Dean Baker has posted a piece in the The Economists Voice on a different approach to addressing the sub-prime mortgage crisis. Baker proposes a “rent to own” program where certain homeowners at risk of foreclosure would shift from owners to renters. In this program some sub-prime borrowers could stay in their homes, but lenders would assume ownership of the property. The borrower-turned-renter would pay fair market rent to the mortgage holder. Baker states the plan could help protect millions of homeowners facing the prospect of losing their home. These homeowners could stay in their home so long as they could afford to pay the rent. Tamar Frankel, the securitization guru, mentioned a similar proposal to me recently. I found it intriguing, and Baker’s piece is the first I have seen that outlines how such a proposal might work.
Yes, says UCLA Law professor Lynn Stout in an essay recently posted on SSRN: Why We Should Stop Teaching Dodge v. Ford. Stout argues that the principle the case is supposed to stand for: that of a singular obligation of the board to maximize shareholder wealth has long been dispensed with, and that the 1919 case does not accurately reflect the current state of corporate law. Stout asserts that Dodge v. Ford remains a popular teaching case due to its simplicity. Simplicity, says Stout, is not always a virtue especially when it helps perpetuate a misleading conception of the law.
Here is the abstract:
Among non-experts, conventional wisdom holds that corporate law requires boards of directors to maximize shareholder wealth. This common but mistaken belief is almost invariably supported by reference to the Michigan Supreme Court’s 1919 opinion in Dodge v. Ford Motor Co.
This Essay argues that Dodge v. Ford is bad law, at least when cited for the proposition that maximizing shareholder wealth is the proper corporate purpose. As a positive matter, U.S. corporate law does not and never has imposed a legal obligation on directors to maximize shareholder wealth. From a normative perspective, options theory, team production theory, the problem of external costs, and differences in shareholder interests all suggest why a rule of shareholder wealth maximization would be bad policy and lead to inefficient results.
Courts accordingly treat Dodge v. Ford as a dead letter. (In the past three decades the Delaware courts have cited the case only once, and then on controlling shareholders’ duties to minority shareholders). Nevertheless, legal scholars continue to teach and cite it. This Essay suggests that Dodge v. Ford has achieved a privileged position in the legal canon not because it accurately captures the law – it does not – or because it provides good normative guidance – it does not – but because it serves professors’ need for a simple answer to the question, “What do corporations do?” Simplicity is not a virtue when it leads to misunderstanding, however. Law professors should mend their collective ways, and stop teaching Dodge v. Ford as anything more than an example of how courts can go astray.
Brett McDonnell of Minnesota Law School has posted Two Goals for Executive Compensation Reform on SSRN. The essay puzzles through divergent issues underlying concerns with high levels of executive compensation at US corporations.
McDonnell notes that most corporate scholars view executive compensation as purely a governance concern, while politicians express concerns with how high levels of executive compenesation contribute to income inequality within society. McDonnell reviews the various perspectives on the issue and concludes that corporate scholars are wrong to ignore concerns with income inequality. He concludes that effects of corporate governance rules and practices on income inequality deserve more discussion within the corporate literature. Here is the abstract:
Most corporate law scholars who suggest reforming executive compensation worry about corporate governance problems that arise out of poor compensation design. Most politicians who suggest reforming executive compensation seem as or more worried about growing economic inequality. This essay briefly considers two arguments justifying legal scholars in ignoring the concern with inequality. The first argument says that we should address inequality concerns only through tax and transfer policy. This essay responds that politics may dictate sometimes trying to reduce inequality through other means as well. The second argument claims that high pay for the top executives of public corporations has played only a small role in the growth of economic inequality. This essay finds this argument much more persuasive, but suggests reasons why further empirical investigation may still show that reforming executive compensation may be a modestly important part of a broader package of reforms to reduce inequality.
The University of Pittsburgh School of Law and the University of Washington School of Law have teamed up to create the new Legal Scholarship Blog: http//legalscholarshipblog.com. The blog features law-related calls for papers, conferences, and workshops — with links to relevant websites and papers as well as an event calendar — along with scholarly resources for Research Deans as well as current and prospective law professors.
Those interested in posting announcements on calls for papers, conferences, and workshop schedules should send requests to legalscholarshipblog|at|gmail.com.
I am pleased to be involved in an exciting new project sponsored by the ABA Commission on Women in the Profession. The Commission is spearheading an oral history project called Women Trailblazers in the Law.
Wisely, the Commission has selected Boston University Law Professor Tamar Frankel to be profiled. I have agreed to interview Professor Frankel for the project. I will be taking a full-life oral history of Professor Frankel over the coming months. The interviews will be taped and transcripts of the interviews will be preserved at the Library of Congress in Washington as a resource for future generations of lawyers and scholars.
Professor Frankel is a distinguished scholar and a pathbreaker in many ways. As the first female professor on the tenure track at BU (and among the first women corporate law professors in the country) she is no doubt a trailblazer. She is a leading expert on fiduciary law having written leading treatises on the Regulation of Money Managers and Securitization. She recently published Trust and Honesty: America’s Business Culture at a Crossroad, which decries the erosion of a culture of ethics in American business.
In addition to her academic accomplishments, Professor Frankel has led a fascinating life. She was born and raised in Israel where she ran her own law practice before moving to the United States to study at Harvard Law School, where she earned her LLM and SJD degrees. I am looking forward to learning more about her life as we move forward with the project.
There’s still some time for catching up on summer reading (at least here at BC Law where a week remains before classes start). To round out your reading list, I recommend The Failure of Corporate Law by my Boston College Law School colleague Kent Greenfield. The book aims to provide “a comprehensive theoretical response to Easterbrook and Fischel from the stakeholder perspective.” Professor Greenfield’s book recently received this highly favorable review in the Law and Policy Book Review: THE FAILURE OF CORPORATE LAW.
Professor Benedict Sheehy of University of New Castle, New South Wales calls The Failure of Corporate Law “refreshing” and “enlightening.” He concludes that Greenfield’s book “merits a place alongside Berle and Means, Easterbrook and Fichel, and indeed, one can but hope that it becomes the touchstone for for further corporate law reform globally.”
Kent will be guest blogging at Corporate Law and Democracy this fall. His book and the book review are a great introduction to his work.
Crafting a Scholarly Persona: A Panel Discussion by Ian Ayres, Paul Robinson, Carol Sanger, Kimberly FerzanAugust 3, 2007
The transcript of an intriguing panel discussion among a group of distinguished legal scholars was posted recently on SSRN. The paper entitled Crafting a Scholarly Persona: A Panel Discussion by Ian Ayres, Paul Robinson, Carol Sanger, Kimberly Ferzan reports the proceedings of a American Association of Law Schools panel on crafting a scholarly persona, sponsored by the Section on Scholarship. Each panelist addressed a number of fundamental questions including “why do you write?” “How do you decide what to write about?” “How do you stay productive?”, etc.
One lesson that emerges from the discussion is that there are many different paths, motivations and styles that work for acheiving scholarly success. It helps to learn what works for others, but what seems most important to individual success is to find what works for you. Clearly this involves a lot of trial and error and false starts. The panelists each relate that they made mistakes early in their careers and adjusted their decision-making and work habits until they found an approach to research and scholarship that worked for them.
The reflections of the panelists, although apparently aimed at beginning scholars, seem valuable for scholars at all stages of their careers. If only because the comments of panelists can lead to valuable self-reflection.
Allan Hutchinsion (York University – Osgoode Hall Law School) has posted Public Policy and Private Cupidity: Berle and Means Re-Visioned on SSRN. The article challenges the conventional interpretation of the Berle and Means classic work, The Modern Corporation and Private Property, and suggests instead other possible understandings that have been lost on corporate scholars. Here is the abstract:
Adolph A. Berle and Gardiner C. Means’ The Modern Corporation and Private Property is one of law’s undisputed canonical texts. Its 75th anniversary is an occasion both to reassess its legacy and perhaps to rework its insights. Although Berle and Means’ work was intended to redirect the governance of corporate affairs away from furthering private cupidity and towards advancing public policy, their enslaving insights have done more harm than good; they have tended to reinforce the primacy of private cupidity or, perhaps more accurately, allowed subsequent theorists to prefer the pursuit of private cupidity by equating it with the development of public policy. This is not only unfortunate, but also unnecessary. Although Berle and Means’ The Modern Corporation forms the bedrock of the prevailing paradigm in corporate law and governance, it also contains some very suggestive materials from which to construct an alternative and more democratic way of proceeding which actually subverts and transforms the established model. In this essay, therefore, I want both to celebrate The Modern Corporation, but also to lament the enduring influence of its received understanding on corporate law scholarship and practice.
Robert Prentice (Texas – McCombs School of Business) has posted Sarbanes-Oxley: The Evidence Regarding the Impact of Section 404 on SSRN. The article assesses evidence regarding costs and benefits of Section 404 of the Sarbanes-Oxley Act. Like the articles posted below, Prentice concludes it is too early to tell whether Section 404 is working. He goes further, however, to argue that the current harsh criticism of 404 is likely to undermine its prospects for success in the long-term. Prentice thus takes on Sarbanes-Oxley’s critics (including Larry Ribstein and Roberta Romano) who savage the the legislation for lacking solid empirical bases for its policies. These critics, he says, commit the very sins they condemn when they attack Section 404 before conclusive evidence is available regarding its effectiveness. Here is the abstract:
Sarbanes-Oxley is the most important securities legislation since the 1930s, and whether it is ultimately considered a success will likely turn on perceptions of its controversial internal controls provision, Section 404. Indeed, whether the law is a success will likely turn on perceptions of 404. SOX 404 has been savagely attacked, especially for its burdensome cost to corporations and its adverse impact on the competitiveness of American capital markets. This article surveys the relevant empirical academic literature. Although that literature does not purport to (and does not) settle the overall question of whether SOX’s benefits generally, or SOX 404’s specifically, outweigh attendant costs, it does illustrate that the harshest criticisms of SOX are overblown. Importantly, SOX 404 has demonstrably improved corporate financial reporting in the short-term. Its potential for having long-term beneficial impact is largely dependent upon its being perceived as legitimate by capital market participants. At the moment, its legitimacy is being undermined by criticism that ignores much of the important evidence.
Two working papers were recently released on SSRN which seek to assess the impact of the Sarbanes-Oxley Act on smaller firms. Both papers conclude that more study is needed.
Ehud Kamar, Pinar Karaca-Mandic and Eric Talley have posted Sarbanes-Oxley’s Effects on Small Firms: What is the Evidence? The paper reviews a number of studies on the impact of Sarbanes Oxley on smaller firms. The authors conclude that prior studies lend support to the propostion that Sarbanes-Oxley had a disproportionate impact on smaller firms, but the evidence is not conclusive.
Christian Leuz has posted Was the Sarbanes-Oxley Act of 2002 Really this Costly? A Discussion of Evidence from Event Returns and Going-Private Decisions. Leuz disputes the conclusions of several studies finding increased net costs for Sarbanes-Oxley. He argues that several of these studies’ key findings may not be attributable to Sarbanes-Oxley, but may instead reflect broader market trends. Leuz concludes we do not have much SOX-related evidence that one-size-fits-all regulation imposes significant costs on firms, and that there is evidence that Sarbanes-Oxley has increased the scrutiny on firms and produced certain benefits.