Tag: corporate governance

CEOs, Politics, and Other People’s Money

By James Kwak

I am, on paper, a corporate law professor, because—well, I guess because I used to work for a corporation (two, actually), and the books I write sometimes have corporations in them, and I teach business organizations as part of my day job. (Secret for those looking for a job as a law professor: UConn was looking for someone to teach corporate law, and I wanted the job, so that’s what I said I could do.) But I’ve made it this far writing exactly one corporate law paper (my summary here), and that was actually about corporate political activity—namely, whether and how shareholders can challenge political contributions that they think are not in the corporation’s interests.

It is well known by now that, in Citizens United, Justice Kennedy committed one of the true howlers of recent Supreme Court history:

With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters. Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are “‘in the pocket’ of so-called moneyed interests.”

The obvious problem is that there is no disclosure of corporate contributions to 501(c)(4) social welfare organizations and 501(c)(6) associations (such as the Chamber of Commerce), and even contributions to 527 Super PACs can be easily laundered through intermediary entities whose owners are secret. The second, slightly less obvious problem is that, under existing standards, there is precious little that shareholders can do to “hold corporations accountable” for political donations. Given the traditional deference that courts show to decisions made by corporate directors and officers, the latter have pretty much free rein to do what they want with their shareholders’ money.

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Corporate Political Contributions and Bad Faith, Whatever That Is

By James Kwak

In an earlier paper (blog post here), I argued that corporate political contributions can in many cases be challenged by shareholders as conflicted transactions that further insiders’ personal interests (e.g., lower individual income taxes) rather than the best interests of the corporation. The argument (to simplify) was that if a political contribution is in the CEO’s individual interests, the resulting conflict of interest should make the business judgment rule inapplicable, placing on the CEO the burden of proving that the contribution was actually in the best interests of the corporation.

In a new paper, law professor Joseph Leahy has outlined a new theory under which shareholders can contest corporate political contributions. He argues that such contributions in many cases will constitute bad faith, since they have a motivation other than serving the best interests of the corporation. This line of reasoning exploits the vagueness of the concept of good faith as it has been established by the Delaware courts in Disney (the case over Michael Ovitz’s $140 million severance package) and later cases. Of course, that is only what the Delaware courts deserve for making such a hash out of the concept. In effect, they first said that any action not motivated by the best interests of the corporation constitutes bad faith, but then in specific cases tried to absolve any actual board of directors of ever actually acting in bad faith.

It is far from clear that a lawsuit brought on these grounds would have much chance of success in court. But by the letter of the case law, they should have a chance. And the more that plaintiffs contest corporate political contributions, the more likely it is that companies will decide that they aren’t worth the trouble. Or, even better, they will decide that they should only make contributions that are actually good for the bottom line and for shareholders—which is the way things should be.

More on Wasting Shareholders’ Money

By James Kwak

A few weeks ago I wrote a post about my most recent “academic” paper, on the issue of whether corporate political contributions might constitute a breach of insiders’ fiduciary duty toward shareholders. The thrust of that paper was that some political contributions could be contested as breaches of the duty of loyalty—for example, if a CEO causes the corporation to give money to a candidate who promises to lower the CEO’s individual income taxes—which would result in the courts applying a higher standard of review.

Joseph Leahy, another law professor, recently directed me to a paper that he wrote last year (but is still being edited for publication in the Missouri Law Review) on basically the same topic. He argues first that corporate political contributions do not qualify as “waste” (which has a precise legal definition), barring the kind of extreme facts that you only see in law school hypotheticals. I agree with that, although my only discussion of the point was in a footnote (79).

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Politics: Another Way To Waste Shareholder Money

By James Kwak

I don’t often go to academic conferences. My general opinion is that at their best, sitting in a windowless room all day listening to people talk about their papers is mildly boring—even when the papers themselves are good. And it takes a lot to justify my spending a night away from my family.

Despite that, a little over a year ago I attended a conference at George Washington University on The Political Economy of Financial Regulation. I went partly because my school’s Insurance Law Center was one of the organizers, partly because there was a star-studded lineup (Staney Sporkin, Frank Partnoy, Michael Barr, Anat Admati, Robert Jenkins, Robert Frank, Joe Stiglitz (who ended up not showing), James Cox, and others, not to mention Simon), and partly because I have friends in family in DC whom I could see. It was one of the best conferences I’ve been to, both for the quality of the ideas and the relatively non-soporific nature of the proceedings.

Many of the papers and presentations from the conference are now available in an issue of the North Carolina Banking Institute Journal (not yet on their website), which should be of interest to financial regulation junkies. My own modest contribution was a paper on the issue of corporate political activity. (In a moment of unwarranted self-confidence, I told one of the organizers I could be on any of three different panels, and they put me on the panel on “political accountability, campaign finance, and regulatory reform.”)

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$100M for Eric Schmidt?

By James Kwak

Over on Twitter, Matt O’Brien wrote:

That inspired me to take a look at the article O’Brien referred to: a column by Steven Davidoff asking why JPMorgan gets pilloried for giving CEO Jamie Dimon $20 million while Google can give Chairman Eric Schmidt $106 million without incurring the wrath of the public.

I went into it thinking I would agree with O’Brien—that there is something worse about lavish Wall Street pay packages than lavish Silicon Valley pay packages. Part of that was home team bias: I spent most of my business career working for companies based in Mountain View, Sunnyvale, Menlo Park, San Mateo, and Foster City (that’s two companies and five office moves). But I ended up mainly agreeing with Davidoff.

I think O’Brien is right on the narrow question of why people are mad: JPMorgan has done a lot of bad things in recent years, while Google’s role in the world is more ambiguous. But at the end of the day, voting the chairman of the board enough money to buy a Gulfstream 650 and an entourage of 550s is not a good use of shareholder money. And it’s shockingly tone-deaf in this age of rising inequality and cuts to food stamps. That’s the topic of my latest Atlantic column.

Why JPMorgan Is JPMorgan

By James Kwak

Which is to say, a basket case. Along with Citigroup, and Bank of America.

We all know that JPMorgan Chase is too big to fail. We all know that this means that it enjoys the benefit of a likely bailout from the federal government and the Federal Reserve should it ever collapse in a financial crisis. So why does that make it a poorly run company? It’s possible for a behemoth to be well run; think of Intel in the 1990s, for example.

One reason, of course, is that it’s too big to manage. Even if bribing Chinese officials by hiring their children wasn’t part of the master strategy, not being able to stop it from happening is a sign that things aren’t really under control. (And for “bribing Chinese officials,” you can insert any number of other things, like “betting on the relative values of various CDS indexes,” or “manipulating LIBOR.”)

Mark Roe (blog post; paper) points out another reason. For decades, the supposed cure for bad management has been the so-called market for corporate control. In other words, do a bad job, and someone will take over your company and you’ll be out of a job. That someone might be a corporate raider like T. Boone Pickens, or it might be a private equity firm, but in either case bad management is a sign of opportunity.

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CEO Salary Justification Season Is Open

By James Kwak

Proxy season is over. Then comes the annual compilation of executive compensation data. Equilar and the Times, for example, reported that the compensation of the median CEO at a large public company was more than $15 million in 2012.

This means that now we are into the season of justifying these stratospheric numbers—and particularly the high rate of growth of those numbers. (2012 median compensation was 16 percent higher than in 2012.) For example, there was Steven Kaplan’s unconvincing attempt to justify high CEO pay by comparing it to . . . high pay among the top 0.1% (see Brad DeLong for a summary).

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Protecting Boards from Their Own Shareholders

By James Kwak

I teach corporate law, and one of the topics in a typical introductory corporate law course is hostile takeovers. The central legal question is: to what extent is a board of directors allowed to undertake defenses against a takeover bid, even if (as is always the case) the potential acquirer is offering a premium over the current market price?

Whenever I teach one of these cases, I always bring up the nagging economic question: if the share price is $20, and Big Bad Raider is offering $30 in cash to each and every shareholder, where does the board get the chutzpah to claim that, under its leadership, the true value of the company is more than $30? (I understand the argument that Bigger Badder Raider might be convinced to pay more than $30, but the law, at least in Delaware, allows boards to use some takeover defenses to fend off any acquirer.) This always baffles me, but the law is premised on the idea that there is some fundamental value that is hidden deep inside the current board’s “strategic plans,” and that Big Bad Raider may rob shareholders of this fundamental value.

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The Effects of Golden Parachutes

By James Kwak

The indefatigable Lucian Bebchuk has written another empirical paper (Dealbook summary), this time with Alma Cohen and Charles Wang, on the impact of golden parachutes (agreements that pay off CEOs generously in case of acquisition by another company) on shareholder value.

Looking just at the question of whether a company is acquired and for how much, they find out that golden parachutes work about how you would expect. Companies whose CEOs have golden parachutes are more likely to get acquisition offers and are more likely to be acquired, presumably because their CEOs are les likely to contest takeovers. On the other hand, these companies tend to sell for lower acquisition premiums, again because their CEOs are more likely to be happy to be bought out.

“So far, so good,” Bebchuk writes. But the problem is that when you take a longer view, golden parachutes appear to be bad for shareholder value. Companies that adopt golden parachutes have lower risk-adjusted stock returns than their peers—despite the fact that they are more likely to be acquired. Some other factor is outweighing the positive effect (for the stock price) of more frequent takeovers.

Bebchuk proposes one explanation: Golden parachutes make being acquired relatively painless to CEOs. Therefore, they are less afraid of being acquired; and, therefore, they are less concerned about maximizing shareholder value in the first place.

Here’s another possibility: Companies are more likely to grant golden parachutes to their CEOs if they have: (a) CEOs who care more about maximizing their personal wealth than about their companies; (b) boards who are more concerned about doing favors for the CEO than about doing what’s right for the company; or (c) both. Those are not the kinds of companies you want to be investing in, since they’re likely to screw up all sorts of other things in addition to their executive compensation policies.

One-Hit Wonders

By James Kwak

Meg Whitman is what is known as a superstar CEO. She became CEO of eBay in 1998 and took it public; during her reign, eBay became one of the most successful, most valuable Internet companies in existence (and Whitman became a billionaire). She used her celebrity to mount a high-profile, expensive, and ultimately unsuccessful campaign to become governor of California (losing to career politician Jerry Brown) before being named CEO of HP, the iconic Silicon Valley company.

Why did HP, one of the largest information technology companies in existence, hire Whitman, who preceded her stint at eBay (auction house for random stuff from people’s attics) with jobs at Disney, a shoe company, a flower delivery service, and a toy company? Because of the idea of the superstar CEO, with transferable general management skills, who can transform any organization.

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What Do Companies Do with Their Political Spending?

By James Kwak

Whatever they’re doing, it doesn’t seem to be good for shareholders. That’s one conclusion of a new paper by John Coates, a Harvard law professor, which I discuss in today’s Atlantic column (which originally misdated the Citizens United decision, thanks to some faulty proof-reading by me). Coates compares firm valuations with levels of lobbying and contributions by corporate PACs and finds that, outside of heavily regulated industries where everyone lobbies heavily, political activity is associated with lower firm value—implying that it’s more like a CEO perk than like a good investment from the shareholder perspective.

Citizens United and Corporate Political Spending

By James Kwak

Today’s Atlantic column is about corporate political spending in the wake of Citizens United and what, if anything, can be done about it. A group of corporate and securities law professors has petitioned the SEC to write rules requiring companies to disclose their political spending, just like they have to disclose their executive compensation today. As usual, I’m not too optimistic about what disclosure can achieve, especially disclosure in SEC filings or proxy statements: who reads those things, anyway? But it’s better than nothing, and with the current makeup of the Supreme Court, nothing is just about what we’ve got now.

A Failure of Corporate Governance

By James Kwak

(I’ve gotten several great articles forwarded to me via email by readers. It may take a few days to do them justice. Here’s one.)

In the great consensus of the past twenty years, government regulation was unnecessary because the free market provided better tools for constraining private companies. One force was the market, idealized by Alan Greenspan, who believed that counterparties could even police effectively against fraud. The other force was shareholders, who would punish managers for acting contrary to their interests. The market would prevent companies from abusing their customers, while corporate governance would prevent them from abusing their shareholders.

For those who still believe in the latter, McClatchy has a good (though infuriating) article on what went wrong on Moody’s, the bond rating agency that, we previously learned, responded to warnings about the toxic assets it was rating by . . . firing the people making the warnings. In the words of an executive on a Moody’s risk committee:

“My question the whole time has been, ‘Where the hell has the board been?’ I would have expected, sitting where I was, that I would have got a lot more calls from the board. I got none of that.”

Another Moody’s executive added, “There was no (corporate) governance at the firm whatsoever. I met the board, I presented to them, and it was just baffling that these guys were there. They were just so out of touch.”

The story that Kevin Hall tells about Moody’s has been told many times before. Board members often serve at the pleasure of the CEO, who controls who receives the perks of board membership. The result is often, but not always, boards that rubber-stamp the decisions of the CEO and his or her inner circle. Court precedents make it difficult to hold board members personally liable for anything, and companies buy liability insurance for their board members just in case. As Lynn Turner, former chief accountant of the SEC, said to McClatchy, “I personally think until law enforcement agencies start holding these boards accountable, . . . you’re probably not going to get a lot of change.”

This is why I am skeptical of proposals to, for example, increase the number of independent board members. There’s nothing wrong with it, but I think it betrays a certain amount of naivete over what independent board members actually do.