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Review: Mark Roe’s “Strong Managers, Weak Owners”

In their 1932 classic, THE MODERN CORPORATION AND PRIVATE PROPERTY, Berle and Means brought to popular attention the separation of ownership and control in U.S. corporations: shareholders exercised virtually no control over either day to day operations or long-term policy; instead, control was vested in the hands of professional managers. Separation of ownership and control occurred, according to Berle and Means, because important technological changes during the 1800s, especially the development of modern mass production techniques, gave great advantages to firms large enough to achieve economics of scale, which in turn gave rise to giant industrial corporations. These firms could be financed only by aggregating many small investments. Modern corporate governance scholars refer to the consequences of separating ownership and control as agency costs, but Berle and Means had identified the basic problem over forty years before the current terminology was invented: "The separation of ownership from control produces a condition where the interests of owner and of ultimate manager may, and often do, diverge ...."

In STRONG MANAGERS, WEAK OWNERS, Mark Roe strikes out in a new direction, by attacking the origins of the agency cost problem. The question Roe poses is the foundational one of whether Berle and Means were correct in assuming that the separation of ownership and control is an inherent aspect of large public corporations. Roe contends that dispersed ownership was not the inevitable consequence of impersonal economic forces, but rather the result of a series of political decisions motivated by a fear of concentrated economic power. Investments could have been channeled to industrial enterprises through large financial intermediaries, such as banks, insurance companies, and mutual and pension funds. Put another way, while it was necessary to aggregate and tap the savings of large numbers of individual investors in order to fund major industrial corporations, such aggregation could have taken place in financial institutions specifically designed to provide savings opportunities. In turn, it would have been those institutions that invested in industrial corporations. American corporate governance did not evolve along these lines because the law created a series of obstacles to financial intermediaries. If those obstacles had not existed, ownership might not have fragmented and thus might not have separated from control. The implication of this thesis, of course, is that while economic forces shaped modern corporate governance, they did so within the parameters set by law. As such, the governance structure of U.S. public corporations may not be optimal in an absolute sense, but only relative to the set of possibilities defined by our legal system.

If I ever get around to working up the "Corporate Canon" blog "a reader" requested, Roe's book defintely would be on it. It is a major and important contribution to our understanding both of (a) how American corporate law/governance evolved, describing in detail the forces that affected that evolution, and (b) comparative corporate law analysis across diverse economic systems, especially the US, Germany, and Japan. This is not too say that I don't disagree with parts of Roe's analysis. I set out my critique in the extended post below. For even more gore details, you can download a law review article-length book review I wrote some years ago here. And, in the pursuit of capitalism, an Amazon "buy now" box is in the extended post too. Show your support for this blog today!

Roe focuses on legal rules preventing institutional investors from acting as financial intermediaries between the investing public and the management of public corporations. The first third of STRONG MANAGERS is devoted to a historical review of the rules that preclude institutions from playing a significant role in corporate governance. In the second third, he reviews recent developments, which perpetuated the legal obstacles to governance activism by institutions. In the final part, he addresses the essential policy implication of his analysis: should the legal system encourage institutions to take a more active governance role?

One can quibble with portions of Roe's historical argument. There is, for example, good evidence that ownership and control separated long before most of the rules Roe blames for the separation went on the books. At the very latest, ownership and control of large corporations had separated by the middle of the nineteenth century. In contrast, the rules with which Roe is concerned mostly came into existence only after 1900. Granted, banks fragmented in the first third of the 18th century, but a number of critical restrictions did not come into play until the New Deal. Insurers were largely unregulated until after 1906. Mutual funds, albeit long of little importance, likewise were essentially unregulated until the New Deal. Given this free market environment, why did these or other financial intermediaries not step into the economic niche opened when ownership and control separated during in the early and mid-1800s?

In other words, Roe has not proven that the Berle-Means corporation would not have evolved in the absence of the constraints on financial intermediaries he describes. But, at a minimum, Roe does demonstrate that politics did nothing to impede the development of the Berle-Means corporation, perhaps facilitated its evolution, and certainly helped sustain it by preventing financial intermediaries from taking active governance roles. In and of itself, that showing is a formidable accomplishment and a valuable contribution to the literature.

Although the first two sections of STRONG MANAGERS are notable in their own right, the book takes on importance mainly because of the significance of the policy questions to which the final section is addressed. Space does not permit one to do full justice to Roe's argument, which is nuanced and well-crafted. Suffice it to say that relatively little has changed since STRONG MANAGERS was published. Despite increased activism in recent years, institutions still are mostly passive. Even the most active institutional investors spend only trifling amounts on corporate governance activism. Institutions devote little effort to monitoring management, rarely conduct proxy solicitations, do not to try to elect directors, and rarely coordinate their activities. And, perhaps, this is a good thing. As Roe concedes, there is good evidence that bank-dominated finance has harmed that Japanese and German economies by impeding venture capital. Moreover, institutional investors may well abuse control by self-dealing. Even if institutional investors are entirely self-less, greater control on their part would still be undesirable if the separation of ownership and control mandated by U.S. law has substantial efficiency benefits. Here is where Roe and I part company-I suspect the Berle-Means corporation has significant economic advantages over its alternatives; he is skeptical. Perhaps only time will tell, as competition in increasingly global markets puts various systems of economic organization to the test. In the meanwhile, Roe's book belongs in the library of anyone interested in corporate law or governance.

Does state corporate law really race to the top?

The Michigan legislature recently amended the state�s control share acquisition statute to make it easier for the Taubman family to fend off the hostile bid for Taubman Centers from Simon Property Group and Westfield America Trust (I describe these statutes and the Michigan amendment in the Extended Post below). Several readers have written or used the comment feature to ask how I square these statutes with the race to the top hypothesis I have espoused in earlier posts (see, e.g., HERE). A fair question, indeed, but the two can be squared.

According to the standard race to the top account, investors will not purchase, or at least not pay as much for, securities of firms incorporated in states that cater too excessively to management. Lenders will not make loans to such firms without compensation for the risks posed by management's lack of accountability. As a result, those firms' cost of capital will rise, while their earnings will fall. Among other things, such firms thereby become more vulnerable to a hostile takeover and subsequent management purges. Corporate managers therefore have strong incentives to incorporate the business in a state offering rules preferred by investors. Competition for corporate charters thus should deter states from racing to the bottom. (The competing �race to the bottom� hypothesis argues that states compete in granting corporate charters. After all, the more charters the state grants, the more franchise and other taxes it collects. According to the race to the bottom theory, because it is corporate managers who decide on the state of incorporation, states compete by adopting statutes allowing corporate managers to exploit shareholders.)

The evidence on the race to the top versus race to the bottom dispute is not free from controversy, but I think the weight of the evidence clearly favors the race to the top. Roberta Romano�s event study of corporations changing their domicile by reincorporating in Delaware, for example, found that such firms experienced statistically significant positive cumulative abnormal returns. Roberta Romano, Law as a Product: Some Pieces of the Incorporation Puzzle, 1 J. L. ECON. & ORG. 225 (1985). In other words, reincorporating in Delaware increased shareholder wealth. This finding strongly supports the race to the top hypothesis. If shareholders thought that Delaware was winning a race to the bottom, shareholders should dump the stock of firms that reincorporate in Delaware, driving down the stock price of such firms. As Romano found, and all of the other major event studies confirm, there is a positive stock price effect upon reincorporation in Delaware. See generally ROBERTA ROMANO, THE ADVANTAGE OF COMPETITIVE FEDERALISM FOR SECURITIES REGULATION 64-73 (2002) (discussing the relevant studies and criticisms thereof).

The event study findings are buttressed by a well-known study by Robert Daines in which he compared the Tobin�s Q of Delaware and non-Delaware corporations. (Tobin�s Q is the ratio of a firm�s market value to its book value and is a widely accepted measure of firm value.) Daines found that Delaware corporations in the period 1981-1996 had a higher Tobin�s Q than those of non-Delaware corporations, suggesting that Delaware law increases shareholder wealth. Robert Daines, Does Delaware Law Improve Firm Value?, 62 J. FIN. ECON. 525 (2001). Although subsequent research suggests that this effect may not hold for all periods, Daines� study remains an important confirmation of the event study data.

Additional support for the event study findings is provided by takeover regulation. Compared to most states, which have adopted multiple anti-takeover statutes of ever-increasing ferocity, Delaware�s single takeover statute is relatively friendly to hostile bidders. An empirical study of state corporation codes by John Coates confirms that the Delaware statute is the least restrictive and imposes the least delay on a hostile bidder. John C. Coates IV, An Index of the Contestability of Corporate Control: Studying Variation in Takeover Vulnerability (June 30, 1999). Given the clear evidence that hostile takeovers increase shareholder wealth, this finding is especially striking. See generally Stephen M. Bainbridge, Corporation Law and Economics 612-14 (2002). The supposed poster child of bad corporate governance, Delaware, turns out to be quite takeover-friendly and, by implication, equally shareholder-friendly. (Indeed, check out this headline: "Beware Delaware." The article goes on to argue that: "Since last summer, the Delaware Supreme Court has issued at least five decisions of great concern to the corporate bar. Each was remarkable not only because it found against directors and in favor of shareholders, but also because it reversed a lower court ruling that went the other way.")

This takes us to the Michigan anti-takeover statute. Given that state takeover regulation demonstrably reduces shareholder wealth but that most states have nevertheless adopted anti-takeover statutes, what are we to make of that data point? In my view, we must concede that state regulation of corporate takeovers appears to be an exception to the rule that efficient solutions tend to win out. But so what? Nobody claims that state competition is perfect. The question is only whether some competition is better than none. Delaware�s relatively hospitable environment for takeovers suggests an affirmative answer to that question.

In other words, the Michigan statute proves a central point of public choice theory. The incentives of legislators and regulators are driven by rent-seeking and interest group politics. In turn, the incentives of directors and managers who lobby state legislators vary by context. In most contexts, the financial incentives of directors and managers are aligned with those of shareholders for the reasons discussed above. In the hostile takeover context, however, the incentives of directors and managers deviate from those of the shareholders. Hostile takeovers are frequently followed by management purges, especially at the top management and board levels. Nobody likes to be fired, so it is hardly surprising that directors and managers try to use the legislative process to protect their jobs. Neither, however, does it disprove the race to the top hypothesis; it only shows that there is an exception to every rule.

Control share acquisition statutes rely on the states' traditional power to define corporate voting rights as a justification for regulating the bidder's right to vote shares acquired in a control transaction. A "control share acquisition" is typically defined as the acquisition of a sufficient number of target company shares to give the acquirer control over more than a specified percentage of the voting power of the target. The triggering level of share ownership is usually defined as an acquisition which would bring the bidder within one of three ranges of voting power: 20 to 33 1/3%, 33 1/3 to 50% and more than 50%. Most control share acquisition laws provide that shares acquired in a control share acquisition shall not have voting rights unless the shareholders approve a resolution granting voting rights to the acquirer's shares. See chapter 8 of my Mergers and Acqusitions text for more details.

Members of the Taubman family formed a group to pool their shares� voting powers to oppose the Simon Property and Westfield hostile bid. Once aggregated, their combined shares exceeded the 33 1/3% threshold. Under the Michigan statute as then worded, the formation of the group constituted a control share acquisition as defined by statute (even though they did not acquire more shares in the usual sense of buying some), or so a federal court held back in May. Accordingly, the formation of the group required approval by Taubman Center�s other shareholders. The new bill amends the control share acquisition statute to permit shareholders to form such a group without triggering the voting requirement.

The stated purpose of control share statutes is providing shareholders with an opportunity to vote on a proposed acquisition of large share blocks which may result in or lead to a change in control of the target. These statutes are premised on the assumption that individual shareholders are often at a disadvantage when faced with a proposed change in control. If the target's shareholders believe that a successful tender offer will be followed by a purchase by the offeror of non tendered shares at a price lower than that offered in the initial bid, for example, individual shareholders may tender their shares to protect themselves from such an eventuality, even if they do not believe the offer to be in their best interests.

By requiring certain disclosures from the prospective purchaser and by allowing the target's shareholders to vote on the acquisition as a group, control share acquisition statutes supposedly provide the shareholders a collective opportunity to reject an inadequate or otherwise undesirable offer. For example, since control share acquisition statutes generally require the offeror to disclose plans for transactions involving the target that would be initiated after the control shares are acquired, shareholders presumably would be unlikely to approve a creeping tender offer or street sweep which would be followed by a squeezeout back end merger at a price less than or in a consideration different than that paid by the acquirer in purchasing the initial share block.

Corp Law Blog on shareholder activism and shareholder proposals

Mike O'Sullivan at Corp Law Blog has a long but great post today on shareholder activism. Bottom line:

The unstated assumption behind the SEC's shareholder access initiative is that shareholders are best able to look out for the interests of a corporation and all its stockholders. I know of investors who exemplify this ideal, and I know of companies that would benefit from giving up some control to these investors. The problem is, I know of political activists who fall far short of this ideal, and I know these activists often target the best-performing companies. I doubt the SEC can craft a rule that would open the doors of the worst companies to investors while closing the doors of the best companies to the activists.

Exactly. Regular readers of this blog will know that I am similarly skeptical of shareholder activism. I strongly encourage you to go read Mike's whole post.

Marginal Revolution on Grasso

Fabio Rojas at Marginal Revolution blogs:

Of course, the question is not how big [Grasso's pay] package was, but how much value did he add to the NYSE and was his fee competitive? Hard to say about the first since the NYSE is a non-profit corporation, but Grasso ($140M pay out) would be paid more than Jefferey Barbakow, who, according to Forbes' magazine ... was the highest paid executive of a publicly held firm in 2002 at $116M.

Exactly! The Wall Street Journal (subscribers only) similarly reports that "Grasso collected more cash between 1995 and 2002 than the heads of 10 of 11 financial-service firms included in benchmarking surveys used to set his pay." Again, it all goes back to bad governance -- directors who were either pets holding down a post they regarded as ceremonial or people who Grasso regulated. Garbage in, garbage out.

UPDATE: Actually, the comparison between Barbakow and Grasso is even more striking than Fabio claims. The NYSE actually paid Grasso $140 million in one lump sum, albeit including deferred compensation and so on. Whereas $111 million of Barbakow's "pay" came from exercising "stock gains, presumably by exercise of stock options, and thus didn't come directly from the corporate treasury.

Al Hunt on Grasso and the NYSE

Al Hunt’s op-ed in today’s Wall Street Journal (subscription req’d) uses the Grasso pay imbroglio to recycle virtually every grievance in the current left-liberal talking points guide, but lets stick to our knitting – i.e., corporate governance. Hunt complains that Grasso’s salary of $140 million is “indefensible” relative to what the “average worker” gets paid. (In a particularly invidious move, Hunt drags in the case of a wounded GI who had to reimburse the government for food during his hospital stay. While deplorable, its not clear what that case has to do with Grasso specifically or even executive compensation generally.) All of which raises the question: in thinking about executive compensation is the comparison to what average workers make a valid one or just a debater’s cheap shot?

If comparing what Grasso makes to the pay of an average worker is okay, then don’t we also have to compare what Shaquille O’Neal makes to that worker’s pay? If Hunt wants to argue that there is a dollar amount of annual earnings that nobody should be allowed to exceed, that’s one thing. But I doubt even Paul Krugman would go that far. Indeed, Hunt says that some folks – naming Tiger Woods, Kevin Costner, and Bill Gates – deserve their compensation, just not Grasso: "Most Americans are upwardly mobile and celebrate the riches of the truly successful and deserving, whether it's Michael Jordan, Kevin Costner, or Bill Gates. But in a time when sacrifices are being made by firefighters, schoolteachers and Marine staff sergeants, many of these same Americans resent the Dick Grassos." I don’t know why he thinks people resent Grasso's pay, but not Costner's. Has Hunt seen any of Costner’s recent movies? I mean, really. If any of the four he names should be joining firefighters et al. making sacrifices, it is Costner. Did you see "Waterworld"? or "The Postman"? Whereas nobody seriously doubts that Grasso was, at the very least, competent and most concede he was doing a good job.

But lets get serious about this for a minute. How much you get paid depends in large part on the thickness of the market for your services. In a thick market, wages tend to be low because there are many potential employees – all more or less fungible – competing for jobs. In a thin market, however, wages tend to be high because many employers are competing to hire a small number of eligible workers. The market for burger flippers is very thick. The market for law professors is relatively thick (so, for that matter, is the market for pundits -- if blogging has done nothing else, it has proven that people like Glenn Reynolds or Eugene Volokh can do punditry at a very high level even though they lacked access to a national medium until recently -- so maybe Hunt's mad because he's in for a paycut?). The market for CEOs of Fortune 500 companies (which is what the NYSE essentially is) is thin. I’d guess the number of people who have what it takes to run a Fortune 500 company isn’t much larger than the number of people who can run a NBA fast break. Its just supply and demand, folks.

Having said that, there are some important differences between Grasso’s and Shaq’s contracts, which do cut against the former. First, although I don't have the citations at the tip of my fingers, I have seen a couple of recent studies to suggest that boards erroneously believe the CEO market is thinner than it actually is, which tends to artificially inflate CEO salaries. Boards tend to want proven track records (picking an unproven CEO who tanks is bad for the board’s reputation), which limits the pool through the “Experience Required” phenomenon. Boards also tend to pick CEO candidates who resemble the prevailing demographics of the directors, which further artificially limits the pool.

Second, and more pertinent, Shaq is accountable in ways that Grasso was not. Shaq is subject to constant evaluation by Phil Jackson and Jerry Buss – neither of whom are shrinking violets. One has little doubt they make darn sure they are getting what they pay for. In contrast, although Grasso was nominally subject to evaluation by the NYSE board, that board was comprised in large part of ceremonial “public” directors who we now know did not take the job as seriously as they should have and representatives of the seat-holders who we have long known have various conflicts of interest. The board itself, moreover, was accountable to no one. So it all comes back to governance. In fairness to Hunt, he does devote a section in the middle of the screed to the governance issues. Contra the main thrust of Hunt’s column, however, the problem is not the dollar amount. The problem is that NYSE’s current governance structure had no mechanism for ensuring that the Exchange got back value commensurate with whatever amount it paid. Everything else is just so much populist agitprop.

Breaking News on Grasso

I was going to blog some thoughts on Holman Jenkins' well-worth reading op-ed in today's WSJ (subscription req'd). Key quotables:

Mr. Grasso, head of the exchange, is about to be fired for being paid too much, by the very board members who were responsible for paying him too much. ... In a real company, board members represent the owners. The NYSE's board, however, is that most ornamental of beasts, a "constituent" board, a collection of the great and commendable who supposedly represent the public good -- i.e., they don't know whom they represent. ... Today's troubles might well be traced back to 1999, when Mr. Grasso let floor traders talk him out of turning the Big Board into a shareholder-owned, for-profit business. You only have to look at the legal problems of Visa and MasterCard to notice that the NYSE is not the only important institution in need of transcending an obsolete form of "mutual" ownership. ...

Regular readers will know that I have been saying the same thing. But CNNfn is reporting:

The board of the New York Stock Exchange will hold an emergency meeting later Wednesday to discuss the future of embattled Chairman Richard Grasso, a person close to the situation told CNNfn.

So I think I'll hold fire for now. More later, probably.

UPDATE: Grasso's out. Fixing the structural problems -- lack of accountability, ceremonial directors, lack of transparency -- still needs prompt and thoughtful attention.

California Joins Washington on SEC Legal Ethics Preemption Fight

TheCorporateCounsel.net Blog reports:

It looks like California has joined the jurisdictional flap over the SEC's new "reporting up" rule. In response to the SEC's General Counsel's letter to the State of Washington, the Corporations Committee of the State Bar's Business Law Section has sent a letter to the SEC notifying it that new Rule 205.3(d)(2) conflicts with California law.

The Corporations Committee also notified the SEC that - in the absence of an appellate judgment in favor of the SEC's pre-emption claim - the California State Bar may not refuse to enforce Section 6068(e) of the California Business and Professions Code. Under Section 6068(e), California attorneys have an ethical obligation to maintain client confidences "at every peril to himself or herself."

As you may recall, back on July 23, the SEC's General Counsel publicly released a letter stating that state bar associations were pre-empted from disciplining an attorney who made voluntary disclosure of client confidences to the SEC in reliance on its rules. This letter was in response to a proposed action by the Washington State Bar Association Board of Governors. On July 26, the Washington State Bar Association Board of Governors took its action notwithstanding the SEC's position.

Corp Law Blog has a very good post on why the SEC may have a harder time preempting state legal ethics rules than conventional wisdom would assume:

Preemption isn't meant to be easy. The California letter details exactly how hard it will be in California, which has a statute (Bus. and Prof. Code Sec. 6068(e)) specifically requiring attorneys to maintain client confidences: "It is the duty of an attorney . . . [t]o maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client."

As you would expect, California does not permit bar associations or anyone else to ignore California statutes based on a letter from the SEC's general counsel. California's Constitution (Art III, Sec. 3.5), specifically requires California agencies, such as its bar association, to enforce California statutes in the face of any Federal law purporting to preempt it unless and until an appellate court determines that the Federal law does, indeed, validly preempt the California law. California attorneys are well-advised to consider this when deciding whether to follow Prezioso's lead and ditch California's attorney conduct rules for the SEC's new rules.

Indeed, for the California State Bar makes clear that it intends to continue disciplining lawyers who disclose client confidences, even though SEC Rule 205.3(d) purports to authorize an attorney appearing before the SEC to disclose client confidences without client consent where "the attorney reasonably believes [it to be] necessary." The letter also makes clear that the California State Bar will not give effect to SEC Rule 205.6(c), which purports to insulate from liability a lawyer who complies in good faith with the SEC's legal ethics rules. Hence, compliance with the SEC rules -- indeed, even the necessity to do so to avoid SEC disciplinary action -- apparently will not be a defense to a California disciplinary proceeding, at least until a federal appeals court orders otherwise.

Applied Economic Analysis: Can a Board Meet Online?

The Wall Street Journal (subscription required) has a good article in Monday's technology section on how corporations are using dedicated board of directors websites to let directors communicate with management and each other. But here's the part that caught my eye:

The main functions of a directors' Web site are simple enough: easy online access to briefing papers and internal company data, so directors can do their homework at home or on the road a few days before board meetings and show up fully informed; the ability to fine-tune a document online, so directors can hold a brief but urgent committee meeting online from different locations; and an exclusive e-mail system.

Can they really meet online? It depends on whether they use Internet telephony or a real-time text-based mechanism (like a chat room). Delaware General Corporation Law sec. 141(i) provides that directors may conduct a meeting:

by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other....

Web-based supplements to a telephone conference call thus are fine, but real-time text based messaging is OUT. To conduct a meeting exclusively online, in a Delaware corporation at least, you must use Internet telephony. I wonder if any Delaware corporations have held invalid text-based board meetings online? I emailed this post to the reporter who wrote the story and asked him. I'll report back if he answers. In the meanwhile, I once wrote an article motivated by DGCL section 141(i)'s requirement that directors be able to hear one another. Why a Board? Group Decision Making in Corporate Governance, 55 VANDERBILT LAW REVIEW 1 (2002). To be clear, the article's not about online meetings -- its a theoretical inquiry (neoinstitutional and behavioral economics with a dose of social norms theory) into why corporations are run by a board rather than an individual autocrat (of course, in practice, many CEOs are individual autocrats). But section 141(i) was what got me thinking about the theory issues. I excerpt the relevant discussion, which explains why I think section 141(i) is correct, in the extended post below for those interested in more information.

UPDATE: The WSJ reporter (Geroeg Anders) have given me permission to blog his response: "As far as I can tell, boards (either deliberately or inadvertently) are staying within the bounds of the Delaware code as currently written. Even when computer-to-computer interactions are a meaningful part of a remote board/committee meeting, there usually are parallel phone lines that are open, so that people can ask questions the old-fashioned way."

The requirement that members be able to �hear� one another seems quaint in an era of electronic mail, instant messaging, and internet chat capabilities. Yet, when Delaware recently amended its corporation statute to permit much greater use of electronic forms of communication, it retained the requirement that board meetings be conducted in such a way that all members may hear one another. As it turns out, this appears to have been the right choice. Research on decision making has found that groups linked by computer make fewer remarks and take longer to reach decisions than do groups meeting face to face. Kiesler and Sproul, for example, not only found that meetings conducted through computers result in greater delays, but also that the decisions made in such meetings were more likely to exhibit the risky shift phenomenon. Sara Kiesler and Lee Sproul, Group Decision Making and Communication Technology, 52 Org. Beh. & Human Decision Processes 96 (1992). They also found that time-constrained groups exchanged much less information when meeting electronically than when meeting face-to-face.

Electronic communication takes place mostly through text-based mediums. For many people reading and typing are slower and require greater effort than verbal communication. Text-based communication also deprives participants of social cues, such as body language and tone of voice, that may be important signals. Social norms constraining behavior apparently function less well in text-based communication, as illustrated by the flame wars that plague Usenet newsgroups.

As with other aspects of the rules governing board meetings, accordingly, there seems to be a legitimate basis for otherwise formalistic rules. Even such housekeeping rules as notice requirements prove to be consistent with the research on group decision making. Unless the articles of incorporation require otherwise, no notice of regularly scheduled board meetings is required. Special meetings require at least two days notice. As a matter of statutory law, the requisite notice need not announce the purpose of the meeting. Because the directors� duty of care requires them to make an informed decision, however, it is advisable whenever possible to provide directors of advance notice of the reason for calling a meeting and any relevant documentation. As with other requirements relating to board meetings, the notice rules are intended to ensure that the board functions as a collegial body, all of whose members participate and get the benefit of the participation by all other members. MBCA � 8.23 cmt.

That notice requirements effectively carry out that function is suggested by research on group performance. Michaelsen et al. conducted a study in which individuals were pre-tested and then re-tested as members of a group. Under those conditions, groups outperformed individuals. Michaelsen et al. analogize this testing order to organizational decision-making processes in which �group members prepare a position paper and circulate it to other group members prior to problem-solving discussions.� Larry K. Michaelsen et al., A Realistic Test of Individual Versus Group Consensus Decision Making, 74 J. App. Psych. 834, 834 (1989). A board meeting conducted after meaningful notice likewise replicates this testing order.