Monday, November 27, 2006
Posted by Jeff Lipshaw
Two articles in the Sunday New York Times (Nov. 26, 2006), seemingly unrelated, made me think of Law in Everyday Life by Austin Sarat and Thomas Kearns (discussed in an earlier post), and, in particular, the particular world view, common among lawyers, that if I process sensory data in a cognitive way, so must everybody else. Indeed, I find it interesting how lawyers (or people who "think like lawyers") over and over and over again, either pose non-cognitive issues as cognitive, or propose cognitive solutions to non-cognitive problems.
Here's what provoked me in the Times this morning. (I will give a couple other examples below the fold.) Gretchen Morgenson (right, receiving her Pulitzer Prize) continues her Sunday Business section campaign on the subject of excessive executive pay. I don't seem to be able to work up the bile for Morgensen's work that you can find over at Larry Ribstein's Ideoblog or in Holman Jenkins' column in the Wall Street Journal (see Alan's previous post on this), but I have to say I scratch my head every time I read her reporting on the subject. I'm willing to accept as a given that the spread between top CEO pay and the lowest paid workers is increasing. But (a) I don't really know what that means in terms of general social welfare, (b) is it any different than pay scale spreads in other areas where the market seems to identify "superstars" (like sports)? and (c) assuming that CEOs make too much money by somebody's standard, what is the alternative proposal?
Morgenson's proposal appears to be more cure by the cognitive approach: we determine value by heuristics, including comparables, so let's put in the proxy statement an incredibly detailed description of the heuristics by which the board determined CEO pay, and that will somehow cause the spread to shrink. Hmm. I seem to recall throwing a line in the proxy statement every year that said shareholders should be aware that we paid a bunch of our executives compensation in amounts that would cause the corporation not to be able to deduct all of it for tax purposes, and I don't think it made one whit of difference on what we paid people, or on what our shareholders thought of the company. If the cognitive approach really worked, then we ought to be able to reduce housing prices in California by making every house buyer read a prospectus on the likelihood that the house is overpriced in relation to equivalent homes in Milwaukee or Des Moines, and in danger of destruction by tsunami, earthquake, or high force Santa Ana winds. (I do remember the cognitive approach working once: when Alene and I were doing Lamaze in her seventh month of pregnancy with our daughter, now 22, we saw the movie about all the things that can go wrong, and on the way home, she said, "okay, I've decided I don't want to be pregnant." I suggested she take a cleansing breath and she smacked me across the head.)
More below the fold.
If we turn, however, to the Week in Review section, "Here Come the Economic Populists," by the fine reporter Louis Uchitelle (I love his name, by the way; it is the Russian word for "teacher"), reflects something I have believed, and stated publicly, about the compensation debate. This is about politics and populism, not about some objective standard of value. Uchitelle compares the Rubinomics of the Clinton administration - allowing markets to operate unfettered and globally, and then dealing with the dislocations of Schumpeterian creative destruction after the fact, through social safety-net measures - with the "economic populists" - those to whom the spread between the wealthy and the less wealthy is the real issue.
I am yet to be convinced that most shareholders ever care about corporate governance as an end in itself. Most shareholders want a return. And therein lies the chicken versus the egg of this particular debate. If you care about class issues, like CEO pay versus the pay of the ordinary worker, then you are hell-bent for election to show that there is a consequential impact of the governance or the pay issue.
Is sunlight (the metaphor for disclosure of information) really the best disinfectant? How can anyone be against sunlight? But sunlight, whether you like it or not, doesn't disinfect if the germs don't care about sunlight. (I think about this every time my intelligent students take their cigarette breaks out in the courtyard. As one of them tells me every time I suggest he is not helping his long-term health, "no conclusive link yet proved!")
The sunlight model is certainly one that appeals to the lawyerly mind, particularly the one that sees the world as one constituted by law. (See Sarat & Kearns.) And the lawyerly solution is to propose cognitive solutions, as though the data will be processed in a lawyerly way, to problems that are, at their core, not cognitive, whether a matter of politics, addiction, or wishful thinking.
As an example of the latter, one academic proposal I have addressed in the past would require venture capitalists to provide something like an S-1 prospectus to the entrepreneur, designed to remedy the perceived inequalities between entrepreneurs and the supposedly more sophisticated venture capitalist. I have observed there something of an infinite regress inherent in a solution that is merely more information – particularly one that smacks of the typical disclaimers that go, for example, into an SEC registration statement for an initial public offering. In his very interesting Wisconsin Law Review article describing the strategic behavior that occurs between entrepreneurs and VCs, and proposing that particular solution, Manuel Utset (Utah, left) variously characterized the typical founding entrepreneur as “over-optimistic,” “over-confident,” (indeed to the point of “blindness to the need for more information”), better at innovating than running a company, having “poor management skills,” and lacking “business savvy,” and having “bounded rationality” (i.e., cannot predict the future very well). I commented on this in a DePaul Law Review article: "In sum, the starry-eyed, cocky, sheltered engineer or scientist lacking people skills and a crystal ball is probably already overwhelmed with information. The regress is in trying to find that conclusive piece of information or disclosure that gets through to this [supposed] knucklehead."
In Germany, even today, if you sell a piece of real estate, or if you sell a multi-billion dollar company that involves the transfer of real estate, the civil code requires that the transaction be undertaken in a notarial deed. This is hardly the notarial act of a U.S. common law jurisdiction. The notary undertakes (for a significant fee) to serve the function that legality and enforceability representations and lawyers' opinions serve here: the notary is putting the imprimatur of legality on the agreement. And if you have ever been party to one of these events, you know that the notary (or someone delegated by the notary) is required to read the entire document (even if a 400-page including exhibits Wall Street firm generated doorstop) out loud. This is an anachronism dating back to the Middle Ages, when the law prevented big city sharpies from cheating the peasants (who generally couldn't read) out of their land.
This, I assume, was the legal equivalent of taking the about-to-be-victim, shaking him (probably not her back then) physically about the head and shoulders, and saying "do you understand what a stupid thing you are about to do?"
I'm certainly not advocating the suppression of information either in the trading of securities or the sale of residential real estate. I like the fact that when I buy a house most state law requires the seller to provide a sworn disclosure of things like water damage or foundation problems. (And, if truth be known, I like the proxy statement compensation information for its heuristic value. When I was about to negotiate my pay package with Great Lakes Chemical, I was very interested in the compensation paid to general counsel who showed up in the proxy statement.) But there is a limit to the ability of additional information (apart from its cost effectiveness) to address some policy issues. I'm not sure that requiring the seller (or her realtor) to describe for me precisely how the asking price was determined is going to be a productive way of getting us to a price. And though the analogy is not exact, I think requiring board compensation committees to go through CEO pay heuristics is closer to the latter than the former.
Addendum: I am reading Robert Penn Warren's All the King's Men (part of my Louisiana acculturation, along with John Kennedy Toole's A Confederacy of Dunces, which I don't quite get). Willie Stark, the Huey Long equivalent, begins his political career as an honest idealist, duped into running in the Democratic primary as a way of splitting the vote. Willie has been giving a boring stump speech, and this is the exchange on the subject of the cognitive approach he has with the cynical reporter covering his campaign:
"You tell 'em too much. Just tell 'em you're gonna soak the fat boys, and forget the rest of the tax stuff."
"What we need is a balanced tax program. Right now the ratio between income tax and total income for the state gives an index that --"
"Yeah," I said, "I heard the speech. But they don't give a damn about that. Hell, make 'em cry, make 'em laugh, make 'em think you're their weak erring pal, or make 'em think you're God-Almighty. Or make 'em mad. Even mad at you. Just stir 'em up, it doesn't matter how or why, and they'll love you and come back for more. Pinch 'em in the soft place. They aren't alive, most of 'em, and haven't been alive in twenty years. . . . [I]t's up to you to give 'em something to stir 'em up and make 'em feel alive again. Just for half an hour. That's what they come for. Tell 'em anything. But for Sweet Jesus' sake don't try to improve their minds."
DISCLAIMER: THIS POST REFLECTS THE OPINION OF THE AUTHOR, AND NOT NECESSARILY THE OPINION OF THE OTHER CO-EDITORS OF LEGAL PROFESSION BLOG, THE LAW PROFESSOR BLOG NETWORK, MY WIFE, OR THE EDUCATIONAL INSTITUTIONS THAT WERE CRAZY ENOUGH TO ISSUE ME DEGREES. IT TOOK ME APPROXIMATELY 90 MINUTES TO WRITE THE POST, NOT COUNTING THE TIME I WASTED WHEN TYPEPAD LOST ALL MY LINKS. OUR BEST ESTIMATE IS THAT IT WILL TAKE FIVE MINUTES TO READ, AND SIX SECONDS TO REJECT AS COMPLETE HOOEY.