May 20, 2013
posted by Carol Loomis
Warren Buffett’s words in his annual letters to Berkshire Hathaway shareholders are brilliant, and years ago Larry Cunningham took them to a still-higher level by reorganizing what Buffett said into single-subject chapters. Cunningham’s The Essays of Warren Buffett (whose third edition we are now celebrating) therefore emerged as a book no student of Buffett can do without. It begins, moreover, with an excellent introduction written by Larry.
After that beginning, the book moves into what Buffett said in his letters—and here I will lay a small claim to being the person participating in this symposium who is most familiar with those words. That’s because I have been the editor of Warren’s annual letter to shareholders for 36 years—since 1977, when he served on a SEC task force studying communications to shareholders and decided to renovate his own letter.
I had then been a friend of Warren’s for about ten years; he knew my work in Fortune; and he sent me a first draft of his letter, saying, “Any suggestions?” Somewhat intimidated—my husband and I were big admirers of Warren and also Berkshire shareholders—I have joked that I suggested changing a “the” to an “a.” Since that time, I have been his pro bono, but attentive editor. The drill over the years has never changed. He writes, I edit (and sometimes, alas, lose arguments about how a sentence should go).
Fortune and I published our own book about Buffett just a few months ago: Tap Dancing to Work, Warren Buffett on Practically Everything, 1966-2012. It is at heart a real-time business biography, containing everything important Fortune published about Buffett in those years (the bulk of it arranged chronologically). Among these articles are speeches he gave and pieces we took from his annual reports (most of which, you will not be surprised to hear, also turn up in Essays).
In the book’s introduction, I praise Buffett for his “consistency of thought” over the years. Cunningham’s book provides constant reminders of how what Buffett thought became what he did—and in this online space, I will present a classic example. There have been a few exceptions to the general rule, though, and I will supply an example on the inconsistency front as well.
Read the rest of this post »
posted by Lawrence Cunningham
We at Concurring Opinions are delighted to welcome a dozen luminaries and thousands of readers to this week’s on-line symposium featuring The Essays of Warren Buffett: Lessons for Corporate.
I began studying Warren Buffett’s letters to the shareholders of Berkshire Hathaway in 1992 when researching what became my first scholarly article, tracing the intellectual history of efficient market theory. The letters went against the grain of prevailing academic work, so they served as a sort of contrary exhibit rather than supporting many standard assertions.
The letters were smart, witty, arresting and expansive, addressing governance, mergers, investing, accounting, taxes and many other topics I would spend my career teaching and writing about. I could not put them down. Yet nor could I, acting alone, give them a place of respect in the academy that I thought they deserved but had not received.
So I decided to host a symposium featuring the letters, gathering a group of 20 scholars to dissect their content. Through Monroe Price, then Dean of Cardozo Law School, where I worked, I contacted Bob Denham, a close Berkshire adviser then and now, who passed along my proposal, which Warren embraced.
We held a two-day conference in New York on October 27-28, 1996, with five separate panels of four to six people each. Warren was in the front row participating actively in the discussion throughout, flanked by his wife Susie, son Howard, insurance maven Ajit Jian and business partner Charlie Munger—who also had a lot to say during the conference.
The centerpiece of the conference was a collection of Buffett’s letters, which I had rearranged thematically, and would later publish as The Essays. The arrangement both enabled a correspondence between the collection and the panel topics and papers, as well as the emergence of an unmistakable organizing principle: the fundamental idea that price and value are different things.
That meant that stock markets are not so efficient as to invariably produce a price that is a reliable proxy for value. This idea is so deep, and was so contrary to academic literature and classroom teaching, that it received an entire section of the collection and separate panel at the symposium. But it was even larger because pretty much all the other principles in The Essays—about governance, mergers, accounting and so on—followed from that tenet.
Since the conference edition (1997), we published a revised first edition (2001), a second edition (2008) and now a third edition (2013), in each case maintaining the themes that have animated the material from the beginning while adding discussion of contemporary issues that radiate from them.
We have often thought of hosting a reunion symposium on The Essays and this week, thanks to the generosity of a dozen luminaries, we do so. Following is a run-down of the participants in this week’s symposium, half of whom participated in the original. They are listed in roughly in the order in which their contributions appear (with links to pieces as they have been posted). Read the rest of this post »
May 17, 2013
posted by admin
by John Duffy, Peter Strauss and Michael Herz
Earlier this year, more than 100,000 citizens petitioned the White House to overturn a copyright rule issued by the Librarian of Congress that made unlocking a cell phone a crime. The White House responded by promising to seek legislation to overturn the Librarian’s rule. That was the most the President would or could do because “[t]he law gives the Librarian the authority,” and the Administration would “respect that process,” even though the Librarian acted contrary to the Administration’s views. See here. As the New York Times reported, “because the Library of Congress, and therefore the copyright office, are part of the legislative branch, the White House cannot simply overturn the current ruling.” See here.
There’s only one problem with all of this: The Department of Justice has been vigorously arguing precisely the contrary constitutional position in the federal courts. Read the rest of this post »
May 15, 2013
posted by Sarah Waldeck
That’s not my headline. It was in the New York Times earlier this month, in the section where the paper provides short blurbs about what is happening around the country.
My youngest daughter is in kindergarten. Here is a list of some of the things that she either cannot do or is not allowed to do: cross a busy street by herself; pour milk from a full gallon jug; ride in a car without a booster seat; and tie her shoes (I know . . . she’s working on that one). She is, however, a highly capable kid. So it might be fairer to her if I listed some of what she can do: get herself ready for school; ride her bike around the block; make her bed; use a variety of electronic devices that begin with an “i”.
But regardless of whether the list is of “cannots” or “cans,” it does not square with this statement from the county coroner in Kentucky:
Mr. White said that the .22-caliber rifle had been kept in a corner and that the family had not realized a bullet was left inside it. “It’s a Crickett,” Mr. White said, referring to a company that makes guns, clothes and books for children. “It’s a little rifle for a kid,” he said, adding, “The little boy’s used to shooting the little gun.”
I grew up in a small Wisconsin town. At my high school, so many teachers and students were absent on the first day of deer season that school might as well have been cancelled. Today some of my close relatives keep hunting rifles in their closets. So while I absolutely do not want to suggest that I know anything about the family that suffered this terrible tragedy, I am familiar with the kind of culture in which a .22-caliber rifle is put in a corner.
Which is not to say that I wasn’t jarred by the phrase “a company that makes guns, clothes and books for children.” Or that I expected, when I visited Crickett’s website, to see child-sized guns in bright blue and pink. And watch out Joe Camel, because Crickett’s mascot is a jolly green frog sporting a rifle, boots, and a hunting cap.
Footbinding, smoking, drunk driving—these are all legend among law and norms scholars. But with few exceptions, almost no one talks about trying to change gun culture through the sort of small, incremental changes that have made such a difference elsewhere. Certainly it is daunting to even think about how to spark change. And it’s also true that those whose ideas would make a difference would only receive posthumous gratification, because change might not actually be realized until my kindergartener has great-grandchildren.
But Boy, 5, Kills Sister, 2.
posted by Danielle Citron
Professor Mary Anne Franks and fantastic guest blogger makes an important contribution with her latest work “How to Feel Like a Woman, or Why Punishment Is A Drag” (forthcoming UCLA Law Review). Professor Franks focuses on the sexual abuse of men in prison to help us better understand sexual and domestic abuse more generally. As Franks writes:
If a man in prison claims he was made “to feel like a woman,” this is commonly understood to mean that was degraded, dehumanized, and sexualized. This association of femininity with punishment has significant implications for the way our society understands not only the sexual abuse of men in prison, but sexual abuse generally. These important implications are usually overlooked, however, because law and society typically regard prison feminization as a problem of gender transposition: that is, as a problem of men being treated like women. This Article argues that feminization is punitive for both men and women: it is as unnatural and as wrong for women to be degraded, dehumanized, and sexualized under coercive circumstances as it is for men to be. This Article suggests that examining the sexual abuse of men in prisons can help disrupt the persistent and uncritical linking of feminization and women. By reading the sexualized abuse of men in prison as a form of forced drag, this Article hopes to expose the artificiality and violence of compelled feminization. The proper approach to assessing forced feminization is to focus on its oppressive structure, not on the gender of its victims. When we do so, we can see what all victims along the spectrum of sexual and domestic abuse have in common, and to form our social and legal responses accordingly. The phenomenon of male sexual abuse in prison thus provides a potentially illuminating opportunity to think about the structure and consequences of sexual abuse in general. This is significant not least because social and legal responses to sexual abuse outside of the prison setting – where sexual abuse is overwhelmingly experienced by women and committed by men – are constrained by pernicious gender stereotypes and a massive failure of empathy. Understanding the phenomenon of male prison sexual abuse is thus essential not only for addressing a specific problem in carceral institutions, but forces law and society to consider sexual abuse in a productively counter-intuitive way.
Also, as my co-blogger Kaimi notes in our Asides, there is a write up of Prof. Franks in Ocean Drive that captures the force of her intelligence and personal strength.
posted by Danielle Citron
Professor Barry Friedman and NYU-graduate and Genevieve Lakier have made an important contribution to our understanding of Commerce Clause power in their piece “‘To Regulate,” Not “To Prohibit:’ Limiting the Commerce Clause.” In the piece, just posted on SSRN, the authors debunk the long-standing and critically unexamined assumption that congressional power to regulate commerce entails the power to shut commerce down:
Today it is taken for granted that Congress’s power “to regulate . . . Commerce among the several States” includes the power to shut interstate markets down. That is why, for example, Congress is understood to have the power to ban the possession and use of marijuana, even though twenty states have expressed contrary preferences, either for the medicinal or recreational use of the drug. This Article argues that as a matter of constitutional history and theory both, this familiar assumption about congressional power is wrong. First, the Article demonstrates that the original understanding, which prevailed for over one hundred years, did not grant Congress the power to ban markets. Congress could pass “helper” statutes to facilitate state choices, and it could even ban particular goods (such as diseased cattle) “in service” of the interstate market; but it could not simply prohibit all commerce in products of which it disapproved. Second, the Article demonstrates that although this understanding changed following the 1903 Supreme Court decision in Champion v. Ames, none of the reasons supporting the change justify Congress possessing the power today. Finally, this Article examines theoretical justifications for congressional power grounded in law and economics and constitutional theory to suggest that the power “to regulate” interstate commerce should not be understood to include the power to prohibit it. The argument has implications for national bans on articles and activities such as interstate gambling, drugs, raw milk products and assault weapons.
May 14, 2013
posted by William McGeveran
I’m proud that my adopted home state of Minnesota became the 12th state to legalize same-sex marriage this afternoon. I’m also proud of my law school colleague Dale Carpenter, who was central to efforts to pass the measure. And I’m looking forward to some weddings.
There are lots of lessons about politics and gay rights to draw from today’s victory. But I want to emphasize a more general lesson about ballot measures.
Two years ago this month, the Minnesota Legislature, then controlled by a newly-installed Republican majority, voted to hold a statewide referendum on marriage. A proposed amendment to the state constitution on the November 2012 ballot would define marriage as between a man and a woman. Unlike many states, Minnesota does not allow citizen-initiated referenda. But a simple majority of the legislature can put proposed constitutional amendments to the voters without the governor’s assent.
Some insiders have claimed that the rationale for doing so was, at least in part, a raw political one. Advancing a measure important to social conservatives would drive up their turnout, helping preserve Republican legislative control. Surely that must have been at least part of it, along with a substantive desire to thwart same-sex marriage in Minnesota.
Whatever the reason, this turned out to be a political strategy failure of epic proportions. In retrospect, the scale of this miscalculation is stunning. Opponents of the amendment organized, raised over $10 million, and coalesced around a new strategy of personalizing marriage issues. The 31-year-old strategist brought on to manage the campaign against the amendment turned out to be a wunderkind. The amendment failed, 52.5% to 47.5%. A month beforehand, I would have predicted the reverse numbers. Not only that, but in a landslide that surprised everyone I know, voters also rejected a voter ID amendment, turned out a Republican U.S. House member, and flipped both chambers of the state legislature back to the Democrats by significant margins. The amendment drove turnout all right — just not the voters its proponents wanted. (The same appears to have happened in neighboring Wisconsin.)
And today was the final kicker. Two years ago, legislation actually allowing same-sex marriage was a pipe dream. Even at the beginning of 2013, it wasn’t clear if a bill would happen. Once again, I would have bet against it. But the sleeping grass-roots giant awakened by the amendment did not go back to bed. By all accounts, the organization that didn’t even exist two years ago pushed the measure through against considerable odds.
So, one other moral of this story: when it comes to referenda, be careful what you wish for.
posted by Kaimipono D. Wenger
I held another “Wills Lab” (voluntary out-of-class practice-focused exercises) a few weeks ago. This time around, I was Andy Nicole Smith, and I needed someone to write my will for me. I did my best to blunder into the exact issues that caused so much confusion with the real Anna Nicole Smith will. My students set me straight. Nicely done.
How did we get to this point? It’s a long story. Read the rest of this post »
posted by Aaron Zelinsky
From filibustered nominees to recess appointments, the D.C. Circuit has been much in the news lately. But for all the blood sport involved in confirming a nominee to the D.C. Circuit, the judges there are surprisingly collegial (a quality that, when I clerked, trickled down to their employees as well).
So it was with some interest that I read Judge David Tatel’s recent speech at the portrait hanging of (now former) Chief Judge David Sentelle. (I’ve received permission to post it in full here). The speech underscores how, for all the political tumult surrounding the D.C. Circuit, the Circuit itself is almost a world apart.
Judge Tatel begins by noting an observer’s likely surprise that a Clinton appointee would speak at the portrait unveiling of Sentelle, Reagan’s choice to replace Justice Scalia. But over the past nineteen years, it turns out that Tatel and Sentelle have “disagreed less than 3% of the time,” an astounding statistic given the common (mis)conception of how the Courts of Appeals operate.
In other words, the vast majority of judges agree on the vast majority of issues the vast majority of the time.
Judge Tatel chalks this up to “restrained decision-making,” or (more familiarly) “judicial restraint.” He relates a few stories about Sentelle to underscore his point, including one about how the two judges tried to write a joint op-ed, but failed because “unconstrained by the rules that bring us together as judges” they were “unable to agree on how to portray certain historical aspects of the issue.”
In fairness, Judge Tatel doesn’t pretend life is always roses. He notes that he and Sentelle “have had our disagreements,” (emphasis in original), and that “despite our best efforts at neutrality, we cannot but see the world – and the law – through the lens of who we are and what we’ve been through.” But even in those circumstances, the D.C. Circuit lives by a “proudly nurtured tradition of collegiality.” Judge Tatel gives special thanks for the particularly good job Chief Judge Sentelle did of “navigating [these] sometimes sensitive waters with a firm but gentle oar.”
The speech is a short five pages and is definitely worth a read. It underscores the noncontroversial nature of the vast amount of Courts of Appeals work, and how much pride the D.C. Circuit takes in its spirit of collegiality even when disagreement surfaces.
May 13, 2013
After Kiobel, extraterritoriality is not a question of subject matter jurisdiction under the Alien Tort Statute – and neither is corporate liability
posted by Marco Simons
(Marco Simons is Legal Director of EarthRights International. He is a graduate of Yale Law School, where he received the Robert L. Bernstein Fellowship in International Human Rights.)
The Supreme Court issued its decision in Kiobel v. Royal Dutch Petroleum a few weeks ago, and it has raised more questions than it has answered. Commentators and scholars have puzzled over what the Court did and what it means – all we really know is that the Court did not expressly rule on whether corporations could be sued for human rights abuses under the Alien Tort Statute (ATS) (the original question certified), and only began to elaborate under what circumstances an ATS suit could be brought for injuries arising in a foreign country (the question certified for reargument).
As to the extraterritoriality question, the Court held that some sort of presumption against extraterritoriality applied to ATS claims. Unlike the usual application of such presumptions, however, the Court did not suggest that this meant that no claims arising in foreign countries could be heard. Instead, the Court’s five-justice majority said that claims needed to be assessed on the basis of the extent to which they “touch and concern” the United States, and that where the only connection to the U.S. is the “mere corporate presence” of a foreign multinational, that is insufficient to allow an ATS claim to proceed.
This raises an interesting question of how this presumption is being applied. As the Supreme Court ruled in Sosa v. Alvarez-Machain, the ATS is a purely jurisdictional statute – claims under the statute come from federal common law. Ordinarily, the presumption against extraterritoriality does not apply to jurisdictional provisions; it only applies to substantive provisions. So Kiobel did not decide that the ATS is not an extraterritorial statute – it decided that the presumption against extraterritoriality applies to claims brought under the ATS. Read the rest of this post »
posted by David Schwartz
This post reflects my initial impressions of an important Federal Circuit development in patent law, which is my primary area of scholarly focus. On Friday, the Federal Circuit, sitting en banc, ruled on a controversial and divisive patent law issue, whether software inventions are patent eligible subject matter. Unfortunately, I find the decision in this case, CLS Bank v. Alice Corp., quite unsatisfying.
The court, sitting with 10 judges, issued 7 separate opinions spanning 135 pages. The court only agreed upon a very brief – 55 words – per curiam opinion affirming the district court ruling that the asserted patents were invalid. The per curiam opinion explained that the “method” and “computer readable media” claims were deemed not patent eligible by the Federal Circuit, while the court was equally divided on the status of the “system” claims. (Basically, there are several different ways that a software invention can be claimed in a patent, including as a process/method of performing steps; as software embedded upon a computer readable medium (i.e., a DVD); and as a system (i.e., software running on a machine/computer).) None of the remaining substantive opinions garnered more than 5 votes – thus, none are binding precedent. Although a majority of the Federal Circuit judges found the method and media claims invalid, a majority could not agree upon the reasoning. Below I will briefly provide a few preliminary observations about the opinions.
May 13, 2013 at 3:26 pm
Tags: CLS Bank, Federal Circuit, patent, patent eligibility, patentable subject matter, software
Posted in: Courts, Intellectual Property, Uncategorized
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May 12, 2013
posted by admin
From everyone here at Concurring Opinions!
May 11, 2013
posted by William McGeveran
The privacy scandal of the week involves Bloomberg terminals, reporters, and Wall Street traders. It started making the rounds of the financial press in the last couple of days and today reached the New York Times, which led its story by declaring that a “shudder went through Wall Street” in response to the revelations. But as with many of the periodic Facebook privacy scandals, this one is only surprising if you haven’t been paying attention. And it distracts the press and the public from more serious matters.
The story, in a nutshell: a Bloomberg terminal like the one in the picture sits on every trading desk. It is the central platform for managing a constant stream of information about market activity, financial news, economic data, and much more. By making this very expensive equipment a necessity, Michael Bloomberg (now New York’s mayor, of course) built a multibillion-dollar empire and made himself fabulously wealthy.
From the beginning, company employees have been able to look up individual Bloomberg subscribers and scrutinize their most recent activity in the system. That may make some sense for sales and technical personnel (although even then it probably ought to have been more anonymized than it seems to have been). Unfortunately, that access also extended to journalists at the many news outlets that have been added to the Bloomberg corporate family over the years. And these reporters appear to have mined that data routinely for tidbits that might have helped with their stories.
Don’t get me wrong, this is not an example of good privacy practices. But it ain’t exactly the allegations of pervasive bribery, eavesdropping, and hacking by journalists in the employ of Rupert Murdoch. Quartz has a pretty good explanation of the data that was available. Primarily, it boils down to the last time a person logged in, the “functions” used (essentially, what general categories of information services were accessed, such as reports of corporate bond trades), and the transcript of any online customer service chats. Crucially, Quartz notes, “Employees can see how many times each function was used but not further details, like which company’s bonds were being researched.” In other words, a lot of it resembles information that many web sites, including news sites, can already glean about most of their customers, particularly those who are logged in. At most, Bloomberg journalists might have obtained some slight lead that would send them on the hunt for more solid information, much as a tip from a source might. In the incident that brought the practice to light, for example, a reporter surmised that a Goldman Sachs partner might have left the firm because he stopped using his Bloomberg terminal.
posted by Lawrence Cunningham
Amid debate over shareholders offering contingent payments to directors, Wachtell Lipton recommends an option that may be tempting for incumbent boards: unilaterally adopting a bylaw banning the arrangements. Boards should be wary of this advice.
True, Wachtell’s position concurs with my view that such payments are lawful, contrary to the position urged by my esteemed fellow corporate law Prof., Stephen Bainbridge. But that’s where Wachtell and I part company, first because Wachtell’s proposal is myopically universal and second because it errs on a basic legal point about board and shareholder power.
In my view, not only are the arrangements lawful, but shareholder bodies ought to have the choice to embrace or reject them. My guess is that they are desirable for some corporations in some settings and not so for others. Therefore, the use or rejection of these ought to be determined, as with much else in corporate life and law, in context by business people participating in particular governance situations. Read the rest of this post »
posted by William McGeveran
I was just working on my next guest post when I noticed a little statistic in the dashboard: there have been 10,007 posts to Concurring Opinions. Which means this lil’ ol’ “blawg” passed a significant milestone about a week ago that deserves some celebration — and heartfelt thanks to Dan Solove and the cadre of other permanent bloggers who keep it going.
By my count, post number 10,000 was a pointer to a new essay about the Kirtsaeng decision in the Stanford Law Review Online. That’s appropriate, because spreading the word about interesting and timely legal scholarship — especially stuff that appears in less traditional places like the journals’ online supplemnets — has been one of ConOp’s many services to the rest of us for years now.
May 10, 2013
posted by Vanderbilt Law Review
Vanderbilt Law Review En Banc is pleased to present our Spring 2013 Roundtable, which considers the SEC’s rulemaking authority under the JOBS Act of April 2012.
Practicing securities attorney Douglas Ellenoff, and Professors Usha Rodrigues and Andrew Schwartz each consider the public policy rationales of the JOBS Act, its legislative history, congressional intent, and practical considerations in order to offer some friendly advice to new Chairman Mary Jo White and the Commission.
Mr. Ellenoff and Prof. Schwartz focus on the rules required or allowed relating to crowdfunding under Title III of the Act, while Prof. Rodrigues examines the lifting of the ban on solicitation and advertising of securities offered to accredited investors under Title II. We hope you find this Roundtable informative and engaging.
Making Crowdfunding CREDIBLE
Douglas S. Ellenoff · 66 Vand. L. Rev. En Banc 19 (2013)
In Search of Safe Harbor: Suggestions for the New Rule 506(c)
Usha Rodrigues · 66 Vand. L. Rev. En Banc 29 (2013)
Keep It Light, Chairman White: SEC Rulemaking Under the CROWDFUND Act
Andrew A. Schwartz · 66 Vand. L. Rev. En Banc 43 (2013)
posted by Lawrence Cunningham
Berkshire Hathaway used to compile bound volumes of Warren Buffett’s letters to its shareholders but stopped that practice years ago. Only collectors could put their hands on such a thing. Until now. A young fan of the man and company has published a full compilation and put it on sale for $24.50 plus shipping. It is a good service and I am grateful to the fan, Max Olson, for sending me a comp copy (pictured at right; he sent them because I published The Essays of Warren Buffett: Lessons for Corporate America).
Berkshire annual reports of the late 1980s and early 1990s (some pictured at left), all stated that compilations of letters from earlier annual reports, dating to 1977 (also pictured), were available on request from the company without charge. By the mid-1990s demand had begun to rise, prompting a new policy: continuing to offer the historical compilations to shareholders for free, but charging non-shareholders $15 (for production and shipping).
Beginning with the 1997 report, the letters, again dating to 1977, were made freely available on the internet (and they still are there). The two-volume historical compilation remained available, but now at a charge of $30, payable by non-shareholders and shareholders alike (shipping included). In 1999, the printed set became a three-volume issue and the charge was raised to $35 for all.
Those printed volumes have not been available for several years (and I feel lucky to have some in my library). That’s been a relief to staff at Berkshire’s famously minimalist headquarters, a handful of people with no time to process payments and stuff envelopes. It is this lacuna that Max Olson’s alternative fills, a good job, especially at the price of $24.50 (plus shipping). Read the rest of this post »
May 9, 2013
posted by Gerard Magliocca
I won’t be posting for the next month or so, unless the Supreme Court does something exciting. I have three good reasons for taking a break. First, I have to grade exams. Second, I’m doing the final proofreading of the book. And third, I’m getting married. After the honeymoon, I’ll be back and ready to inflict my opinions on you again.
Here, by the way, is the Amazon ad for the Bingham book.
posted by Kelli Alces
Last week, I wrote about Lynn Stout’s new book, The Shareholder Value Myth, and her argument that shareholder value maximization should not be the goal of managers in corporate decision making, nor should it be the purpose of corporate operations. In the book, and in her presentation last week, Stout seemed particularly concerned that managers of public companies seem to manage firms with an eye to current stock price and so may take action to increase earnings in the short term at the expense of long term viability. For example, a firm might not invest in research and development in order to keep the cash on the books and enhance current share price without having to take the risk that a long term investment in innovation might not work out. More perniciously, managers may manipulate financial reports in order to boost current stock price in the hopes that next quarter’s numbers will take care of themselves somehow.
If these short-termist tendencies were a pervasive problem, that would be troubling indeed. In some ways, evidence of short-termism seems to be all around. Executives are paid handsomely in the form of stock option awards that allow them to capitalize on sharp increases in stock price. If stock price falls shortly after the executive exercises her options, the executive does not have to disgorge her gain. Executives are under constant pressure to “meet expectations” and the average CEO tenure is relatively short (less than seven years, according to Steven Kaplan & Bernadette Minton). A CEO could well drive up the stock price of one company with a creative display of smoke and mirrors and move on to her next employer before the first one tanks from her failure to plan for its future. If public corporations were being run to seem to flourish today while disaster lurks next year, then our economy would suffer greatly.
Many blame executive compensation, particularly compensation with stock options, for managers’ seeming short-term focus on daily stock prices. (On the other hand, Gregg Polsky and Andrew Lund have argued that incentive compensation may not matter much, given the other incentives managers have to abide by shareholders’ wishes.) Stock options not only focus managers’ attention on stock prices, but they also have the effect of increasing managers’ appetite for corporate risk-taking. Options give managers an incentive to take big risks in the hopes of big returns as they are insulated from losses. Stout pointed out that current executive compensation schemes tie managers’ interests to those of well-diversified shareholders (which is exactly what they were designed to do), and that connection is harmful because if no one has an interest in the corporation’s long-term viability, companies will fail frequently and spectacularly and impose significant social costs in doing so. A well-diversified shareholder can diversify away firm-specific risk, so is not vulnerable to the risk of loss associated with any one firm, but society suffers if public corporations are driven to insolvency by greedy short-term shareholders. With bubbles bursting all around us, how can one argue that short-termism is not a problem?
May 8, 2013
posted by William McGeveran
Thanks so much to the Concurring Opinions gang for having me back for another guest blogging stint. My semester has ended, so let the blogging begin!
Except … even though I have not received my students’ exams from the registrar yet, I am grading. Why? Because I assigned group projects during the semester and have not completed marking the last one. This raises an uncomfortable question for me: have I done the students any good by giving them a graded assignment during the semester if they don’t receive feedback on it until they are on the cusp of taking the final exam?
That really depends on the reasons for requiring “grading events” such as group projects, short papers, quizzes, midterms, or oral presentations during the semester. Like many of my colleagues, I have increasingly moved away from the traditional law school model that based the entire course grade on a high-stakes final examination, perhaps with some small adjustment for class participation. It seems clear to me that this is a good decision — even though it has meant a lot more grading (every professor’s least favorite task) and even though the institutional incentives for law faculty don’t really encourage or assist us to do depart from the tradition of the all-or-nothing final exam.
But I have to confess that my views of the reasons for continuing assessment are unsettled and even a little muddled. Here are the main candidates in my mind:
- Earlier graded events give students feedback about their understanding of the material and performance in the course while there is still time to correct it.
- Basing the course grade on more than one event reduces the “fluke factor” of a student who is ill or overtired or just not in top form the day of the final exam.
- The events themselves — say, a group project — serve valuable pedagogical goals and making them part of the grade ensures that students will take them seriously.
- Educational research shows that students learn more effectively if they synthesize knowledge as they go along rather than just doing a big outline at the end of the course, and graded events spur them to synthesize earlier.
- Basing the grade on different types of exercises rewards varied abilities beyond the particular (and slightly bizarre) skill set that excels at law school issue spotter exams.
Only the first of these requires me to return students’ grades sooner than I’ve managed to do for this group project. Of course, I am saying this partly to assuage my guilt over my own tardiness. But I also wonder how well we articulate the reasons for continuous assessment to our students — or even, frankly, to ourselves. I have now more carefully engaged in the sort of reflection about these goals that I should have gone through before the semester started. Now I know for next time that my answer is: all of the above.
Uh oh. I better get back to grading those group projects right now.