Ideoblog

Blogging and scholarship

Tyler Cowen has some interesting reflections on blogs as scholarship growing out of the new Becker/Posner venture.  Regular Ideoblog readers will see that it fits several of Tyler's proposed models -- publicity for my scholarship, collecting others' scholarship, short public lectures.  And I agree that the advantage of a blog is that it collects all this under an identifiable personality.  Can you guess from reading my blog that I have a particular way of seeing things that I want to convey?  Look real hard and maybe you'll see it.

Parachuting out of Merck

When last I looked Merck was playing an ill-advised end game with its mis-marketed drug, Vioxx. Sounds like a company whose management needs to be replaced through a vigorous market for corporate control.  Too bad we don't have such a thing -- managers of most publicly held companies (e.g., PeopleSoft) can put up a vigorous fight, aided by the trust-busters if the acquirer is a competitor.   

But in our imperfect world we have golden parachutes, like those doled out to Merck insiders, to take some of the sting out of a takeover.  In Merck these are change-of-control benefits up to three times salary and bonus. Merck is selling this as a way to keep valuable employees in uncertain times. Less charitable folks would call it a reward for poor performance. I would say (see Why Corporations?) that it's a sympton of what happens when we lock corporate assets up in the hands of powerful managers.

The Oracle insider trading suit

In 2003 the Delaware Chancery Court allowed this case to proceed past an attempted dismissal by a  "special litigation committee." The claim involves alleged insider trading by Oracle's Larry Ellison. The court said that SLC members, including law prof Joe Grundfest, were too close to Ellison because of their ties to Stanford University, to which Ellison was a major contributor.

Now, according to the W$J, the court has granted summary judgment for the defendants. So, four  years of expense and publicity after the events that gave rise to the suit, we finally have at least a temporary resolution, pending, of course, appeal to the supreme court.

No, we would not be better off with such cases in federal court.  As I have argued, these insider trading claims do belong in state court, for all that the feds have tried to make this insider trading cause of action their own.

But we might be better off trusting boards to decide whether to sue.  As it turned out, the board's original call, through the slc, looks right here. And even if the suit is marginally sound on the merits, the court ought to trust the board's business judgment as to whether to pursue it.

The deeper problem is that, if Delaware does this, we might expect the federal insider trading remedy to expand to invite more cases into federal courts, consistent with Mark Roe's theory on federal/state competition.  I wish I could offer an easy solution to that problem.

Bainbridge on Stout on Disney

Professor Bainbridge links this Lynn Stout  op-ed on Disney and Ovitz to the effect that it's not about the stupidity of the decisions involved, but about the business judgment rule.  So I said recently. But I also wonder if we really have to accept board decisions like this as a fact of business life.

Employer subsidies for responsible consumers

Apropos of yesterday's post on consumers helping society by paying extra for gas/electric hybrids, we have today's W$J story on Hyperion, a software company, offering its employees $5,000 toward buying these cars if they get more than 45 mpg.

This raises some questions about the appropriate limits of corporate social responsibility.  Fuel economy doesn't seem to have much to do with this company's business. The company says that showing good corporate citizenship is important to attracting tech-savvy workers.  Sounds plausible.  But it's useful to distinguish this move from the sort of good citizenship that has to be bundled with the company's business -- e.g., good working conditions, Google-type business practices.  In other words, why not give the employee $5k and let him decide how socially responsible to be?  The company might even recommend that he spend it on the car -- or give it to the Sierra Club, or for AIDS research.  How does the company know this is the most socially productive use of the cash? Does the worker get a warmer glow from working for a company that subsidies enviro-friendly cars than from actually having the extra cash to buy these cars?

My point yesterday is that expanded markets now make profit-maximization equivalent in many situations to social responsibility.  By taking the auto purchase decision to some extent out of the market (through the subsidy), Hyperion's actions don't seem to accomplish either objective.

A test of the socially responsible consumer

Today debuts a new topic here on corporate social responsibility. The occasion is a paper I'm working on, about which I'll have more to say over the coming months.

One of my points in the paper will be that corporate social responsibility meshes significantly with profit-maximization because there are markets, including consumer markets, for social responsibility.   

Today's lesson is this NYT review of the Honda Accord hybrid.  This car's $3400 premium apparently doesn't recoup its extra gas mileage. This would seem to be almost a pure test of the socially responsible consumer:  figure out the likely fuel savings over the average life of the car, subtract a little for the modest performance advantage, and you have a premium people are willing to pay to be (or at least seen as) "responsible." 

I'm not making any judgments on whether these cars do, in fact, maximize social wealth. For example, do the extra resources consumed, pollution created, etc., in making the electric parts for the hybrid exceed the benefits in foregone consumption? But this would be a hard call for automobile executives and government regulators as well.

Nor is Honda operating in a regulation-free world. Hybrids might help Honda meet CAFE standards.  But corporate social responsibility is usually viewed as operating in the interstices that regulation doesn't reach.

The important point here is that this "responsibility" should not be viewed as a matter to be decided solely by corporate managers, shareholders and government. Consumers, as well as workers and others, "vote" in the various markets in which firms transact business.  So if it produces profits, as this car probably will, it's socially responsible.  If it doesn't, people don't want to pay the price. In other words, they've "voted" against it -- society doesn't want it.

This market-driven social responsibility, of course, doesn't produce the same good feeling that corporate managers might get from being "altruistic" (with the shareholders' money).  But if they want to feel good, they can always go out and buy a hybrid.

The costs of Sarbox: CFO's

A funny thing happens when you make a job much less pleasant -- fewer people want to do the job.  So it is with chief financial officers in the litigious, Sarbox-ridden post-Enron world,  as the NY Times reports.

TV films through the letterbox

As Norma Desmond said in Sunset Blvd. (1950), "I am big.  It's the pictures that got small."

No kidding. Most of my cable channels show films non-letterboxed, meaning that widescreen is "pan and scanned" into a small screen, meaning that a guy in the middle of the frame will often be talking to somebody off-screen, or to a part of somebody's head (comparisons here).  They usually show you the titles in wide-screen, I think just to torture you with what you're missing. Here's more of the technical story.

I have been wondering when this will change.  More people have 16:9 aspect televisions.  There are a zillion cable channels, why not more of a choice than Sundance, Fox Movie Channel, and dvd?

The worrisome thing is that the filmmakers seem to be giving in, unless it's my imagination.  Pan and scan seems less irritating for newer movies. Are the movies being shot for small televisions --  for example, with the subjects closer to the center of the frame?  Possibly someone can enlighten me.

If so, there will be no escape, not even by getting the dvd or going to the theatre.  But even if not, the situation is dire. Why are there no protests, no street demonstrations, no boycotts?  Why was this not an issue in the last election?  Kerry would have gotten my vote by promising to outlaw pan and scan.  I know I don't much favor regulation, but when markets fail so utterly, there is no viable choice.

In the meantime, consumers need to protest up the distribution channel.  Watch FMC, which promises always to show the letterbox version if available, and tell the other folks you're doing so.  Be noisy.  Use the Internet. Submit shareholder proposals.

Taking a more sanguine view, though, I suppose I should be happy.  At last I am a victim.

Investor confusion and Sarbox 404

I've been writing about the massive costs imposed by the internal controls report provision of Sarbanes-Oxley Section 404.  What are we getting for this money?  Apparently a lot of confusion, according to James Turley, CEO of Ernst & Young, in today's W$J:

Section 404 entails a major risk this first year -- that the opinions on internal controls provided by management and independent auditors may be misinterpreted by the market. . . . The potential for misinterpretation could be compounded by the possibility that the 404 reporting process will likely yield more reported material weaknesses in internal controls than the investing public expects. Furthermore, determining what does and doesn't constitute a material weakness will require judgment, the basis of which may not be clear to the average investor .

Sort of ironic, since Sarbox was supposed to clear things up.  But Mr. Turley adds:

the bottom line is that investors will derive significant benefits from the implementation of 404. And the markets, in turn, will benefit from enhanced investor confidence.

That's a relief.  And I'm sure that the fact that Mr. Turley's firm is among those getting paid to do these reports does not affect this assessment.

The "Academic neglect" of the LLC?

Howard Friedman, in a forthcoming article, The Silent LLC Revolution - The Social Cost of Academic Neglect, writes (as summarized in the abstract):

The law of Business Associations usually develops slowly. The business forms that were dominant until the end of the 20th century have been in existence for centuries. However, as the new data set examined in detail demonstrates, in the last decade a revolution has taken place. Contrary to conclusions reached in leading articles published as recently as 2000, limited liability companies have now become the business form of choice for small firms in a majority of the states. In 2003, more LLCs than corporations were formed in 29 states. In 11 other states over 45% of new business filings were for LLCs. This article explains why LLCs have become so popular and examines the state-specific peculiarities that have prevented them from overtaking corporations in a handful of important jurisdictions. The LLC revolution has been practitioner-driven. This article contends that there has been a dereliction of duty by those who usually disseminate cutting-edge developments in the law. Teaching materials, legal scholarship, curricular offerings and bar examinations have largely neglected the recent sea change in the law of business organizations. The article concludes with a preliminary LLC research agenda for academics. The need for rationalization of questions relating to the operating agreement, issues of authority, fiduciary duties and dissolution are highlighted in hopes of stimulating more research in this area.

I am happy to see somebody call attention to the fact that legal academics have "neglected" research on LLCs, and on unincorporated business entities generally (what I call the "uncorporation").  I also appreciate the attention the paper pays to my own work, agree with many of the points Friedman makes, and invite all business law professors to read the article.

But I do have several significant caveats.  First, in describing teaching materials, the paper goes no further than counting pages on LLCs.  This hardly captures the books' coverage, particularly with respect to my Unincorporated Business Entities, (which devotes the highest percentage of pages to coverage of LLCs of any book discussed).  Since my book covers the uncorporation in detail throughout, including planning and theoretical problems that apply across the uncorporation universe, simply counting the LLC pages is not a fair description.  This may be true of some of the other books.

Second, I wish there were more explanation of reasons for the lack of academic attention to LLCs and partnerships generally.

Third, author goes overboard in blaming the casebook authors for lack of participation the development of LLCs. He notes that they tend to teach in states that have relatively few LLCs, and suggests without apparent basis that they "do not normally interact with practicing lawyers."  Again, I won't speak for the others, but will note that in Illinois, as in the other states in which have taught, I spend significant time participating in law reform and drafting projects with practicing lawyers (in Illinois, I serve on the Illinois Secretary of State Business Act Advisory Committee).  The author notes that the problem in Illinois is high fees for LLCs -- something I have consistently argued against.

Fourth, although the article is about "academic neglect," it curiously neglects evidence that this neglect is ending -- the recent University of Illinois Uncorporation Conference, held in Chicago last April and forthcoming in the Illinois Law Review, described here.  The April drafts of these papers are linked through the conference web page. The conference papers have all been revised for publication, and these revisions are appearing on SSRN, including Bainbridge, Baker and Krawiec, Ribstein, and Stout.  Here's a draft of my introduction to the Symposium, which provides a brief introduction. 

Although this Symposium is obviously only a beginning, it is, I believe, substantially more ambitious than the research agenda that Friedman suggests.  He focuses on LLCs rather than the whole uncorporation phenomenon, and on state-specific issues and statutes rather than the deeper policy issues and implications.

So do read the Friedman article, but read it with these caveats in mind, and explore my book and the papers in the Uncorporation symposium to get a better idea of what's happening in this new area.