Site Meter

Author: Jeffrey Lipshaw


Flies and Horses: Thoughts on the Law of Entrepreneurship

My friends Gordon Smith and Darian Ibrahim have posted an interesting short paper on whether there is a “law of entrepreneurship” (“Entrepreneurs on Horseback: Reflections on the Organization of Law“). The first half pokes some fun at the stodgy view that there is nothing (and never will be anything) new under the sun – hence, there is no Law of the Horse, Law of Cyberspace, Law of Entrepreneurship. (For a detailed tracing of the Law of the Horse allusion from Llewellyn to Wellington to Easterbrook to Lessig, see the first few footnotes of the article.)

I can’t deny that there is some unique law to entrepreneurship (the most prominent being the effect of the so-called “down round” which invokes the anti-dilution clause of the venture capital agreement, on which Gordon has written a perspicacious article), as well as a host of legal skills and disciplines (many of which Gordon and Darian ably summarize) that need to be in the “toolbox” of any lawyer who hopes to do work for entrepreneurs and startup companies .

Not to beat a dead horse, but if horse is the image du jour, then I can’t help thinking of lawyers and law, at least in the traditional way of thinking about lawyers and the law, as flies buzzing around (and trying to keep up with) the galloping steed. Gordon and Darian are absolutely right to highlight the necessarily interdisciplinary nature of the study of entrepreneurship, but I keep thinking that focusing on the legal is the fly’s-eye view – one that is not invalid or wrong, but pretty much of primary interest to the fly. (I’ve read Ronald Gilson’s iconic piece on Value Creation by Lawyers, and I’m still not fully persuaded on the “transaction cost engineer” model, at least from the examples Gilson gives in a sophisticated M&A agreement. The one place I do think lawyers serve a cost-reducing function is in the transmission of information about what is “market” in VC term sheet boilerplate. But that’s informed intuition, on my part, not rigorous data. And, as Gilson points out, there’s no reason particularly why lawyers as opposed to VCs have to be the repositories of that information.)

Does the horse even notice the fly? Well, I’ll let you ponder that while I change horses in the middle of this stream of consciousness, and continue below the fold about some really interesting work outside the legal academy on the subject.

Read More


The Rule of Law (Professors)

I admit that I keep a relatively limited list of RSS feeds because I try to have a life. But a quick scan this morning seems to indicate that I am the first person to note the following insight: it is possible that within the next couple of years two of the most powerful leaders in the world could be [cough, gasp, ahem, cough, cough] former law professors. We know about Barack Obama’s tenure at the University of Chicago, but it has now been revealed that Dmitri Medvedev, Vladimir Putin’s hand-picked successor, is also a former law professor.

I am trying to imagine a world governed by law professors. Comments are welcome, but my first thought is that anyone with more than five or six years experience in the real world will be considered disqualified for cabinet positions.


Playing the Accounting Game

The Weekend Edition of the Wall Street Journal was rich with interesting stuff today, including the left side of the editorial page (the neo-Neanderthal part) bashing the Bush Administration’s incompetence, and the right side featuring a piece by Barack Obama on mortgage lending issues, and a really depressing opinion on the situation in my hometown, Detroit. And, if you are into it, Phil Simms on how to throw a football.

At the risk of going over the top with shameless self-promotion (oh, gee, why not?), I was particularly gratified by the story in Section B, entitled “This Game Theory is a Cautionary Tale,” since it confirmed one of the problems I discussed in Models and Games. Discussing financial service companies, Donn Vickrey (who used to be an accounting prof) of Gradient Analytics says: “I think for a number of years they played games.” One of the alleged gaming tactics was “gain on sale” accounting, in which loans were packaged and sold to other investors.

The article doesn’t discuss it, but the issue here is really the anomaly created by accrual versus cash accounting. When you sell and ship a widget in March, you get to record the sales price as revenue in March, even though the other accounting entry is not to cash, but to accounts receivable. That receivable is an asset, and when the cash comes in later, you reduce the receivable and increase the cash (in journal entries this is debiting and crediting, but those terms don’t mean to accountants what they might mean to you and me). The reason for doing it this way is that you want to match the costs incurred in making that sale as closely as possible with the revenue from that sale. So you will also reflect in March the cost of the widget, which you record by reducing your inventory by the cost of one widget (on the balance sheet) and reflecting the cost of one widget as a “cost of goods sold” on your income (profit and loss) statement. Suffice it to say that if you do cash accounting, and you spend all the money to make the widgets, say, in 2003, and collect all the cash in 2006, your 2006 accounts will accurately reflect cash, but they won’t really tell you how profitable the sale was, because the costs are not matched to the revenues.

More than you ever wanted to know about the subtleties of accounting below the fold.

Read More


Decision 2008: What We Can Learn from Annie the Dog

We have two dogs, Max and Annie. We rescued both from shelters about a year apart. Max is kind of a lovable lug, not too bright, but even-keeled as the day is long. Annie, on the other paw, while extremely pretty, has, shall we say, “issues.” She was brought into the Indianapolis Humane Society as a stray, and had BB wounds in her leg. She weighs about 60 pounds now, but was about 42 pounds when we brought her home. The first time I took her out for a walk on the nearby rail-to-trail she trembled. All of this is to say she is what is known as “dog-dog aggressive;” a sweetheart to people but lacking in social skills with other dogs. She gets along fine with Max, but has a hair-trigger fear reflex, and a “good offense is the best defense” strategy.

I can’t even begin to count up the hours and dollars we have spent on training with Annie. We have gone from the choke collar correction to positive reinforcement methods and back and forth again. I have watched endless hours of Cesar Millan, the Dog Whisperer, until I became convinced that most of his method is wrong, and this begins my point of departure that is going to end up, believe it or not, in a discussion of the 2008 U.S. Presidential race. Bear (or dog) with me.

Our current trainer is Vera Wilkinson of The Pet Needs Company here in the Boston area. Her primary method is using positive reinforcement (in the form of treats, namely chopped up Red Barn dog food) to get Annie to connect with me in the face of distraction, like other dogs. We work on basics, like sit and stay and come, all with the object of getting her to look first to me when she is either distracted or fearful. I’d say we’ve made a fair amount of progress.

The main objection to Cesar and others is the attempt to psychoanalyze the dog, and the anthropomorphizing of the dog’s behavior. Dogs don’t want to please their owners. They respond to pain and pleasure. They understand “safe” and “dangerous.” They are black boxes that we train not by thinking of them as human, but by operant conditioning. (I want to make it clear that I think dogs have souls, but agree with Douglas Hofstadter that compared to humans they are “smaller souls.” This is why I have dogs and not mosquitos as pets.)

Well, if you want to find out how this all segues into Decision 2008, unless you’re reading this on your RSS feed, you’re going to have to continue below the fold.

Read More


Jeremy Waldron (and F. Scott Fitzgerald?) on the Rule of Law

In this wonderful period of time after the end of classes, and randomly looking at pieces on the Rule of Law far less mystical than my own ruminations, I happened upon Jeremy Waldron‘s reflections (Is the Rule of Law an Essentially Contested Concept (in Florida)? in Law and Philosophy 21:137-164 (2002)). He was inspired by the repeated use of that phrase by both sides in the dispute over the 2000 Florida Presidential vote count. This is a wonderful approach: he takes a small segment of a real world issue, and unpacks it to the core, and in the process, makes a far more universal observation about truth and argumentation. I suppose the only down side of the approach is that it sounds topical, but it’s really not.

Professor Waldron draws on the work of linguistic philosopher W.B. Gallie to treat “the Rule of Law” as an “essentially contested concept.” What this means is that the concept being bandied is, at its core, not susceptible to a single, crisp, resolution, even though participants in the argument seem to be contending that it is. Such a concept, like “the Rule of Law” or “Justice” or “democracy” or “Jewish” (my particular addition to the list) is both normative and complex, such that there is room for contestation within the concept.

Is this another way of seeing F. Scott Fitzgerald’s dictum from The Crack Up (1936), particularly when you look at the entire quote? “The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function. One should, for example, be able to see that things are hopeless yet be determined to make them otherwise.” How can something be true and not true at the same time? As Waldron observes, this is usually the point at which the relativists or radical indeterminists step in to say there are no universals, but he opts instead for the more difficult (and Kantian) view, answering in the affirmative the following questions: “Is it possible to engage in one of these debates [e.g., about whether a particular decision affirms or undermines the Rule of Law] as a partisan of a particular view but also as a theorist who knows why disputes of this kind are intractable? Can one acknowledge that a concept is essentially contested and still claim that one’s own view is right and one’s opponent’s view wrong?”

The fundamental paradox of the Rule of Law is that a system of laws overcomes the rule of men. The Rule of Law is supposed “to supersede the role of human discretion;” nevertheless, without people, “how can we make the law rule?” I admire (and share) Professor Waldron’s optimism, even about something as intractable as the Florida dispute:

My point at this stage is just to emphasize. . .that disputation can make things better whether or not the participants are in position to associate that process with anything like the idea of essential contestability. Perhaps it is best to say, then, that we should call an idea essentially contested when we find that contestation about its definition helps deepen and enrich our sense of what is at stake in a given area. We should not suppose that this deepening and enriching effect depends upon a prior characterization of the concept as essentially contested or that it depends upon the parties accepting such a characterization. Their arguments play a part in the process whether they do so self-consciously or not.

In other words, unlike the participants who are citing the Rule of Law instrumentally, we third-party observers see something that we can call the Rule of Law even in the bizarre twists and turns of what became Bush v. Gore.


A Nod to Angie’s List as an Alternative to Contract Law

As I’ve written in Models and Games, I think contract law is often a poor template and, hence, a poor solution for issues in transactions.

My lousy experience with builders and contractors is the stuff of legend. I was walking home from the Porter Square T station, looking at the old Cambridge houses, and wondering how, in the view of the general level of competence out there, any building actually manages to withstand entropy. We have a brand new house in Cambridge, and notwithstanding my contractual right to have an entire punch list of repairs done, and notwithstanding the builder’s one year warranty, and notwithstanding his earlier promises to show up, he has disappeared with only a voice mail message as evidence that he ever existed.

Contract law is not going to solve my problem, except in the most indirect sense. Because I have a contract, I can sue the builder, get a judgment (I assume it will be a default judgment in small claims court), and have the judgment satisfied by a guaranty fund that the Commonwealth of Massachusetts established with the builders’ license fees. Other than that, the accepted wisdom is that you never resort to the contract in arguing a money issue with your builder. You may win the battle, but you will lose the war, particularly if you never manage to get inside the walls to discover he used 1/4 inch rather than 3/4 inch plywood or a lower grade of insulation to make back what he lost in the other battle.

An even better tack is to deal with people who will do what they say will do regardless of the contract. In that regard, let me recommend Angie’s List. This was founded by a person in Indianapolis, where we used to live, and has spread around the country. We got referrals for the electrician and the plumber from the list of A-rated companies, and I just finished posting excellent reviews of both.


Corporate Governance – Some Reflections and Some Data

One of my pet peeves is the typical introduction to a paper on corporate governance, in which the author, whether by political inclination, the availability heuristic, or naivete, assumes there is a crisis in corporate governance, and proceeds to spend the next 25,000 words or so proposing a legal solution. For better or worse, I tend not to think of companies either as the unnamed “they” or as black boxes. People run companies in groups, and the groups are subject to the usual dynamics that militate doing things well sometimes, badly sometimes. Moreover, the groups are made up of individuals, and all individuals are not created equal in their charisma, their courage, their complacency, their decisiveness, their passiveness, etc. I’m not inclined to think that complex regimens of rules would improve the decision-making of corporate management and boards. A tinker here, and a tweak there, sure. But as I have said here, what really makes the world go ’round is too complex to capture in a one-size-fits-all rule. (That feeling is particularly acute when you consider how different kinds of organizations govern themselves. I’ve participated in the governance of a public corporation, a major religious institution, a leading private school, a community organization or two, and now a faculty. Nothing says a business can’t be a democracy, just like nothing says a law school class can’t be a democracy. The model just doesn’t work very well compared even to more or less enlightened schools of thought on leadership, management, or pedagogy.)

What prompted this reflection was my receipt of the 2007 Spencer Stuart Board Index, a database on the governance practice of the Standard & Poors 500 companies, which includes details on board size, compensation, retirement age, independence, gender, composition, process, organization and many other aspects of corporate governance. Here are some interesting highlights:

1. Active CEOs constituted 53% of all new independent directors in 2000, and 41% in 2002. In 2007, the figure was down to 33%. The report contains a discussion whether that is a favorable or unfavorable trend.

2. The number of new independent board members who are at the next level down from the CEO (i.e. leaders of major divisions and functions) is up from 7% in 2002 to 21% in 2007. I know that we had at least one director who was a CEO heir apparent at another company; his own company encouraged it as a learning experience, and he was one of our best and most insightful directors.

3. Even though only 16% of all S&P 500 directors are women (up from 12% in 2002), there are women on 91% of all S&P 500 boards.

What is particularly interesting about this report is the breadth of opinion it reflects. It contains interviews not only with Ira Millstein, a long-time Weil Gotshal partner and corporate governance guru, and David Swinford, the CEO of Pearl Meyer & Partners, probably the leading executive compensation consultant in the U.S., but also Nell Minow, one of the original founders of Institutional Shareholder Services, and the founder of The Corporate Library.

The best thing about the material is that it takes one beyond prescription by the pathological – the idea that the regulatory schemes around public company governance should be shaped by, rather than responsive to, Enron and the other usual suspects of companies behaving badly.


Taking a Bit of My Own Advice About Failing Well

I happened to see two quotes yesterday that seemed apropos to the subject of success and failure, which has caught my attention over the last couple days. The first comes from Winston Churchill: “I am always ready to learn although I do not always like being taught.” The second is attributed to Henry James: “No man like to have his intelligence or good faith questioned, especially if he has doubts about it himself.”

It’s appointments season, so considerations of success and failure smack you in the face whether you like it or not. If my reaction is at all typical, you have to wonder, in the abundance of talent seeking jobs in the legal academy, how you yourself ever got hired. (Well, I am sure there are a few people out there who don’t have to wonder.) In the midst of a hiring season induced bout of impostor syndrome, I received a rejection e-mail from a peer-reviewed journal on a piece I had submitted six months ago. It’s pretty clear it was rejected at the editor level, not after being sent out for review (my experience from having had rejected a book manuscript that richly deserved to be rejected is that if the latter, you see the reviews). So I am here thinking out loud about taking my own advice, liberally offered to others, about failing well.

1. It’s not bad to fail ambitiously. I was attempting a difficult placement, and it was something of a flier when I started it. With six months reflection, I see my own weaknesses better (too many thoughts crammed into too little space; not enough accommodation to the concrete versus the abstract, hesitation about my own voice, etc., etc.).

2. Like Winston Churchill, I don’t mind learning, but I don’t always like being taught. What I think is more accurate in my case is that I don’t mind learning, I don’t even mind being taught (by a kind teacher), but I really don’t relish the prospect of being taught or criticized, which is always far worse in the anticipation than in the doing. And that, I think, is because of a slight variation on Henry James’ offering, which is that we Type-A, hyper-competitive, perfectionist, impostor-syndrome-affected sorts don’t like to anticipate our intelligence being questioned (which it rarely is!), especially when we have doubts about it ourselves.

3. It’s probably a bit of jargon, but in my prior life I always liked the idea of a learning organization as corporate model. It’s really, really tough to do, because it’s idealistic and aspirational, and the realities always come back to undermine it. Nevertheless, it’s a powerful enough concept that GE installed Steve Kerr as its Chief Learning Officer a number of years ago (he since moved on to Goldman Sachs doing the same thing). Learning in this context is more than being educated. This is from Peter Senge’s The Fifth Discipline, which attracted quite a following. The idea is “personal mastery,” the kind of self-view we’d expect both from leaders and those led in a learning organization:

People with a high level of personal mastery live in a continual learning mode. They never ‘arrive’. Sometimes, language, such as the term ‘personal mastery’ creates a misleading sense of definiteness, of black and white. But personal mastery is not something you possess. It is a process. It is a lifelong discipline. People with a high level of personal mastery are acutely aware of their ignorance, their incompetence, their growth areas. And they are deeply self-confident. Paradoxical? Only for those who do not see the ‘journey is the reward’.

The great irony here, of course, is that schools are not necessarily learning organizations, particularly for faculty, but that’s a subject for another time and another place. Suffice it to say that in a learning organization we would talk about the relationship between failing ambitiously and succeeding cautiously.


Corporate Governance, the Rule of Law, and Glimpses of the Infinite

Non-sequitur alert. Try to figure what the next two segments have to do with each other. I will get back to you about it below the fold.

* * *

The other day I posted what at the time I thought was a grumpy comment to a post by Jennifer O’Hare of Villanova over at Conglomerate. The gist of her post was whether the failure of a corporation to have a “succession plan” for the CEO position could be laid at the doorstep of the board of directors in the form of liability for breach of fiduciary duty – I suppose either the duty of care or the duty of loyalty in the sense of the more recent Delaware decisions. The genesis for Professor O’Hare’s post was a report in the Wall Street Journal that only 50% of public and private corporations had “succession plans.” I remind my students from time to time that I’m an ex-corporate shill, and to take any view I profess with that in mind, so readers here are advised similarly.

* * *

I seem to have gotten fixated over the last few weeks on the words “Justice” and “Rule of Law.” This all started back in July at the Law & Society Association annual meeting in Berlin, first at an “Author Meets Readers” session about Brian Tamanaha‘s Law as a Means to an End, and later at a roundtable on which I was honored to participate about the New Formalism. Larry Solum organized both sessions, so it’s appropriate to hearken back to my paraphrase at the time of his words capsuling the issue: “We grapple with an antinomy between a sense of permanence or immanence or determinacy in the legal rules by which our social relationships are regulated or constituted, on one hand, and our manipulation of those rules to achieve individual purposes on the other – in a word, instrumentalism.” Or to put it in the context of the sociology of Niklas Luhmann (about which there was a concurrent series of sessions going on): it’s only within the legal system that the participants operate under the delusion there is Justice or Rule of Law. From the outside looking in, the paradox is obvious: we want to believe there is either a transcendent or immanent, but more importantly, objective right answer, even while we argue from subjective and instrumental positions. The only way the legal system works is with a kind of doublethink; believing in this dialectic that objective truth can somehow arise out of the clash of instrumental interests (to which, of course, Brian Tamanaha objected).

We are, like everyone else, in the faculty appointment job talk part of the year, and I have now heard the idea of Justice and Rule of Law discussed several times in different contexts. One set of job talks had to do with the idea of juvenile justice. Juvenile lawyers (and in our case, juvenile legal clinicians) have to deal with two competing concerns, the best interest of the child, and the obligation of zealous representation in delinquency trials. To put it more plainly, confession may be good for the soul, for healthy development, and for the making of good citizens, but it’s bad for the juvenile defendant and his lawyer.

The idea surfaced again in a job talk about school desegregation, and the fact that Brown v. Board of Education (Brown I) was cited in support of three different positions in the recent Supreme Court case on school desegregation (i.e. colorblindness, integrationist, and a hybrid view). The candidate had an interesting thesis: that Brown has a colloquial or popular meaning apart from its technical legal holding. I like that idea, but it seems to me all it is saying is that Brown has become a shorthand reference for “Justice” or the “Rule of Law” in the context of racial equality. So it’s no more surprising that everybody cites Brown than than everyone insists, in an instrumental way, that its view is the one consistent with justice or the Rule of Law.

* * *

Well, I have some street cred on the subject of corporate governance, and almost none on juvenile justice or school desegregation, but I am still fixated on these paradoxes in the ideas of Justice and the Rule of Law. So below the fold, I’m going to ramble a bit about corporate governance, the paradoxes of the Rule of Law, and glimpses of the Infinite.

Read More


Models and Games

This seems like an auspicious occasion to announce that, following in the Larry Solum model of developing a paper from blog post to short idea piece to full-blown article, I’ve posted on SSRN the complete version of what was known in a prior iteration as “Aboutness, Thingness. . . .” The last thing to go was the old title, and the second to last were the first several paragraphs of the old introduction, I suppose because the words are like children, these particular words had been around since I first put fingers to keyboard, and, if truth be known, I thought they were really clever. But these are all aspects either of self-deception or unwillingness to make choices, and who of all people inspired me but Katie Holmes (or at least her character in Wonder Boys, Hannah Green) who observed to Michael Douglas (as Grady Tripp) that writing was about making choices and he had made none in the manuscript of his second novel.

The gist of the piece, if I were to put it blog-colloquially, is how some modes of making sense of cause-and-effect, particularly in the realm of human behavior, just plain miss the boat. In natural science, an example would be trying to explain dog behavior and conditioning at the level of physiology. That level of explanation might suffice for a physiologist who is interested in measuring muscle contractions at feeding time, but it doesn’t tell the microbiologist much, nor does it do much to explain at the level of operant conditioning. In the social sciences, the distinction would be (courtesy of historian Thomas Haskell), the difference between explanatory cause and attributive cause. If you ask the thug why he beat the old man, an answer that involves neural pathways and muscular contractions may explain cause and effect at one level, but it doesn’t make sense in the same way this answer does: “because I wanted his wallet full of money.”

The part of the piece with which I had the most fun was where I applied the foregoing to the 2003 Yale Law Journal article by Alan Schwartz and Bob Scott on contract interpretation. In a nutshell (but you will have to read the piece to see why), my claim was that their mode of explanation simply missed the boat in the same explanatory versus attributive way.

The article is Models and Games: The Difference Between Explanation and Understanding for Lawyers and Ethicists. The abstract follows the fold.

Read More