Scholarly Tributes

May 18, 2007

Most academics value scholarly recognition and seem to welcome it from any source.  In corporate and securities law, scholars make a great deal out of which articles are voted among the 12 or so “best” in the annual poll by Corporate Practice Commentator (Robert Thompson, editor).  Recent blog posts at Leiter Reports, Securities Law Prof, and Conglomerate are examples of the current discussion.

Maybe poll results, with their democratic flavor, are meaningful substantively.  Yet at least as meaningful, but not enjoying the same celebrity status, is selection of the 16 articles reprinted to form the Commentator’s annual bound volume. In contrast to polling, this selection reflects scholarly judgment backed by the costs and stakes of publishing.

From 1994 to 2004 (Volumes 35-45), the Commentator reprinted 179 articles and the period’s “best of” polls produced 112 favorites.  Only 30 articles appeared in both the volumes and the polls.  The small overlap reflects the different procedures and purposes of the poll compared to the publication decision.  No doubt, scholars are happy to be in either category.  But if one cannot be in both, which is preferred and why?  Should more attention be given to pieces selected for publication or those voted in the poll?  (Disclosure: one article of mine was selected for publication and none voted tops in the polls.)

Litigiousness and Gatekeeper Scholarship

May 17, 2007

Law and scholarship on capital market gatekeepers rely mainly on liability threats to promote gatekeeper effectiveness.  The literature struggles with individual versus enterprise liability, strict or negligence-based, compensatory versus deterrence, joint versus several, fines versus jail terms and so on.  Come Fall, the Supreme Court, in Stoneridge Investment v. Scientific-Atlanta, will reexamine aiding and abetting liability for secondary actors under its Central Bank decision. 

The preoccupation with sticks for gatekeepers could reflect US litigiousness or an occupational hazard of legal scholars.  Whatever the reason, a new approach emerging in the literature looks to carrots instead.  Examples are Tamar Frankel’s recent Business Lawyer piece, David McGowan’s California piece and my own forthcoming Minnesota piece.

The intuition behind rewarding gatekeepers using carrots rather than merely threatening with sticks follows the intuition behind incentive compensation used in other contexts.  Examples are stocks options for executives and contingent fees for bankers in takeovers.  Both can actually create perverse incentives, with managers using aggressive accounting and bankers blessing deals not in the client’s best interest. 

To correct for such perversions, as Warren Buffett quipped, “If I’m going to pay $5 million to somebody if they give me the advice and the deal goes through, then I think I probably ought to pay $5 million to somebody else whose advice I listen to who gets paid the $5 million only if the deal doesn’t go through.”  Similarly, if shareholders pay executives incentive compensation to achieve performance measures, they should be willing to pay gatekeepers incentive compensation to assure that such performance goals are achieved using fair reporting. 

Max Weber and “Principles-Based” Accounting

May 16, 2007

I have expored how the prevailing romance over “principles-based” corporate regulation, especially in accounting, cannot be explained by a correspondence between the labels “principles-based” or “rules-based” and any actual accounting or regulatory system.  The interim report of the Committee on Capital Markets Regulation (a.k.a. the Paulson Committee) unwittingly shows the difficulty  of connecting the labels to reality when it advocates “principles-based” systems yet prescribes reforms that would yield more rules than principles.   

The lack of connection between rhetoric and reality concerning principles-based accounting might be explained as an unconscious move to a new stage of accounting necessary to facilitate globalization of capitalism and democracy.   This new stage evokes the theories that Max Weber explored about capital accounting as a pre-condition to capitalism within the broader social and political dimensions of market exchanges (see, e.g., Weber, The Protestant Ethic and the Spirit of Capitalism).

Accounting was a representation of the calculative mentality focused on maximizing rates of return on invested capital.  Other social institutions were necessary too, including requisite technologies, religious sensibilities, state bureaucracies and an entrepreneurial spirit.  Those remain mostly in place.  What is needed is a system of international capital accounting as a pre-condition to the globalization of capitalism and democracy. 

The current challenge is to forge a single system commanding worldwide recognition.  For decades, US GAAP has been the front-runner but other powers, especially Europe and its member states, champion International Financial Reporting Standards (IFRS).  Lately, IFRS is attracting more support, including from the Securities and Exchange Commission  (SEC).  The SEC has long indirectly controlled US GAAP and increasingly exerts indirect control over IFRS. The result is that IFRS may emerge as the system of capital accounting necessary for globalization.  The US and other countries all can claim some ownership of IFRS: it appears to emanate from outside the hegemonic power but really is its product.  Packaging and celebrating IFRS as “principles-based” increases the chances that it will command requisite global recognition.  

The Dawning Eclipse of FASB?

May 15, 2007

The Securities and Exchange Commission (SEC) plans to issue a release  this summer proposing rules that would allow non-US enterprises to report financial statements using International Financial Reporting Standards (IFRS), eliminating the longstanding requirement that such statements be reconciled to US GAAP.  Companies would elect to use either IFRS or US GAAP.   The proposal also entertains the possibility of allowing US enterprises to make the same election. 

If approved, these changes would intensify competition between the promulgators of IFRS, the International Accounting Standards Board (IASB), and the promulgators of US GAAP, the Financial Accounting Standards Board (FASB).  What will define the terms of the heightened competition?  Race to the bottom or race to the top?  Will accounting standards—and financial statements—be friendlier to investors and other users or to managers and auditors? 

The changes likely would hasten the move to a single international capital accounting system, with one of the two winning the race.   The loser could go out of business.  Picking the winner is difficult.  But the packaging of the relatively young IFRS to fit the prevailing romance with so-called “principles-based” accounting is a clue: the smart money bets that adopting the proposal would put FASB out of business within a decade. 

What’s in a Label?

May 14, 2007

Thanks, Renee, for inviting me to guest on this valuable new academic blog!  My stint starts with queries about temptations to label it.  I love the site description: a repository for multidisciplinary thought on “corporate law and democracy” and the influence of “corporations and corporate law on political and social structure.”  The posts so far are wonderfully varied, highlighting work by Professors Ahdeih, Bilder and Macey among others.

Yet, over at PropertyProf , Al Brophy welcomes Corporate Law and Democracy by noting how, along with BC’s Kent Greenfield, BC Law “has emerged as one of the leading schools for progressive corporate scholarship.”  At Professor Bainbridge , the eponymous blogger says that “the role of corporations in a democratic society is a vital question . . .  so I will be watching [Renee’s] blog with interest” and follows with a summary of his “critique of the strain of left communitarianism . . .  in corporate law scholarship.” 

Why these labels? Is this site “progressive” or “communitarian” (or “left communitarian”)?  Is federalism progressive?  Is democracy communitarian?  Is an “ownership society” left wing?  Is your humble guest blogger?  I don’t think so!  Labeling is a curious thing, and political labeling perhaps a sign of our “polarized times.”  What I see is an academic blog collecting ideas without political boundaries (and my guest posts will follow that spirit!).