Truth on the Market

Academic commentary on law, business, economics and more

Archive for July, 2006

Charges filed against Brocade CEO for option backdating

Posted by Bill Sjostrom on July 20, 2006

Story here. The SEC will hold a Webcast press conference at 5pm E.D.T. (click here).

Posted in option timing scandal | 1 Comment »

Apparently, some of us do more than just blog once in a while

Posted by Geoffrey Manne on July 19, 2006

I’m sure you noticed that Bill’s recent draft is, deservedly, the most downloaded corporate law paper in the last 3 months over at SSRN. 

It also turns out that Josh has been pretty busy himself.  In fact, according to Brian Leiter, Josh is 19th in the list of authors with at least three papers with the most downloads per paper in the last 12 months.  He has 5 new papers with 162 downloads per paper.  And he has some pretty good company:  Bainbridge is number 17 and Ribstein number 18.

Congratulations to both.

Posted in announcements, legal scholarship, musings, scholarship, SSRN | 1 Comment »

Empirical Scholarship for the Untenured and at SEALS

Posted by Josh Wright on July 19, 2006

Lisa Fairfax kicked off an interesting discussion over at the Glom regarding some reasons why untenured folks should not engage in empirical scholarship. The basic message: it takes too long, is too hard (to get data, mostly), may not be received well by tenure committees. There are some great comments to the post defending the enterprise of empirical legal scholarship by the untenured and the theme is picked up at ELS Blog. Many thanks to Lisa for kicking off this very interesting and important discussion. It is a valuable discussion of some of the tradeoffs facing those who would like to include empirical work in their research agenda pre-tenure. Understanding the risks associated with undertaking your research agenda, whatever it is, is certainly a better option than going in blind.

I think Bill Henderson’s comment has it about right:

“In the fall of 2001, as I job-talked my first empirical article, I remember hearing the caveat on pre-tenure empirical work from the chair an appointments committee. But two years later, an IU colleague told me, “In this business, we spend a lot of time doing scholarship. You’ve got to follow your star.”

So which advice is better? In my case, I could not follow both. So I picked empiricism because I loved the work.

… .

Sure, two years from now I may not get tenure (I remain optimistic!), but intellectually, this has been the best five years of my life. Why give in to fear? Follow that damn star.”

Bill’s comment, to me, gets to the heart of the matter. While law school tenure standards are light relative to social science departments, tenure is not guaranteed. Young empirical scholars, like juniors in many other fields, must make some tough choices about their research agendas and make some fairly subjective judgments about the potential costs and benefits of those decisions over time. We law professors have the opportunity to follow whatever research agenda we desire, not to mention a pretty wonderful job in the meantime. Not to minimize the obvious utility of the other suggestions in the comments for those seeking tenure (find an institution that values empirical work, find publicly available data, etc.), but I think the best advice an untenured faculty member can get is to find a research agenda they are passionate about and then put your head down and get to work.

Speaking of empirical scholarship, and on a bit of a tangent, yesterday I spoke at SEALS panel dedicated to the topic of “Empirical Law and Economics.” I presented my empirical paper on the consumer welfare consequences of slotting allowances, uncreatively but hopefully appropriately titled, “Slotting Contracts and Consumer Welfare” (forthcoming in the Antitrust Law Journal).

The panel featured presentations by the Glom’s Fred Tung and Joanna Shepherd (both of Emory Law School). Both papers were took on very interesting and important research questions and were very carefully done. At other conferences, like ALEA, I typically sit on panels that are topic specific, i.e. antitrust. While I very much enjoy that model, which allows me to talk to specialists in my field, this panel was particularly enjoyable for me because it tied together empirical papers from very different fields: corporate governance, torts, and antitrust. Fred presented work co-authored by Joanna Shepherd and Albert Yoon (Northwesetern) entitled “Cross Monitoring and Corporate Governance” examining the role of banks in reducing agency costs. Joanna presented “Tort Reform and Accidental Deaths,” a thought provoking and excellent study co-authored by Paul Rubin of the impact of a number of tort reform measures on accidental deaths. Here is the abstract:

Theory suggests that tort reform could have either of two impacts on accidents. First, reforms could increase accidents as tortfeasors internalize less of the costs of externalities, and thus, have less incentive to reduce the risk of accidents. Second, tort reforms could decrease accidents as lower expected liability costs result in lower prices, enabling consumers to buy more risk-reducing products such as medicines, safety equipment, and medical services, and as consumers take additional precautions to avoid accidents. We test which effect dominates by examining the effect of tort reforms on non-motor vehicle accidental death rates, using panel-data techniques. We find that caps on noneconomic damages, a higher evidence standard for punitive damages, product liability reform, and prejudgment interest reform lead to fewer accidental deaths, while reforms to the collateral source rule lead to increased deaths. Overall, the tort reforms in the states between 1981-2000 have led to an estimated 22,000 fewer accidental deaths.

UPDATE: Paul Horwitz and Larry Solum offer some additional thoughts.

Posted in law school, legal scholarship, scholarship | 3 Comments »

SSRN Top Tens for Corporate, Corporate Governance, and Securities Law

Posted by Bill Sjostrom on July 19, 2006

The current SSRN top tens for corporate, corporate governance, and securities law are after the jump. Read the rest of this entry »

Posted in SSRN | 2 Comments »

NYT on Chicago’s Proposed Trans-Fat Ban

Posted by Thom Lambert on July 18, 2006

Today’s NYT contains an article on Chicago’s proposed trans-fat ban, which I criticized a couple of weeks ago. Most revealing is the chief ban proponent’s response to the argument that the city council should not try to regulate people’s (non-externality-causing) bad habits:

And if the City Council had agreed to simply steer clear of peoples’ bad habits, said Mr. Burke, an influential alderman who long pushed to ban smoking in indoor public spaces, Chicago might never have passed the smoking ban that went into effect this year….

Alderman Burke’s argument follows perfect modus tollens logic:

(1) If it’s inappropriate for government to force people to be healthy (even if that requires a personal utility sacrifice whose magnitude the government does not know), then the smoking ban was inappropriate.

(2) The smoking ban was not inappropriate.

(3) Therefore, it’s proper for government to force people to be healthy.

Of course, an argument may be valid (i.e., logically correct) but unsound (i.e., wrong) if one of the premises is factually untrue. (See here.) And that’s exactly the case here. For reasons I’ve stated elsewhere (e.g., here and here), step two of Alderman Burke’s syllogism is wrong; smoking bans represent unwise policy, and Chicago’s ban promises to reduce social welfare.

Alderman Burke’s argument also reveals the slipperiness of the slope smoking bans create. If the government can tell private property owners they can’t allow people to light up in their private airspaces (which all patrons have voluntarily entered), then why can’t it tell restaurant patrons that they can’t voluntarily choose to purchase tasty and cheap trans-fatty foods? While slippery slope arguments are frequently pretty unpersuasive (see, e.g., the use of such arguments in the gay marriage debate), the busybodies on the Chicago Board of Aldermen make this particular slippery slope argument look more persuasive all the time.

Posted in musings, politics, regulation | Comments Off

ISS on Option Timing

Posted by Bill Sjostrom on July 18, 2006

Institutional Shareholder Services (ISS) has posted an eight-page white
paper entitled An Investor Guide to the Stock Option Timing Scandal. The paper provides a good overview of the recent option backdating and spring-loading revelations.

There has been a number of posts in the blawgosphere debating the legality of backdating and spring-loading. While these practices are not necessarily illegal, as the paper points out:

The option-timing scandal . . . calls into question the oversight provided by boards and compensation committee members at these companies. . . . [I]nvestors may fear that other accounting problems exist but have yet to come to light. The disclosure of backdating sends a ‘signal that management is willing to fudge numbers for their own benefit and they might be willing to play other accounting tricks.’

ISS recommends the following as best practices for option grants:

  • Adopt “blackout” periods to preclude stock grants when company executives have material, non-public information in hand.
  • Adopt fixed grant date schedules that provide for grants on a periodic basis (monthly, quarterly, or annually), along with rules for the establishment of option exercise prices on such grant dates.
  • Refrain from making grants on these fixed dates when executives have market-moving news.
  • Disclose the rationale for grants on a certain date, explaining why the compensation committee chose that date over other possible dates.
  • File Form 4 reports on option grants promptly with the SEC.

While these practices would certainly go a long way towards eliminating backdating and spring-loading, as Geoff pointed out essentially on day one of the scandal (see here), option timing can be an efficient form of compensation. SEC Commissioner Atkins recently expressed a similar view regarding spring-loading in a speech before the International Corporate Governance Network (see here). This view, however, has not been particularly well received (see, e.g., here), perhaps in part for the reasons Tom discusses here.

It will be interesting to see how many companies adopt the measures recommended by ISS. For companies embroiled in the scandal, the lost flexibility in designing a compensation package would likely be outweighed by the potential restoration of investor confidence. For companies outside the fray, perhaps the scandal will simply result in a couple of lines of added disclosure along the lines of “The compensation committee may, in the exercise of its business judgment, from time to time approve grants of options shortly before the public disclosure of favorable company developments.”

Posted in corporate governance, disclosure regulation, executive compensation, option timing scandal | 5 Comments »

Kinderstart Antitrust Claims Dismissed … For Now …

Posted by Josh Wright on July 15, 2006

Google’s motion to dismiss Kinderstart’s claims has been granted with leave to amend all claims. Eric Goldman provides commentary, thoughts on the defamation claim, and a link to the court’s order. As far as the antitrust claims go, I commented here that Google’s motion was likely to prevail:

Labeling conduct “anticompetitive� or “exclusionary� is simply not enough under antitrust law to render that conduct actionable under Section 2. And it does not appear that the Kinderstart claim does much more than that.

Indeed, the court noted that Kinderstart had failed “to identify any specific acts by Google that would evince an intent either to control prices in the Search Ad market or to destroy competition in the Search Engine Market, nor has Kinderstart made clear what prices Google allegedly is attempting to control.” The court also emphasized Kinderstart’s failure to sufficiently describe the markets in which it is alleging antitrust injury. I agree with Hanno Kaiser at Antitrust Review about the practice of dismissals without prejudice in instances like this:

Giving the plaintiff one opportunity after another to amend its complaint imposes significant costs on the defendant and, perversely, forces the defendant to help the plaintiff write a reasonable complaint.

Looks like Google will have to shell out a few more bucks before the inevitable dismissal of these particular antitrust claims.

Posted in antitrust, economics, google, intellectual property, regulation, technology | Comments Off

Seventh Grade Math, revisited

Posted by Elizabeth Nowicki on July 14, 2006

Upon the advice of my friend Kate Litvak, I took a short summer vacation to Walt Disney World.  (In reality, the trip was a work excursion, to meet up with the other Professor Nowicki to work on an executive compensation paper.  But the good news is that the other Professor Nowicki was then at Walt Disney World, so I was able to treat the work trip as a bit of a vacation.)Â

The following vexing math problem arose on the trip, and I am offering it to the group for your consideration:

Dad Nowicki, Professor Nowicki, and the Other Professor Nowicki go to lunch.  The Other Professor Nowicki, due to a professional relationship with “The Institution,” gets a 20% discount for all on lunch.  The 20% comes off of the total bill, before tax.  Gratuity of 18% is automatically added before the discount is taken.  Tax in this state is 8%.  The total bill comes to $44.21.

How much was the original price of each person’s meal?

I am not going to tell you how long it took me to calculate the answer to this question – I blame it on the post-lunch food coma.  Tell me how long it takes you.  The shortest time *wins* the lingering Univ. of Richmond.  John Armstrong and James Grimmelman are disqualified from the competition for obvious reasons.

Posted in Uncategorized | 16 Comments »

Jenkins channels Manne

Posted by Geoffrey Manne on July 12, 2006

Today’s WSJ has a great article by Holman Jenkins on reporting on the backdating “scandal.”  Larry is, of course, on the case.  I would also — modestly — point out that much of what Jenkins says in his article today, I said in this space about four months ago, when the news was first breaking.  The key elements:

  1. The notion that backdating gives executives an incentive-defeating ”paper profit right from the start” is asinine.
  2. “Backdating” may make perfect sense as a means of compensation, especially given certain regulatory quirks.
  3. If the practice amounts to corporate shenanigans, they sure didn’t bother to hide it very well.
  4. Non disclosure of the practice, if disclosure was required, may, of course, be illegal.
  5. To quote Larry, ”second-guessing executive compensation is a tricky business, even when the problems seem clear.”

On the somewhat-related matter of spring-loaded options (the raising of which was not at all inappropriate, Elizabeth), I find myself in complete agreement with Larry.  Strange, I know.  But it ain’t misappropriation if the board knows what’s going on.  Once again, perhaps some disclosure is required, but it’s hard to see how non-disclosure of the compensation scheme could transform informed executive compensation into a section 10(b) violation.

In both cases, I’m pretty sure there’s no “there” there, but I’m equally sure we’ll be reading (and litigating) about them for quite some time to come.

Posted in 10b-5, disclosure regulation, executive compensation, insider trading, option timing scandal, securities regulation | 5 Comments »

*Why* Are Directors Awarding Spring-Loaded Options?

Posted by Elizabeth Nowicki on July 12, 2006

Of late, my colleagues on the internet have been blogging about stock options – notably discussing backdating and “spring-loading.�  My colleagues have done a fine job with debating whether or not the latter is illegal (and/or reprehensible) and discussing the status of play with the former.

My contribution to the discussion is to ask “what are boards of directors *thinking* when they sign-off on spring-loaded options�?  Why are directors willing to risk a firestorm?

As to backdating, it is possible that directors are often unaware of the backdating (the Wall Street Journal had an article today discussing a fellow who was fired for refusing to change employees’ employment dates (to result in revalued options), and the article indicated that the backdating endeavors at issue were covert).  As to awarding “spring-loadedâ€? options, however, I have a hard time thinking of an instance where a CEO (CFO, COO, etc.) could get these options without approval first from the directors (or arguably just the compensation committee of the board).  Therefore, the directors clearly know or should know about the granting of these options, and I have to wonder why directors of the corporations at issue sign-off on the awards.

Here is why I am raising the point:  I can see no other reason for granting spring-loaded options than to allow a CEO to get a monetary award from an about-to-be-announced item of material good news.  Yet the timing of this sort of award at least raises securities fraud issues, as others have noted.  Even if ultimately it is determined that the award of spring-loaded options on as-yet undisclosed material news is not securities fraud, it clearly smells bad.  Why would a thoughtful director go down that road?

Moreover, as best I can tell, these options are intended to be a reward to the grantee presumably for a job well done (as opposed to a motivator for future success).  Given the “smells bad� concern, why would thoughtful directors not insist on rewarding executives in a more innocuous way, such as with cash?  The tax hit is moderate (relatively speaking), the cost to the corporation is relatively small, the disclosure is limited (e.g. I am not sure that the cash would need to be more specifically broken down on the year-end report than any other bonus), and the potential for ugly media is minimal.  Someone on these boards of directors should have been saying “Isn’t it going to. . . look bad to give options to an executive dated/priced the day before we announce big, positive, stock-price-moving news?  Aren’t our stockholders going to be . . . miffed?�

From the director liability standpoint, surely one cannot argue that the failure to raise the issue within the board of directors is an act of good faith.  (Remember that the “good faithâ€? language has recently been the language du jure regarding director liability.)  If directors are signing-off on the spring-loaded options, *and* the directors know that the corporation is soon to announce big news, there is no credible argument that the directors were justifiably unaware of the “spring-loading smells badâ€? issue.  Failure to discuss at length the “smells bad” issue (or the “potential illegality” issue) before awarding the options cannot be an act in good faith, if the directors know that (a) spring-loaded options at least *raise* the securities fraud issue, (b) public disclosure of the options will likely not enhance corporate goodwill and reputation, (c) the option grants might well undermine investor trust (to the extent that they at least smell a bit like insider trading), and (d) there are other, more conservative, less controversial ways to reward executives on the eve of good news.Â

Let me take a moment to plug an article written by organizational behavior maven Dr. Margaret Nowicki (the smarter, funnier, nicer Professor Nowicki) and her colleagues Drs. Lippitt and Lewis on symmetrically re-loading stock options. Directors might consider whether the re-loading feature these professors suggest is worth using to avoid the heat that spring-loading draws.  I think it is.

P.S.  Hopefully it is not a violation of blogging norms to post a topic related to a very recent post by Professor Wright.  If so, I apologize.  I do not want to be fired after only one day as a associate visiting guest or visiting associate guest or associate guest visitor or whatever.

Posted in executive compensation, option timing scandal | 3 Comments »

 
Follow

Get every new post delivered to your Inbox.

Join 1,035 other followers