Just saw this.  Here's hoping her early detection foreshadows a healthy recovery.

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As some of you know, I was on the University of Illinois Dean Search committee from August 2007 until December 2008.  (I assume that I'm not on it anymore -- our wonderful new dean, Bruce Smith, was announced in early January.)  While most of what I learned is not bloggable, I do have to say that the (very time-consuming) experience was invaluable.  I learned an awful lot about my home school, other schools, and the state of legal education in general.  Being in an 18-month debate about the future of law schools tends to hone one's knowledge and opinion.  In fact, in addition to sitting/former deans and associate deans, past members of these types of committees seem to know more about how law schools operate than anyone.

Relatedly, we're hearing a lot about how the demand for law school deans may be higher than the supply of talented candidates.  I will say that the pool of dean candidates out there is shallow, and the number of qualified candidates is fairly small within that pool.  Here is a recent National Law Journal article on this phenomenon, tying it to the economy.  Well, this may be true, but the pool was just as shallow in the summer of 2007 when the economic outlook was not as bleak.  So, here in a nutshell are some of the take-away lessons from my dean search stint:

more ...

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Yes, says Joe Weisenthal, along with some experts.  I'm not so sure, though Vic's possible workarounds suggest that, as with taxes, it's more possible to avoid putatively tough, but possibly only symbolic, government rules than you'd think.  First, the good news for senior executives: it's not a retroactive freeze, restricted stock options aren't covered by the cap, and most bailed out firms can avoid caps by getting shareholder approval to do so.

However, the "guidelines" we've seen so far (and maybe Treasury has a more formal document out there, but it's not up on the web yet) provide:

Some people think that the term "senior executive" only applies to the CEO and not star traders.  But I'm not so sure.  The question is whether star traders, many of whom carry the job title "vice president," or "head of global derivatives," are "executives" or not.  "Senior executive" is defined by the statute by compensation, not position:

So I'm not sure that these guidelines might not have at least a little bite, at least with regard to the second $350 billion of TARP money, in that they'll require embarassing say on pay procedures ... or one of Vic's workarounds.

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The guidelines on executive pay will present an interesting drafting exercise for the lawyers at Treasury.  Off the top of my head, I can think of a couple of possible workarounds:

1.  Hedging.  The challenge for the banks will be to reduce the riskiness of compensation to counterbalance the cap on salary (since salary is normally the risk-free portion of compensation).  The obvious way to do this is to increase the restricted stock awards, but allow the executives to hedge (for example, by buying put options or entering into an equity swap or short forward contract).  Corporate and securities law restrictions may make it difficult to hedge directly by buying puts on employer stock, but executives might be able to buy a put option or enter into a total return swap on a basket of financial stocks. 

Treasury could respond by placing restrictions on executive's ability to monetize or substantially reduce the risk of loss associated with holding restricted stock.  This is going to get complicated.

2.  Management companies.  A bank could set up a management company (or series of management companies) alongside the holding company to employ top managers.  In lieu of salary, the parent holding company would pay uncapped "management fees" to the management company, which in turn would divide up the fees among the executives.  Investment banks already do this, to some extent, for their "merchant banking" fund managers; it seems feasible to extend this structure to any executive group whose compensation could be tied to the performance of underlying portfolio assets.  It might be more difficult, but not impossible, to do this for managers who provide services to a wide variety of corporate functions.  For example, the managers could migrate to a newly-formed consulting partnership with a long-term service contract with the company.

Treasury could create an "anti-abuse" rule extending the cap on pay to affiliates of the parent holding company, but it's going to get tricky:  if you define affiliate too broadly, no one--including lawyers, accounting firms, and consulting firms--will want to do business with the bank for fear of getting infected with a cap-on-pay. 

3.  On an unrelated note, an observation:  we normally think of restricted stock as less risky (and less likely to make executives overly risk-seeking) than at-the-money stock options.  If the salary cap means that restricted stock only vests once the government gets paid back, the effect is more like an at-the-money or slightly out of the money stock option. 

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The hills are alive with the sounds of grumbling and cheering at news that the next recipients of bailout money will have tighter reins on executive compensation.  Not disclosure.  Caps.  Here are thoughts of co-blogger and bailout guru David Zaring below and my colleague Larry Ribstein, complete with links.

If I were on the Obama team, I would separate out acceptable negotiated covenants from any new proposal from general theories of corporate regulation.  What does that mean?  As a needed supplier of an infusion of capital, the U.S. Treasury has both the ability and I would say the obligation to act like one.  If a company were nearing insolvency or was in other financial straits and approached a commercial lender, who would lend money pursuant to a loan agreement, or an angel investor, a venture capital fund, a private equity fund, or some other preferred shareholder who would infuse capital pursuant to a negotiated agreement, then that capital provider would negotiate for some pretty stiff protections.  If the borrower/issuer seems like it is in financial distress, then the party doing the bailout wants to negotiate some affirmative and negative covenants to make sure that any money is not wasted.  So, a good attorney would negotiate covenants against capital expenditures, dividends, salaries and bonuses.  A new preferred shareholder might become comfortable by taking a position on the board.  Either way, the U.S. Treasury demanding assurances that money that a company is begging for will not be frittered away is the right thing to do.  If the company borrowing or issuing shares then needs to make a capital expenditure or hire a new CEO at a higher wage, then negotiations for a waiver can commence.  This isn't a nanny state; this is just good business.

But the proposed Treasury rule has a lot of stuff that looks more like regulation mucking up what should merely be hardball covenants that seem reasonable given the credit profiles of the bailees.  The first is in the terms of the restrictions -- executive compensation structure and strategy must be disclosed to shareholders and subject to a "say on pay" shareholder resolutions.  Well, that's sort of hands-on, isn't it?  Would a lender or a new preferred shareholder ask for this type of covenant?  No.  The government should be acting as a market participant here, not a social engineer.  If the Obama administration is really excited about shareholder proposals, then go to the SEC and talk about it there. 

Worse, the proposed rule has an entire section that begins "Even as we work to recover from current market events, it is not too early to begin a serious effort to both examine how company-wide compensation strategies at financial institutions – not just those related to top executives – may have encouraged excessive risk-taking that contributed to current market events and to begin developing model compensation policies for the future."

OK, nice, but talk about it somewhere else.  Let's not screw up fixing an immediate problem because we see it as an opening to make very big, and very controversial changes.  Let's leave the debate over the right level and the right kind of corporate governance regulation and executive pay regulation to another day.  President Obama is right to be outraged and disappointed at Wall Street bonuses as a provider of capital to those institutions.  But keep your outraged lender/private equity hat on for awhile and negotiate a better deal in the future.  The Treasury does not need to try to map regulatory change at the same time; hopefully, the Treasurer will not be a market participant forever and can then let those still in the game make their own rules.

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I asked Lyman Johnson for some more thoughts on Gantler, particularly whether the decision will trigger a Van Gorkom-style panic over executive liability, since Delaware's exculpation statute doesn't cover officers. He's allowing me to quote his response:

As to 102(b)(7), I think now is not an opportune time for executives to be seeking exculpation due to the anti-executive social-political climate. I am told by those present in Delaware back in the mid-1980s that officers were deliberately excluded. Moreover, I think Delaware has now, as a result of Gantler, altered its position vis a vis the federal government on the “threat” issue that Mark Roe has rightly explained over the past few years.

My view has been that Delaware competed on the officer front by not doing anything significant, leaving the SEC to bring far more actions than we see in Delaware and prompting Congress to insert several provisions into SOX that address officers. Delaware did amend its jurisdictional statute several years ago, but the plaintiffs’ bar has fumbled around in its approach to officers, and many officers just settle up with boards when they are terminated in seeming anticipation of an uptick in claims against officers. Interestingly, there is more fiduciary duty action against officers in bankruptcy courts because trustees are motivated to pursue officers to recover assets.

I think as I said that Gantler portends Delaware coming more visibly into the fray on the officer issue, and if the courts do not provide meaningful sanctions they face threats on this front as well as on the director/stockholder fronts that Roe has articulated. So, I doubt the legislature will do anything and I think the courts have to keep a bit of heat on officers as well lest the feds do more on the officer front than cap pay!

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Now that the Obama administration, pursuant to the EESA, is capping executive compensation in bailout recipient firms at $500,000, it's time for a bit of we told you so.  The previous Treasury Secretary, Henry Paulson, asked for lots of flexibility in setting executive compensation standards once it became clear that Congress would insist on them as a condition of the bailout.  This flexibility was sought one month before an election that the government was extremely likely to lose, at least if you trust Ray Fair or Jack Balkin (this post by Balkin was written in February, 2008).  Are the standards that the Obama administration will adopt the ones that Paulson would have wanted?  Even a median term political strategist might have suggested that he negotiate for some hard targets on executive compensation (or, you know, a Trojan horse) in the bill rather than unfettered discretion.  Which suggests, as Steve Davidoff and I have written, that the government was thinking more about the next deal than the long, or even median, term.

Is the Obama compensation limitation legal?  Pending a close reading of the yet to be released provisions, I bet it will be.  Though the TARP exec comp provision contemplated asset purchases (which the government never did), it indicates that companies in which the government takes an equity position shall be subject to "appropriate" limitations, which grants a lot of discretion to Treasury:

There's some detail for senior executive officers, and said officers might be able to argue that capping executive compensation at $500,000 does not prevent them from taking excessive risks - an argument I think is risible:

Moreover, since "senior executive officer" is defined a the top five best paid at the firm, it's not as if you can cut the CEO's pay, but fork over big bucks to the star traders, at least, not unless the Obama administration wants it that way.

It will certainly incentivize paying off the bailout money as fast as possible.

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David Brooks has an editorial today, Ward Three Mentality, that is strongly reminiscent of Bonfire of the Vanities, a brilliant book by Tom Wolfe chronicling the events of the 1980s mostly through the perspective of a bond trader who fancies himself a "Master of the Unvierse."  The book was utterly destroyed by being made into one of the worst movies of all time, with the bizarre cast of Tom Hanks (as the bond trader), Melanie Griffith and Bruce Willis.

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This Friday, I will be hosting and participating in the BYU Law Review Symposium, which is entitled "Evaluating Legal Origins Theory." Beginning with the publication of Legal Determinants of External Finance in 1997, Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny ("LLSV") launched an ambitious research project to explore the meaning and importance of legal origins in financial development ("Legal Origins Theory"). Over the ensuing years, LLSV have embraced an expansive notion of legal origins under which common law is associated with support of market outcomes, while civil law is associated with state-desired allocations. Legal Origins Theory holds that a wide array of laws and regulations are influenced by legal origins, and that these laws and regulations in turn influence economic outcomes.

Many legal scholars have been skeptical of Legal Origins Theory, even as economists have pressed the fundamental claims through increasingly diverse and sophisticated studies. Work on Legal Origins Theory has emphasized three themes: investor protection, government regulation or ownership of economic activities, and judicial enforcement of property rights and contracts. This symposium will bring the insights of leading scholars to bear on each of those themes.

Keynote Speaker

Simon Deakin, Professor of Law, University of Cambridge Faculty of Law, The Legal Origins Hypothesis: What are We Learning from Time-Series Evidence?

Session 1: Legal Families

Holger Spamann, Executive Director, Program on Corporate Governance, Harvard Law School, Contemporary Legal Transplants -- Legal Families and the Diffusion of (Corporate) Law

John W. Cioffi, Assistant Professor of Political Science, University of California – Riverside, Legal Regimes and Political Particularism: A Comparative Law Critique of the 'Legal Families' Theory

Commentary, J. Mark Ramseyer, Mitsubishi Professor of Japanese Legal Studies, Harvard Law School

Session 2: LLSV in the Midst of the Financial Crisis

Lisa Fairfax, Professor of Law and Director, Business Law Program, The University of Maryland School of Law, Legal Origins Theory Through the Prism of the Current Economic Crisis

Ruth V. Aguilera, Associate Professor, University of Illinois at Urbana-Champaign College of Business, and Cynthia Williams, Osler Chair in Business Law, Osgoode Hall Law School, York University, “Law and Finance:” Inaccurate, Incomplete and Important

Commentary, Karl Okamoto, Associate Professor of Law, Earle Mack School of Law, Drexel University

Luncheon Speaker

Katharina Pistor, Professor of Law, Columbia Law School, Rethinking the Law and Finance Paradigm

Session 3: Government Regulation or Ownership of Economic Activities

D. Daniel Sokol, Assistant Professor of Law, Levin College of Law, University of Florida, Competition Policy and Comparative Corporate Governance of State Owned Enterprises

John K.M. Ohnesorge, Associate Professor of Law, University of Wisconsin Law School, Legal Origins Theory and Developing Economies

Commentary, Chris Whytock, Associate Professor of Law, S.J. Quinney College of Law, The University of Utah

Session 4: Investor Protection

Poonam Puri, Associate Professor, Osgoode Hall Law School, York University, Investor Protection, Enforcement, the Canadian Capital Markets and the Legal Origins Theory

Andreas Engert, Lecturer, University of Munich, Institute of International Law and Comparative Law, and D. Gordon Smith, Glen L. Farr Professor of Law, J. Reuben Clark Law School, Brigham Young University, Are Civil Law Courts More Formalist? A Qualitative Exploration of the Adaptability Hypothesis

Commentary, Naomi R. Lamoreaux, Professor of Economics, History, and Law, University of California Los Angeles

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The Fed has extended the lives of all of those emergency funding programs devised in the fall - backstops for commercial paper, money market funds, primary dealers (read: investment banks not yet clearly bank holding companies) and short-duration securities - for six more months.  I'm no believer in the empire-building hypothesis of ever expanding efforts to build regulatory turf, but it's hard to stop a market intervention once you've done it by fiat, no?

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