Monday, November 14, 2011

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.


Corporations, Joshua P. Fershee | Permalink


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