June 05, 2008
The W$J does a nice story on the eight-year transition of power from Bill Gates to Steve Ballmer, which will culminate this summer in Gates vacating the premises to focus on philanthropy. For my taste, the most interesting tidbit from the story:
One concern for Mr. Ballmer was how to preserve Mr. Gates's role of technology visionary inside the company. Looking for guidance, Mr. Ballmer says he cracked open a book from his college years by Max Weber, the German sociologist, on how organizations handle the disappearance of "charismatic leaders."
On March 28, 2006, Mr. Ballmer described the book to Microsoft's board at a retreat in the San Juan Islands near Seattle, Microsoft executives say. One way for a firm to retain the charisma of a departing leader, Mr. Weber wrote some 100 years ago, is for the leader to name his own replacement.
Mr. Gates did just that. In June 2006, he named his own two successors as tech czars: Craig Mundie, one of Mr. Gates's chief technical advisers, and [Ray] Ozzie, the [founder of Groove Networks Inc.]
According to the story, Bill Gates has "stayed largely on the sidelines" in the Yahoo negotiations. If Yahoo's founders had followed his example, I suspect they wouldn't find themselves in such a mess right now.
McDonald's continues to supply interesting franchising disputes. The most recent revolves around the Dollar Menu: though the cost of food is rising, prices on the Dollar Menu remain fixed. McDonald's and its franchisees view this problem through different lenses.
McDonald's receives royalties based on sales and, thus, has an incentive to increase sales, even reduced-margin or, in some instances, negative-margin sales. On the other hand, franchisees profit only when revenues exceed expenses. The problem with the Dollar Menu is that franchisees don't make money selling a Double Cheeseburger for a dollar.
Franchisees can opt out of the Dollar Menu, but they still are required to pay into a collective advertising fund, so all of those ads promoting the Dollar Menu (reportedly $100 million of McDonald's $810 million measured media buy) are wasted on a non-participating franchisee. Or worse, if customers are upset about not being able to purchase food on the Dollar Menu.
McDonald's is experimenting with Double Cheeseburgers for $1.09 in Georgia and Mississippi, but that sort of blows away the notion of a Dollar Menu. For a brief report on the situation, see Marketplace.
This story reminded me of the old McDonald's television commercial stating that you could get a full meal (burger, fries, drink) and still get change back from your dollar. Gas was about $.25/gallon at the time, too. Anyway, I looked for that old ad on You Tube and couldn't find it, but I did stumble across this very early version of Ronald McDonald ... Yikes!
June 04, 2008
I will not try to summarize the lengthy posts by Larry Ribstein and Bill Henderson, but if you are interested in law school governance, you won't want to miss this debate. The latest is from Larry, and he links to Bill, who links to further posts in the series, including this post by Brian Leiter that started the whole thing.
Permalink | Law Schools & Lawyering | Comments (0) | TrackBack (0)
Aren't Jack and Suzi Welch pretty rare? He - well, you know who he is. She - the former editor of the Harvard Business Review. They - an active consulting practice supported by columns occasionally opining on the wisdom of the aged. All told, it's a two-headed business guru, and though I confess plenty of unfamiliarity with the field, isn't that pretty rare? Most paired business gurus consist of a CEO and a ghost, right? We're not too sentimental at the Glom, but this week we like happy couples, and so we're willing to point you to those who posit that age is nothing but a number.
Permalink | Businesses of Note | Comments (0) | TrackBack (0)
Two economists at the Kauffman Foundation, Robert Litan and Tim Kane, have started Growthology, a new blog on entrepreneurship and economic growth. Gotta love the name. The Kauffman Foundation announcement is here.
Permalink | Entrepreneurship Education, Globalization & Trade, Law & Entrepreneurship, Social Entrepreneurship | Comments (0) | TrackBack (0)
June 03, 2008
The Canadian Law and Economics Association 2008 annual meeting will be September 26-27 in Toronto (as always). The submission deadline for abstracts/papers has been extended to June 28th (submission through SSRN).
Some interesting findings on CEO hirings and firings from a recent Economist piece:
1. Importance of finance. One-fifth of US CEOs in 2005 were formerly CFOs, almost twice the percentage from a decade prior. Increased focus on financial reporting and SOX compliance has likely augmented the CFO's overall importance within companies.
2. Build or buy? Both in Europe and the US (among the FTSEurofirst 300 and the S&P 500), "lifers" make it to the executive suite more quickly on average than "hoppers," defined as those who jump through 4 or more companies. Lifers make it in 22 (US) or 24 (EU) years on average, while hoppers take at least 26 years. Information asymmetry probably explains this difference.
3. Women at the top. Eleven percent of US CEOs were women in 2001. In the early 1980s, by contrast, there were none.
4. Time to the top. The average climb to the top took 28 years in 1980. By 2001, it took only 24. The average CEO had fewer jobs on the way up (five instead of six) and spent less time at each intermediate job (only four years) than before.
5. Naked capitalism. In a set of surprising (to me) results, EU capitalism appears to be a bit more rough-and-tumble than in the US, at least as regards CEO tenure. EU CEOs have much shorter tenures than in the US and have a tougher time staying there. They're also much less likely to be lifers in Europe (18% versus 26% in the US). Average CEO tenure over the past decade was just over 9 years in the US, but under 7 years in Europe. European CEO firings accounted for 37% of turnover, but only 27% in the US. European CEOs are also younger on average than in the US--54 versus 56 years of age.
Permalink | Business Organizations, Comparative Law, Corporate Governance, Finance, Globalization & Trade | Comments (2) | TrackBack (0)
I want to thank David and Gordon for asking me to be a guest blogger for the next few weeks. I look forward to getting to know the Conglomerate community.
My post for this week could easily have been entitled "How the Shipping Container Changed the World." You probably have never given much thought to shipping containers, but you really should. Those narrow, windowless 40 x 8 feet steel structures, ubiquitous in port cities, revolutionized business. In fact, it would not be too much of a stretch to say that without shipping containers globalization would not have been possible. How? Before Macolm McLean invented the shipping container in the 1950s, goods were individually and manually loaded onto a ship piece by piece in "break bulk," an expensive process that often took days to complete and subjected goods to theft or breakage. Worse yet, when they arrived at their destination port, the process had to begin all over again. The shipping container allowed goods to be packed at the place of production; later, the same container would be transported by rail or truck to a seaport where it would be hoisted by crane onto a ship and delivered to the ultimate consumer.
McLean’s invention did for maritime shipping what Henry Ford’s assembly line did for the automobile industry—making the system faster, more efficient and cost effective. Businesses could now cheaply export (and import) computers, bicycles, clothing, toys, and all manner of goods. And that, in part, led to the globalization explosion. Today, over 90 % of world trade in goods moves by container, but that’s not all it brings.
Only one month after the September 11 attacks, the shipping container was transformed from a link in the trade supply chain to a possible means of exporting terrorism. On October 26, 2001, Italian officials intercepted Rizik Amid Farid, an Egyptian national and reputed Al-Qaeda member, in a container bound for Canada. Farid carried with him a Canadian passport, along with several airport security passes, and an aircraft mechanic certificate that allowed him entry into sensitive areas in New York’s John F. Kennedy airport, as well as Newark International, Los Angeles International and Chicago-O’Hare. Unfortunately, this was not the first high-profile example of people using shipping containers to advance potentially dangerous ends. In 2004, Abdul Qadeer Khan, the father of Pakistan’s atomic bomb, confessed to smuggling nuclear equipment and technology to Libya, Iran and North Korea in a smuggling network that spanned 15 years. Khan purportedly shipped all of his nuclear materials inside containers.
If a shipping container could house an Al Qaeda operative and nuclear paraphernalia, could it also hold a "dirty bomb"? Could a terrorist stow a nuclear device in a container, ship it to one of the nation’s busiest ports, and then detonate that device by remote control upon arrival? The "nuke-in-a-box" scenario, which would have seemed far-fetched before September 11, now drives U.S. container security policy.
In 2002, U.S. Customs adopted The Container Security Initiative ("CSI"), a program designed to "extend [the United States'] zone of security outward," by stationing U.S. Customs agents in ports all over the world (with consent of the host) where they can work with officials to identify suspect containers and inspect them before they ever arrive on U.S. shores. CSI has been called a "hidden revolution," because it has quietly but radically altered the way international maritime trade is conducted. In the process, it has transformed the world trade system creating winners and losers.
Next week, I want to explore who gains and who loses under the new CSI system. For a more detailed version of this post (and to preview next week’s arguments!) please visit my website.
Cross posted at www.intlawgrrls.blogspot.com
Permalink | Economic Development | Comments (3) | TrackBack (0)
June 02, 2008
Even as Yahoo and Microsoft try to hammer out a deal over a round of golf and Carl Icahn clears the way to acquire more shares, the Yahoo shareholders litigation plows forward in Delaware. Chancellor Chandler unsealed the plaintiffs' amended complaint this morning, giving us a lot more detail about the severance plan that we have had to date. (You can find all of the litigation documents on the website of BLB&G.) This is suddenly a lot more interesting case than it was two weeks ago.
At that time, I ventured the following opinion about the plaintiffs' case: "The claims raised in the shareholder litigation are not viable." In response to Steve Bainbridge's comment and post on the possibility of Unocal review based on Yahoo's "threatened" deal with Google, I noted: "The short response to your comment is that there is no Google maneuver, yet. The two sides have been talking, but that seems pretty far from a 'defensive action' for purposes of Unocal." I continued, "Other than the severance agreements with Yahoo officers (perhaps), I don't see anything that Yahoo has done that looks like a defensive action."
Well, the plaintiffs are still arguing about the threatened Google transaction, and I still think that argument is a loser, but the real traction comes from the claims about Yahoo's severance plan. This is something I have never seen before, and I don't think we have a clear answer from the courts on this issue. The new complaint makes the plan look like a defensive measure, and this will trigger Unocal review. But the plan does not seem to be either preclusive or coercive, as defined in Unitrin, which leaves the court to decide whether it falls within the "range of reasonableness." Plaintiffs do not have a great batting average against the "range of reasonableness," but this plan is pushing the envelope.
The first thing you should know about the plan is that it covers 100% of Yahoo's employees. When this proposal was initially disclosed to Tim Sparks, president of Compensia, an outside compensation firm hired by Yahoo, he responded via email, "That's nuts." Uh, yeah.
The second thing to notice is the potential costs of the plan. Of course, the fact that it covers all of Yahoo's employees is still a key fact, but also note two things: (1) the size of the benefits, and (2) the breadth of the trigger. The benefits include immediate 100% acceleration of all outstanding equity rights as well as a cash payment, and those benefits are triggered not only by involuntary termination of employment, but also by voluntary termination "for good reason." According to the plan, Yahoo employees have good reason to terminate their employment whenever they are subject to a "substantial adverse alteration" in their duties or responsibilities. The plaintiffs argue that the court should consider the costs of the plan at 100% reduction in force, which seems a bit much, but that would place the costs north of $2 billion. Even at lower amounts, the plan would cost hundreds of millions.
Defensive? Yes.
Expensive? Yes.
Preclusive or coercive? No.
Outside the range of reasonableness? Hmm. This is at least worth talking about. In the mid-1990s, under Unitrin, this doesn't look like a very close question. Remember this paragraph from Unitrin:
The ratio decidendi for the "range of reasonableness" standard is a need of the board of directors for latitude in discharging its fiduciary duties to the corporation and its shareholders when defending against perceived threats. The concomitant requirement is for judicial restraint. Consequently, if the board of directors' defensive response is not draconian (preclusive or coercive) and is within a "range of reasonableness," a court must not substitute its judgment for the board's.
That sounds like business-judgment-rule talk. And the modern cases maintain a fair amount of that deference when discussing the standard. But they also talk about whether the board adequately considered alternatives and whether the ultimate decision comports with similar decisions made by other boards. In this case, the Yahoo board approved a plan that is at least on the "very aggressive" end of the spectrum, and it wouldn't shock me if a court found it to be unreasonable. Even though I think Chancellor Chandler is likely to defer to the board in this case, if he ever gets to the point of deciding it on the merits.
Permalink | Corporate Governance, Corporate Law, Delaware | Comments (1) | TrackBack (0)
June 01, 2008
Complying with those regulations in the war on terror designed to cut of financing to the bad guys has proved to be really quite burdensome for both the banks who have to investigate all of their customers and the Treasury Department, which now receives millions of forms a year detailing possibly - albeit not probably - suspicious transactions. The new workload hasn't generally deterred Treasury, which has embraced its rather implausible repurposing as a front line defense against the terrorists. Elena Baylis and I wrote a piece about the problems with this regulatory innovation here.
But Treasury just lost a round in its terrorism efforts. A court reviewing a denial of reimbursement to a contracting party with an alleged bad guy recently decided that Treasury's OFAC agency had failed to explain what it was doing when it seized money, had failed to distinguish between the statutory authority given it to effect those seizures, and that, moreover, it wasn't doing a great job of explaining what it was doing with the money it sequestered and why it had the legal authority to do anything with it: "any explanation by OFAC that protecting the rights of any potential and unknown creditors has any connection to the aims of the Kingpin act is so implausible that it could not be ascribed to a difference in view or a product of agency expertise." (unavailable online, but check Case No.: 07-CIV-20398 in the Southern District of Florida if you are interested)
Ouch. Given that the explanation OFAC did submit in the case came from its smart and wise (and former co-worker of your author) director, I'd expect an appeal. And bemoan the customary difficulties in obtaining published federal opinions reversing agency conduct in the meantime.
HT: Steve Vladeck, tipping me from the land of rain and smoked herring
Permalink | Administrative Law | Comments (0) | TrackBack (0)
For the next couple of weeks, we're delighted to welcome Marjorie Florestal to the Glom. She is an international economic law expert, a trade scholar who has - rather uncommonly - done a lot of implementing of trade law, a professor at McGeorge, and an experienced blogger, who writes for the always interesting IntLawGrrls. Her experiences there will assuredly inform her experiences here.
For those readers interested in Marjorie's work, and in the history of trade law, consider this interesting take on the importance of the 1884 Berlin Conference that divided up the colonial world.
May 30, 2008
Is something fishy is going on with dollar Libor (London interbank offered rate)? Libor is supposed to approximate the average rate that banks lend unsecured funds to one another. To calculate the dollar Libor rate, the British Bankers’ Association (the BBA), has a panel of 16 banks report their borrowing costs. Some believe that these banks may be submitting artificially low borrowing costs in order to avoid appearing cash strapped. Amid this criticism, the BBA announced today that it “will be strengthening the oversight of BBA Libor. The details will be published in due course.” The BBA, however, did not change the make-up of the 16 bank panel.
Does this mean legal trouble for the many, many contracts that rely on Libor as a financial benchmark? Well for past payments or obligations, it probably will have little effect. In my experience, most contracts rely on Libor as quoted by a particular source, at a particular time. For example:
"LIBOR Rate" means … the rate offered from time to time for U.S. Dollar deposits for the Interest Period selected, as quoted by Telerate News Services as of 11:00 A.M. London setting time … on the first Eurodollar business day of the Interest Period, provided, that if two or more of such offered rates appear on Telerate …, the "LIBOR Rate" shall be the highest of the two quoted.
To me this suggests that the parties decided that, rather than debate about what rate or rate quote might best reflect current conditions, they would instead rely on a particular source’s quote even if that quote might later turn out to be “wrong.” Of course, those hurt by low Libor rates are likely to put pressure on the BBA to ensure that going forward banks are accurately reporting their borrowing cost. Those hurt may even turn to tort law seeking redress from BBA or banks on the panel. More long-term, if people lose confidence in the reliability of Libor, future contracts will simply rely on another benchmark.
May 29, 2008
This afternoon, I attended an excellent session at the Law & Society Annual Meeting entitled "Integration Through Law in the European Union." The panelists are members of this discussion group at the European University Institute. My former Wisconsin colleague, Dave Trubek, noted in response to the presentations that all of the panelists seemed to agree on one point: something unique is happening with EU law (or, in Dave's words, "the EU is a different animal, not like anything else we have ever studied"), and the challenge is to figure it out.
That seems right to me, and it's the reason I have long been drawn to the subject. (Though I have never published on EU law, that will finally change next year, as I am helping the BYU Law Review to organize a symposium on legal origins.) When I was in law school in the late 1980s, I took several classes on the European Community at Chicago, and we had a very naive view of integration. The word "harmonization" is used in Europe, but what does that mean? That all national laws would be identical, marching in lockstep with directives from Brussels? That didn't happen in the late 1980s, and it certainly isn't happening now.
What are the implications for corporate law? More about that in some future posts ...
Judge Leslie Tchaikovsky, a bankruptcy judge in the Northern District of California, has issued a whopper of an opinion holding that a mortgage lender on a stated income loan is not entitled to rely on the "stated" income in the loan application for purposes of bankruptcy discharge.
A stated income loan, of course, is a loan where the borrower "states" her income without also being required to document the amount of said income--e.g., cough up pay stubs. Whether the lender could "reasonably rely" on the stated income is critical to the question whether a debtor may discharge the debt in bankruptcy. Section 523(a)(2) of the bankruptcy code precludes the discharge of certain debts procured by fraud. In this case, the lender would have had to reasonably rely on the false statement of income in the debtors' loan application, in order for the debt to be deemed not dischargeable.
The mortgage loan at issue was an equity line that was underwater and rendered unsecured after the first mortgage lender foreclosed on the debtors' house. Judge T. apparently did not believe the debtors' protestations that they unwittingly signed the false loan app. However, the lender didn't get any sympathy either. Not only did the judge question the reasonable reliance of the individual lender, but she questioned whether industry guidelines on stated income loans were objectively reasonable. The minimal verification for stated income loans suggests that they're essential asset-based loans--loans made in reliance only on the value of the collateral!
Now, this seems intuitively right to me. Personally, I never liked the term "liar loan." I know perfectly respectable borrowers and lenders who engage in these stated income deals--especially for purchase money mortgages--with all parties understanding that it's really the big downpayment that enables the deal. When it gets to equity lines, though, it starts to look more speculative. Especially in the actual case, the debtors' last credit extension from the lender was a $50,000 extension on their HELOC--from $200K to $250K--six months after the HELOC was first made. This extension relied on an appraisal that showed a 9% increase in the value of the house over six months. Not that appreciation like that is impossible in some parts of NorCal, but it seems pretty aggressive nonetheless, especially for a no-doc loan.
Big win for borrowers--even undeserving ones, as the case illustrates. As if things weren't ugly enough in the mortgage and residential MBS markets. OTOH, separating deserving from undeserving borrowers may be cost-prohibitive. Even good debtors are likely to have trouble footing the bill for nondischargeability litigation, so that as a practical matter, many good but wealth constrained debtors would end up settling on disadvantageous terms. As between informed banks and the mixed pool of deserving and undeserving debtors--depending on your assumptions about the mix--it's probably better to put the costs on the lenders, both on fairness and efficiency grounds.
HT to Tanta at CalculatedRISK. As far as I can tell, the decision has not yet been published. But keep an eye out: In re Hill (City National Bank v. Hill), United States Bankruptcy Court, Northern District of California, Case No. A.P. 07-4106 (May 28, 2008).
Permalink | Bankruptcy, Securities Trading & Regulation | Comments (8) | TrackBack (0)
