Business Law Prof Blog

The Cost of Long-term Investing in Mutual Funds

We are all familiar with a distinguishing features of investing in operating companies and investing in mutual funds: sale of stock in operating companies and redemption at NAV (net asset value) in mutual funds.  An interesting article (Mutual Fund Liquidity and Fiduciary Conflicts of Interest)¹ was recently brought to my attention which argues that the liquidity costs of the redemption model disadvantages long-term investors-- those investors who stay in the fund.  

Redemption of mutual fund shares requires the fund to maintain liquidity (uninvested assets) in order to supply the NAV to any departing investor.  The required liquidity extracts a small cost on the fund for each exit.  This cost, small when evaluated for a single trade, becomes significant in the aggregate.  Trading and liquidity cost estimates range from $10-17 billion annually, costs that are born exclusively by the investors who stay in the fund. This means that long-term investors, particularly those investors who are relatively locked into their mutual funds such as retirement investors (a group I refer to in my scholarship as Citizen Shareholders) are subsidizing the dominance of the exit strategy for other retail investors.  This has deep implications for the arguments advanced by John Morley and Curtis Quinn in their 2010 article Taking Exit Rights Seriously,²  where they argue that exit is the dominant strategy over voting and litigation in mutual funds.  If exit is the dominant strategy for mutual fund investors, and there is a cost associated with that exit, who should bear the cost?  I have an essay forthcoming this spring that further addresses question of exit rights as they pertain to Citizen Shareholders.

One novel solution advanced by Sacks Equalization Model, Inc., is a patented algorithm that assigns a small liquidity cost to all selling investors and to all new investors to push the transaction cost on those investors engaging in the transaction, not the stable, long-term investors.

-Anne Tucker

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[1] Miles Livingston and David Rakowski, Mutual Fund Liquidity and Conflicts of Interest, Journal of Applied Finance, Vol. 23, No. 2, pp 95-103 (2013).

[2] John Morley & Quinn Curtis, Taking Exit Rights Seriously: Why Governance and Fee Litigation Don’t Work in Mutual Funds, 120 Yale L.J. 84 (2010).

 

Courts and the LLC, End of the Year Edition

I continue to document how courts (and lawyers) continue to conflate (and thus confuse) LLCs and corporations, so I did a quick look at some recent cases to see if anything of interest was recently filed. Sure enough, there are more than few references to "limited liability corporations" (when the court meant "limited liability companies."  That's annoying, but not especially interesting at this point.  

One case did grab my eye, though, because because of the way the court lays out and resolves the plaintiffs' claim.  The case is McKee v. Whitman & Meyers, LLC, 13-CV-793-JTC, 2014 WL 7272748 (W.D.N.Y. Dec. 18, 2014).  In McKee, theplaintiff filed a complaint claiming several violations of the Fair Debt Collection Practices Act against defendants Whitman & Meyers, LLC and Joseph M. Goho, who failed to appear and defend this action, leading to a default judgment. After the default judgment was entered, defense counsel finally responded.  

This case has all sorts of good lessons.  Lesson 1: don't forget that all named parties matter.  Get this: 

Defense counsel admits that he was under the mistaken assumption that default was to be taken against the corporate entity only. See Item 17. However, default was entered as to both the corporate and individual defendants on July 3, 2014 (Item 9). Defense counsel did not move to vacate the default and in fact did not respond in any way until the default judgment was entered on September 17, 2014. Item 12. Even then, the defense motion was framed as one for an extension of time in which to file an answer (Item 14), rather than a motion to vacate the default or default judgment. Inexplicably, in his papers, defense counsel states that a default judgment has not been entered. See Item 17. Since good cause is to be construed generously and doubts resolved in favor of the defaulting party, see Enron Oil Corp., 10 F.3d at 96, the court will accept the explanation of defense counsel as evidence of a careless lack of attention to procedural detail rather than an egregious and willful default on the part of defendant Goho [the individual and apparent owner of the LLC].

McKee v. Whitman & Meyers, LLC, No. 13-CV-793-JTC, 2014 WL 7272748, at *1 (W.D.N.Y. Dec. 18, 2014).  A link to a free version of the case is here.

 

Wow.  I concede there are some procedural details here, but this sure sounds substantive to me, as well.  

 

Lesson 2: if you name someone in the caption, you probably want to have some allegations about them as a defendant.  Fortunately for defense counsel, the plaintiff's counsel was not on the ball, either.  Though Goho was named in the caption, the complaint did not describe Goho as a party or contain allegations about Goho's individual liability for the FDCPA violations. The defendant's Prayer for Relief also only sought judgment from the Whitman & Myers, LLC. (The court conveniently skips the fact that court probably should have noticed these deficiencies the first time around, before entering default judgment against Goho.)  

Finally, the moment regular readers (see, e.g.,  here, here, here, here, and here) saw coming:

 

Lesson 3: You Can’t Pierce the Corporate Veil of an LLC Because It Doesn't Have One.  The plaintiff argued that "the court should pierce the corporate veil and hold defendant Goho personally liable." The court's response: "[T]here is nothing on the face of the complaint or in the record that would support individual liability for defendant Goho on the basis of corporate veil-piercing . . ."  

 

The court is, of course, correct. However, the sentence should be followed by one that says, "This is because there is no corporation named as a party to this case, so there is no corporate veil to pierce."  Obviously, the court could have gone on to note that even if the plaintiffs meant for the court to pierce the limited liability veil of the LLC, the allegations were insufficient for that, too.

 

As a side note, it would have been interesting to see how the court would have dealt with the argument that Goho and his LLC were so intertwined that they share legal counsel and that even his own counsel did not immediately recognize the individual and the entity as separate until after default judgment was entered.  (I don't see that as a winning argument, but it's better than what was argued.) 

 

Moving forward, I'd like to see courts tell plaintiffs that a request to "pierce the corporate veil" of an LLC amounts to a failure to state a claim.  The court should allow counsel to amend the complaint to get the language right. Until there is a consequence, even a minor one, for merging LLCs and corporations, attorneys and courts will continue to get it wrong.  

 

Thus, a New Year's Resolution for Courts:  "We will treat corporations and LLCs as separate entity types."  And, please, after making sure to always call LLCs "limited liability companies," move on to creating separate veil piercing language.  

Entrepreneurship Books by Jason Gordon

This week I received the notice below from Professor Jason Gordon. Professor Gordon is a legal studies and management professor at Georgia Gwinnett College, School of Business. As explained below, he is offering copies of two entrepreneurship books that he thought might be useful to BLPB readers.  

Dear Colleagues,

 

I recently published two texts entitled Business Plans for Growth-Based Ventures and Understanding Business Entities for Entrepreneurs and Managers. These books are designed for use by clinical law professors and as a supplement in entrepreneurship courses. The second text concerns entity selection considerations, but includes entity funding and conversion considerations and specific considerations for startup ventures.

 

The texts also contain supplemental electronic material available for free at TheBusinessProfessor.com.

 

If any of you would like a free copy of either text in Amazon e-book format, please send me your email address at jgordon10 [at] ggc [dot] edu.

 

A preview of the Business Plans E-Book is available here.

 

A preview of the Business Entities E-Book is available here. 

 

It's Interview Season (Again) (Still). What Should Female Candidates for Law Jobs Wear?

Grades are in--a few hours late, but in nevertheless.  It must be almost time for New Year's Eve, syllabus and first-assignment posting, the AALS conferenece, the first day of classes, . . .  and more job searching for our students!

I was reminded in an email from a student this morning that the hunt for summer and permanent law jobs is revving back up again after the holiday doldrums.  The student, a 1L mentee seeking summer employment, was asking a few questions about my cover letter post, to which I eaerlier had referred him.  I expect to start getting more of these communications from students about their job searches over the next few weeks.

Our brother bloggers over at the Law Skills Prof Blog have already struck while the iron is hot on this issue.  Specifically, Lou Sirico posted a quip on dressing for job interviews the other day.  The quoted advice?  "The interviewer should remember what you said and not what you were wearing."  

Hmm.  Yeah.  I guess so.  Well, maybe not.

Certainly, that's the advice I was given by NYU Law's fabulous placement folks in "the day."  Then, that meant wearing: a black, navy or midnight blue, or gray skirt suit; a neutral (white, ivory, gray, black) collared shirt or jewel-neck blouse; skin-tone hose; dark, solid-colored, medium-heeled pumps or really lovely flats; and either Barbara Bush pearls (the double strand) or a silk floppy bow tie (like an Hermes twilly, only not as fashion-forward).  Bo-ring.

I am proud (but call me lucky) to have gotten my job wearing (to the initial interview) a deep pink--almost fuchsia--silk-blend skirt suit (midi-length skirt, hip-length jacket), with a white collared blouse, neutral hose, black flats, and a patterned (pink, blue, etc.) floppy silk bow tie.  (This is where the folks in the UT Law Career Center lose faith that they are sending students to the right place when they refer them to me for career advice!)  I was confident and radiant in that suit (although I am not sure I realized that fully at the time), and I am convinced that made a big difference in the reception that I got from people when I wore it.  However, it's true that I  was interviewed by a woman (a female senior associate in a multicolored silk dress with straight blond hair down to her derrière) and I was seeking employment at an entrepreneurial, individualistic firm--Skadden.  

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Best Non-Law Books I Read in 2014: Fiction

Believe it or not, I and the other editors of the Business Law Prof Blog don't spend all of our time reading and thinking about business law. I assume none of you do, either, so I thought you might be interested in a list of the best non-law books I have run across this year.

I originally planned to put them all in a single post, but I read a number of very good books in 2014, so I decided to divide the list into two posts. Today, fiction. Next week, non-fiction.

I’m limiting both lists to books published relatively recently, so you don’t have to wade through a list of old science fiction or Thomas Hardy novels, no matter how excellent I thought they were when I reread them this year.

Except for the first book, they’re in no real order.

1. Anthony Doerr, All the Light We Cannot See. If you read only one book on this list, this should be it. This is the best new novel I have read in some time. It centers on a bright young German boy and a blind French girl in the period prior to and during World War II. It’s hard to explain the story in a few words, but I think it’s an absolutely brilliant book.

2. Chang-Rae Lee, On Such a Full Sea. The main character searches for the father of her unborn child in a dystopian future. The book has no real conclusion, and I usually don’t like that, but I’m willing to excuse that, given the excellent writing.

3. Rachel Joyce, Perfect. This brilliant novel has two alternating stories: one about a young boy who becomes obsessed when a friend tells him that two extra seconds will be added to clocks; the other about a disturbed 50-year-old supermarket worker. Keep reading: she eventually ties the two story lines together.

4. Andy Weir, The Martian. An astronaut is stranded on Mars without adequate supplies after his colleagues leave, thinking he’s dead. A solid piece of science fiction.

5. Karen Russell, Sleep Donation. A novella about a sickness that keeps people from sleeping. They use a machine to borrow sleep from sleep donors.

6. Joshua Ferris, To Rise Again at a Decent Hour. I’m not a huge Joshua Ferris fan, but I liked this one. A dentist discovers that someone is posting online in his name about a lost Middle Eastern group and a religion whose primary belief is a doubt that God exists.

7. Jo Walton, My Real Children. I really enjoy Jo Walton’s science fiction, and this book was not an exception. It’s about a woman with Alzheimer’s who remembers two very distinct lives—diverging when she said either “yes” or “no” to a marriage proposal.

8. Matthew Thomas, We are Not Ourselves. A bittersweet first novel about a woman and her families—the family she grew up with and, later, her husband and son. A story of regret and uncertainty, it's sad and depressing, but extremely good.

9. Bill Roorbach, The Remedy for Love. A fascinating love(?) story involving a small-town lawyer stuck in a tiny, isolated cabin with a disturbed woman during a once-a-century blizzard. A charming story, expertly told.

ICYMI: Tweets From the Week (Dec. 28, 2014)

"current update about the adoption of the Revised Limited Liability Company Act ('RULLCA')" http://t.co/wORQa4h58N

— Stefan Padfield (@ProfPadfield) December 22, 2014

ICYMI: "Corporate transparency: The disappearing subsidiary" http://t.co/5qKheqbA5X

— Stefan Padfield (@ProfPadfield) December 24, 2014

"Institutional Investors, Proxy Advisors Fail To Use Economic Value Creation As Major Factor In Say-on-pay Voting" http://t.co/hdNahfeAnw

— Stefan Padfield (@ProfPadfield) December 27, 2014

How to interpret the increase in corporate whistleblower reports http://t.co/DseDWYr5SZ @CGMA @TheNetworkInc #corpgov pic.twitter.com/YoTHAtxlKf

— Mark P. Borman (@MPBorman) December 28, 2014

.@StevenDavidoff grades this year's notable deals. http://t.co/iVL81L3fSk

— Stefan Padfield (@ProfPadfield) December 24, 2014

Market inefficiency

That markets are less than perfectly efficient is hardly a controversial proposition; indeed, several examples of notable market efficiencies were presented to the Supreme Court this past Term when it considered the continuing vitality to the fraud-on-the-market challenge in Halliburton.  Many of those examples, however, are several years old - which is why it was so amusing for me to see two new instances of dramatic inefficiencies just in the last month.

First, the New York Times published a piece, How Our Taxi Article Happened to Undercut the Efficient Market Hypothesis, explaining how publication of an article on falling medallion prices sent the stock price of Medallion Financial - a company that issues loans secured by taxi medallions - tumbling.  This was surprising because information about taxi medallion prices is public, so the stock should not have been reacted to the news.  Josh Barro, author of both pieces, speculates that the price drop may have occurred because some of the information in his article may have been difficult for investors to obtain, particularly since false information regarding medallion prices had been (inadvertently) circulated by the New York Taxi and Limousine Commission.

(Which, by the way, suggests that courts are correct to be wary of the "truth on the market" hypothesis - the argument often advanced by securities fraud defendants that even if their statements were false, it was canceled out by publicly available truthful information.  In the case of Medallion Financial, the false information apparently dominated over truthful information, at least so long as the truthful information was piecemeal and required effort to gather.)

The second example of market inefficiencies occurred when President Obama announced that the U.S. would be resuming diplomatic ties with Cuba.  The news sent the price of the Herzfeld Caribbean Basin Fund soaring, because that fund invests in companies that stand to benefit from improved diplomatic relations.  It also, apparently, boosted the price of any company that even appeared to be associated with Cuba, including shares of Cuba Beverage, which makes energy drinks and has nothing whatsoever to do with Cuba, the country.  The Wall Street Journal article on the subject offers other examples of similar sorts of investor confusion.

 Also, here is a blue Christmas tree that has been decorated to look like the Cookie Monster:

 (x)

Happy holidays!

Law Firm Alumni Networks

Over the past few months, I have received a number of e-mails from the alumni associations of each of my two former law firms.  

In theory, I think these alumni networks are good ideas. They could help us keep in touch and could introduce us to people with common ties to those law firms. They could also help the law firms maintain ties with alums who could become clients.  

In practice, however, I rarely use any of the alumni services offered.

One of the main reasons is that my former firms do not have offices where I currently live (in Nashville) and they rarely, if ever, have events here.  If I still lived in Atlanta or New York City, I would probably attend some of the offered alumni CLE events, but I am probably never going to travel for them. 

As to the online alumni networks on the law firms' websites, I think the contact information for alums probably stays relatively out of date (as people choose to update their information on major social networks, but may forget about the ones at the law firms).  LinkedIn law firm alumni groups are probably the most useful thing that the law firms do, but I find the content posted there is generally not that helpful and can be dominated by some desperate group member salesperson.  (I also think LinkedIn is the least user friendly of the major social networks, but that is a topic for another post). 

What law firm alumni network efforts have you seen be successful? Are they worth the effort that major law firms seem to be putting into them?

My shortest post

Merry Chistmas!

New York’s Fracking Failure

Environmental groups and other opponents of high-volume hydraulic fracturing (also known as fracking) for oil and natural gas have roundly applauded Governor Cuomo’s decision to ban the process in the state of New York. The ban, which confirms New York’s more than five-year moratorium on the process, has been lauded as an environmental success and a model for other states.   The ban is neither. 

Oil and natural gas prices are at their lowest prices in years. Interest in expanding drilling in the Marcellus Shale, which is the geologic formation holding natural gas deposits under New York, Pennsylvania, and West Virginia, is correspondingly low.  That makes the fracking ban an easy decision because there is relatively limited interest in drilling in state.

There are those with interest in drilling in New York, of course, but as long as prices are low and there are other places to drill (like Pennsylvania and West Virginia), that interest will remain modest.  The ban also raises the value of Pennsylvania and West Virginia mineral rights by reducing competition, so companies with interests in the entire region have little reason to weigh in forcefully.

In this environment, then, an outright ban was easier to put in place than real and stringent regulations to help ensure the fracking process is done with minimal risk and maximum gain. An outright ban is the easy road because it minimizes the potential fight. Companies engaging in hydraulic fracturing around the country would object to new regulations in New York, even if they don’t have interest in drilling in the state because they are afraid the states where they drill would follow New York’s lead.  But no one will fight about a ban in a state where they don’t want to drill. 

When natural gas prices rebound – and they will rebound – money will flow into the state to overturn the ban and allow access to the natural gas.  The economic pressure will be enormous and when the financial potential reaches the point that large and diverse groups in the state see the possibility of significant gain, it’s highly likely the ban will be reversed through legislative or other political action.  At that point, the debate will not be about the quality of regulations or enforcement – it will be about whether the state will allow fracking or not. 

Done properly, the risks of hydraulic fracturing are comparable to traditional oil and gas exploration and to other common extractive and industrial processes.  The better course of action now would have been to put in place stringent safeguards that would made New York the leader in environmental protection in hydraulic fracturing. Such rules could have banned the process in areas that could put New York City’s water supply at risk, and allowed in the southwestern part of the state, as was proposed in 2012 for Broome, Chemung, Chenango, Steuben and Tioga Counties.  The rules could have required significant recycling and cradle-to-grave tracking of waste water created by the process, added the highest level well casing standards, and enacted stringent air and water quality standards.

Such a set of rules would be expensive for those seeking to drill in the state and would have served as a model for other states (and nations around the world) in how best to regulate hydraulic fracturing.  The rules would be expensive enough for exploration companies that few, if any, would start drilling in the state.  But when prices reach the level where the cost of compliance becomes economic, the state would have been ready with strong and enforceable rules.

Creating stringent rules would also have forced companies to seek to rollback specific environmental protections, which would mean discussing and explaining specific risks.   Instead, the governor has taken the easy path, and in doing so he pushed the real debate down the road.  Rather than talking about the risks inherent in this and any industrial process, and seeking to address those risks, the ban reduces the discourse to a simple “yes” or “no.” A “no” answer is easy when prices are low, but “yes” is likely to follow when prices are high. 

The governor had a chance to be a leader on this issue, and instead chose to score easy political points.  That’s his and his administration’s prerogative, but time will show that the outright ban was a mistake because it was a missed opportunity in New York and beyond. 

Law and Entrepreneurship Association: CFP (from Usha Rodrigues)

March 21, 2015
University of Georgia School of Law, Athens GA

The ninth annual meeting of the Law and Entrepreneurship Association (LEA) will occur on March 21, 2015 in Athens, Georgia.  The LEA is a group of legal scholars interested in the topic of entrepreneurship—broadly construed.  Topics have ranged from crowdfunding to electronic contracting to issues of taxation in startups.

Our annual conference is an intimate gathering where each participant is expected to have read and actively engage with all of the pieces under discussion.  We call for papers and proposals relating to the general topic of entrepreneurship and the law.

Proposals should be comprehensive enough to allow the LEA board to evaluate the aims and likely content of papers they propose. Papers may be accepted for publication but must not be published prior to the meeting. Works in progress, even those at a relatively early stage, are welcome.  Junior scholars and those considering entering the legal academy are especially encouraged to participate. There is no registration fee, but participants must cover their own costs.

To submit a presentation, email Professor Usha Rodrigues at [email protected] with a proposal or paper by February 1, 2015. Please title the email “LEA Submission – {Name}.”  For additional information, please email Professor Usha Rodrigues at [email protected].

LEA Board

Robert Bartlett (UC Berkeley School of Law)

Brian Broughman (Indiana University Maurer School of Law)

Victor Fleischer (San Diego University School of Law)

Michelle Harner (University of Maryland Francis King Carey School of Law)

Christine Hurt (BYU School of Law)

Darian Ibrahim (William & Mary School of Law)

Sean O’Connor (University of Washington School of Law)

Usha Rodrigues (University of Georgia School of Law) (President)

Gordon Smith (BYU School of Law)

Invest Tennessee - Student-Initiated Intrastate "Crowdfunding" Legislation

Effective as of January 1. 2015, Tennessee will allow Tennessee corporations to engage in intrastate offerings of securities to Tennessee residents over the internet without registration.  The new law, adopted earlier this year, is the direct result of a law-student-led movement.  The key student leader was one of my students, and he kept me informed about the effort as it moved along.  (I was called upon for advice and commentary from time to time, but the bill is all their work.)

In my experience, this kind of effort--a student-initiated, non-credit, extracurricular engagement in business law reform--is almost unheard of.  I was intrigued by the enterprise and impressed by its success.  As a result, I asked the student leader, Brandon Whiteley, now an alumnus, to send me some of his perceptions about drafting and proposing the bill and getting it passed.  

This is the first in a series of three posts that feature Brandon's observations on the legislative process, the key influences on the bill, and the importance of communication.  This post highlights his commentary on the legislative process (which I have edited minimally with his consent).  I think you'll agree that his wisdom and humor both shine through in this first installment (as well as the others).  His organizational capabilities also are evident throughout.

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Curiosity and Learning

My co-blogger Haskell Murray had an interesting post last month on curiosity and obedience. He wrote about the natural curiosity of children: “As a professor, I wish I could bottle my son’s curiosity and feed it to my students.” But what exactly is curiosity and how exactly do we encourage it in law students?

I recently read an excellent book on curiosity: Curious: The Desire to Know and Why Your Future Depends on It, by Ian Leslie. The book has a lot of interesting things to say about education, parenting, life-long learning, creativity, and innovation. I couldn’t possibly do it justice here. But, if you’re interested in learning and education, legal or otherwise, I strongly recommend it.
 
Leslie makes a distinction between diversive curiosity and epistemic curiosity. Diversive curiosity is shallow—wanting to know a particular piece of information. When I check on IMDb for the name of the actress in the movie I’m watching, that’s diversive curiosity. Epistemic curiosity, what we really want to encourage in our kids and our students, is the quest for knowledge and understanding, the desire to address the mysteries that don’t have readily ascertainable answers.

Google is mostly about diversive curiosity, finding answers. Google is great at that, but not so good at promoting epistemic curiosity. In fact, Leslie believes that Google inhibits our epistemic curiosity, and thus stifles deep learning.

Why remember information, or teach students information, that we can easily look up on Google? The answer, according to Leslie, is that having those “mere facts” in our long-term memories promotes innovation and creativity. Creativity results from those various facts serendipitously bouncing into each other inside our heads. Instead of deadening curiosity, as many people argue, learning those facts actually promotes epistemic curiosity. The more we know, the more easily we can understand how it all fits together and (the essence of innovation) try to fit it together in different ways. Leslie argues that deep thinking is becoming a lost art as more and more people rely on their machines for information.

I'm still working through what all this means for my teaching, but the book is definitely worth reading.

ICYMI: Tweets From the Week (Dec. 21, 2014)

Corporate transparency: The openness revolution http://t.co/7WirJPUmDv #corpgov Thx @PIRCpress for bringing to my attention

— James McRitchie (@corpgovnet) December 16, 2014

mandatory-arbitration & fee-shifting provisions: what a post-class action landscape could look like http://t.co/RsQQt7k1Nm #corpgov

— Stefan Padfield (@ProfPadfield) December 19, 2014

CfP: International Workshop: The Social Contract in Corporate and Economic Ethics, Granada, May 22-23, 2015 http://t.co/ZBUHaI3lTD #ethics

— Christoph Lütge (@chluetge) December 5, 2014

"the benefit corporation model relies on stockholders to enforce the duties to other constituencies" 4 Harv. Bus. L. Rev. 235 #socent

— Stefan Padfield (@ProfPadfield) December 21, 2014

[VIDEO] The Black Box Society: @FrankPasquale New Book Explores the Intersection of Corporations, Secrecy & Big Data http://t.co/GkjdEF5xXE

— Maryland Carey Law (@UMDLaw) December 18, 2014

The incompleteness of "leaning in"

Joshua Fershee has previously noted that men and women experience careers in business differently.  If women want to get to the top, they often have a longer haul than men.

Previous research has also shown that women are evaluated negatively for seeking raises (an attitude that Microsoft's CEO inadvertently seemed to endorse) and that (at least in the tech industry) performance reviews of women tend to be more critical than those of men, and include more personality-based criticism.

Now a new study in the Harvard Business Review shows that men and women have very different expectations regarding how they balance their careers and their personal lives when they graduate from Harvard Business School – and men’s expectations are more accurate than women’s.

According to the study, in general, men who graduate from HBS expect their careers will take precedence over their spouses’ careers – and they turn out to be right.  Women expect that their careers will have equal importance – and their hopes are dashed.  (It should be noted that men’s responses differ along racial lines; men of color tend to expect a more equal division of career precedence). 

The authors conclude:

Whatever the explanation, this disconnect exacts a psychic cost—for both women and men. Women who started out with egalitarian expectations but ended up in more-traditional arrangements felt less satisfied with how their careers have progressed than did women who both expected and experienced egalitarian partnerships at home. And in general, women tended to be less satisfied than men with their career growth—except for those whose careers and child care responsibilities were seen as equal to their partners’. Conversely, men who expected traditional arrangements but found themselves in egalitarian relationships were less satisfied with their career growth than were their peers in more-traditional arrangements, perhaps reflecting an enduring cultural ideal wherein men’s work is privileged. Indeed, traditional partnerships were linked to higher career satisfaction for men, whereas women who ended up in such arrangements were less satisfied, regardless of their original expectations.

Which is why I watched this video made by Columbia Business School students with both amusement and sadness:

 

(Warning:  The video contains explicit language and sexual innuendo.  Perhaps that's more of an advertisement than a warning?  Anyway, yeah, the lyrics are pretty explicit so, you know, go in with that expectation.)

Anyway, the basic theme of the video is that the women proclaim that they will not tolerate sexism and double standards, they will not tolerate being told that they should be nicer or less abrasive, and they will still succeed in business regardless of the obstacles placed in their path.  I appreciate and applaud the attitude and determination, but the reality is – as the HBS study concludes – it’s not simply about women’s determination and goals.  So long as women work within institutional structures that place higher values on male contributions - when even professors are more likely to offer guidance and mentoring to white males over women and people of color - women can be assertive and produce high quality work, but their individual determination not to back down in the face of criticism won't solve the problem.

 

Social Subsidiaries

This week I had nice conversations with Brad Edmondson (Author of Ice Cream Social: The Struggle for the Soul of Ben & Jerry’s) and Michael Pirron (CEO of ImpactMakers, a certified benefit corporation).*

Both conversations turned to a topic that has been on my mind recently – that of social businesses that are acquired by large conglomerates that do not seem to have a similar mission.

A few of the parent/sub relationships that spring to mind (or that were discussed) include:

• Campbell Soup / Plum Organics
• Coca-Cola / Honest Tea
• Colgate-Palmolive / Tom’s of Maine
• Clorox / Burt’s Bees
• Group Danone / Stonyfield Farm   
• Unilever / Ben & Jerry’s

I may update this list from time to time, so feel free to suggest additions in the comments. 

At The Guardian, Kyle Westaway argues that Burt Bees worked from within Clorox to make the entire company more sustainable. Similarly, some argue that Unilever has become more sustainable after (and maybe because of) their acquisition of Ben & Jerry’s.

I have heard others argue that social businesses like Burt's Bees and Ben & Jerry’s “sold out,” and that the acquiring large conglomerates tend to cut many socially beneficial initiatives. The conglomerates, these folks argue, are only doing enough for society to keep the customer goodwill and the resulting profits. 

While each acquisition is different, I imagine both sides of the argument can find some support in the facts.

As someone interested in corporate governance, I hope to explore the governance issues involved when a conglomerate owns a social subsidiary in future articles. In Ben & Jerry’s case, I know they put a number of interesting clauses into the acquisition agreement, such as restricting certain action by Unilever regarding employees and local operations (for a period of time) and establishing an independent (and I believe self-perpetuating) board of directors for Ben & Jerry’s.  I am still investigating exactly how much power the Ben & Jerry’s board of directors has, and Unilever did eventually lay off some Ben & Jerry’s employees and close some local plants. In addition, Unilever and Ben & Jerry’s have not always agreed and have taken different, public stances on issues like GMO labeling. But Unilever has become a champion of sustainability among larger companies.  

Personally, I am not sure whether social businesses will tend to have more impact as independent businesses or as social subsidiaries of larger companies – and it may be impossible to generalize – but I will continue to watch future acquisitions and development in this area with interest. 

* My co-bloggers Joan Heminway and Marcia Narine may remember Michael Pirron from a Regent Law symposium they spoke at on social enterprise law. That was a fun conference and it was good to catch up with Micheal and hear how much his company has grown in the past year and a half. 

How well does the media portray business?

In each of the classes I have taught I have offered extra credit for a reflection paper on how the media portrays the particular subject because most Americans, including law students, form their opinions about legal issues from television and the movies. Sometimes the media does a great job. I’m told by my friends who teach and practice criminal law that The Wire gets it right. Although I have never practiced criminal law, I assume that ABC’s How to Get Away With Murder, in which first-year students skip their other classes to both solve and commit murders, is probably less accurate. I do have some students who now watch CNBC because I show relevant clips in class. After a particularly heated on-air debate, one student called the network “the ESPN for business people.”

I’m looking for new fiction movies or TV shows to suggest to my students next semester. In addition to the standard business movies and documentaries, what makes your list of high-quality business-related shows? Friends, colleagues, and students have suggested the following traditional and nontraditional must-sees: 

1)   Game of Thrones (one student wrote about it in the partnership context)

2)   House of Cards (not purely business, but shows how business and politics intersect)

3)   House of Lies (a look at the world of management consulting)

4)   Silicon Valley (one episode I saw talked about entity selection)

5)   The Newsroom (during the last season writers tackled insider trading, hostile takeovers, and white knights)

6)   Sons of Anarchy (I don’t watch this one so I can’t judge)

7)   Shark Tank (not always a complete or accurate depiction but entertaining)

I look forward to your suggestions and to some binge-watching over the holidays.

High Frequency Trading 101

I recently participated in an institutional investor round table where one of the topics of the day was high frequency trading. Although embarrassed to do so, I will admit that I had to do some serious groundwork on this topic because I had heretofore largely avoided it in any substantive way. If you (or your students) are in the position I was in just a few weeks ago, this post may be a good starting point to understanding a very complex and interested set of issues.

Being new to the high frequency trading debate, I needed to build a basic understanding of the issues. If you haven't read Michael Lewis' Flash Boys (or anything other than this delightful synopsis courtesy of the NYT Magazine) check out Forbes' explanation of high frequency trading.  Even if YOU don't need it, this is a great reference for students interested in the topic.  

Of course, another starting point was the flash crash of 2010, where the Dow Jones Industrial Average fell over 1000 points in a matter of minutes.  The flash crash wasn't the start of high frequency trading, but it was an event that highlighted the role it plays in the markets.  You can read the SEC's report on the Flash Crash here. The publicity raised awareness and scrutiny of the practice.  For example, the NY Attorney General indicted financial institutions in June 2014 for practices related to high frequency trading.

The debate on the pros and cons of high frequency trading can be boiled down to two very simple points, and both relate to efficiency.  High frequency trading promotes efficient market pricing by  relaying information across markets and reducing buy-sell price spreads.  Eric Budish and John Shim both at the University of Chicago and Peter Cramton at University of Maryland published a 2013 paper studying S&P 500 trading data where futures and exchange-traded funds are correlated at the minute intervals.  Their study found that the correlation disappears at the 250 millisecond interval.  At the 250 millisecond interval the prices are discordant, but by 1 second the price has smoothed.  This is how the bid/ask spread shrinks, a trend of efficiency that has reduced the bid/ask spread from 90 basis points 20 years ago to 3 points today.

The second argument is that high frequency trading is bad for small investors because it is not value oriented (buy and sell decisions have no relationship to the underlying value of the assets) and capitalizes on the supply/demand problems posed by large institutional investor buy/sell orders.  The fear is that high frequency trading distorts the long term value proposition of stocks.  This argument suggests that high frequency trading is not efficient but rather is superfluous financial intermediation because it isn't connecting buyers and seller of securities (making markets), but is jumping in between buyers and sellers who would otherwise find each other.  

A newly posted article on SSRN by Jonathan Broggard et al. using Nasdaq data finds that high frequency traders provide liquidity (and therefore stability) in times of high financial stress, and thus may perform a protective market function.  The same study also observes that in normal market conditions, high frequency traders demand more liquidity than they create.  These findings suggest the validity of both arguments summarized above.

If you have any suggestions for must read articles-- academic or popular press--on high frequency trading, please respond in the comments.

AT

What Stock Prices and Oil Prices Don't Have in Common: You Can't Chart Stocks

In September, Myles Udland  wrote an article citing Burton G. Malkiel and his book, A Random Walk Down Wall Street, noting, "The past history of stock prices cannot be used to predict the future in any meaningful way." This is a great point.

I also saw Udland's article from today, which notes oil prices (and stock prices) have gone bonkers. Both prices have fluctuated wildly, and oil has been mostly trending mostly downward. As I have said before, I don't expect prices to stay low (sub-$70 per barrel) for long, but time will tell.  

Low oil and gas prices are certainly having an impact on markets and economies. The big one right now is Russia, which is struggling, in major part because of low oil prices.  The ruble has taken a beating, and the nation's central bank raised interest rates from 10.5 to 17 percent. Wow.  

The bulk of U.S. oil production appears safe well in the low- to mid-$40 per barrel price range, and I don't think it will stay below $55 for long.  Then again, as much as I follow all of this, I am still a law professor, and not a financial analyst, so keep that in mind.  

Anyway, having read all of this, I was reminded that people are sometimes inclined to view stock prices and commodities markets similarly. That would be wrong. Despite my views that oil is likely to go back up, at least some, it's also worth noting that using history as a predictor of markets is a dangerous game.  It's reasonable to assume that, eventually, a market will go up, but whether it will take three weeks, three months, or three years (or more) is hard to say.  

One recent report notes that oil price histories suggest we're near the bottom, and that (on average) prices should rebound significantly. The timing here is unpredictable, too, but the history of oil prices do suggest a rebound will happen sooner rather than later, even with global markets struggling. 

Uland's articles keep the issues separate, but still, lest anyone get confused (and history suggest they might), it is worth noting that charting commodity markets is different than charting stock prices.  As Professor Bainbridge's Safety Tip of the Day: Charting Doesn't Work  from ten years ago notes, "Consistently, empirical studies have demonstrated that securities prices move randomly and, moreover, have shown that charting is not a long term profitable trading strategy." Bainbridge similarly cites Burton G. Malkiel, A Random Walk Down Wall Street  (1996)  in that post, and in an earlier one from 2003, Random stock traders and the ECMH; with a review of Malkiel's Random Walk.  

I learned a lot about stock markets (and Business Organizations) from reading the good professor's writing, and I thought it worthwhile to continue to spread the message: Even though some people like to think that stock prices will follow historical trends and that stocks are like commodities and currencies, you follow their lead at your own peril. 

Yale/Stanford/Harvard 16th Junior Faculty Forum--Request for Submissions

Yale, Stanford, and Harvard Law Schools announce the 16th session of the Yale/Stanford/Harvard Junior Faculty Forum to be held at Harvard Law School on June 16-17, 2015 and seek submissions for its meeting.  The request for submissions is available at this link: Download JFF final call for submissions.

-AT