Category: Culture

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The Future, Heaven, and Limbo Have Been and Will Always Be Apple Stores

If you saw Sleeper, Heaven Can Wait, or the last of the Harry Potter films, you might notice that they all have scenes that look quite like an Apple Store. White, seemingly floating desks, some robots, a sense of what it is all about. The likely reason is the design gurus of the 1970s like the stark white, sharp lines look. Steve Jobs was a student of that era and it informed Apple, The Sequel from iPods to the stores (the first Apple movie was design tools, the second was “we design, you buy”). As for Harry Potter, why fight the future and the masters? Tap into that vibe and viewers will be happy to know that even limbo, afterlife (whatever that was) is much as it has always been. White, simple, soothing, yet confusing too.

I wonder whether the Chinese group that copied the Apple Store perfectly could argue that the trade dress was generic?

2

There She Is, Your Homemade AR-15

I cannot give a talk about 3D printing without addressing the question of homemade guns. As Gerard and I pointed out in Patents, Meet Napster: 3D Printing and the Digitization of Things, this is America and making guns at home is legal. The issues many faced was whether the gun would work well, fail, or possibly misfire and harm the user. These issues are important as we look at the shifts in manufacturing. Many of us may prefer authorized, branded files and materials for home made goods or prefer to order from a third party that certifies the goods. That said, some gun folks and hobbyists are different. They want to make things at home, because they can. And now, Defense Distributed has made the “Ghost Gunner” “a small CNC milling machine that costs a mere $1200 and is capable of spitting out an aluminum lower receiver for an AR-15 rifle.” That lower is the part the the Federal government regulates.

Accoridng to Extreme Tech, Defense Distributed’s founder Cody Wilson, thinks that “Allowing everyone to create an assault rifle with a few clicks is his way of showing that technology can always evade regulation and render the state obsolete. If a few people are shot by ghost guns, that’s just the price we have to pay for freedom, according to Wilson.” This position is what most folks want to debate. But Gerard and I think something else is revealed here. As ExtremeTech puts it, “This is an entirely new era in the manufacturing of real world objects, in both plastic and metal. It used to be that you needed training as a gunsmith to make your own firearm, but that’s no longer the case.” That point is what motivated me to write about 3D printing and look deeper at digitization and disruption.

The first, short, follow-up on these ideas is in an essay called The New Steam: On Digitization, Decentralization, and Disruption that appeared in Hastings Law Journal this past summer.

4

Sports, Player Protection, and of course, Money

The attention to the way football head injuries affect players at all levels of the game is good. Whether the game as it is loved today can persist, I leave to others. But as the NFL has asserted that it wants to protect its players, the question of injury and health beyond head injuries struck me as a good one. I love football. I grew up with hard-nosed, crazy players (Raiders fan even during the abysmal last twenty plus years of dubious management). But with the evidence that these Sunday circuses put players at so much risk, I hope that the league and fans can find ways to mitigate the long-term harms of the sport. As Arian Foster recently pointed out, Thursday night games are not geared to protect players. Quite the opposite. They generate large revenue and are not going away. Yet it seems that a solution is at hand.

Use the bye-week teams to play on Thursday nights. With some juggling, the teams could be set up so that if a team is on a bye week, they play on Thursday, and then they again would have nine days rest. That should make for fewer injuries overall and a better post-season. Others may have written about this option (and a good friend had made this argument in the past but not to me). There may be fewer Thursday night games. But smart folks at the NFL should be able to figure out how to maximize the games, while still making money for the league and the players. Some may ask whether all long-term injuries can be mitigated. I doubt that. Still, if lawsuits persist, football, soccer (more contact and head injuries than one might think), and many contact sports may have to shift their rules or find that they can’t attract the best athletes. Hmm a world of basketball, extreme sports, and curling. Maybe I could get into that.

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Chapter 8 of Berkshire Beyond Buffett: An Excerpt and Link

untitledThe following is an excerpt from Chapter 8, Autonomy, from Berkshire Beyond Buffett: The Enduring Value of Values; the full text of the chapter, which considers the case for Berkshire’s distinctive trust-based model of corporate governance, can be downloaded free from SSRN here.

. . . Berkshire corporate policy strikes a balance between autonomy and authority. Buffett issues written instructions every two years that reflect the balance. The missive states the mandates Berkshire places on subsidiary CEOs: (1) guard Berkshire’s reputation; (2) report bad news early; (3) confer about post-retirement benefit changes and large capital expenditures (including acquisitions, which are encouraged); (4) adopt a fifty-year time horizon; (5) refer any opportunities for a Berkshire acquisition to Omaha; and (6) submit written successor recommendations. Otherwise, Berkshire stresses that managers were chosen because of their excellence and are urged to act on that excellence.   

Berkshire defers as much as possible to subsidiary chief executives on operational matters with scarcely any central supervision. All quotidian decisions would qualify: GEICO’s advertising budget and underwriting standards; loan terms at Clayton Homes and environmental quality of Benjamin Moore paints; the product mix and pricing at Johns Manville, the furniture stores and jewelry shops. The same applies to decisions about hiring, merchandising, inventory, and receivables management, whether Acme Brick, Garan, or The Pampered Chef. Berkshire’s deference extends to subsidiary decisions on succession to senior positions, including chief executive officer, as seen in such cases as Dairy Queen and Justin Brands.

Munger has said Berkshire’s oversight is just short of abdication. In a wild example, Lou Vincenti, the chief executive at Berkshire’s Wesco Financial subsidiary since its acquisition in 1973, ran the company for several years while suffering from Alzheimer’s disease—without Buffett or Munger aware of the condition. “We loved him so much,” Munger said, “that even after we found out, we kept him in his job until the week that he went off to the Alzheimer’s home. He liked coming in, and he wasn’t doing us any harm.” The two lightened a grim situation, quipping that they wished to have more subsidiaries so earnest and reputable that they could be managed by people with such debilitating medical conditions.   

There are obvious exceptions to Berkshire’s tenet of autonomy. Large capital expenditures—or the chance of that—lead reinsurance executives to run outsize policies and risks by headquarters. Berkshire intervenes in extraordinary circumstances, for example, the costly deterioration in underwriting standards at Gen Re and threatened repudiation of a Berkshire commitment to distributors at Benjamin Moore. Mandatory or not, Berkshire was involved in R. C. Willey’s expansion outside of Utah and rightly asserts itself in costly capital allocation decisions like those concerning purchasing aviation simulators at FlightSafety or increasing the size of the core fleet at NetJets.

 Ironically, gains from Berkshire’s hands-off management are highlighted by an occasion when Buffett made an exception. Buffett persuaded GEICO managers to launch a credit card business for its policyholders. Buffett hatched the idea after puzzling for years to imagine an additional product to offer its millions of loyal car insurance customers. GEICO’s management warned Buffett against the move, expressing concern that the likely result would be to get a high volume of business from its least creditworthy customers and little from its most reliable ones. By 2009, GEICO had lost more than $6 million in the credit card business and took another $44 million hit when it sold the portfolio of receivables at a discount to face value. The costly venture would not have been pursued had Berkshire stuck to its autonomy principle.

The more important—and more difficult—question is the price of autonomy.  Buffett has explained Berkshire’s preference for autonomy and assessment of the related costs: 

We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree. That means we are sometimes late in spotting management problems and that [disagreeable] operating and capital decisions are occasionally made. . . . Most of our managers, however, use the independence we grant them magnificently, rewarding our confidence by maintaining an owner-oriented attitude that is invaluable and too seldom found in huge organizations. We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly—or not at all—because of a stifling bureaucracy.

Berkshire’s approach is so unusual that the occasional crises that result provoke public debate about which is better in corporate culture: Berkshire’s model of autonomy-and-trust or the more common approach of command-and-control. Few episodes have been more wrenching and instructive for Berkshire culture than when David L. Sokol, an esteemed senior executive with his hand in many Berkshire subsidiaries, was suspected of insider trading in an acquisition candidate’s stock. . . .

[To read the full chapter, which can be downloaded for free, click here and hit download]

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U Delaware Chaplin Tyler Lecture

I’m honored to be giving this lecture at my alma mater, and thanks go to Charles Elson for the opportunity and Kim Ragan for organizing the event.  It’s the first in the book tour that will take me to many other great universities with thanks to many more wonderful colleagues nationwide.  More details as they are finalized.

Poster U Delaware-page1

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On National Ice Cream Day, Thanks Dairy Queen

DQIn honor of National Ice Cream Day (July 20), here is a brief celebration of Dairy Queen, an institution of American culture—entrepreneurial, legal, literary, and familial—that helped put this cold concoction on the national calendar. I developed these reflections when researching my upcoming book, Berkshire Beyond Buffett: The Enduring Value of Values (Columbia U. Press 2014), which provides deep looks at the corporate culture of Berkshire Hathaway’s fifty-plus subsidiaries, including Dairy Queen.

While full treatment must await publication of the book (which can be pre-ordered now), here are a few passages along with many outtakes—i.e., sections that did not make it into the final book because they are too technical, but may appeal to readers of this blog interested in the history of franchising businesses and intellectual property rights.

Dairy Queen’s roots date to 1927’s founding of Homemade Ice Cream Company by John F. (“Grandpa”) McCullough (1871‒1963) and his son Alex near the Iowa-Illinois border. Innovative ice cream makers, they experimented with temperatures and textures and eventually pioneered soft ice creams. One discovery: ice cream was frozen for the convenience of manufacturers and merchants, not for the delight of consumers.

At first, the McCulloughs were unable to interest any manufacturer in building the necessary freezers and dispensers to serve soft ice cream. Luckily, however, Grandpa happened to see a newspaper ad in the Chicago Tribune describing a newly-patented continuous freezer that could dispense soft ice cream. Grandpa answered the inventor/manufacturer, Harry M. Oltz, and the two made a deal in the summer of 1939.

The McCullough-Oltz agreement entitled Oltz to patent royalties equal to two cents per gallon of soft ice cream run through the freezer; the agreement also granted the McCulloughs patent licensing rights in the Western U.S., while Oltz retained them for the Eastern part of the country. The agreements that McCullough and Oltz made with licensees seemed to cover only the patent, rather than the DQ trademark, and contained few quality controls.

After World War II, DQ stores hit their stride, drawing lengthy lines of increasingly loyal customers enjoying the cooling effects of soft ice cream all sultry-summer long. The customer throngs at one store in Moline, Illinois caught the attention of Harry Axene. An entrepreneurial farm equipment salesman for Allis-Chalmers, Axene wanted to invest in the business. He contacted the McCulloughs and acquired both the rights to sell the ice cream in Illinois and Iowa as well as an interest in the McCullough’s ice cream manufacturing facility. Read More

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The Babe Ruth of Good Business Today

baberuthOne hundred years ago this week, on July 11, 1914, George Herman (“Babe”) Ruth made his major league debut, for the Boston Red Sox at two-year old Fenway Park. Over the course of his baseball career, The Great Bambino set many records, including leading the league in home runs for twelve seasons; most total bases in a season (457); and highest slugging percentage for a season (.847). In all, he hit 714 home runs, a record that stood until 1974, when Hank Aaron of the Atlanta Braves claimed the title. But that is not why the Babe is immortal.

Other home run kings have achieved nothing like Ruth’s iconic status. Many decade-leading hitters—such as Harry Davis, Gavy Cravath, or Jimmie Foxx—are barely known. Even falling short of Ruth’s stature are the two players who passed him in home runs, Aaron and Barry Bonds (Pittsburgh Pirates and San Francisco Giants), who took the top spot in 2007. Nor is Ruth’s immortality due entirely to the fact that he also excelled as a pitcher: for forty-three years he held the record for consecutive scoreless innings pitched in World Series play and his overall win-loss ratio (.671) remains the seventh best of all time.

Ruth’s immorality, rather, is due to how, through such extraordinary feats, he changed the game of baseball. He brought power to the sport at a time when typical strategy was to move players around the bases one small hit at a time. While baseball was thriving as an American pastime before he played, the Babe’s bold style, vast generosity, and utter unpretentiousness won the public’s adulation. His deep sense of ethics helped to rescue baseball from the damage done by the miscreant players who threw the 1919 World Series.  His strength and optimism gave hope to millions during the Great Depression. Ruth made baseball a richer sport with a wider and enduring following, which is why we all recognize his name a century after his rookie year. And people venerate the Babe despite his many bad personal habits, such as gluttony, promiscuity, and pugnaciousness.

In American business, we have likewise enshrined transformative figures like Ruth despite faults. Andrew Carnegie, John D. Rockefeller, and Cornelius Vanderbilt built the nation’s infrastructure while J. P. Morgan and Henry Ford forged its business structures and methods. We condemn the cheaters to memory’s hell—from Charles Ponzi to Bernie Madoff—or at least purgatory, as with Michael Milken. We remain ambivalent about the likes of Jay Gould and others still derided as robber barons. Read More

2

Happy 4th to The Persons of the Divided States of America

shredded flag“Person means a natural person, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated business association, joint venture, governmental entity, or other organization.”

That is from the definitions section of a commercial agreement I happened to be reading today for a consulting assignment.  That type of definition appears in millions of commercial contracts–purchase agreements, merger agreements, loan agreements, leases, licenses, you name it.

In the commercial world, among business lawyers and clients, it is commonly assumed that whenever we reference persons we mean to include every form of organization people have created.   That familiar usage might make the holdings in cases such as Holly Hobby or Citizens United seem natural, with corporations having many of the same rights and duties as people have.

On the other hand, we use the term this way in the business context where the issues being addressed concern commercial obligations and powers, liabilities and indemnities and purchases and sales–not free speech or free exercise of religion.  Moreover, the presence of such definitions in these agreements, despite ubiquity, underscores that it is more natural for persons to be seen only as natural persons, not organizations.

Hard liners on both sides of debates about corporate rights and duties show stupidity, arrogance, or mendacity when declaring either, on the right, “of course corporations are persons” or, on the left, “of course corporations are not persons.” In fact, organizations are not natural persons.  But for some purposes, they should be treated as natural persons are and for others they should not.  (See here for some additional thoughts on Hobby Lobby drawing on the example of Berkshire Hathaway.)

Context is key and hard liners tend to forget context.  In the talk these days about these two SCOTUS cases, it looks as if the Divided States of America is increasingly peopled by hard liners. Alas, that’s not something to celebrate this Fourth of July.

Facebook’s Hidden Persuaders

hidden-persuadersMajor internet platforms are constantly trying new things out on users, to better change their interfaces. Perhaps they’re interested in changing their users, too. Consider this account of Facebook’s manipulation of its newsfeed:

If you were feeling glum in January 2012, it might not have been you. Facebook ran an experiment on 689,003 users to see if it could manipulate their emotions. One experimental group had stories with positive words like “love” and “nice” filtered out of their News Feeds; another experimental group had stories with negative words like “hurt” and “nasty” filtered out. And indeed, people who saw fewer positive posts created fewer of their own. Facebook made them sad for a psych experiment.

James Grimmelmann suggests some potential legal and ethical pitfalls. Julie Cohen has dissected the larger political economy of modulation. For now, I’d just like to present a subtle shift in Silicon Valley rhetoric:

c. 2008: “How dare you suggest we’d manipulate our users! What a paranoid view.”
c. 2014: “Of course we manipulate users! That’s how we optimize time-on-machine.”

There are many cards in the denialists’ deck. An earlier Facebook-inspired study warns of “greater spikes in global emotion that could generate increased volatility in everything from political systems to financial markets.” Perhaps social networks will take on the dampening of inconvenient emotions as a public service. For a few glimpses of the road ahead, take a look at Bernard Harcourt (on Zunzuneo), Jonathan Zittrain, Robert Epstein, and N. Katherine Hayles.

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Trashing, Defending, and Deferring to Yeshiva University

University bashing is in fashion, from the broad-gauged film Ivory Tower to particular attacks on given schools. Some critiques usefully expose problems that need correcting with constructive solutions on offer.  But others seem to trash the academy for other reasons, as with a recent diatribe against Yeshiva University, which seems more calculated to exacerbate the school’s problems than help it find solutions.

In an  expose-style that seems to blow the school’s financial challenges out of proportion, Steven Weiss, who acknowledges having been expelled from Yeshiva in 2002, portrays Yeshiva’s leadership since that year variously as gullible, myopic, conflicted, or greedy.  This piece stung because I am a graduate and former faculty member of Yeshiva’s law school (Cardozo) and I know and have worked with some of the people vilified in the story.  While I am not familiar with all of the factual background of the University’s recent experience, Weiss’s story seems awfully one-sided and therefore the story, as much as the facts about Yeshiva, causes concern.

I share Weiss’s praise for Yeshiva’s former president, Rabbi Norman Lamm, whom I knew, worked with, and admired.  Lamm, and later his VP for business affairs, Sheldon Socol, led Yeshiva from the brink of bankruptcy in 1975 to fiscal soundness and renewed its status for academic excellence and cultural distinction.  (Rabbi Lamm told me how, when he was about to declare bankruptcy, his hand shook so intensely that he could not sign the papers.)

But Weiss then makes a foil out of Lamm,  painting a golden era that ended after 2002 when he passed the baton to Richard Joel, the current president, who has faced a different set of challenges that entices Weiss’s wrath.  In Weiss’s telling, after Lamm’s retirement and Joel’s succession, it’s been all downhill for Yeshiva and its students.  Joel, whom I knew as an able administrator and gentleman when he served as Dean of Business Affairs at Cardozo, certainly has a different style than the rabbi-scholars such as Lamm who preceded him.  But Weiss exaggerates in inexplicably inflammatory tones how this style difference has played out, in a story misleadingly headlined “How to Lose $1 Billion: Yeshiva University Blows Its Future on Loser Hedge Funds.” Read More