Author: Lawrence Cunningham

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A Toast to 50 Cent’s New Series: Power

The rap artist 50 Cent, whose real name is Curtis Jackson, is producing a new series on STARZ called Power. Famed for his entrepreneurial skills in hip-hop and business, not to be overlooked is his important contribution to contract law and knowledge.  Thanks to an intense dispute with his girlfriend a decade ago, students and lawyers have been treated to a saga 50 Cent endured that illuminates the nature of contracts—of legally enforceable bargains. In a tribute to his latest venture, herewith an account of this case from my book, Contracts in the Real World: Stories of Popular Contracts and Why They Matter (Cambridge University Press 2012).

Jackson secured his first recording contract in October 2003. It came with a $300,000 advance.  To boost his professional image as a rapper, he bought a Hummer and a Connecticut mansion once owned by boxer Mike Tyson. The mansion boasted a state-of-the-art recording studio and the rapper hired a full-time caretaker and professional cleaning crew to maintain it.    In 2004 Jackson bought another house in Valley Stream, the small village in New York’s Nassau County where his grandmother lived; in December 2006, he added to his real estate holdings a $2 million house at 2 Sandra Lane, Dix Hills, on Long Island, New York. By then, he had sold tens of millions of recordings, toured the world, and amassed hundreds of millions of dollars in net worth, as chronicled in his 2005 autobiographical film, “Get Rich, or Die Tryin.”  

This success came after hard knocks. Jackson had dealt crack cocaine as a teenager. In 1995, at age 20, he was released from jail and became involved with Shaniqua Tompkins in his hometown of Jamaica in Queens, New York. The two had a son, Marquise, out of wedlock in 1996. Jackson and Tompkins had no money and no real home—living with his grandmother or hers.     In May 2000, Jackson nearly died when he was shot nine times during a gangland ambush. He was in the hospital for weeks, followed by months of rehab spent at his mother’s house, near the Pocono Mountains in Pennsylvania. Though before the shooting Jackson had been negotiating with Columbia Records, the record company stopped returning his calls.

Jackson, however, persevered. In November 2001, he launched a recording company, Rotten Apple Records. The rising rap star Eminem brought Jackson’s 2002 self-produced record to the industry’s attention.  As a result, Interscope Records offered Jackson the 2003 deal that propelled him to fame and fortune. With money flowing in and Jackson leading the high life, Tompkins asserted her right to a share. But Jackson’s relationship with Tompkins was tumultuous. They did not always live together and fought often, sometimes physically.

When Jackson bought the Dix Hills house in 2006, both agreed it was the best place to raise Marquise, then almost 10-years-old, and Tompkins pled with Jackson to put it in her name. Though Jackson promised to do so, he never did. After the relationship soured, Jackson tried to evict Tompkins from the Dix Hills house.  During that battle, the house burned to the ground under circumstances that authorities considered suspicious. The house had been insured against fire, but the policy lapsed for non-payment of the premium a few weeks before. In response to Jackson’s eviction lawsuit, Tompkins asserted a claim of her own: that the two had a contract entitling her to $50 million. Read More

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New Book: Berkshire Beyond Buffett

As people speculate about what will happen to Berkshire Hathaway after Warren Buffett is no longer around, I’ve written what I hope to be the definitive book explaining how Berkshire will continue to prosper, thanks to the culture that Buffett has forged at Berkshire.

The book, Berkshire Beyond Buffett: The Enduring Value of Values, will be released in October, as we put the finishing touches on it this summer.

Available for pre-ordering now at amazon (and B&N, BAM and elsewhere), the book has been endorsed by Adam Grant of Penn’s Wharton School, and author of Give and Take, in the following terms:

How did Warren Buffett build such a great firm as Berkshire Hathaway? To unravel this mystery, Lawrence Cunningham takes a deep dive inside the cultures of Berkshire’s subsidiaries, highlighting the value of integrity, kinship, and autonomy — and revealing how building moats around the castles may help the firm outlast its visionary founder.

Bob Hagstrom, best-selling author of the 1995 book, The Warren Buffett Way, has endorsed Berkshire Beyond Buffett in this way:

Lawrence Cunningham is well known to the Berkshire community, as Buffett’s pick for cataloging and organizing his famous annual reports in The Essays of Warren Buffett: Lessons for Corporate America. Now Cunningham takes us in a new direction, inside the companies that make up Berkshire.  Berkshire Beyond Buffett is an insightful and important book.

Tom Murphy, the legendary businessman who built ABC before selling it to Walt Disney, has generously contributed the foreword to the book–itself worth the price!   As Tom explains:

Berkshire’s trajectory has been so seamless that Warren’s professional transition has gone almost unnoticed. The man who began business life as a precocious “stock picker” has morphed into chief executive of one of the largest collections of businesses in the world. Larry’s book astutely chronicles this development.

Berkshire’s scale and Buffett’s stature make the book timely and relevant, as suggested by news coverage this morning by Bloomberg Business Week of the company’s $30 billion commitment to renewable energy.  The book is based in part on interviews and surveys I conducted with dozens of Berkshire executives, including many chief executives of the fifty subsidiary companies whose cultures and histories I recount in the book.  The following is from the book jacket, courtesy of Columbia University Press:

Berkshire Hathaway, the $300 billion conglomerate that Warren Buffett built, is among the world’s largest and most famous corporations. Yet, for all its power and celebrity, few people understand Berkshire, and many assume it cannot survive without Buffett. This book proves that assumption wrong.

In a comprehensive portrait of the distinct corporate culture that unites and sustains Berkshire’s fifty direct subsidiaries, Lawrence A. Cunningham unearths the traits that assure the conglomerate’s perpetual prosperity.  Riveting stories recount each subsidiary’s origins, triumphs, and journey to Berkshire and reveal the strategies managers use to generate economic value from intangible values, such as thrift, integrity, entrepreneurship, autonomy, and a sense of permanence.

Rich with lessons for those wishing to profit from the Berkshire model, this engaging book is a valuable read for entrepreneurs, business owners, managers, and investors, and it makes an important resource for scholars of corporate stewardship. General readers will enjoy learning how an iconoclastic businessman transformed a struggling textile company into a corporate fortress destined to be his lasting legacy.

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JP Morgan Summer Reading List

The 15th Bi-Annual JP Morgan Reading List is out, with a characteristically rich selection of ten recommended titles in several categories (business, sports, art, adventure, science, cooking, philanthropy, and personal growth). Among the fine books, I’d heartily endorse as number one Col. Chris Hadfield’s An Astronaut’s Guide to Life on Earth, a gripping and engaging account of space travels with lessons for life.

A notable new feature this year is a retrospective on the 15th anniversary.  The editors explain:

The Reading List began as a way for us to share timely, thoughtful and relevant titles that piqued our interest. . . . [T]his year we have reached the 15-year mark.  To celebrate this anniversary, we asked some of our favorite authors from previous lists to share with us their thoughts on writing, imagination, inspiration and the creative process.  Here are their fascinating responses . . . .

Among those 15 authors are Malcolm Gladwell (Tipping Point), Jim Collins (Good to Great), Tom Friedman (The World is Flat), George Taber (Judgment of Paris), and yours truly (How To Think Like Benjamin Graham and Invest Like Warren Buffett).

I speak to how my work on a given topic often needs to reach different audiences using different media.  In addition to (1) books such as the one they featured for a general audience, I gave the examples, concerning investors and financial oversight, of (2) a white paper for a professional group, (3) an article for academic researchers, (4) a textbook for my students, and (5) blog posts here at Concurring Opinions for the widest audience of all.

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Hitting Back When Hit By Google

Tuesday’s European Court of Justice decision requires internet search engines to omit listing irrelevant or inadequate items in response to searches for individuals by name. The ruling is simultaneously hailed and condemned, depending on whether one stresses individual control over reputation or anti-censorship (e.g.. Henry Farrell in WaPo; Jonathan Zittrain in NYT; the ubiquitous Brian Leiter).  Two aspects of the incentive effects of the recurring problem seem overlooked, as illustrated by a true story (with minor fact changes in the name of privacy).

A few years ago, a colleague got a blistering review of his teaching from a student blog.  There may have been some underlying basis for the criticism, but the post blew it all out of proportion and offered no context for the specific objection and no counterbalancing assessment of the teacher’s considerable strengths. It was both authoritative and damning as well as inadequate and of dubious relevance.

My friend’s distress intensified when this url appeared first in all searches for his name using Ask, Bing, Google, Yahoo! and other search tools.  It came up ahead of the professor’s SSRN page, school biography, library bibliography, and laudatory references in numerous other urls on the web. The result magnified the post’s significance and caused my colleague anguish.

The blog publisher refused his request to take down the post, citing forum policies on open-access, autonomy, and self-regulation.  At that time, at least, the search engines could not be bothered. Day after day, we’d do a search of his name and the inflammatory post kept coming up number one, threatening the professor’s reputation.

Finally overcoming his frustration, the professor chose to fight fire with fire.  He created a new blog and began posting entries at a regular clip.  Gradually, these posts and responses or references to them rose up the lists of hits for his name.  Eventually, the objectionable link sank down the list into a more proportionate presence, there as part of a more complete portrait, not the salient bruise it started out as.

The episode also emboldened my friend to redouble his investment in teaching.  Accepting the old adage that “where there’s smoke, there’s fire”, he vowed to minimize the chances that such postings, however acontextual or lopsided, would reappear.  His teaching evaluations, in fact, rose from just above average to well above average.

There are obviously many more significant complex issues associated with the hierarchy or presence of misleading or irrelevant information on the internet.  For example, norms in Europe may differ from those in the U.S., and a ruling like that of the ECJ seems unlikely in America.  And there are probably better forums to solve the problem than courthouses, including legislators, markets, and think tanks.

But in struggling with associated trade-offs and conflicting values, the incentive effects should be noted.   I don’t want negative urls polluting my public persona.  But that produces two positive results: I try to avoid doing anything that would feed them and to engage enough to neutralize their effects on my profile.  It worked for my old friend.

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What Everyone Should Remember about Buffett’s Views on Executive Compensation

Intelligent and well-meaning as they are, critics of Warren Buffett’s decision to have Berkshire Hathaway abstain from voting as a shareholder of Coca-Cola on the latter’s executive pay proposal suffer from two problems.  Some, like Joe Nocera of the New York Timesseem to believe that, since Buffett is powerful and historically a strong vocal critic of executive compensation, he is obliged to cast Berkshire’s vote against it.  When he explained last weekend that directors may not always vote against proposals with which they disagreed others, including Vitaliy Katsenelson at the Institutional Investor, lamented that directors may not always stand up for what they believe.

These positions are a combination of misreading history and naïve. Buffett has always stressed that, as costly to shareholders as executive compensation may be, in raw amounts and in terms of conflicts of interest, they pale in comparison to the vastly larger costs to shareholders of other conflicts between executives and shareholders, especially on acquisitions.  No rational investor should believe that directors are unabashed devotees of the shareholder interest at every turn.  Here is an excerpt from remarks Buffett made as discussant at a Cardozo Law School conference I hosted in 1997, the themes of which he has repeated for two decades:

As a stockholder, I’m really only interested in the board accomplishing two ends. One is to get a first class manager and the second is to intervene in some way when even that first class manager will have interests that are contrary to the interests of the owners.

I think there are great difficulties in achieving both of those ends. I’ve been a director of, counting them up, seventeen publicly owned companies, not counting ones which we control (which probably shows a very dominant, masochistic gene) (laughter). But over that time I’ve wrestled with just these couple of problems and there may be processes that would improve them.

The first one: getting the first class manager. I have never seen in those seventeen cases – and I’m not aware of it in other cases – where a question of mediocrity or worse and the evaluation of change has been made in the presence of a chief executive. It just doesn’t happen. So, I think absolutely to have any chance of having that one solved, you have to have regular meetings of evaluation of chief executives, absent that chief executive. If they are rump meetings or something of the sort – if they’re not regularly scheduled – there is just too much tension created. Because a board may be a legal creation, but it’s a social animal. It is very difficult for a group of people without a very strong leader to all of a sudden, spontaneously decide that they’re going to hold some meetings elsewhere and discuss whether this person who may be a perfectly decent individual, really should be batting clean-up.

So, I think there should be a lot of emphasis on process in terms of evaluation of a CEO. I don’t know how you create a greater willingness on the part of directors to really bounce somebody that they would bounce if they owned 100% of the company or if their family was dependent on the income from the business and so on. I just have not seen it in corporate America.

If you get that first class chief executive – which is a top priority – he doesn’t have to be the best in the world, just a first class one. And I may agree with Jill to some extent – you may be able to turn a five into a five-and-a-half or something by having him consult with lots of other CEOs and get a lot of advice from the board. But my experience is that you don’t turn a five into an eight. I think you’re better off getting rid of the five and having him find something else to do in life and going out and acquiring an eight.

The second problem is: even a first class chief executive has some interests that are in conflict with the shareholders. One is his or her own compensation. The second one gets into the acquisition category. There are psychic benefits to an executive of running a bigger show or just having more action or whatever that can be in conflict with the shareholders, even though that executive may be first class in other respects. The nature of acquisitions is that they get to the board at a point where if you turn them down you are rejecting the chief executive, you are embarrassing him in front of his troops, you’re doing all kinds of things. So, it just doesn’t happen.

I have seen board after board approve deals that afterwards the board members say, “you know, I really didn’t think it was a very good idea but what could we do about it?” And there should be a better mechanism. But I’m not sure what it is. There should be a better mechanism, though, for a board to make those important decisions where a first class chief executive can have an absolutely different equation than the shareholders, weighing all of the personal economic and non-economic considerations. There should be a mechanism that enables the board to bring independent judgment on those in a way that doesn’t put the CEO in a position virtually where he or she has to resign or is embarrassed in front of the troops. And I would welcome any discussion on those matters.

The compensation question where the first class executive could be in conflict with the owners, I think it gets abused some but I don’t think that it amounts to that much when compared with the other two questions – getting the right one and also the question of acquisitions. I think it costs shareholders some money that’s unnecessary, and I think that a lot of the compensation schemes have been quite illogical, but I don’t think that they are overwhelming in terms of evaluation.

On compensation, I can turn purple in meetings. But in the end, the big, dumb acquisitions are going to cost shareholders far, far more money than all of the other stuff.

 

 

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Berkshire’s 2014 Annual Meeting

Among delightful things I did last week in Omaha was lunch with Bloomberg reporter Noah Buhayar on Thursday ahead of Saturday’s meeting of Berkshire Hathaway shareholders.  Noah wrote several stories in which he kindly quoted me. Here are highlights.

1. Coke Pay.  On Berkshire’s abstention from voting on whether to support or oppose Coca-Cola’s executive pay plan, which other Coca-Cola shareholders challenged and which Buffett considered excessive, Noah correctly quoted what I said Thursday as follows:  “People like to raise tricky issues at the Berkshire meeting, and that’s probably the trickiest one.  You’ve got to decide when you’re going to throw that weight around.” That’s pretty much the answer Buffett and Munger gave on Saturday.  (See Noah’s piece referencing Coke here.)

2. Shareholder Activism.  On Charlie Munger’s remarks about shareholder activism being bad for America–and the responses of two activists–Noah quoted me from a Sunday morning follow-up interview:  “As iconoclastic and unusual as Berkshire Hathaway is, it represents big, corporate America on this issue of activism.  Munger perceives activist investing as making corporations more like commodities than complex, social institutions that over time can contribute value.” (See Noah’s piece on this topic here.)

3. Stock Picking to Business Building. On Buffett’s move from picking stocks to building companies:  “He became famous as a stock picker, and that reputation still dominates in the public image.  He was very good at doing that, but that has not been the definition or content of Berkshire in recent years.”  (See Noah’s piece on this big shift at Berkshire here and my elaboration of it here.)

4. Mood and Continuity.  I predicted on Thursday: “The mood at the meeting will be celebratory, with the stock near an all-time high. Topics at the gathering are often similar from year to year.  From one meeting to the next, the big thing that changes is size. Everything’s bigger.” (See Noah’s piece referencing the celebratory mood here.)

Plus ça change, plus c’est la même chose. And it’s a good thing too.

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Buffett’s Evolution: From Stock-Picking Disciple of Ben Graham to Business-Building Devotee of Tom Murphy

While everyone knows that Warren Buffett modeled himself after Ben Graham for the stock picking that made Buffett famous in the latter 20th century, virtually no one knows a more important point for the 21st century: he has modeled himself after Tom Murphy in assembling a mighty conglomerate.   Murphy, a legendary executive with great skills in the field of acquisitions that resulted in the Capital Cities communications empire, engineered the 1985 $3.5 billion takeover by Capital Cities of ABC before selling it all to to Disney a decade later for $19 billion.  You did not hear that explicitly at Saturday’s Berkshire Hathaway annual meeting, but Warren mentioned it to me at brunch on Sunday and, when you think about it, it’s a point implicit deep in the meeting’s themes and many questions.

In fact, Berkshire mBBB COvereetings are wonderful for their predictability.   Few questions surprise informed participants and most seasoned observers can give the correct outlines of answers before hearing Buffett or vice chairman Charlie Munger speak. While exact issues vary year to year and the company and its leaders evolve, the core principles are few, simple, and unwavering.  The meetings reinforce the venerability and durability of Berkshire’s bedrock principles even as they drive important underlying shifts that accumulate over many years.  Three examples and their upshot illustrate, all of which I expand on in a new book due out later this year (pictured; pre-order here).

Permanence versus Size/Break Up. People since the 1980s have argued that as Berkshire grows, it gets more difficult to outperform. Buffett has always agreed that scale is an anchor. And it’s true that these critics have always been right that it gets harder but always wrong that it is impossible to outperform.   People for at least a decade have wondered whether it might be desirable to divide Berkshire’s 50+ direct subsidiaries into multiple corporations or spin-off some businesses.  The answer has always been and remains no.  Berkshire’s most fundamental principle is permanence, always has been, always will be. Divisions and divestitures are antithetical to that proposition.

Trust and Autonomy versus Internal Control. Every time there is a problem at a given subsidiary or with a given person—spotlighted at 2011’s meeting by subsidiary CEO David Sokol’s buying stock in Lubrizol before pitching it as an acquisition target—people want to know whether Berkshire gives its personnel too much autonomy. The answer is Berkshire is totally decentralized and always will be-another distinctive bedrock principle. The rationale has always been the same: yes, tight leashes and controls might help avoid this or that costly embarrassment but the gains from a trust-based culture of autonomy, while less visible, dwarf those costs.

Capital Allocation: Berkshire has always adopted the doubled-barreled approach to capital allocation, buying minority stakes in common stocks as well as entire subsidiaries (and subs of subs).  The significant change at Berkshire in the past two decades is moving from a mix of 80% stocks with 20% subsidiaries to the opposite, now 80% subsidiaries with 20% stocks.  That underscores the unnoticed change: in addition to Munger, Buffett’s most important model is not only Graham but Murphy, who built Capital Cities/ABC in the way that Buffett has consciously emulated in the recent building of Berkshire.

For me, this year’s meeting was a particularly joy because I’ve just completed the manuscript of my next book, Berkshire Beyond Buffett: The Enduring Value of Values (Columbia University Press, available October 2014). It articulates and consolidates these themes through a close and delightful look at its fifty-plus subsidiaries, based in part on interviews and surveys of many subsidiary CEOs and other Berkshire insiders and shareholders.   The draft jacket copy follows. Read More

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Correction on Faculty Hiring and Buyouts

This post, partly apology, is prompted by a request from a law school dean to retract an assertion I made in a post earlier this week, which requires a little explanation at the outset. In Pikettian Law Schools, I noted how different law schools respond to the problems in legal education that arise from decreased demand and persistent high costs.  A large number of schools are downsizing via faculty buyouts, I said, while some buck the trend by hiring in surprisingly large numbers.

Readers offered various responses to my suggestion that this mimics the idea that the rich get rich and the poor get poorer, including by suggesting it might be about relative sensitivity to market demand or other natural competitive forces.  Some perceived that being listed  among those doing buyouts rather than hiring would hurt a school’s reputation while others thought it would help; some seemed to think that hiring is a sign of strength while others thought it a sign of being irresponsible.

Two readers–a professor at one law school and a dean at another–commented directly on the post that I had incorrectly listed their schools as having taken the buyout approach, noting instead that they had actually been doing serious hiring.   I promptly responded to both comments and made related corrections in the post.

Thereafter, I received a follow-up request from the Dean of Chapman University’s law school to make a new post retracting my erroneous inclusion of Chapman from the list.  I said I would oblige and noted that I would also include his email to me, which is posted below.  I apologize for the error(s) in my previous post.

 

Dear Professor Cunningham,

I am writing to point out an inaccuracy in your April 28 blog entry, Pikettian Law Schools, in which you identify Chapman as a school that has encouraged early faculty retirement without replacing vacancies. With respect to Chapman, this is simply not the case. In fact, this past year, we added four new faculty members, including a significant lateral hire, Lan Cao, who was a Boyd Fellow and Professor of Law at William and Mary Law School before joining our faculty last fall. She is now the Betty Hutton Williams Professor of International Law at the Chapman University Dale E. Fowler School of Law.

We realize that errors like this may sometimes occur; however, this type of information can be harmful to a school’s reputation and to its perception by those in the broader academic community. Because of the impact of such an error, I ask that you do more than simply correct your blog. Instead, would you kindly publish a follow-up retraction, identifying this mistake? I fear that simply posting my response will not do enough to undo initial impressions by the vast majority of your readers who will have already read the blog entry.

Thank you.

Tom Campbell

Dean, Chapman University Dale E. Fowler School of Law

 

 

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Pikettian Law Schools

Amid a general trend toward far less lateral recruiting by US law schools (see here and here), there are some contrarian schools on the move this year. They are expanding their faculties, while others cut budgets by reducing faculty size.  For example, each of the following schools recruited three lateral tenured law professors this year:  Columbia, Cornell, Harvard, Stanford, and Virginia.  (Source: Brian Leiter, here).

In the academic year just ended, only 28 U.S. law schools (of more than 200) recruited any laterals, the vast majority abandoning a long tradition in legal education.  They moved a total of only 46 professors of many thousands in the profession, down considerably from levels seen in decades past.

Other schools in this minority bucking the trend, with two recruits apiece this year: Alabama, Berkeley, Boston College (where I once was a professor and academic dean), BYU, and Penn.  Among those hiring one tenured  lateral are my own George Washington as well as our archi-rival Georgetown and Northwestern and Texas.

At the other end of the resource spectrum, dozens of schools cut salary expense, the largest line item on academic income statements. They are encouraging early retirement and not replacing the vacancies.  For example, each of the following schools reportedly engaged in significant buyouts in the past couple of years: Albany, Appalachian, Barry, Buffalo, Charleston, Charlotte, Elon, Faulkner, Florida Coastal, Hamline, Liberty, New England,  Phoenix, Seton Hall, Vermont, and Widener.

Others are more curious and harder to classify. Take U. Cal. Irvine, a newcomer climbing the ladder in part through aggressive lateral recruiting, setting the year’s record among schools, reeling in four.  Or Florida International, which hired two laterally this year.

Curiosities aside, in a capitalist society, the rich do get richer and the poor get poorer, as Thomas Piketty has reminded everyone while soaring to academic stardom. Is it surprising that, in such a civilization, the fancier established schools get bigger and stronger faculties while weaker rivals cut faculty deeply through aggressive buyouts?

 

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Contracts in the Real World Gets CHOICE Award for Outstanding Title

Pop K CoverThe American Library Association last year named my book, Contracts in the Real World: Stories of Popular Contracts and Why They Matter (Cambridge University Press 2012), an “outstanding title” in its annual CHOICE awards.  The following kind entry accompanied the announcement, supplied by A. R. S. Lorenz of Ramapo College.  I’m grateful to the Association–and to the many 1Ls who have bought and used the book profitably in their courses!

 

 

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