May 14, 2013
Colin Mayer Is Against Shareholder-Oriented Governance
Posted by David Zaring

Over at HBR, Mayer, the former dean of the Said Business School at Oxford, decries British best-in-breed corporate governance.  A taste:

The form of capitalism that has emerged in Britain is the textbook description of how to organize capital markets and corporate sectors. It features dispersed shareholders with powers to elect directors and remove them with or without cause, large stock markets, active markets for corporate control, a good legal system, strong investor protection, a rigorous anti-trust authority — the list goes on.

...

The downside, though, is that exemplary as a form of control the British financial system might be, it systematically extinguishes any sense of commitment — of investors to companies, of executives to employees, of employees to firms, of firms to their investors, of firms to communities, or of this generation to any subsequent or past one. It is a transactional island in which you are as good as your last deal, as farsighted as the next deal, admired for what you can get away with, and condemned for what you confess.

While incentives and control are center-stage in conventional economics, commitment is not. Enhancing choice, competition, and liquidity is the economist's prescription for improving social welfare, and legal contracts, competition policy, and regulation are the toolkit for achieving it. Eliminate restrictions on consumers' freedom to choose, firms' ability to compete, and financial markets' provision of liquidity and we can all move closer to economic nirvana.

Worth a look, at any rate.  We can surmise that Lucian Bebchuk will be unconvinced; the question, to my mind, is whether Stephen Bainbridge will be persuaded?  HT: Matthew Yglesias

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May 13, 2013
Delaware Public Benefit Corporations: Branding
Posted by Haskell Murray

Cross-posted at SocEntLaw

This is my third and final substantive post comparing the Model Benefit Corporation Legislation (the “Model”) to the proposed Delaware Public Benefit Corporation (“PBC”) amendments.

"Branding" is one area where proponents of the Model may argue that the Model is better than the PBC.  As mentioned in my first substantive post, the PBC favors private ordering more than the Model, which makes the PBC more flexible, but also makes it more difficult to maintain a consistent brand.  Branding could be useful to investors, consumers, and governments that wish to quickly identify socially responsible companies. 

Some proponents of the Model may point to the required annual report (PBC only requires a biennial report) and the requirement of measuring general public benefit against a third party standard (optional under the PBC) as building the Model’s brand.  In my opinion, however, neither the required annual report nor mandatory use of a third party standard is likely to facilitate creation of a useful brand under the current language of the Model. 

First, the Model does not expressly provide an enforcement mechanism for assuring the public posting of an annual report and the use of a third party standard.  Currently, a number of benefit corporations are in violation of the statute, but nothing seems to be done about the violations.  Second, most of the few annual reports available are full of fluffy self-promotion and do not include much of value.  Third, the available third party standards vary wildly, so simply requiring a third party standard is not likely to lead to a consistent and valuable brand.  The updated version of the Model requires that the third party standard be “comprehensive,” “independent,” “credible,” and “transparent,” but those requirements will be difficult to enforce and, in any event, do not appear aimed at creating a consistent brand.  A benefit corporation that does not see the value in using a third party standard may use the lowest standard available, provide little to no useful information to the market, and waste company resources in the process. 

If the Model proponents wished to create a brand via statute they would do better requiring an annual charitable giving floor and a partial asset lock, as I suggest here.  In my opinion, however, the heavy lifting in the branding department of social enterprise should be left to private organizations like B Lab.  The social enterprise space is evolving quickly, and I think it unlikely the state governments would keep up with the changes and engage in the type of enforcement needed to maintain a valuable brand.  Also, the term “social good” means very different things to different people, and therefore it is likely better to have private organizations develop various standards and allow the market to determine which standards, if any, are useful and valuable. 

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April 11, 2013
Public Benefit Corporation Amendment to DGCL
Posted by Usha Rodrigues

From the Harvard Law School Forum on Corporate Governance and Financial Regulation, via Allen M. Terrell, Jr. of Richards, Layton & Finger, comes a summary of proposed amendments to the Delaware General Corporation Law. I had heard about the elimination of the vote in second-step mergers, but the public benefit corporation was news to me.

It sounds a lot like the benefit corporation legislation that's been spreading across the country (see this chart by Haskell Murray.  At first blush I was surprised to see Delaware contemplating this kind of social enterprise legislation, since it's not really a stakeholders' rights kinda state.  But on further reflection I guess a "let a thousand flowers bloom" attitude makes sense for Delaware's let-the-market-decide, opt-in attitude.  Here's the description:

In general, under the proposed legislation, a public benefit corporation would be a corporation managed in a manner that balances the stockholders’ pecuniary interests, the interests of those materially affected by the corporation’s conduct, and one or more public benefits identified in its certificate of incorporation. To this last point, each public benefit corporation would be required, in its certificate of incorporation, to identify itself as a public benefit corporation and to state the public benefits it intends to promote. The proposed legislation generally defines “public benefits” as positive effects (or minimization of negative effects) on persons, entities, communities or interests, including those of an artistic, charitable, cultural, economic, educational, literary, medical, religious, scientific or technological nature.

Central to the proposed new subchapter’s operation is the statutory mandate that would be imposed on directors. The new subchapter would provide that directors, in managing the business and affairs of the public benefit corporation, shall balance the pecuniary interests of the stockholders, the interests of those materially affected by the corporation’s conduct, and the identified public benefits. The new subchapter also would provide that directors shall not have any duty to any person solely on account of any interest in the public benefit and would provide that, where directors perform the balancing of interests described above, they will be deemed to have satisfied their fiduciary duties to stockholders and the corporation if their decision is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.

The new subchapter would impose special notice requirements on public benefit corporations, mandating periodic statements to stockholders regarding the corporation’s promotion and attainment of its public benefits. The new subchapter also would provide a means of enforcing the promotion of the public benefits. By statute, stockholders holding at least 2% of the corporation’s outstanding shares (or, in the case of listed companies, the lesser 2% of the outstanding shares or shares having at least $2 million in market value) would be able to maintain a derivative lawsuit to enforce specified requirements in the subchapter.

Update: Steve Bainbridge makes a good point: Delaware is moving to protect its market share.

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March 27, 2013
Guest Review: Larry Cunningham's The Essays Of Warren Buffett, by Pamela Holmes
Posted by David Zaring

Over the transom comes this review of one of Larry Cunningham's two business memoirs, from seasoned reviewer Pamela Holmes.  Nice to get a different perspective on the book:

What you see is what you get with Warren Buffett.  When he writes to his shareholders, he talks about not just the numbers in their annual report, but about himself, what he thinks, and how Berkshire Hathaway has come to be where it is today.  The book is a compilation of Warren Buffett’s annual letters to Berkshire Hathaway shareholders from 1979 to 2011, and reads as sound investment strategy and business practices, with abundant offerings of good horse sense.   He believes if "you can't understand a footnote or other managerial explanation, it's usually because the CEO doesn't want you to."

The first edition of The Essays of Warren Buffett: Lessons for Corporate America was the focus of a symposium held twenty years ago and was the standard textbook for a specialized course taught by the author, Professor Lawrence A. Cunningham of George Washington University Law School.  It has since been adopted by many law and business schools for study in investment, finance and accounting.  Investment firms have used this book in their staff and investor training programs.  However, the layman should not be put off by these credentials as the book is an approachable guide to understanding investment.  Buffett quotes Twain, Churchill and even Woody Allen.  If it's a matter of faith in Warren's wisdom, you may be reassured by the sprinkling of Biblical references used to illustrate his points.

A sampling of Buffett's sage advice to shareholders includes, "Beware of companies displaying weak accounting."  If you question what you see, "it is likely they are following a similar path behind the scenes.  There is seldom just one cockroach in the kitchen."  Berkshire Hathaway's board of directors do not receive company stock as part of their compensation, they "purchased their holdings in the market just as you did...I love such honest-to-God ownership.  After all, who ever washes a rental car?"  Another gem, "...lemmings as a class may be derided but never does an individual lemming get criticized."

Organized by topic rather than chronologically, the words of Mr. Buffett are the words of every man - there is extremely little corporate lingo and no baffling verbiage.  His plain-speak is valuable guidance to learning the history of investing in the U.S., the good and the bad, and to understanding how you can make an intelligent investment decision if effort is put into researching the integrity and focus of company and management behind the investment.

The table of contents is well organized and the book includes a concept glossary and a disposition summary to help readers familiar with the previous editions of this book.

Berkshire Hathaway Inc. is a holding company owning subsidiaries involved in business activities including insurance and reinsurance, freight rail transportation, utilities and energy, finance, manufacturing, services, and retailing.  They hold interests in 28 newspapers, even with the overwhelming influence today of the Internet.

I typically review biographies and lifestyle publications, and have been an admirer of Warren Buffett for many years so, naturally, I wanted very much to read this book.  Clearly, is it a valuable tool for training anyone in anyway connected with handling the money of others, and I would highly recommend this book to investment clubs and to anyone giving serious thought to planning their retirement portfolio, be they in their 20's or their 60's.

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March 24, 2013
Academics On Corporate Boards
Posted by David Zaring
A good thing, if you believe the cheering study found by Bainbridge.

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March 22, 2013
Discretion
Posted by Gordon Smith

One of my colleagues said that my latest article (written with one of my excellent students, Jordan Lee) sounds like an R-rated movie. The title is Discretion, and here is the abstract:

Discretion is an important feature of all contractual relationships. In this Article, we rely on incomplete contract theory to motivate our study of discretion, with particular attention to fiduciary relationships. We make two contributions to the substantial literature on fiduciary law. First, we describe the role of fiduciary law as “boundary enforcement,” and we urge courts to honor the appropriate exercise of discretion by fiduciaries, even when the beneficiary or the judge might perceive a preferable action after the fact. Second, we answer the question, how should a court define the boundaries of fiduciary discretion? We observe that courts often define these boundaries by reference to industry customs and social norms. We also defend this as the most sensible and coherent approach to boundary enforcement.

I wrote an article about a decade ago called "The Critical Resource Theory of Fiduciary Duty" that still gets downloaded and cited a fair amount, at least for a fiduciary duty article. It is about the structure of fiduciary relationships, and I wanted to do a follow on article about how courts know when someone has breached a fiduciary duty. I actually had a fairly long draft of an article that was just horrible, and I never published it, but I kept thinking about and teaching about this problem. Earlier this year, I had a brainstorm about the subject, and the result is this new article. 

By the way, interest in fiduciary law seems to have exploded in the past decade. Some of that interest stems from Tamar Frankel's book and the accompanying conference at Boston University. Some of the interest stems from the fact that fiduciary law is interesting in many countries outside the United States, where much of the best writing on this subject is found (see Paul Miller, for example). I look forward to a new surge in interest this summer, as Andrew Gold and Paul Miller have organized an excellent conference on The Philosophical Foundations of Fiduciary Law, to be held in Chicago. I am writing a paper entitled "True Loyalty" for that conference and very much looking forward to reading the other contributions.

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March 05, 2013
A CEO's Farewell Memo, Annotated By Venture Capitalists
Posted by David Zaring

Andrew Mason, the CEO of Groupon, wrote a pretty nice exit letter when the board fired him.  But the annotation by Marc Andreesen and Bo Horowitz is also illuminating, if you like that tech start-up kind of thing.

HT: Felix Salmon

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January 08, 2013
Business Ethics Teaching Conference
Posted by Gordon Smith
Cynthia Williams and I are organizing a a Business Ethics Teaching Conference at Aspen Grove, a BYU center in the mountains by Provo, Utah on February 21-22. As with our last teaching conference in 2010, this one will be participatory, with an interdisciplinary focus on business ethics and how issues of ethics and social responsibilities can be incorporated into the basic business course. While space is limited, we are looking for junior professors (including fellows or visiting assistant professors) who have a strong interest in business ethics and might want to attend. Please contact me as soon as possible.

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December 18, 2012
AALS Section Meetings: Business Associations
Posted by Gordon Smith

Our own Christine Hurt will be featured in the Business Associations section ...

Business Associations and Governance in Emerging Economies

    Moderator: Brett H. McDonnell, University of Minnesota Law School

    Speakers:

    Virginia Harper Ho, University of Kansas School of Law

    Nicholas C. Howson, The University of Michigan Law School

    Christine Hurt, University of Illinois College of Law

    Kellye Y. Testy, University of Washington School of Law

    Commentator: Jodie Kirshner, University Lecturer, University of Cambridge F aculty of Law, Cambridge, United Kingdom

    Emerging economies such as China, India, and Brazil play an increasingly important role in the world economy. Companies based in these economies face their own particular set of challenges in corporate governance. In some ways these problems are the same as those faced in developed economies, and in some ways they are quite different. The challenges, and solutions to those challenges, also vary among emerging economies. Panelists will discuss those challenges and how participants in emerging economies are meeting them. Some panelists are drawn from a Call for Papers; other panelists will comment upon those papers and use them as a launching point for a general discussion of corporate governance in emerging economies.

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September 25, 2012
Hiring Announcement - Wharton
Posted by David Zaring

My department is hiring at the junior and senior level, and, although we're casting the net broadly, is very interested in the subjects in which the readers of this blog are interested. So if you think you'd be interested, please do apply!  The announcement is below.  We want your application!

FACULTY POSITIONS IN BUSINESS LAW AND BUSINESS ETHICS

The Wharton School at the University of Pennsylvania invites applications for tenured and tenure-track positions in its Department of Legal Studies and Business Ethics.  The Department has seventeen full-time faculty who teach a wide variety of business-oriented courses in law and ethics in the undergraduate, MBA, and Ph.D. programs and whose research is regularly published in leading journals.  The Wharton School has one of the largest and best-published business school faculties in the world. 

Applicants should have either a J.D. or a Ph.D. from an accredited institution (an expected completion date no later than July 1, 2014 is acceptable) and a demonstrated commitment to scholarship in business law, business ethics, or a combination of the two fields.  Specific areas of potential focus for hiring include corporate governance, financial regulation, health law/bioethics, securities regulation, and social impact/sustainability.  In addition, the Wharton School has particular strengths in its global reach and perspective, as well as an interdisciplinary approach to business issues (embracing ten academic departments and over twenty research centers). 

Please submit electronically your letter of introduction, c.v., and one selected article or writing sample in PDF format via the following website by December 15, 2012: http://lgst.wharton.upenn.edu.  Decisions for interviews will be made on a rolling basis, so candidates are encouraged to apply early.

The University of Pennsylvania is an equal opportunity, affirmative action employer.  Women and minority candidates are strongly encouraged to apply.

 

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September 07, 2012
Weekend Reading: A Transactional Genealogy of Scandal
Posted by Erik Gerding

As in a bad horror movie (or a great Rolling Stones song), observers of the current crisis may have been disquieted that one of the central characters in this disaster also played a central role in the Enron era. Is it coincidence that special purpose entities (SPEs) were at the core of both the Enron transactions and many of the structured finance deals that fell part in the Panic of 2007-2008?

Bill Bratton (Penn) and Adam Levitin (Georgetown) think not. Bratton and Levin have a really fine new paper out, A Transactional Genealogy of Scandal, that not only draws deep connections between these two episodes, but also traces back the lineage of collateralized debt obligations (CDOs) back to Michael Millken. The paper provides a masterful guided tour of the history of CDOs from the S&L/junk bond era to the innovations of J.P. Morgan through to the Goldman ABACUS deals and the freeze of the asset-backed commercial paper market .

Their account argues that the development of the SPE is the apotheosis of the firm as “nexus of contracts.” These shell companies, after all, are nothing but contracts. This feature, according to Bratton & Levin, allows SPEs to become ideal tools either for deceiving investors or arbitraging financial regulations.

Here is their abstract:

Three scandals have fundamentally reshaped business regulation over the past thirty years: the securities fraud prosecution of Michael Milken in 1988, the Enron implosion of 2001, and the Goldman Sachs “Abacus” enforcement action of 2010. The scandals have always been seen as unrelated. This Article highlights a previously unnoticed transactional affinity tying these scandals together — a deal structure known as the synthetic collateralized debt obligation (“CDO”) involving the use of a special purpose entity (“SPE”). The SPE is a new and widely used form of corporate alter ego designed to undertake transactions for its creator’s accounting and regulatory benefit.

The SPE remains mysterious and poorly understood, despite its use in framing transactions involving trillions of dollars and its prominence in foundational scandals. The traditional corporate alter ego was a subsidiary or affiliate with equity control. The SPE eschews equity control in favor of control through pre-set instructions emanating from transactional documents. In theory, these instructions are complete or very close thereto, making SPEs a real world manifestation of the “nexus of contracts” firm of economic and legal theory. In practice, however, formal designations of separateness do not always stand up under the strain of economic reality.

When coupled with financial disaster, the use of an SPE alter ego can turn even a minor compliance problem into scandal because of the mismatch between the traditional legal model of the firm and the SPE’s economic reality. The standard legal model looks to equity ownership to determine the boundaries of the firm: equity is inside the firm, while contract is outside. Regulatory regimes make inter-firm connections by tracking equity ownership. SPEs escape regulation by funneling inter-firm connections through contracts, rather than equity ownership.

The integration of SPEs into regulatory systems requires a ground-up rethinking of traditional legal models of the firm. A theory is emerging, not from corporate law or financial economics but from accounting principles. Accounting has responded to these scandals by abandoning the equity touchstone in favor of an analysis in which contractual allocations of risk, reward, and control operate as functional equivalents of equity ownership, and approach that redraws the boundaries of the firm. Transaction engineers need to come to terms with this new functional model as it could herald unexpected liability, as Goldman Sachs learned with its Abacus CDO.

The paper should be on the reading list of scholars in securities and financial institution regulation. The historical account also provides a rich source of material for corporate law scholars engaged in the Theory of the Firm literature.

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August 16, 2012
CSR: The Chick-fil-A Controversy and a Masters Forum on Corporate Social Responsibility
Posted by Erik Gerding

We have decided to convene a late summer forum of the Conglomerate Masters -- our roster of distinguished corporate and financial law professors -- to discuss the current state of corporate social responsibility.  In particular, we wanted to address the controversy over Chick-fil-A's corporate stance against same sex marriage and to use this Economist blog post as a jumping off-point. 

The Economist blogger contends that Chick-fil-A's culture is in fact a prime example of a firm embracing corporate social responsibility (or "CSR") - albeit not with the politics that one traditionally associates with that movement.  The blogger concludes that the Chick-fil-A example demonstrates that matters of social policy should best be left to democratic institutions.  He or she writes:

Matters of moral truth aside, what's the difference between buying a little social justice with your coffee and buying a little Christian traditionalism with your chicken? There is no difference. Which speaks to my proposition that CSR, when married to norms of ethical consumption, will inevitably incite bouts of culture-war strife. CSR with honest moral content, as opposed to anodyne public-relations campaigns about "values", is a recipe for the politicisation of production and sales. But if we also promote politicised consumption, we're asking consumers to punish companies whose ideas about social responsibility clash with our own. Or, to put it another way, CSR that takes moral disagreement and diversity seriously—that really isn't a way of using corporations as instruments for the enactment of progressive social change that voters can't be convinced to support—asks companies with controversial ideas about social responsibility to screw over their owners and creditors and employees for...what? 

It is a provocative argument.  Although one wonders if the author would have made this same series of arguments in the 1960s: would the author have encouraged civil rights protesters to abandon lunch-counter sit-ins and lobby state legislators instead?

Still, the Chick-fil-A example raises some disquieting questions for CSR, which our Masters may address.  These include:

Is corporate law the most effective or legitimate tool for social change?  If we are worried about environmental degradation, is the solution to broaden the stakeholders to whom a corporation must answer?  Or shouldn't we look instead to environmental law?

Is CSR viewpoint neutral?  When covering CSR in a Corporations course, I ask students whether social activists who are lobbying a corporation to change what they see as immoral employment practices, should be able to put their views to a shareholder vote?  Then I ask whether the answer would or should change based on whether the activists are looking to end racial or gender discrimination or whether they are lobbying a company to stop offering benefits to partners in same sex couples.

At the same time, the current state of legal affairs raises some disquieting questions for opponents of CSR too.  The conclusion in the Economist blog -- leave social policy to democratic institutions and public law -- has a long lineage.  It harkens back to Milton Friedman's arguments that corporations and the states do and should exist in separate spheres; if citizens want to change corporate policy, the argument goes, they should act through the political process and push through public regulation.

But, the separate spheres argument looks more and more outdated, as corporations influence and permeate the sphere of government.  Do arguments to leave regulating the public dimension of corporate behavior out of corporate law and governance -- and leave it to traditional legislative and regulatory bodies -- appear naive in a post-Citizens United (and post-public choice)world?

Also, do these same questions for proponents and critics of CSR apply in equal measure to the growing field of social entrepreneurship?  Can entrepreneurs do well while doing good?  Should we expect them too?  Is social entrepreneurship a workable, stable, and viewpoint neutral concept?  If so, what does it entail?  Does/should CSR apply equally to small businesses and startups as to global corporations?

We look forward to hearing from our Masters...

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August 14, 2012
Does The Mittelstand Even Exist?
Posted by David Zaring

The Times has a not that newsy profile of the Mittelstand, today, Germany's vaunted SME sector, and one that counts for 60 percent of its employment.  The big reveal is that the Mittelstand likes the euro, though that calculation is largely on the basis of interviews at one obscure (every Mittelstand company is obscure, that's rather the point) shut-off valve manufacturer.

If you hang out at business schools, the Mittelstand is a useful corrective to everything you think you're supposed to know about finance.  German companies eschew debt, we are told, rely on banks instead of capital markets for funding, and retain their employees at all costs.  Basically the opposite of the private equity playbook.  And yet ... look at the awesome German economy!  It has implications for corporate law, too, given that Mittelstand firms are likely to be closely held, with representation for workers and banks if it isn't just a family thing.  Maybe that's what Delaware ought to be offering!

But I think this obsession with the Mittelstand may be branding more than anything else. Take that 60% employment number.  In the US, though, small businesses account for half, and 65% of all new jobs.  And some Mittelstand firms probably count as large businesses in the American definition (500 employees is the cutoff).  Nor is Germany radically more industrialized than the US, though that's what the Mittelstand is supposed to be.  28% of the country's employees are in manufacturing.  The we-just-do-service United States proportion?  22%

Wiser heads than mine accept the Mittelstand as different - the interest in SME-usable research is an excellent way to fund a project in not just German, but European universities more generally.  But surely some perspective is in order.  It's easy to overstate modest differences, and while I'll be happy to conclude that the German model well and truly is unique, I'd like to see a few more differences between that approach and ours before doing so.

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April 30, 2012
AALS Section on Business Associations: 2013 Call for Papers
Posted by Gordon Smith

The AALS Section on Business Associations will meet during the AALS Annual Meeting in New Orleans, Louisiana, from 3:30-5.15 pm on January 5, 2013.

The topic for this year’s session is:  Business Associations and Governance in Emerging Economies.   

Panelists will be chosen on the basis of submissions made in response to this Call for Papers.  In addition, distinguished scholars will provide comments on the chosen papers.  The topic is intended to be broad.  Papers may deal with just one emerging economy, or may compare several or many emerging economies as well as other economies.  Papers may cover any issues relevant to the governance of corporations or other kinds of business associations.  The Executive Committee welcomes submissions on a broad range of issues related to this year’s topic, including empirical and theoretical perspectives.  The Committee specifically encourages submissions from junior scholars.

If you are interested in presenting a paper, please submit a summary of no more than three double-spaced pages, preferably by e-mail, before Friday, June 29, 2012.  In addition to the summary, you also may submit a complete draft of your paper.  Direct your submission to:

Professor Brett McDonnell
University of Minnesota Law School
229 19th Avenue South
Minneapolis, MN 55405
bhm@umn.edu

Papers will be selected after review by members of the Executive Committee of the Section on Business Associations, including:

Jayne Barnard (William & Mary)                       Robert Bartlett (Berkeley)
Daniel Greenwood (Hofstra)                           Joan Heminway (Tennessee, Chair Elect)
Kim Krawiec (Duke)                                      Don Langevoort (Georgetown)
Brett McDonnell (Minnesota, Chair)                 Tamara Piety (Tulsa)
Usha Rodrigues (Georgia)                              Hillary Sale (Washington U., Past Chair)
Guhan Subramanian (Harvard)                        Cheryl Wade (St. John’s)

Authors of accepted papers will be notified by September 7, 2012.  Please feel free to pass this Call for Papers along to any colleagues who may be interested.

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December 16, 2011
Educating Today’s Law Students to Be Tomorrow’s Counselors and Gatekeepers
Posted by Marcia Narine

Law schools are under attack. Depending upon the source, between 20-50% of corporate counsel won’t pay for junior associate work at big firms. Practicing lawyers, academics, law students and members of the general public have weighed in publicly and vehemently about the perceived failure of America’s law schools to prepare students for the real world.

Admittedly, before I joined academia a few months ago, I held some of the same views about lack of preparedness. Having worked with law students and new graduates as outside and in house counsel, I was often unimpressed with the level of skills of these well-meaning, very bright new graduates. I didn’t expect them to know the details of every law, but I did want them to know how to research effectively, write clearly, and be able to influence the clients and me.  The first two requirements aren’t too much to expect, and schools have greatly improved here.  But many young attorneys still leave school without the ability to balance different points of view, articulate a position in plain English, and influence others.

To be fair, unlike MBAs, most law students don’t have a lot of work experience, and generally, very little experience in a legal environment before they graduate.  Assuming they know the substantive area of the law, they don’t have any context as to what may be relevant to their clients. 

How can law schools help?

First, regardless of the area in which a student believes s/he wants to specialize, schools should require them to take business associations, tax, and a basic finance or accounting course.  No lawyer can be effective without understanding business, whether s/he wants to focus on mom and pop clients, estate planning, family law, nonprofit, government or corporate law. More important, students have no idea where they will end up after graduation or ten years later.  Trying to learn finance when they already have a job wastes the graduate’s and the employer’s time.

Of course, many law schools already require tax and business organizations courses, but how many of those schools also show students an actual proxy statement or simulate a shareholder’s meeting to provide some real world flavor? Do students really understand what it means to be a fiducuiary?

Second and on a related point, in the core courses, students may not need to draft interrogatories in a basic civil procedure course, but they should at least read a complaint and a motion for summary judgment, and perhaps spend some time making the arguments to their brethren in the classroom on a current case on a docket. No one can learn effectively by simply reading appellate cases. Why not have  students redraft contract clauses? When I co-taught professional responsibility this semester, students simulated client conversations, examined do-it-yourself legal service websites for violations of state law, and wrote client letters so that the work came alive.

When possible, schools should also re-evaluate their core requirements to see if they can add more clinicals (which are admittedly expensive) or labs for negotiation, client consultation or transactional drafting (like my employer UMKC offers). I’m not convinced that law school needs to last for three years, but I am convinced that more of the time needs to be spent marrying the doctrinal and theoretical work to practical skills into the current curriculum.

Third, schools can look to their communities. In addition to using adjuncts to bring practical experience to the classroom, schools, the public and private sector should develop partnerships where students can intern more frequently and easily for school credit in the area of their choice, including nonprofit work, local government, criminal law, in house work and of course, firm work of all sizes.  Current Department of Labor rules unnecessarily complicate internship processes and those rules should change.

This broader range of opportunities will provide students with practical experience, a more realistic idea of the market, and will also help address access to justice issues affecting underserved communities, for example by allowing supervised students to draft by-laws for a 501(c)(3). I’ll leave the discussion of high student loans, misleading career statistics from law schools and the oversupply of lawyers to others who have spoken on these hot topics issues recently.

Fourth, law schools should integrate the cataclysmic changes that the legal profession is undergoing into as many classes as they can. Law professors actually need to learn this as well.  How are we preparing students for the commoditization of legal services through the rise of technology, the calls for de-regulation, outsourcing, and the emerging competition from global firms who can integrate legal and other professional services in ways that the US won’t currently allow?

Finally and most important, what are we teaching students about managing and appreciating risk? While this may not be relevant in every class, it can certainly be part of the discussions in many. Perhaps students will learn more from using a combination of reading law school cases and using the business school case method.

If students don’t understand how to recognize, measure, monitor and mitigate risk, how will they advise their clients? If they plan to work in house, as I did, they serve an additional gatekeeper role and increasingly face SEC investigations and jail terms.  As more general counsels start hiring people directly from law schools, junior lawyers will face these complexities even earlier in their careers. Even if they counsel external clients, understanding risk appetite is essential in an increasingly complex, litigious and regulated world.

When I teach my course on corporate governance, compliance and social responsibility next spring, my students will look at SEC comment letters, critically scrutinize corporate social responsibility reports, read blogs, draft board minutes, dissect legislation, compare international developments and role play as regulators, legislators, board members, labor organizations, NGOs and executives to understand all perspectives and practice influencing each other. Learning what Sarbanes-Oxley or Dodd-Frank says without understanding what it means in practice is useless.

The good news is that more schools are starting to look at those kinds of issues. The Carnegie Model of legal education “supports courses and curricula that integrate three sets of values or ‘apprenticeships’: knowledge, practice and professionalism.” Educating Tomorrow’s Lawyers is a growing consortium of law schools which recommends “an integrated, three-part curriculum: (1) the teaching of legal doctrine and analysis, which provides the basis for professional growth; (2) introduction to the several facets of practice included under the rubric of lawyering, leading to acting with responsibility for clients; and (3) exploration and assumption of the identity, values and dispositions consonant with the fundamental purposes of the legal profession.”  The University of Miami’s innovative LawWithoutWalls program brings students, academics, entrepreneurs and practitioners from around the world together to examine the fundamental shifts in legal practice and education and develop viable solutions.

The problems facing the legal profession are huge, but not insurmountable. The question is whether more law schools and professors are able to leave their comfort zones, law students are able to think more globally and long term, and the popular press and public are willing to credit those who are already moving in the right direction.  I’m no expert, but as a former consumer of these legal services, I’m ready to do my part.

 

 

 

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