Does anyone teach non-profits in their business organizations class? I haven’t yet, but am contemplating it. After all, non-profits comprise a significant part of the economy and they offer fruitful comparisons to traditional corporations, just as LLCs and partnerships do.

For example, Larry Ribstein’s recent Uncorporating the Large Firm talks about “uncorporations” (a catch-all term encompassing partnership-type entities like private equity firms, publicly traded partnerships, REITs, and hedge funds) often having a distributional mandate to help reduce agency costs. You’re worried about managers using retained earnings for empire building, paying themselves too much, or taking fancy company jets? Make them distribute a certain amount of the profits, or put an end date on the investment.

Non-profits use the opposite technique to achieve a similar result of cabining managerial discretion over profits. Here the non-distributional constraint helps solve the agency problem that otherwise results when you contract with an intermediary to provide a benefit to someone, say feed the homeless in your city. You could hire a grocery store like Safeway to provide this benefit. But a for-profit has an incentive to skimp on the food provided and pocket the difference as profit. So to reassure donors you take away the possibility for profit by making the intermediary a non-profit, which cannot distribute profits to its owners. Or so says Henry Hansmann, and it makes sense.

Another point: I tell students that the shareholders are the residual claimant, and that’s why they are the group with the right to vote—they have the incentive to monitor and make sure the firm does well, because they’re last in line. Partners and members take this place in partnerships and LLCs. But there isn’t really a residual claimant in the non-profit, or at least, it’s who ever happens to be named in the charter, and he/she/it isn't guaranteed a vote. Who does vote? The members, if the charter says so, but they don’t necessarily—the board can be self-perpetuating.

If nothing else, non-profits offer another way to show students that the corporate set-up where shareholders vote (and sell and sue) and managers manage and boards monitor isn’t the only way to run the railroad. With the added bonus of reminding them that non-profits need transactional lawyers, too.

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Jonathan Weil expresses some confusion about Lehman's latest survival strategy; I'm keeping my eye on how the Fed and the SEC are going to divvy up the oversight responsibilities if this thing goes south, and meanwhile Henry Paulson has told the British that he's trying to figure out how to allow big financial firms to fail.  Here's Weil:

So let's say you're a big shot at Lehman Brothers Holdings Inc., trying to keep your firm from becoming the next Bear Stearns Cos. The stock has tanked. The market has doubts about your balance sheet. What do you do?    

One step to avoid would be any action that might create needless public uncertainty about your company's finances, because investors' greatest fear is of the unknown.    

So what does Lehman do? It sells billions of dollars of assets to a newly formed hedge fund that:    

1) counts Lehman as a significant investor;    

2) is run by seven recently departed Lehman executives;    

3) is operating out of Lehman's office space, three floors down from the office of Lehman's corporate secretary.    

Hat Tip: Brad DeLong.

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Some interesting findings on CEO hirings and firings from a recent Economist piece:

1.  Importance of finance.  One-fifth of US CEOs in 2005 were formerly CFOs, almost twice the percentage from a decade prior.  Increased focus on financial reporting and SOX compliance has likely augmented the CFO's overall importance within companies.

2.  Build or buy?  Both in Europe and the US (among the FTSEurofirst 300 and the S&P 500), "lifers" make it to the executive suite more quickly on average than "hoppers," defined as those who jump through 4 or more companies.  Lifers make it in 22 (US) or 24 (EU) years on average, while hoppers take at least 26 years.  Information asymmetry probably explains this difference.

3.  Women at the top.   Eleven percent of US CEOs were women in 2001.  In the early 1980s, by contrast, there were none.

4.  Time to the top.  The average climb to the top took 28 years in 1980.  By 2001, it took only 24.  The average CEO had fewer jobs on the way up (five instead of six) and spent less time at each intermediate job (only four years) than before.

5.  Naked capitalism.  In a set of surprising (to me) results, EU capitalism appears to be a bit more rough-and-tumble than in the US, at least as regards CEO tenure.  EU CEOs have much shorter tenures than in the US and have a tougher time staying there.  They're also much less likely to be lifers in Europe (18% versus 26% in the US). Average CEO tenure over the past decade was just over 9 years in the US, but under 7 years in Europe.  European CEO firings accounted for 37% of turnover, but only 27% in the US.  European CEOs are also younger on average than in the US--54 versus 56 years of age.   

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A few years ago, while I was still at the University of Wisconsin, I started investigating the business of cheesemaking. Wisconsin has long been the leading producer of cheese in the United States, but as California has increased production, Wisconsin cheesemakers have turned increasingly to the production of specialty cheeses. I noticed that some of these specialty cheesemakers were organized as corporations or limited liability companies, while others were organized as cooperatives.

At roughly the same time that I was looking into cheesemaking, I had a couple of students who were interested in the law governing cooperatives. I did a bit of reading and started asking around in the local legal community. We never discuss cooperatives in Business Organizations, and very few legal scholars write about cooperatives (Henry Hansmann being the notable exception). I became fascinated by this lost corner of our law, which obviously still has some traction in the U.S.

So last year I recruited Brayden King and Marc Schneiberg, two organizational sociologists, as co-authors. We applied for and received a grant from the University of Wisconsin Center for Cooperatives. And I took the occasion of the Wisconsin Contracts Conference to visit some cheesemakers in southwest Wisconsin. This is my first time using interviews as a research methodology, and it's a lot more fun than sitting in my office hatching theories of fiduciary duty. Not that there's anything wrong with that.

The only problem is the weather. A storm on Sunday -- rain followed by snow -- left the roads icy, and most of these cheesemakers reside in very small towns ... or in no town at all. They are accessible only by country roads, which are beautiful in the summer, but treacherous this week. Yesterday, I ended up in a snowbank on an unmarked curve. Fortunately, a cheesemaker named Ole (I am not making this up) had a truck and a chain and was able to pull me out.

My discussions with the cheesemakers are fascinating. I am constantly reminded of Stewart Macaulay's famous study of non-contractual relations because the smaller cheesemakers simply can't be bothered with formal contracts. If they come crosswise with a farmer who supplies them with milk or a distributor who sells their cheese, they just stop dealing with them. Simple.

UPDATE: If you want to get a feel for some disturbing local culture, this is one of the towns I visited yesterday.

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Sprint-Nextel is the third largest American mobile phone network.  And it is beating the tar out of the not-likely-to-last-forever Vonage in its patent litigation.  But the company's earning are down, its merger - between an American consumer provider and a Canadian business provider that use different technologies - is a mess, and its CEO, COO, and executive chairman have all quit within the last year. 

At least it hasn't started forking over serious bucks for accounting fraud.  That's the cunningly similarly named Canadian provider Nortel Networks, which just paid a million loonies to the Ontario Securities Commission and, today, $35 million to the SEC to settle such allegations. 

Something to think about, if you're an Ontario teacher and you're trying to figure out if it was a good idea to buy the phone company.

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Siobhán O'Mahony, speaking at the Comparative Organizations Conference about Katherine Chen's work on Burning Man, noted that the organizers of the project had formed a limited liability company called Black Rock City, LLC.

Does this strike you as incongruous? Perhaps. After all, the essence of Burning Man is spontaneity ("There are no rules about how one must behave or express oneself at this event (save the rules that serve to protect the health, safety, and experience of the community at large); rather, it is up to each participant to decide how they will contribute and what they will give to this community."). And yet, the need for organization for such a vast undertaking is obvious. I suppose the question is: why this form of organization? Why not a non-profit corporation?

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