Law Faculty Blogs and the State of the Blogosphere: Court Citations

Blogs have appeared in a number of cases.  A study done in 2006 chronicled 27 references to blogs in court opinions, including one citation by the US Supreme Court. By June 2012, the number had increased to 88, including a second US Supreme Court citation (Mayo Collaborative Servs. v. Prometheus Labs., Inc., 132 S. Ct. 1289 (2012) (citing PatentlyO)). The blogs cited by courts are:

Rank  # of Citations   Blog

(1)          45             Sentencing Law and Policy (43 fed; 2 state)

(2)          8               Volokh Conspiracy (7 fed; 1 state)

(3)          6               Patently 0 (6 fed)

(4)          4               The Confrontation Blog (1 fed, 3 state)

(5)          3               ProfessorBainbridge (3 state)

(5)          3               Election Law Blog (2 fed; 1 State)

(7)          2               Becker-Posner Blog (1 fed; 1 state)

(7)          2               Credit Slips (1 fed; 1 state)

(7)          2               Ideoblog (2 state)

Another 13 blogs have one court citation each.  These include Balkinization (federal); Cases and Materials on Bus. Entities (state); China Law Blog (federal); Evidence Prof Blog (state); Goldman’s Observations (federal); Harvard Forum on Corp. Governance & Financial Regulation; Immigration Law Prof Blog (federal); Instapundit (federal); Legal Theory Blog (state); Legal Insurrection (federal); Lessig Blog (federal); Prawfs Blog (federal); and TheRacetotheBottom (state).

For those who want a look at a complete version of the data, it can be found at Law Faculty Blogs and Disruptive Innovation: the Data.

Law Faculty Blogs and the State of the Blogosphere: Introduction

One of the pleasures that comes with blogging is a greater awareness of what is happening on the Blogosphere.  It is a dynamic and often difficult to predict place.  Yet those with a lengthy and consistent Internet footprint learn some of these shifts by seeing them first hand.

The Race to the Bottom was not an early entrant onto the Blogosphere.  For early adopters among law faculty who continue to this day include such luminaries as Eugene Volokh at the Volkokh Conspiracy (2002), Larry Solum at the Legal Theory Blog (2002), Jack Balkin at Balkinization (Jan. 2003), and Steve Bainbridge at ProfessorBainbridge.com (2003).  The Race to the Bottom only entered the Blogosphere in 2007. 

Nonetheless, with five years of experience, it is clear that the blogosphere has undergone considerable evolution.  Two earlier papers chronicled some of this evolution: Of Empires, Independents, and Captives: Law Blogging, Law Scholarship, and Law School Rankings (2008) and Blogs, Law School Rankings, and TheRacetotheBottom.org (2007).  It is time to update the analysis. 

As an initial observation, however, law blogging has become entrenched.  As will be shown, there are now thousands of law review citations to law faculty blogs.  Moreover, some have attempted to assess academic reputation by examining the number of citations in law reviews for each faculty member.  See Scholarly Impact of Law School Faculties in 2012: Applying Leiter Scores to Rank the Top Third.  The citation list includes blog posts that are cited in law reviews.  Thus, blogging, among other advantages/consequences, now has the potential to have a material impact on rankings based upon citations in law reviews.  

What will follow is a series of posts that provide raw data. The first will rank blogs based upon court citations.  The second will provide a ranking of law faculty blogs by law review citations.  We will then note who is blogging at what law schools.  This data will be repackaged to show who blogs based upon the ranking of the law school using the ever prominent ranking by US News.  Once the raw data is up, we will offer some conclusions suggested by the data.  

The first post will go up tomorrow.  As the data goes up, we certainly hope that anyone finding a mistake will send in the correction.  Trying to identify law faculty blogs and who is actually blogging is not an easy task and there may well be some omissions.

Corporate Governance and the Problem of Executive Compensation: A Final Word

What does all of this tell us about the future of executive compensation as a matter of corporate governance?

As we have noted, the problem fundamentally rests with the states.  Delaware, for the most part, merely requires a showing of proper process, with the amount and type of compensation largely irrelevant to the analysis.  Process requires little more than a majority of "independent" directors and some modest amount of information.  Nor is the definition of "independent" rigorously enforced.  See Returning Fairness to Executive Compensation.   Moreover, as Zucker illustrates, the safety valve of waste is no safety valve at all.  The result is compensation without limits.

Given the lack of limits under state law, compensation will continue to escalate in amount.  Pressure on Congress to intervene will also continue.  Moreover, SOX and Dodd-Frank show that Congress is not afraid to intervene in the compensation process when circumstances dictate.  These efforts effectively took authority away from the states and effectively transferred them to the Securities and Exchange Commission.

So far, however, Congress has chosen a second best solution in the regulation of compensation.  Rather than directly address the problem by altering the fiduciary duty standards applicable to the determination of compensation, Congress for the most part has opted to add additional process (the ban on loans in SOX is a significant exception). 

Some of the efforts, particularly say on pay, will engender positive changes.  Boards will be under increasing pressure to make compensation more performance based.  What the reforms will not do is decrease the amount (or more accurately the rate of increase) in compensation.  While shareholders may not object to a significant amount of compensation tied to rising share prices, the public will react differently.  To the public, the amount matters.    

As the example of Britain shows, once executive compensation becomes a matter of public debate, pressure on politicians increases.  Britain responded first by implementing say on pay then providing for a mandatory vote on compensation policies.  There is no reason to believe that the pressure on politicians in Britain to intervene in the compensation process will stop with these reforms.  The developments in Britain could be harbingers of what will happen in the United States.  Pressure on politicians in Washington to address the issue of executive compensation will likely continue.

Is there any real solution?  The best approach would be for states to take a firmer hand in regulating executive compensation.  In the absence of this approach, Congress should consider adopting a federal fiduciary standard applicable to compensation decisions.  In effect, this would accomplish what states ought to do.  The approach would address the problem at its root and avoid second best solutions. 

You don't have to hate business to denounce corporate personhood.

One of the most emailed Wall Street Journal items this week was an opinion piece by Jack and Suzy Welch entitled, “It's True: Corporations Are People.”  In it, the Welchs note that:

Of course corporations are people. What else would they be? Buildings don't hire people…. Corporations are people working together toward a shared goal, just as hospitals, schools, farms, restaurants, ballparks and museums are.

Because this is so obvious, the Welchs opine that:

[T]here can only be one conclusion drawn when we hear the pronouncement, "Corporations aren't people"—that it's doublespeak. That is, when people say that corporations aren't people, what they really want to say is, "Business is evil."

However, I would like to offer another explanation.  I believe that when people say, “Corporations aren’t people,” they are best understood as simply saying that corporations should not have rights—particularly Constitutional rights—co-extensive with natural persons, and that since the Supreme Court showed us in Citizens United how difficult it is to regulate an entity that has the benefit of being deemed a person for purposes of, for example, the First Amendment, we might be better off removing that benefit.  Reaching that conclusion does not require one to believe that business is evil.

Take government, for example.  The analysis used by the Welchs to conclude that corporations are obviously people also leads to the inescapable conclusion that government is also people.  However, since our founding we have felt that the particular penchant for abusing power inherent in that particular association of people warrants imposing limitations on its right to act.  Now, these limitations are expressly set forth in our Constitution, but nothing even remotely resembling modern corporations existed at the time of our founding so the absence of an express determination in the Constitution of how corporations should be treated does not inevitably lead to the conclusion that they should simply get lumped together with all other associations of citizens.  (As an aside, while at times seemingly used interchangeably, there is a very meaningful distinction between the phrase “association of persons” and “association of citizens.”  Foreigners are not permitted to influence our elections via campaign contributions (see here).  U.S. corporations, on the other hand, generally have no such limitation on foreign involvement.  Yet in Citizens United the majority repeatedly referred to corporations as “associations of citizens.”  Relatedly, the DISCLOSE Act, which at least some feel could help expose significant foreign spending on our elections, recently failed to garner enough votes to overcome the expected Republican filibuster.)

So, getting back to government: I am more of a Hobbesian than a Lockean when it comes to guessing about the state of nature sans government.  That is to say, I am grateful for our having a strong government because I believe it is one of the primary things standing between us and an existence that is “solitary, poor, nasty, brutish, and short.”  At the same time, governments throughout history have proven that there is no limit to the abuse of power they can engage in, so I think our system of limited government is a pretty good one.  That is to say, my belief that government shouldn’t be treated as simply another association of persons because it is prone to abuse its unique power does not translate into my thinking government is evil.  Quite to the contrary, I think government is necessary to prevent certain types of evil.

Likewise, the fact that I think there are good reasons to be skeptical of all of the conclusions that led to the majority opinion in Citizens United—including, (1) corporations are people, (2) money is speech, (3) only quid-pro-quo arrangements constitute corruption, and (4) none of the government’s justifications for the regulation in question satisfied strict scrutiny—does not mean I think business is evil.  In fact, I think the Welchs may well be correct when they say that:

[T]his movement afoot that hates on business is craziness. It will destroy America as we know it because very few jobs get created in an environment that's outright hostile to business. And without jobs, the whole thing falls down. It becomes a welfare state. We become a welfare state.

Nonetheless, I think a good argument can be made that at least some corporations have become as powerful as at least some governments (and engage in government-like functions, see here and here), and, therefore, I can conclude that it is in our best interest to differentiate them from other associations of persons when it comes to determining their rights and responsibilities.  Now, it may be possible to do that while leaving their current Constitutional personhood rights untouched, but it is certainly not necessary to hate business in order to conclude that change is necessary in that area as well.  You simply need to believe that corporations, like government, have the potential to abuse their power in a way (or, if you like, pose a sufficient systemic risk) that warrants differentiating them from other associations of persons.

Corporate Governance and the Problem of Executive Compensation: The Role of Say on Pay

The other place where matters have been federalized is with respect to say on pay.  Say on pay gives shareholders of every public company (defined as those traded on a stock exchange or registered under Section 12(g) of the Exchange Act) the right to an advisory vote on the amount paid to the top five executive officers (two of whom are the CEO and CFO).  See Rule 14a-21, 17 CFR 240.14a-21. 

Shareholders have taken advantage of the authority and proved very willing to vote against a pay package.  More than 50 companies this proxy season have received a negative vote on their compensation.  According to the WSJ, four of the companies in 2012 were repeat offenders, receiving negative votes in 2011 and 2012. 

Negative votes have generated derivative claims against the board.  They have not, for the most part, been successful.  Most recently,  the court in Iron Workers Local No. 25 Pension Fund v. Bogart, N.D. Cal., No. 11-4604, June 13, 2012 (a copy of the decision is here), dismissed a derivative suit based upon a negative say on pay vote.  Relying on Aronson, the court found that the allegations were not sufficient to show reasonable doubt as to the applicability of the business judgment rule. 

The Fund does not even claim that the MPS Board was not adequately informed when it made its decision to increase executive compensation. Instead, the Fund primarily relies upon the negative 'say-on-pay' vote to cast doubt on the honesty and good faith of MPS’s board in making its decision to increase executive compensation. The Fund argues that the negative 'say-on-pay' shareholder vote is evidence showing that directors failed to act in the shareholders' best interests and rebuts the presumption that the MPS Board’s decision regarding compensation is entitled to business judgment deference.

Allegations based only upon a negative say on pay vote were not, however, enough.

The Fund’s allegations here regarding the challenged compensation decision are not sufficient to overcome the presumption that the MPS Board reasonably exercised its business judgment. The fact that the Fund’s interpretation of the 'pay-for-performance' policy does not match the MPS Board’s executive decision is not the equivalent of an allegation that the MPS Board intentionally misled shareholders. Additionally, the 64% negative vote by shareholders does not, on its own, rebut the business judgment presumption.

While litigation has not succeeded, anecdotal evidence suggests that companies receiving a negative vote have responded to shareholder unhappiness.  Nonetheless, the impact of advisory votes is likely to be modest.  It will probably cause compensation to become more performance based.  Certain types of abusive practices will be less common.  With respect to amount, however, the experience in Britain suggests that say on pay is not likely to prevent the continued escalation of compensation. 

Corporate Governance and the Problem of Executive Compensation: Federalization and the Shift in Compensation Norms

We have been discussing the problem of executive compensation as a matter of corporate governance.  We attributed the problem primarily to lax fiduciary standards under state law.  The inability (or unwillingness) of states to address the issue has resulted in increased preemption at the federal level.  Congress has intervened a number of times in the compensation area, transferring regulatory authority away from the states and, for the most part, to the SEC.  Moreover, the issue is a global one, with Great Britain embarking on a path that may presage what will happen in the United States.

The regulation of clawbacks represents an example of reform that illustrates the weakness of the state law regime and the need for federal reform.  SOX put in place a requirement that boards clawback performance based compensation paid to the CEO and CFO following certain restatements.  In effect, Congress told companies that they had to recoup performance based compensation when the performance metrics used as a basis for computing the compensation proved to be inaccurate.  Said another way, Congress mandated the recovery of compensation that should never have been paid in the first instance. 

It was remarkable that this took an act of Congress.  Rigorous fiduciary duty standards presumably would have caused boards to seek repayment of the compensation in these circumstances.  Yet fiduicary standards were not rigorous enough to cause boards to seek the return of funds that were incorrectly paid.  As a result, the federal government was forced to act.  

SOX imposed clawbacks on a limited basis.  Fiduciary duties, however, remained lax and Congress was forced to step in once again.  In Dodd-Frank, Congress broadened the category of officers subject to clawbacks, lengthened the time period clawbacks would apply, and expanded the types of restatements that would trigger the recoupment.  Again, it was federal intervention rather than fiduciary obligations that ensured companies would collect compensation that should not have been paid. 

After two interventions by the federal government, boards may be getting the message.  Some companies have gone beyond the legal minimum required by SOX and Dodd-Frank and imposed clawback options on broader swathes of employees for broader types of conduct. Thus, JP Morgan Case indicated in its proxy statement that:  

Recoupment policies should go beyond Sarbanes-Oxley and other minimum requirements and include recovery of compensation paid for earnings that were never ultimately realized, or if it’s determined that compensation was based on materially inaccurate performance metrics or a misrepresentation by an employee. We have in place recovery provisions for “cause” terminations, misconduct, detrimental behavior, and actions causing financial or reputational harm to the Firm or its business activities. For members of the Operating Committee and senior employees with primary responsibility for risk positions and risk management, the Firm may cancel or require repayment of shares if employees failed to properly identify, raise, or assess risks material to the Firm or its business activities.

According to the WSJ, the policy was put into play with respect to the recent losses incurred by JP Morgan.  The WSJ indicated that three managers with "direct responsibility" over the portfolio "at the center of the trading losses" had been subjected to the recoupment policy.  

The article stated that this was the "most prominent instance of a major U.S. bank seeking to recover pay from a high-ranking executive since the financial crisis."  In other words, the action is unusual.  Nonetheless, it may suggest a shift in traditional norms.  Perhaps boards of public entities will take these types of steps more often.  Of course, the real test will be whether boards of public companies will apply these broader standards to top executive officers rather than lower level employees. 

But if boards look at recoupment in a broader set of circumstances, where recoupment is in the best interests of shareholders, perhaps future federal intervention will be unnecessary. 

Corporate Governance and the Problem of Executive Compensation: The International Response to the Compensation Problem (Pay Ratios)

We have a few more posts on the issue of executive compensation but will wrap up this week with some final thoughts.

Congress in Dodd-Frank has taken a number of approaches to executive compensation.  They include mandating say on pay for all public companies and imposing additional procedural requirements on the compensation process used by listed companies.  In addition, Congress mandated additional disclosure.  Different from the usual requirements, Congress went beyond the computation of executive compensation and required the disclosure of a comparative metric.  The SEC must adopt rules that require the disclosure of pay ratios.  In effect, companies had to reveal the ratio between the compensation paid to the CEO and that paid to the median employee.  See Section 953 of Dodd-Frank. 

The metric provides another basis for determining the reasonableness of compensation.  It is also company specific.  The metric, therefore, gives shareholders a mechanism for assessing the fairness of the amount paid within a particular company.  Changes in the metric from year to year may also provide valuable information on the relative fairness of CEO compensation.   

So far the rule has remained dormant.  The provision is merely included in a long inventory of unfinished business under Dodd-Frank.  The SEC's inaction has a number of likely explanations.  The Rule has generated considerable opposition.  Companies do not like it.  Likewise, some on the Commission staff appear to have taken an excessively narrow perspective of the agency's rulemaking discretion in the implementation of the provision.  See Dodd-Frank, Compensation Ratios, and the Expanding Role of Shareholders in the Governance Process. 

At the same time, Congress did not impose a mandatory deadline for the rule.  Given the pressure on staff resources, attention has likely shifted to other rulemaking endeavors such as those imposed under the JOBS Act.  Nonetheless, at least one commissioner has expressed disappointment in the slow pace associated with this and other governance rules mandated by Dodd-Frank.  

While the merits of pay ratios has been vigorously debated in the US, the approach has received favorable attention abroad.  The High Pay Commission supported disclosure of ratios.  As the Report noted:

The publication of a pay ratio would allow closer scrutiny of the pay gap in companies.  The Commission particularly feels that this those who would excel at engineering become engineers, but equally that those who would become good doctors or teachers are not deterred by the gap in rewards. Rawls in A Theory of Justice determined that reward should be based on the difference principle: that any difference in reward should be based on whether it will assist the poorest in society. Thus rewarding executives more – to ensure the best people seek the role – can be seen as a fair distribution of resources to an extent.

Delay on this rule is unfortunate.  One of the main advantages of the rule will likely be inside the board room.  Directors will have greater incentive to take a hard line on compensation that skews the ratio.  While CEO use of the corporate aircraft for personal trips is hard to deny from a legal perspective, it may be easier to turn down if it results in negative shift in the ratio.  As long as the rule remains dormant, however, this benefit will not arise. 

Holding Out for Holder to Prosecute Libor Liars

“Tim Geithner had evidence of a financial crime of epic proportion — so he wrote a memo,” quipped Charles Gasparino in the New York Post yesterday. This one-sentence observation of Geithner’s inaction in the face of concrete evidence of  Libor-rigging is perfect. It captures well how certain of the banking regulators continually enable fraud and abuse.

Libor, the London Interbank Offered Rate, is updated daily at 11 a.m. in London  (6 a.m. e.t ). It is actually a schedule of rates, calculated based upon the average interest rates banks report that they are charged to borrow from each other. The schedule includes rates for 10 different currencies and 15 different maturities (from overnight to 12 months), thus 150 total. Though an unfamiliar concept to most American consumers, Libor is quite significant, as it is a worldwide benchmark for about $10 trillion in loans, including many mortgages, student loans, car loans and credit cards, and more than $350 trillion in derivatives.

How does this affect American consumers? For example, according to the Cleveland Fed, more than 50 percent of prime adjustable rate mortgages and nearly all subprime mortgages  in the US in 2008 were tied to Libor. Though Barclays (and presumably others) were underreporting at one time, to appear more healthy, there is also a belief  that the rates were kept artificially too high at other times.

As early as December of 2007, the Federal Reserve Bank of New York learned that some banks might be falsely reporting what it cost them to borrow, thus manipulating Libor. According to phone call transcripts, a Barclay’s employee told  a New York Fed official in April of 2008:

We know that we’re not posting um, an honest LIBOR. And yet and yet we are doing it, because, um, if we didn’t do it it draws, um, unwanted attention on ourselves.

In response, Geithner wrote a memo to Mervyn King, the Governor of the Bank of England in June. In the memo he made suggestions for improving the Libor process. Those ideas were never adopted, and the rigging continued through at least 2009. The HuffingtonPost reported today that Geithner’s suggestions were not his own or even from his staff, but instead were formulated by the banks themselves.

What was Geithner thinking? As President of the New York Fed wasn’t there more he could have and should have done upon learning about the fraud? We  can be troubled by his inadequate response, but we should not be surprised. Remember, during his confirmation hearings to become Secretary of the Treasury, Geithner insisted, “I’ve never been a regulator.”  This was a jarring comment given that the job of the New York Fed includes supervision and regulation. Just take a look at the “what we do” page of the website which states:

In addition to responsibilities the New York Fed shares in common with the other Reserve Banks, the New York Fed has several unique responsibilities, including conducting open market operations, intervening in foreign exchange markets, and storing monetary gold for foreign central banks, governments and international agencies. Foremost among its functions is the implementation of monetary policy, one of the three missions of the New York Fed. The other two are supervision and regulation, and international operations. (bold type in the original).

So, to understand Geithner, if he was not a regulator, then was he admitting that he deliberately neglected one of the three missions?

Barclays recently paid a total of $453 million in civil settlements with the Justice Department, the CFTC and the British Financial Services Authority. Though there have been no criminal charges to date, reportedly, the criminal division of the Justice Department “is building cases against several financial institutions and their employees.” There are many more banks under investigation, including Bank of America, Citibank and JP Morgan Chase. This trio comprises the three US banks on the panel that submit interest rate information for inclusion in the Libor.

All eyes should now be on Attorney General Eric Holder. Even if Geithner forgot he was a regulator, perhaps Holder will remember that he is a prosecutor. Just to be sure, you can review the mission of the criminal division of Justice, as posted on the website:

The mission of the Criminal Division is to serve the public interest through the enforcement of criminal statutes in a vigorous, fair, and effective manner; and to exercise general supervision over the enforcement of all federal criminal laws, with the exception of those statutes specifically assigned to the Antitrust, Civil Rights, Environment and Natural Resources, or Tax Divisions.

Prosecuting Libor-rate-rigging seems to fit that mission.  Journalist James Stewart in the New York Times on Friday deemed the LIBOR fiasco a “textbook case of white collar financial crime — including a conspiracy that was flourishing at the height of the financial crisis.”  Hopefully, Holder will make an effort to bring criminal charges against the top personnel and firms who participated in this as well as other crimes associated with the financial meltdown of 2008 and beyond.

It would be a fine time to do so. As noted here, more than a year ago, “after the Savings and Loan Crisis of late 1980s, more than 1,000 bank officials were prosecuted and around 800 went to jail,” whereas so far not a single high-profile participant in the 2008 financial crisis has been prosecuted. The continued failure of this Administration to enforce the law vigorously, fairly and effectively is a great disappointment. Maybe that will change.  And while change is in the air, it’s time for Mr. Geithner to write another memo, this one to the President, tendering his resignation.

(This post also appeared on July 16, 2012 on The Pareto Commons website).

Corporate Governance and the Problem of Executive Compensation: The International Response to the Compensation Problem (Lessons for the United States)

The plans proposed by the British government must be approved by Parliament. They have already met with criticism both by opposition politicians for not going far enough and business interests who think the proposals go too far.

Yet they represent a compromise that stopped short of the recommendations of the High Pay Commission. The government did not propose an expansion of the "closed" system to include employees. Nor did the government propose to give shareholders a binding vote on compensation. Instead, shareholders only got the right to a binding vote on compensation policies.

The authority will make the compensation process more complicated and limit the board's ability to quickly and materially change the formula for determining compensation. But assuming the policies approved by shareholders are broad, boards will still have considerable discretion in determining compensation. The reforms, therefore, will probably not have a substantial impact on the amount paid to executives.

Nonetheless, the reforms will temporarily take pressure off the government. The British government can assert that the reforms should be given some time to work. To the extent, however, the reforms do not temper the escalating nature of executive compensation, public pressure for additional and more intrusive reforms will continue to build.

What does this suggest about the United States? A memorandum put out by Wachtel Lipton noted the proposals and had this to say: "We find these proposals troubling, and discourage them traveling across the Atlantic and becoming seriously considered in the United States. . . ."

The experience in the UK could be a harbinger of things to come in the United States. Say on pay in the US looks like it will cause the board to more closely align compensation with performance, the same thing that happened in the UK. But, as the UK example shows, this alignment does not automatically reduce the escalation of compensation. For that to occur, as we have noted, the fiduciary obligations of the board need to change and the standard for reviewing compensation decisions made more exacting. See Returning Fairness to Executive Compensation.

To the extent these reforms do not slow the escalation of compensation, continued pressure will build, as it did in the UK, for further reforms. As in Britain, it will only occur after additional abuses and further public pressure on politicians. Moreover, by then, the reforms in Britain will have been in place for a period of time, providing empirical information for the reforms that could be adopted in the United States.

Should we use a Venn diagram when teaching materiality?

My first couple of years in legal academia I focused my scholarship on the issue of materiality in securities regulation (see here and here).  More recently, however, I’ve been focusing on corporate theory (see, e.g., here).  Thus, I felt like I might have missed something when I recently noticed that the Supreme Court cited only the “total mix” definition of materiality in its Matrixx decision.

For the uninitiated, materiality is a central concept in securities regulation because it frequently determines whether a disclosure needs to be made, or constitutes a basis for liability.  In TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 499 (1976), a case involving proxy voting, the Supreme Court defined materiality as follows:

An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote…. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.

I have always thought that these alternative formulations were intended to essentially overlap.  That is to say, I don't think the Court intended to create a Venn diagram with meaningful buckets of facts capable of satisfying only one, but not the other, of the two formulations.  Having said that, I have also been under the impression that courts have at least occasionally acted like the choice of definition mattered a great deal.  In addition, the “total mix” definition appears to have moved from being secondary to being primary--with a corresponding overall increase in dismissals based on immateriality.  (All of these impressions, of course, are subject to empirical verification.)

So what am I to make of the fact that the Supreme Court cited only the “total mix” definition of materiality in Matrixx?  My sense is that the answer is, “not too much.”  Most likely, focusing on the “total mix” definition was simply consistent with the Court re-affirming the no-bright-line-rules aspect of materiality.  See Basic Inc. v. Levinson, 485 U.S. 224, 236 (1988) (“Any approach that designates a single fact or occurrence as always determinative of an inherently fact-specific finding such as materiality, must necessarily be overinclusive or underinclusive.”). That is to say, the “total mix” formulation of materiality arguably stresses the contextual nature of materiality more than the alternative formulation, so it made sense to focus on that definition in concluding that the lack of statistical significance, standing alone, could not be dispositive of materiality.  (It is interesting to note that in Matrixx the “total mix” definition was relied upon to increase--or at least not decrease--the universe of potentially material statements.)

All of which leads me to my question for those of you who teach Securities Regulation: Do you use a Venn diagram when teaching materiality?

Corporate Governance and the Problem of Executive Compensation: The International Response to the Compensation Problem (The Proposed Reforms)

The High Pay Commission provided the groundwork for reforms.  The continuing shareholder revolt and public criticism effectively forced the government's hand.  The proposals (but not the actual statutory language) surfaced in June.  The press release announcing the proposal is here.  A statement of government policy on the issue is here. 

The government's proposal stops short of making say on pay mandatory.  Instead, shareholders have the right to approve the company's "pay policy."  The pay policy report submitted to shareholders must include:

• A table setting out the key elements of pay and supporting information, including how each supports the achievement of the company’s strategy, the maximum potential value and performance metrics.

• Information on employment contracts.

• Scenarios for what directors will get paid for performance that is above, on, and below target.

• Information on the percentage change in profit, dividends, and the overall spend on pay.

• The principles on which exit payments will be made, including how they will be calculated; whether the company will distinguish between types of leave or the circumstances of exit and how performance will be taken into account.

• Material factors that have been taken into account when setting the pay policy, specifically employee pay and shareholder views.

The pay policy also must explain any "exit payments" or golden parachutes.  Companies cannot "pay exiting directors more than shareholders have agreed."  To the extent a pay policy is voted down, it will have to "continue to use the existing policy until a revised policy is agreed." 

The vote on pay policy must occur everytime it is changed or every three years, whichever is sooner.  The government reasoned that this approach would "encourage companies to devise a policy for the long term, clearly linked to their strategy and will put downward pressure on pay ratcheting."  In addition, companies receiving a negative advisory vote on specific pay packages must resubmit the pay policy to shareholders the following year. 

The government also will require a "total compensation" calculation much like the one used in the US and has under consideration a requirement that a company receiving a negative say on pay vote from a "substantial minority" of shareholders be required to issue a "a statement saying what they will do to address shareholder concerns." 

The proposals, therefore, amounts to a compromise.  The government stopped short of transforming advisory votes on pay packages into binding votes.  The government essentially forced boards to submit to shareholders the process and factors used in determining compensation.  Presumably the aide was that these will be binding and prevent a board from significantly changing the policy in order to pay executive officers even more.

The approach will increase the complexity of pay approval.  Shareholders will get at least two votes, one on policies and one on actual pay packages.  Boards will find themselves hemmed in by shareholder approved policies.

But will it work?  To the extent the concern is over the amount of compensation, they are not likely to succeed.  Boards will have an incentive to submit policies that are broad and permit plenty of discretion.  As a result, pay will continue to go up.  Public anger and pressure will likely continue.   

Corporate Governance and the Problem of Executive Compensation: The International Response to the Compensation Problem (Lessons from the Report of the High Pay Commission)

The Report of the High Pay Commission contained a number of possible warnings, both for companies in Britain and in the United States. 

What was clear from the Report was that matters of executive compensation had become an issue of public concern.  In other words, the matter was no longer between owners and managers.  For the most part, shareholders want to see compensation linked to performance.  The amount paid is less significant.  With respect to the public, however, the concerns are reversed.  The public is less interested in the relationship between performance and compensation and more interested in the escalating amounts.

As the Report of the High Pay Commission shows, once the matter becomes an issue of public debate, the proposed solutions shift.  They increasingly focus on efforts to temper the escalation of executive compensation.  In other words, they focus on the amount rather than the type of compensation.

In the next few posts, we will examine the reaction of the British Government to the recommendations of the High Pay Commission. 

Corporate Governance and the Problem of Executive Compensation: The International Response to the Compensation Problem (Public Pressure for Reform)

The Report of the High Pay Commission put on the table some relatively radical possibilities, including the involvement of employees in the compensation process.  Likewise, the Commission injected into the debate general notions of fairness.  The government, however, sat on the recommendations and, for much of 2012, took no action.

The government's discretion was reduced, however, by the constant attention given to compensation issues in the press.  A much chronicled shareholder revolt took place over the compensation pay to the CEO of Barclays.  Another occurred at WPP PLC when shareholders voted down the pay package.  Political pressure, therefore, continued to build. 

The issue, therefore, put pressure on politicians.  As the WSJ described: 

Executive pay has become a hot-button political issue, with the coalition government having come under criticism from opposition politicians and others for failing to counteract sharp rises in executive pay despite management shortcomings during the recent financial crisis. High pay packets for top managers also have drawn public criticism as the U.K. economy continues to contract, putting thousands more out of work and leaving households with shrinking disposable incomes.

The government, therefore, felt the need to act.  It did so in June 2012.

Corporate Governance and the Problem of Executive Compensation: The International Response to the Compensation Problem (The High Pay Commission)

The United States is not the only country wrestling with the problem of executive compensation.  The issue has been much debated in Great Britain, with the country's approach providing possible lessons for the United States. 

Britain has had say on pay in place since the early part of the new millenium.  So Britain has had almost a decade of experience with the practice.  Say on pay may have caused a shift in practices, causing compensation to become better alligned with performance.  But what say on pay did not do was restrain the amount of compensation.  This was made clear in a study by the High Pay Commission late last year. 

The Commission was tasked to examine the issue.  The Commission viewed its mandate broadly.  Billed as non-partisan, the High Pay Commission focused on the escalation in executive pay and the harm not only to investors but also to employees (the disparity "undermines trust and [employee] commitment to the business"), the economy (describing the resulting wage inequality as a "toxic form of free market capitalism") and "society as a whole." 

The Report included a number of findings and recommendations.  Among other things, the Report took issue with a number of standard justifications for high levels of compensation.  The argument that increased compensation was needed to avoid a global brain drain was dispatched. 

Our findings also show that the argument used by many senior figures in British business, that pay must escalate in order to attract the best talent from abroad to UK companies, is a myth. Our own evidence shows that global mobility is limited, with only one successful FTSE 100 chief executive officer poached in five years – and even this person was poached by a British company.

The High Pay Commission issued a number of recommendations, including the need to simplify the pay package.  Most interesting, the recommendations took aim at the "closed" system for determining compensation.  As the Report described:

[R]emuneration committees remain a closed shop. Many continue to be made up of current or recently retired chief executives. This contributes to the dramatic growth in top pay, and the dislocation we have witnessed between average pay and the rewards given to some CEOs.

The closed shop did little to retrain the escalation of executive compensation.  See id. (the "current model of corporate governance locates absolute control in the hands of the owners, the shareholders and their representatives the nonexecutive directors. In the UK this model has failed to restrain escalating top pay.").

The solution?  Rather than leave the matter entirely to directors, the Report called for employee representation on the compensation committee of the board.  As the Report stated:

We believe that greater engagement with employees may help restrain executive pay and help mitigate negative impacts on morale as well as encourage a greater engagement with the workforce. We therefore call for employees to be represented on remuneration committees as a first step to better engagement and accountability.

In effect, the Report, in a mild way, argued for a stakeholder approach with respect to executive compensation.  Under the thinking of the Report, executive compensation would cease to be an issue between owners and managers, but would have require participation of other segments of the broader population.   

Corporate Governance and the Problem of Executive Compensation: The Role of the SEC (Compensation Consultants and Director Compensation) (Part 6)

We are discussing Rule 10C-1, the rule designed to implement the requirements in Dodd-Frank with respect to compensation committees of the board.  The rule is discussed in Exchange Act Release No. 67220 (June 20, 2012).

Director compensation has become an increasingly important issue to investors.  The Commission in 2006 required companies to disclose total compensation paid to directors.  In some cases, the amount paid has approached or exceeded $1 million.  Shareholders have submitted proposals calling for an advisory vote on director compensation (say on director pay). 

The compensation committee reforms recently adopted by the Commission expanded the disclosure requirements applicable to compensation consultants used in determining directors fees.  Item 407 of Regulation S-K already required disclosure of the role played by compensation consultants in the determination of director fees.  The SEC, however, amended the provision to require disclosure of any conflict posed by the consultant and the manner in which the conflict was "being addressed."  Said another way, Item 407 applies "the compensation consultant conflict of interest disclosure requirement to director compensation in the same manner as executive compensation."  Exchange Act Release No. 67220 (June 20, 2012).

The effect of the requirement is to ensure that compensation committees consider the factors set out in 10C-1 when retaining a consultant for use in determining director fees.  It is, therefore, a disclosure requirement that will alter substantive behavior.  This is not the first or the last time disclosure has been used in this fashion.  See Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure. 

The Week in Review (Sort of)

The following are some items that I came across or reviewed this week that I thought might be of interest to our readers.

Item 1: Greenwood on Human Rights for Human Beings

On June 26^th, Daniel Greenwood responded (here) to the Supreme Court’s summary reversal of a Montana Supreme Court decision upholding that state’s campaign finance regulation.  The Montana Supreme Court had upheld the statute despite the fact that it directly targeted corporate political spending contrary to Citizens United. What follows is an excerpt, but I encourage you to read his entire piece here (it’s not long).

Obviously, corporations, which are creatures of statute, must have legal rights [like being able to sue]…. These corporate legal rights come from the legislatures, which regularly tinker with them. Constitutional rights, however, are rights against the legislatures: they are rights we have even if our representatives try to take them away. As a result, constitutional rights are also rights defined by judges, who are supposed to determine the content and limits of the rights by interpreting the text of the Constitution…. It is hard to see why anyone would want to fossilize corporate law in our hard-to-amend Constitution, let alone give judges primary responsibility for regulating large economic enterprises.

Item 2: Partnoy on Slowing Down

Pushing back against the seemingly never-ending pressure to get more things done in less time, Frank Partnoy, author of books such as “Infectious Greed: How Deceit and Risk Corrupted the Financial Markets” and “F.I.A.S.C.O.: Blood in the Water on Wall Street,” has just published “Wait: The Art and Science of Delay.”  The book is currently #10 on Amazon’s Business & Investing (Finance) bestseller list, and you can find a review from the Wall Street Journal here.

Item 3: Quote of the Week

U.K. Business Secretary Vince Cable had this to say about the Libor-fixing scandal (here):

[The public] just can't understand why people are thrown into jail for petty theft and these guys just walk away ….

Item 4:  Things That Make You Go “Hmmm”

The Reuters story on the expert panel report looking into the Fukushima disaster (here) prominently quotes the panel report’s reference to “collusion” among government, regulators, and the Tokyo Electric Power Co. in its headline.  Meanwhile, the Wall Street Journal story (here) merely cites negligence and makes no reference to collusion.

Does Poker Staking Constitute a Securities Transaction?

If you followed my posts on the Business Law Prof Blog and/or the Akron Law Café before I arrived here, then you know that I am a fan of poker.  In fact, I have blogged more than once about my desire to cobble together a “Poker for Law Students” course.  I have also blogged previously about whether poker-staking constitutes a securities transaction.  I was reminded of all of this when I came across a story in today’s Wall Street Journal about how many of the professional players planning to play in tomorrow’s “One Drop” $1 million buy-in tournament (10% of each buy-in goes to the “One Drop” charity, which seeks to provide access to safe water worldwide) are selling large pieces of themselves to get into the action.  

I won’t repeat what I’ve said before on this topic (that’s what the links are for), but a couple of things in the WSJ article did jump out at me that I thought warranted some additional comments.  First, one of the players in the story reportedly set up an LLC (“One Drop Investments LLC”) to help organize the financing of his poker buy-in.  Second, there is apparently at least one investment fund (“Arial Ventures, LLC”) dedicated to investing in poker players.  Here is a description of the fund that you’ll find here:

Arial Ventures is a poker backing company – an organization that invests it’s [sic] capital and shares in earnings with some of the top poker players in the world, in some cases household names who have each earned millions of dollars of tournament prize money. The company was founded by and is run by two veteran entrepreneurs and one of the most respected professional player/coaches in poker today.

Now, I have no idea whether any of these folks are aware of their potential liability under, for example, Rule 10b-5, or whether they have looked into their potential registration obligations, but my guess is they haven’t.  Given that I believe there is a strong case to be made for poker-staking qualifying as an investment contract under the securities laws, I think this might be a significant oversight.

PS—Akron Law Café recently moved to a new home.  Please come visit us here.

Corporate Governance and the Problem of Executive Compensation: The Source of the Problem and the Consequences (Part 2)

In In re Goldman Sachs, plaintiffs challenged the compensation structure put in place at the investment banking firm.  A seven part series on the decision starts here.  Primary materials, including the decision in the case, can be found at the DU Corporate Governance web site.

In considering whether to allow the case to go beyond the pleading stage, the lower court first considered the independence of the board.  Despite a number of connections between members of the board and Goldman (or the Goldman foundation), the court found that plaintiffs had not raised "reasonable doubt" about independence at the pleading stage. 

In effect, the court disregarded allegations that directors were not independent because the company's foundation paid significant amounts to charities supported by the directors.  It was as if this benefit did not give directors an incentive to favor management in order to retain their seat on the board.  The same opinion also found that significant business relationships alleged by plaintiffs did not cross the reasonable doubt threshold. 

In addition, however, plaintiffs sought to show a breach of fiduciary obligations by presenting allegations about the amount of compensation relative to other peer companies.  Plaintiffs asserted that the amount of compensation was "anywhere from two to six times the amounts that its peers."  In finding the claims insufficient to allow the case to go forward, the court questioned the peer companies used by plaintiffs.

Plaintiffs provide comparisons of Goldman’s average pay per employee to firms such as Morgan Stanley, Bear Stearns, Merrill Lynch, Citigroup, and Bank of America.  The Plaintiffs note that these firms are investment banks, but do not provide any indication of why these firms are comparable to Goldman or their respective primary areas of business.

More importantly, the allegations of significant disparities in relation to peer companies was not enough to state a claim for breach of fiduciary duties.  

A broad assertion that Goldman’s board devoted more resources to compensation than did other firms, standing alone, is not a particularized factual allegation creating a reasonable doubt that Goldman’s compensation levels were the product of a valid business judgment.

In other words, alleging that compensation was disproportionate relative to peer companies was not even enough to allow the case to go to discovery.   

The case was summarily affirmed by the the Supreme Court in SPTA v. Blankfein.  The Court had this to say in toto: 

To the extent that: (a) the issues raised on appeal are factual, the record evidence supports the trial judge's factual findings; (b) the errors alleged on appeal are attributed to an abuse of discretion, the record does not support those assertions; (c) the issues raised on appeal are legal, they are controlled by settled Delaware law, which was properly applied.

This case illustrates that, in Delaware, courts have little interest in allowing shareholders to challenge compensation decisions based upon the amount.  As long as the board has a majority of independent directors and is "informed, allegations of disproportionate payment will not save a case from dismissal."  Efforts, therefore, to use fiduciary duties to prevent continued increase in compensation or the payment of disproportionate amounts is not likely to happen under state law.  

With state law foreclosed, reforms have focused on federal law.  Congress has increasingly intervened, shifting compensation matters from the states to the federal scheme.  SOX and Dodd-Frank have included a mix of provisions addressing compensation issues.  Loans to executive officers and directors have been prohibited.  Boards have been forced to seek clawbacks of compensation in certain circumstances.  Say on pay has been implemented.  And, as we will discuss in the next posts, control over the process for determining compensation has increasingly been shifted to the SEC.

Corporate Governance and the Problem of Executive Compensation: The Source of the Problem and the Consequences (Part 1)

Boards are the front line of the executive compensation issue.  They have the authority to determine compensation and to adopt standards that minimize abuse. 

Compensation decisions are, like all matters, tested under the board's fiduciary obligations.  The duties are broadly divided into a duty of care and a duty of loyalty.  The duty of care is a process standard.  If the process is done correctly, the substance of the decision, for the most part, is irrelevant.  The duty of loyalty on the other hand imposes on the board the burden of showing that the transaction was fair.  In these circumstances, substance matters.  

With respect to CEO compensation, the default standard is the duty of loyalty.  In the US, the CEO sits on the board.  As a result, the board is determining compensation for someone inside the board room.  This creates an obvious conflict of interest and, to protect shareholders, directors must show that the compensation was fair. 

Were fairness to be the applicable standard, boards would have greater difficulty showing that personal use of the aircraft or total compensation measured in nine or more figures was fair.  Moreover, since directors are personally liable for breaches of their fiduciary obligations, they would likely take a rigorous approach to fairness.  The benefit of applying a fairness standard can be seen in few cases where it has been applied.  For a discussion of cases applying this standard, see Returning Fairness to Executive Compensation.

Yet for the most part, fairness and substance are not part of any review of CEO compensation.  The Delaware courts have interpreted fiduciary duties in a manner that results in the application of the duty of care rather than duty of loyalty to CEO compensation.  The courts have done so by finding that the duty of care applies where the board is informed and consists of a majority of independent directors (a requirement for all listed companies). 

In those circumstances, the "taint" of any conflict (the presence of the CEO inside the boardroom) is deemed to have been expunged.  It doesn't matter for the most part that the CEO is present when the decision is made or participates in the discussion.  For more on this, see Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty.

What is a recent example of this approach?  In re Goldman Sachs, a case we will address in the next post.

Diversity, Italy and the Dearth of Women in the Boardroom

Yesterday, Facebook announced that it was appointing a woman to its board.  As noted, women make up somewhere between 12-16% of the directors serving on boards of public companies.  (A study by ISS put the number at 12.7% of the top 1500 largest public companies).  It is not because there are an inadequate number of qualified candidates.  For a possible explanation, see Essay: Neutralizing the Board of Directors and the Impact on Diversity. 

The problem of inadequate representation of women on corporate boards is not limited to the US, but global in nature.  Some countries in Europe addressing the issue have taken a more top-down approach.  Norway now requires boards of listed companies to have at least 40% of each gender.  As a result, Norway has the highest percentage of women on boards.  

Spain and France have tried this approach.  Italy has now decided to join them.  With only around 6% of women on the boards of Italian companies, a recent law requires that the percentage be increased to one-third by 2015.  Labeled the "pink quota," the provision goes into effect in August.  Those companies that do not comply will apparently face "progressive sanctions, including fines of up to €1 million ($1.25 million)."

Such an approach would not work in the US.  This type of government intervention is viewed as excessive interference in the market.  Nonetheless, as these laws become more common and the percentage of women on boards increase in other countries, the US will increasingly appear to be a laggard.  That will put additional pressure on the businesses in this country to increase the number of women on their boards.