Sunday, February 1, 2009

Explanation and Meaning in the Merrill Lynch/Bank of America Transaction

Posted by Jeff Lipshaw

The ongoing contretemps involving John Thain's recent dismissal from Merrill Lynch is once again (and unfortunately) an object lesson for corporate insiders and outsiders in the subtleties of judgment.  I am, as Ronald Gilson observed of another law professor, a "beetle turned entomologist," so it ought not be surprising that what interests me is the relationship between the players in the corporate governance game and those who observe it.  My thesis is that, consistent with the ascendance of scientific modes of thought over the last century, both insiders and outsiders fail to appreciate the important distinction between explanation and meaning.

Let's take the two issues separately.  The first is the revelation that Thain caused Merrill to spend in excess of $1,000,000 redecorating his office.  As a former public company general counsel, I am aghast.  I believe firmly there is a relationship between a certain level of comfort in one's office and productivity, but that's why I have a University of Michigan beanbag chair that I bought for $49 over the Internet.  I see this as a kind of tone-deafness to meaning; even if financial performance warranted the expenditure, or if there was room in the general and administrative budget, or if it can otherwise be explained (read: rationalized) the purchase takes on a meaning to those observing it, and the import of that meaning cannot possibly be a good one.  I heard this a number of times from senior executives who attempted to rationalize questionable personal behavior:  "as long as I'm doing my job, what I do in [you name the vice] is my own personal affair."  No.  The job carries with it the obligation to understand a bit of philosophy:  if you are self-knowing and self-conscious, then so are others, and they are not merely objects.  They in turn will attribute meaning to your actions, and it will affect your ability to lead the organization.

The second has to do with the payment of bonuses before the end of 2008 to senior (but not the most senior) executives at Merrill Lynch.  This is a far more subtle issue, both as to explanation and meaning.  The public interpretation (particularly in view of the TARP conditions affecting executive compensation) immediately jumps to the nefarious (particularly when juxtaposed with the far stupider furniture issue).  Compensation in connection with a deal isn't that simple, however, and target and acquirer may have a community of interests, whether arising out of legitimate concerns about post-closing integration of the business, the retention of talent, or where and when the cost will be accounted for.  Indeed, when Merrill issued its proxy solicitation, it was only able to disclose that BoA was still talking to senior Merrill executives about "arrangements seek[ing] to ensure continued service and align the executives’ interests with the combined company after consummation of the merger." This isn't to say that agency costs or greed are never involved, just that it is far more difficult to judge from mere appearance.  Here, the issue is converse of the furniture purchase.  Outsiders attribute meaning to the actions, where perhaps explanation would be the better way to go.

This is another instance of a problem I've discussed in this forum:  the inter-relationship of the objective and the subjective in dealing with rule-based systems.  My article, Models and Games:  The Difference Between Explanation and Understanding for Lawyers and Ethicists, recently published in the Cleveland State Law Review, takes the view that outsiders are modelers and insiders are game players, each simultaneously explaining and interpreting, each both a subject and an object, and independent or interdependent within the context of the games they play and the models they construct. As the article suggests, there is real danger in confusing models and games both for modelers and game-players.  For Thain, were the furniture purchases simply one move in the "new CEO" game?  Did he fail to see how others would explain it or attribute meaning to it?  For critics of the bonuses, do the explanatory models have anything to do with what was meaningful to the players - that is, do the observers understand, from the players' subjective point of view, what was going on?  Or are the critics imposing another set of game rules (possibly after the fact) whose context imparts a different meaning to the bonuses?

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