Category: Corporate Governance

0

Get Out! Jevic To Liquidate After Post-SCOTUS Deal Fails

Get your priorities straight

Last Monday (May 21, 2018), the Bankruptcy Court for the District of Delaware converted the chapter 11 bankruptcy of Jevic Transportation Corp. to a chapter 7 liquidation.  This means that the ten-year effort to “reorganize” the former trucking company will become a straight liquidation supervised by a trustee.

I put “reorganize” in quotes because everyone knew from the start of the case, in 2008, that the debtor could not reorganize in a conventional sense because the business had already collapsed.  Instead, the managers (and the senior lenders) would remain in possession and control of the debtor to engage in an orderly liquidation, which is permitted by chapter 11.  Most believed this was better than a straight liquidation under chapter 7 of the Bankruptcy Code because they would have greater expertise in maximizing asset values, and more flexibility in making distributions, than a chapter 7 trustee, who would be a stranger to the company.

This last point—flexibility in distributions—earned the case a trip to the Supreme Court, where a 6-2 majority held last spring that final distributions must follow the Bankruptcy Code’s order of priority strictly, unless (in simple terms) creditors “consent,” e.g., by voting for a deviation under a plan of reorganization, a cross between a contract and a consent decree, and the presumptive way out of chapter 11.  But, because management could not muster support for a plan, they had tried to resolve the case through a so-called “structured dismissal,” a procedural concoction that had many features of a plan but none of its protections, such as voting.

The details of Jevic are complex, but the bottom line, in my view, is that Jevic is about two things, although it receives attention only for one. First, SCOTUS affirmed—yet again—that “absolute priority” applies in final distributions in any kind of bankruptcy absent meaningful consent to an alternative.  Distributive priority was in dispute here because management and senior creditors did not want to honor the priority payment rights of the debtor’s former truck drivers, who objected to this treatment, and who were the successful petitioners in the Supreme Court. [Disclosure: I was co-counsel to a group of academics who were amici curiae in support of petitioners].  On remand, the parties tried, but could not come to a negotiated deal that respected the Supreme Court’s ruling, so Judge Shannon converted the case to one under chapter 7, which permits no flexibility in distributions.

Absolute priority is important, but not really news, since it has been the law of the land for over one hundred years.

Instead, I think Jevic’s more important, but more subtle, contribution reflects concern about the integrity of the chapter 11 process.  Read More

0

Contract (as) Social Responsibility (Part 3): Model Contract Terms

My prior posts (#1 and #2) set up the idea that contract appears to be an increasingly attractive way to do some sort of “social justice,” for example by attempting to reduce labor trafficking in supply chain contracts.  I refer to this generally as “contract (as) social responsibility” (KSR).

A contradiction in terms?

I want to turn now to a thoughtful example of KSR terms, the Model Terms (Model Terms) being developed by the Working Group to Draft Human Rights Protections in Supply Contracts of the Business Law Section of the American Bar Association (Working Group).

The Working Group is led by Professor David Snyder (American University) and attorney Susan Maslow.  Although the Model Terms have not yet been posted, they should be shortly and, in any case, are available from David (dsnyder@wcl.american.edu) and Susan (smaslow@ammlaw.com).  The Working Group’s report and the Model Terms are slated to be published in The Business Lawyer later this year.  [Disclaimer:  I am a member of the Working Group and on the editorial board of The Business Lawyer.  Nothing I say on CoOp should be imputed to them.]

While I should probably post a “spoiler alert” here, I thought it would be helpful to summarize certain aspects of the Model Terms in order to identify some of the issues they and, by inference, other KSR terms may raise.

The Model Terms have two goals that are, perhaps, in tension.

Read More

0

Contract (as) Social Responsibility (Part 2): Defined Terms

An earlier post set up the month’s agenda:  explore theoretical, doctrinal, and empirical opportunities presented by “contract (as) social responsibility” (KSR).  Before going further, it may be useful to provide some examples and define what I mean by KSR.

Examples

Labor-related terms in supply chain contracts, discussed in the prior post, are a well-known example of KSR, but not the only ones.  Michael Vandenbergh, for example, has argued that supply chain agreements can also be used to advance environmental goals.

But there is a world of KSR beyond supply chain contracts.  Frances McDormand’s speech at the Academy Awards, for example, implored the A-listers in the audience to negotiate for “inclusion riders,” contract terms that would require movie productions to have a certain level of social diversity (e.g., race, gender).  “Impact investing,” according to one enthusiast, “could be one of the most important social innovations in our lifetimes, leveraging the massive power of the capital markets to a higher purpose than maximizing returns for shareholders.” The oldest example I have found so far—and I suspect there are still older ones—is the Beatles’ early performance agreement, which apparently required venues to integrate racially.

Don’t let it be.

KSR can be seen as part of a longer arc of social activism through market action.  From the contested notion that African Americans could use market power to counter the pernicious effects of racism, to Cesar Chavez’s lettuce boycotts of the 1960s, to the South African divestment campaigns of the 1980s, the socially active have long believed that money can do more than talk: it may compel others to walk.  Sometimes, as in apartheid, they may have been right. In other cases, such as black banking, they may not.

Still, we (want to believe that we) can achieve social justice through the beer and coffee we choose to purchase.  Who we see in the media may affect what we believe to be possible in reality, in terms of gender and racial diversity.  Eric Posner and Glen Weyl argue that the “emancipatory force” of “radical markets” “can reawaken the dormant nineteenth-century spirit of liberal reform and lead to greater equality, prosperity, and cooperation.”  Whether or not that is true, there is little doubt that there is demand for social change through market participation.

Because contracting is an important mechanism in market function, the rise of KSR seems, from this perspective, inevitable.  Yet, not all market participation involves contract in any formal sense, and of course most contracting probably does not purport to be socially responsible in the sense that interests me.  So, KSR is at most a (small?) (very small?) subset of contract-based market activity.

Business lawyers love their defined terms–and I am at heart a business lawyer–so what might a definition of KSR look like? Read More

2

Contract (as) Social Responsibility (Part 1): Revenge of the Nerds

On a sunny Saturday morning in April I found myself in an airless room in an exceptionally beige Orlando conference hotel discussing what would, to many, be the nadir of contract nerd-dom:  model supply chain terms.

Supply chain agreements set forth the rights and responsibilities of buyers and sellers of goods that lead to products that affect just about everyone who participates in the market economy.  It reportedly takes about 200 contracts to make an iPhone—a number that strikes me as pretty low.

These contracts are important, of course, but only in the same sense that contract terms on indemnification, ERISA, and choice-of-law are important: they are the province of hardcore law junkies because they are so boring no one would really want to spend time thinking about them unless paid to do so.

And, yet, the Orlando conference room was electric.  That’s because these were not the usual supply chain terms dealing with, e.g., quantity, price, delivery, etc.  Instead, this was a meeting of the Working Group to Draft Human Rights Protections in Supply Contracts of the Business Law Section of the American Bar Association (“Working Group”), and the terms we were talking about seek to solve some of the most troubling ethical problems presented by market globalization:  baseline human rights protections for those who work for or with companies in the modern global supply chain.

I will call these terms one of many examples of “Contract (as) Social Responsibility”: efforts to achieve social justice through contract as a formal, legal instrument.

I find just about every word in the preceding paragraph (including “I” and “will”) to be problematic—in an interesting sort of way—and am grateful to the keepers of Concurring Opinions for permitting me to spend the month of May trying to develop my thoughts on this.

 

Read More

0

Cunningham “Buffett Shareholder” Omaha Events 2018

Following are the public events during this year’s Berkshire Hathaway Annual Meeting surrounding the launch of our new book, The Warren Buffett Shareholder.  Hope to see some of you there, and regrets that our New York book launch event is already sold out.

Thursday Friday — Daytime Friday — Evening Saturday Sunday
U. Nebraska Mammel Hall

Berkshire System Summit

11:40 to 12

(talk 11 to 11:40)

CenturyLink Center

Shareholder Shopping Day

Bookworm

11 to 6

 

Embassy Suites

Yellow BRKers

4 to 7

(greetings at around 5)

 

CenturyLink Center

BRK Annual Meeting

Bookworm

7 to 4 pm

Hilton Hotel

Markel Brunch

8:30 to 10:30 a.m.

U. Nebraska Mammel Hall

Value Investor Conference

3 to 4 & 6 to 6:30

 

Creighton University

Value Investing Panel

2 to 3 & 5 to 6

(panel 3 to 5)

 

Hilton Hotel

Tilson/Kase Reception

8 to 12 midnight

 

Hilton Hotel

Tilson/Kase Reception

4 to 6

 

 ALSO: Visit the Bookworm in town and the Hudson bookstore in the airport for special displays and offerings around the book.
0

New Book: Jack Bogle Appreciates Warren Buffett’s Surprise Shout Out

From this morning’s Omaha World Herald.  Editor’s note: In a new book, “The Warren Buffett Shareholder,” Buffett-watchers Lawrence Cunningham and Stephanie Cuba have compiled essays by 43 people about Berkshire Hathaway’s shareholder meetings, which now draw more than 40,000 people to Omaha each year. We will excerpt some of those essays each Sunday in print before this year’s May 5 annual meeting. Today’s comes from Vanguard Group founder Jack Bogle.

Late in December 2016, I received a note from my good friend Steve Galbraith asking me to put a “save-the-date” marker on my calendar for the weekend of May 6, 2017. He and his wife, Lucy, had a plan, undisclosed, to celebrate my 88th birthday on May 8.

At a dinner in Omaha with Warren and his new team of money managers (as Steve later told me), he had mentioned our friendship. Steve offered to bring me to the upcoming annual meeting of Berkshire Hathaway shareholders. Warren thought that was a great idea, and so the plot was hatched.

Unbeknownst to me, Steve had checked with Emily Snyder, my assistant at Vanguard, and with my wife, Eve, and told them of his plan to fly me out to Omaha and attend the annual meeting, something I had never done before.

So when the morning of May 5, 2017, arrived, Eve and I, with daughter Barbara and son-in-law Scott Renninger in tow, drove to Atlantic Aviation, Philadelphia’s terminal for private planes.

No sooner had we arrived than a Citation jet with Steve and Lucy aboard swooped down and scooped up our quartet. We were on our way! (Son Andrew and his friend Kathryn would meet us in Omaha on Saturday morning.)

After a short hop (that jet is fast!), we landed in Omaha. As Vanguard’s founder, I’d attained a modest celebrity status in the world of investing, but that hardly prepared me for the reception I received when we entered the Omaha Hilton.

At least 10 guests, armed with camera-ready iPhones, immediately snapped away at the new arrival.

Later, when our sextet dined at the hotel, scores of celebrity hunters continued to take photos, asking politely and working smartly. (I quickly learned that saying “yes” was infinitely more efficient then saying “no” and then arguing about it.)

When I awakened on Saturday morning and looked out of my hotel room window, I could hardly believe what I saw. A line, maybe four people wide, stretched from the CenturyLink Center, site of the annual meeting, to as far as I could see.

All told, 40,000 people would attend the 2017 annual meeting, almost half of whom were in the arena, with the rest of the throng watching on video from a remote site. Our now octet was ushered to premier seating in the arena, right behind the space reserved for Berkshire Hathaway longtime shareholders, and next to the company’s directors.

Warren and Charlie Munger were seated on the stage immediately before us.

As Warren gave his opening remarks — a summary of Berkshire’s 2016 results — I couldn’t help wondering why Steve had brought us to Omaha. My question was soon answered, as these excerpts from the meeting transcript reflect:

Buffett:

“Jack Bogle has done probably more for the American investor than any man in the country. Jack, could you stand up? There he is.

“Jack Bogle many years ago, he wasn’t the only one talking about an index fund, but it wouldn’t have happened without him. …

“I estimate that Jack, at a minimum, has saved, left in the pockets of investors without hurting them overall in terms of performance, gross performance, he’s put tens, and tens, and tens, of billions into their pockets.

“And those numbers are going to be hundreds and hundreds of billions over time. It’s Jack’s 88th birthday on Monday. So I just say, Happy Birthday, Jack. And thank you on behalf of American investors.”

Despite my surprise and delight, I was able to stand up and wave to Warren, Charlie and the cheering crowd. I confess to being deeply and emotionally touched by Warren Buffett’s generous words — a “red-letter” day in my now 67-year career.

After Warren’s shoutout, the number of photo seekers soared, to the point where I found it useful to leave each session 5 or 10 minutes before the intermission.

Even then, I began to understand why rock stars among our entertainers are so eager to avoid the paparazzi who follow their every move.

But I confess that, on this one grand occasion, I found huge satisfaction in being recognized for my contribution to the world of investing, and to the wealth of the human beings who have entrusted their assets to Vanguard’s index funds. (I’m only human!) …

This was hardly the first indication that Warren and I operated on investment principles that, while a long way from identical, have a certain commonality. …

Accolades are nice, and endorsements are, too, but human connections are what life is largely about. I celebrate the friendship and mutual admiration that I’ve shared with Warren Buffett and Steve Galbraith, men of integrity, wisdom and class.

Excerpted exclusively for The World-Herald from “The Warren Buffett Shareholder: Stories From Inside the Berkshire Hathaway Annual Meeting,” edited by Lawrence Cunningham and Stephanie Cuba. (Cunningham Cuba LLC & Harriman House Ltd., 242 pages, $25)

0

Berkshire’s Prosperous Simplicity: Try It!

Berkshire Hathaway is simple. Though among America’s largest public companies, it is almost entirely self sufficient. It rarely uses intermediaries — brokers, lenders, advisers, consultants and other staples of today’s corporate bureaucracies. It’s interesting to ponder how and why, but as important to ask why is it so unusual — and what people are doing about it.

While American companies borrow heavily, Berkshire shuns debt as costly and constraining, preferring to rely on itself and to use its own money. It generates abundant earnings and retains 100 percent, having not paid a dividend in more than 50 years. Berkshire earns some $30 billion annually — all available for reinvestment. In addition, thanks to its longtime horizon, Berkshire holds many assets acquired decades ago, resulting in deferred taxes now nearing $100 billion. These amount to interest-free government loans without conditions.

The principal leverage at Berkshire is insurance float. This refers to funds that arise because Berkshire receives premiums up front but need not pay claims until later, if it all. Provided insurance is underwritten with discipline, float is akin to borrowed money but cheaper. At Berkshire, float now runs another $100 billion, which it uses to buy businesses that continue to multiply Berkshire’s value.

American corporations tend to design acquisition programs using strategic plans administrated by an acquisitions department. They rely heavily on intermediaries such as business brokers and investment bankers, who charge fees and have incentives to get deals done; firms also use consultants, accountants and lawyers to conduct due diligence before closing. Read More

0

What’s Buffett’s Secret to Great Writing?

symposium-coverWe all write more than ever today, but do we communicate well?  As one group, corporate directors, pondered how to communicate effectively to shareholders, they  turned to the gold standard.  They wondered, what most distinguishes Warren Buffett’s annual missive to Berkshire Hathaway shareholders, and asked me, as a student of these writings for two decades, for the answer.

Clarity, wit and rationality are hallmarks to emulate, I said, along with how Buffett personally pens lengthy sections to read more as literary essays than corporate communications.

But, far more important, these attractive qualities are products of a deeper distinction with greatest value. Every Buffett communiqué has a particular motivation: to attract shareholders and colleagues—including sellers of businesses—who endorse his unique philosophy. Tenets include fundamental business analysis, old-fashioned valuation methods, and a long time horizon.

A recurring motif of Buffett’s writing is the classic rhetorical practice of disagreement. Buffett recites conventional wisdom along with multiple reasons why it is inaccurate or incomplete. He then differentiates Berkshire with themes like autonomy, permanence, and trust.

In a new article I wrote at the request of the National Association of Corporate Directors (available free here), I parse recent examples to show that Buffett’s dispatches often work on several levels simultaneously. Think of circles on a dartboard, with the bull’s-eye as Berkshire’s distinctive practices, which Buffett relentlessly explains. Surrounding that core explication, in concentric circles, Buffett lauds specific Berkshire businesses or personnel, contrasts their industry or competitors, and opines on related public policy debates.

By arguing in this artful manner, Buffett hones Berkshire’s corporate culture while answering rivals and critics alike. Leaving an unmistakable effect on the conglomerate’s millions of owners, managers, and employees, Buffett’s essays are a model of tone-at-the-top governance.

Buffett’s essays are rich with history, putting current debates in broad context, and steeped in statistics, anchoring argument in data. Buffett contrasts and compares; jokes and quips; and prefers to praise by name but criticize by category. Even when confronting critics, Buffett’s essays avoid sounding defensive.

Above all, the work expresses who Warren is—a confident, astute and joyous capitalist. Yale University writing professor William Zinsser says that “Motivation is at the heart of writing.” Buffett loves Berkshire, his curated life’s work defined by unusual shareholders, adroit managers, and idiosyncratic principles. Munger has commented: “Warren’s whole ego is poured into Berkshire.”

More than the elements of style, such motivation is a gold standard worth aspiring to.

Download the full article free here.

* * * * *

In 1996, based on a law review symposium they led together, Warren Buffett chose Lawrence Cunningham to compile his famous shareholder letters into the book, The Essays of Warren Buffett: Lessons for Corporate America, now in its 4th edition and sold worldwide in a dozen languages.

0

Berkshire’s Blemishes: Lessons for Buffett’s Successors, Peers, and Policy

Columbia University has published my most recent research paper, available free on SSRN (registration required): “Berkshire’s Blemishes: Lessons for Buffett’s Successors, Peers, and Policy.” Here is the abstract.

* * * * * * * * * *

Berkshire Hathaway’s unique managerial model is lauded for its great value; this article highlights its costs. Most costs stem from the same features that yield such great value, which boil down, ironically, to Berkshire trying to be something it isn’t: it is a massive industrial conglomerate run as an old-fashioned investment partnership. An advisory board gives unchecked power to a single manager (Warren Buffett); Buffett makes huge capital allocations and pivotal executive hiring-and-firing decisions with modest investigation and scant oversight; Berkshire’s autonomous and decentralized structure grants operating managers enormous discretion with limited second-guessing; its trust-based culture relies on a cultivated vision of integrity more than internal controls; and its thrifty anti-bureaucracy means no central departments, such as public relations or general counsel.

Delineating the visible costs of Berkshire’s model confirms the desirability of tolerating many of them, given the value concurrently generated, but also reveals ways to improve the model—a few while Buffett is at the helm but mostly for successors. Current reform suggestions include hiring a full-time public relations professional at headquarters and more systematically developing senior executives; suggestions for future reform include enhanced subsidiary compliance resources and separating the identity and personal opinions of top executives from the corporation and its official policy.

Besides helping Berkshire, the review and suggestions will help managers of other companies inspired by Buffett’s unique managerial model and policymakers who should study it. Implications for peers and policymakers include highlighting flexibility in corporate governance, the efficacy of the conglomerate form, and especially the value of strategies that produce long-term thinking among shareholders and managers alike.

0

Better Bankers Symposium, June Carbone

Thanks to everyone who participated in the Better Bankers Symposium.

My two cents worth it that the current system does not just reward “greed,” it create a Gresham’s dynamic where those most motivated not just by self-interest, but a preference for short term financial rewards, drive out others who see their self-interest defined in other ways.  Market discipline may produce boom and bust cycles that put firms like Lehman Brothers out of existence, but the corrections of the market often either overcorrect (Akerlof’s references to lemons’ markets) or do so at very high cost (the financial crisis).  This is because greedy individuals (those motivated by short term gains) have managed to create an opaque system in which market responses kick in only after individuals have a chance to leave the companies they undermined, with their outsized individual bonuses intact.

Better Bankers thinks more creatively about how self-interest can be marshalled to police such activities before they get out of control.  It seeks to restore the identity of interests between bankers and banks.  It thus seeks to create a system in which self-interest includes interests broader than short term financial incentives, and in which private market mechanisms can become more effective.  The old joke is “how many economists does it take to change a lightbulb?  None, the market will do it if it needs to be done.”  Hill and Painter’s answer is that it requires a design and it requires the will to create the conditions where the more intelligent design is likely to be adopted because it advances the common good at the expense of individuals who would like to be able to continue to game the system.  Let’s hope their proposal finds fertile ground.
JUNE CARBONE