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.

A couple of weeks ago I blogged about the pending criminal trial of former Bear Stearns executives Ralph Cioffi and Matthew Tannin on charges they defrauded investors in connection with the failure of their hedge funds.  While I did not agree with those who characterized the case as one of "spin versus fraud", I did believe the prosecution would have a hard time proving criminal intent.  Apparently, the jury concurred because Cioffi and Tannin were acquitted this past Tuesday by a "jury of mostly working class Americans."  Now, the question becomes how much steam the government has left to pursue criminal convictions against other executives tied to the financial crisis–like some of those at AIG and Lehman.  Sorting that out will involve determining how much of what went wrong for the prosecution in this case is limited to its particular facts.  Here's a short list of possible explanations for why the jury sided with the defense:

• The jury was confused by the complexity of the case.  As the Wall Street Journal put it:

Throughout the case, the jury was bombarded with mortgage-related lingo — "collateralized debt obligations," "credit models" and the like — in an attempt to explain how two Bear Stearns funds run by the defendants imploded.

• To the extent the jury's confusion was alleviated, it was likely in favor of the defendants because of

the expert testimony of R. Glenn Hubbard . . . the dean of Columbia University’s business school, who said he reviewed data about the funds from the relevant period and said the men could reasonably expect to return to profitability, and that it was reasonable for them to ask investors for more money. . . . Hubbard, who is a former economic advisor to President George W. Bush and whose research for the Bear trial came with a $100,000 price tag declined to comment to the blog.

• The jury was not permitted to hear about a particularly incriminating email:

Today, Judge Frederic Block of Brooklyn, who was considered to be a great draw for the defendants, ruled that prosecutors could not introduce as evidence an email written by one of the defendants, in yet another apparent setback for the government’s case. In the email, Tannin wrote that hedge funds he helped run could “blow up.” Months later they did.

Personally, I think the government will continue to pursue criminal convictions where appropriate.  A spokesman for the government had this to say following the acquittal:

Honesty and integrity are the principles upon which our financial markets function. Enforcing and protecting those principals will continue to be one of the principle efforts of this office.

By the way, if you want a good read that will help you make up your own mind I can recommend "House of Cards" (the audio version is highly entertaining).

We watch the movie "Wall Street" as part of my M&A class.   Recently, we came to the scene where Gordon Gekko proclaims that greed is good:

The point is, ladies and gentleman, that greed, for lack of a better word, is good.  Greed is right, greed works.  Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.  Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind.  And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA.  Thank you very much.

A recent paper by Wang & Murnighan (HT: Prof. Ribstein) suggests Gekko may have taken a few economics classes on the side while working his way up through the school of hard knocks:

Greed is a classic topic in human development (Balot, 2001; Robertson, 2001) and it inevitably affects many of our choices and decisions.  Although greed is typically viewed as uniformly negative and reprehensible, we propose that people's attitudes and opinions about greed are actually subject to change.  In particular, studying economics may help legitimize and even beautify greed.  Previous research shows that economics education might make people more self-interested because self-interest maximization is central to most economic models (Marwell & Ames, 1981; Frank, et al, 1993).  Because greed and maximizing self-interest are sometimes difficult to separate, conceptually or empirically, we propose that studying economics may make people view greed as potentially positive and beneficial.  Two complementary studies support our proposition.  Study 1 shows that students who are pursuing economics view greed more positively than students who are pursuing other majors and taking other courses.  Study 2 indicates that positively priming greed can significantly increase people's positive attitudes and opinions about greed.

But if greed is by definition tied to excess, can it ever be good?  I'm not sure where I come out on this, but one suggestion I do feel comfortable making is that we include classes on cognitive biases along with our econ classes.  Greedy may be good, but greedy and dangerously overconfident is just a recipe for disaster.

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.

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?

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.

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.

Here are links to two blog posts you may find interesting:  The Volokh Conspiracy on Constitutional Rights and Corporations, and The Race to the Bottom on the Federal Takeover of Delaware Corporate Law.  Enjoy!

On January 1, 2009, Bank of America closed its deal to acquire Merrill Lynch in what can fairly be called one of the “distressed” deals of the financial crisis.  Prior to closing the deal, the bank had gotten required shareholder approval for the transaction—but without fully disclosing, as Fortune notes, “that Bank of America had already agreed in writing to let Merrill Lynch pay its execs up to $5.8 billion in bonus compensation — a sum amounting to 12% of Merrill's $50 billion price-tag.”  (Fifteen billion dollars in pending Merrill losses were also not disclosed.) 

This past August, the SEC settled its dispute with Bank of America over the propriety of the bank’s compensation disclosures for $33 million.  (As Professor Davidoff puts it, the SEC didn’t want to touch the failure to disclose the pending losses because that “would encroach upon the question of whether the government actually ordered Bank of America not to disclose these losses later in December.”) 

However, Judge Rakoff of the Southern District of New York (and former Akron Law Jurist-in-Residence) shocked many when he questioned the settlement and refused to approve it.  Wrote Judge Rakoff:

Overall, indeed, the parties’ submissions, when carefully read, leave the distinct impression that the proposed Consent Judgment was a contrivance designed to provide the S.E.C. with the facade of enforcement and the management of the Bank with a quick resolution of an embarrassing inquiry – all at the expense of the sole alleged victims, the shareholders. Even under the most deferential review, this proposed Consent Judgment cannot remotely be called fair.

Professor Davidoff has argued that the failure to disclose the precise terms of the agreed-to bonus payments should be considered immaterial because: (1) the total mix of information available to investors should have made them aware of the pendency of significant bonus payments; and, (2) the form of disclosure should have sufficiently alerted investors because “[a]ny investor knowledgeable about merger agreements and disclosure schedules would read it and know what it meant, how it worked and that there was undisclosed information on that schedule.” 

 The “total mix” defense is not without its limits, however.  The Supreme Court has noted that “not every mixture with the true will neutralize the deceptive.  If it would take a financial analyst to spot the tension between the one and the other, whatever is misleading will remain materially so, and liability should follow.”  Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1097 (1991).  And in this case I think there is at least some merit to the SEC’s position (as set forth by Davidoff) that “an investor should not be forced to ‘puzzle’ through other data,” where the most prominent disclosure on the issue by BoA seems to have been that Merrill would not “pay any amounts to Employees not required by any current plan or agreement (other than base salary in the ordinary course of business).”  

 Furthermore, materiality is judged by the “reasonable investor” standard, not the reasonable-investor-knowledgeable-about-merger-agreements-and-disclosure-schedules (though there are some good arguments to be made that something like this should be the standard).  One of the commentators to Davidoff’s post, “Marco,” put the investor’s dilemma like this:

 So, let’s say that I read the proxy statement, which basically informs me not to rely entirely on the info set forth therein and [directs] me to review the full text of the merger agreement.  As suggested, I diligently take a look at the merger document, but the material qualifications to key provisions, which are those that truly define the actual content of the agreement, are withheld from me because of confidentiality.

 But Davidoff clearly is aware of these points and continues:

 [Y]ou can quibble about who is a reasonable investor and whether it is one who would know all of this, whether the information was actually disclosed elsewhere, and whether this bare negative statement is sufficient to establish a disclosure violation. But it all boils down to the fact that Bank of America is right that it has viable defenses here to the S.E.C.’s claims.

And the reason BoA has a viable defense is because the SEC must prove “scienter”—an intent to mislead (or recklessness in connection with making statements likely to mislead).  Here, Davidoff makes a great case for concluding that the disclosures were consistent with market practice.  This may raise issues about current market practice, but it also makes the SEC’s task of proving scienter very difficult.

 I am currently working on a project that argues courts should stop relying so much on materiality to dismiss what they deem to be frivolous suits.  This would, among other things, be consistent with the Supreme Court’s admonition, as set forth in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976), that:

 Only if the established omissions are “so obviously important to an investor, that reasonable minds cannot differ on the question of materiality” is the ultimate issue of materiality appropriately resolved “as a matter of law” by summary judgment.

 If this case really can be decided on the issue scienter, then perhaps we are better served by leaving the discussion of materiality to other forums like academia, the SEC (in its rule-making capacity), and Congress–because courts, under tremendous pressure to dismiss "frivolous" suits, have arguably done a bad job of capturing the perspective of actual investors when it comes to their pretrial materiality determinations.  This is a point I make in my article "Is Puffery Material to Investors? Maybe We Should Ask Them."

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."

James Kwak has an interesting post over at The Baseline Scenario describing the battle lines being drawn over the Consumer Financial Protection Agency (CFPA) as pitting outcomes against principles:

I suspect that the real divide in the battle over the Consumer Financial Protection Agency is between outcomes and principles.  CFPA supporters believe that policies should attempt to achieve the best possible outcomes for the largest number of people; if the number of people harmed by a product exceeds the number helped, then it should be banned, or at least made harder to buy.  CFPA opponents believe that policies should faithfully reflect certain principles; in this case, people should be free to make their own financial choices, even if in aggregate most people will make bad choices, and they should bear the consequences of those choices.

To the extent this issue could be characterized as one of disclosure versus merit review, I find the discussion quite interesting because I write in the area of securities regulation where we in the U.S. made a clear choice (at least at the federal level) in favor of disclosure after the Great Crash of 1929.  I think Kwak makes a great point when he notes that disclosure is only half the story (the other half being written in greater and greater detail by behavioral economists):

In order to get utility-maximizing outcomes, you need perfect information and rational decision-making.  Disclosure gives you information about the product you are buying, but it doesn’t make you a rational actor – especially not when you have to make predictions about your own future behavior.  Remember, not only are we a species in which 90% of people think they are above-average drivers, but 85% of people in hospitals who just caused auto accidents think they are above-average drivers.

I think the post and comments are well worth reading.  The nuance I would add is that: (1) disclosure often isn't for the end purchaser, and (2) to say we are going to rely primarily on disclosure only begins the discussion.  The fact that the stock purchaser never reads the prospectus (in the sec reg case) may not necessarily mean disclosure is ineffective when the executives, bankers, accounts, and lawyers have to sweat the details of all those disclosures with the threat of liability hanging over their heads.  Furthermore, to acknowledge that we suffer from "bounded" rationality may merely mean that we need to do a better job of crafting the form and content of disclosures to overcome our inefficient biases.

Assume XYZ Corp. enters into sham agreements with ABC Corp. in order to bolster XYZ's bottom line.  Under the sham agreements, XYZ pays an additional $20 per widget purchased from ABC, and ABC then returns that $20 to XYZ under the guise of purchasing advertising.  XYZ then books the $20 as advertising revenue, creating the impression of a business that is thriving more than it actually is.  If you purchased XYZ stock during the period that its stock price was arguably inflated as a result of these sham transactions, should you be able to sue ABC (the firm on the other side of the sham transactions) for securities fraud under Section 10 of the Securities Exchange Act of 1934?  (Section 10 provides that:  "It shall be unlawful for any person, directly or indirectly . . . [t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device.")  The Supreme Court of the United States said "no" in Stoneridge v. Scientific-Atlanta, but now Sen. Specter is introducing legislation to overturn that decision.  The proposed legislation is causing quite a stir and the battle lines seem nicely summed up as follows:

Lisa A. Rickard, president of the Chamber’s Institute for Legal Reform, said, ”Greatly expanding private securities class action lawsuits will only slow our economic recovery, drag down investors’ portfolios and retirement accounts, and delay the creation of much needed new jobs.”

Dan Newman, a spokesman for the large plaintiffs firm Coughlin Stoia Geller Rudman & Robbins countered: “For our economy and our financial markets to thrive, corporations must be held accountable when they commit fraud.”

Commentators are likewise divided.   Stephen Bainbridge opines that:

"Stoneridge got the policy right.  Specter's bill would once again throw American business to the trial lawyer wolves, weakening our competitive position, at a time when our economy needs all the help it can get."

Meanwhile, Gordon Smith is a bit less convinced:

I have a hard time explaining, on policy grounds, why firms like [ABC] should not be liable for securities fraud.  I am not persuaded that allowing lawsuits against firms that enter into sham transactions for the purpose of misleading the market is damaging to our competitiveness.  To be sure, if this new bill opens the floodgates to unmeritorious litigation, count me among the opposition. Otherwise, let 'em sue the deceivers.

For now, you can put me in Gordon Smith's camp.  The empirical question of whether the costs of expanding liability in a case such as this would outweigh the benefits is hotly debated, and in light of the recent financial crisis I have become even less sympathetic to generalized claims that the greatest threat to our economy is "frivolous" litigation.  That leaves the question of whether a claim against ABC otherwise satisfies the elements of Rule 10b-5 (the relevant rule promulgated by the SEC under Section 10).  The Court in Stoneridge concluded that the firm on the other side of the sham transaction in that case was not merely aiding and abetting securities fraud (which would have precluded a private action under the Court's decision in Central Bank) but rather was potentially liable as a secondary actor engaged in a primary violation.  However, the Court ultimately dismissed the claim for lack of reliance–a conclusion roundly criticized by commentators on both sides of this debate.  Since I agree with the Court's conclusion on the aiding and abetting question, and disagree with the Court on the reliance question, I end up in favor of liability on these facts.

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!

Consider the following alleged facts involving Maverick billionaire Mark Cuban:

[I]n June 2004, Mamma.com Inc. invited Cuban to participate in [a] stock offering after he agreed to keep the information [about the offering] confidential. The complaint further alleges that Cuban knew that the offering would be conducted at a discount to the prevailing market price and that it would be dilutive to existing shareholders. Within hours of receiving this information, according to the complaint, Cuban called his broker and instructed him to sell Cuban's entire position in the company. When the offering was publicly announced, Mamma.com's stock price opened at $11.89, down $1.215 or 9.3 percent from the prior day's closing price of $13.105. According to the complaint, Cuban avoided losses in excess of $750,000 by selling his stock prior to the public announcement of the offering.

Do you think Cuban should be allowed to trade on this information without disclosing it?  A quick review of insider trading law may help you settle on an answer.

As a general rule, corporate insiders are prohibited from personally trading in the stock of their corporation on the basis of nonpublic and undisclosed material information they derived from their position as insiders.  The Supreme Court, in Dirks v. SEC, included "transactional insiders" within the coverage of this rule:

Under certain circumstances, such as where corporate information is revealed legitimately to an underwriter, accountant, lawyer, or consultant working for the corporation, these outsiders may become fiduciaries of the shareholders.  The basis for recognizing this fiduciary duty is not simply that such persons acquired nonpublic corporate information, but rather that they have entered into a special confidential relationship in the conduct of the business of the enterprise and are given access to information solely for corporate purposes.

The rule also extends to insiders trading in another corporation's stock if they "misappropriated" relevant information from their corporation.  In US v. O'Hagan, the Supreme Court described its rationale for this rule as follows:

The theory is also well tuned to an animating purpose of the Exchange Act: to insure honest securities markets and thereby promote investor confidence.   See 45 Fed. Reg. 60412 (1980) (trading on misappropriated information "undermines the integrity of, and investor confidence in, the securities markets").  Although informational disparity is inevitable in the securities markets, investors likely would hesitate to venture their capital in a market where trading based on misappropriated nonpublic information is unchecked by law.  An investor's informational disadvantage vis á vis a misappropriator with material, nonpublic information stems from contrivance, not luck; it is a disadvantage that cannot be overcome with research or skill.

The sum of all this is that you don't need to be a corporate director or officer, nor do you need to have a duty to the shareholder on the other side of the relevant transaction, to be subject to insider trading law.  The SEC, in Rule 10b5-2, further clarified that a duty of trust and confidence giving rise to a duty not to use inside information for personal trading gain could arise "[w]henever a person agrees to maintain information in confidence."

However, in the Mark Cuban case set out above, the US District Court for the Northern District of Texas concluded that merely agreeing to keep information confidential was not sufficient to impose a duty to abstain from trading on that information absent a further agreement not to use (as opposed to disclose) the information.  In other words, according to the district court Cuban could have his cake and eat it too.  He could get information otherwise only available to insiders by agreeing to keep it confidential, but absent a specific agreement not to trade on that information he was free to use that information to dump his stock on some other unwitting investor.

The case has been heavily discussed.   For some good analysis, I recommend you go here, here, and here.

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.

Professor Bainbridge notes: "Eight of the top 10 Amazon bestsellers in the fantasy category are vampire romance novels by female authors. Whatever happened to elves, orcs, swords, and sorcery?"

Never one to miss an opportunity to jump to spurious conclusions, this made me wonder whether women have lost such faith in the men who continue to dominate our society that their last bastion of hope is stories telling them that happy endings can be found even when you know [your] man is a monster (if it's not obvious, please note that my tongue is firmly planted in my cheek).  Here, in no particular order (it is the summer–I'm not going to spend all day doing this), are some related talking points:

On May 22, the Wall Street Journal reported that Anne Mulcahy would become the first African-American woman to lead a Fortune 500 company (Xerox).

In a post entitled "Bankers Will Be Boys", James Kwak notes (via Anne Sibert) that: "In a fascinating and innovative study, Coates and Herbert (2008) advance the notion that steroid feedback loops may help explain why male bankers behave irrationally when caught up in bubbles."

Joan MacLeod Heminway has asked: "Is the reasonable investor a woman?"

And "The Intelligent Investor" sums it up nicely thus: "Fess up, fellows: The masters of the universe have turned out to be masters of disaster. No matter which aspect of the financial crisis you consider, there is a man behind it."

What does all this mean?  I'll leave it to you to discuss.  I'm off to have lunch with my mom.

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"?

The story of the 20th anniversary of the Tiananmen Square Massacre ran in the Wall Street Journal yesterday and today.  If it qualifies for the Wall Street Journal, it qualifies for this blog.  Furthermore, if you can't excessively self-disclose on your blog, then where?  So, without further ado, and in memory of this tragedy, I reproduce here the lyrics to a song I wrote about the event 20 years ago, along with a link to the recording.

For those of you who need some more background information, here's a short video.

You stayed

You would not back down

You saw them coming, but you held your ground

You were willing to die for what I take for granted

They came in the morning, while you were still asleep

They came to take back what they could not keep

And I can't believe this happened today

Did you think they'd let you live

In this world you made?

Did you think they'd listen to

What you had to say?

Did you think you'd walk away

From this chosen place?

Did you know the fire and the horror that you would face?

I cried, though you would say

I shouldn't waste my strength that way

Is this justice

Or is this the price we must pay?

From the square in China

To the streets in my hometown

There's people fighting to get out from underground

Maybe it's time

Maybe it's time that we listened

Did you think they'd let you live

In this world you made?

Did you think they'd listen to

What you had to say?

Did you think you'd walk away

From this chosen place?

Did you know the fire and the horror that you would face?

Did you know the fire and the horror that you would face?

Brother of mine

We remember you

This struggle for freedom

Took your life from you

I only hope

That you did not die in vain

I only hope that you did not die in vain

Tiananmen Square