Author: Michelle Harner

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Parting Thoughts on the Profession

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).

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The Entrepreneurial Dilemma

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.

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Where Have All of the Storefronts Gone?

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 herehere 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.”

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Gearing Up for a Let Down?

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.

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The Great Sport of Entrepreneurship

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.

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Volunteering in a Recession

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?

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The Very Active Activist Investors

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.

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Creating Corporate Culture Through Comedy?

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.

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Teaching Professionalism

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.

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Perhaps a Sign of Things to Come

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.