my mouth that I felt compelled to clear up any confusion I may have created.  I also acknowledge that I may yet be convinced that there are indeed situations where a choice must be made between civility and justice, but I'll leave that for another day.

More Citigroup Settlement Musings

I'm continuing my email interview with a journalist regarding Judge Rakoff's Citigroup settlement decision (see my prior post on this here), and among other things I was asked whether I was surprised by the SEC's decision to appeal the ruling.  Here is part of my response:

I was not surprised by the appeal, but it does set up an interesting conflict.  On the one hand, the SEC is likely correct that requiring an admission of facts in order for a settlement to be approved in these types of cases is unprecedented.  On the other hand, Judge Rakoff seems to be stating an obvious truth when he asserts that he cannot carry out his duty of determining whether the settlement is "fair, reasonable, adequate, and in the public interest" without some facts upon which to render this decision.  I think the following quote from Judge Rakoff's opinion is right on point:

"Here, the S.E.C.'s long-standing policy—hallowed by history, but not by reason—of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations, deprives the Court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact…. The S.E.C., by contrast, took the position that, because Citigroup did not expressly deny the allegations, the Court, and the public, somehow knew the truth of the allegations. This is wrong as a matter of law and unpersuasive as a matter of fact."

I think the Second Circuit will feel a great deal of pressure to overturn Judge Rakoff's decision, but it will be interesting to see how it resolves this issue if in fact it does reverse.

12/18 UPDATE: Prof. Bainbridge is surprised by the appeal.

SJP

Postal Service Slow Down: Can't Credit Complaints Without Cash

My local paper, the inimitable Grand Forks Herald, provided this opinion piece today:  Stop the Postal Service’s ‘panic selling’.  The piece argues that the Post Office has refused to listen to thousands of complaints about the proposal to make financial cuts that will lead to slower mail delivery.  They argue:

These changes are coming too fast and with too little thought being put into them. Furthermore, they’re being driven not by any sense of the public good but simply by money — namely, the Postal Service’s financial crisis. ...

[T]he trouble is, the Postal Service is not just another business. It may be a quasi-private organization, but it’s also one with a centuries-old public-service mission: delivering America’s mail.

Perhaps, although it's my understanding that the Post Office isn't getting taxpayer funding. It seems to me this piece gives too much credance to complaints about the Postal Service's proposal without asking one more key question:  Are you willing pay enough to pay to keep the status quo? 

If not, the plan is the best option. And that's business, folks. 

--JPF

Weekend Reading: On Politics, Poetry, and Finances

I had the opportunity to spend some time on a plane with Sunday's New York Times Magazine this weekend. It was a particularly good read.  Here are some highlights that have some applicability to business and business law:

Building a Better Mitt Romney-Bot: 

Mitt Romney’s campaign has decided upon a rather novel approach to winning the presidency. It has taken a smart and highly qualified but largely colorless candidate and made him exquisitely one-dimensional: All-Business Man, the world’s most boring superhero.

The Foul Reign of Emerson’s ‘Self-Reliance’

The excessive love of individual liberty that debases our national politics? It found its original poet in Ralph Waldo [Emerson]. . . .

The larger problem with [“Self-Reliance”], and its more lasting legacy as a cornerstone of the American identity, has been Emerson’s tacit endorsement of a radically self-centered worldview. It’s a lot like the Ptolemaic model of the planets that preceded Copernicus; the sun, the moon and the stars revolve around our portable reclining chairs, and whatever contradicts our right to harbor misconceptions — whether it be Birtherism, climate-science denial or the conviction that Trader Joe’s sells good food — is the prattle of the unenlightened majority and can be dismissed out of hand.

“A man is to carry himself in the presence of all opposition,” Emerson advises, “as if every thing were titular and ephemeral but he.” If this isn’t the official motto of the 112th Congress of the United States, well, it should be. The gridlock, grandstanding, rule manipulating and inability to compromise aren’t symptoms of national decline. We’re simply coming into our own as Emerson’s republic.

Europe’s Financial Crisis, in Plain English

[T]he bottom line is simple: Europe’s problems are a lot like ours, only worse. Like Wall Street, Germany is where the money is. Italy, like California, has let bad governance squander great natural resources. Greece is like a much older version of Mississippi — forever poor and living a bit too much off its richer neighbors. Slovenia, Slovakia and Estonia are like the heartland states that learned the hard way how entwined so-called Main Street is with Wall Street. Now remember that these countries share neither a government nor a language. Nor a realistic bailout plan, either.

This article on the Euro also notes that Lord Wolfson, CEO of Next (a European retailer) is offering a £250,000 prize to anyone who can "answer the question of how to manage the orderly exit of one or more member states from the European Monetary Union."  The PDF announcement is here.  Why does this matter? As the Times Magazine article explains: 

Q: Will the euro survive?

It’s a dangerous question to ask out loud. Suppose a credible rumor spread throughout Greece that, rather than accept the harsh terms of another bailout package, the government was plotting to revert to the drachma. Fearing the devaluation of their savings, Greeks would move their money somewhere safer, like a German bank. The Greek banking system would then, in all likelihood, implode.

But Greece’s economy is too small for an isolated collapse to cause any significant damage throughout the continent. (Even a collapse confined to Greece, Ireland and Portugal couldn’t take down Europe.)  So the concern about a run on the Greek banking system is largely about whether a panic might spread to Spain or — worse — Italy, which could topple Europe’s financial system.

If you have any ideas on how to orchestrate a reasonably smooth exit of one or more countries from the European Monetary Union, you could line your pockets with some British currency, while stabilizing European markets. That'd be a good day's work.

--JPF

Judge Rakoff and the Citigroup Settlement Rejection

A journalist asked me some questions via email regarding Judge Rakoff's rejection of the Citigroup settlement.  (DealBook has the opinion, as well as an overview, here.)  Here are a couple of my responses:

I believe Judge Rakoff’s obvious frustration with the SEC practice of routinely entering into these sorts of agreements where the other side neither admits nor denies any wrongdoing is part of a growing trend.  One might even go so far as to see a connection to the Occupy Movement, which at least in part seems to be protesting a perceived “crony capitalism” wherein government regulates big business by way of wink-and-nod processes that leave both sides happy and the average citizen worse off.  (I’m not alone in making this connection.  Jonathan Macey had this to say at Politico (HT: Bainbridge): “The victory that Rakoff gave to the Occupy Wall Street movement Monday came from the federal courthouse — not far from Zucotti Park, the lower Manhattan headquarters of OWS.”; “Adopting the language of the Occupy Wall Street movement, Rakoff ruled that if judges do not have enough information on which to base their decisions, then the deployment of judicial power ‘serves no lawful or moral purpose and is simply an engine of oppression.’”)

I am somewhat ambivalent about the decision.  On the one hand, I recognize that there are good reasons for entering into these types of settlements.  Defendants like Citigroup have strong incentives to settle without admitting any wrongdoing in order to avoid those admissions being used against them in later private proceedings.  Meanwhile, the SEC has strong incentives to settle because of the costs and risks inherent in litigation.  On the other hand, while the agreements appear to make sense for the SEC and the defendants, it is much less clear whether they make sense for shareholders and the public.  The SEC suggests that there would be much less money available to return to investors if its power to enter into these sorts of agreements were to be curtailed.  One may question, however, whether the routine use of these agreements does not in some way foster more injury to investors and the public in the long run, since there is at least some message being sent to the alleged wrongdoers in these cases that they will avoid any meaningful personal penalty for similar conduct in the future.  One particular issue that I think needs to be examined more closely is the public’s perception of these settlements.  I have heard the SEC defend its practices in these cases by saying they support investor confidence.  I’m not so sure about that, and if the SEC is making decisions based at least in part on that presumption it is something that should be empirically tested.  Personally, I think the public has grown more and more suspicious of these deals—so I find that particular justification to carry little weight, if it doesn’t in fact cut the other way.

SJP

Stanford Law Review Online: Summe on Misconceptions About Lehman Brothers’ Bankruptcy

Over at the Stanford Law Review Online, Kimberly Summe has posted "Misconceptions About Lehman Brothers’ Bankruptcy and the Role Derivatives Played."  Here is an excerpt, but the entire piece is well worth a read:

Misconception #1: Derivatives Caused Lehman Brothers’ Failure ….

At the time of its bankruptcy, Lehman Brothers had an estimated $35 trillion notional derivatives portfolio. The 2,209 page autopsy report prepared by Lehman Brothers’ bankruptcy examiner, Anton Valukas, never mentions derivatives as a cause of the bank’s failure. Rather, poor management choices and a sharp lack of liquidity drove the narrative of Lehman Brothers’ bankruptcy…..

Misconception #2: Regulators Lacked Information About Lehman Brothers’ Financial Condition

The Valukas report was explicit that regulatory agencies sat on mountains of data but took no action to regulate Lehman Brothers’ conduct…..

Misconception #3: Derivatives Caused the Destruction of $75 Billion in Value ….

The allegation that derivatives destroyed value is flatly at odds with the fact that derivatives were the biggest contributor to boosting recoveries for Lehman’s creditors....

Misconception #4: Insufficient Collateralization

Policymakers focused on collateralization as a derivatives risk mitigation technique. Collateralization of derivatives, however, has existed for twenty years….

Misconception #5: The Bankruptcy Code Is Not Optimal for Systemically Important Bankruptcies ….

[U]nder the current settlement framework, Lehman Brothers’ bankruptcy will be resolved in just over three years—a remarkable timeframe given that Enron’s resolution took a decade.

Policymakers also focused on the wrong entities for failure. Banks, the most likely candidates for application of Dodd-Frank’s orderly resolution authority, have in fact been the least likely to experience failures due to derivatives losses, in part because of their efforts to hedge exposures. The largest derivatives failures to date involved non-bank entities such as Orange County, the hedge fund Long-Term Capital Management, and AIG Financial Products—entities with fewer risk management and legal resources than banks and which are less likely to hedge exposure. These types of entities are not covered by Dodd-Frank.

Conclusion

An alternative vision for policymakers in the aftermath of Lehman Brothers’ bankruptcy would have involved greater consideration of how liquidity can become constrained so quickly, as in the commercial paper and repo markets, and an effort to mandate the type and amount of collateral provided in these asset classes. In addition, a clarion call mentality among regulators with respect to critical issues such as the size and makeup of a bank’s liquidity pool and an insistence on adherence to banks’ self-established risk tolerances should be actionable. Instead, policymakers overlooked some of the principal causes of Lehman Brothers’ bankruptcy….

SJP

Occupy Climate Change

Democracy Now recently published transcribed portions of "Occupy Everywhere," a panel hosted by The Nation magazine, "On the New Politics and Possibilities of the Movement Against Corporate Power" (here).  Naomi Klein was quoted as drawing a connection between the movement and the climate change debate, saying the following:

[T]here has been an ecological consciousness woven into these occupations from the start…. So, what I find exciting is the idea that the solutions to the ecological crisis can be the solutions to the economic crisis, and that we stop seeing these as two problems to be pitted against each other by savvy politicians, but that we see them as a ... single crisis, born of a single root, which is unrestrained corporate greed that can never have enough, and that ... trashes people and that trashes the planet, and that would shatter the bedrock of the continent to get out .. the last drops of fuel and natural gas. It’s the same mentality that would shatter the bedrock of societies to maximize profits. And that’s what’s being protested.... [T]he reason why the right is denying climate change now in record numbers— … 80 percent….. [is] because they have looked at what science demands, they’ve looked at the level of emissions cuts that science demands, 80 percent or more by 2050, and they have said, "You can’t do that within our current economic model. This is a socialist plot." [T]heir entire ideology, which is laissez-faire government, attacks on the public sphere, privatization, cuts to social spending, all of that, none of it can survive actually reckoning with the climate science, because once your reckon with the climate science, you obviously have to do something. You have to intervene strongly in the economy.

For more on this you can read her article "Capitalism vs. the Climate."

SJP

Pizza is a vegetable. Really?

By now you've probably heard about Pizzagate--what some have described as: "Congress puts the food lobby above child nutrition." Here's Kermit's take (30-second ad up front):

 

SJP

Jordan on Business Roundtable v. SEC

My colleague Bill Jordan has written a review of the Business Roundtable v. SEC decision (striking down the SEC's proxy access rule) for his "News from the Circuits" column in the forthcoming 37 Administrative and Regulatory Law News 1.  Here's an excerpt:

The court criticized the agency’s rejection of studies favoring the management position in favor of “two relatively unpersuasive studies” purportedly showing the value of the inclusion of dissident directors on corporate boards.

The court’s dismissive treatment of the SEC’s response to these studies contrasts sharply with the longstanding principle of judicial, deference to agency assessment of complex technical and scientific studies.... Note that the court considered itself qualified to determine that the studies relied upon by the SEC were “relatively unpersuasive.” This is not the language of arbitrary and capricious review or even of hard look review.  This is the language of substantive judgment, even political judgment.

The contrast is particularly striking because this case essentially involved judgments about the value of democracy. In assessing electoral democracy, surely we assume that elections improve outcomes because they hold politicians accountable for their actions. It seems reasonable for the SEC to incorporate this fundamental principle of democratic institutions into the arena of shareholder democracy. At least a court should review such agency judgments – made by the politically accountable electoral branch of government rather than the unaccountable judiciary – with considerable deference. The D.C. Circuit’s review in this case was precisely the opposite. On one particular issue, the court characterized the agency’s explanation as “utterly mindless.”

It is difficult to determine the long-term significance of this decision. It suggests, among other things, that the D.C. Circuit (at least these three judges) consider themselves well qualified to second-guess agency decisions about issues of corporate structure and costs even if they should defer to agency decisions about scientific and technical issues.

SJP

Why haven't the Occupy coders used Facebook?

There's an interesting short piece at The Atlantic about the web developers coding the online presence of the Occupy movement and how their choices have reflected the organizational structure and ethos of the movement.  Check it out here.

It captures an interesting aspect of the movement and group speech.

--Elizabeth Pollman

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

New Report on the S&P 500's Corporate Governance of Political Expenditures

Back in August, ten law professors, as the "Committee on Disclosure of Corporate Political Spending," submitted a petition to the SEC asking “that the Commission develop rules to require public companies to disclose to shareholders the use of corporate resources for political activities.” 

The group includes Lucian Bebchuk, Bernard Black, John Coffee Jr., James Cox, Jeffrey Gordon, Ronald Gilson, Henry Hansmann, Robert Jackson Jr., Donald Langevoort, and Hillary Sale.  The petition explains:  “We differ in our views on the extent to which corporate political spending is beneficial for, or detrimental to, shareholder interests. We all share, however, the view that information about corporate spending on politics is important to shareholders—and that the Commission’s rules should require this information to be disclosed.”

I’ve been following with interest the comments to this petition. They’ve included statements from scholars like Ciara Torres-Spelliscy who has written extensively about corporate political spending, and this week the IRRC Institute has submitted a report on the S&P 500's corporate governance of political expenditures. In its submission cover letter, the IRRC Institute explains: “The report is the first to examine the governance policies of the full S&P 500; the first to report on spending of the full S&P 500; and the first to be part of a benchmarking time series, enabling trends to be examined robustly.”

Earlier this month, I posted about a recent report on the governance practices of the S&P 100, which the Center for Political Accountability and Wharton’s Zicklin Center for Business Ethics released.

I’m still digesting the new IRRC Institute report and may post more soon, but note for those interested in this area that it is well worth reading as it takes a broad and detailed approach, including information on topics such as governance about lobbying and whether companies provide public justifications for why they spend money on politics.

A few tidbits from the fascinating report:

On companies with “no spending” policies:  “The overall number of companies that assert they do not spend money in politics has grown to 57, up from 40 a year ago. But a comparison of spending records and policy prohibitions shows that only 23 companies with ‘no spending’ policies actually did not give any money to political committees, parties or candidates in 2010 (though they may still lobby). Only 17 of these firms avoided all forms of political spending, including lobbying. (Another 57 companies have no policies about spending but also do not seem to spend.)”

On transparency:  “Voluntary company disclosure of political spending remains limited and only 20 percent of S&P 500 companies report on how they spent shareowners’ money. Two‐thirds of the companies that appear to spend from their treasuries do not report to investors on this spending. The least transparent are Telecommunications and Financials firms; by contrast over 40 percent of Health Care companies explain where the money goes.”

On independent expenditures: “There has been a significant increase in the number of companies that discuss independent expenditures, which following Citizens United are allowed at the federal level for the first time in 100 years. Comparing companies in the index in both years (468 firms) shows that 19 more companies now say they will not fund campaign advertisements for or against candidates, generally will not do so, or are reviewing their policies—up from 58 last year. But only five companies now acknowledge in their policies that they make independent expenditures, even though careful scrutiny of voluntary spending reports adds a few firms to this tally.”

On the increasing adoption of indirect spending policies: “The proportion of companies that have adopted policies on indirect political spending through their trade associations has grown from 14 percent in 2010 to 24 percent. Half of the 100 biggest companies now disclose their policies on indirect spending through trade groups and other politically active non‐profit groups, but this commitment evaporates at smaller companies.”

On big companies spending big: “The top two revenue quintile companies were responsible for the vast majority of both federal lobbying and treasury contributions to national political committees and state political entities, with $915 million (93 percent) of the S&P 500’s total.”

On board oversight: “The 151 companies with board oversight of their spending disburse on average 30 percent more than their peers that do not have such oversight, when the latter comparison is controlled for revenue size. This may give some comfort to investors and others concerned about accountability and transparency, but not to those who think that corporate governance could be used as a lever to reduce spending.”

The report is also terrifically direct about information that is unknown, such as how much companies give indirectly through trade associations and other non-profit groups that spend in elections and on lobbying.

--Elizabeth Pollman

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

"Europe: How bad will it get?"

Today I attended a terrific event hosted by the Rock Center for Corporate Governance at Stanford on whether the Eurozone will survive in the present form. It seems the answer to this post's titular question is that it's going to get real bad. 

Robert Madsen from the Center of International Studies at MIT shed light on this quite dark subject. Madsen cut through all of the jargons and acronyms you might hear in discussions of sovereign solvency and the Eurozone crisis. He highlighted the following key issues:

• The structural flaws in the way the Eurozone was designed (the lack of a common business cycle, cultural barriers and other obstacles to labor mobility, the lack of a fiscal transfer mechanism, and issues with developing a shared political commitment)

• The massive increase in debt, public and private, in some European countries

• The cost of fixing the problem (in short: trillions, perhaps in the double digits)

As Madsen described the possible ways of moving forward, a palpable gloom hung over the room. A major financial restructuring seems unlikely. The present strategy of fiscal austerity and ad hoc measures is not promising. The other possibilities include preemptive changes to the Eurozone and some kind of delayed collapse. The takeaway: fasten your seatbelts.

The Rock Center website may have a video of the event soon.

--Elizabeth Pollman

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