Yesterday, attorneys for the shareholders of News Corporation announced an agreement in principle to settle derivative claims filed in various U.S. jurisdictions, including Delaware, against officers and directors of the corporation for $139 million (minus attorney fees, TBD). The payment will be made to the corporation from the various D&O insurance policies. The Memorandum of Understanding is here. The amended complaint is here. The parties agreed to file a stipulation with the Delaware Chancery Court within 14 days for approval. Kevin La Croix's expert commentary on the D & O issues is here.
So, what were the claims? The claims fall roughly into two big groups, both under the Duty of Loyalty: (1) the conflicted $615 million acquisition by News Corp. of an entity owned by (controlling shareholder, CEO and Chair) Rupert Murdoch's daughter; and (2) lack of oversight related to the illegal surveillance scandal involving News Corp.'s 100% owned subsidiary, News of the World. Sprinkled around these claims are accusations of Murdoch using the corporation as a vehicle for supporting his political agenda. The overarching thesis of the complaint is that the board allowed Murdoch to use News Corp. for his own personal purposes: family and political.
Historically, conflict-of-interest claims have teeth; oversight (Caremark) claims do not: waste claims don't even have a mouth. Something here had a lot of teeth given that the parties agreed to go to mediation prior to a ruling on a motion to dismiss and given the $139 million figure. For those of us waiting to see a winning Caremark claim, failure to oversee an ongoing pattern of illegal news-gathering activity that was well-known internally might be it. But, we may never know if the settlement is all about the acquisition or a little bit of both. Perhaps the oral argument for the motion to dismiss last year held some clues that the court thought the oversight claim was not going to be dimissed, at least.
The remedy section of the MOU has not only the monetary award but also positive remedial changes, such as more compliance, a compliance officer, an independent Chairman of the Board, and new definitions of "independent" for board members, etc., that might match up to oversight if the money merely lines up with the acquisition. And, interestingly, a new "Political Activity Policy":
Stay tuned to see if this is a throw-away provision (like most remedial changes in derivative settlements, or something to see.
2. The Company has or will implement a policy requiring annual public disclosure to its shareholders of political conributions made directly by the Company to state or local candidates, political party committees, political committees (e.g., PACs) or other political organizations exempt from federal income taxes under Section 527 of the IRC; payments to any other entity that is earmarked to be used for independent expenditures for a candidate or political party; or to a ballot measure committee. . . .
3. The Company will notify the Board (for its information and not approval) on an annual basis of payments in excess of $25,000 (including special assessments) that are not deductible under Chapter 162(e) of the IRC . . . and are. . .made to any US-based trade association, Section 501(c)(4) organization, or Section 501(c)(3) organization that coordinates directly with the Company in drafting proposed legislation or grassroots lobbying activities. . . .
Interesting stuff. I favor the proposed rule because I believe that information about corporate spending on politics is important to shareholders, and although some of that spending is currently disclosed, the proposal rule would provide more coherent and easily accessible disclosure.
So, Mitt Romney's off-the-cuff remarks about the 47% are now part of social media history. He has responded this (Friday) afternoon by releasing his tax returns. (Politics are nothing if not fascinating.)
But what intrigued me by Mr. Romney's statements was the underlying assumption that we all vote our economic interest. And not just that, but we all vote our short-term, bottom-line interest. In short, we vote for the guy who lowers our tax bracket next year. Perhaps on K Street, this is common knowledge in all campaign offices, Democrat or Republican. But it was startling to me.
Here is the plucked-out quote:
There are 47 percent of the people who will vote for the president no matter what. All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe that government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you name it. That that's an entitlement. And the government should give it to them. And they will vote for this president no matter what. And I mean, the president starts off with 48, 49, 48—he starts off with a huge number. These are people who pay no income tax. Forty-seven percent of Americans pay no income tax. So our message of low taxes doesn't connect.
So, this statement could mean many things. First, it could just be hyperbole. There are a whole lot of people out there who aren't interested in lowering their taxes or keeping more of their own money. Thousand points of light wouldn't resonate; you are a better director of your money than the government wouldn't resonate. But his other statements about entitlements sugests that's not the gist. The gist is more about net "takers" and "givers." Only net "givers" want less taxes.
So second, it could be a description (whether one that is considered unfortunate or one that's embraced) of reality as Romney (and maybe all politicians, whichever party) sees it: Americans who vote will only vote their short-term bottom-line interest. So, if you aren't going to lower my income taxes or capital gain taxes or the entity-level taxes on my small business, I'm not voting for you. If you raise those taxes, I really won't vote for you. In essence, my vote is for sale. Whether with tax breaks or vouchers or whatever. If I'm a busienss, I won't vote for you unless you give my industry a tax break. So, if I pay no taxes, you can't pander to me by lowering taxes, only by giving me more handouts.
But government spending (vouchers) or anti-spending (tax cuts) should be based on a greater good that is embraced by the majority: lower taxes spurs innovation or economic growth or R&D or something. Vouchers improve education nationwide. [Name your government program] improves society. Eliminating or limiting [name your government program] improves society. Voters vote to improve society. Right? So, even if you raise my taxes, I should vote for you if I think raising taxes to pay down debt or improve social programs is a good idea. And, there may be many reasons to vote for someone that are noneconomic short-term -- civil rights, reproductive freedom, etc.
I am bracketing here problems in the statement that others have pointed out -- many in the 47% pay other types of taxes; many are retired and have paid taxes before; many are retired but have grown children that pay taxes; many net "takers" have cognitive dissonance about the government subsidies they receive and don't often vote their interest. So, to say that the entire 47% is already voting Democrat is wrong, just as the next conclusion that only a small percentage of folks that pay taxes ever vote Democrat is wrong.
What I'm more interested in is the surrendering of all pretense that a citizen's interest in government lies only in how many cents per dollar it is taxed -- not what government leaders do with those cents or what policies government leaders implement as they live off your cents.
Yes, we try to stay away from hot political topics here at the Glom, but the "You Didn't Build That" meme jumps into our territory. President Obama is being quoted as saying, "If you've got a business -- you didn't build that" as part of a speech on how even the most successful of us achieve that success with the help of other individuals and government institutions that provide infrastructure, an educated work force, etc. This speech is similar to ones he has given before, and to Elizabeth Warren's speech, but it's a slow news cycle and that sentence has gone viral. Here is the whole section from which the quote is taken:
If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business -- you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.
So, the "that" may refer not to "business," but to "roads and bridges" or "this unbelievable American system." But, if my Facebook friends are any indication, small business owners are not giving Obama the benefit of the grammar doubt. Commentators are arguing that Obama's slipup reveals his hatred of capitalism and disdain for entrepreneurship. Here at the Glom, we tend to be proponents of both of those things, but I'm not jumping on that bandwagon. Here are two responses, theoretical and practical.
Theoretical. The knee-jerk response to Obama's poor sentence structure exposes the fact that travelers along this journey of life can be sorted along a 2 X 2 grid. (Bear with me). Along life's defeats and successes, one may greet them with an attitude of gratitude, recognizing the hand of fortune, good or bad, or one may greet them with an attitude of desert, ascribing the outcome to one's own contributions. However, few of us greet both bad and good results the same -- mostly we greet good outcomes with feelings of desert, and bad outcomes with feelings of anti-gratitude (result as caused by bad fortune). And the truly human among us ascribe our own good results to our own actions, or own bad results to bad fortune, others' good results to fortune and others' bad results to their own poor choices. A more humanitarian response would be to be grateful for our own successes, take responsibility for our poor choices for our own actions, give others respect for their successes, and sympathize with others' poor outcomes by recognizing the hand of fortune. Cultivating gratitude does not take away from our successes, and I think we can still honor individualism while also recognizing the role of other forces.
Practical. Like many others (including Obama and Romney), I've spent time in a country where there is no "unbelievable American system." We tend to believe that good roads, a postal delivery system, telephone lines, free schools, police officers, and firefighters are a floor. A government isn't helping you by providing these things; one needn't be thankful for these things. My daughter also believes that I'm not a good mom even though I do a million things a day for her. Because she has known no other mom, she thinks that's what all moms do as a starting point. The American system isn't a baseline; it's a wonder. I now realize that even if you are an amazing entrepreneur with the best intellect and work ethic, it is very hard to succeed in a country with no free public schools (or very poor ones with no materials), no roads to get your goods to market, no system of delivering parts for your goods, no educated workforce for your business, etc. No easy way to communicate. No way to protect your business from vandals.
Commentators have pointed out that all Americans enjoy good roads, public schools, etc., yet not everyone is a successful entrepreneurs. Therefore, the successful got that way by virtue of their own hard work alone. The climate is the constant, their industriousness the deciding and only factor. I think this is odd logic. If I built a ten-foot platform from which individuals could to try to jump to catch a prize twelve feet in the air, not all will obtain the prize. The ones who do can jump higher than the others; however, they did not obtain the prize all on their own.
While most folks in the U.S. probably had a relatively relaxed weekend, perhaps a holiday weekend for some, the past four or five days have been fairly expectant (ok, tense) in Malawi. The conclusion to the story is that today Malawi has a new President, Joyce Banda.
Thursday morning, the then-President Bingu wa Mutharika, collapsed of cardiac arrest. For a day or so, no official would confirm his death, though it was widely rumored. Some officials claimed he had been flown to South Africa for emergency treatment (a two-hour jet plane flight) while others claimed he was perfectly fine. Finally, the government confirmed that Mutharika, 78, had passed away. On Saturday afternoon, the Vice-President, Joyce Banda, was sworn in as President.
But that bland description does not capture the uncertainty of the past few days and of the future. Following Thursday's news of Mutharika's possible death, tensions were very high over who would be the next President. Under the Malawi Constitution, should the President become incapacitated or die, the office of President, until the next election, falls to the Vice-President. However, two possible problems could have arisen. First, it was not completely clear whether the rule of law would prevail. Malawi is a young democracy, and the past year had seen a reversal in respect of some principal democractic concepts, if not the rule of law. Banda, as I will explain further in a moment, was in opposition to Mutharika, and quite recently opposition leaders had been arrested. So, a peaceful transition of power could not be completely assumed.
Second, members of Mutharika's party, the Democratic Progressive Party (remember that joke about the Holy Roman Empire not being Holy, nor Roman, etc.?), had claimed that Banda was not legally the V-P. Though Banda and Mutharika had run as members of the DPP, Mutharika had later expelled Banda from the party because of her "anti-party" activities. Banda then organized her own party, the People's Party, and was going to run for President in 2014. (Mutharika was constitutionally banned from running because of term limits, but his brother, Peter, would have been the party nominee.). However, she could not be fired as V-P, though her duties were reassigned. So, supporters braced for a court battle over whether Banda was the legal V-P and would legally be the successor.
So far, things look cautiously optimistic. But Banda inherits more problems than we can even fathom. Almost a year ago, Mutharika expelled the British ambassador from the country, prompting the U.K. to withhold aid from the country. That aid constituted 40% of the budget of the government of Malawi, so this cut in aid, which had ripple effects throughout the aid community, threw an already incredibly impoverished country in to severe economic crisis. Last week, the country's currency, the kwacha, was trading on the black market at almost twice its official rate. The IMF had called upon Malawi repeatedly to devalue the kwacha, but the government refused. Severe shortages of fuel and other commodities are everyday occurrences. (If you can find petrol, it's at least $10/liter.) A ten-day mourning period has been announced for the late President, but then a lot of hard work will need to be done.
It is interesting to see the House sweat over whether they have to act on a bill that passed the Senate 96-3. But part of the reason may be because the expert networks about which the SEC is so suspicious, at least if they are the political variants of the same, will have to register as lobbyists. Can't imagine the hedge fund industry expected that. Anyway, this Times piece is pretty interesting.
While charitable contributions and taxes are sometimes portrayed as substitutes, we think of charitable giving as "generous" and we think of paying taxes as a necessary cost of living in a civil society. Thus, Learned Hand aptly described our attitude toward the payment of taxes: "any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." Helvering v. Gregory, 69 F.2d 809, 810-11 (2d Cir. 1934).
Despite this widespread view toward the payment of taxes, Romney is still criticized for not paying (or wanting to pay) more taxes. In a WaPo piece from earlier today, for example, Rabbi Sharon Brous of Los Angeles observes, "On one hand, I really admire his sense of obligation to his immediate community, but I would offer that perhaps he might adopt a more expansive notion of what community is." This, despite the fact that Romney was not using the most tax-advantageous method of making his charitable contributions. (Thanks, Miranda.)
Rather than blaming Romney for paying too little in taxes, perhaps we should encourage more charitable giving. Again from the WaPo story:
Overall, Americans give between 2 and 3 percent of their income to charity, according to the Philanthropy Roundtable, but in the first few years of the recession, that number dropped, too. Newt Gingrich gave just $81,000 — 2.58 percent of his $3.1 million income and a fraction of his 2005-06 tab at Tiffany’s — to charity in 2010....
The more individuals and corporations give, the less the government has to. Giving, and giving until it hurts, forces you to recognize that, like a parent, you’re responsible for other people — whether in your own community or around the world. When you lay down your money, you say, “This (church sanctuary, child, environmental hazard) is my problem.” Providing a sense of interconnected obligation is traditionally what religious communities have done best, and it is no surprise that the religious groups that are growing fastest in America — Mormons, Pentecostals, certain sects of Jews — are those that make demands on their members' time and money.
The Republican debate in South Carolina was the most entertaining of this election cycle. Just for some extra fun, I was following the Twitter chatter. The only person from the debate who is trending on Twitter: Juan Williams.
If you ever want confirmation that beauty is in the eye of the beholder, follow a debate on Twitter. Still, looking at the debate grades, lots of people seemed to agree that Newt Gingrich and Rick Perry did well, while Rick Santorum lagged behind. The effort to "unite the conservatives" has been a failure, so far.
Before the debate, Romney was threatening to run away with the nomination, but he did not help himself tonight, and he may have hurt himself. The Twitter traffic was not kind. The candidates have another debate on Thursday, so it's hard to say how this weak performance will affect the voters of South Carolina, but the non-Romneys are energized and Mitt looked confused.
Fox used Twitter traffic to evaluate the winners and losers in the debate. One of the big winners in the Twitterverse was Ron Paul, even though most of the people issuing grades had him dead last. Who are these people tweeting away during the debate? Are they representive of anything?
Res ipsa loquitur ...
..and that's the problem Mitt Romney's got right now. You can argue that it's hard to feel too sorry for private equity types: they certainly tend to live up to their name, keeping their name and doings out of the limelight (unless they're going public this year, and have to reveal that their top 3 execs made $402 million). It's that privacy that's hurting Romney now.
The mystery of private equity is something I confront each spring as I being my Life Cycle of the Corporation course. As the title suggests, it covers a corporation's life, from founding through venture financing, going public, and being public (and M&A and bankruptcy, time permitting).
Fully a third of the substantive classes focus on venture financing. That because it takes a while for the students to grasp what venture capitalists do. We watch a movie. We discuss term sheets and Series A financing documents. We have a negotiation exercise, pitting company counsel against investor counsel. By the end of the unit, they really do get it. But it takes three weeks.
Most of America hasn't done this. So maybe when they hear, as the Journal reported yesterday, that of the 77 companies Bain invested in during its tenure, 22% filed for bankruptcy or stopped operations by year 8, or that "most of the 50-80% of annual gains" Bain produced came from "a relatively small number of deals, and some of these winning companies later ended up filing for bankruptcy protection", that sounds scandalous. To me, it sounds like Bain hit it out of the park. But I know the odds are against a successful exit, even for a venture-backed corporation. I know it's normal for a few "home-runs" in a fund to make up for a lot of ho-hum investments and some real stinkers. Most Americans don't know that.
Like Gordon, I think Perry's "vulture capitalist" label is unfair and misplaced. But there aren't really any venture capitalist household names--Gordon Gekko is one popular image of private equity, and he plays a villain. Steve Jobs may be an entrepreneur-hero, but the public doesn't lionize the VC funds that got Apple off the ground.
Gordon says this issue "should be a winner for Mitt, if he can make the connection to average voters." The question for me, is whether Romney is going to try to explain venture capital and private equity to the average American in soundbites. My experience tells me that might be a tall order.
The "King of Bain" video by Invest in America is here. If you are inclined to embrace the Romney-as-Raider narrative that Newt Gingrich has been developing, you might find this film effective, but it's hard to imagine independent-minded voters being persuaded.
One problem is that many of the claims and insinuations in the film are facially ridiculous. For example, the first case study of Romney's rapaciousness is about a company called UniMac. According to the film, this was the Bain formula: buy a great company, degrade the products, fire the employees, and sell the company at a huge profit to the Canadians. In that order.
The bigger problem is that the tone and rhetoric of the film are well-designed to affirm preexisting beliefs, but not likely to persuade those who are independent or inclined to favor Romney. Romney buys big houses, and he makes them bigger! He is rich, and he likes money! He says crazy stuff like, "everything corporations earn ultimately goes to people"! His own firm took "foreign seed money from Latin America"! And in case you missed the fact that Mitt isn't like you, look at a clip of him speaking French!
It's just over the top.
"More ruthless than Wall Street," Romney apparently coined the term "creative destruction." (Sorry, Mr. Schumpeter.) For Newt Gingrich, this film is just about destruction. Ultimately, I think it will be self-destruction.
The WSJ has a story about Mitt Romney's time at Bain Capital. Lots of Bain's investments failed, but that's no surprise for a venture capital/LBO firm. The firm had some home runs, too, which is also no surprise. Neither the failures nor the home runs are entirely attributable to Mitt, of course, so I am not sure this report will get much traction among voters. One thing we know for sure, and that is the investors in Bain profited handsomely:
The Wall Street Journal, aiming for a comprehensive assessment, examined 77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999, to see how they fared during Bain's involvement and shortly afterward.... The Journal analysis shows that in total, Bain produced about $2.5 billion in gains for its investors in the 77 deals, on about $1.1 billion invested. Overall, Bain recorded roughly 50% to 80% annual gains in this period, which experts said was among the best track records for buyout firms in that era.
I have known a number of people who worked with Mitt at Bain, and, if memory serves, all of them had good things to say about Mitt. I am not sure any of them thought that he was the world's greatest businessman, but he was no slouch, either.
Does this matter in choosing a President? Mitt certainly thinks it matters. He keeps pressing his experience at Bain, partly as evidence of his leadership and partly as evidence of his understanding of how to create jobs. I don't find this part of his leadership narrative all that compelling because he was the investor -- a sounding board with money -- not the entrepreneur. On the jobs issue, however, I think this is an angle worth exploiting. Building successful companies is a theoretical exercise for most politicians, including President Obama, but Mitt has been part of the process.
Time Magazine’s “person of the year” is the “protestor.” Occupy Wall Street’s participants have generated discussion unprecedented in recent years about the role of corporations and their executives in society. The movement has influenced workers and unemployed alike around the world and has clearly shaped the political debate.
But how does a corporation really act? Doesn’t it act through its people? And do those people behave like the members of the homo economicus species acting rationally, selfishly for their greatest material advantage and without consideration about morality, ethics or other people? If so, can a corporation really have a conscience?
In her book Cultivating Conscience: How Good Laws Make Good People, Lynn Stout, a corporate and securities professor at UCLA School of Law argues that the homo economicus model does a poor job of predicting behavior within corporations. Stout takes aim at Oliver Wendell Holmes’ theory of the “bad man” (which forms the basis of homo economicus), Hobbes’ approach in Leviathan, John Stuart Mill’s theory of political economy, and those judges, law professors, regulators and policymakers who focus solely on the law and economics theory that material incentives are the only things that matter.
Citing hundreds of sociological studies that have been replicated around the world over the past fifty years, evolutionary biology, and experimental gaming theory, she concludes that people do not generally behave like the “rational maximizers” that ecomonic theory would predict. In fact other than the 1-3% of the population who are psychopaths, people are “prosocial, ” meaning that they sacrifice to follow ethical rules, or to help or avoid harming others (although interestingly in student studies, economics majors tended to be less prosocial than others).
She recommends a three-factor model for judges, regulators and legislators who want to shape human behavior:
“Unselfish prosocial behavior toward strangers, including unselfish compliance with legal and ethical rules, is triggered by social context, including especially:
(1) instructions from authority
(2) beliefs about others’ prosocial behavior; and
(3) the magnitude of the benefits to others.
Prosocial behavior declines, however, as the personal cost of acting prosocially increases.”
While she focuses on tort, contract and criminal law, her model and criticisms of the homo economicus model may be particularly helpful in the context of understanding corporate behavior. Corporations clearly influence how their people act. Professor Pamela Bucy, for example, argues that government should only be able to convict a corporation if it proves that the corporate ethos encouraged agents of the corporation to commit the criminal act. That corporate ethos results from individuals working together toward corporate goals.
Stout observes that an entire generation of business and political leaders has been taught that people only respond to material incentives, which leads to poor planning that can have devastating results by steering naturally prosocial people to toward unethical or illegal behavior. She warns against “rais[ing] the cost of conscience,” stating that “if we want people to be good, we must not tempt them to be bad.”
In her forthcoming article “Killing Conscience: The Unintended Behavioral Consequences of ‘Pay for Performance,’” she applies behavioral science to incentive based-pay. She points to the savings and loans crisis of the 80's, the recent teacher cheating scandals on standardized tests, Enron, Worldcom, the 2008 credit crisis, which stemmed in part from performance-based bonuses that tempted brokers to approve risky loans, and Bear Sterns and AIG executives who bet on risky derivatives. She disagrees with those who say that that those incentive plans were poorly designed, arguing instead that excessive reliance on even well designed ex-ante incentive plans can “snuff out” or suppress conscience and create “psycopathogenic” environments, and has done so as evidenced by “a disturbing outbreak of executive-driven corporate frauds, scandals and failures.” She further notes that the pay for performance movement has produced less than stellar improvement in the performance and profitability of most US companies.
She advocates instead for trust-based” compensation arrangements, which take into account the parties’ capacity for prosocial behavior rather than leading employees to believe that the employer rewards selfish behavior. This is especially true if that reward tempts employees to engage in fraudulent or opportunistic behavior if that is the only way to realistically achieve the performance metric.
Applying her three factor model looks like this: Does the company’s messaging tell employees that it doesn’t care about ethics? Is it rewarding other people to act in the same way? And is it signaling that there is nothing wrong with unethical behavior or that there are no victims? This theory fits in nicely with the Bucy corporate ethos paradigm described above.
Stout proposes modest, nonmaterial rewards such as greater job responsibilities, public recognition, and more reasonable cash awards based upon subjective, ex post evaluations on the employee’s performance, and cites studies indicating that most employees thrive and are more creative in environments that don’t focus on ex ante monetary incentives. She yearns for the pre 162(m) days when the tax code didn’t require corporations to tie executive pay over one million dollars to performance metrics.
Stout’s application of these behavioral science theories provide guidance that lawmakers and others may want to consider as they look at legislation to prevent or at least mitigate the next corporate scandal. She also provides food for thought for those in corporate America who want to change the dynamics and trust factors within their organizations, and by extension their employee base, shareholders and the general population.
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As promised this post will be about recent proposals advocating that governments adopt various measures of aggregate happiness to complement such traditional measures of economic well-being as Gross Domestic Product (GDP) or Gross National Product (GNP). The basic premise for these proposals can be found in the first major campaign speech that Senator Robert F. Kennedy gave on March 18, 1968 at the University of Kansas. That speech challenged the prevailing orthodoxy of how governments measure progress and well-being.
Not surprisingly, the speech is right in that many items that are part of GNP do not reflect genuine social progress. To be clear and for the record, most economists themselves have long understood that GDP is an imperfect proxy for social welfare. Such proposed refinements as the idea of Net Economic Welfare (NEW) attempt to improve GDP by placing values upon and subtracting the costs on such negative externalities as crime, congestion, and environmental pollution from GDP. The last paragraph of the speech is what proposed social measures of subjective well-being intend to capture:
"Yet the Gross National Product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans."
Of course, the claim that GNP "measures everything, in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans" is a bit overstated. Nonetheless, GNP can be improved to better measure what governments and societies value. There is currently a lively debate over whether and if so, how governments can pragmatically measure aggregate happiness. One reason that such a debate is and will be contested is that once an item is measured and recorded, that item becomes harder to ignore and is likely to become a part of policy discussions. As Kenneth Arrow pointed out on pages 47-48 of his book, The Limits of Organization,
"The Full Employment Act of 1946 amounted to nothing more than a statement that full employment was at last on the Federal agenda, and many felt that this was a hollow victory indeed. But those who opposed it so violently were not deceived; in the long run, this recognition was decisive, though the process of implementing the responsibility was slow indeed. Once an item has arrived on the agenda, it is difficult not to treat it in a somewhat rational manner, if that is at all possible, and almost any considered solution may be better than neglect."
Professors Kahneman and Sugden introduce a methodology of policy evaluation based on experienced utility to environmental economics that avoids well-known problems of preference anomalies for contingent valuation studies. French President Nicolas Sarkozy recently created a Commission on the Measurement of Economic Performance and Social Progress, chaired by 2001 Nobel Laureate in economics, Joseph E. Stiglitz. The report by this commission makes a number of recommendations, including “Recommendation 10: Measures of both objective and subjective well-being provide key information about people’s quality of life. Statistical offices should incorporate questions to capture people’s life evaluations, hedonic experiences and priorities in their own survey." In a discussion paper titled Beyond GDP and Back: What is the Value-Added by Additional Components of Welfare Measurement, economists Sonja C. Kassenboehmer and Christoph M. Schmidt analyze quality-of-life indicators that are suggested in the Stiglitz Report to find that much of the variation in many well-being measures is already well-captured by such traditional economic indicators as GDP and the unemployment rate, but because the correlation of alternative indicators with monetary measures is far from perfect, there is room to augment traditional statistical reporting by non-standard indicators.
British Prime Minister David Cameron recently announced similar plans to collect national well-being measures that incorporate life satisfaction. In an article titled Emotional Prosperity and the Stiglitz Commission, British economist Andrew Oswald argues that countries are capable of and should measure their emotional prosperity and focus on mental well-being. In that article, Oswald summarizes seven studies that suggest emotional prosperity and broad measures of psychological well-being have recently been declining over time. In a National Bureau of Economic Research working paper titled, Beyond GDP? Welfare across Countries and Time, American economists Charles I. Jones and Peter J. Klenow propose a simple summary statistic for a country’s flow of well-being that combines data about consumption, inequality, leisure, and mortality.
In an article titled Happiness and Public Choice, European economists Bruno S. Frey and Alois Stutzer caution that a policy of maximizing aggregate happiness faces a number of difficulties including that it reduces people to being merely happiness metric stations in addition to discounts problems with political institutions and incentive distortion. In their article, they instead propose two practical ways to utilize happiness research for policy: (1) facilitate identification of those institutions that assist people in best achieving their personal goals and in so doing contributing maximally to individual happiness, and (2) provide crucial information as inputs to political discussion process.
Instead of maximizing a measure of aggregate happiness, it might be more politically feasible to minimize a measure of aggregate misery, stress, or unhappiness, such as the U-index, which in their article titled Recent Developments in the Measurement of Subjective Well-Being, Daniel Kahneman and labor economist Alan Krueger proposed and defined to measure the fraction of time that people spend experiencing unpleasant emotions. The U-index provides empirical information about negative emotional experiences that society may care about.
Another way to incorporate happiness data into policy analysis is to introduce maximum levels of a measure of unhappiness or minimum levels of a measure of happiness as constraints that government policies must satisfy while optimizing some objective function or goal besides happiness or unhappiness. This approach is analogous to philosopher Robert Nozick’s approach in his book titled Anarchy, State, and Utopia to incorporating rights as constraints that are not to be violated as opposed to rights as part of a policy goal to be optimized.
In her article titled Happiness on the Political Agenda? PROS and CONS, philosopher Valérie De Prycker argues that actual incorporation of happiness research into policy implicates a number of value-loaded ethical, ideological, and moral issues. But, in his article titled Greater Happiness for a Greater Number Is that Possible and Desirable?, sociologist Ruut Veenhoven believes that empirical research about life satisfaction refutes all theoretical philosophical objections against the greatest happiness principle. In yet a third article titled Greater Happiness for a Greater Number: Some Non-controversial Options for Governments, social scientist Jan C. Ott believes that governments can increase average happiness, eventually reduce happiness inequalities, and realize both purposively by non-controversial means. In another article titled Good Governance and Happiness in Nations: Technical Quality Precedes Democracy and Quality Beats Size, Professor Ott examines how quality of governance and in particular technical as opposed to democratic quality is correlated with average happiness of a country's citizens and finds that technically good governance appears to be a universal condition for happiness independent of culture. Once technical quality of governance reaches a minimum level, democratic quality of governance adds substantially to the positive effects of technical quality of governance upon average happiness.
In his chapter titled That Which Makes Life Worthwhile in the book Measuring the Subjective Well-Being of Nations: National Accounts of Time Use and Well-Being, behavioral economist George Lowenstein proposes that time-use surveys ask people not just about how much positive and negative affect is felt during a particular activity, but also if people believed that a particular activity was a valuable or worthwhile use of their time or instead a waste of their time. In their article titled Accounting for the Richness of Daily Activities, psychologist Mathew P. White and economist Paul Dolan ask people not just about how they felt during a particular activity, but also six additional questions about such non-hedonic aspects of experience as being engaged, focused, and finding meaning. These fundamental insights about how people care about not just positive affect, but also meaning in their lives raise questions about whether law and policy should care more about positive affect versus meaning in people’s lives.
In the article titled The Metrics of Subjective Wellbeing: Cardinality, Neutrality and Additivity, Australian economist Ingebjørg Kristoffersen provides a legitimate source of uneasiness about basing social policies upon aggregation of empirical happiness data via his quantitative analysis of certain mathematical properties of empirical happiness data that continue to remain contentious among economists, namely additivity, cardinality, and neutrality of such data, even though psychologists have to some degree already been able to address how to make international, interpersonal, and intertemporal comparisons of happiness data. This mathematical analysis also serves to provide a cautionary, persuasive critique of recent proposals by law professors for governments to eschew cost-benefit analysis and instead to determine and evaluate policy based upon aggregation of happiness, defined simply as experienced positive feeling.
Finally, a concern with experienced subjective well-being captured by self-reports of happiness is what economist Carol Graham terms a paradox of happy peasants and miserable millionaires, due to differences in anticipations or expectations between poor and rich people. As Graham notes, optimism among poor individuals can be a tool for their survival and parents who are poor may revise their own personal expectations downward but maintain hopeful expectations for their children. If peasants report being happy due to lowered expectations and (perhaps some) hedonic adaptation, while millionaires report misery due to envy towards even richer people and (perhaps unrealistic) expectations, should law and policy be more concerned over self-reported unhappiness of rich people, or about increasing self-reported happiness of poor folks, even if that means encouraging or nudging poor individuals to expect more of their future?