There's a proposal out there, with support from various surprising corners of the political spectrum, to get rid of the NY Fed's place on the FOMC, on account of it being too close to Wall Street, big banks, and so on. I wrote about it for DealBook - do check it out. A taste:
I have my doubts about any legislation that threatens the central bank’s independence, but would evaluate it by looking to three of my pet axioms of financial regulation.
When I apply these axioms, I conclude that the New York Fed should not lose its vote. The short-term benefits are unclear, making the change look like a symbolic effort to shift the long-term focus of the Fed away from Wall Street. But Wall Street is important, and deserves its focus. There’s no reason to believe that the New York Fed will do a better or different job on Wall Street if it loses its automatic vote.
Do let me know what you think, either in the comments or otherwise.....
I blogged last week about Etsy's IPO, but it took me until now to figure out what bothered me about the story. It came to me while I was explaining to a local entrepreneur the difference between a B-Corp and a benefit corporation. A B-Corp can be a for-profit entity, but is certified "to meet rigorous standards of social and environmental performance, accountability, and transparency)" A benefit corporation is a different kind of corporation--one organized not just for profit, but for some other social purpose as well. If you think that entity choice matters--as I do--then the choice to become a benefit corporation is a much stronger statement than just being a B-Corp, because that choice is baked into that organization's constitutive document. It's a more credible commitment, if you will, to social values.
Let me be clear, I'm skeptical of the need for benefit corporations on principle. Unless you're Craigslist or Henry Ford, I think corporate law gives you plenty of flexibility. But if you buy into the presumption that benefit corporations do provide value, they matter as signals to investors and consumers. As I explained to the Athens entrepreneur, currently if you want to show that social enterprise matters to you, you can become a B-Corp. And if you really want to show that it matters, you can become a benefit corporation. But if B Lab requires certified B-Corps to become benefit corporations within 4 years, entities have fewer modes to express their degree of social commitment. And I don't think that's a good thing.
The WSJ has a story today that suggests that indeed it does.I'm not so sure, and I've been looking into the situation. Looking at the plain numbers doesn't account for selection effects - one reason the agency might take a case to an ALJ is because they've already settled it, and it's inexpensive to put the settlement on record before an in-house judge. So we should probably strip settled cases out of the analysis. But there's no question that the SEC is ramping up ALJ enforcement, and that it usually wins there.
Hence the recent spate of arguments that ALJs are unconstitutional. I'll have more to say on that, too, but it's worth remembering the "part of the furniture" theory of constitutional law as a first order reason to conclude that a government program is probably okay. If something has been around forever, and is important, it's probably constitutional. The Supreme Court has probably decided hundreds of cases that began with ALJ proceedings. You can expect it, and other Article III judges, to assume that the institution of the SEC ALJ should survive.
I admit that I don't tear into every paper reverse engineering the USNWR rankings out of principle, but this paper by Robert L. Jones (hat tip: Tax Prof Blog) seemed worth the read. (The paper is a shorter essay updating a longitudinal research paper from two years ago that I missed.) Both papers look at those ever-so-important "academic reputation" scores that show up in the USNWR to make every law school strive to improve its academic reputation. These scores are the result of surveys sent to every law school dean, academic associate dean, chair of appointments and newly tenured faculty member. Each school is rated 1 to 5. If you've ever stepped foot into a law school as a faculty member, you have been in a conversation on how to boost this score. Splashy new hires? Increasing scholarship? Increasing visibility of scholarship? Conferences? And you will inevitably hear someone say that academic reputation scores are "sticky" -- they do not seem to move quickly or substantially, no matter what schools do. This paper answers the "why" of the sticky question and concludes that the scores are not sticky -- they are intentionally deflated. First, here's Jones' graph showing that the average ARS has declined since 1998, with a particular trend since the disruption in the legal market during the financial crisis, despite all the investments schools have made in increasing scholarship and expanded hiring. Moreover, these scores have declined while judge/lawyer reputation scores have increased.
Why this decline then? Jones contends that because of the importance of the rankings and the competition the rankings engender, that voters act strategically by deflating the rankings of competitor schools. The more important the rankings are, then the more strategic the voting. No voter has an incentive to give high reputation scores, but a real incentive to give low ones. Therefore, Jones concludes, the academic reputation scores are worthless. (I could see an argument that if all voters systematically gave lower grades to everyone, then the scores are valid as a ranking, much like a 2.7 grading curve mean. But, we don't know how systematic the strategic ranking is. One could imagine that competitor schools over-punish schools that make large, visible investments in academic quality and ignore schools that are not seen as threats.) I have just begun to foment thoughts on this theory, but if it's true then it calls into question many firmly-held beliefs about expensive practices that are thought to "boost the rankings."
The National Business Law Scholars Conference has extended its CFP through May 8. They've announced two fantastic keynote speakers and a stellar plenary session (including my friend Josh White from UGA's finance department. He is awesome). Here are the details:
PLENARY PANEL - THE EXTRATERRITORIAL APPLICATION OF FEDERAL FINANCIAL MARKETS REGULATIONS
CALL FOR PAPERS (EXTENDED UNTIL MAY 8, 2015)
LOCAL ATTRACTIONS AND INFORMATION
I can't decide if I have post-Ultron depression or if this sequel just isn't that great. My kids and I have "literally" been waiting for this movie since the credits (really) ended after The Avengers. We have watched every movie in the Marvel Cinematic Universe multiple times. We have watched every episode of Agent Carter and Agents of Shield. We've known that Scarlet Witch and Quicksilver were going to be in the movie since the end of Captain America: Winter Soldier. We bought our tickets ahead of time. In 3D. But walking out, I kept asking everyone, "Did you like it? Was it better than The Avengers?" because I was not sure.
There are many spoilers, so the rest is below the fold.
It's an evergreen topic, so perhaps it is worth pointing you to this column by Stephen Davidoff Solomon on the latest shenanigans by boards, this post by Joshua Fershee sort of taking a middle ground on the debate, this paper by Bernard Sharfman, who is in the activist camp, and this from Stephen Bainbridge, who prefers boards. So there you go - a linkfest on boards v. activists with nothing by Martin Lipton or Lucian Bebchuk. Is it comprehensive? Hey, I study regulation, not internal corporate dynamics.
I'm co-organizing a conference in Heidelberg; it's perhaps not something that all of the Glom's readers work on, but for those that do, we'd love to get your proposals:
On 11-12 December 2015, the International Economic Law Interest Groups of the American and European Societies of International Law, together with the Max Planck Institute for Comparative Public Law and International Law, will hold a joint works-in-progress workshop in Heidelberg, Germany. The overarching theme of the workshop is "The Future of Transatlantic Economic Governance in the Age of the BRICS." The deadline for paper proposals is 30 June 2015.
Proposals are encouraged across all areas of international economic law (trade, investment, financial regulation, monetary law, cross-border regulation of MNCs, law and development, etc.) For full details, please consult the Call for Papers in the documents section of the ASIL Interest Group's website:
We look forward to receiving your proposals! The Organizers
Transactional Lawyering and Contractual Innovation
2016 AALS Annual Meeting
New York, NY
In a world of dramatic economic, technological and legal change, there is a need for contractual innovation. Contractual innovation has traditionally been challenging for transactional lawyers due to a number of factors, including stickiness in contract terms, locked-in practices, and structural impediments to better contract design. Transformative technology and stresses on the legal profession, with a focus on reducing costs, may further affect contractual innovation. An early stage technology company, for example, can easily set itself up and generate customized legal forms through online tools that will help the company establish and run its venture with minimal up-front legal costs and little involvement from transactional lawyers. Even in more complex transactions, technology has led to automation of contract design. Panel members for this program will address a number of important questions as to how to encourage innovation by transactional lawyers in the face of these challenges: What role can and should transactional lawyers play in driving contractual innovation? To what extent can innovation in designing contracts provide transactional lawyers with new opportunities for premium work? What impact does the structure of law firms play in shaping the process of contract design and production? What roles do norms and standard practices in dealmaking play in shaping innovation in contract design? Does the process of innovation differ in one area of transactional practice from another, for example mergers and acquisitions versus venture capital financing versus establishing unincorporated entities?
The first part of our program will involve a panel of speakers who will focus their comments on the questions posed above. Panel participants include Professors John Coyle, Kevin Davis and George Triantis.
The Section on Transactional Law and Skills invites submissions from any full-time faculty member of an AALS member school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper on this topic to submit a 1 or 2-page proposal to the Chair of the Section by August 31, 2015. The Executive Committee will review all submissions and select proposals for presentation as part of our AALS 2016 Section Meeting.
Please direct all submissions and questions to the Chair of the Section, Afra Afsharipour, at the address below:
Professor of Law & Martin Luther King, Jr. Hall Research Scholar
UC Davis School of Law, King Hall
Tel: +1 530 754 0111
The NFL is a nonprofit corporation. That should be no surprise when you stop to think about it. Many--indeed, most--trade associations are nonprofit, because their point is to create benefit for their members, not to create profits at the trade association entity level. IRC 501(c)(6) exempts from taxation for chambers of commerce (and professional football leagues) for just this reason.
For years, the NFL's tax-exempt status has been the subject of scrutiny and ridicule. To many people, the fact that a league headed by a commissioner making $44 million a year was categorized as a nonprofit was absurd.
This is not absurd, it's fuzzy thinking. Each NFL teams individually still pays tax on all its profits, since each is a for-profit entity. They teams pay taxes on any money the NFL distributes to them. But as an entity, it's not supposed to make a profit. Just because you're a nonprofit doesn't mean you can't make a profit. Harvard's endowment was $36.4 billion on June 30 of last year. It's doing quite well.
It's unclear exactly how much the NFL will save per year by forgoing its 501(c)(6) status--this WSJ article has estimates costing from $10.9 million to $91 million annually--this for a $10 billion-a-year organization. Commissioner Goodell's letter to the owners characterized the NFL's tax-exempt status as a "distraction,"--but even at the low-end estimate of costing $11 million per year, wouldn't you put up with the distraction? Reading between the lines, the reason is clearly that Goodell doesn't like the public disclosure attendant with 501(c)(6) status. Particularly the disclosure of his salary, which totaled $35 million in 2014.
Costing your organization $10 million a year because you don't like having your salary being public? Now that strikes me as absurd.
The member of the Zaring family who studies such matters passes along this editorial, which yes, indeed, "prior to publication, authors will have to remove all vestiges of the NHSTP [null hypothesis significance testing procedure] (p-values, t-values, F-values, statements about ‘‘significant’’ differences or lack thereof, and so on)." The idea is that this sort of testing is less useful in psychology research than is effects testing, given that it's a largely experimental field that often doesn't have huge sample sizes (though huge sample sizes present their own problems of spurious p-values). It doesn't seem to have led to a stampede away from significance testing yet, but there's an interesting overview of the controversy here. And I might as well link to the research on which a couple of my colleagues will be dining out for years, demonstrating the suspicious ease with which it is possible to find statistical significance in lots of cases. And here's a rant. My sense is that there is very little attention paid in empirical legal research to this issue; Dave Hoffman mulled this over last month, and said that at CELS, every single paper he saw came with a p-value.
Friend of the Conglomerate Larry Cunningham points to Popular Science's September roundup of 100 inventions that changed the world, only one of which is a legal innovation: the corporation (link not available - ask your librarian!). It's a strong contender; indeed, I can't really think of another legal fiction with such significance, though patents probably come close, and I guess I wonder if an agency is a legal fiction. But you can have your constructive trusts, trade secrets, and asset-backed securities! Readers are invited to provide their own suggestions for similarly consequential legal inventions in the comments.
They've got the details over at Business Law Prof Blog.
I'm also a week late on the Etsy IPO, and I trolled around the likely law prof blogs to see if anyone else had beat me to the punch (if I missed someone, please let me know and I'll update accordingly).
Etsy IPO'd last Thursday, pricing at $16 and opening at $30, raising $267 million. According the WSJ Blog, that's the most ever for a NY-based VC-backed firm.
But for my money the more interesting take came from the NYT, since it concerned organizational form. Etsy is a B-Corp-- but not a benefit corp. Here's Haskell Murray on the difference. Bottom line, a B-Corp is a certification thing, and you can be a for-profit B-Corp. A benefit corporation is a whole separate kind of entity, one organized not just for profit.
Here's the NYT on the importance of the B-Corp designation to Etsy:
Etsy declares in its public offering prospectus that it wants to change the decades-old conventional retail model of valuing profits over community. It states that its reputation depends on maintaining its B Corp status by continuing to offer employees stock options and paid time for volunteering, paying all part-time and temporary workers 40 percent above local living wages, teaching local women and minorities programming skills, and composting its food waste.
But wait, there's more. To maintain its B-Corp status, Etsy must reincorporate as a benefit corporation in a few years. B Lab's website says "companies must elect benefit corporation status within four years of the first effective date of the legislation or two years of initial certification, whichever is later." The NYT suggests a slightly longer glide-path: "B Lab is giving companies four years from the date any relevant state legislation is passed to comply with the state law or risk losing B Corp certification. Since Delaware passed that law in August 2013, Etsy has until 2017 to become a benefit corporation." Yet Etsy CEO Chad Dickerson is quoted as saying Etsy had no plans to reincorporate as a benefit corporation: “Regardless of certification, we plan to focus on delivering a strong business that also generates social good,” he said."
It will interesting to see how a publicly traded corporation like Etsy weighs the benefits of B-Corp certification against the risks and costs of moving to benefit corporation status. Risks like opening yourself up to 10b-5 and derivative shareholder suits if you fail to fulfill whatever social purpose you articulate in your articles of incorporation. Not to mention the securities law issues around stressing the importance of B-Corp status while seeming to suggest that it will lose that status in a few years.
Update 2: I knew Haskell Murray must have been on this, but I didn't look back far enough to see this post.
The end of the semester hit like a ton of bricks, so there are a few blogposts that I semi-composed in my head and left unwritten. Plus this Associate Dean thing can make life a bit busy. But lest I get out of the habit of blogging entirely, here's a belated rant on Michael Malone's WSJ opinion piece, Reviving the Flagging Spirit of Silicon Valley.
Malone paints a picture of the vibrant, Wild-West Silicon Valley of yesteryear, where "anyone with brains, hard work, the guts to take real risks, and a whole lot of luck can become successful beyond their wildest dreams. That “anyone”—scientist, entrepreneur, secretary or receptionist—has a shot at the brass ring."
In Malone's story
The great turning point came with the dot-com bubble and its bust at the turn of the century. The bust allowed powerful institutions to get their hands on a place considered too renegade, too independent, and too successful to decide its own destiny. The federal government, long believing the Valley’s great companies were not displaying sufficient fealty—i.e., lobbyists and campaign money—came down hard on the tech industry. And as we all know, the Valley caved.
Then came a series of regulatory handcuffs. First was Sarbanes-Oxley, sold to the public as a curb on the corruption of the stock markets by over-pumped IPOs. In reality Sarbox was a way for Washington and big, mature tech companies to suppress new competitive startups that would lure away their talented employees. Next came the expensing of stock options by the Financial Accounting Standards Board.
I'm struggling with why my reaction to Malone's op-ed is so viscerally negative. After all, I teach and write in entrepreneurship. I like startups. And, for the record, what Malone says about the political economy is clearly right--it paid the price for thumbing its nose at Washington. Silicon Valley now spends a lot more money on Capitol Hill, and has reaped handsome returns, viz the JOBS Act.
Here's the rub for me: A lot of the policy arguments for the JOBS Act amounted to "We don't have as many IPOs/public companies as we used to! That's bad! Let's fix that!" To which I respond: How do you know what the right number of IPOs/public companies are? Just because they used to be at a certain level--say, in 2000--doesn't mean that's the right number. Maybe there are other reasons why IPOs declined, that have nothing to do with U.S. securities law.
To be fair, Malone 's gripe focuses on the fact that companies no longer widely distribute stock options to secretaries, receptionists, and the like. He blames FASB's move to expense stock options in 2004. But I keep coming back to Warren Buffet's simple questions: "“If stock options aren’t a form of compensation, what are they? If compensation isn’t an expense, what is it? And, if expenses shouldn’t go into the calculation of earnings, where in the world do they go?” FASB's rules should make sure that a corporation's books accurately reflect its finances. They're not about social engineering or fostering startups.
Malone mistakes correlation for causation thusly: "Say what you will, but the pre-Sarbanes, pre-FASB, pre-RSU Silicon Valley worked." It's not clear that the pre-Sarbanes, Pre_FASB Silicon Valley world was sustainable, even in a world without Sarbanes-Oxley or options-expensing. Moreover, his argument seems a particularly strange one given that Silicon Valley-style startups don't need any encouragement right now. A landscape with 83 private firms valued at $1 billion or more seems more bubblicious than moribund.
And, for the second time, get off my lawn.