Last summer, Eric Dash of the New York Times wrote an excellent article on the problems associated with big business in the U.S. Dash noted that almost 100 years ago, Supreme Court Justice Louis Brandeis wrote prophetically about the “curse of bigness.” Justice Brandeis denounced generally the influence that big business had on U.S. politics and its economy.
Today, Brandies’s “curse of bigness” is incorporated into the less pejorative term for large U.S. companies — companies that are “too big to fail.” Certainly in light of the recent U.S. financial crisis, people are well aware of the influence that these large U.S. companies have on U.S. politics and its economy. But these “too big to fail” companies may also be creating moral hazards in business operations, and the U.S. has yet to establish a unified system for dealing with the business of bigness. Continue reading “The Business of Bigness”
First, thank you for the invitation to be the March Student Blogger. I have significant experience in blogs. But perhaps unfortunately for this blog, that experience is restricted to Nebraska football and Lost blogs. And I don’t think this is the proper forum for discussions of the Huskers’ 2011 recruiting class or how the Valenzetti Equation may answer all your questions regarding Lost. However, I am open to requests during my March tenure.
Several blogs on this site have addressed election issues and reform in the judicial and political spheres. Yet, despite imminent changes with regard to the election of corporate directors, any discussion of corporate election reform has been noticeably absent. I do not doubt that the rules regarding the election of directors will change significantly this year.
Specifically, on June 10, 2009, the SEC published proposed amendments to the federal proxy rules that would facilitate shareholders’ ability to nominate directors to company boards of directors. Under the current director election rules, shareholders seeking to nominate a competing slate of director candidates have to bear all costs of a proxy campaign. Yet, all costs for the campaigns of the incumbent board’s nominees are paid for out of corporate funds. That advantage to the board’s nominees coupled with the significant costs in mounting a proxy contest serve as effective barriers to dissident shareholders seeking to initiate an election contest. Continue reading “Proxy Amendments and Short-Term Shareholders”
The Supreme Court decision in Citizens United v. FEC strikes down as unconstitutional a federal law that prohibits corporations and unions from using general treasury funds to make independent expenditures that expressly advocate the election or defeat of candidates for office. The majority opinion, written by Justice Kennedy, ignores hundreds of years of Supreme Court history in interpreting the subjects of federalism, free markets, and free speech. In its place, Justice Kennedy presents a textualist interpretation of the First Amendment that is divorced from any history or context. Justice Kennedy engages in the sort of “faux originalism” (syn. “fake,” “artificial,” “false”) that has been criticized by Judge Richard Posner. Kennedy places a historical glaze on his own personal values and policy preferences, and calls the result the “original understanding” of the First Amendment.
As such, Citizens United v. FEC stands with District of Columbia v. Heller, the Second Amendment case decided in 2008, as an example of the Justices slapping the “originalist” label on a profoundly un-originalist interpretation of the Bill of Rights. It is appropriate to view the two cases together. Both are exercises in raw political power employed in order to accomplish conservative objectives. Both ignore hundreds of years of understanding about the meaning of the relevant constitutional provisions, in favor of a meaning derived by taking the words of the Amendment out of context. And both embrace interpretations of the constitutional Amendment at issue that are inconsistent with the meaning ascribed to that same language by the intellectual father of originalism, Robert Bork. In the same way that modern scholars deride the “Lochner era” as a misguided period in American Constitutional Law, I believe that future scholars and judges will recognize and reject the intellectual dishonesty of the “Heller era.” Continue reading “Federalism, Free Markets, and Free Speech”
In one of his characteristically thoughtful blog postings (available here), Ed Fallone argues that market regulation follows the Second Law of Thermodynamics, which states (to paraphrase) that in any closed system, disorder will reign over time. Ed argues that this principle holds true for federal securities regulation, where technological and market changes have made the comprehensive statutory scheme of market regulation obsolete. With respect to non-financial institutions, he proposes (consistent with the Obama administration’s proposal) replacing our current scheme of detailed disclosure rules with regulation that focuses on the consumer (the investor), and the consumer’s need for multiple products to choose from as well as information to make product comparisons.
It does seem to make sense to consider the needs of investors in creating legislation aimed at protecting investors. But in my view, any new regulatory scheme aimed at protecting investors should leave to the states the regulation over business organizations’ internal affairs. Continue reading “The Second Law of Thermodynamics and “Say on Pay””
In 1789, as the inchoate American government was climbing out of the mountainous debt left over from the Revolutionary War, a thorny political problem emerged. While most of the chattering class was consumed with the debate over whether the states’ war debt should be federalized, another far more visceral controversy arose. Because the Continental Congress lacked funds during the war, the Revolution was funded partly by wealthy private citizens who invested in bonds. As a result of the lack of governmental money, many American soldiers were given worthless IOUs at the end of the war, as states scampered for a way to give the patriots their back pay. Many of these soldiers panicked, and sold their IOUs to speculators for as little as fifteen cents on the dollar. The problem was, once the federal government began repaying the debt, the value of the bonds soared. So who should get the money: the patriots who fought bravely for their country and only sold the IOUs because of fear they would get nothing from their government, or the speculators?
Continue reading “Contract Rights Under Assault”
At first blush, one would not think that Barney Frank and Stephen Hawking would have anything in common. The first is the Chairman of the House Financial Services Committee, and is currently conducting hearings on the regulatory reform of the financial markets. The second is the noted University of Cambridge professor of theoretical physics and the author of the best selling book A Brief History of Time.
However, in my mind both men are associated with the Second Law of Thermodynamics. This law of physics states that the entropy of an isolated system always increases over time. Stephen Hawking described it in more comprehensible terms in A Brief History of Time:
It is a common experience that disorder will increase if things are left to themselves. . . . In any closed system disorder, or entropy, always increases with time.
Therefore, when I think of Hawking, I think of someone who can explain the Second Law of Thermodynamics. When I think of Barney Frank, I think of someone who is desperately trying to avoid its operation.
I would contend that all forms of market regulation follow the Second Law of Thermodynamics. In each case, a comprehensive statutory scheme is enacted as law, it imposes a closed system of rules on market actors, and over time the scheme inexorably breaks down. Federal securities regulation, which began with the Securities Act of 1933 and the Securities Exchange Act of 1934, provides the perfect case history of this principle in action. Continue reading “Regulation and the Second Law of Thermodynamics”
The National Law Journal recently reported that the law firm of Howrey & Simon has adopted an innovative training program for new associates. Newly hired lawyers will serve a two year “apprenticeship” prior to being fully integrated into the law firm. This program will reduce the number and the compensation of the law school graduates hired by the firm, and it is part of Howrey’s overall program to eliminate “lockstep” salary increases for its associates.
Lawyers in Howrey’s apprenticeship program will be paid significantly less than the going rate for first year associates at other large law firms. During their first year, the new associates will take firm sponsored classes on legal writing and gain practical experience by working on pro bono matters. During their second year, the associates in the program will spend several months “embedded” at client sites where their work will be charged at a reduced billing rate. The law firm’s managing partner compared the apprenticeship program to the training programs typically employed in the medical and accounting professions.
The Howrey program provides an opportunity to reconsider the entire continuum of legal education: a process that begins with undergraduate instruction, continues through law school, and is perpetuated by continuing legal education requirements. From time to time, each stage in the continuum comes under scrutiny, as Rick Esenberg’s post on Reengineering Law School illustrates. In my opinion, the continuum should be viewed holistically when we evaluate whether we are succeeding at training competent and ethical members of the legal profession. Law schools, law firms and the state bar all need to cooperate in order to ensure that there are no gaps in the preparation that new lawyers receive as they start their careers. As a member of the Wisconsin Legal Education Commission in 1996, I argued in favor of a program of mandatory skills-based CLE instruction for recent bar admittees. Many of our students are undoubtedly pleased that the State Bar chose not to implement this particular Commission recommendation.
Given my predisposition in favor of practical training, I should be supportive of the Howrey apprenticeship model. Instead, I find myself troubled. In particular, I am wary of the idea of embedding future corporate lawyers within a client’s legal department for any significant period of time. Continue reading “The Apprentice”
Nadelle Grossman has two new corporate law papers on SSRN. The first, entitled “Turning a Short-Term Fling into a Long-Term Commitment: Board Duties in a New Era,” deals with the timely topic of corporate leaders making strategic decisions based on short-term profits without regard to long-term risk. As a solution, she proposes changes in the legal duties owed by corporate directors. Here is the abstract:
Corporate boards face significant pressure to make decisions that maximize profits in the short run. That pressure comes in part from executives who are financially rewarded for short-term profits despite the long-term risks associated with those profit-making activities. The current financial crisis, where executives at AIG and numerous other institutions ignored the long-term risks associated with their mortgage-backed securities investments, arose largely because those executives were compensated for the short-term profits generated by those investments despite their longer-term risks. Pressure on boards for short-term profits also comes from activist investors who seek to make quick money off of trading in stocks whose prices overly reflect short-term firm values.
Yet this excessive focus on producing short-term profits runs counter to the interests of non-short-termist investors and other corporate constituents, as well as our economy and society as a whole, in creating corporate enterprises that are profitable on an enduring basis. Once again, the current financial crisis provides a lens through which we can see the distressing impact — both to individual businesses as well as to the entire U.S community — of an excessive focus on short-term profits.
I propose a solution to address this problem of short-termism. Under my proposal, directors would be required to make decisions that are in the long-term best interest of stockholders and the corporation under their fiduciary duties. I explain in the article why I propose fixing the short-termism problem through fiduciary duties as well as how, practically, my proposal would be implemented.
This paper is forthcoming in the Michigan Journal of Law Reform. Continue reading “Grossman on Governance”
To open my month as faculty blogger, I would first like to thank my colleague Michael O’Hear, whose dedication to, and work for, the Marquette Faculty Blog since its creation last summer have been incredible. This is very much one of the major reasons why this project has been so successful and brought so many wonderful contributions to so many aspects of the law so far.
Another fundamental area where the Marquette Law School faculty is also showing important contributions to the law is the production of scholarship that results in law review articles, book chapters, textbooks, etc. We often present and discuss these works when they are still in progress in conferences around the country with our colleagues in our areas at other schools. Still, to facilitate even further these very important discussions, the MULS Academic Programs Committee, led by Professor Chad Oldfather, has organized two sessions of an in-house Works-in-Progress Workshop for June and July.
The June session was a great success. A group of eight of us met this past Wednesday and presented our works-in-progress, from very rough to more completed drafts of scholarship, to our colleagues participating in the program. Continue reading “MULS 2009 Works-In-Progress Workshop (June Session)”
On March 2, the Wisconsin Supreme Court accepted six new cases for review, five criminal cases and one civil case.
The first case, State v. Henley, 2008AP697, presents an interesting issue regarding the authority of the courts of appeal, or the supreme court, to grant a new trial to a criminal defendant in the interests of justice, without regard to the passing of the time for appeal. As Judges Vergeront, Lundsten, and Bridge explained in their certification of the questions in the case, Continue reading “Wisconsin Supreme Court Accepts Six New Cases, Including Issue of Inherent Authority of Wisconsin Appellate Courts to Grant a New Trial in the Interests of Justice”
Over at Concurring Opinions, Frank Pasquale has written a post entitled “The Economics Was Fake But the Bonuses Were Real.” If you find yourself wondering lately about whether and how we will “rebuild the trust necessary for a thriving economy” (Pasquale’s words), it’s worth reading. He discusses, for instance, the recent and somewhat surprising statements by a “shaken Richard Posner,” who seems to be losing his faith in law and economics. And he describes the profound opportunism at the base of our economic crisis:
The current crisis exposes the fragility of markets generally. They are built on mutual reciprocity, and as more opportunism from trusted intermediaries is exposed, the weaker our faith in other market actors becomes. Both Francis Fukuyama’s work on trust and Robert Putnam’s on the “social capital” it reflects bode ill for our economy. Putnam describes a southern Italy mired in corruption and fraud, and a northern Italy whose economic success is built on its long history of civic associations and mutual endeavor. Can anyone doubt that our economy is exposed (with each passing day) as more Sicilian in its “winners'” casual acceptance of fraud, more Russian in its oligarchic tendencies, more Brazilian in its inequality? After the Madoff scandal, what are investors to do–personally spot-check their broker’s office and assure that trades are actually being made?
There is a bunch of other interesting stuff in this post, but I think I’ll just end with my favorite part. In discussing the “worship of wealth,” Pasquale quotes from the blog of former fund manager John Bogle:
At a party given by a billionaire on Shelter Island, the late Kurt Vonnegut informs his pal, the author Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch 22 over its whole history. Heller responds, “Yes, but I have something he will never have . . . Enough.”
Chicago is NOT the place to be these days (of course people from Milwaukee already know that) — especially if you are a corrupt politician or a financially-stressed newspaper. On the newspaper side of things — Elizabeth Dale (Florida) writes to tell us that the ESOP angle of the The Tribune Company bankruptcy is truly a mess.
She points us to this story from the New York Times Deal Book:
The possibility of a bankruptcy filing at Tribune Company is an embarrassing development for Samuel Zell, the real-estate mogul who took the media company private last December.
But it is likely that Tribune’s employees — or, more specifically, the employees’ stock-ownership plan — would take the first hit.
Because of the unusual structure of Tribune’s $8 billion buyout, Tribune’s employee stock-ownership plan holds 100 percent of Tribune’s common equity, regulatory filings show. Common stockholders are generally the first to take a loss in a bankruptcy restructuring, and they usually recover next to nothing.
Mr. Zell, by contrast, supplied mostly debt in the complex transaction, putting him higher in line to get paid. His $315 million investment in the Tribune deal consisted of a $225 million promissory note; the rest was for warrants to buy about 40 percent of Tribune’s stock in the future.
Great, another self-centered corporate CEO looking out for himself and screwing the employees of his company. I guess we should be thankful that at least he is not asking for a bail out.
More about this story here.
Cross posted at Workplace Prof Blog.