Well, here we are at the end of another semester.  I just finished teaching my last class in our new, three-credit-hour, basic Business Associations offering.  (Next semester, I take my first shot at teaching a two-credit-hour advanced version of Business Associations.  More to come on that at a later date.)  The basic Business Associations course is intended to be an introduction to the doctrine and norms of business associations law–it is broad-based and designed to provide a foundation for practice (of whatever kind).  I hope I didn’t make hash out of everything in cutting back the material covered from the predecessor four-credit-hour version of Business Associations . . . .

I find teaching fiduciary duty in the corporations part of the basic Business Associations course more than a bit humbling.  There is a lot there to offer, and one can only cover so much (whether in a three-credit-hour or four-credit-hour course format).  Every year, I steel myself for the inevitable questions–in class, on the class website (TWEN), and in the post-term review session (scheduled for today at 5 PM)–about the law of fiduciary duty as it applies to directors.  This past weekend, I received a question in that category on the course website.  In pertinent part, it read as follows (as edited for fluency in some places):

I am having problems with understanding the duty of loyalty for directors.

First, . . . I don’t think I know which transactions are breaches of loyalty. Do they include interested director transactions, competition, officer’s compensation, and not acting in good faith? Second, do care, good faith, and loyalty all require that the directors be grossly negligent? I think I am just confused on the standard to determine whether a director has breached the duty of loyalty and/or care.  

Also, I have in my notes “use the entire fairness test” . . . .
 
You get the picture.  It’s hard to resist the temptation to re-teach the entire part of the course on corporate fiduciary duties when one gets a question/series of questions like this.  I did, in fact, resist.  I will spare you the entire substance of my response (unpacking the ways to think through the question presented using the material we covered in the course), but here are the key, process-oriented paragraphs:
 
 . . . It is somewhat meaningless, except by example, to focus on “transactions” that breach the duty of loyalty.  Among other things, not all breaches of duty occur in the context of transactions.  Fiduciary duty is an obligation that the board carries with it in conducting its activities in managing the business and affairs of the corporation.
 
 . . .
 
That’s a long answer to your question, but I sensed that you needed to slow down and remember (1) what fiduciary duty is and (2) where it comes from before you started to think about (3) circumstances in which litigants have claimed breaches of those duties (not all transactions) and (4) ways in which courts have treated those claims.  Separate out these four things and review the cases (and sparse related statutory law) we have covered to ensure that you “see” all this.  You may decide I have over-simplified here (and I have).  But it should help get you back on a productive path.
 
How do you answer questions like this when they are posed to you at the end of the semester?  I am always looking to get better at what I do in and outside the classroom, and since I know I will get these kinds of questions every time I teach the course (varying somewhat in content from year to year and student to student), I am interested in learning how others approach this type of question.  I am all ears, so fill them with ideas . . . .

I recently read a very interesting article on legal education, The MIT School of Law? A Perspective on Legal Education in the 21st Century, by Daniel Martin Katz, scheduled to appear in the 2014 U. Ill. L. Rev. 

Katz, an associate professor at Michigan State, considers the impact of the information revolution and changes in the market for legal services on legal education. He considers how a hypothetical law school might market itself and its students. The key, according to Katz, “is to stop trying to be the ‘50th or 100th best Harvard and Yale’ and instead to concentrate on outflanking these and other institutions by becoming leaders in law’s major emerging employment sectors.” Rather than consider how to incrementally change existing law schools, Katz tries to work backward from what he thinks the future market for lawyers will be like to how a law school should be structured to serve that market. Not surprisingly, Katz concludes that knowledge of technology, math, engineering and science will be important for future lawyers—thus, the MIT School of Law in the article’s title.

I’m a little late getting to this, but it’s a very interesting, provocative article—well worth reading. Katz’s article is part of the Illinois Law Review’s  tribute to Larry Ribstein. That entire issue is worth a close look when it is available.

When commenters look back at the financial crisis, many blame the ratings agencies, at least in part – and in particular, the dominance of a small number of firms (Moody’s, S&P, and – distantly – Fitch).  This is why, for example, the SEC has been criticized for erecting barriers that prevent other agencies from earning the coveted NRSRO label. 

Which is why I found this story regarding an apparent effort by Moody’s to eliminate a competitor so fascinating.  According to the WSJ:

Moody’s Corp. doesn’t often give away its thoughts free of charge.

But the ratings firm made an exception recently, issuing an unsolicited credit rating to National Penn Bancshares Inc., a small community bank it had never assessed before.

Moody’s grade was lower than one issued just weeks earlier by Kroll Bond Rating Agency Inc., which the bank had hired to rate a new bond.

Kroll contends Moody’s deliberately lowballed its rating—a move that could have ripple effects through the market for National Penn’s bonds—to scare other small banks into hiring it for future deals.

“It seems this was nothing less than intimidation,” said Kroll President Jim Nadler. “Investors and issuers are worried that Moody’s, if it’s not paid their ransom, will continue doing this until they bully their way into the market.”

A Moody’s spokesman said the firm’s unsolicited rating for National Penn was due to the relatively large size of the debt deal for a regional bank. “We thought our opinion would be helpful to market participants,” he said….

Moody’s never met with National Penn senior management. Instead, Moody’s analysts sifted through public disclosures, listened to earnings calls and read news articles, Mr. Tischler said. These types of situations, with no participation from the rated issuer, are “definitely the minority,” he added.

Moody’s hadn’t rated a U.S. bank with assets under $10 billion all year. In its eight-paragraph rating rationale from Oct. 31, Moody’s said National Penn’s “acquisition appetite” for troubled banks “poses risks for creditors,” calling into question the management’s strategy. Few detailed financials were mentioned in the initial Moody’s rating.

Now, this is not the first time Moody’s has been accused of this kind of behavior.  In Jefferson County School District No. R-1 v. Moody’s Investor’s Services, Inc., 175 F.3d 848 (10th Cir. 1999), for example, the plaintiff alleged that Moody’s publicized an unsolicited low-ball rating as punishment to an issuer for failing to hire Moody’s to rate the deal.  In that case, the Tenth Circuit held that ratings are opinions subject to First Amendment protection, and dismissed state law tort claims as well as federal antitrust claims.

It raises really interesting questions, because on the one hand, many observers believe that “ratings shopping” – the practice of one issuer going to different agencies until it receives the rating it wants – corrupts ratings and contributed to the financial crisis.  So we want to encourage agencies to rate securities even when an issuer has chosen a different agency – which necessarily means protecting them from lawsuits by disgruntled issuers.  On the other hand, the last thing we want is for agencies to use ratings as a means to exclude competitors from the market. 

The reality is, the best system would be one in which the issuer itself did not get to choose the agency (or, more creatively, perhaps one in which the rater itself was forced to invest in the securities it rates) – but despite proposals, we haven’t been able to adopt a workable system to make that happen (as demonstrated by the fact that investors will sue the agencies for issuing unreliable ratings even as they continue to rely on them as a cornerstone of their investment policy).

Earlier this week, I watched Ivory Tower: Is College Worth the Cost? on CNN, which was a somewhat depressing documentary for someone who hopes to spend the next 30+ years in higher education.

One of the things the documentary decries is the construction of more and more extravagant buildings and amenities on college campuses.

While the extent and type of building that should occur can be reasonably debated – and my own institution has almost doubled the number of buildings on campus in the past decade – I want to make a relatively modest claim here: aesthetics matter in higher education.

Belmont University

(Photo of a Belmont University building and fountain from my iPhone).

Perhaps some schools have gone overboard in creating beautiful campuses. However, at institutions that exist to illuminate for students something much more important than mere financial returns, I think it is fitting to invest in beautiful campuses, for their own sake.

Again, perhaps most schools do not need student recreation centers than costs hundreds of millions of dollars, but there is something inspiring about going to a school, and teaching at a school, that is breathtakingly beautiful. 

This post may surprise some people who know me because I tend to be a pretty practical person, and I still believe that campus buildings should be functional over fancy, if you have to choose. But I think we need to widen the lens when we look at the benefits college and graduate school experiences provide. Yes, the financial benefits are quite important, and most schools need to be actively looking at increasing the financial benefits and/or reducing the financial costs.

Hopefully, however, college is about much more than just paying money now for an opportunity to earn more money later. Hopefully, college is about building relationships, learning independence, learning to think critically, being inspired, being mentored, creating and appreciating beauty. Maybe this is wishful thinking from a professor, but I do regularly see students who seem to capture much more from college than just better job prospects. Granted, many students do not take full advantage of the meaningful opportunities available, but those meaningful opportunities exist and they are hard to capture on a balance sheet.

I don’t know what a beautiful building is worth. I guess we could measure its worth by counting the number of additional students it attracts to the school, but that seems cynical and narrow. Beautiful buildings may inspire. Inspiration is tough to quantify, but, nonetheless, I think it has value. Personally, I am thankful I work on a beautiful campus, and hope the campus inspires our students not only while they study here, but after they leave as well.     

As regular readers know, I research and write on business and human rights. For this reason, I really enjoyed the post about corporate citizenship on Thanksgiving by Ann Lipton, and Haskell Murray’s post about the social enterprise and strategic considerations behind a “values” message for Whole Foods, in contrast to the low price mantra for Wal-Mart. Both posts garnered a number of insightful comments.

As I write this on Thanksgiving Day, I’m working on a law review article, refining final exam questions, and meeting with students who have finals starting next week (being on campus is a great way to avoid holiday cooking, by the way). Fortunately, I gladly do all of this without complaint, but many workers are in stores setting up for “door-buster” sales that now start at Wal-Mart, JC Penney, Best Buy, and Toys R Us shortly after families clear the table on Thanksgiving, if not before. As Ann pointed out, a number of protestors have targeted these purportedly “anti-family” businesses and touted the “values” of those businesses that plan to stick to the now “normal” crack of dawn opening time on Friday (which of course requires workers to arrive in the middle of the night). The United Auto Workers plans to hold a series of protests at Wal-Mart in solidarity with the workers, and more are planned around the country.

I’m not sure what effect these protests will have on the bottom line, and I hope that someone does some good empirical research on this issue. On the one hand, boycotts can be a powerful motivator for firms to change behavior. Consumer boycotts have become an American tradition, dating back to the Boston Tea Party. But while boycotts can garner attention, my initial research reveals that most boycotts fail to have any noticeable impact for companies, although admittedly the negative media coverage that boycotts generate often makes it harder for a companies to control the messages they send out to the public. In order for boycotts to succeed there needs to be widespread support and consumers must be passionate about the issue.

In this age of “hashtag activism” or “slacktivism,” I’m not sure that a large number of people will sustain these boycotts. Furthermore, even when consumers vocalize their passion, it has not always translated to impact to lower revenue. For example, the CEO of Chick-Fil-A’s comments on gay marriage triggered a consumer boycott that opened up a platform to further political and social goals, although it did little to hurt the company’s bottom line and in fact led proponents of the CEO’s views to develop a campaign to counteract the boycott.

Similarly, I’m also not sure of the effect that socially responsible investors can have as it relates to these labor issues. In 2006, the Norwegian Pension Fund divested its $400 million position (over 14 million shares in the US and Mexico operations) in Wal-Mart. In fact, Wal-Mart constitutes two of the three companies excluded for “serious of systematic” human rights violations. Pension funds in Sweden and the Netherlands followed the Fund’s lead after determining that Wal-Mart had not done enough to change after meetings on its labor practices. In a similar decision, Portland has become the first major city to divest its Wal-Mart holdings. City Commissioner Steve Novick cited the company’s labor, wage and hour practices, and recent bribery scandal as significant factors in the decision. Yet, the allegations about Wal-Mart’s labor practices persist, notwithstanding a strong corporate social responsibility campaign to blunt the effects of the bad publicity. Perhaps more important to the Walton family, the company is doing just fine financially, trading near its 52-week high as of the time of this writing.

I will be thinking of these issues as I head to Geneva on Saturday for the third annual UN Forum on Business and Human Rights, which had over 1700 companies, NGOs, academics, state representatives, and civil society organizations in attendance last year. I am particularly interested in the sessions on the financial sector and human rights, where banking executives and others will discuss incorporation of the UN Guiding Principles on Business and Human Rights into the human rights policies of major banks, as well as the role of the socially responsible investing community. Another panel that I will attend with interest relates to the human rights impacts in supply chains. A group of large law firm partners and professors will also present on a proposal for an international tribunal to adjudicate business and human rights issues. I will blog about these panels and others that may be of interest to the business community next Thursday. Until then enjoy your holiday and if you participate in or see any protests, send me a picture.

This is the time of year when we craft exam questions and grading grids in anticipation of exams.

Aside from Teaching Law by Design (a fabulous resource that I recommend for all new teachers as a great continuing resource for even those grizzled from years in the trenches), I have used few formal resources to guide my exam writing and grading process. Fortunately, I work with creative, collaborative and generous colleagues who all shared lots of samples and tips when I first started writing exams.  Before committing myself to my Corporations exam this year, I decided to see what is out there to guide exam construction and grading. Finding little that was useful on SSRN or Westlaw, I turned to a broader search, which brought me to a general test instruction guideline produced by Indiana University, aptly titled: How to Write Better Tests.  It had the following information regarding essay exams that serve as a useful reminder about why we are so meticulous in constructing our grading rubrics and creating grading schemes that, to the greatest extent possible, reduce our individual biases.

Consider the limitations of the limitations of essay questions:

1. Because of the time required to answer each question, essay items sample less of the content.

2. They require a long time to read and score.

3. They are difficult to score objectively and reliably. Research shows that a number of factors can bias the scoring:

A) Different scores may be assigned by different readers or by the same reader at different times

B) A context effect may operate; an essay preceded by a top quality essay receives     lower marks than when preceded by a poor quality essay.

C) The higher the essay is in the stack of papers, the higher the score assigned.

D) Papers that have strong answers to items appearing early in the test and weaker answers later will fare better than papers with the weaker answers appearing first.

To combat these common issues the guidelines recommend:

  • anonymous grading (check)
  • grading all responses to question 1 before moving on to question 2, and so on (check)
  • reorganizing the order of exams between questions (check)
  • deciding in advance how to handle ambiguous issues (check, thanks to my grading rubric)
  • be on the alert for bluffing (CHECK!)

If anyone has found a particularly useful resource regarding exam construction and grading, please share in the comments. I am sure everyone would benefit.

Happy Thanksgiving BLPB readers!

-AT

We want the best for both of our kids, and we are working to help them learn as much as they can about being good people and successful people. We’re fortunate that we have a (relatively) stable life, we’ve had good health, and we’re able to provide our children a lot of opportunities.  For my daughter, as I have noted before, I do worry about institutional limits that are placed on her in many contexts. 

She’s in first grade, but expectations are already being set.  On her homework last week: a little boy in her reading comprehension story builds a tower with sticks and bricks and stones.  Next story: a little girl gets fancy bows in her hair instead of her usual ponytails.  I wish I were making this up.  

This is more pervasive than I think many people appreciate.  Take, for example, the Barbie computer science book that had people raising their eyebrows (and cursing).  NPR has a report explaining the basic issues here. The basics:

A book called Barbie: I Can Be A Computer Engineer was originally published in 2010. Author and Disney screenwriter Pamela Ribon discovered the book at a friend’s house and was initially excited at the book’s prospects, she tells guest host Tess Vigeland.

But then she continued reading.

“It starts so promising; Barbie is designing a game to show kids how computers work,” Ribon says. “She’s going to make a robot puppy do cute tricks by matching up colored blocks.”

But then Barbie’s friend Skipper asks if she can play it, and the book continues:

” ‘I’m only creating the design ideas,’ Barbie says, laughing. ‘I’ll need Steven’s and Brian’s help to turn it into a real game.’ “

Sigh. 

Harvard Business Review recently published a piece, Research: How Female CEOs Actually Get to the Top, that offers some insights.  It’s a good read, and is shows that success at the highest levels  is often limited to women pursuing a different path and in companies with a particular culture. At a minimum, the article suggest that the advice we give women about how to get ahead may not be useful. (Not shocking given that the advice is often coming from men.) Here’s an excerpt with my biggest takeaways, but I recommend the whole things (it’s a short read): 

The consistent theme in the data is that steady focus wins the day. The median long stint for these women CEOs is 23 years spent at a single company in one stretch before becoming the CEO. To understand whether this was the norm, we pulled a random sample of their male Fortune 500 CEO counterparts. For the men in the sample, the median long stint is 15 years. This means that for women, the long climb is over 50% longer than for their male peers. Moreover, 71% of the female CEOs were promoted as long-term insiders versus only 48% of the male CEOs. This doesn’t leave a lot of time for hopscotch early in women’s careers.

* * * 

It may be that the playbook for advising young women with their sights set on leading large companies needs to be revised. Just as important, there is something inspiring for young women in the stories of these female CEOs: the notion that regardless of background, you can commit to a company, work hard, prove yourself in multiple roles, and ultimately ascend to top leadership. These female CEOs didn’t have to go to the best schools or get the most prestigious jobs. But they did have to find a good place to climb.

To be clear, I am thankful things have progressed to the point that my daughter really does have a legitimate shot at the same success as my son. Things are better than they were, and I see that.  I’m just not satisfied that we’re where we need to be, because her access to opportunities do not mean she has the same likelihood of success. We’ll keep working on it, as I’d like to think we all should.  

Turkey_0

Happy Thanksgiving you all!  With my co-blogger colleagues here on the BLPB writing various Thanksgiving posts on retail-related and other holiday-oriented business law issues (here and here), I find myself in a Thanksgiving-kind-of-mood.  I honestly have so much to be thankful for, it’s hard to know where to start . . . .  But apropos of the business law focus of this blog, I am choosing today to be thankful for my students.  They make my job really special.

This semester, I have been teaching Business Associations in a new three-credit-hour format (challenging and stressful, but I have wanted to teach Business Associations in this format for fifteen years) and Corporate Finance (which I teach as a planning and drafting seminar).  I have 69 students in Business Associations and ten in Corporate Finance.  I have two class meetings left in each course.

The 69 students in Business Associations have been among the most intellectually and doctrinally curious folks to which I have taught this material.  I have talked to a lot of them after class about the law and its application in specific contexts.  Two stayed after class the other day to discuss statutory interpretation rules with me in the context of some problems I gave them.  This large group also includes a number of students who have great senses of humor, offering us some real fun on occasion in class meetings and on the class TWEN site.  They are not always as prepared as I would like (and, in fact, some of the students have expressed to me their disappointment in their colleagues’ lack of preparedness and participation), but they pick up after each other when one of them leaves a mess in his or her wake (volunteering to be “co-counsel” for a colleague–a concept I introduce in class early in the semester).  I enjoy getting up on Monday mornings to teach them at 9:00 am.

Corporate Finance includes a more narrow self-selected group.  Almost all of these students have or are actively seeking a job in transactional or advocacy-oriented business law.  They handed in their principal planning and drafting projects a bit over a week ago, projects that they spend much of the semester working on.  (These substantial written projects are described further in this transcribed presentation.)  Now, each student is reviewing and commenting on a project drafted by a fellow student.  Both the project and the review are constructed in a circumscribed format that I define.  I am excited to read their work on these projects, given the great conversations I have had with a number of them over the course of the semester as they puzzled through financial covenants, indemnification provisions, antidilution adjustments, and the like.  Great stuff.  I teach this class from 1:00 pm to 2:15 pm two days a week–a time in the day when I generally am most sleepy/least enthusiastic to teach.  But these folks ask good questions and seem to genuinely enjoy talking about corporate finance instruments and transactions, making the experience much more worthwhile.

So, I am very thankful for each and all of these 79 students.  I may not feel that way after I finish all the grading I have to do, but for now, I am both grateful and content.  And I didn’t consume a single calorie getting there (which is more than I will be able to say Thursday night . . .).  Just looking at the picture at the top of this post makes my stomach feel full and me feel heavier.  Ugh.

The federal government has a limited amount of money available for student financial aid. Many people believe the size of that financial aid pot should be increased. That may be true but, until that happens, the government should try to allocate the limited funds it has as efficiently as possible. So I ask, should the government be giving that money to law students?

I have great respect for my profession. I think lawyers serve an extremely important function. I’m a strong believer in individual liberty and many of our personal liberties have been preserved through the law and the efforts of lawyers. But it’s hard to argue that the most important issue in the United States today is a shortage of lawyers.

We need more scientists, engineers, mathematicians, and primary care physicians. So why is the government paying for students to major in fields like political science, sociology, and law, just to name a few? Wouldn’t we be better off allocating more money to math and the hard sciences, to give students an incentive to move into those areas? (Or, since many students aren’t prepared to move into those areas, perhaps some of that money needs to be used to improve primary and secondary education in science and math.)

I admit that I financed both my undergraduate political science degree and my law degree in part with federal funds. (When I went to college, I discovered that what I had always considered a liability—my family’s lack of money—was suddenly a benefit.) I was able to pursue my dream with the federal government’s help. But perhaps the government should have encouraged me to be a scientist or engineer. Or, if I really wanted to be a lawyer, to finance that dream myself.

There’s even less money available now than there was when I was a student, back in the days of Aristotle. (Not less in nominal dollars, but less as a percentage of the cost of a higher education.) Because of that, the need to allocate that financial aid money well is even stronger.

I’m a law professor, so even suggesting this is going against my own self-interest. But sometimes self-interest has to yield to national interest.