Author Archive for michelle-harner

The Merits of Merit-Based Pay

posted by Michelle Harner

Yesterday, Bingham McCutchen announced its move to a merit-lockstep compensation scheme. Under the scheme, associates’ base salaries will be determined on a lockstep basis that considers years of experience and hours billed. So if you are a second-year associate who bills 1,900 hours or more, you make $170,000. If you are a second-year associate who bills less than 1,900 hours but 1,500 hours or more, you make $165,000. If you bill less than 1,500 hours, your salary is frozen (see here). Bingham McCutchen’s bonuses, however, will be based on a more individualized merit evaluation. In contrast, firms like Drinker Biddle, Howrey and Orrick are moving to a complete merit-based compensation structure that generally places associates in different tiers tied to individual evaluations. (For a discussion of the difficulties of transitioning to these new schemes, see here.)

In theory, merit-based compensation structures sound great. Consider Howrey’s description of its new procedures: “‘We will expect certain levels of performance and certain levels of experience, and it will be the responsibility of the law firm and the partners that oversee them to make those experiences available to them.’ . . . Associates will be assigned to partners who will be responsible for their development and their individual evaluations.” More mentoring and individualized supervision of associates would enhance not only law firm productivity but also client service, the quality of law firms’ products and the profession generally.

But will merit-based compensation really encourage more meaningful partner/associate dialogue and professional development efforts or just re-emphasize the importance of billable hours? Most firms using merit-based compensation structures consider an associate’s billable hour number as a significant factor in her evaluation. More billable hours do not, however, translate into quality products or meritorious performance (see here and here). In fact, efficiency itself may be among the best indicia of a truly talented associate. Will merit-based compensation structures account for and reward efficiency, or will they encourage greater inefficiency? The answer, I think, depends largely on firm culture and the individual partners performing the evaluations, but I have to say I have my doubts.

  February 10, 2010 at 5:25 pm  Tags: Current Events, Law Practice  Posted in: Uncategorized   Print This Post   14 Comments

Tale of Two CEOs

posted by Michelle Harner

As I mentioned in a previous post, Bank of America and some of its current and former executives, including its former CEO Ken Lewis, are facing tough times. The executives were named as defendants in a scathing complaint filed last week by New York Attorney General, Andrew Cuomo, relating to Bank of America’s 2008 acquisition of Merrill Lynch. And yesterday, Judge Rakoff suggested that he might not approve Bank of America’s latest $150 million deal with the SEC to settle allegations of fraud and misconduct in connection with the Merrill Lynch acquisition. Judge Rakoff expressed his views that the settlement was too small, lacked focus on the individual executives and did provide sufficient oversight of Bank of America’s proposed corporate governance changes.

In contrast to these trying times for Bank of America and its executives, one former Bank of America/Merrill Lynch executive is getting a second chance. John Thain, the former CEO of Merrill Lynch who orchestrated the Bank of America deal and then redecorated his office for a reported $1.2 million, was named as the new CEO of small business lender, CIT. Admittedly, CIT could use a talented turnaround artist at its helm; having just emerged from bankruptcy, CIT has a long way to go. And the markets seem to think Thain is the guy. Time will tell whether Thain can achieve for CIT what he did for NYSE and Merrill Lynch. In the interim, Thain’s new opportunity must add insult to injury on the heels of Bank of America’s and its executives’ latest legal challenges, which stem in part from bonuses that Thain approved for Merrill Lynch employees immediately before the Bank of America acquisition.

  February 9, 2010 at 7:50 am  Tags: Corporate Law, Current Events  Posted in: Uncategorized   Print This Post   No Comments

Corporate Versus Individual Accountability

posted by Michelle Harner

The recent announcements that the SEC reached a new $150 million settlement with Bank of America (see here) and that the New York Attorney General commenced civil litigation against certain current and former Bank of America executives (see here) are an interesting study in corporate versus individual accountability for corporate misconduct. The SEC did not pursue any actions against the individual executives at Bank of America (see here); rather, the SEC’s action and resulting settlement focus on the corporate entity. The Attorney General’s action, on the other hand, focuses on alleged individual misconduct.

The different approaches may be due in part to different legal standards of liability. In general, the SEC must establish intentional misconduct on the part of individuals in this context (see also here); the applicable New York law does not include this type of scienter requirement. (A cynic also might say that the difference relates to public opinion and Andrew Cuomo’s potential campaign for the governor’s office.) Nevertheless, the New York Attorney General’s approach appears to address more directly the concerns expressed by Judge Rakoff when he rejected the SEC’s original $33 million settlement with Bank of America (see also here).

The different approaches also raise an important question regarding whether corporate or individual liability is a more appropriate or effective remedy and deterrent for corporate misconduct. How far do we want to extend the legal fiction of the corporation? How in either situation do we avoid the corporation and its shareholders paying for individual misconduct that harms the corporation and its shareholders (e.g., indemnification)? How do we distinguish between good faith, honest mistakes and reckless, cavalier misconduct? And how do we level appropriate sanctions against individual wrongdoers without deterring other qualified individuals from serving on corporate boards?

These are difficult questions that courts, legislatures and commentators try to balance and address. I am not convinced that we have reached an appropriate equilibrium, and perhaps we never will. But I think we could benefit from acknowledging that corporate misconduct is caused by individuals and that some individual accountability is necessary to deter future misconduct. Notably, that remedy does not need to be a monetary penalty. In fact, public reprimands and temporary and permanent bars could be even more effective because those remedies impact reputation and arguably make it more difficult for the individual to commit similar wrongs in the future. (For a discussion of bars and the SEC’s and courts’ use of them, see here and here.) They also may ameliorate the concern that holding an individual liable for the amount of losses typically associated with corporate misconduct is too punitive. (For other means to address this concern, see here.) As we continue to reflect on and try to learn from the economic crisis of the past few years, I hope we consider alternatives to link more directly corporate misconduct and corporate accountability.

  February 5, 2010 at 8:09 am  Tags: Corporate Law, Current Events  Posted in: Uncategorized   Print This Post   6 Comments

So Young, So Cynical

posted by Michelle Harner

As I mentioned in a previous post, I teach (and really enjoy teaching) Legal Profession. In my prior post, I noted my sense that students resist ethics courses because they view themselves as moral, ethical people who will be moral, ethical lawyers. That trend has continued this semester, but I am also hearing more cynicism about the profession than in the past.

Now, it may be that I am teaching 1Ls this semester, as opposed to 3Ls who simply want to graduate and do not want to stir the pot. (And I have to say that I have a very thoughtful and engaged group of 1Ls.) It may be that law students are questioning their decision to enter the profession in different ways and on different levels than in the past because of the current environment. Indeed, given the amount of money these students invest in their legal education, they must cringe when they read the newspapers—or more likely the Internet—these days. (For recent stories regarding downsizing in the profession, see here, here and here.) Regardless of the reason, the sentiment is striking. I should note, however, that I am not surprised by it given the generally negative public perception of lawyers.

So what type of cynicism am I hearing? We recently were discussing what constitutes lawyer misconduct, a lawyer’s obligation to report the misconduct of colleagues and a lawyer’s obligation to disclose her own misconduct to the client. That last duty always gets them, and we typically discuss in detail the origins of this duty (see here, here and here) and the circumstances that might give rise to the duty basically to tell your client that you made a mistake. In several discussions with my students both in- and outside class, the common questions have been along the lines of: “Well Prof. Harner, this all sounds great in theory, but who actually reports misconduct in the real world? And why would you ever report your own misconduct?” These are very honest and sobering questions.

I do my best to instill in my students the importance of the self-reporting nature of the profession and the value (both personal and professional) to being an ethical, honest lawyer. We discuss the trust and integrity that underscore the lawyer-client relationship and what happens to legal process when that trust is breached. And I think they get all of that. But I also think they are sensitive to life in the real world, and the pressures they will be facing—assuming they can actually get jobs—as associates subject in many respects to the whims and behaviors of more senior lawyers and clients. As one of my students told me in discussing ABC’s new series, The Deep End (see also here), “You know Prof. Harner, the associates always find a happy resolution to ethical dilemmas on television, but I doubt it is really that easy in practice; being ethical and calling a colleague on her misconduct could end your career.”

I think my students are raising valid concerns; these certainly are not new concerns but perhaps they have renewed importance as students are more and more concerned about getting and then keeping jobs. I find that shock therapy helps drive the point home for some students, so I give them many examples of lawyers being disbarred and note the junior associate who now faces sanctions and discipline in connection with the Qualcomm discovery litigation (see here and here). And I hope that when they face that hard decision in practice, they will make the right one.

  February 3, 2010 at 5:50 pm  Tags: Current Events, Ethics  Posted in: Uncategorized   Print This Post   8 Comments

Conflicts and Competitive Advantage

posted by Michelle Harner

This week, Toyota announced a massive recall of some of its most popular models, including Highlander, Corolla, Venza, Matrix and Pontiac Vibe. Specifically, “Toyota has recalled 2.3 million vehicles for sticky accelerator pedals . . . and has shut down sales and production of eight models while it works on a fix.” (See here.) Notably, “[t]he Obama administration said it pressed Toyota to protect consumers who own vehicles under recall and to stop building new cars with the problem.” (See here.) Although I understand and appreciate the administration’s concern for consumer safety, I cannot help also seeing a glaring conflict of interest in the administration’s conduct.

As you might recall, the government owns stock in General Motors and Chrysler—key competitors of Toyota. And consider the following: “GM announced today it will offer interest-free loans and other incentives. In and of itself, this is no big deal, but GM is making the offer exclusively to Toyota owners who may now want to get rid of their vehicles because of the recall involving faulty gas pedals.”  (See here.)

GM’s decision might be good business; companies often seek to capitalize on a competitor’s misfortunes. And I suspect that the administration’s involvement in the Toyota recall was unrelated to GM’s business decision regarding the Toyota incentive plan. But it just does not look good, and it highlights the significant issues with the government intervening in and owning private businesses. (For a more detailed discussion of these issues, see here and here.)

Also, as a follow up on my prior post regarding the General Motors and Chrysler bankruptcies and the government’s decision to grant arbitration rights to dealers who are party to rejected franchise agreements, recent reports suggest that over 1,400 dealers are pursuing their arbitration rights. Chrysler also has agreed to participate in the arbitration program.

  January 29, 2010 at 7:31 am  Tags: Bankruptcy, Current Events  Posted in: Uncategorized   Print This Post   No Comments

Making Money in a Down Economy

posted by Michelle Harner

For the past few years, many businesses have struggled to meet payroll and keep the doors open. But such challenges are not bad news for everyone. At least one group of investors (a/k/a distressed debt investors) has found a way to capitalize on the financial troubles of businesses. In fact, recent reports (see here and here) suggest significant above-market returns for hedge funds that utilize a distressed debt investment strategy (e.g., Avenue Capital Group, Third Avenue Funds, Third Point Funds).

A distressed debt investor basically buys the debt of a troubled company and then flips the debt for a quick profit or seeks returns through a longer investment horizon. Investors that fall in the latter category may simply wait for the debt to be refinanced or cashed out, or they may seek to utilize the leverage associated with the debt instrument upon a default or potential default by the company. In fact, “activist” distressed debt investors may use their distressed debt holdings to influence management decisions (think of Carl Icahn’s letter to CIT bondholders) or gain control of the company through a debt-for-equity exchange or credit bid at an asset sale (think of Carl Icahn’s recent acquisition of Tropicana Entertainment and bid for Trump Entertainment).

The existence of an activist investor in a company’s debt holdings can swiftly change the dynamics of the company’s restructuring negotiations. These investors typically want to achieve their objective at the lowest cost (thereby maximizing their upside), which often conflicts with the objectives of other stakeholders. Conflict can lead to delay, expense, litigation and even liquidation. Many companies, such as Adelphia, Aleris, Foamex, Fairpoint, Lyondell and Tropicana Entertainment, have experienced this type of conflict firsthand.

That being said, hedge funds and private equity firms that typically invest in distressed debt may be a good (or the only) source of funding for troubled companies. And their investment objective (maximizing their upside) is understandable given their obligations to their own fund investors and, let’s be honest, the typical fund fee structure.  So the question then becomes who is or should be protecting the interests of other stakeholders to mitigate conflict and obtain a fair deal for the company? Is management, particularly in a distressed situation, up to the task? Even if it is, management typically does not learn about the presence of a distressed debt investor in the company’s capital structure until it is too late. Notably, this issue is beyond the scope of the proposed Hedge Fund Transparency Act of 2009 and the Financial Regulatory Reform: A New Foundation proposal submitted by the Group of 30. Moreover, proposed revisions to Bankruptcy Rule 2019 (requiring some disclosure of holdings) may help some companies and other stakeholders in the bankruptcy context, but again the information may come too late and only for bankrupt companies. And whether you focus on disclosure, representation or accountability in considering the creditor control issue, you certainly need to target more players than just hedge funds and private equity firms.

  January 27, 2010 at 2:08 pm  Tags: Bankruptcy, Corporate Law, Current Events  Posted in: Uncategorized   Print This Post   No Comments

Time’s Cover Jinx?

posted by Michelle Harner

Sports fans are probably familiar with Sports Illustrated’s cover jinx. As SI itself explains, “Millions of superstitious readers — and many athletes — believe that an appearance on Sports Illustrated’s cover is the kiss of death.” (The SI jinx timeline really is remarkable, see here.)

So, is the same type of jinx emerging with Time’s “Person of the Year” cover? Richard Nixon receives the honor (for a second time) in 1972, and the Watergate scandal breaks in 1973. Ronald Reagan, Bill Clinton and Barack Obama all receive the honor in the year they are elected President of the United States, and their approval ratings drop dramatically in the following, first year of their presidential terms. “You” receive the honor in 2006, and we all know what happens to the bank accounts of many of those honorees in 2007 and 2008. And now just a month after being named Time’s Person of the Year for 2009, Federal Reserve Chairman Ben Bernanke’s confirmation is in question. (See here and here.)

Admittedly, Chairman Bernanke is controversial. Some believe that he pulled the global economy back from the brink, sparing us from further devastation in another depression. Others believe that he leans too closely towards Wall Street and did not do enough to prevent the economic crisis. But what would a “no” vote at this time mean for the economy? Markets like certainty, and at least Chairman Bernanke is a known quantity, particularly when there is no known “Plan B.” In the end, I suspect that all of the political anxiety about the confirmation will fall into the category of being “much ado about nothing,” (see here) and the political rhetoric of the past week will simply be another example of politicians governing with an eye towards the next election, rather than the long-term interests of the country.

  January 24, 2010 at 8:25 am  Tags: Current Events  Posted in: Uncategorized   Print This Post   No Comments

Are Hedge Funds and Private Equity Firms Next?

posted by Michelle Harner

As widely reported, President Obama came out swinging yesterday against large financial institutions. Under the administration’s proposal, commercial banks no longer could invest in or sponsor hedge funds or private equity firms, and the banks would be subject to new leverage caps. This proposal is the most recent step by the administration to try to regulate risk. According to President Obama, “We simply cannot accept a system in which hedge funds or private equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could pose a conflict of interest.”  (Full text of speech here.)

As you might imagine, the financial sector is highly critical of the proposal (for example, see here) and some commentators are questioning whether it is feasible given the structure of firms like Goldman Sachs (for example, see here) and the global nature of the economy (and mixed reactions from the U.K. and Europe so far, see here and here). You also have to wonder what is next. Given Tuesday’s election results (for a discussion of resulting policy shifts, see here) and the reappearance of Paul Volcker on the scene, those aspects of the Group of 30 report, Financial Regulatory Reform:  A New Foundation, previously not pushed by the administration might be back on the table. Indeed, the administration previously downplayed the need to restrict the size or activities of large financial institutions:  “We have created them [i.e., large financial institutions], and we’re sort of past that point, and I think that in some sense, the genie’s out of the bottle and what we need to do is to manage them and to oversee them, as opposed to hark back to a time that we’re unlikely to ever come back to or want to come back to.” (Comments of Diana Farrell, Deputy Director of the National Economic Counsel.)

If that is the case, will we see a renewed focus on hedge funds and private equity firms? They were among the initial targets of public anger and Congressional inquiry, but little has been done with The Hedge Fund Transparency Act of 2009 or the more aggressive oversight proposed by the Group of 30 report. And will any of these efforts really mitigate financial risk in the market? Even if you believe that some government intervention is necessary, is the government really equipped to perform a meaningful oversight role?

  January 22, 2010 at 8:21 am  Tags: Current Events  Posted in: Current Events   Print This Post   2 Comments

The “It Will Never Happen to Me” Mentality

posted by Michelle Harner

We started our spring semester today at Maryland, and I am teaching one of my favorite courses, Legal Profession. Having faced ethical dilemmas in practice (and unfortunately seen very talented lawyers disciplined, disbarred and jailed), I believe that this course is extremely valuable. I suspect, however, that most of our students disagree with me, which is why they typically wait until the last semester of law school to take this required course. In fact, the very first time I taught Legal Profession, I asked my class of 75 3Ls to raise their hands if they would “elect” to take Legal Profession if it was not required for graduation. Only one student raised her hand; I promptly commented that she was perhaps the smartest woman in the room. Since that first year, more students have raised their hands, but I attribute at least part of that increase to a note in prior students’ outlines to “raise hand when Prof. Harner asks . . . .”

Why the resistance to learning, understanding and appreciating the ethical rules governing lawyers’ conduct? Some students have the ill-conceived notion that the study of ethics is boring. (I actually happen to think the topic, particularly the hard questions in the grey areas, is really interesting, controversial and timely; ever watch an episode of Boston Legal?) But for many students, at least based on my conversations, their lack of enthusiasm for the course stems from the simple belief that they are moral individuals who would never act unethically. It is the old “it will never happen to me” mentality.

Unfortunately, I think individuals, including lawyers and business executives, fall prey to this mentality far too frequently. (For an interesting discussion of similar psychological traps, see here and here.) For example, a lawyer may be a moral individual but the pressure of the practice—client demands, senior partner demands, billables, family obligations, etc.—and even good old human greed can blur the line between right and wrong. Likewise, not all executives who get caught up in corporate scandals or pursue excessive risk are bad people; rather, these individuals often get trapped by the same pressures as lawyers. And the consequences can be devastating for the individual and those around her.

I do not know how we correct this mentality or if we can change this aspect of human nature. For my part, I try sensitize my students to the issue and help them decide what kind of person and lawyer they want to be before they enter the profession. I think the use of peer reporting and whistleblower provisions may help curb some of these human tendencies (in the lawyer context, consider Model Rules of Professional Conduct 8.3 and 1.13), but we need to stay focused on the human side of the problem as we continue to draft and amend rules and regulations to govern lawyers, business executives and others. (This side of the corporate risk management problem was thoughtfully raised in a comment to one of my prior posts. See here.) It is a difficult issue, but one worth tackling.

  January 19, 2010 at 9:15 am  Tags: Corporate Law, Legal Ethics  Posted in: Corporate Law, Legal Ethics   Print This Post   2 Comments

Risky Business

posted by Michelle Harner

Not surprisingly, fingers are pointing in Washington. For example, in connection with the proposed bank responsibility tax, bank executives argue that they should not have to pay for the bailout of the auto industry, and the administration counters that “major financial institutions were both a significant cause of the crisis and major beneficiaries of the government’s rescue efforts and should thus bear the brunt of the cost.” (For recent blogs on the tax, see here.) Likewise, in their testimony before the Financial Crisis Inquiry Commission, bank executives admitted making some mistakes, but largely blamed other factors for the economic crisis. “In retrospect, many firms were too highly leveraged, took on too much risk and did not have sufficient resources to manage those risks effectively in a rapidly changing environment.” (Quote from the Chairman of Morgan Stanley, John Mack.)

Risk management is a frequently-cited cause of the economic crisis. Commentators and government officials have emphasized the failure of risk management practices in the period leading up to the crisis. For example, Chairman Bernanke stated: “Among other things, our analysis reaffirms that capital adequacy, effective liquidity planning, and strong risk management are essential for safe and sound banking; the crisis revealed serious deficiencies on the part of some financial institutions in one or more of the areas.” Risk management failures alone obviously did not cause the crisis, but the crisis certainly highlighted weaknesses in firms’ risk management practices. I think this focus on risk management is a welcome wake-up call not only for financial institutions, but also corporate America generally.

Part of my enthusiasm for risk management relates to a developing risk management technique called “enterprise risk management” (ERM). ERM is a holistic approach to risk management, integrating risk management throughout the firm and encouraging firms to create a “risk culture.” (For a thorough discussion of ERM basics, see here; for a discussion of ERM failures in the context of the economic crisis, see here.) Many proponents of ERM also encourage more board involvement in setting a firm’s risk appetite and designing, implementing and monitoring the firm’s overall risk management system. (For my recent article on ERM, see here.)

Now, I do not mean to suggest that ERM will solve all of a firm’s problems or prevent the next economic downturn. It will not. I do believe, however, that an effective ERM system can strengthen a firm’s internal governance and help the firm and stakeholders better monitor and manage risk. And I do think the board has an important role to play in ERM. Among other things, the board can help create a risk culture and retain executives who buy into that culture and will be effective risk managers on a day-to-day basis.

That being said, I think convincing firms to adopt meaningful ERM will be challenging. What are the consequences if they don’t? The Delaware Chancery Court dismissed a claim against Citigroup basically alleging ineffective risk management in connection with the crisis. The bank executives generally all testified at Wednesday’s hearing that they had effective risk management; the problem was risk management at other firms. (Although notably, in its written statement, Morgan Stanley did indicate that it worked to strengthen its risk management practices in 2007 and 2008. For all of the testimony from the hearings, see here.) And the SEC’s new rules only mandate disclosure about risk management practices.

Perhaps with more discussion and evidence on the effectiveness of ERM, firms will voluntarily implement more meaningful risk management practices. (In particular, I think studies linking ERM to improved productivity are key; profits talks.) Shareholders and creditors also could have an important voice here. So, hopefully the current focus on ERM will evolve into an ongoing best-practices dialogue and not fade with memories of the crisis.

  January 15, 2010 at 10:52 am   Posted in: Corporate Law, Current Events   Print This Post   2 Comments

The Semantics of the Crisis

posted by Michelle Harner

Most Americans have learned several new terms during the economic crisis. Indeed, semantics have played a large role in trying to ease the public’s fears and manage expectations. First we were told that America (or most of America) was not in a recession. Then we were (but we were not in a depression). Next we were told that the recession ended in May 2009, then in July 2009 and then in September 2009, etc. (although, for the record, the recession is not really over until NBER says it is). Nevertheless, we were warned that the recovery would be slow and painful. In fact, Americans were told to brace for a “sluggish recovery,” a “jobless recovery” and perhaps even a “double dip recession.”

The most recent semantics have us discussing a “second stimulus” versus “targeted actions.” Regardless of what we call it, the proposed solution for our sluggish recovery seems to be more government spending. But is that really what we need? In 2009, individuals filed for bankruptcy because they lost their jobs, experienced a reduction in salary or were trying to save their homes; companies filed for bankruptcy because their sales were down (people simply are not spending money) and access to capital was limited. Notably, consumer and business bankruptcy filings surged by 32% in 2009, with approximately 1.44 million filings. More spending on infrastructure will not fix these problems. We need to focus less on semantics and more on substance; not an easy feat generally but perhaps even more difficult in a midterm election year.

  January 13, 2010 at 5:10 am   Posted in: Uncategorized   Print This Post   4 Comments

The Unintended Consequences of Good Intentions

posted by Michelle Harner

The chapter 11 bankruptcy cases of Chrysler and General Motors received a great deal of press coverage in 2009. (For an excellent and concise summary of these chapter 11 cases, see here.) Although both cases were extremely quick, they were very painful for many people. For example, Chrysler and General Motors collectively terminated their relationships with almost 2,000 franchisees (i.e., local auto dealers), leaving these dealerships with little ability to continue their business operations. For many franchisees, their dealerships were their livelihoods.

Now you may ask, “How can this happen?” You may even agree with some of the dealers and observers that it is “un-American.” As counterintuitive as it may seem, however, this type of contract termination is very common and completely permissible under U.S. bankruptcy laws. When a company files for chapter 11 protection, it receives the right to evaluate its executory contracts (including franchise agreements) and decide whether to keep the contract, assign it to another party or reject it. The non-debtor party to the contract can object to, and the Bankruptcy Court must approve, the debtor’s decision. The non-debtor party also can assert a bankruptcy damages claim if the contract is rejected.

The treatment of franchise agreements and the rights of franchisees are common issues in franchisor chapter 11 cases. Nevertheless, the Chrysler and General Motors cases are different because, among other things, state legislatures and Congress have intervened on behalf of franchisees. At least four states have enacted or are contemplating legislation trying to preserve some of the rights of franchisees under state law, and Congress recently passed legislation (see here section 747) giving franchisees the right to seek binding arbitration as to whether or not their franchise agreements should be terminated. This legislation follows several decisions by the Bankruptcy Court not only approving the rejection of these agreements but, in the Chrysler case, also enjoining the franchisees from pursuing their state law rights.

Now, I have no doubt that legislators are trying to respond to the public outrage over the treatment of the Chrysler and General Motors dealers. This response is understandable from a purely human, as well as political perspective. But is it good policy? Other than the fact that the U.S. government owns part of these companies, is there anything that distinguishes the economic harm suffered by the dealers from that suffered by every other claimant in these and other chapter 11 cases? The federal legislation basically gives this one class of claimants in these two particular chapter 11 cases the right to challenge the decisions of the Bankruptcy Court outside of the bankruptcy process and subject to a different standard of review. (In bankruptcy, the debtor’s decision to reject a contract is reviewed under a business judgment standard. Under the federal legislation, the arbitrator is to consider and balance the economic interests of the debtor, the dealer and the public at large.) What about the state legislation purporting to preserve not only the franchisees’ state law rights but also to foreclose the franchisors’ ability to grant new franchises in the jurisdiction; should states be allowed to legislate around the results of a federal bankruptcy case (and what about federal pre-emption issues; see, e.g., last paragraph here)? And will any of this legislation help the majority of dealers; do they have the resources to keep their dealerships open and participate in the arbitration process? If not, is the potential cost to the federal bankruptcy system really worth the benefits? I do not necessarily have the answers, but I think these are important questions to consider.

  January 11, 2010 at 9:23 am   Posted in: Uncategorized   Print This Post   8 Comments

Bonuses are Back

posted by Michelle Harner

I of course was not surprised this morning to wake up to the news that some of the large financial institutions are preparing to grant large bonuses for 2009. Specifically, “Goldman Sachs is expected to pay its employees an average of about $595,000 apiece for 2009, one of the most profitable years in its 141-year history. Workers in the investment bank of JP Morgan Chase stand to collect about $463,000 on average.” I expect that we will see more bonus announcements in the days to come. It also will be interesting to see if the firms couch these bonuses in “all-stock” deals to try to mitigate public outrage or if they will distribute all-cash or mixed packages (likely the later). I also wonder whether the increasing use of “claw-back” provisions will really change the dynamics of compensation practices or, like Goldman’s use of all-stock bonuses last year, is most likely just packaging to try to appease the public and government officials. In either case, 2010 is certain to be another interesting year on the executive compensation front. (For my recap of the 2009 executive compensation debate, see here.)

  January 10, 2010 at 6:47 am   Posted in: Uncategorized   Print This Post   3 Comments

Can (and Should) We Regulate Executive Pay?

posted by Michelle Harner

Although hedge funds and derivatives were the initial targets of public anger over the recent economic crisis, executive compensation emerged in 2009 as the primary target—at least for politicians, regulators and the media. This shift in focus was caused, in part, by the realization that numerous institutions receiving federal assistance under TARP paid or planned to pay their top executives handsome bonuses at the end of 2008. Specifically, in December 2008, the media reported that “[t]he 116 banks . . . receiving billions in taxpayer-provided bailout money this year actually paid out $1.6 billion in compensation and benefits to their top executives last year – even though the results at some of these institutions were so poor that they would soon have to turn to Washington for a government-engineered rescue.” The response from Washington was quick and clear: rein in executive pay.

Washington kept its promise. In February 2009, Congress imposed new restrictions on executive compensation at institutions receiving TARP funds, and in October 2009, the administration actually reduced compensation packages at several of those institutions. Simultaneously, politicians called for greater regulation of executive pay, both in the financial sector and corporate America generally. The favored means of regulation, particularly for firms outside of the financial sector, is shareholder “say on pay,” which gives a company’s shareholders a typically non-binding (i.e., advisory) vote on the company’s compensation practices. (For an interesting essay on why “say on pay” alone is not a satisfactory solution for financial institutions, see Lucian Bebchuk’s article in the Financial Times.) In fact, this type of provision is included in The Wall Street Reform and Consumer Protection Act of 2009, which the House of Representatives passed in December 2009.

The reaction to “say on pay” and other types of executive compensation regulation is mixed. I think most Americans believe that executive compensation is excessive, particularly when compared to compensation received by other employees at those same companies. (For a fun discussion of executive pay, see here.)  Whether or not commentators agree with that basic sentiment, they diverge on whether executive compensation is a problem and, if so, what is a workable solution. For example, Stephen Bainbridge suggests that no regulation of executive compensation is necessary. Other commentators express concern regarding the effectiveness of the “say on pay” approach (see, e.g., here). And reports suggest that CEO’s oppose the measure and institutional investors (typically a company’s largest shareholders) are indifferent. As Bernard Black noted in a recent article, “We just haven’t seen a huge amount of effort being put out by institutional shareholders to affect compensation levels. . . . Whether it’s because they don’t mind the pay practices or because the money managers are making millions themselves, you don’t see them jumping up and down.”

So where does that leave us? I think the recent disclosure regulations adopted by the SEC are a step in the right direction. Although I appreciate and understand the additional burdens placed on reporting companies by the regulations, I think more information and transparency are essential to mitigating the effects of future economic downturns. (As I will discuss in a future post, I particularly like the disclosures relating to risk management practices in that context.) I am skeptical, however, regarding whether “say on pay” or similar regulations will really rein in executive pay or change corporate compensation practices for the long-term. First, I suspect that public outrage about and attention to executive pay will fade quickly (at least until the next wave of corporate scandals); consequently, corporations will likely return to their old ways just as quickly. Second, I am not convinced that advisory shareholder votes will really persuade corporate boards to completely overhaul compensation practices. America’s corporate culture generally does not seem to respond well to “shaming” techniques or to place much value on fostering long-term relationships. (For a more positive take on shaming, see here and here.) Rather, the American “winner-take-all” mentality seems to stifle consensus-building in corporate governance and business practices generally. (For a brief discussion of cultural differences in the executive compensation context, see here.) Accordingly, I hope that corporations continue to explore alternative ways to align executive incentives with the long-term value of firms, which I believe is in everyone’s best interests.

  January 6, 2010 at 8:10 am   Posted in: Uncategorized   Print This Post   2 Comments

What Will the New Year Bring?

posted by Michelle Harner

First, two preliminary matters: I want to thank Danielle Citron and the other authors at Concurring Opinions for inviting me to guest blog this month, and I want to wish everyone a very Happy New Year. Second, as Danielle mentioned in her much-too-kind introduction, my scholarship and teaching focus on business law, insolvency law and ethics, and that background informs much of my commentary.

I am starting this new year as I typically do, trying to figure out where the past 12 months went, what happened during that time and what the future might hold. I have always undertaken this exercise to some extent on a personal level, but since changing careers a few years back, I also reflect on matters relating to my research and teaching interests. (Prior to that time, I was in private practice, and unfortunately you cannot bill for time spent on professional reflection; although I think the profession certainly could benefit from the exercise.) Consequently, I thought I would use my time with Concurring Opinions to consider some of the key issues raised in the corporate governance and insolvency contexts during 2009 and what new surprises might be in store for us in 2010.

Much of what transpired in my legal fields of interest during 2009 was connected in some way to the global economic crisis dating back to 2007. (For an interesting exploration of the crisis, visit PBS Frontline: Inside the Meltdown.) Politicians and commentators called for government reform in executive compensation and financial institutions and securities regulations. The administration and Congress bailed out not only financial institutions but also two of the big three U.S. automakers by orchestrating and essentially overseeing the General Motors and Chrysler chapter 11 bankruptcy cases. The number of home foreclosures skyrocketed, as did unemployment and the national debt. And although many analysts have declared the recession over, most of these “trailing” issues remain on the table and unresolved as we start 2010.

Like many observers, I am intrigued by and keenly interested in the events of the past three years. I also am somewhat skeptical (perhaps “concerned” is a better word) about whether we will really learn any meaningful, long-lasting lessons from the experience. As Lawrence Cunningham recently noted in an insightful post, “This century’s inauspicious beginnings, marred by terrorist attacks on Sept. 11, 2001 and 2001-02’s corporate ruination at Enron and a half-dozen likewise fraudulent industrial companies, are eerily echoed by this decade’s ill-fated close, marred by the terrorist airplane assault on Christmas Day 2009 and ruination at AIG, Bear Stearns, Citicorp and a score of likewise irresponsible financial companies in 2008-09.” I hope to explore several of these issues with you in my upcoming posts.

  January 4, 2010 at 7:38 am   Posted in: Uncategorized   Print This Post   2 Comments

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