Author: Lawrence Cunningham


Prawf Musings and Query on the Value of Values

My Mother, God bless her, had a hard time understanding why I’d trade a higher-paying job for a lower-paying one.  This happened in the early 1990s.  I had begun my career as a high-paid corporate lawyer at the prominent New York law firm of Cravath, Swaine & Moore. There I had at least some chance of becoming partner and an excellent chance of becoming partner at some such firm upon leaving Cravath.

Then another future appeared: an offer to become a law professor, first at Cardozo Law School and later at Boston College and George Washington University.  The pay at Cravath or another law firm dwarfs the pay at GW, BC or Cardozo (though longer term, when book royalties and consulting fees are added, being a law professor remains a reasonable living).

My Mother wondered: “aren’t you supposed to move up, from lower-paying jobs to higher-paying jobs?”  I explained that there are compensating values of the professorial position. Chief among these, for me, were tenure and academic freedom.  I was willing to trade the higher pay in part for those commitments of permanence and autonomy.

There are many other such compensating values too. Those who are thrifty by nature may like the budget-consciousness of a school compared to the lavishness of the kind of private practice I had. I valued the earnestness and sincerity of legal pedagogy and scholarship (calling things as I seem them) over the advocacy of law practice (whose bread I eat, his song I sing), true even when I take consulting assignments.

Many find the academy more congenial in the sense of boasting a shared mission and aspiring to morals above those of the marketplace.  In contrast to many law firm cultures, I welcomed the opportunity for entrepreneurship: academic entrepreneurship of hosting innovative conferences, writing on unusual topics, pioneering programs, redesigning curriculum, building institutions, leading student learning.

Some like professorial life because it exists at the basic level in the legal profession, the gate-keeping end where new lawyers are vetted and trained. Something about that rudimentary point is more enticing than working to add new clients to an old practice or derive new sub-specialties from there.

I explained to my Mother how some sellers of companies feel the same way and analogized to a situation my Dad once faced.  He once had to choose between two business opportunities, one that paid more but the other that put his name on the door, put him in charge and gave him a sense that his business would be around forever.  That recall helped my Mom get why I was moving from Cravath to Cardozo.  

I  wonder how other professors (or aspiring professors) might answer their parents or spouses or kids when explaining why they wish to take a lower-paying job over a higher-paying one.  Not only what the factors are but how to interpret them commensurately.  If you could earn $60 million in a 30-year partnership career at Cravath but only $6 million in the same time period as a Cardozo professor, does that mean the value of tenure and autonomy and the rest is something like $54 million?


A Lament on Corporate Governance

The following essay, which I wrote for a book with Hank Greenberg about AIG, laments recent decades of changes in corporate governance and is excerpted from the current issue of Directors & Boards, as adapted by its editor, Jim Kristie.

AIG’s founding corporate board in 1967 included luminaries who made AIG into the largest insurance company in the world. In the ensuing decades, AIG enlisted some of its most distinguished corporate officers to serve on its board of directors. Those traditional officer-directors not only knew the company and the insurance business well but were world travelers who understood the demands of building a global financial services company.

The early board appreciated the appeal of nominating some directors from outside AIG for election by shareholders. Such nonemployee directors offered fresh perspectives, opened doors to business opportunities and made decisions when employee directors faced conflicts of interest.

Outside directors who served during the 1970s through the 1980s included former cabinet officials, international business executives, foreign service officers, central bankers and financial accountants. In general, these outside directors served as senior advisors, without intending to second-guess managerial judgments, particularly concerning arcane insurance industry matters beyond their expertise. Outside director Dean P. Phypers (1979–1999), chief financial officer of IBM, noted that this was the standard corporate governance model of the period, at AIG and elsewhere: a collegial body operating in an atmosphere of trust and informality.

A changing model

That model began to change in the 1970s—just as American Home launched its thriving directors and officers (D&O) insurance business. Routinely ever since, in response to national scandals involving corporate misconduct, Congress passed new legislation and the New York Stock Exchange—where AIG listed its shares in 1984—adopted rules that increasingly required corporations to add outside directors to the board. The authorities also first suggested and later required increasing numbers of committees whose membership was limited to outside directors.

These changes were aimed at checking management shirking and enhancing corporate performance, though empirical research never provided much support that such reforms achieved such objectives. Legislators, regulators, and judges seemed to believe that, at the very least, outside directors would be able to exercise independent judgment. On that basis, as a “reform” to respond to crisis, elevating the number and power of outside directors helped forge political consensus. It did not matter whether directors had knowledge of a company’s operations or industry or any other expertise.

Letting political expediency dictate business practice is always dangerous and such universal regulation necessarily overlooked variation among companies. Concerning AIG, its roots as a private company, its long-standing entrepreneurial culture and engagement in the complex field of international insurance all pointed in favor of an inside board. Nevertheless, throughout this period of increased enthusiasm for outside directors on corporate boards, AIG successfully recruited capable people who added the value of their business judgment and experience and put the interests of AIG and shareholder prosperity first. Read More


The Wild Eliot Spitzer

Eliot Spitzer says he’ll do in the New York City comptroller’s office what he did in the New York State Attorney General’s office.  Assuming he is not lying, that would be a very dangerous thing. New York City voters should remember what he did as AG.  Here is a sampling.

As AG, Spitzer twisted a Depression-era law called the Martin Act, intended to police bootleggers, into a despotic sword against corporate New York—the “legal equivalent of King Arthur’s Excalibur,” an informed legal analyst wrote.[i]  Writers at Forbes summarized the modus operandi: “The hallmark of a Spitzer trophy is victory by intimidation.”[ii] To give some examples, AG Spitzer:

● coerced Marsh & McLennan’s board to oust CEO Jeff Greenberg, an abuse of power that prompted corporate governance expert Richard I. Beattie, chairman of Simpson Thacher, to condemn Spitzer’s misconduct.[iii]

● pressured AIG’s board to oust CEO Hank Greenberg, an abuse of power that prompted Stanford law professor and former SEC Commissioner Joseph A. Grundfest to lament that if a government official insists that a board fire a CEO, the CEO will be fired, even before any investigation or hearing and even if evidence later shows the government was wrong.[iv]

● blackmailed Merrill Lynch’s board into settling a civil case by saying he would otherwise file assorted criminal charges, dubious as a matter of legal ethics.[v]

● threatened John C. Whitehead, former deputy secretary of state and chairman of Goldman Sachs, for a Wall Street Journal op-ed questioning Spitzer’s tactics, yelling “there is now a war between us and you’ve fired the first shot. I will be coming after you. You will pay the price. . . . You will pay dearly.” [vi]

● bullied friends of  Kenneth R. Langone, co-founder of Home Depot and benefactor of NYU medical school, cornering Jack Welch, former chairman of GE, to say he “was so mad that he was going to put a spike through Langone’s heart.”[vii]

● ranted to former New York State Attorney General Dennis C. Vacco about  Hank and Jeff Greenberg, that he was going “to take those mother fuckers down.”[viii]

● screamed at a law partner of David Boies, the prominent lawyer who represents Hank Greenberg: “Because your firm is in bed with someone like Hank Greenberg, you have to bear the consequences and I have a bazooka pointed at David Boies, you and everyone else at your firm who is involved.”[ix]

Spitzer brought many down and rattled innocent good citizens.  Everyone in New York City should worry that Spitzer will find ways, as he threatens, to radically expand the power of the comptroller to do equally dangerous things in the City.  That will include trampling on due process rights and instilling in people fear of out-of-control government officials such he aspires once again to be.

Read More


Berkshire Hathaway’s Unique Permanence

aaa rock of gibralterPermanence is the most distinctive trait of Berkshire Hathaway, the diversified Fortune 10 conglomerate whose unusual features, thanks to iconoclastic chairman Warren Buffett, are legion. Permanence is salient because, unlike any other conglomerate in history or rival in the acquisitions market, Berkshire has never sold a subsidiary it acquired.

Ironically, the experience that led to this unique practice culminated in the reluctant sale of Berkshire’s original business, textile manufacturing, in 1985. That sale was so painful for management, employees and other stakeholders that Berkshire committed to avoid a replay.

Instead, it adopted a policy of up-front screening, rigorous acquisition criteria that cut the chances of owning a business that would be tempting to sell. Berkshire then turned that policy into a huge advantage, assuring prospective sellers of companies a permanent corporate home.

In turn, the assurance of permanence appealed strongly to the kinds of companies that would meet Berkshire’s rigorous acquisition criteria: those owned and loved by families, entrepreneurs and other owner-oriented types. Some fifty acquisitions later, the promise has never been broken.

That is why I found so peculiar the following passage in William Thorndike’s well-selling book, The Outsiders, a profile of select big-name CEOs, including Buffett, whom Thorndike considers to have been similar to each other but different from everybody else. After referencing the 1985 closure of Berkshire’s ailing textile business, he writes: Read More


Top Differences Between the UCC and the Common Law of Contracts

“What are the top dozen (or so) differences between the common law of contracts and Article II of the Uniform Commercial Code?” The following is a reliable list.  (For more on this topic, especially the common law aspects in an entertaining treatment of disputes in the headlines, see Contracts in the Real World: Stories of Popular Contracts and Why They Matter).

1. Firm Offers: even without consideration, offers by merchants can be irrevocable for reasonable time periods. 2-205.

2. Battle of the Forms: an acceptance need not mirror an offer’s terms to form a contract, unless the offer says so, the variation is a big deal or is protested promptly by the other side.  2-207.

3.  Definiteness / Open Price Term: even without a stated price, a contract may be sufficiently definite so long as the parties manifest an intention to be bound and there is a basis to provide a remedy on breach.  UCC 2-204; 2-305; 2-311.

4. Warranties: (a) implied warranty of merchantability; (b) implied warranty of fitness when seller knows buyer is relying on seller’s expertise; and (c) express warranties based on promises or representations. 2-314; 2-315.

5. Perfect Tender Rule: buyers may insist on performance to a tee, no room for the substantial performance doctrine of common law (though there are complex and vital wrinkles, including giving time to cure before covering).  2-601.

6.  Acceptance by Shipment: buyer orders for “prompt shipment” can be accepted either by promise or prompt shipment, at the seller’s election. 2-206.

7.  Good Faith Modifications: no consideration required. 2-209.

8.  Time: absent contractual definiteness as to time, a reasonable good faith time is supplied

9.  Assurance of Due Performance: reasonable grounds for insecurity about the other side’s performance permit suspending performance and demanding assurance—absent which, the contract is deemed repudiated.  2-609

10.  Damages on Repudiation: buyer damages when seller repudiates are the difference between the contract price and the market price when buyer learned of the repudiation (plus incidental damages).  2-713.

11.  Statute of Frauds: Not so much a variation from common law as from non-goods statutory law, a memo of some sort is generally required for transactions in goods over $500, with exceptions for confirmations not protested and specially manufactured goods after serious work begins.  2-201.

12.  Parol Evidence Rule: bit more liberal concerning course of dealing.  2-202.

13.  Assignable Requirements Contracts: so long as assignee’s quantity is not unreasonably disproportionate to assignor’s quantity.  2-306.

14.  Lost Volume Seller: duty to mitigate obviated.  2-718.

Lists such as these abstract specific detail from the richer mix of differences in philosophy, history, purpose, application and context between the common law and commercial code.  This is the start of the discussion, not the end!  (Again: see Contracts in the Real World: Stories of Popular Contracts and Why They Matter).



Spitzer’s Unforgivable Character Flaw: Hypocrisy

SpitzerElliott Spitzer has lately managed to make everyone think that his biggest fault was having sex with hookers. He taps into American willingness to forgive sexual indiscretions of politicos. What he has gotten people to forget is that he is a hypocrite, a character flaw that is disqualifying and unforgivable.

Spitzer resigned the New York governorship only in part because he violated laws against solicitation of prostitution.   Many find such laws contestable and transgressions minor, after all, even when married middle-aged men regularly have sex with girls younger than their daughters over a period of several years.

More important is the other reason Spitzer resigned in disgrace: criminal evasion of federal banking laws.  Spitzer wired the payments for his sex, in aggregate involving large amounts of money, while concealing evidence of its source.  That is a violation of federal  law.  His bank filed suspicious activity reports with federal overseers as federal law requires.  Federal authorities stumbled upon these when investigating the prostitution ring Spitzter had patronized for many years. That triggered his downfall.

During his term as New York attorney general, Spitzer had acted as a crusader against any form of lawbreaking. He particularly despised financial shenanigans that complied with technical aspects of laws but bent them out of shape.  When we found out that he committed just that kind of legal violation, he was exposed as a hypocrite.  That is a character flaw. 

Spitzter can ask forgiveness and redemption for cheating on his wife and scarring his children.  Many Americans and New Yorkers will be fine with such.  While I object vehemently to the unethical practices Spitzer displayed while serving as attorney general, some people even now  applaud his zealotry when prosecuting and investigating financial powerhouses and rich and powerful individuals. But hypocrisy is a character flaw that cannot be forgiven or redeemed. I would not trust such a man to be dog catcher let alone put in charge of a city’s financial affairs.

New Yorkers would do well to recall this passage from the 2010 book by Peter Elkind about the disgraced politician (pp. 259-260):

Spitzer’s entire political strategy was based on his projection of an image as a moralist.   That he broke numerous laws, so furtively and mischievously, to engage in extramarital sex with young women blew his cover. He was not what he portrayed himself to be. At best, he was a hypocrite. His tactics in the cases he brought underscored that he was not, in fact, the devotee of the rule of law or proponent of justice he and his media friends projected. But in their zeal to condemn, Spitzer and his fans overlooked many principles of legal ethics designed to prevent prosecutors from harassing citizens and unfairly or wantonly destroying reputations. 


Warren Buffett’s Single Bid Rule

Among the many ways that Warren Buffett is unusual is his approach to the role of price in business acquisition negotiations. Other people commonly haggle over price. Tactics include sellers naming an asking price that is higher than warranted or buyers making a low-ball bid. Some people enjoy the give and take and many believe it is a way to produce value in exchange.

Buffett eschews such exercises as a waste of time. One of Berkshire’s acquisition criteria (in addition to size, proven earnings power, quality management in place and relative simplicity of the business) is having a price. Eschewing the games so many negotiators like to play over ranges of values, Buffett wants a single price at which each side can say yes—or walk away. His bid is his bid; when he gives you a bid, what you have is what most people classify as the “best price,” “final offer,” or “highest bid.”

Buffett has repeatedly statesd this policy, along with the other acquisition criteria, in every Berkshire Hathaway annual report since 1983 (and once in a 1986 ad in the Wall Street Journal). Yet I know many people who are skeptical about whether Buffett and Berkshire actually adhere to this policy—doesn’t he engage in price negotiations in at least some cases, they ask? Aren’t there situations in which the value of an exchange is not discovered other than through the dynamic of negotiations, including about appropriate methodology?

To answer such questions, I examined the 16 Berkshire Hathaway acquisitions over the past two decades that involved public company targets. Unlike private company targets, those companies are required by U.S. federal law to publicly disclose the background of the transaction, including negotiation over all material terms, such as price. Read More