Professor Bainbridge...on law, politics, religion, culture & food

Blogging Law Professors and the Prescient Wayne LaFave

My buddy Larry Ribstein sent along the following quotation from from Wayne LaFave, SURFING AS SCHOLARSHIP: THE EMERGING CRITICAL CYBERSPACE STUDIES MOVEMENT, 84 Geo. L. J. 521, 521-522 (1996) (note especially the date -- it's not a mistake):

History teaches that whenever a significant number of law professors get diverted from the law to something else, but then confront the "publish or perish" imperative, they always respond by inventing a new jurisprudential niche that allows them to turn the diversion into acceptable scholarship. And thus, LaFave elaborated, the soon-to-emerge Critical Cyberspace Studies Movement would allow law teachers to continue feeding their surfing addiction but still publish.

Wayne LaFave was one of my senior colleagues back when I taught at Illinois and, of course, remains a (the?) leading expert on search and seizure law. But I had forgotten that he, in effect, predicted the emergence of law professor bloggers.

Giving academics credit for blogging

The discussion prompted by my tongue-in-cheek post about my law school dean having to give me credit for blogging because my blog was cited in the Yale Journal has been continued in a very serious and credible way by Brian Leiter and Mark Sargent over at Brian's blog (go here first; then here). More later.

Shareholder Access: Does the SEC Know When Enough Is Enough?

The Securities and Exchange Commission is now considering proposed regulations designed to allow shareholders to nominate directors and, moreover, to require the incumbent directors to place the shareholder’s nominee on the company’s own proxy statement and ballot, albeit under relatively limited circumstances. At first blush, the regulation strike many people as perfectly reasonable. After all, directors are elected by shareholders, so why shouldn’t the shareholders be allowed to nominate directors?

This argument, however, fails to put the SEC proposal in context. The SEC’s proposed regulations are just the latest in a continuing string of new corporate governance rules. Taken together, these new rules have significantly increased the regulatory burden on Corporate America. So let’s step back and look at the SEC proposal in its proper context: the recent corporate scandals and the government’s response.

Good for Government

History teaches that market bubbles are fertile ground for fraud. Cheats abounded during the Dutch tulip bulb mania of the 1630s. The South Sea Company, which was at the center of the English stock market bubble in the early 1700s, itself was a pyramid scheme. No one should have been surprised that fraudsters and cheats were to be found when we started turning over the rocks in the rubble left behind when the stock market bubble burst in 2000.

We all know the litany, of course: accounting scandals at Enron and WorldCom, to cite but two; insider trading at ImClone; alleged looting at Adelphia and Tyco; and so on. New York’s attorney general, Elliott Spitzer has brought to light high profile problems calling into question the integrity of both stock market analysts and mutual fund managers.

Corporate scandals are always good news for big government types. After every bubble bursts, going all the way back to the South Sea Bubble, a slew of new laws have been enacted. Why? There is nothing a politician or regulator wants more than to persuade angry investors that he or she is “doing something” and being “aggressive” in rooting out corporate fraud. Look, for example, at how vigorously the SEC is trying to keep up with attorney general Spitzer.

Hence, it was entirely predictable that the shenanigans at Enron, WorldCom et al., coming after several years of steady decline in the stock market, would lead to regulation. Yet, how quickly we forget. Remember what Ronald Reagan said: “The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’”

Costs Beginning to Mount

Like a cook who throws spaghetti at the wall to see if it’s done, legislators and regulators have been throwing a lot of new rules at corporations to see what sticks: Sarbanes-Oxley, numerous SEC regulations, California’s onerous corporate disclosure act, Spitzer’s settlement with the analyst community, and countless law suits and indictments. Unlike the cook, who stops when the spaghetti is done, the lawmakers just keep throwing stuff at corporations without stopping to ask whether enough is enough.

The costs of all this regulatory activity are beginning to mount. Some companies, for example, will incur 20,000 staff hours to comply with just one SEC new rule—a rule the SEC estimated would require only 383 staff hours per firm. According to a study by Foley Lardner, “Senior management of public middle market companies expect costs directly associated with being public to increase by almost 100% as a result of corporate governance compliance and increased disclosure as a result of the Sarbanes-Oxley Act of 2002 (SOX), new SEC regulations and changes to [stock] exchange listing requirements.”

If adopted, the SEC’s shareholder access proposal would significantly add to that regulatory burden. A review of contests in the late 1980s found that insurgents spent an average of $1.8 million and incumbents an average of $4.4 million. Those costs are almost certainly much higher today, but let’s use them as a baseline. Assume that a company faces a shareholder nominee every three years. Assume further that a shareholder nomination contest costs one-third what a full proxy contest costs. On those assumptions, each public corporation would face annualized costs of about $500,000. Using the 10,000 actively traded U.S. companies in the Compustat database as a proxy for the number of companies potentially subject to the rule, we can estimate an aggregate annual cost of $5 billion. Of course, I may be overestimating the number of contests and the cost of each contest. Remember two things, however: (1) I’m using 1980s era cost estimates and (2) the SEC grossly underestimated the cost of complying with Sarbanes-Oxley.

A more conservative estimate might use data about shareholder proposals under current SEC regulations. According to the SEC’s own figures, the cost per company of including a shareholder proposal in the proxy statement is $87,000. ISS tracked 1,042 shareholder proposals at public corporations during the 2003 proxy season, which gives us total corporate expenditures on shareholder proposals of $90,654,000.

Either way, there can be no doubt that giving shareholders access to the proxy statement to nominate directors is going to be expensive. Plus there are all the indirect costs. Companies are already having a hard time attracting independent directors. The shareholder access proposal likely will make that search even harder. Why would somebody be willing to serve on the board if he or she might be the one singled out to be ousted?

Disrupting Successful Boards

The election of a shareholder representative also will disrupt the delicate internal dynamics that make boards successful. Its effect will be analogous to that of cumulative voting, which allows minority shareholders representation on the board. Experience with cumulative voting suggests that it often leads to pre-meeting caucuses by the majority and a reduction in information flows to the board as a whole. In turn, this results in adversarial relations between the majority and minority board members, which interferes with effective board governance.

Is it clear that the benefits of shareholder access will exceed these costs? Why, for example, should you and I have to subsidize some activist or gadfly who wants some free publicity?

If the SEC could figure out a way to limit the proposal to situations in which the board is clearly dysfunctional, these concerns might less important. The problem is that the SEC rules apply to all public corporations, whether their internal governance is good, bad, or just indifferent. As currently drafted, a shareholder would be allowed to put its nominee on the corporation’s proxy if one of two triggering events occurred:

(1) A shareholder puts forward a proposal to authorize shareholder nominations, which is then approved by the holders of a majority of the outstanding shares; or

(2) Shareholders representing at least 35% of the votes withhold authority on their proxy cards for their shares to be voted in favor of any director nominated by the incumbent board of directors.

Nothing in either trigger limits the rule to the Enrons of the world. If enough shareholders are disgruntled, for whatever reason, they can force a vote. This makes no sense. The point of all these reforms, supposedly, is to restore investor confidence by ensuring good corporate governance. But if firms are well-managed why put them to the expense and bother of a shareholder nomination contest?

Just as a good cook eventually stops throwing spaghetti at the wall, it is time for the regulators to stop, take a deep breath, and stop throwing new reforms at Corporate America. Let’s wait and see how the first couple of rounds of reform play out before imposing yet more burdens on corporations in our still precarious economic environment.

The Lea Fastow Plea

So the judge has said he will accept Lea Fastow's guilty plea, if she signs off on the plea bargain (here). What does that mean? Lea's husband Andrew was Enron's CFO. After his wife pleads, odds are very high that Andy will cop a plea too. Which means you can stick a fork in Jeffrey Skilling and Kenneth Lay, because they're done. The feds have no reason to cut a deal with Fastows unless they can hand the feds Skilling and Lay's heads on a platter. Update: As of April 8, 2004, Lea's plea is off again - see here, which likely will impact Andrew's level of cooperation.

Manne on the Mutual Fund Scandal

Henry Manne (the dean of law and economics) has a fascinating column in today's WSJ ($), the gist of which is that the market timing and late trading scandal is an unintended consequences of a 1983 SEC rule change. Before the change, Manne argues, mutual funds could - and did - price discriminate among investors by allowing market timing but charging timers higher fees. As long as funds could do so, long-term investors weren't heart by market timing and, indeed, may even have benefitted. After the 1983 rule change effectively eliminated the ability to price discriminate, market timing didn't go away. Instead, it was driven underground, only to eventually burst forth in the current scandal. The right regulatory response therefore would be to restore funds' ability to price discriminate.

Academic credit for blogging

My tongue-in-cheeck post on getting credit with my dean for the time I spend blogging elicited an Instalanche, some serious commentary by a couple of En Bancers, and now an email from an actual dean (my friend Mark Sargent of Villanova) on how one dean might view the prospect of actually giving some credit to those who blog:

Your quip at the end of your last post re credit from your dean for blogging actually raises some serious questions about the significance of the blogosphere and blogging in evaluating an academic's contributions to scholarship. I've actually started thinking about this from the standpoint of a dean who has to make hard decisions about tenure, promotion and merit raises. I've come up with some preliminary thoughts.

1. On the most fundamental level, it is becoming apparent to me that legal scholars' ability to contibute to and advance scholarly debates through the blogosphere is real, despite the relative brevity of most posts. The blogosphere allows for wide, rapid and highly interactive dissemination of views in a way that is unique. A faculty member who is blogging in a serious way thus would seem to me to be engaged in scholarship.

2. Of course, "in a serious way" is an important modifier." Not all blogs, even blogs by serious people, are "serious" in the way I mean. I'm vastly entertained by clever bloggers' comments about politics, movies, art and even wine (though I'm more of a diet Coke guy), and portal blogs can be useful, but what I mean is thoughtful and carefully reasoned commentary such as Larry Solum's legal theory blog, Punishment Theory, Volokh on constitutional law, you on law, economics or legal theory and so on.

3. One of the traditional objections to self-publication on the net from a tenure or merit raise standpoint was that it didn't go through the filter of peer review or editorial review (such as it is in student-run law reviews). Thus there is no sort of imprimatur on it from theoretically competent, independent reviewers, which of course ways heavily with tenure committees and deans. Self publication on the net thus looks like hard copy publishing in a vanity press. Not blogposts! If they are at all interesting, ther are immediately seized upon, dissected and assessed. That process gives an evaluator a sense of the quality of the blogger's thinking. As a reader, I'm impressed when a blogger is taken seriously by serious people. As a dean, I would be impressed if that blogger were one of my faculty.

4. Blogging or, more precisely, interaction among bloggers and their readers, strikes me as something very useful to people doing more conventional scholarship. Most realize, I think that scholarship is not done in a vacuum, and that the ability to test one's ideas, and to get ideas from others, would help in writing articles and books. Blogging helps with all that tremendously and in novel ways. In fact, I'm advising my junior colleagues to start following the blogs in their fields, and to think about contributing where appropriate.

5. That being said, just reading blogs - let alone writing them - can be entirely too much fun, and could suck time away from the grind of in depth writing and research. In fact, I should be massaging my footnotes instead of writing this. I'm also advising my juniors not to get blog-happy.

6. As a dean, I'm always looking for means of institutional self-aggrandizement. Having a really good (ie serious) blogger at my law school who is read widely and appreciated by other legal academics would bring us much appreciated recognition.

7. I always tell tenure candidates this about their articles: the fact that an article has been written is good; the fact that others are reading it is better; the fact that others are writing about is best! Good blogging fits into that equation nicely.

8. Bottom line: While no replacement for writing articles and books, and no one is going to get tenured or promoted through blogging (at least not today); but what I've called a serious blogger would get a big plus on the positive side on the ledger from me when it gets to merit review time! Failing to reward it would be failing to recognize that blogging is not just another new communication medium; it is a new way to do scholarship.

It's good to see one dean thinking seriously about the role blogging can play in the development of both an individual's academic career and an academic institution. I suspect other deans will have to start grappling with these questions soon. Personally, I find very little to quibble with in Mark's analysis and am in whole-hearted agreement with his bottom line. (Hardly surprising, of course.)

Arnold on the UC System

Again, from Drudge's transcript of the State of the State speech:

In the past two years, college fees have increased over 40 percent. We must end this boom-and-bust cycle of widely fluctuating fees with a predictable, capped fee policy for college students and their parents. And we must limit the fee increases to no more than ten percent a year. Like our kindergarten through grade 12 schools, our colleges and universities must also share the burden of the fiscal crisis, but we must work to expand the dream of college. And we must not let the dream bypass our Central Valley. That is why my budget is funding UC's tenth campus -- UC Merced.

Gulp. Well, we're all going to have make sacrifices to get the state back into the black. Gulp....

Black to be ousted from Hollinger?

The NY Post is reporting:

Conrad Black's failure to start paying back money he owes to Hollinger International on time has sparked negotiations that may lead to his ouster from the company, say sources close to the situation.

This is pretty shoddy reporting. Even after giving up his post as CEO, Black still has three roles at Hollinger: majority shareholder; member of the board of directors; chairman of the board of directors. You can't oust a majority shareholder, all you can do is to try to persuade him to sell his stock. (Towards the end of the article the Post reports that Hollinger doesn;t want Black to sell his stock. Why not?) You can't oust a member of the board either, as I've explained before, especially when the board member also is a majority shareholder. All you can do is to try to persuade him to step down. You can remove the chairnman of the board title from someone against their will, however, although that person remains a board member. So which is it? The NY Post article goes on to say:

One source said Black's exit as chairman could be imminent. Another confirmed that Black's stepping down is under review.

So it could be that the board is going to remove his title over his objections. Or it could be they are trying to negotiate his exit from the board. But the Post fails to explain. Frustrating.