Author Archive for michelle-harner
Parting Thoughts on the Profession
posted by Michelle Harner
I want to thank the permanent authors of Concurring Opinions for the opportunity to guest blog. I truly enjoyed the experience and the lively debate. Academia can be isolating in many respects—particularly compared to private practice—so it is nice to have this type of forum to exchange ideas and discuss timely and interesting topics.
For my last post, I want to highlight some trends in law firm practices and consider what they mean for the profession more generally. We are all aware of the difficult job market: law school graduates continue to receive deferred offers, summer associate classes continue to be smaller and many lawyers who lost their jobs are still unemployed. (Even lawyers who managed to keep their jobs may face challanges, see here.) These realities have translated into increased anxiety for law students (exactly what they do not need; law school is stressful enough when the market is good) and new challenges for law schools. But what do they mean for law firms? (For a thoughtful discussion of the challenges facing big law, see here.)
Many commentators have opined on the changing roles of law firms and lawyers, and they often paint a pretty bleak picture (see here, here and here). It is one where lawyers are marginalized and society protects its legal rights by purchasing commoditized legal products or interacting with a computer program or virtual lawyer. The profession also faces challenges from non-lawyers and non-U.S. lawyers. In fact, anecdotal evidence suggests that an increasing number of firms are—either voluntarily (to reduce overhead) or involuntarily (to meet client demands)—outsourcing certain legal services to lawyers in foreign countries (see here and here).
February 28, 2011 at 6:48 am
Tags: academia, Current Events
Posted in: Law Practice
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The Entrepreneurial Dilemma
posted by Michelle Harner
I attended the Fifth Annual Law and Entrepreneurship Retreat this week, and it was an interesting, inter-disciplinary discussion of all things entrepreneurial. The papers and debate focused not only on how the law shapes entrepreneurial conduct, but also how entrepreneurial conduct and innovation might reshape the law. (As I noted in a previous post, whether lawyers have the entrepreneurial spirit that often facilitates innovation is a separate question that some debate.)
As part of the retreat, I had the pleasure of reading and discussing a paper entitled Entrepreneurial Litigation and Venture Capital Finance, by Doug Cumming, Bruce Haslem and April Knill. The paper focuses on a dilemma that I suspect many entrepreneurs face in the startup stage: whether to devote limited resources to litigation that might be necessary to protect and preserve key rights for the company (see, e.g., here). These rights might concern intellectual property, contracts, employees or other aspects of the entrepreneur’s nascent business. Initiating litigation may consume all of the company’s resources and make it less attractive to a venture capitalist; but losing the subject rights may force the company out of business. Entrepreneurial Litigation presents empirical data to guide entrepreneurs and venture capitalists in this decision-making process. (For an interesting study of the other side of this equation and how litigation impacts venture capitalist reputation, see here.)
Although not the focus of Entrepreneurial Litigation, the paper also highlights the significant risk and uncertainty inherent in any entrepreneurial venture. Having a big idea is not enough; a lot can happen as an entrepreneur tries to get that idea to market. Litigation is just one of these risks. But certainly instituting litigation to protect a patent or challenge the application of an existing law to the entrepreneur’s product or business model is not cheap. Litigation can easily consume a large portion of an entrepreneur’s working capital. (For some perspectives on entrepreneurs and litigation, see here and here.) And if the firm folds, a competitor may get the benefit of its innovation and proactive legal strategy—adding insult to injury.
I am not sure that most people appreciate this inherent risk. Certainly entrepreneurs and venture capitalists living this risk cycle do, but I suspect others associate entrepreneurship with Bill Gates, Mark Zuckerberg, Biz Stone and other success stories. It looks so easy in the movies. Given the importance of entrepreneurs and startups to our economy, I am excited that academics and industry organizations are devoting resources to the role that law plays in entrepreneurial ventures.
February 20, 2011 at 8:34 am
Tags: Current Events, entrepreneurship
Posted in: Uncategorized
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Where Have All of the Storefronts Gone?
posted by Michelle Harner
Have you noticed the number of empty storefronts around? (For a list of recent store closings, see here.) Business failure unfortunately is part of an economic recession, but it also follows changes in consumer patterns and market demands. Although studies debate the advantages of online versus brick and mortar stores (see here, here and here), consumers are increasingly more comfortable shopping online. Increased security and user-friendly return policies (not to mention all of those free shipping deals) appear to be fostering that trend.
Online or virtual stores also have a very different business model and cost structure (see, e.g., here). A small workforce in one location can service all of a company’s online customers. Compare that model with the brick and mortar model where a company operating in more than one location needs, at a minimum, to own or lease property in each location, pay maintenance and taxes for each facility, retain employees at each facility and comply with the law of each jurisdiction. (For interesting comparisons, see here, here and here.) Accordingly, brick and mortar stores are relying to some extent on certain intangibles—e.g., consumers wanting to touch and see what they are buying, wanting personal service, etc.—to offset these additional costs.
So is it the economy, the changing market or (as is likely) some combination of factors causing companies like Blockbuster, Borders and Harry and David’s to struggle? (For my prior post related to Borders’ financial challenges, see here.) And if it is the latter, will traditional brick and mortar retail stores make a strong comeback when the economy recovers? I am not so sure. I think we may see more retail bankruptcies end like Circuit City’s case—i.e., Circuit City’s core business continues, as does the use of its name, but only in an online form (and under new ownership; see here). Although I appreciate the efficiencies of this model for both the company and the consumer, I do not think it is necessarily the best trend for us as communities and neighbors. As the commercial says, having a face-to-face conversation with a salesperson about your product questions: “priceless.”
February 15, 2011 at 7:35 pm
Tags: Bankruptcy, Corporate Law, Current Events, financial crisis
Posted in: Current Events, Uncategorized
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Gearing Up for a Let Down?
posted by Michelle Harner
There currently is a lot of activity surrounding implementation of the Dodd-Frank Act. The various agencies are proposing rules, numerous organizations are filing responsive comments and many rules have become final. (For useful resources to help track rulemaking and developments, see here and here.) Major portions of the Act are taking shape (see, e.g., here, here and here); the new Consumer Financial Protection Bureau even has its website up and running.
But there are problems. Although progress is being made, agencies are behind schedule in meeting certain benchmarks, with the first anniversary of the Act quickly approaching. Opposition lobbies continue to form and are gaining strength (see, e.g., here and here), and funding for the Act’s initiatives remains in question (see here, here and here). I can’t help but wonder about the endgame. Can our already understaffed and underfunded agencies enforce these new rules? Are rules on the books without any meaningful enforcement mechanisms effective? If the answer to both of these questions is no, where exactly are we headed?
I am not the first, and certainly will not be the last, to raise these types of questions. Nevertheless, I raise them to consider the alternatives. If the risk management, corporate governance and consumer protection issues highlighted by the recent recession can’t be fixed effectively through the regulatory process, what might work? The obvious alternatives—market discipline and industry self-regulation—have their own problems, which might be as challenging to overcome as the resource issues facing the government. (For interesting perspectives on these alternatives, see, e.g., here and here.) But I think we should continue to try; we should consider innovative ways to enhance the efficiency of these and other monitoring/disciplining tools that could complement whatever comes out of the regulatory initiatives. The economic problems we face are too big for us to fail.
February 11, 2011 at 1:25 pm
Tags: Current Events, financial crisis
Posted in: Current Events
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The Great Sport of Entrepreneurship
posted by Michelle Harner
Being a huge sports fan and a corporate law geek, I have truly enjoyed the attention garnered by the Green Bay Packers’ ownership structure in the build up to the Super Bowl (see, e.g., here). The success of the Packers’ non-profit, fan-owner structure raises several interesting questions (see here). That structure also is a refreshing departure from the commercialization of the sports industry generally.
Nevertheless, the Packers’ appearance in Super Bowl XLV also highlights opportunity for innovation and small business profit in the sports context. Indeed, the infamous cheesehead hats were created by a Wisconsin sports fan on his way to a Brewers’ game (see here). Talk about innovation—he apparently ripped the foam from his couch and painted it orange. Before he knew it, he owned and operated a small foam-manufacturing company that caters to Wisconsin sports fans’ every need.
Interestingly, the cheesehead hat entrepreneur is not alone. There is an entire cottage industry of sports entrepreneurs who seek to profit from the loyalty of sports fans everywhere (see, e.g., here and here). And these are not just the high-profile athletes turned entrepreneurs. These are ordinary people with unique or innovative ideas. Take those sports entrepreneurs who are operating online sports stock exchanges (see, e.g., here). I suspect that Aaron Rodgers’ stock price is at an all-time high at the moment.
February 4, 2011 at 12:06 pm
Tags: Corporate Law, Current Events
Posted in: Current Events
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Volunteering in a Recession
posted by Michelle Harner
I heard an interview today with a representative of a nonprofit organization that matches volunteers with organizations in need—a sort of match-maker in the volunteer context. Interestingly, the representative reported an increase in the number of available volunteers during the recession (see also here and here). She attributed this trend to two things: people who had lost their jobs wanting to keep up their skills while searching for new employment and people generally wanting to help others in need.
The report piqued my interest regarding whether the recession was having a similar, positive effect on the provision of pro bono legal services. I suspected that more people were in greater need of legal assistance as a result of the recession, which in fact turns out to be the case (see here and here). I did not know, however, whether lawyers were meeting this increased demand. I like to think we are, but the profession’s record on this point is not necessarily encouraging (see, e.g., here).
The results appear mixed. Some reports suggest that the level of pro bono activity has remained the same or increased slightly in the past few years (but see here). (For interesting perspectives on the recession and the legal profession, including pro bono legal services, see here and here.) Nevertheless, even these increased activity levels fall woefully short of the reported need. So, given high lawyer unemployment rates and the desire to better train new lawyers, why does this gap exist?
January 31, 2011 at 10:35 pm
Tags: Current Events, financial crisis, Law School
Posted in: Legal Ethics
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The Very Active Activist Investors
posted by Michelle Harner
Activist investors have been very busy in recent months, both in the U.S. (see here, here and here) and elsewhere. Among other things, Bill Ackman, through Pershing Square Capital Management, obtained seats on the board of J.C. Penney and was named Chairman of Howard Hughes Corp.—the spinoff of General Growth Properties. Ackman invested in both the equity and debt of General Growth Properties shortly before its chapter 11 bankruptcy filing and, by many accounts, hit a home run on this particular investment. The governance structure of the resulting company, Howard Hughes Corp. (which is reportedly named for the former filmmaker/entrepreneur), also is very interesting. According to Ackman, “it’s a company you can buy stock in. You can throw out the board. The board is elected annually. You can call a shareholder meeting with 15 percent of the vote…so, you know, you can get me back.” So is this a sign of things to come?
Many predict a very active proxy season for activist shareholders and the companies they target. (For an explanation of this trend, see here.) Commentators also suggest the activist agenda likely will include “proliferation of majority voting for directors from the larger public companies to mid-size and smaller companies (which we believe will see the largest number of proposals), separation of the offices of Chairman of the Board and CEO, 10 percent or lower thresholds for shareholders to call special meetings and enabling shareholders to act by majority written consent.” This agenda includes governance features that are similar to those ascribed to Howard Hughes Corp., but Ackman was able to achieve that structure without a proxy fight. Ackman, like a growing number of activists, turned to the chapter 11 bankruptcy process to win control and implement a specific governance agenda. (For an explanation of this loan-to-own strategy, see here.)
Activist distressed debt investors recently acquired ownership and control of companies like Lear Corp., Philadelphia Newspapers, Reader’s Digest, Six Flags and Tropicana Casino & Resorts through chapter 11. Certainly, not all activist distressed debt investors are focused on governance changes, and the value added by their activism is subject to debate. And interestingly, much of their activism goes unnoticed, unlike their shareholder counterparts. So will these debtholder activists follow Howard Hughes Corp.’s lead and implement investor-friendly governance policies? Will these policies truly enhance enterprise value? These important questions—related to both shareholder and debtholder activism—will only be answered with time and performance results, but create many issues for corporate boards and governance scholars to consider in the interim.
January 28, 2011 at 11:28 am
Tags: Corporate Law, Current Events
Posted in: Corporate Law
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Creating Corporate Culture Through Comedy?
posted by Michelle Harner
As I was preparing to fly home from a conference yesterday, I was watching msnbc’s Your Business, which was profiling a small business that uses comedy to create a positive corporate culture. The company, Peppercom (a public relations firm), employs a comedy coach to work with its employees not so much to help employees tell good jokes but to build confidence and communication skills. Although this approach may not work for every business, Peppercom apparently has landed several large accounts based on its approach to business and the personality of the firm and its employees. (For an example of using comedy to discuss corporate ethics with employees, see here.)
I have to admit that I initially thought the msnbc segment was entertaining but not really applicable to the larger business community. I then boarded my Southwest Airlines’ flight and, along with the other passengers, was serenaded by one of the flight attendants who actually got most of the people on the flight to join her in the chorus of “Rolling Down the Runway” (adapted from John Fogerty’s “Proud Mary”). This experience made me reflect further on the importance of corporate culture to the overall productivity of a firm (see here and here) and the tools available to cultivate that culture.
I have previously written about corporate culture and “tone at the top” in the context of enterprise risk management (see here and here), but certainly the benefits of a positive corporate culture do not end there. Employing a workforce that enjoys coming to work, is comfortable communicating throughout the firm and portrays that positive image to the outside world potentially holds real value. (For interesting discussions of corporate culture at AIG and Lehman Brothers prior to the crisis, see here, here, here and here.) I think the challenge in this broader context, as in the enterprise risk management context, is finding the right people to foster that culture. Policymakers can impose incentives and perhaps even a process designed to promote a positive, ethical and risk aware culture at any given company, but those regulations only go so far. The people leading the company must be committed to the endeavor and the implementation of that culture—checking the box or adopting an ethical code or employee handbook is not enough.
This notion of good corporate governance being tied to the individuals serving on boards of directors and management teams was one of the issues explored during the conference I was attending. That conference, hosted by the Adolf A. Berle, Jr. Center on Corporations, Law and Society at the Seattle University School of Law, was a wonderful collection of corporate scholars from various disciplines discussing the issues we continue to face in corporate governance generally and how Adolf Berle’s work informs that discussion. I am not sure we uncovered any definitive answers, but I certainly am encouraged by the discourse and energized to continue the pursuit.
January 24, 2011 at 12:52 pm
Tags: Corporate Law, Current Events
Posted in: Corporate Law
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Teaching Professionalism
posted by Michelle Harner
One of my favorite courses to teach is Legal Profession (i.e., ethics and professionalism) because it truly is an “ah-ha” moment for many law students. I tend to believe that not many students consider the “profession” part of the “legal profession” prior to attending law school. Rather, I suspect they view law school as a means to an end—landing a lucrative job (or at least that was the case in days gone by; see here, here and here). They probably give little thought to the fact that they are preparing to join a “profession.”
I know that many even inside the legal profession question whether it remains a profession or is now just a business and all about the bottom line. (For interesting discussions of this debate, see here, here, here and here). I am very traditional in this respect, and I hold dear the notion that the law is an esteemed profession. (I particularly like Roscoe Pound’s definition of the legal profession as “a group…pursuing a learned art as a common calling in the spirit of public service—no less a public service because it may incidentally be a means of livelihood.”) And I am proud to be a member of that profession.
For this reason, I stress the nature of the profession and what it means to be a professional in the early days of Legal Profession. I often quote the Preamble of the Model Rules of Professional Conduct to emphasize that a lawyer does more than serve clients. “A lawyer, as a member of the legal profession, is a representative of clients, an officer of the legal system and a public citizen having special responsibility for the quality of justice.” I then use a series of hypothetical problems to work through what that triad of responsibilities means for lawyers. You can actually see the light bulb go off for some students.
January 20, 2011 at 2:44 pm
Tags: Law School
Posted in: Law School (Teaching), Legal Ethics
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Perhaps a Sign of Things to Come
posted by Michelle Harner
A Federal Reserve staffer suggested this week that the Fed will defer a key consumer decision to the newly-created Consumer Financial Protection Bureau (CFPB). That decision concerns homeowners’ rights of rescission. The rescission right gives a homeowner a certain period of time (in some cases up to three years) to challenge a mortgage on the grounds of misrepresentation or inadequate disclosure and requires the mortgagor to release its lien on the subject property. As you might guess, the rescission remedy has been invoked extensively in the recent economic downturn.
The mortgage industry has been encouraging the Federal Reserve to address the rescission issue with a sense of urgency, perhaps fearing what might happen to the rule after July 21, 2011—the date that authority on such issues is transferred to the CFPB. The Federal Reserve looked poised to make a move, having proposed a rule in September 2010 that would significantly restrict the circumstances under which a homeowner could seek to rescind a mortgage. The comment period for the proposed rule closed on December 23rd, and, despite opposition by consumer groups, many thought the Federal Reserve would continue to pursue the proposal.
A decision by the Federal Reserve to defer this particular issue to the CFPB would be consistent with the CFPB’s objective to consolidate the oversight and implementation of consumer protection regulations in a single agency. It may not, however, produce a result consistent with the intent of the Federal Reserve’s proposed rule and the desires of many in the mortgage industry. One of the CFPB’s charges is to oversee the mortgage and credit card industries, including the language and substance of consumer disclosures. Given the CFPB’s preemption provisions (which favor enforcing state consumer protection laws), the CFPB’s proposed partnership with state attorneys general and the robo-signing and related concerns swirling around the mortgage industry, I doubt that weakening consumers’ rescission rights is high on the priority list.
I look forward to seeing how this and other pressing consumer issues play out, particularly after July 21st. The CFPB is starting to take shape (see here and here), and it appears that it will hit the ground running. (For interesting Q&A with Elizabeth Warren on the CFPB, see here and here.) In any event, the agency certainly has its work cut out for it.
January 16, 2011 at 9:34 pm
Tags: Current Events, financial crisis
Posted in: Consumer Protection Law
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Let the Good Times Roll
posted by Michelle Harner
The PR departments of the Big 3 automakers are working overtime. With the public opening of the North American International Auto Show just days away, Ford, General Motors and Chrysler released financial results showing a significant increase in sales in 2010 and promising outlooks for 2011. And the flurry of news coverage certainly has a different feel than the doom and gloom of the coverage just two years ago (see, e.g., here).
Why the difference? Is the economic recovery helping the Big 3? Is chapter 11 bankruptcy the reason for the apparent rebirth of General Motors and Chrysler? If so, what explains Ford’s current success (for some interesting perspectives on this, see here and here)?
Many commentators have analyzed the General Motors and Chrysler bankruptcy cases, and they thoughtfully dissect what was novel, not so novel and somewhat troubling about those cases (see, e.g., here, here and here). It is difficult to assess exactly what role chapter 11 played in General Motors’ and Chrysler’s recoveries, other than to state the obvious that both companies used the process to reduce overhead and balance sheet liabilities significantly. That certainly can provide new life to a company; the question then becomes what the company does with the opportunity.
January 12, 2011 at 9:16 am
Tags: Bankruptcy, Corporate Law, Current Events
Posted in: Bankruptcy
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Socializing Students to the Practice of Law
posted by Michelle Harner
When I was in private practice, I never gave much thought to how law schools prepare students for a career in the legal profession. I was fortunate to have a very positive law school experience and even more fortunate to end up in a small practice group within a big law firm that took pride in training its young associates. (I also had a wonderful mentor during my judicial clerkship experience.) As a result, I never felt unprepared for the practice of law.
It was not until I left practice and started teaching that I truly appreciated the gap between legal education and legal practice. I know that statement is not a new revelation; many have discussed the lack of practical skills imparted to students during their three years of law school (see, e.g., here, here, here and here). And I do not make it to criticize legal education (for the most recent critique, see here). Although some things could be done differently (for a collection of articles on legal education reform, see here), I believe that teaching students critical analytical skills provides a solid foundation for legal practice and inculcates a skill set that translates beyond the legal profession (see here and here). I raise it, however, to share my recent, very enjoyable experience with third year law students in Business Planning.
This fall, I co-taught Business Planning with my colleague, Dan Goldberg, who focuses his teaching and scholarship on tax law. Dan and I worked together to prepare lesson plans and assignments, and we co-taught each class meeting. In fact, we structured the class to simulate a small law firm; Dan and I played the role of the tax and corporate partners, and the students played corporate associates. (For a discussion of training law students to be more client ready, see here.)
The class started with one of the law firm’s long-time individual clients seeking the law firm’s assistance in structuring a new business venture among the firm’s client and two other individuals. The students confronted ethical issues presented by this request and then helped the individuals evaluate their entity choice options from tax, governance and general business perspectives. This exercise introduced students to business plans, balance sheets and organizational documents. The hypothetical law firm and student associates served as counsel to the newly-formed business entity during the remainder of the semester, and they helped this hypothetical client work through liquidity and growth issues, an unsolicited purchase offer and an initial public offering.
January 10, 2011 at 7:40 am
Tags: Education, Law School
Posted in: Law School (Teaching)
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Are You a Winner?
posted by Michelle Harner
Two lucky people woke up this morning mega millionaires. After yesterday’s lottery ticket buying frenzy, one winning ticket was sold in Idaho and the other in Washington (see here). The winners will share equally the $355 million jackpot.
Sounds like a dream coming true, right? Unfortunately, for many lottery winners, winning the lottery eventually leads to bankruptcy (see here, here and here). Statistics tend to show that a good portion of lottery winners file chapter 7 or chapter 13 personal bankruptcy cases within five years of receiving their jackpots (see here and here). In one sense, the tale of doom attached to big lottery winnings seems similar to the ploy of telling a bride that rain on her wedding day signals good luck—it makes those of us who didn’t win feel a little better. In another sense, however, it highlights a real problem in our approach to financial education.
Yesterday, the American Bankruptcy Institute reported a significant increase in overall personal bankruptcy filings. Undoubtedly, some of those filings are the direct result of the recession, and some filings stem from similar unforeseen changes in circumstances, such as divorce and serious health problems. But many personal bankruptcies involve honest, unsophisticated individuals who simply do not understand or have the skill set to manage their personal finances. Yes, these individuals should take responsibility for their finances, but they also need training and resources to be successful in that endeavor. Studies suggest that many high school graduates do not understand how credit cards and other basic financial instruments work (see here, here and here), yet most carry credit and debit cards in their wallets.
I appreciate the enormous challenges facing the U.S. education system. As we evaluate these challenges, however, we need to consider financial education as part of the core curriculum. We also need to continue working to provide meaningful financial education to adults (for an interesting study concerning financial education and bankruptcy, see here). Although the 2005 amendments to the U.S. Bankruptcy Code incorporate a consumer education component, that requirement has become little more than the potential debtor sitting in front of a computer screen and answering a few questions in order to be able to file her bankruptcy petition (for other perspectives, see here, here and here; for an excellent study regarding the impact of the 2005 amendments on consumer debtors, see here). I hope that as the economy recovers, so too do our financial education initiatives (see here and here) so that more individuals have a real chance at sustainable financial health.
January 5, 2011 at 9:54 am
Tags: Bankruptcy, Education, financial crisis
Posted in: Bankruptcy
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Creative Reconstruction
posted by Michelle Harner
In my opening post, I referenced the slow pace of change and how it can be exceedingly painful for individual consumers. I want to follow up on that concept in the business context, where slow change—or the failure to change at all—can be fatal.
Consider, for example, Borders, which recently announced that it was suspending payments to vendors and trying to refinance its debt obligations (see here and here). Borders, like its competitor Barnes & Noble, is struggling to compete with big box retailers that offer steep discounts on traditional books and the growing popularity of e-Books (see here, here and here). Also like many retailers, Borders was hit hard by the economic recession (see here).
Some may say that Borders is a victim of the recession and creative destruction. And that may, in part, be accurate. (For interesting perspectives on the utility of recessions and creative destruction, see here and here.) But anyone who follows the retail industry or is an avid reader had some sense that this was coming (see here, here and here). So why didn’t Borders’ management? Or rather, why didn’t they react more quickly to the changing market and economy?
January 4, 2011 at 9:46 am
Tags: Corporate Law, Current Events, financial crisis
Posted in: Bankruptcy
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2011: Has that much really changed?
posted by Michelle Harner
I want to start by wishing everyone a very happy New Year and by thanking my colleague Danielle Citron and all of the permanent authors of Concurring Opinions for inviting me back to guest blog. I truly enjoyed my time as a guest blogger last January, and I look forward to participating on the blog during the next few weeks.
2010 certainly was an active year—we saw Congress pass landmark legislation (see here and here), voters overhaul the political landscape in the mid-term elections (see here and here) and everyone continue to focus on the economic recovery (see here, here and here). But as I reflect on the past year and look forward to 2011, I am not really sure that much has changed.
Yes, we were told that the economic recession officially ended, but people, businesses and countries are still feeling the pain. Domestic unemployment continues to hover around 9.8 percent, and some jobs lost during the recession may not be coming back (see here). The U.S. national debt exceeds $13 trillion, and we have no clear path for reducing it (see here and here). Several European countries continue to struggle with liquidity issues (see here and here) and banks continue to fail.
Nevertheless, some things do appear to be changing—albeit at a very slow pace. For academics, slow change can be good, in that it allows us to analyze critically the causes, developments and potential resolutions in (almost) real time. For others, the slow pace of change can be exceedingly painful. In any case, part of what I hope to do during the next few weeks is explore ongoing changes in the corporate and financial fields, as well as the challenges we continue to face in the legal profession generally. These areas are the primary focus of my teaching and scholarship, and I will endeavor to impart some of my passion, concern and optimism for each through my upcoming posts.
January 2, 2011 at 7:43 pm
Tags: Current Events, financial crisis
Posted in: Uncategorized
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Parting Thoughts
posted by Michelle Harner
I want to thank the authors of Concurring Opinion for giving me this wonderful space to guest blog the past several weeks. I truly enjoyed my experience, and I am grateful for the opportunity. I also want to thank the readers who provided thought-provoking and insightful comments on my posts. I enjoyed our ongoing dialogue.
I started my posts by concentrating on the economic crisis; the issues and flaws in our financial and governance systems highlighted by the crisis will keep many of us scholars, practitioners and politicians busy for the foreseeable future. Indeed, we are still revisiting issues from the economic downturn and corporate scandals of the early 2000s (e.g., the U.S. Supreme Court will hear Jeff Skilling’s appeal tomorrow, see here and here). Congress continues to propose new legislation intended to address the current crisis (see here for the latest proposal introduced by Senator Dodd to create a Bureau of Financial Protection within Treasury), and it is by no means evident that the current crisis is over (see here, here and here).
As I mentioned in several of my posts, many of the issues we face today as a result of the crisis are neither new nor novel. We have long struggled with corporate mismanagement, risk management, agency costs, executive compensation and regulating innovation. The recurring nature of these issues suggests that a fresh look at both the issues and the corresponding legal system is needed. Simply creating more rules or more bureaucracy is not the answer. Adversity often creates opportunity; I certainly hope that is the case here.
February 28, 2010 at 9:53 am
Tags: Current Events
Posted in: Uncategorized
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CEOs: The Favorite Child?
posted by Michelle Harner
Something about Tiger Woods’ press conference last Friday was very familiar. I felt as though I had heard those words before. “I knew my actions were wrong. . . . But I convinced myself that normal rules didn’t apply. I felt I was entitled.” (See here for this quote and an interesting comparison of the Woods and Toyota situations.) I then heard an interview yesterday with author and psychologist Ellen Weber Libby, who is promoting her new book, The Favorite Child (video description of book here). After listening to Libby’s interview, I realized that the hubris evident in Woods’ statement is similar to that we often hear in the comments, or see in the conduct, of corporate managers. Consider Ken Lay’s statement regarding the Enron scandal: “I take full responsibility for what happened at Enron. But saying that, I know in my mind that I did nothing criminal.” (See also description of allegations in complaint against Bank of America here.)
Libby explains the “favorite child” scenario as one where a child makes her parents feel good and in exchange the child receives special privileges. Libby herself used Tiger Woods as an example in the interview and uses her brother-in-law, Scooter Libby, as an example in the book. Although treating a child as a favorite can promote positive characteristics, such as self-confidence, it also can impair a child’s ability to recognize the consequences of her actions, according to Libby. I cannot help but notice similarities between these natural family tendencies and those we observe in the corporate “family” context. (Notably, the overconfidence and failure to appreciate consequences sometimes apparent in the corporate context might be a combination of the two; a corporate manager raised as a favorite child in her natural family and then further enabled by her corporate family. Indeed, personality traits such as narcissism are identified by some commentators as indicative of an overconfidence bias in corporate managers. See here and here for discussion of overconfidence in the current and past economic downturns.)
The analogy is not perfect, but I think it fosters valuable analysis. Corporate boards may overlook or be more lenient with respect to scrutinizing the conduct of corporate managers when times are good and the managers’ performance is making the board feel good about the company. The same arguably can be said about oversight from shareholders, regulators and the markets. But this leniency obviously is troublesome when exceptional corporate performance is based on inappropriate risk-taking or illegal conduct. So the challenge then becomes how to motivate appropriate oversight and encourage a healthy dose of skepticism into corporate governance. I touched on this issue in a prior post, and I come back to it here because I think it is an extremely challenging task. Creating a legal rule is not difficult, but designing a rule to change human behavior in an effective manner and without unwanted side effects is. And then you have to consider how best to implement that rule—e.g., legislation, best practices, etc. This difficulty may explain our long history of corporate scandals (for just a portion of this history, see here and here), but it should not discourage us from continuing to try.
February 27, 2010 at 9:24 am
Tags: Corporate Law, Current Events
Posted in: Corporate Law, Current Events
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The Power of the People
posted by Michelle Harner
On Sunday the Conservative Party in the United Kingdom introduced the concept of a “people’s bank bonus.” Party representatives justified the move by stating, “Taxpayers bailed out the banks, so they deserve a ‘people’s bank bonus’ when the time comes to sell the government shares.” The basic concept is that once Royal Bank of Scotland (government owns 84% stake) and Lloyds (government owns 41% stake) stabilize and recapture market value, the government would offer its shares to the people at a discount rate (see here). Some apparently suggest that the government should even endow the shares to the people (see here).
This announcement is just the latest example of the intense public outrage and related public and political responses to the economic crisis and bank bailouts in the United Kingdom. Admittedly, factors leading to the economic crisis have outraged people across the globe, but I have been intrigued by the passionate U.K. outcry. Perhaps it is because many outsiders view people in the United Kingdom as being more reserved and less emotional in the public forum. That image does not quite fit with the popular U.K. game “Whack a Banker” in which “[y]ou pay 40p to hit as many bankers as you can in 30 seconds as their heads pop up. It’s based on an older game called ‘Whack a Mole’.” (See here.) There also is an online version of the game. (See here; beware, slightly graphic.)
The rally cry of the people encouraged the bank bonus tax announced by the U.K. finance minister in December (see here), additional bonus restrictions that limit the cash component and permit amounts to be clawed back (see here) and a British singer to threaten withholding his own taxes until the government regulated excessive bank bonuses (see here and here). The CEOs of Lloyds, Royal Bank of Scotland and certain other banks have waived their 2009 bonuses. (For an interesting article suggesting that the focus on bonuses is misplaced, see here.) And, according to a recent survey, the U.K. public anger continues to linger. In fact, several companies are hoping to take advantage of public discontent to break into the retail banking market. As I noted in a prior post, it remains to be seen whether any of the noise surrounding the economic crisis will result in long-term change, but it certainly has generated a lot of activity across the pond.
February 23, 2010 at 5:08 am
Tags: Current Events
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Regulating Innovation
posted by Michelle Harner
I was honored last week to attend the Fourth Annual Law & Entrepreneurship Retreat, hosted by Gordon Smith at the BYU Law School. It was a wonderful collection of legal scholars who focus aspects of their teaching and scholarship on legal issues affecting entrepreneurs and innovation. Several of the papers and much of the general discussion considered innovation, particularly whether we can or should attempt to regulate innovation and related risks. The economic crisis provided the general context for this discussion; should we restrict or monitor innovation in the financial industry and, if so, how can we perform those tasks effectively?
I was struck by several things during the conference, including the universal and recurring nature of the innovation conundrum. I realized as we were debating solutions to abuses of credit derivatives that the proposed subject of regulation was novel, but the problem was not. We struggled with governing “the marriage of steam power and iron rail” in the late 1800s (see sample of related text here); it is a habitual problem in the biotech, energy, intellectual property and other fields (see here, here and here); and the problem is not confined to the United States (see here).
The recurring Hobson’s choice lies in the nature of innovation itself—to innovate is to create something new or different. As one commentator observes, “Genuine novelty knows no rules. We cannot reduce to routine what we do not know. Yet of course we cannot resist trying.” (See here at 1.) And innovation is often a very good thing (see here). So the challenge is to mitigate the negative side effects of innovation without stifling it altogether. (For a discussion of the regulation choices and challenges in the financial product context, see here, here and here.) Certainly easier said than done.
February 21, 2010 at 11:11 am
Tags: Corporate Law, Current Events
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Winning the Battle Only to Lose the War?
posted by Michelle Harner
Many incredible and interesting stories have emerged from the economic turmoil of the past few years. One story that has intrigued me since I first read about it in late 2008 is that of five Wisconsin school districts that invested in collateralized debt obligations (CDOs) on a leveraged basis and lost approximately $200 million. The story underscores the confusion surrounding CDOs and the almost blind faith with which investors made investment decisions prior to the crisis. (For one of my prior posts on this story, see here.) For example, the school districts apparently thought they were investing in corporate bonds and did not understand the insurance-like nature of their investment in synthetic CDOs. As the school districts later discovered, however, they actually invested in a pool of credit default swaps that insured against defaults on certain bonds. (For helpful diagrams of synthetic CDOs, see here and click “Profits in Crisis” link in this New York Times article.)
Given the nature of synthetic CDOs, the school districts would make money (from premiums paid by credit risk protection buyers) as long as the underlying bonds were performing. If those bonds defaulted, however, the school districts’ investment would be used to pay the credit risk protection buyers, leaving the districts with nothing. We of course all know what happened, and like many investors who lost everything, the crisis left the school districts in a liquidity crunch, facing budget cuts and looking for answers. As one of the districts’ teachers explained, “I am really worried. . . . If millions of dollars are gone, what happens to my retirement? Or the construction paper and pencils and supplies we need to teach?” (See here.)
The Wisconsin school districts sued Stifel Nicolaus & Co. and Royal Bank of Canada for, among other things, alleged fraud and misrepresentation in connection with the districts’ investments. According to the districts’ complaint, “[T]hey were told that ‘15 Enrons’ would need to happen before the districts would be affected, none of the CDO’s had sub-prime debt, and the investments were ‘safe’ and ‘conservative.’” (See here.) At the end of last month, Milwaukee County Circuit Judge William W. Brash III denied Stifel’s and Royal Bank of Canada’s motions to dismiss on all counts. But as one of Stifel’s lawyers noted after the ruling, now the districts have the difficult and expensive task of proving their allegations. (This sentiment was echoed by Stifel’s CEO in an interview on CNBC last week, see here (comments come at end of interview).) Indeed, the litigation has already been very costly for the districts (see here).
So what does this small victory mean for the districts? Do they really have viable claims against Stifel and Royal Bank of Canada, or is this simply a human reaction by the judge to public empathy for the districts? Perhaps it is similar to some of the judicial reaction to the Enron and WorldCom scandals, where courts appeared to lower entry barriers for litigants even though the ultimate standards for liability remained the same. (For a discussion of that reaction, see here.) And if that is the case, at what cost does this victory come? It will be interesting to watch the resolution of this and other crisis-related lawsuits to see if litigants achieve any meaningful relief.
February 13, 2010 at 3:46 pm
Tags: Current Events
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