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

Are Junior Professors Better teachers?

Via Paul Caron, I learned of Gregory Bowman’s article The Comparative and Absolute Advantages of Junior Law Faculty: Implications for Teaching and the Future of American Law Schools, 2008 BYU Educ. & L.J. 171, in which Bowman argues:

In the ongoing debate about how to improve law school teaching, there is a general consensus that law schools should do more to train junior faculty members how to teach. While this may be the case, this consensus inadvertently leads to an implicit assumption that is not true—that in all facets of law teaching, junior faculty are at a disadvantage compared to senior faculty. In fact, there are aspects of law teaching for which junior faculty can be better suited than their senior colleagues. This Article reviews scholarship concerning law teaching and identifies three teaching factors that generally favor junior law faculty: generational proximity to the law school student body; recency of law practice experience as junior practitioners; and lower susceptibility to the problem of conceptual condensation - extreme depth of subject matter knowledge that makes it difficult to see subjects from the students’ perspective.

This Article employs the economic concepts of (a) economies of scale or productive efficiency and (b) absolute and comparative advantage to suggest how these junior faculty advantages could be harnessed to improve law school teaching. With respect to productive efficiency, it is suggested that greater intra-faculty dialogue can increase a law faculty’s output of effective teaching. Currently, senior faculty members often provide assistance or advice to junior faculty in areas of senior faculty expertise or advantage—such as depth of knowledge in a course’s subject matter—but this is largely a one-way flow of information. However, if junior faculty were also to provide insight and advice to senior faculty regarding areas of junior faculty advantage, the quality of law school teaching might be significantly enhanced. Junior-senior faculty dialogue might be promoted through a variety of means, including faculty workshops and even perhaps teaching reviews of senior faculty by junior faculty.

With respect to the concepts of absolute and comparative advantage, this Article suggests that law school teaching could be improved through the specialization of teaching functions. Instead of professors individually teaching separate courses, professors might coordinate their teaching (that is, team-teach) across a number of courses in the law school curriculum, as a means to more effectively harness the respective strengths (and minimize the respective weaknesses) of junior and senior faculty in the classroom. Through the leveraging of junior faculty advantages, overall law school teaching might be significantly improved. This Article concludes by discussing the implications of these recommendations for law school culture in general and for the legal profession as a whole.

The trouble is that I don’t buy any of the alleged advantages Bowman says junior teachers possess. As for “generational proximity to the law school student body,” it often translates into difficulty for the young teacher to gain respect from the students. Anyway, it seems more relevant to dating than teaching. As for “recency of law practice experience as junior practitioners,” most law professors (at elite schools, anyway) come into practice with only a few years of practice experience. Being bottom man on a deal or litigation team fora couple of years doesn’t translate into meaningful knowledge. At best, it gives you a few war stories. Personally, I’ve learned a lot more that I use in the classroom from consulting than I ever did in practice. Since sniors likely have more consulting opportunities than juniors, this is at best a wash. Finally, as for “lower susceptibility to the problem of conceptual condensation - extreme depth of subject matter knowledge that makes it difficult to see subjects from the students’ perspective,” I’d rather know too much then too little. When I was just starting out, I lived in dread of the student question for which I had no answer. Today, it almost never happens.

Sinclair Oil v Levien

Sinclair Oil v. Levien is one of my favorite teaching cases in Business Associations. Bob Thompson has just published a wonderfully insightful article on the case, which provides the detailed factual background, and a thoughtful analysis of how the case frames Delaware jurisprudence even to this day. The abstract follows:

The defining issue of corporate law is the intensity of judicial review of director actions. Over the last four decades, Delaware has developed an elaborate array of judicial standards and defined (and then rearranged) the process by which such litigation plays out. This piece explores that development using the framework set out in Sinclair Oil v. Levien, a classic of Delaware corporate jurisprudence. The first part tells the story of this case, the parties and their lawyers, in a way that seeks to provide a context for the discussion of fiduciary duty within a parent/subsidiary corporate group. Subsequent parts develop, with a graphic aid, the judicial space defined by the Sinclair court and filled in by judges over the ensuing decades and then analyzes the fiduciary duty of controlling shareholders Sinclair provides room for “selfish” ownership for a majority shareholder, so long as the minority shareholders receive a proportional benefit, a standard that at the time seemed to expand the discretion for majority shareholders. Viewed from a point decades later, this part of Sinclair has not proved to be a template for broader applications and other doctrines have developed to constrain the actions of majority shareholders.

The intensity of judicial review of corporate decisions is the central issue of corporate law. Sinclair Oil Corp. v. Levien, a foundational decision in Delaware corporate jurisprudence from 1971, defines the space within which judicial review occurs with a format that still guides courts today. Along one boundary is deference by judges to decisions of business managers that is reflected in the business judgment rule. Along the other boundary is an intrusive judicial involvement by which the court asks the corporation or other defendant to prove the intrinsic fairness of the transaction. Since Sinclair the Delaware courts have filled in the space defined within those boundaries with a host of other decision points and varying degrees of judicial review, but it was Sinclair that provided the landscape.

The case remains in wide use today in classrooms (and courtrooms) because it presents an attractive pedagogical package. Three challenged actions were before the court; for two of those actions the court adopted deference and for the other, intrinsic fairness. Hence, the outcome provides a structure that directs students to address the differences between the two standards. At the same time, the case raises the difficult policy question of how far a parent corporation can go in directing the actions of the subsidiary for the parent’s own purposes. The Sinclair court takes a rather narrow definition of self-dealing, requiring that the parent get something at the expense of the subsidiary before a court will interfere with the directors’ decision.

This story unfolds in three parts. Section I introduces the parties and frames the issues presented in the case. Section II develops, with a graphic aid, the judicial space defined by the Sinclair court and filled in by judges over the ensuing decades. Section III analyzes the fiduciary duty of controlling shareholders (as opposed to duties of directors and managers without share control.) Sinclair provides room for “selfish” ownership for a majority shareholder, so long as the minority shareholders receive a proportional benefit, a standard that at the time seemed to expand the discretion for majority shareholders. Viewed from a point decades later, this part of Sinclair has not proved to be a template for broader applications and other doctrines have developed to constrain the actions of majority shareholders.

Keywords: director action, judicial review of corporate action, business judgment rule, intrinsic fairness, enhanced scrutiny, controlling shareholders, fiduciary duty

JEL Classifications: K22

I expect I’ll have more comments soon.

All work and no play … Fantasy football time

I’ve set up the ProfessorBainbridge.com fantasy football league at Yahoo.

Maximum # teams: 12
Scoring: PPR
Live Draft: Sat Aug 23 12:00pm PDT
Roster: QB, WR, WR, RB, RB, TE, W/R, K, DEF, BN, BN, BN, BN, BN, BN

Send me an if you’re interested in playing. Regular readers/commenters will be given preference.

Properly Understanding the Relationship Between the BJR and CSR

Crooked Timberite Daniel posts on the shareholder wealth maximization norm, commenting in part that:

In real life, the business judgement rule protects more or less anything that the Creative Capitalism gang [a corporate social responsibility outfit] might want businesses to do. Even the paradigm example used by Posner – of a corporate chief executive making charitable donations and specifically saying that they weren’t doing it for PR purposes and that they didn’t run the company in the interests of the shareholders – doesn’t actually necessarily give rise to a situation which would fail the business judgement test, because that’s pretty much the story of Body Shop, and if the only way that a company can secure the services of a talented and energetic cosmetics executive like Anita Roddick is to give away money without regard for shareholders, then that’s in the interests of shareholders. There is, of course, a cottage industry in business school cases and the funnies pages of the Economist in proving that instances of corporate philanthropy are actually in the interests of shareholders in the long term.

He’s mostly right, of course. As I explained in The Bishops and the Corporate Stakeholder Debate, however, it’s important to understand why the business judgment rule does so:

[C]urrent law in fact allows boards of directors substantial discretion to consider the impact of their decisions on interests other than shareholder wealth maximization. This discretion, however, exists not as the outcome of conscious social policy but rather as an unintended consequence of the business judgment rule.  To be sure, some scholars find an inconsistency between the business judgment rule and the shareholder wealth maximization norm.  I concede that the business judgment rule sometimes has the effect of insulating a board of directors from liability when it puts the interests of nonshareholder constituencies ahead of those of shareholders, but deny that that is the rule’s intent.  Instead, as the Delaware supreme court has explained:

Under Delaware law, the business judgment rule is the offspring of the fundamental principle, codified in [Delaware General Corporation Law] § 141(a), the business and affairs of a Delaware corporation are managed by or under its board of directors.... The business judgment rule exists to protect and promote the full and free exercise of the managerial power granted to Delaware directors.

The business judgment rule thus operationalizes the intuition that fiat— i.e., centralization of decisionmaking authority—is the essential attribute of efficient corporate governance.  As Nobel laureate economist Kenneth Arrow explains, however, authority and accountability cannot be reconciled:

[Accountability mechanisms] must be capable of correcting errors but should not be such as to destroy the genuine values of authority. Clearly, a sufficiently strict and continuous organ of [accountability] can easily amount to a denial of authority. If every decision of A is to be reviewed by B, then all we have really is a shift in the locus of authority from A to B and hence no solution to the original problem.

The business judgment rule prevents such a shift in the locus of decisionmaking authority from boards to judges. It does so by establishing a limited system for case-by-case oversight in which judicial review of the substantive merits of those decisions is avoided. The court begins with a presumption against review.  It then reviews the facts to determine not the quality of the decision, but rather whether the decisionmaking process was tainted by self-dealing and the like.  The questions asked are objective and straightforward: Did the board commit fraud? Did the board commit an illegal act? Did the board self-deal? Whether or not the board exercised reasonable care is irrelevant, as well it should be.  The business judgment rule thus erects a prophylactic barrier by which courts pre-commit to resisting the temptation to review the merits of the board’s decision.

The business judgment rule, however, has no application where the board of directors is disabled by conflicted interests.  In such cases, concern for director accountability trumps protection of their discretionary authority. In corporate takeovers, for example, a well-known conflict of interest taints target company director decisionmaking.  Not surprisingly, therefore, the law denies directors discretion to consider the interests of nonshareholder constituencies in the takeover setting.  To be sure, the interests of shareholders and nonshareholder may be consistent in takeover fights, just as they are in many settings. In light of the directors’ conflict of interest, however, we can no longer trust them to make an unbiased assessment of those competing interests. The conflict between management and shareholder interests requires skepticism when management claims to be acting in the stakeholders’ best interests. A board decision to resist a hostile offer may have been motivated by concern for potentially affected nonshareholder constituencies, but it may just as easily have been motivated by the directors’ and managers’ concern for their own positions and perquisites. Selfish decisions thus easily could be justified by an appropriate paper trail of tears over the employees’ fate. Consequently, in the takeover setting, rigorous application of the shareholder wealth maximization norm properly becomes the standard of judicial review.

This then is the major failing of the Bishops’ support for a multi-constituency conception of corporate directors’ duties. “Any social order that intends to endure must be based on a certain realism about human beings and, therefore, on a theory of sin and a praxis for dealing with it.” Here, the sin in question is that of self-interest. While the Bishops’ proposal would empower honest directors to act in the best interests of all the corporation’s constituents, it also would empower dishonest directors to pursue their own self-interest. There is a very real risk that directors and managers given discretion to consider interests other than shareholder wealth maximization will use stakeholder interests as a cloak for actions taken to advance their own selfish interests.

Corporate Philanthropy

A blog comment over at Volokh’s place asks what I think about corporate philanthropy. I addressed that issue in Corporation Law and Economics, where I wrote that:

Corporate charitable donations are subject to attack under two doctrines: ultra vires and breach of fiduciary duty. Neither is likely to succeed, so long as the amount in question is reasonable and some plausible corporate purpose may be asserted.

Virtually all states have adopted statutes specifically granting corporations the power to make charitable donations, which eliminates the ultra vires issue. Although these statutes typically contain no express limit on the size of permissible gifts, courts interpreting the statutes require corporate charitable donations to be reasonable both as to the amount and the purpose for which they are given.  The federal corporate income tax code’s limits on the deductibility of corporate charitable giving are often used by analogy by courts seeking guidance on whether a gift was reasonable in amount.

As for breach of fiduciary duty claims, the principles announced in Dodge v. Ford Motor Co. arguably require that corporate philanthropy redound to the corporation’s benefit. As Shlensky v. Wrigley suggests, however, reasonable corporate donations should be protected by the business judgment rule.  Consequently, Barlow’s discourse on corporate social responsibility properly is regarded as mere dicta.

Law professors worry a lot about corporate philanthropy—a small forest has died to print all the law review articles on the subject.  Yet, the corporate law rules governing this subject are perfectly consistent with our theory of the firm. To be sure, corporate philanthropy poses a classic agency cost problem. Just as corporate managers may divert resources to perquisites for themselves, they likewise may divert resources to philanthropic giving from which they derive psychic utility. This suspicion is confirmed by Warren Buffet’s amusing anecdote:

I have a friend who is the chief fundraiser for a philanthropy. . . . All he wants is to take some other big shot with him who will sort of nod affirmatively while he meets with the CEO. He has found that what many big shots love is what I call elephant bumping. I mean they like to go to the places where other elephants are, because it reaffirms the fact when they look around the room and they see all these other elephants that they must be an elephant too, or why would they be there? . . . So my friend always takes an elephant with him when he goes to call on another elephant. And the soliciting elephant, as my friend goes through his little pitch, nods and the receiving elephant listens attentively, and as long as the visiting elephant is appropriately large, my friend gets his money. And it’s rather interesting, in the last five years he’s raised about 8 million dollars. He’s raised it from 60 corporations. It almost never fails if he has the right elephant. And in the process of raising this 8 million dollars from 60 corporations from people who nod and say it’s a marvelous idea, it’s pro-social, etc., not one CEO has reached in his pocket and pulled out 10 bucks of his own to give to this marvelous charity. They’ve given 8 million dollars collectively of other people’s money.

The identities of the typical beneficiaries of corporate philanthropy likewise confirm that it is driven more by managerial ego than corporate advantage. The charities supported by most corporations tend to be rich people’s charities: art, music, public television, and the like. One can but question how big a bang a company gets for its advertising buck in giving to those charities.

One can concede the agency cost story, however, without conceding that the legal system ought to regulate corporate charitable giving. In the first place, it seems unlikely that corporate charitable giving even remotely approaches a level that materially injures shareholders. Although estimates vary widely, it seems unlikely that corporate charitable giving amounts to more than a couple of billion dollars annually, an infinitesimally small portion of total corporate earnings.

More important, deference to corporate philanthropic decisions is consistent with—indeed, mandated by—[my theory of director primacy, as explained in detail in in my new book The New Corporate Governance in Theory and Practice]. The case for judicial and regulatory deference was developed in detail in our discussion of the business judgment rule. An abbreviated version is worth recalling here, however.

As noted, corporate charitable giving typically is defended on grounds that it produces good will and favorable publicity. In effect, charitable giving is simply another form of advertising. As such, it supposedly results in more business and higher profits. Who knows for sure if that is true? Maybe GM really does sell more luxury sport utility vehicles because it sponsors PBS programs—or maybe not. But that is not the right question. The right question is: who decides? The board of directors or the courts? That directors feel good about themselves for having made such a decision hardly seems like the kind of self-dealing that justifies heightened scrutiny.

Board discretion over issues like charitable giving is the inescapable side-effect of separating ownership and control. If there are good reasons for maintaining that separation, and there are, the board’s discretionary authority must be preserved. As we have repeatedly seen, holding directors accountable for their use of that discretionary authority inevitably limits that discretion. Consequently, deference to board decisions is always the appropriate null hypothesis.

There are cases where the board’s abuse of its discretionary authority warrants regulatory or judicial intervention. Breaches of the duty of loyalty spring to mind as the clearest example. As already noted, it seems doubtful that corporate philanthropy poses the sort of conflict of interest necessary to justify limiting board discretion. Yet, even if corporate philanthropy involved material sums, deference would still be appropriate. The theory of the second best holds that inefficiencies in one part of the system should be tolerated if “fixing” them would create even greater inefficiencies elsewhere in the system as a whole. Even if we concede arguendo the case against board control over corporate giving, judicial oversight or regulatory intervention still would be inappropriate if it imposes costs in other parts of the corporate governance system. By restricting the board’s authority in this context, the various academic proposals to “reform” corporate philanthropy impose just such costs by also restricting the board’s authority with respect to the everyday decisions upon which shareholder wealth principally depends. Slippery slope arguments are usually the last resort of those with no better argument, but one nonetheless must beware eviscerating exceptions that could swallow the general rule of deference. Once regulation of corporate philanthropy allows the camel’s nose in the tent, it becomes harder to justify resistance to further encroachments on board discretion.

Update: I take on some related issues in Crooked Timberites on the Corporate Directors’ Duties to Shareholders and Properly Understanding the Relationship Between the BJR and CSR.

Counsel for CA Comments on CA v AFSCME

Robert Giuffra of Sullivan and Cromwell represented CA in the recent proceeding before the Delaware supreme court. He comments on the court’s opinion:

It reaffirms the bedrock principle of Delaware corporate law that the directors of a corporation, not the shareholders, manage the business and affairs of the corporation. The decision confirms that shareholder bylaws may not prevent the directors from fulfilling their fiduciary duties. To attempt to address the concerns articulated by the Court with the proposed bylaw, stockholders may attempt to modify their proposed bylaws in ways that leave boards with discretion to discharge their fiduciary duties. In addition, the decision makes clear that bylaws may not “mandate how the board should decide specific substantive business decisions,” but may “define the process and procedures by which those decisions are made.” Where the line will be drawn between those bylaws that mandate substantive decisions and bylaws that are procedural likely will be decided by the Delaware courts on a case-by-case basis in the future. Finally, under the Court’s reasoning, a binding shareholder bylaw proposal to prohibit a board of directors from adopting or implementing a “poison pill” likely would be deemed improper under Delaware law.

I think that’s right, although I plan to post separately on the latter point.

Sullivan and Cromwell has put out a clients and friends memo on the case.

Veasey on Competitive Federalism and Delaware’s Role

Former Delaware Chief Justice Norman Veasey has authored a new paper entitled Whither Federalization of Delaware’s Corporate Law? (HT: Pileggi) It’s a valuable and thoughtful perspective. He concludes:

Although I am mindful of the admonition to “be careful what you ask for,” I think we should not always be waiting for the next scandal to stimulate Congress into an unwise paroxysm of federalization. I think there should be a comprehensive, general analysis of federalism vs. federalization beginning with the corporate area.

I agree. And, if such a debate were to occur, I would come down squarely on Delaware’s side for the reasons discussed in my article Creeping Federalization of Corporate Law.

Case Book Supplement Available

Users of Klein, Ramseyer, & Bainbridge’s Business Associations case book are advised that a 2008 supplement is now available. Table of Contents:

Chapter 1. Agency 1
Section 3. Liability of Principal to Third Parties in Tort 1
A. Servant versus Independent Contractor 1
Chapter 2. Partnerships 3
Section 2. The Fiduciary Obligations of Partners 3
A. Introduction 3
Perretta v. Prometheus Development Company, Inc. 3
Note 9
Analysis 9
Chapter 5. The Duties of Officers, Directors, and Other Insiders 11
Section 2. Duty of Loyalty 11
A. Directors and Managers 11
Benihana of Tokyo, Inc. v. Benihana, Inc. 11
Analysis 16
Section 3. The Obligation of Good Faith 17
Introduction 17
A. Compensation 18
In re The Walt Disney Co. Derivative Litigation 18
Analysis 37
Desimone v. Barrows 38
Analysis 54
Jones v. Harris Associates L.P. 55
Analysis 58
B. Oversight 59
Introduction 59
Stone v. Ritter 59
Analysis 66
Section 4. Disclosure and Fairness 67
C. Rule 10b-5 67
Dura Pharmaceuticals, Inc. v. Broudo 67
Analysis 70
Chapter 6. Problems of Control 71
Section 1. Proxy Fights 71
C. Private Actions for Proxy Rule Violations 71
Aftermath 71
D. Shareholder Proposals 71
AFSCME v. AIG, Inc. 71
Background and Aftermath 75
Analysis 75
Problems 76
E. Shareholder Inspection Rights 77
Aftermath 77
Section 4. Abuse of Control 77
Brodie v. Jordan 77
Analysis 81