In today's Wall Street Journal, there is an interview with Prof. Daylian Cain of the Yale School of Management.  Prof. Cain teaches a course entitled, "Business Ethics Meets Behavioral Economics."  In the interview, Prof. Cain states that:  "Behavioral economics is such a great tool because it shows how people make bad decisions and separate their actions from their values."  In other words, you can be really smart and have really great values and still make terrible mistakes because you are not the perfectly rational actor of classical economics who lives in a world where all the messy realities of life are assumed away.

Perhaps some of this insight is implicated by today's post by Prof. Lawrence Cunningham over at Concurring Opinions (HT: Kristina Melomed).  Prof. Cunningham recounts that:

In practice and scholarship, intensifying through the 1980s and into the 1990s, transactional and financial innovation was the rage.  Corporate lawyers turned innovative, cutting edge, exciting, doing deals, developing new contractual devices for financial products—including those I worked on.  Corporate law scholars took up finance theory with alacrity, doing exciting research showing how this innovation worked, with many producers and devotees of this work arguing how law should give it maximal space to flourish (though there were dissenters from this dominant view, including me).   As recently as 2005, Professor Romano, a leading scholar in this dominant style, urged doing more of it, more innovative financial engineering in practice and more finance oriented and exciting research in the academy.

However, as Prof. Cunningham goes on to point out, the roots of the recent financial crisis can be traced back to these very same "exciting" financial products:

Causes of the worldwide credit crisis include, perhaps dominantly, the proliferation of innovative financial contracts, purportedly devices that would reduce financial risk but that instead backfired to concentrate and intensify it on a galactic scale.

Maybe more attention to the lessons of behavioral economics can help stem some of the hubris that commonly precedes a fall.  But then again, perhaps we'll just do with the lessons of behavioral economics what we do with the knowledge that not everyone can be an above-average driver.  You know it's true, but that in no way changes the fact that you also know that you are one of the above-average drivers.

The following post comes from Prof. Jay Dratler, Jr.:

The case of Bilski v. Kappos, argued yesterday before the Supreme Court, 2009 Term, No. 08-964, addresses a question vital to the survival of our free enterprise system. (Number citations are to pages and lines of the oral argument transcript.)

Can anyone with a new and nonobvious business idea (or business “model,” in current parlance) patent it and exclude competition for twenty years from the patent’s application date?  Twenty years are an eternity in many innovative businesses today, so the “limited Time” of the patent grant has limited practical effect.

Since Parliament adopted the Statute of Monopolies in 1623, England’s and others’ free-market economies have answered that question “no.”  In 1998, a panel of our own Federal Circuit—our primary patent appeals court—answered it “yes.”  See State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998).  See generally, Jay Dratler, Jr., Does Lord Darcy Yet Live?  The Case Against Software and Business-Method Patents, 43 Santa Clara L. Rev. 823 (2003).

Now the patentee-petitioner in Bilski wants the same “yes” answer for slightly different facts.  Yet this time the en banc Federal Circuit said “no,” in a limited way.  Our Deputy Solicitor General supported the Federal Circuit’s ruling in his oral argument.

There are some technical subtleties. The Bilski patent claims abstract steps in a process for consummating certain commodities-trading transactions.  The Federal Circuit, sitting en banc, rejected that process as unpatentable subject matter for being insufficiently tied to a physical machine or transformation. See 545 F.3d 943, 963-64 (Fed. Cir. 2008).  Its limitation has become known as the “machine-or-transformation” test. (3-12)

But as five Justices acknowledged in oral argument yesterday (see below), upholding that limitation will have no discernable effect, except on the parties to Bilski and others with already-issued patents whose claims cannot be amended.

The reason is simple.  Our patent law explicitly provides for patents on both a “process” and a “machine.”  35 U.S.C. § 101.  If Bilski wins, patent applicants can circumvent the age-old prohibition against general business monopolies by patenting business ideas in the abstract, step by step, as “processes” or “methods.”  As Chief Justice Roberts helpfully illustrated (10-7 to 10-8): “I initiate a series of transactions with buyers.  I buy low and sell high.  That’s my patent for maximizing wealth.”

But if Bilski loses, his successors can reach the very same goal by a slightly more circuitous route.  They can write a computer program to perform the desired process or method, load it into a computer, call the computer-cum-program a “machine,” and patent it.  In Justice Breyer’s words (46-20 to 46-24), “all you do is you get somebody who knows computers, and you turn every business patent into a setting of switches on the machine because there are no businesses that don’t use those machines.”

Thus any decision in Bilski, for which the patent bar has waited 28 years (since Diamond v. Diehr, 450 U.S. 175 (1981)), will be a practical, commercial and economic nullity, except perhaps for poor Bilski and those like him.  Heads Bilski wins and the public loses.  Tails the public loses and those who can still claim business ideas as programmed computers win.  As Justice Sotomayor sagely observed, “No ruling in this case is going to change State Street.”  (30-1 to 30-2; see also, Kennedy, 40-2 to 40-10)

Here’s the math:

Seven Justices (all but Alito and Thomas) expressed unease with both the current state of the law and any decision for Bilski that would reject the machine-or-transformation test. (Breyer, 6-5 to 7-4; Ginsburg, 5-22 to 6-1, 12-21 to 13-1, 39-17 to 39-22; Kennedy, 10-21 to 11-9, 18-4 to 18-9, 21-25 to 22-10; Roberts, 9-23 to 10-10, 22-16 to 22-18; Scalia, 16-1 to 16-17; Sotomayor, 7-7 to 7-12, 8-9 to 8-13, 14-5 to 14-9, 18-18 to 19-3, 20-17 to 21-11; Stevens, 14-24 to 15-8, 44-1 to 44-14)

Five Justices worried that a decision upholding the machine-or-transformation test might have unintended consequences for specific industries.  (Alito, 27-16 to 27-22; Breyer, 31-8 to 32-4; Ginsburg, 47-18 to 48-3; Scalia, 30-22 to 30-24; Sotomayor, 28-3 to 28-12, 36-23 to 37-4).

Five Justices noted that future Bilskis could circumvent a decision against petitioner Bilski by using the computer-program-machine three-step outlined above.  (Breyer, 46-10 to 46-23; Kennedy, 40-2 to 40-10, 44-15 to 44-16; Roberts, 33-8 to 33-18; 35-13 to 35-18; Sotomayor, 30-1 to 30-4; Stevens, 44-11 to 44-14, 45-19 to 45-22)  Deputy Solicitor General Stewart admitted as much. (42-1 to 42-12; 43-13 to 43-21; 45-11 to 45-18).

Two Justices asked for a better test than the Federal Circuit’s machine-or-transformation test and got no answer.  (Breyer, 9-1 to 9-17; 19-8 to 20-12; Sotomayor, 37-19 to 37-24)

So the Bilski math produces the following result, strange as it may seem:

7 + 5 + 5 + 2  = 0.

Apart from Bilski and those like him (who cannot now write computer programs and add new machine claims to their patents), nothing the good Justices may decide in Bilski will save our free-enterprise system from patent cancer.

Yet there is hope.  The five Justices who noted or described the easy “machine” circumvention of any decision in Bilski seemed not to like the idea.  So a definitive ruling on business-method and computer-program patents, which are intimately related, awaits the next case.  In the meantime, patent lawyers will continue to claim business ideas one way or the other, and the scope of freedom in our free-enterprise system will continue to shrink.

Interesting article over at MSN Money.  Here's a taste:

Just where did Wall Street go wrong? It's popular to blame misaligned incentives, lack of regulation or just plain greed. . . . The truth is, sadly, more complex, but it boils down to this: Harvard Business School is to blame. Harvard Business School led the charge away from an approach to business centered on relationships and commerce and toward one rooted in markets and competition. . . . a Hobbesian view of business — nasty, brutish and every man for himself — and a rejection of the idea that ultimately we're all in this together. . . . In this worldview, "business ethics" is an oxymoron, not because of bad behavior but because ethics can't even exist apart from some notion of a "relationship" to something or someone else. Subordinating everything to shareholder value is, literally, anti-ethical.

I just want to say that I fully support blaming Harvard.  I graduated from Brown.  In fact, I think this should justify granting sole possession of the 2008 Ivy League football championship to Brown.

The University of Akron School of Law will host a lecture by leading tax authority Rick Grafmeyer, a 1982 graduate of Akron Law on Thursday, Nov. 5 at 5 p.m. in Room 152. The event is free and open to the public.

Grafmeyer is currently a partner with Capitol Tax Partners, Washington D.C.’s largest independent consulting firm specializing in tax legislative and regulatory matters. He served as chief tax advisor to Sen. John McCain during the 2008 Presidential election. From 1998 to 2000, he was deputy chief of staff of the Joint Committee on Taxation (JCT) and was responsible for major simplification study (three volumes), and separate studies on Tax Code penalty and disclosure provisions and tax-exempt organizations issued by JCT.

In the 1990s, Grafmeyer was nominated to the Social Security Advisory Council by President Clinton and was the deputy republican staff director of the Senate Finance Committee. He also served as senior republican tax counsel for the Senate Finance Committee and was responsible for general business tax issues, tax-exempt organizations, employee benefits, tax accounting, and IRS compliance.

Prior to his work on Capitol Hill, Grafmeyer was a partner in Arthur Andersen's National Office of Federal Tax Services and the leader of the firm's legislative practice and involved in regulatory and administrative issues before the Treasury Department and the Internal Revenue Service.  He also was a partner with Ernst & Young and National Director for Washington Tax Services focusing on tax issues before Congress or pending within Treasury or the IRS.

 Grafmeyer is also a frequent commentator on tax and budget issues for CNN, CNBC, and PBS Nightly Business News.

Some commentators are fretting that the recent blockbuster insider trading case involving Galleon Management (nice summary here) is going to chill market-enhancing research.  For example, Prof. Bainbridge argues that:

There is a very serious risk that this case could chill aggressive but legitimate research by hedge funds and other professional investors.  If so, the SEC will have done a serious disservice to the ordinary investors it claims to be protecting.  Those investors will be left with a less efficient and less liquid market.

Prof. Painter adds, in a comment to Prof. Bainbridge's post, that:

I am as concerned as anybody about illegal insider trading by hedge funds and others.  I am also concerned about the great lack of clarity in this area of the law — a topic I and two coauthors raised after the O'Hagan case in a law review article — "Don't Ask, Just Tell: Insider Trading After United States v. O'Hagan" 84 Virginia Law Review (1998).  Eleven years later there is still insufficient clarity here.  One should not have to have Professor Bainbridge on call to avoid running afoul of a criminal statute.

But I am not convinced that this is such a gray area.

Under Dirks v. SEC, 463 U.S. 646 (1983), we know that:

1.  "[A] tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach," and

2.  "[T]he test is whether the insider personally will benefit, directly or indirectly, from his disclosure.  Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach."

In this case we apparently have evidence of direct exchanges of value for the information as well as seemingly very little doubt on the part of the participants that they were engaging in illegal conduct (e.g.:  “You put me in jail if you talk,” and “I’ll be like Martha…Stewart.”).  Does this kind of conduct really implicate legitimate research analysts?

AIG has been in the news for over a year now for its fiasco involving the payment of bonuses to employees from government-loaned bailout funds.  Just last week, AIG was back in the news, seeking to pay additional bonuses.  The "pay czar," Ken Fienberg (the former head of the 9/11 compensation fund) is also trying to find ways to stop AIG's payments — with no success.  It appears AIG has found a huge loophole: bonuses paid pursuant to contracts entered into prior to fall 2009 (the date of the bailout legislation) are exempt from limitation.  Thus, lawmakers are once again searching for ways to recoup the money.  In a recent essay, I suggest that the law of restitution provides several options for seeking the return of unjust gains.  To read it, go to http://lawreview.wustl.edu/slip-opinions/bailouts-bonuses-and-the-return-of-unjust-gains/

Imagine you are invested in a hedge fund around the time the credit crisis was beginning to rear its head.  You get on a call with one of the hedge fund managers and are told that he is "very comfortable with exactly where we are" and "there's no basis for thinking this is one big disaster."  When asked about redemptions by other investors, the hedge fund manager reports that there were "just a 'couple of million' dollars of redemptions requested by investors in June."  In another conversation, the hedge fund manager assures you that he himself is putting more of his own money in the fund.

It turns out, however, that three days before the conference call the hedge fund manager e-mailed a colleague to say: "The entire subprime market is toast," . . . "[t]here is simply no way for us to make money — ever." He had also written that "if an internal report prepared by a colleague is 'ANYWHERE CLOSE to accurate, I think we should close the funds now.'"  Furthermore, it turns out that rather than investors asking for merely a couple of million dollars back, one investor had informed the fund that "it wished to withdraw its entire $57 million investment."  The fund manager later admits that "he pulled the couple of million dollars amount 'out of thin air.'"  Finally, the manager was taking millions of dollars of his own money out of the fund while claiming to be adding to his investment.

Now let's say that you and the rest of your fellow investors ended up losing $1.5 billion on your investment in this fund.  Were you defrauded?  Should the hedge fund manager go to jail?  Should he go to jail for 20 years?

Well, that's exactly what a jury will get to decide in the criminal trial of former Bear Stearns executives Ralph Cioffi and Matthew Tannin, which began this past Tuesday.  (The quoted language above was taken from here and here.)  Commentators are framing the case as one of spin versus fraud, but the real issue is going to be intent.  Most people would equate "spin" with immaterial puffery.  But even as far as courts and judges are willing to go to label optimistic misstatements immaterial puffery in the context of securities litigation, I think that would be a hard sell on these facts.  Rather, the difficult task for the prosecution in this case will be to prove that these statements were made with an intent to defraud as opposed to being mere responses to "panic and desperation . . . that he was simply paralyzed by circumstances spiraling out of control."  Of course, he apparently wasn't too panicked or paralyzed to pull out his own money or chat up investors.

The University of Akron School of Law and Vestige presents the Electronic Evidence Certificate Program.  Learn to advise clients using electronic evidence to accurately document and prove maximum damages in civil cases, investigate without interviewing personnel, find facts without relying upon human recall, document events without incurring outside counsel fees, and lead outside counsel and client to claims and defenses faster and more economically.  Participants will receive an Electronic Evidence Certificate demonstrating competency in the legal and technical knowledge and skill sets necessary to advise clients.

Cost:  $450 per person (early bird registration received before Nov. 9), $500 per person (registration received after Nov. 9).  Cost includes 12 CLE hours (one hour ethics, one hour professionalism and .5 substance abuse).  Lunch and Breakfast provided for both days.

An email exchange played out on my desktop that I thought readers might find interesting.  It started with Kristina Melomed (a former student of mine and a JD and MTax Candidate here at the University of Akron) passing on the following:

"Please find attached a chart showing the top 5 banks holding the largest percentage of credit default swaps, measured in outstanding notional amounts, as reported by the Office of the Comptroller of the Currency.  I was pretty excited to learn that the OCC releases reports on credit default swaps."

The chart can be found here: http://www.thesunshinereport.net/marksunshine/wp-content/uploads/2009/10/100609-0226-whoownsthed12.png

Another recipient of the email responded: "Staggering numbers.  If I'm understanding them, the banks, in the aggregate, have some 20 – 30 times as much derivatives as they do assets.  After what happened last year, it's hard to just trust that that's not a problem b/c they know what they're doing."

This prompted Professor Cohen to opine:

They don’t and it is.  FASB changed the accounting rules so we could ignore this problem for some time, but the toxic assets are still there (at least for now).  The banks will not be able to earn their way out of this mess (even with “free money”) and they still have defaults in CRE, credit cards, Alt-A mortgages, etc. to account for.  And the icing on the cake is that they are currently under-reserved, by most accounts.

I remain amazed that the American public is not completely outraged by the bank bailouts and all the policy measures and accommodations for Wall Street and the big banks.  This is not a political statement.  I don’t care who did it – in my view, it’s morally wrong and filled with moral hazard.  The worst part is that all these bailouts and accommodations will inhibit a recovery, not encourage one (as the Fed & others believe).  Politically, we are incapable of accepting short-term pain for longer-term concerns.  When a recession starts, we immediately work at overcoming it.  Recessions are a normal part of the business cycle – they are cleansing mechanisms.  The financial crisis involved systemic imbalances and misallocation of capital (as do our policies to deal with the crisis).  Instead of allowing the system to correct the imbalances (to be sure, a painful process), we work to overcome the crisis and interfere with the corrective process.  In fact, we have effectively maintained the imbalances (no doubt, as an unintended consequence – I hope – of our policies).

Interestingly, the New York Times DealBook Blog just posted a piece by Daniel Alpert of Westwood Capital entitled "Banking Lessons We Should Have Learned," wherein he noted that:

Some observers may (not incorrectly) point out that, despite some degree of recovery, certain, arguably systemically critical institutions simply cannot currently raise sufficient private capital to eliminate the true risks they pose to the financial system. After all, even today, the magnitude of potential losses to many institutional balance sheets is still too great — and, to an extent, unknowable.

Asset sales to raise capital may not be an option, given that many bank assets, held in excess of market value, are still on the books. . . .

Requiring banks to increase capital substantially will — assuming investors of equity capital are rational and wish to avoid future dilution — require banks to make greater provisions for troubled assets. . . .

We would argue that we are past the point of panic and that it is now time to take the necessary steps to recapitalize the most sickly of institutions on the backs of any of their stakeholders (owners and/or creditors), where this needs to occur.

Apparently, serious questions remain about whether we have really learned our lesson.

The New York Times described the case of Citizens United v. FEC, which was recently re-argued before the Supreme Court, as "a momentous case that could transform the way political campaigns are conducted."  As the NYT reports:

The case involves “Hillary: The Movie,” a mix of advocacy journalism and political commentary that is a relentlessly negative look at Mrs. Clinton’s character and career.  The documentary was made by a conservative advocacy group called Citizens United, which lost a lawsuit against the Federal Election Commission seeking permission to distribute it on a video-on-demand service.  The film is available on the Internet and on DVD.  The issue was that the McCain-Feingold law bans corporate money being used for electioneering.

The Times article goes on to note that:

[T]he relevant law, the Bipartisan Campaign Reform Act of 2002, more commonly called McCain-Feingold, applies only to broadcast, satellite or cable transmissions. That leaves out old technologies, like newspapers and books, and new ones, like the Internet. . . . The McCain-Feingold law [also] does contain an exception for broadcast news reports, commentaries and editorials.

One possible way of describing the tension here is as follows:  On the one hand, owners and managers of corporations consider the corporation to be their property and believe they should be protected by the First Amendment in the use of that property for political speech.  On the other hand, one can argue that the corporation is a "creature of the state" uniquely designed to facilitate wealth accumulation for the benefit of society as a whole and that the use of that wealth to influence elections may be regulated by the state.  As I wrote in an article a few years ago:

It is important to note here (and should be obvious upon reflection) that the State did not grant limited liability to shareholders or immortality to the corporate entity merely out of a benevolent desire solely to increase the wealth of shareholders.  Rather, the State saw that its interests as sovereign, whether building specific pieces of infrastructure or promoting economic growth generally, could be furthered via the corporate form.

But somewhere along the way the corporation was granted personhood under the Constitution and now we are arguing about the free speech rights of a fictional entity.  In the oral arguments last week, newly-appointed Justice Sotomayor questioned this fundamental attribute of the corporation.  The Wall Street Journal reported it this way:

During arguments in [Citizens United], the court's majority conservatives seemed persuaded that corporations have broad First Amendment rights and that recent precedents upholding limits on corporate political spending should be overruled.  But Justice Sotomayor suggested the majority might have it all wrong — and that instead the court should reconsider the 19th century rulings that first afforded corporations the same rights flesh-and-blood people have.  Judges "created corporations as persons, gave birth to corporations as persons," she said.  "There could be an argument made that that was the court's error to start with…[imbuing] a creature of state law with human characteristics."

This made me think back to some of the warnings regarding the abuses of corporate power that I wrote about in another recent article:

Almost from the time of the birth of the modern corporation there have been many voices loudly proclaiming that the accumulation of power that the corporate vehicle promised posed a threat to the people. . . .  These voices include U.S. Presidents like Thomas Jefferson, who urged citizens to "crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country"; Abraham Lincoln, who wrote that "corporations have been enthroned and an era of corruption in high places will follow," and predicted that "the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed"; and Dwight D. Eisenhower, who warned us to "guard against the acquisition of unwarranted influence . . . by the military industrial complex."  President Ruthord B. Hayes went so far as to assert that, "This is a government of the people, by the people and for the people no longer. It is a government of corporations, by corporations and for corporations."

However, it does not seem like these warnings will be heeded by the Court in Citizens United.  As SCOTUSBLOG noted in reviewing the oral argument:

If supporters of federal curbs on political campaign spending by corporations were counting on Chief Justice John G. Roberts, Jr., and Justice Samuel A. Alito, Jr., to hesitate to strike down such restrictions, they could take no comfort from the Supreme Court’s 93-minute hearing Wednesday on that historic question. Despite the best efforts of four other Justices to argue for ruling only very narrowly, the strongest impression was that they had not convinced the two members of the Court thought to be still open to that approach. At least the immediate prospect was for a sweeping declaration of independence in politics for companies and advocacy groups formed as corporations.

PS–Former Akron Law Jurist-in-Residence Judge Rakoff has been making quite a bit of news lately with his refusal to approve the proposed settlement between the SEC and B0fA over allegations of impropriety in connection with the failure to fully disclose Merrill bonuses before the BofA-Merrill merger.  I plan on blogging on this story next week.

PPS–I have been listening to William Cohan's "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street", and I can highly recommend it.  It's all about how rational and efficient markets can solve everything

Here are a few bits of news you might find interesting:

1.  The race is on to write the script, can you guess how this movie ends (hat tip to Kristina Melomed)?

After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one. The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. . . . The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.

The link to the NYT story is here.  More after the break.

2.  In honor of Labor Day:  "Swiss topple U.S. as most competitive economy."  The money quote for the guy always complaining about about private business taking over the government:

The [World Economic Forum] said the U.S. economy was still extremely productive but a number of escalating weaknesses were taking its toll. Concerns were growing about the government's ability to maintain distance to the private sector . . . .

3.  Speaking of big business running governments, the Wall Street Journal reported this past Saturday that:

British oil giant BP PLC lobbied the U.K. in late 2007 over a controversial prisoner transfer agreement with Libya . . . . Revelations of the efforts Friday fed speculation by opposition politicians and victims' families that the recent release of the convicted Lockerbie bomber is entangled with oil interests.

On Tuesday the WSJ reported further that:

Scottish Justice Secretary Kenny MacAskill, who recently released the Lockerbie bomber, has a brother who is an energy-industry executive and who has worked at firms that have pitched for oil business in Libya.

But I'm just paranoid.

This is what I wrote a while back in my paper "Finding State Action When Corporations Govern" (last revised April 15, 2009):

This Article argues that corporations have for some time been increasingly taking on roles as pseudo-governmental actors without incurring the accountability to the people generally associated with state action.  This is happening via “new governance,” and while the recent financial crisis may suggest that the problems associated with new governance are waning, the reality is that the corporate consolidations likely to follow in the wake of the downturn . . . will result in even more powerful corporate actors with an even greater ability to govern.

This is what David Cho wrote in The Washington Post this past Friday:

The crisis may be turning out very well for many of the behemoths that dominate U.S. finance.  A series of federally arranged mergers safely landed troubled banks on the decks of more stable firms.  And it allowed the survivors to emerge from the turmoil with strengthened market positions . . . .  [N]o consequence of the crisis alarms top regulators more than having banks that were already too big to fail grow even larger and more interconnected.

Stay tuned.

Question 1:  Who are the owners of the typical U.S. publicly traded corporation?

(a)  The shareholders.

(b)  The board of directors.

(c)  The management (CEO, CFO, etc.).

Question 2:  If the owners of the corporation want to put a slate of nominees for the board of directors on the corporation's annual proxy statement, who should bear the cost?

(a)  The owners.

(b)  The corporation.

Keep these questions and your answers in mind while you peruse some of the latest discussion on the SEC's new proxy access proposal that you will find here and here.

Fun weekly "coincidence":

First, Frank Rich (HT: Kristina Melomed) opines that:

What the Great Recession has crystallized is a larger syndrome that Obama tapped into during the campaign.  It’s the sinking sensation that the American game is rigged — that, as the president typically put it a month after his inauguration, the system is in hock to “the interests of powerful lobbyists or the wealthiest few” who have “run Washington far too long.”. . . What disturbs Americans of all ideological persuasions is the fear that almost everything, not just government, is fixed or manipulated by some powerful hidden hand, from commercial transactions as trivial as the sales of prime concert tickets to cultural forces as pervasive as the news media.

Then we hear about a paper from Cooper, Gulen & Ovtchinnikov entitled "Corporate Political Contributions and Stock Returns":

In our paper Corporate Political Contributions and Stock Returns, which was recently accepted for publication in the Journal of Finance, we study whether there is a robust relation between firm contributions and contributing firm returns. . . . We find that the number of supported candidates has a statistically significant positive relation with future abnormal returns for firms which contribute to political candidates. . . . [T]he contribution effect appears to increase for firms that have longer relationships with candidates, support more home candidates, and support more powerful candidates.

And people call me paranoid when I write that "corporations have for some time been increasingly taking on roles as pseudo-governmental actors without incurring the accountability to the people generally associated with state action."

The Wall Street Journal reports today that:

A Senate panel has subpoenaed financial institutions, including Goldman Sachs Group Inc. and Deutsche Bank AG, seeking evidence of fraud in last year's mortgage-market meltdown, according to people familiar with the situation.  The congressional investigation appears to focus on whether internal communications, such as email, show bankers had private doubts about whether mortgage-related securities they were putting together were as financially sound as their public pronouncements suggested.

Since this will likely rouse the market apologists to argue that labeling the conduct underlying our current financial crisis as "fraud" is a bit harsh, I thought this would be a good time to review some of the more memorable quotes connected with related "business practices" of the ratings agencies.

William Black documents one of the more memorable exchanges here:

The first document everyone should read is by S&P, the largest of the rating agencies. The context of the document is that a professional credit rater has told his superiors that he needs to examine the mortgage loan files to evaluate the risk of a complex financial derivative whose risk and market value depend on the credit quality of the nonprime mortgages "underlying" the derivative. A senior manager sends a blistering reply with this forceful punctuation:  "Any request for loan level tapes is TOTALLY UNREASONABLE!!! Most investors don't have it and can't provide it. [W]e MUST produce a credit estimate. It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so."

Clusterstock has a couple more here:

* In one email, an S&P analytical staffer emailed another that a mortgage or structured-finance deal was "ridiculous" and that "we should not be rating it." The other S&P staffer replied that "we rate every deal," adding that "it could be structured by cows and we would rate it."

* Meanwhile, an analytical manager in the collateralized debt obligations group at S&P told a senior analytical manager in a separate email that "rating agencies continue to create" an "even bigger monster — the CDO market. Let's hope we are all wealthy and retired by the time this house of cards falters.;O)"

Reminds me of a saying I used to hear every so often when I was in the Army:  "If you ain't cheatin', you ain't trying."

Happy Trading!

I'm teaching Corporations this summer and we recently discussed how different jurisdictions deal with the problem of structural bias when it comes to allowing special litigation committees to dismiss derivative actions.  To give some brief background, we start with the proposition that the decision of whether or not to pursue a legal claim held by the corporation is a business decision generally left to the discretion of the board of directors.  When the corporation's claim actually runs against the directors, however, we are rightly concerned that the directors may place their own self-interest ahead of the best interests of the corporation and so we allow shareholders to bring such claims on behalf of the corporation.   The board is subsequently "conflicted out" of seeking to intervene in such litigation with a motion to dismiss grounded on the board's determination that the suit is not in the best interests of the corporation.

But what if the board with the conflict of interest appoints a committee of disinterested directors who then proceed to conclude that suit should be dismissed?  Should that determination receive the usual deference accorded such decisions?  Courts are divided on the issue and the differences in treatment tend to reflect to what degree the court is concerned about structural bias–the bias one might expect to flow from the conflicted board to the individuals they appoint, regardless of the appointees' apparent disinterestedness.  I was reminded of this issue of structural bias in reviewing some recent news stories on Goldman Sachs.

A couple of weeks ago, Matt Taibbi posted an article entitled, "Inside the Great American Bubble Machine", which described Goldman Sachs and its place in our current economy as follows:

Any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything.  What you need to know is the big picture:  If America is circling the drain, Goldman Sachs has found a way to be that drain . . . .  It began in September of last year, when then-Treasury secretary [and Goldman alum] Paulson made a momentous series of decisions. . . .  Paulson elected to let Lehman Brothers — one of Goldman's last real competitors — collapse without intervention.  ("Goldman's superhero status was left intact," says market analyst Eric Salzman, "and an investment-banking competitor, Lehman, goes away.")  The very next day, Paulson greenlighted a massive, $85 billion bailout of AIG, which promptly turned around and repaid $13 billion it owed to Goldman.  Thanks to the rescue effort, the bank ended up getting paid in full for its bad bets.  By contrast, retired auto workers awaiting the Chrysler bailout will be lucky to receive 50 cents for every dollar they are owed.

Since that article, the following news items have caught my eye:

On July 8th, the Wall Street Journal, in an article entitled, "Are Large Banks Now Too Big to Foil?", noted that:

The Obama administration, after saving the banks, is now planning regulatory changes that could establish an elite group of U.S. institutions with large investment-banking activities.  That will be hard to join and compete against. . . .  There is a hint of the funding benefit in recent numbers.  In the first quarter, a truly tumultuous time for broker-dealers, Goldman's interest-bearing liabilities had an average cost of just 1.24%.  While that partly is due to steps the firm took to cut borrowing costs as interest rates fell, it is hard to imagine its liabilities being that cheap if the government hadn't guaranteed some of Goldman's debt and supported the wider system.

On July 13th, a Journal headline read:  "Rivals Play Catch-Up as Goldman Thrives", and on July 15th: "Goldman Gains on Rivals' Pain".

So, do we have a structural bias problem here?  Goldman Sachs apparently responded to Taibbi's charges with the following:  "We reject the assertion that we are inflators of bubbles and profiteers in busts, and we are painfully conscious of the importance in being a force for good."  Of course, Goldman is dealing with the difficult reality that this is precisely what we would expect them to say if everything Taibbi asserts is true.

One of the justifications given for not being too concerned about structural bias is that a free market will punish any self-dealing that is contrary to the best interests of the corporation.  But is our current market really free?

When I attended the AALS's midyear meeting focusing on business law this past June, I was struck by Michael Woronoff's response to the question of whether law schools were teaching students adequate transactional skills.  The reason his remarks caught my attention was because it was the first time I had heard someone seriously challenge the notion that law schools should spend more of their resources teaching practice skills.  Since that time, he has posted a draft of his remarks and I would like to add some of my own thoughts here.

Woronoff divides the skills necessary to be a good transactional lawyer into three types: (1) substantive knowledge, (2) practical skills such as contract drafting and negotiation, and (3) expertise that comes from "real world" (my words, not his) experience.  He argues that while law schools have a comparative advantage over law firms in teaching substantive knowledge, and while they have the ability to teach practical skills, the comparative advantage when it comes to developing expertise resides with the law firms.  Furthermore, he believes law schools still have significant room for improvement in conveying the substantive knowledge and practical skills necessary to be a good transactional lawyer.  Thus, he concludes that rather than devoting already limited resources to areas where they lack the comparative advantage, law schools should seek to improve themselves in the area where they already have the advantage (or at least a realistic ability to add value): conveying substantive knowledge  and developing practical skills.  Specifically, he suggests that attempts by law schools to increase the amount of exposure they give students to "real world" transactional practice–whether via simulations or legal clinics–is time that would be better spent focusing on the first two types of skills he describes.

I have to admit that I have a bias here.  At the Akron School of Law we have a fantastic New Business Legal Clinic that the students rave about.  One consideration I would add to Mr. Woronoff's analysis is the possibility that the choice for at least some students may not be between the business legal clinic or my Securities Regulation course, but rather between the clinic and some other non-transactional related course/activity.  In other words, providing simulations and clinics provides an alternative way of increasing a student's exposure to transactional law and this is important in light of our seemingly ever-increasing awareness of how differently students learn.  I'm not sure if this additional consideration would tip the scales of the argument, but it does seem worth mentioning.

By the way, speaking of Securities Regulation, I can't help but add the following plugs from Woronoff . . .

If you have a sophisticated corporate transactional practice, you need to have a deep understanding of the securities laws. . . . Law firms simply cannot teach securities law the way a law school can (if at all). . . . [I]n today’s world, law school training is necessary (even though not sufficient) to ultimately master this subject.

and Usha Rodrigues (also commenting on the midyear meeting–the "Blogger note" is hers):

Several speakers stressed the importance of taking Securities Regulation. [Blogger note: I cannot echo this enough. My students know that I am adamant on this point. My spiel goes like this: “you can’t learn everything in law school, but you should take classes that it would be difficult to pick up on the fly. Securities Regulation is just such a class.”]

One thing I am definitely going to change personally is the advice I give to students who come to me with a desire to practice transactional law but uncertain as to what courses are best to advance that goal.  I used to advise them that they would have time (and indeed be expected to) learn the specific law of their particular area of practice once they started working and that they should use law school as an opportunity (perhaps the last) to study as many different areas of the law as interest them.  After reading and hearing Michael Woronoff's views (he is a partner at Proskauer Rose LLP, in addition to being an adjunct professor at UCLA School of Law) I think I will share with them his perspective that the following is a problem:

[I]t’s not just securities—accounting, administrative law, antitrust, bankruptcy, commercial transactions, corporate finance, entity taxation, IP and a host of others. Time and time again I talk to students who KNOW they want to practice transactional law and yet they have not taken, and have no plans to take, courses that contain information that is very important to their careers.

Delaware General Corporation Law Section 141 tells us that the "business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors."  Given the complexity of managing or overseeing the business and affairs of modern corporations, an outsider may be forgiven for being surprised at finding out that (as I've noted before) directorships are often part-time positions filled by individuals who generally have other very pressing full-time demands.  Now we can add another curiosity to this area: the celebrity director.  Bloomberg reports that:

Rules being considered by the Securities and Exchange Commission would force Bank of America Corp. to explain how leading the 2003 invasion of Iraq prepared former U.S. General Tommy Franks to sit on its audit committee.  Franks and ex-Admiral Joseph Prueher, who both resigned as directors of the bank this month, are among military leaders and athletes paid as directors by U.S. companies.  They include seven-time Tour de France champion Lance Armstrong, who quit Morgans Hotel Group Co. after missing 11 board meetings in 2007.

Now there may be some good arguments for the notion that having some star power on the board is good for business, or that certain skills like leadership are important and transferable.  But in an age where financial expertise and specialized business knowledge seem essential to effective oversight, there must be better positions than director for leveraging those skills. Then again, those other positions would probably require one to show up more than once a quarter (if that).

Of course, this whole issue may be unduly magnified by the very star power it questions.  Prof. Quinn notes: "I wonder how big a problem this really is.  The SEC has been gradually tigtening the screws on director nominations and qualifications. SOX has placed added burdens on directors.  If you're a celebrity, why would you want the hassle?"  He goes on to argue that the SEC's time might be better spent "thinking about limiting the number of board assignments that full-time CEOs take on."  I tend to agree.

But there may be another incentive for appointing celebrities to directorships.  The general rule is that a director cannot be held liable for failing to spot a "red flag" due to a lack of expertise.  However, if the particular director has the relevant expertise he or she will be held accountable for that knowledge.  Thus, when it comes to dealing with the seemingly inevitable lawsuits challenging directorial oversight, the "I'm just a world-class cyclist" defense may actually carry some weight.  For now, I'll just add this to the list of reasons why we should strive to close the gap between the rule of director primacy and the reality of part-time directors.  Perhaps "an independent, nonprofit clearinghouse to recruit and screen independent directors" may be part of the solution.

Yesterday, the Obama administration unveiled its most recent proposals for financial regulatory reform, calling for "A New Foundation."  The proposals break down into five key objectives: (1) "Promote robust supervision and regulation of financial firms," including creation of a new "Financial Services Oversight Council of financial regulators to identify emerging systemic risks and improve interagency cooperation" and increased regulation of hedge funds; (2) "Establish comprehensive supervision of financial markets," including "[c]omprehensive regulation of all over-the-counter derivatives"; (3) "Protect consumers and investors from financial abuse," including creation of a new Consumer Financial Protection Agency and requiring public companies to "implement 'say on pay' rules, which require [non-binding] shareholder votes on executive compensation packages"; (4) "Provide the government with the tools it needs to manage financial crises," including increased governmental power to take over failing firms posing significant systemic risk; and (5) "Raise international regulatory standards and improve international cooperation."  As should be expected, early reactions span a wide spectrum.

Simon Johnson complains that the proposals don't go far enough.  He identifies the key issue underlying the recent financial crisis as being the existence of entities that had gotten "too big to fail."  But as far as addressing this issue, the new proposals provide "little reason to be encouraged."

The reform process appears to be have been captured at an early stage – by design the lobbyists were let into the executive branch's working, so we don't even get to have a transparent debate or to hear specious arguments about why we really need big banks. . . . In order to get to the point where you can reform like FDR, you first have to break the political power of the big banks, and that requires substantially reducing their economic power – the moment calls more for Teddy Roosevelt-type trustbusting, and it appears that is exactly what we will not get.

Meanwhile, Lawrence Cunningham describes the proposals as "exquisitely moderate and modest"–a "prudently simple set of ideas."  Finally, Larry Ribstein seems to lean to the other end of the spectrum in suggesting the proposals go too far, though he adds a most important qualifier:

First, we have to keep in mind that this isn't really a legislative package, but a kind of starting gun to let the intense lobbying begin. It will be interesting to compare the proposal to the sausage that emerges at the other end of the grinder.

My own initial take is that the majority of the proposals seem sensible, at least in theory.  Of course, the devil is in the details.  Ultimately, I agree with Prof. Ribstein that it is still too soon to tell how these proposals will fare.  Stay tuned.

Section 141(a) of the the Delaware General Corporation Law provides that: "The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors . . . ."  (The reason we corporate law scholars generally cite to Delaware law is that the vast majority of Fortune 500 companies are incorporated there.)  Given this statutorily directed (pun intended) "director primacy," one could be forgiven for expressing some surprise at finding out that directors are often part-timers (though well compensated and with some nice perquisites), with no necessary experience in the particular business they are directing or particular financial expertise.  For example, "Bank of America Corp on Friday appointed four outside directors to bolster its board's banking and financial expertise, after U.S. regulators pushed the nation's largest bank to improve governance after a federal bailout."  Again, one might be forgiven for having expected Bank of America's board to be bursting at the seams with banking and financial experts.

One common complaint is that there simply aren't enough industry and financial experts to go around, and so boards are filled with individuals who arguably have various forms of exemplary general business expertise.  In addition, it is noted that boards are really more overseers than managers, and that filling the board with industry experts would lead to them "meddling" with the day-to-day management of the business.  Finally, there is the response that shareholders elect directors and if they wanted more expertise they could vote for it, either at the ballot box or with their feet.

Putting aside for the moment the question of whether we actually have effective shareholder voice in corporate governance, it seems the lack of board oversight is precisely what many see as one of the root causes of the financial crisis.  (Though according to the Delaware Court of Chancery, this lack of oversight did not rise to the level of a fiduciary care violation in the case of Citigroup.)  Furthermore, this lack of oversight is often blamed on the the board's inability to grasp the intricacies of, for example, the risk the business is taking on via securitization and credit-default swap contracts.  Now, it may be that the problem is simply that the relevant information isn't getting to the board.  But if you are only "on the job" 12 times a year, how effective of a monitor can you really be in any case?

All this leads to another (perhaps tangentially related) question: Is there any connection between the lack of effective board oversight (assuming you agree there is a problem in that area) and the seeming corporate addiction to the crack pipe of lavish excess.  Case in point: Wal-Mart's recent annual meeting:

As is traditional for Wal-Mart, the meeting was a Roman spectacle of sorts, where the company eschewed its skinflint practices to celebrate its financial performance and growing list of international conquests. The Vegas-style festivities included an appearance by basketball legend Michael Jordan and musical performances by American Idol winner Kris Allen and teen phenomenon Miley Cyrus. Actor Ben Stiller hosted the lavish production.

Now, far be it for me to judge, but is this really the time for "Roman spectacles"?

This past Friday, the D.C. Circuit Court of Appeals "ruled that the tobacco industry engaged in a half-century-long campaign to deceive Americans about the health hazards of smoking."  This reminded me of Ford's cost-benefit analysis of safety improvements versus a total of 360 preventable burn deaths and serious burn injuries.  It also made me think of McDonald's insistence that its coffee be served at 180-190 degrees (making it not only hot, but "scalding – capable of almost instantaneous destruction of skin, flesh and muscle") despite the fact that McDonald's had received "more than 700 claims by people burned by its coffee between 1982 and 1992", some involving third-degree burns.  (Some have suggested McDonald's did this to avoid having to give out so many free refills.)  So it should probably not come as any surprise to hear this Deutsche Bank whistleblower's claim:

[W]e have a moral hazard problem. . . . the system of incentives encourages people to take risks.  I have seen honest, high-integrity people lose themselves in this cowboy culture, because more risk-taking generally means better pay.  Bizarrely, this risk comes with virtually no liability, and this system of O.P.M. (Other People's Money) insures that the firm absorbs any losses from bad trades.

As these losses have grown, taxpayers are being forced to absorb these losses. As an example, my firm recently received nearly $12 billion from American International Group (which has effectively been nationalized with $180 billion in taxpayer funds).  Essentially, every American household sent my firm a check for $105.  The reason for this payment: my firm bought credit default swaps from A.I.G.  In plain-speak, we bought unregulated "insurance" from A.I.G. to cover losses from bad trades. What did taxpayers get in return? Nothing.  Taxpayers simply paid an I.O.U. triggered by our gambling losses.

And people wonder why I tend to favor vigorous regulation of these "soulless" entities.

Over at the Delaware Corporate and Commercial Litigation Blog, Francis Pileggi has this to say about corporate law and natural rights:

[M]any of the most important rights in the U.S. Constitution, such as those in the First and Second Amendment, were considered by the Founders to be inherent human rights that were (are) based on "natural law". . . . How does this relate to corporate law?  …  Based on these basic natural rights that we (should) enjoy, a foundation is provided that allows us to fashion our commerce and the laws that govern commerce in a manner that gives private parties the maximum freedom to order their affairs, subject to government regulation (the extent to which is the subject of current debate).

It is important to note, however, that there is a natural rights counter-argument to the maximization of personal liberty as defined as freedom from government regulation.  Our relevant natural rights arguably also include the right to engage in "the pursuit of happiness" from a position embodying the belief that "all men [and women] are created equal."  Understood in this context, it becomes a perversion of natural law and the natural rights of human beings for government to stand aside while the powerful abuse their position claiming the "liberty" to do so.

For example, in the course of discusing the issue of whether corporations should have First Amendment rights, Prof. Daniel Greenwood had this to say:

Much as the old freedom of contract was a radical improvement over slavery or immutable
status, freedom of speech is a lot better than its pre-modern alternative, censorship.  Still, it is
one of those freedoms that is strangely more useful to the powerful than the powerless, that uses the rhetoric of equality to reinforce inequality in the name of liberation.  Like freedom of
contract, freedom of speech is a doctrine of selective government abstention — and the absence of government always empowers those who have the power to do as they please in the absence of government.

And lest we forget, Lochner has been overruled for quite some time.

Over at The Huffington Post, Professor Ronald Colombo opines that what is at the root of our current financial crisis is "a national crisis of character."  He argues that the Great Crash of 1929 was seemingly the result of "the moral laxity of the cabaret and the bedroom . . . extend[ing] to a certain moral laxity within the corporation and the boardroom," and that similarly "today's financial meltdown has been preceded by a certain relaxation of traditional values."  His prescription: more "values" education in schools, more ethics training in MBA and JD programs, and more discussion and consideration of moral issues in corporate communications and decision-making.

But I'm not sure that all this soul-searching and soul-cleansing solves the problem of capitalism.  Capitalism is predicated on the free flow of capital.  Capital flows to where it is expected to earn the greatest return.  Businesses that attract capital thrive, those that don't die.  So, when the time comes to choose between profit and virtue (and the time will come), the virtuous capitalist that sacrifices profit will be left to starve.  By its very nature, capitalism sets up a sort of Lemons Market.  Virtuous capitalists will eventually be priced out of the market because they will eventually have to sacrifice profit for virtue and the natural law of capitalism dictates that capital will abandon them the moment they do so.

So, what is the solution?  Well, since the problem of capitalism that I've just described is rooted in the efficient flow of capital in pursuit of profit, the solution arguably is to put some brakes on the speed at which capital can "jump ship" and the heights to which profit-seeking can go.  Putting limits on the size to which firms can grow and how much compensation the managers of those firms can make might be a start.

Over at the Glom they are conducting a very interesting online symposium entitled:  "Exploring the Connection between Religious Faith and Corporate Law".  The discussion, which is still ongoing, raises a number of fascinating issues.  I will summarize a couple of them here, along with a few of my own comments and questions.

1.  To what extent should corporations be allowed to be directed toward religious, rather than profit-maximizing goals? Lyman Johnson and Steve Bainbridge take up the two sides of the debate here.  (The "middle way" may be to say that corporate law does impose a duty to maximize shareholder value, but that this duty is subject to numerous exceptions.)  Given that the corporation is a "creature of the state", does the constitutionally mandated separation of church and state have anything to say about this issue?  Or, does the fact that the corporation is deemed a "person" in the eyes of the law give it a concomitant freedom of religious expression?  Should the fact that some believers, for example, understand it to be their prerogative to use up all the world's resources because a better world is coming impact our view?  Or, is this simply a matter for environmental regulation rather than corporate law?  Given that corporations may well satisfy the diagnostic criteria for a sociopath, and that individual role identification may well limit the applicability of religious norms in the corporate setting–does any of this even matter?  (See the block quote that follows, from Sarah Duggin, for an example of the limiting power of role identification.  The quote is taken from a comment set forth at the link that immediately follows.)

In the course of many years in practice, like most lawyers, I often found myself sitting with clients as they struggled to make hard decisions. On one occasion the CEO of a major corporation was facing a very difficult choice. He looked at me and asked, "How can I make this decision? What can I possibly do?" I replied, "In the end you need to do what you think is right." He responded, "If only I could, but I don't have that luxury. I have a company to run."

2.  Is only the Christian perspective relevant? Ronald Colombo responds to David Skeel on that issue here.  As a Buddhist-in-training, I am a bit torn.  My very limited understanding of Buddhist enlightenment suggest the ultimate answer may well be: "There is no corporation."  I can certainly understand why some may find that to be a less than satisfying response.  However, I did find something close to that from David Loy, which does seem to give some teeth to this Buddhist response:

My Buddhist conclusion is that transnational corporations are by their very nature problematical. We cannot solve the problems they create by addressing the conduct of this or that particular corporation; it's the institution that's the problem. I do not see how, given their present structure, we can repair them to make them more compassionate. So we need to consider whether it is possible to reform them in some fundamental way or whether we need to replace them with better economic and political institutions — better because they are responsible not to anonymous investers but to the communities they function in, better because are motivated not by profit but by service to the earth and the beings who dwell on it.

So, does the corporation have Buddha nature?  Mu.

Ever since the U.S. government starting taking ownership stakes in businesses as part of its response to the current financial crisis, people have been expressing concern about the possible negative consequences of "active" government ownership.  This concern was expressed again this week, with the prospect of the government becoming an 80% owner of GM.  Questions about "conflicts of interest" were prevalent:

The Obama administration has said it isn't interested in running an auto company, but with that big of a stake, some analysts say the government would probably be tempted to push its own policies on such issues as alternative fuel vehicles and unions.

But the opinion of some that the proper role of government in a case such as this is to act as a source of capital and nothing more is just that–an opinion.

The government is always an active player in private enterprise.  The fact that our government often chooses to defer to the free market is an active policy decision, subject to change should circumstances warrant.  The belief: "That government is best which governs least" does not express some sort of inviolable natural law.

So, will the government have free rein to exercise its ownership power to pursue "selfish" interests (such as protecting the environment) beyond short-term stock price maximization?  As a controlling shareholder, it is subject to certain duties.  Professors Iman Anabtawi and Lynn Stout point out that, while

[C]ourts have held that majority shareholders, like corporate officers and directors, owe a fiduciary duty of loyalty to minority shareholders that precludes them from using their positions as controlling shareholders to extract material economic benefits from the firm at the minority's expense. . . . [S]hareholder fiduciary duties are commonly understood to exist … principally in the contexts of freezeouts and closely-held companies.

However, it shouldn't take much to cobble together a sufficiently reasonable argument that producing fuel-efficient cars is good for business so as to withstand a challenge based upon fiduciary duty.  And the ultimate decision on matters such as these will rest with the board of directors, which is subject to its own set of duties to act in the best interests of the corporation and the shareholders as a whole.  Furthermore, as a matter of principle, I have no real problem with the government advancing its "selfish" interest as a shareholder to the extent the law allows.  After all, wasn't it the management of all those avowed profit-maximizers that brought the company to its knees hat in hand before the government?  If there's a less "offensive" source of capital out there dying to invest in your car company, you are certainly free to take their money instead.