Archives For nonprofits

Packers, LLC?

Larry Ribstein —  1 February 2011

Just in time for the Super Bowl the New Yorker writes about the non-profit Packers — the only NFL team organized in this form.  The argument for the NFL rule barring anymore non-profits is that it takes a lot of money to run an NFL franchise.  But the article says

Green Bay stands as a living, breathing, and, for the owners, frightening example, that pro sports can aid our cities in tough economic times, not drain them of scarce public resources. Fans in San Diego and Minnesota, in particular, where local N.F.L. owners are threatening to uproot the home teams and move them to Los Angeles, might look toward Green Bay and wonder whether they could do a better job than the men in the owner’s box. And if N.F.L. owners go ahead and lock the players out next season, more than a few long suffering fans might look at their long suffering franchises and ask, “Maybe we don’t need owners at all.” It has worked in Green Bay—all the way to the Super Bowl.

This called to mind Usha Rodrigues’s recent Entity and Identity, which discusses non-profits’ benefits of creating (per the abstract) “a special ‘warm-glow’ identity that cannot be replicated by the for-profit form.” Usha discusses, among other examples, the Packers and the Cubs.

The Cubs were the subject of Shlenksy v. Wrigley, 95 Ill. App. 2d 173, 237 N.E.2d 776 (1968), in which an owner challenged the majority shareholder’s refusal to put lights in Wrigley field.  As Usha says (footnotes omitted):

The case illustrates the power of the business judgment rule: directors’ actions cannot be questioned absent fraud, illegality, or conflict of interest. For our purposes, what is interesting is that it appears that Wrigley, who owned 80% of the firm’s shares, may have been interested in running the corporation in a way that “protect[ed] values such as tradition and concern for neighbors, even at the expense of short term profit.” While the business judgment rule provides a shield, nevertheless majority owners in a for-profit organization such goals and motives are vulnerable to attack by minority shareholders. In contrast, the nonprofit structure of the Packers ensures that a Shlenksy-style suit could never even be brought against the management.

George Will has written (in Pursuit of Happiness and Other Sobering Thoughts 311 (1978)) that when, back in the pre-Tribune days, he sought to buy stock in the Cubs a substantial Cub shareholder told him to ignore “price-earnings ratios, return on capital, and a bunch of other hogwash which has no place in a transaction between two true sportsmen.”  Usha is suggesting that it that’s so, the team should make it official and use the non-profit form.

But do you really need a non-profit corporation to ensure the preservations of lofty ideas?  In my Accountability and Responsibility in Corporate Governance I stress the capaciousness of the business judgment rule in accommodating this objective.  After all, Wrigley’s emphasis on traditionalism and no lights helped build a powerful franchise and cement Chicagoans to the team despite the use of the for-profit form.

Usha may have a point that the non-profit form does it better by better signaling the firm’s objectives.  But, as with everything, there are tradeoffs.  Agency costs might be higher in non-profits, which have no owners in the sense of residual claimants to discipline managers. 

It might be better to have a hybrid form, which locks “warm glow” into the for-profit form.  You might do that in a conventional for-profit corporation, and Wrigley did succeed in fighting off the challenge in Shlensky.  But you never know when the rigid precepts of the corporation, including fiduciary duties, will rear up in court and defeat the parties’ idiosyncratic objectives.

That’s where LLCs come in.  As I argue at length in my Rise of the Uncorporation, the flexibility of the LLC form allows the owners to tailor it to their needs without worrying they will be bit by centuries of corporate law.  Even here, uncertainty may arise when the for-profit nature of the firm clashes with “warm glow” objectives.  For example, unless the LLC operating agreement locks the issue down tight, and unless the firm is organized under the clear pro-contract principles of Delaware law, the managers of a “Packers, LLC” turn down a very lucrative bid to leave Green Bay?

A variation on the LLC, the “low profit LLC,” or “L3C,” addresses this problem by providing for a firm that has owners but that commits not to make profits a significant objective of the firm.  I’m skeptical, however, that these firms solve more problems than they create.  See the above book at p. 161 and an earlier blog post.

The bottom line is a “warm glow” is one of the many things that uncorporations do better than corporations. Even so, I’m not suggesting that we need to tinker with the Packers.

I’m delighted to report that the Liberty Fund has produced a three-volume collection of my dad’s oeuvre.  Fred McChesney edits, Jon Macey writes a new biography and Henry Butler, Steve Bainbridge and Jon Macey write introductions.  The collection can be ordered here.

Here’s the description:

As the founder of the Center for Law and Economics at George Mason University and dean emeritus of the George Mason School of Law, Henry G. Manne is one of the founding scholars of law and economics as a discipline. This three-volume collection includes articles, reviews, and books from more than four decades, featuring Wall Street in Transition, which redefined the commonly held view of the corporate firm.

Volume 1, The Economics of Corporations and Corporate Law, includes Manne’s seminal writings on corporate law and his landmark blend of economics and law that is today accepted as a standard discipline, showing how Manne developed a comprehensive theory of the modern corporation that has provided a framework for legal, economic, and financial analysis of the corporate firm.

Volume 2, Insider Trading, uses Manne’s ground-breaking Insider Trading and the Stock Market as a framework for many of Manne’s innovative contributions to the field, as well as a fresh context for understanding the complex world of corporate law and securities regulation.

Volume 3, Liberty and Freedom in the Economic Ordering of Society, includes selections exploring Manne’s thoughts on corporate social responsibility, on the regulation of capital markets and securities offerings, especially as examined in Wall Street in Transition, on the role of the modern university, and on the relationship among law, regulation, and the free market.

Manne’s most auspicious work in corporate law began with the two pieces from the Columbia Law Review that appear in volume 1, says general editor Fred S. McChesney. Editor Henry Butler adds: “Henry Manne was an innovator challenging the very foundations of the current learning.” “The ‘Higher Criticism’ of the Modern Corporation” was Manne’s first attempt at refuting the all too common notion that corporations were merely devices that allowed managers to plunder shareholders. Manne saw that such a view of corporations was inconsistent with the basic economic assumption that individuals either understand or soon will understand the costs and benefits of their own situations and that they respond according to rational self-interest.

My dad tells me the sample copies have arrived at his house, and I expect my review copy any day now.  But I can already tell you that the content is excellent.  Now-under-cited-but-essential-nonetheless corporate law classics like Some Theoretical Aspects of Share Voting and Our Two Corporation Systems: Law and Economics (two of his best, IMHO) should get some new life.  Among his non-corporations works, the classic and fun Parable of the Parking Lots (showing a humorous side of Henry that unfortunately rarely comes through in the innumerable joke emails he passes along to those of us lucky enough to be on “the list”) and the truly-excellent The Political Economy of Modern Universities (an updating of which forms a large part of a long-unfinished manuscript by my dad and me) are standouts.  And the content in the third volume from Wall Street in Transition has particular relevance today, and we would all do well to re-learn the lessons of those important contributions.

The full table of contents is below the fold.  Get it while it’s hot! Continue Reading…

WSJ has a fascinating story this morning about a group of restaurants in Utah, Washington, Colorado and other places adopting a completely voluntary pricing system. No registers. No prices. No “suggested” prices and no tips. The business model is essentially to provide food and allow customers to put whatever they want in a lock box at the front of the store. This is similar to the former economist turned Bagel Man in Freakonomics who delivered bagels to DC area offices on a quasi-honor system. There are some obvious potential benefits to this strategy in the retail setting: avoiding credit card system fees, not having to pay somebody to run the register (though somebody presumably still has to count the money to calculate taxes), and potentially differentiating one’s offering from competitors who still believe in the whole “prices” thing.

But my sense is that, neighborhood lemonade stands aside, long term profitability with voluntary pricing in any sort of retail setting would not be likely. The Bagel Man found that approximately 13% of office workers were “stealing” bagels. I doubt that the rate would be much lower in a local cafe or coffee shop than it would be in the cafe setting because the former, it seems to me, would involve greater reputational and informal sanctions for “cheating” the implicit agreement to pay fair value. However, these types of shops also seem likely to have a small group of loyal and repeat customers and so it may be possible that such an environment comes close to replicating these sanctions (this is consistent with the Bagel Man’s findings that theft rates were lower in smaller offices). This seems like a substantial number of non-paying customers in a setting where margins are typically very small and barriers to entry are low. The hope, of course, is that some customers will subsidize the free-riders. But in the retail setting, especially over time, one would expect that the inflow of free-riders would be substantial and difficult to control because retailers do not observe which customers are free-riders and which are subsidizers and thus cannot exclude them. Consistent with this view, the article does suggest that these restaurants, with some exceptions in both directions, are largely breaking even.

william pepicelloPeter Klein at the always excellent Organizations & Markets Blog has a characteristically excellent post on the New York Times’ characteristically anti-market article on the University of Phoenix (and for-profit higher education).

Lest there be any doubt that the article was meant to cast UOP in an unflattering light, check out the picture of UOP’s president, William Pepicello, that accompanies the article.  The picture makes him look like a cross between a clown and a devil–some sort of devil clown!

At any rate, the article is little short of a hatchet job, as Peter aptly demonstrates in his post.

I don’t know for certain whether UOP students maximize their utility by choosing UOP over Princteton (aka clown college, coincidentally), but there is, at a minimum, some theoretical merit to the form of organization. 

Here’s what I (and Adam Smith) said on the topic once before:

Here’s Adam Smith on universities:

The endowments of schools and colleges have necessarily diminished more or less the necessity of application in the teachers.  Their subsistence, so far as it arises from their salaries, is evidently derived from a fund altogether independent of their success and reputation in their particular professions.

In some universities the salary makes but a part, and frequently but a small part of the emoluments of the teacher, of which the greater part arises from the honoraries or fees of his pupils.  The necessity of application, though always more or less diminished, is not in this case entirely taken away . . . and he still has some dependency upon the affection, gratitude, and favourable report of those who have attended upon his instructions . . . . 

In other universities the teacher is prohibited from receiving any honorary or fee from his pupils, and his salary constitutes the whole of the revenue which he derives from his office.  His interest is, in this case, set as directly in opposition to his duty as it is possible to set it.

Faculties in today’s universities are substantially insulated from both the reputational and remunerative consequences of offering poor (or exceptional) education.  As direct payment by students — and, eventually, the conferring of degrees on “independent” courses of study — becomes more commonplace, this insulation will be seriously weakened, much to the likely benefit of the students.

I have no doubt that UOP isn’t perfect.  But it certainly mitigates some of the problems of traditional, nonprofit higher education.  Perhaps a comparative institutional analysis would have been in order.  The implication that UOP’s shortcomings derive necessarily from its for-profit status is both unsupported and unsupportable.

More on universities

Geoffrey Manne —  16 March 2006

My post on universities/Zittrain/Harvard generated an excellent comment from Mike Madison.university of chicago

Here is my comment to Mike’s post:

I suppose at the end of the day and over a few glasses of scotch I would largely agree with your characterization of my position. I do believe that norms exist and can be beneficial, and that they may be shaped in competitive environments. I also agree that there is some competition among universities around the edges. But here are my quibbles.

First, I think I disagree with everything in this paragraph except the first sentence:

Geoff recognizes that; he’s opposed to uncritically encouraging more reliance on those ideals, as opposed to checking them via market discipline. Which seems fine except — how do we know when ideals should stop, and markets should start? And who’s to make the call? Geoff, rightly, is suspicious that the government should step in to police the professions; I assume, therefore, that he should be equally suspicious of the government telling, say, the Harvard Corporation (or the New York Times) that “the market� has a better idea of the public good for the university or for the newspaper than the institution’s managers do. I have a hard time believing that we shouldn’t let Harvard be Harvard, whatever that is, as defined by the Corporation (and not, by the way, by the faculty), whatever errors in judgment some believe the Corporation may make.

It is precisely my point that “we� don’t have to “know� when ideals should stop and markets start. My aversion to government planning is animated by the fact that “we� can’t know. All organizations are subject to the problems of limited information; those problems should be efficiently minimized, not exacerbated. Government tends to opt for the latter path. Universities as organizations tend also to insulate “ideals� from market forces, to social detriment, but not, of course, to the detriment of the idealists.

I am in no way arguing for a government fix to the problem; I’m merely suggesting that universities serve some ends better than others. And reliance on ideals may be a bad way to go about ensuring universities serve what I believe both Jonathan and I (and you) think are the “right� ends.

I’ve said it before and I’ll say it again: An environment that purports to foster Ideal A by removing the burdens of market pressures is also an environment where Ideal B may thrive. Ideal A might be devotion to students, commitment to knowledge, education and the free exchange of ideas. Ideal B might be laziness, self-promotion and intolerance. We’d all like to believe that Ideal A thrives to the exclusion of Ideal B, but why do we believe that? If I thought market forces were strong, I wouldn’t care; In schools where Ideal B predominated, I’d just figure that, for reasons I don’t know, Ideal B is better for students than Ideal A. But market forces are not strong here, as Adam Smith long ago made clear. Whether to do anything about it and, if so, what to do, of course, remain intractable questions.

And of course “we� should let Harvard be Harvard. I make these comments only as an observer (and maybe as a parent, although as my daughter is only 11 months old, I heavily discount the relevance); I’m not in the business of dictating behavior to private organizations. Your reductio (�well, then, isn’t government also limited in its ability to ‘know’ when to ‘dictate’ markets?�) is inapposite.

At any rate — as I said, perhaps the disagreements are slight. And, what’s more, perhaps no one really cares. Students don’t want better education; employers don’t need it; parents don’t care; etc. If it’s only the faculties who care anyway, then this may truly be the Best of All Possible Worlds.

And, of course, Brett and I are destined not to agree on much short of matters like the best version of TLEO (5-26-73, Kezar or 2-9-73, Palo Alto). Competition on the basis of ideals is all well and good as long as it’s possible credibly to commit to a certain ideal. I think that’s exceptionally difficult here (but, of course, it probably doesn’t hurt to try, and the trying might even help to make the commitment more credible).

Last week I made a few observations and asked a few questions about higher education in the wake of the Summers fiasco (which I dubbed l’Affair Étés, but apparently no one thought that was nearly as clever as I did).

Over at Prawfsblawg, guest blogger Jonathan Zittrain takes NYT columnist John Tierney (for my money, the only reason to buy the Times other than the weather map and the movie listings) to task for his assertion that universities would do well to adopt a for-profit corporate model of organization. Bill Henderson piles on. Zittrain’s argument is, essentially, that the profit motive would subvert “proper” higher education.

Zittrain’s key conceit is to turn the tables on Tierney and assert that newspapers would, in fact, be better if they adopted a less market-responsive stance and emulated the universities Tierney is so quick to criticize. He says,

[w]e might actually know more about our world if journalists had tenure and were free to pursue stories wherever they led, without fear of financial repercussion.

The funny thing is, newspapers operate in an extremely competitive market. If Zittrain were right, they would already be doing this (or failing). Oh — and it turns out, according to Bill Henderson, they are! He quotes the Times’ Howell Raines:

Hiring mistakes are rarely shown the door at the Times, and the paper can be stuck with them for years. After a probationary period of fourteen weeks would-be staff members get tenure for life.

Now, to what effect? Has this behavior, along with myriad others, served newspapers like the Times well? I doubt anyone would actually make that claim. Tierney’s point is that tenure helps to insulate university faculties from market forces, to the detriment of students’ education. He asserts (perhaps incorrectly) that newspapers tend to take a different tack. Countering in response that newspapers would be better if they, too, were more insulated from market forces hardly scores any points.

But Zittrain goes on:

The idea behind a profession — law, medicine, journalism — is that it exists as something other than simply a raw market-responding entity. There are ideals associated with it, and members of the profession are to see those ideals as influencing their behavior independently of market forces (while also having good arguments about what those ideals should be).

This strikes me as dangerously naive. It means one of two things:

  1. We can and should rely on the idealism and self-restraint of professionals untainted by market incentives.
  2. Someone or something other than the market can and should police the professions (hmmmmm . . . who could it be . . .? Why, the government, of course!)

Forget #2 for now (it doesn’t factor in Zittrain’s analysis). Does anyone really believe #1? Leave aside the reality (which Zittrain does seem to acknowledge) that even relatively-insulated professionals are still subject to important market forces — does anyone really think we’d be better off with a greater degree of ideology and self-appointed moral arbiters to guide the professions?

If you do, please run out and buy this book: Armen Alchian, Economic Forces at Work (Liberty Fund, 1977). Turn to page 151 and read Alchian & Kessel’s 1962 article, Competition, Monopoly and the Pursuit of Money. Alchian and Kessel point out that, because property rights are attenuated in monopolies (and other “nonowned” institutions like nonprofits), more resources in these non-competitive environments will be used to satisfy “personal interests” rather than profits. Perhaps this will be a personal interest in fulfilling the noble ideals of the profession. Or, as Alchian and Kessel emphasize, it may be a personal interest in discrimination, pretty secretaries and easy work environments.

I have never understood why the world is so quick to believe the insiders in the academy (or journalism, for that matter) when we claim to be motivated by the “public good.” The same mechanism that takes the profit motive out of the equation also insulates insiders from the repercussions of extreme self-regard and makes these claims dubious. Precisely where market constraints are at their lowest we defer most fully to the insiders’ relatively un-monitored, unaccountable motives. That seems perverse.

Higher education and print media (oh — and health care. Can’t forget health care) may be two of the last bastions for defenders of the odious notion that the public good and markets are incompatible. But as Larry Ribstein has noted:

The Times is . . . selling a product. I also think that, in doing this, it is performing a public service, like every other profit-seeking business.

In contrast, Zittrain seems to belive that profit-making and good journalism are incompatible. He fears that

[i]f newspapers were to grant tenure to journalists, they might be less responsive to market demands and therefore less profitable.

In other words, the idiots out there who, you know, buy newspapers, think “good journalism” entails something quite different than what Jonathan Zittrain thinks it entails, and a newspaper that catered to his (inherently superior) vision would inevitably go belly up. Actually, he’s probably right. I gather that almost no one buys the NYT anymore. But he is wrong to imply that “selling a product” effectively is inconsistent with “public service.” The two are actually intimately entwined, and it seems quite elitist to me to suggest otherwise here.

I agree with Zittrain on one point: There is a great benefit (to those who can afford it) to getting a liberal arts education.

[T]here’s a world out there beyond the raw vocational skills needed for one’s next phase of life, and . . . there is a benefit — an incredible privilege — to have a number of years to view the world according to one’s intellectual curiosity, seeking and building truth for truth’s sake, and learning to know it when one sees it.

But to me, this suggests that universities that look a lot like today’s universities would continue to exist and thrive in a more competitive, more accountable environment. The market does not lead to the lowest common denominator as Zittrain implies; it leads to a diversity of choice, responsive to the range of consumer demand. It is rather the current model that is static — and troubling.

Whose university is it?

Geoffrey Manne —  22 February 2006

Harvard-Yale-Football-Program-1959.jpgThere’s been some recent (and widely disparate) posting on the nature and governance of universities. See, for example, here (Tsai on sports and higher ed), here (Oesterle on endowment spending), here (Bollier on the knowledge commons; see especially comments by me and Josh in the . . . comments section (duh)), here (Posner on tenure), here (Becker on tenure), and here (me on the education market of the future). More recently Becker and Posner wade back in with posts on for-profit universities.

Now comes news of Larry Summers resignation, on which see Larry here and here.

The unifying (if implicit) question is: For whose benefit are universities operated, and how is that benefit determined? It’s not such an easy question. Many would answer quickly, “the students,” but, even if this were true (and it sure seems not to be), the question would remain, why is it true? Students have almost no say in most university governance, and little ability to evaluate specific university decisions. What constrains faculties, administrators and trustees to act in their interest?

The problem is endemic to nonprofits, but especially universities. Among the (interrelated) problems in sorting all this out are these:

  1. Residual claimants are not well-defined, meaning something of a free-for-all (rent seeking) and imperfect (to say the least) fiduciary relationships.
  2. There’s nothing approaching unity of interest among the potential residual claimants and other stakeholders.
  3. There’s no control market (a function of the above and the legal inalienability of profits).
  4. “Maximization” is generally ambiguous, no matter whose preferences prevail (where the maximand isn’t profits).
  5. Other markets are weak, as well, because the products on offer (ranging from education to research to a “marriage market” and beyond) are hard to observe and measure.

As I said in the post linked above, I think in particular that faculties have little accountability to students and other stakeholders, much to the detriment of students (and probably the broader society). So how should we start to talk about the merits of sports on campus, tenure and “knowledge commons”? Or how should we take Summer’s forced resignation at the hands of, as Larry points out, “segments of the Arts and Sciences faculty”? Are these “good”? How can you tell? By what standard do you judge? Is there any basis for inferring value from persistence?

For example, tenure might be an efficient solution to the problem of the “high commitment” academic workplace, as Posner suggests. But how would you know? There’s not much of a market to punish relative failure and reward relative success in teaching quality (and even research, although this market is a little better). Tenure may encourage the creation and operation of “good” norms, but it also opens the door to bad ones. Which effect prevails? And even if there were a market (if students paid directly for professors’ teaching services) how well do students’ narrow, perceived interests track their real interest or social welfare?

It’s hard for any reasonable observer to be other than disgusted at the situation at Harvard (although perhaps not surprised). What, if anything, is to be done, and by whom? Anyone have any answers?

UPDATE: Becker and Posner weigh in on the Summers debacle. I would just add that, as Posner echoes, l’Affair Étés (get it?) points up the problem with de facto residual claimancy by faculty members within the university organization, strengthening Becker’s plea for more powerful administrators. But the real problem is the relative absence of markets — and, especially with tenure, who will effectively challenge the faculty for control of the organization?

UPDATE 2:  David Friedman reminds us again that Adam Smith said it all before.  A point I also made (quoting the same excerpt) here.