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

New Corporate Governance Reviewed

Brett McDonnell has posted a review of my new book, The New Corporate Governance in Theory and Practice. Here’s the abstract:

The New Corporate Governance in Theory and Practice, a new book by Stephen Bainbridge, pulls together the leading arguments for director primacy that Bainbridge has made in a series of articles. In his core argument, Bainbridge uses theoretical work by Kenneth Arrow to explain the attractions of the separation of ownership and control with a centralized hierarchy headed by a board of directors. Bainbridge posits that achieving an optimal tradeoff between authority and accountability is the central problem of corporate law. He uses a key passage from Arrow to argue that in making this tradeoff, lawmakers should always make a presumption in favoring of preserving managerial authority. This paper examines Bainbridge’s argument, and shows that he does not succeed in justifying this presumption. Arrow’s argument does persuasively show why rules that lead to constant review of all board decisions would effectively eliminate board authority, and that this would be unattractive. However, none of the major pro-accountability reform proposals currently in play comes even close to eliminating board authority. Arrow’s argument is not able to tell us whether reform in favor of somewhat more accountability at the expense of some, but far from a total, loss in authority is a good idea or not. That is, Bainbridge’s use of Arrow does not help us determine the wisdom of current reform proposals. Bainbridge’s attempt to use Arrow thus falls far short of his target. Bainbridge has other, less original, arguments which supplement his core argument for board authority. This paper considers the leading supplementary arguments as well, and also finds them wanting. The paper ultimately moves beyond a critique of Bainbridge to argue more affirmatively for greater accountability for boards.

Although Brett’s review is critical (and very much so in spots), I think it’s a fair review that offers a number of constructive criticisms. In the end, we’ll just have to agree to disagree.

Here’s a few quotes I especially liked (go read the paper if you want the negative ones):

• “Bainbridge makes a great advance in framing the debate over corporate governance as a tradeoff between authority and accountability, and he does an excellent job in extolling the benefits that authority brings.” I like this because my project has been designed from the outset to counter what I regard as the over-emphasis on ageny costs and accountability in the academic corporate governance literature. Accountabilty alone cannot be the goal of corporate governance. Authority matters too.
• “I do not disagree much with Bainbridge’s descriptive claim that shareholders have very little power—most corporate decisionmaking power is indeed vested in the board.”
• “Bainbridge’s normative defense of board authority is the leading academic defense available for the basic contours of American corporate law. The two leading academic alternatives to Bainbridge—contractarianism and shareholder primacy—do not explain American corporate law as well.” I never thought so either, which is why director primacy was needed.
• “The contractarian law and economics tradition of scholars such as Romano and Easterbrook and Fischel does explain and defend much of corporate law. However, as I have noted elsewhere, that tradition does not do a great job of explaining why board authority is so hard-wired into our corporate law.” Hence, director primacy.

I’ll be interested to see people’s reactions. I plan to reply to Brett’s main criticisms in depth in a later post.

Quality Circles in Education

Gordon Smith offers up a long blog post on his plans to use quality circles in his business associations class. I’m fascinated by his plans, because I did a lot of research on quality circles and other forms of participatory management back in the late 1990s, and came away a skeptic. Go read Gordon’s post and then come back.

In my article, Privately Ordered Participatory Management: An Organizational Failures Analysis, I wrote that: Quality circles commonly consist of a small group of employees (typically under 15) meeting on a regular basis on company time to discuss problems in their work environment. The emphasis is on productivity and product quality.  Members of a given quality circle usually come from a single department, in contrast to the plant or firm-wide committees typical of QWL. Employee enrollment in a quality circle program is usually voluntary, with participation by 25% of a plant’s work force being typical.

Unlike QWL’s broad jurisdictional purview, discussions within quality circles are typically limited to production processes. A common task is the design of workplace procedures. Recall that under Taylorism, management developed standardized work procedures and enforced employee compliance with them. At NUMMI (GM’s joint venture with Toyota), quality circle-like groups of workers designed their own standardized procedures. As one worker explained, “we all work out the objectively best way to do the job, and everyone does it that way.”

Quality circles are often associated with so-called Total Quality Management, perhaps the best known management fad of the last decade. In fact, however, TQM’s proponents usually draw a sharp distinction between the employee involvement aspects of TQM, which involve the use of cross-functional problem-solving teams, and quality circles. Despite their insistence on these denominational distinctions, TQM teams and quality circles are sufficiently similar to justify treating them as variations on the same theme.

Quality circles have undergone many changes in recent years. One important trend is the demise of permanent quality circles and their replacement by temporary problem-solving teams.  An important sub-set of quality circles has evolved in the direction of self-directed work teams, which are discussed below. In such cases, participation in the circle is usually mandatory and typically involves the entire work force.

…

Quality circles are quite explicitly directed at gathering input from line employees about production processes. At Otis Specialty Paper, Inc., for example, ad hoc circles are convened to solve production problems and provide input on changes in the production process.  Recall also the NUMMI example in which quality circles were used to design standardized work procedures.

Interestingly, Gordon plans to use them as a two-way flow of information.

Many features of quality circles confirm their information gathering function. Quality circle training focuses on training both individuals and groups to process and communicate information.  Once implemented, quality circles (like problem-solving QWLs) encourage employees to communicate more freely with supervisors.  In at least some firms, management also reviews meeting minutes or directly observes meetings.

Interestingly, management-initiated quality circles solve more problems and solve them faster than employee-initiated circles.  This suggests that circles are most useful when put to management-intended purposes. At the same time, however, manager-dominated quality circles are not as successful as those in which managers play a less dominant role.  This evidence supports my hypothesis: if the point of quality circles is to give management access to employee-held information, that purpose is negated when managers take over.

I will be interested to see reports from Gordon on the extent to which he led the discussion, versus simply listening. It might be interesting for Gordon to experiment in the future with allowing the QC to meet outside his presence, with someone taking detailed minutes he (and the class?) could review later.

The information gathering function is especially explicit in TQM, which places great emphasis on collecting data and solving problems.  The goal is continuous learning about and improvement of the production process.  Quality circles are an integral part of this management style. Under TQM, quality circles are sometimes divided into two types. One is the “steering arm,” which identifies the organization’s main problems. The other is the “diagnostic team,” which tries to find solutions to the identified problem. In both cases, teams are composed of those “people who can provide access to the data necessary for testing potential solutions and who are critical to implementing the solutions developed.” Once the teams are formed, three techniques are used to extract production information from the team members: Brainstorming is used to generate lists of ideas, with a strong emphasis on creative thinking. Flowcharts of the production process are drafted by team members to help eliminate inefficient steps in the process. Cause and effect diagrams are used to match problems to the probable causes.

What information asymetrically held by students is Gordon trying to extract from the class via the quality circle? Why is that information impacted in such a way that makes a quality circle the best way of extracting it? The post identifies the following benefits:

Quality circles give constructive criticism of your teaching when you can do something about it.
Quality circles let you counter students’ criticisms.
Quality circles let you explain where you’re coming from.
Quality circles help with diversity issues.
Quality circles give you a mechanism for criticizing your students.
Quality circles give students a sense of ownership of the class.

For experienced teachers, it seems unlikely that you need a quality circle to get a handle on these issues. Plus, the academic literature on quality circles doesn’t suggest any reason to think they would be particularly adept mechanisms at resolving most of these issues.

As my hypothesis predicts, however, quality circles do not devolve real decisionmaking power to employees. To the contrary, the managerial literature on quality circles strongly emphasizes the need for management to retain ultimate decisionmaking control.  After discussing a problem, a quality circle may make recommendations to management, but typically has no power to direct that the recommendation be implemented.  In contrast, management retains a considerable degree of control over the quality circle itself; management readily can punish quality circles that tackle the wrong problems or make poor recommendations.  As one critic of quality circles observed, they provide “an ideal structure for controlling decision making while management’s power to implement decisions is maintained.”

…

Employees who work together acquire at low cost information about one another, which is not readily available to managers.  In cases in which this information asymmetry is especially pronounced, traditional Taylorist monitoring structures may be rendered wholly ineffectual. If such employees can be motivated to monitor one another, however, peer pressure may substitute for managerial monitoring. Some forms of participatory management, most noticeably self-directed work teams, are well-suited for creating substantial peer pressure.

As with self-monitoring, peer pressure takes advantage of widely-shared traits among U.S. workers. The Families and Work Institute’s survey is again instructive. Thirty percent of the respondents defined success as earning the respect or recognition of their supervisors and peers.  Such employees are likely to engage in self-monitoring, but are also vulnerable to peer pressure. Indeed, as to such employees, the peer pressure generated by operational participation programs should prove a powerful motivating force.

This prediction is borne out by Guillermo Grenier’s well-known case study of a quality circle program in which workers were given responsibility for making discipline decisions with respect to their fellow employees. “Although this responsibility was largely illusory,” as my hypothesis predicts, it proved an effective means of generating peer pressure for greater productivity.  Workers were required to provide written evaluations of their fellow team members, which were used to determine raises.  The circles also identified and openly discussed individual employees who had problems constituting “counterproductive behavior.”

Because the firm’s workers had some of the forms of decisionmaking power, while ultimate authority remained in management’s hands, the quality circles studied by Grenier closely resembled self-directed work teams. As such, Grenier’s work points towards an explanation of the ambivalent empirical data relating to quality circles. Studies of employee attitudes find that quality circles positively affect program-specific attitudes (such as the perception of influence), but also find a negative impact on general employee attitudes (such as job satisfaction and organizational commitment).  About half of the studies of the effect of quality circles on firm productivity find positive effects, but half find no effect.  Many favorable studies could not show causal links between participation and productivity.  Only one study tried to measure changes in product quality resulting from a quality circle program; it found no effect.

Although the effectiveness of quality circles remains open to question as a matter of solid empirical data, there is a growing body of anecdotal evidence suggesting that long-term quality circles generally are not successful.  Estimates of the failure rates for quality circles range from a low of one-third to a high of 60%.  Whatever the cause of these failures, a question on which we shall speculate in a moment, quality circles arguably have flopped as a management tool.  According to some observers, they are an unstable organizational structure waiting to self-destruct.

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[Q]uality circles fail because they lack a monitoring component or put no teeth into team members’ ability to monitor one another.  In such cases, quality circles can only serve information transmission purposes. We have known at least since Taylor’s time that informational asymmetries about production processes arise precisely because workers have strong incentives to withhold information from management that might prevent shirking or otherwise be used to the workers’ disadvantage. As noted above, this was the rationale for Taylorism’s emphasis on discouraging workers from thinking about their job or its place in the production process. Quality circles may not offer sufficient incentives to overcome the strong bias against voluntary disclosure of information asymmetrically held by workers.  Quality circles therefore ought to be subject to displacement by programs that can both more effectively resolve informational asymmetries and provide enhanced monitoring mechanisms to prevent shirking, which is precisely what my analysis suggests self-directed work teams have done.

Gordon (and Eric Orts on whose work the idea is based) seem focused solely on information gathering and transmission; specifically, two-directional feedback about how the class is going. To the extent quality circles have any utility in the classroom, it would seem useful to direct them mainly at trying to get a handle on how well students are learning the material.

Count me an interested skeptic

Bad PowerPoint Advice

I’m a big believer in PowerPoint and an avid consumer of PowerPoint advice. Unfortunately, much PowerPoint advice ... well, to be frank, sucks. Case in point: I recently read an author who suggests the following algorithim: “Find out the age of the oldest person in your audience. Divide by 2 and that’s your optimal font size.” That might be good advice if you’re giving a talk to senior citizens, but when your audience consists of law students in their 20s, you really don;t want to use 10-12 point fonts!

The Business Associations Bookstore

Here at UCLA, I’m about to go teach my first Business Associations class of the semester. All over the country, teachers and students are doing likewise. If you’re looking for study aids and background materials, I’ve collected my recommendations at my Business Associations Bookstore, which is one department of the ProfessorBainbridge.com aStore, where you’ll also find recommendations for:

Books
Business
Conservative Politics
Humor
Law
Law: Business Associations
Law: Corporate Finance
Religion
Science Fiction
Wine and Food
Very Short Introductions

Cooking
DVD
Technology
Wine Service

Why I Don’t Use the Socratic Method

With the start of the new law school semester looming tomorrow, I thought it was time to revisit a favorite issue. From my Rutter Award for Teaching Excellence speech last spring:

When I joined the Illinois faculty 20 years ago, I began a long struggle with the problem of pedagogy. Like a lot of newly minted law professors of a certain age, I thought Professor Kingsfield was the standard to which I had to aspire. But Kingsfield never had to teach Securities Regulation at 3 p.m. on a Friday afternoon to a class consisting of third-year students in their last semester of law school.

Suffice it to say that it was not a success. Perhaps I lacked a certain gravitas or was just too cherubic for my own good. Being a fairly laid back guy informed with laissez-faire sensibilities probably didn’t help.

I began reflecting back on my own law school experience. As I pondered the various teachers I had in law school, it occurred to me that there were only two whose style had been truly Kingsfield-like. One was my contracts professor, Bob Scott, whose command of the classroom was amazing. He could hide the ball and then, like a great magician, pull it out of your ear. Interestingly, however, in the courses I took from Professor Scott in my second and third years of law school he did a lot more talking than he had in first year contracts.

The other Kingsfield-like teacher I had at Virginia was my torts professor, who should probably remain nameless. His idea of snappy Socratic dialogue was to respond to every student statement with “so what?” or “who cares?” Imagine Socrates with Tourette syndrome. The only thing I learned in that class was that the Coase theorem answered any question, which admittedly has served me well.

In contrast, most of my professors used what I’ve come to call the soft Socratic style. Instead of cold calling students, they used panels of students who were on call for a few days per semester. Instead of grilling a specific student at length, each student would be tossed a few questions and then the professor moved on to the next. Students were never told that they had given a wrong answer, let alone told to go and call their mothers as they would never become a lawyer. At most, the professor gently guided the student towards the proper conclusion.

In my early years at Illinois, I frequently sat in on classes taught by colleagues who were said to be great Socratic teachers. Oddly, however, in most of those classes, Socrates did almost all of the talking. Just as at Virginia, the dominant pedagogic style was soft Socratic. In preparing for this lecture, for example, I went back and dug out an evaluation I wrote of one of my Illinois colleagues:

His style is very soft Socratic. He tosses an occasional question out there and waits for answers. If nobody responds, he answers the question himself.

He started today’s session by picking up the thread of a discussion from yesterday. After reviewing the material by lecture, he started the new material As before, he relied on volunteers. He got some participation, but it wasn’t particularly interactive. Students made a comment, he made a comment, and went on.

In fairness, back in those days you could have said much the same thing about my classroom style.

You see, I knew I was not then and never would be Kingsfield-like, but I was still trapped in the mindset that no self-respecting law professor could depart from the Socratic method. So I too became a soft Socratic teacher. But doubts kept intruding. Were the students who were not “on call” prepared? What did they get out of listening to a colleague answer a question but not having to struggle with it, since I typically moved on to another student or lectured if the student struggled?

It is [said] that [the Socratic method] teaches students how to “think like lawyers.” This claim would, of course, require some evidence. For example, in most countries, including other common law countries, law is not taught via anything like the Socratic method. Yet presumptively their lawyers think like, well, lawyers. So somehow they learned. ‘Thinking like a lawyer’ is a matter of learning how to reason and argue, in some ways that lawyers share with everyone else, and in other ways that are peculiar to lawyers (e.g., arguments from authority are not fallacious in the law). But why think that one learns how to do this by being grilled Socratically as opposed to reading examples of lawyerly thinking and hearing lectures explaining lawyerly arguments?[1]

I eventually came to two conclusions. First, if students couldn’t think like lawyers by the time they got to me in their second or third year of law school, there was very little I could do to help them except suggest another line of work.

Second, the Socratic method doesn’t really teach you to “think like a lawyer.” At best, it teaches you to think like a litigator.

Consider a typical law student who accepts a [transactional] job at a large firm. She has spent perhaps ninety-five percent of her time in law school reading and discussing cases and law review articles. Once in practice, she will go days or weeks at a time without picking up a case or a law review article. Instead, her days will be filled with drafting, reviewing, and marking up transactional documents, negotiating language with opposing counsel, participating in conference calls, and composing memos, emails, and letters to colleagues and clients.[2]

“Thinking like a lawyer,” as Kingsfield and his ilk would have our graduate do is not very conducive to success in that environment.

In his book, The Terrible Truth About Lawyers, Mark McCormack, founder of the International Management Group, a major sports and entertainment agency, wrote that “it’s the lawyers who: (1) gum up the works; (2) get people mad at each other; (3) make business procedures more expensive than they need to be; and now and then deep-six what had seemed like a perfectly workable arrangement.” McCormack further observed that, “when lawyers try to horn in on the business aspects of a deal, the practical result is usually confusion and wasted time.” He concluded: “the best way to deal with lawyers is not to deal with them at all.”

All of which is why I emphasize not only doctrine but also economics and business. Transactional lawyers must understand the business, financial, and economic aspects of deals so as to draft workable contracts and disclosure documents, conduct due diligence, or counsel clients on issues that require business savvy as well as knowing the law.

I want my students to understand that successful transactional lawyers build their practice by adding value to their clients’ transactions. Instead of thinking like Kingsfield, I want them to learn where the value in a given transaction comes from and how they might add even more value to the deal.

I had always lectured some. I defy even Professor Scott to teach the Capital Asset Pricing Model Socratically. As my teaching became more oriented towards transactions, and business and economics became more important, and identifying sources of value in the underlying deals out of which the cases arose became the key task, grilling law students seemed less and less effective.

Gradually, bit by bit, I freed myself from the trappings of the soft Socratic method. Away with panels! Away with volunteers! Away with questions! Up with PowerPoint!

Once I went through the 12 step program and became what Brian Leiter calls a “recovering Socratic teacher,” I noticed that I had some interesting company. Leiter, for example, has written that: “There is no evidence—as in ‘none’—that the Socratic Method is an effective teaching tool. And there is much evidence that it’s a recipe for total confusion.”[3]

In her 1997 book, Becoming Gentlemen, Lani Guinier blasted the Socratic Method for forcing female students to adopt a style that many found alien to them. Former Secretary of Labor Robert Reich, wrote in a 1998 essay that the method had “morphed beyond recognition” into an exercise in intellectual arrogance in which the professor always had the right answer.

Even so, at first, lecturing was my dirty little secret. I felt like a deacon sneaking out of town to get a snootful. What if my colleagues found out?

Gradually, however, word leaked out … and nothing bad happened. My classes were full to the bursting. Deans patted me on the back for getting good evaluations. Promotions and raises kept coming.

And now the Rutter Award. I’d like to think that this Award in some way validates the evolutionary path my teaching has followed. I’d also like to think that it might encourage some of my younger colleagues who are dissatisfied with the Socratic method to consider alternatives.

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[1] Brian Leiter, The “Socratic Method”: The Scandal of American Legal Education

[2] Victor Fleischer, Deals: Bringing Corporate Transactions into the Law School Classroom.

[3] Leiter, supra note 1.

2008 Casebook Supplement Available

Attention adopters of Klein, Ramseyer & Bainbridge Business Associations:

The 2008 Case Supplement for Klein, Ramseyer and Bainbridge’s Business Associations, Cases and Materials on Agency, Partnership and Corporations, Sixth Edition is available for Fall 2008 classes. 

Gordon Smith on AALS Boycott

Gordon Smith offers up a thoughtful and important comment on the AALS annual meeting dispute. Money quote:

I couldn’t help but notice that one of the groups calling for the boycott was the AALS Section on Legal Writing Research and Reasoning. They seem strangely light on reasoning over there.

Go read the whole thing to find out why.

Update: Related thoughts from Larry Ribstein.

Longest Law Review Article Title?

Rick Garnett cites what may be one of the longest law review titles ever:

The Servant Leader Where the Modern Lawyer Should Be and How the Modern Lawyer Can Get There: How the Professionalism Paradigm Fueled by a Lawyer’s Ethical Obligation to Inform Clients about Alternative Dispute Resolution Can Revive the Lawyer’s Sense of Self, Sense of Vocation, and Sense of Service

Forty-eight words. But what’s the record? Various Google searches proved unavailing. As did a Westlaw search of both longest /s article /s title and longest /s title.