January 2012

Schumer and Cantwell’s deceptive advertising on shareholder “rights.”

by John Berlau on June 8, 2009

in Bailout Watch, Legal, Nanny State, Politics as Usual

If deceptive labeling of bills in Congess were punishable by regulatory agencies, Sens. Chuck Schumer (D-NY) and Maria Cantwell (D-WA) would be paying a hefty fine.

Their so-called “shareholder bill of rights,” recently introduced in the Senate, would impose a one-size fits all regime on public companies that would limit choices for shareholders, reduce corporate performance, and allow political agendas of pressure groups to trump the interests of ordinary investors. Most egregiously, the bill would make illegal a key feature of the corporate governance structures that have served shareholders very well at companies from Google and Microsoft to Berkshire Hathaway.

The bill would make it illegal for the CEO of a public company to also serve as the chairman of its board. The argument that critics such as the senators and others such as union pension funds make is that the chairman needs to be independent of the CEO for to provide better oversight for shareholders.

A prominent example critics point to is Bank of America CEO Ken Lewis, who made a series of bad calls while also serving as the company’s chairman. At the company’s recent annual meeting, Lewis was removed from his position as chairman, but not CEO, by a shareholder vote.

But this example, like many anecodotes without data, is very selective. There are many examples, by contrast, of some of the best performing companies in America.

For many decades, for instance, Warren Buffett has served as Chairman and CEO of his conglomerate Berkshire Hathaway. Yet Berkshire shareholders have not had much to complain about in terms of the company’s performance.

Simlarly, shareholders have not generally been displeased with Eric Schmidt’s tenure as chairman and CEO of Google since it went public in 2004. Past examples of sucessful stints as chairman and CEO include Bill Gates at Microsoft, where he served in both positions until he retired as CEO at the height of Microsoft’s success in 2000, and Jack Welch at General Electric in the ’80s and ’90s.

Nor is there any real evidence that having a separated chairman and CEO will keep a company from blowing up. Citigroup has had separate individuals in these position since 2004, but as it shareholders (and U.S. taxpayers) are painfully aware of, this hardly improved its corporate governance.

Different governance structuces are appropriate for different companies. A new company in its entrepreneurial stages often wants the same person as chairman and CEO for more of a focus on growth. A more established company may function better by separating these positions. Regardless, a company won’t have effective governance without diligent oversight by boards and shareholders.

The overall lesson from the experience of these companies is that shareholders are perfectly capable of deciding on things like whether the chairman and CEO should be separate, and these matters shouldn’t be dictated to them by the government. The same can be said for the bills other mandates such as “say on pay,” the requirement of an annual non-binding shareholder vote on executive salaries.

“Say on pay” has been on the proxy ballots of many companies, and sharholders have rejected the provision in the vast majority of cases, seeing the process as redundant and a waste of the company’s resources. So why should Schumer-Cantwell now impose ”say on pay” on shareholders who already have said that they didn’t want it.

Schumer-Cantwell also is on a parallel track with the Securities and Exchange Commission to impose “proxy access,” the ultimate corporate governance Trojan horse. Under this mandate, the company — and all of its shareholders — would be forced to subsidize the election campaign of any candidate for the board of directors that as few as one percent of shareholders wish to nominate.

As I have written prevously, “proxy access” lead to all sorts pressure groups, such as union pension funds and “green” foundations, cutting deals with CEOs. A union could, for instance, threaten to run candidates for the board unless the company imposed “card check” or forced unionization among its workers.

These special interest gains would come at the expense of ordinary shareholders, as the company’s performance would likely decline. And a recent survey released by the U.S. Chamber of Commerce showed that a large majority of even union households believe that pension funds should be managed to maximize retirement returns rather than, in the survey’s words, “advance the union’s social and political goals.”

So in the spirit of truth-in-advertising, Schumer and Cantwell should change the name of their legislation to the “Bossing Shareholders Around and Reducing Shareholder Value” bill. Or better yet, withdraw this destructive bill altogether.

Regulation of the Day: Drawbridge Schedules in Sturgeon Bay, WI

by Ryan Young on June 8, 2009

in Deregulate to Stimulate, Regulation, Regulation of the Day

The second installment of an occasional series that shines a little light on what the regulatory state is up to.

Today’s Regulation of the Day comes to us from the Department of Homeland Security (208,000 employees, $52 billion 2009 budget).

Sturgeon Bay (pop. 9,778) is the largest city in Door County, Wisconsin. It’s a fine place to take a vacation, by the way. The downtown’s historic Michigan Street Bridge is under repair this summer, increasing traffic over Sturgeon Bay’s other drawbridge. The drawbridge’s raising/lowering schedule needs to be adjusted to fit the changed traffic patterns and still allow boats access to the ship canal.

This is not rocket science – bridge up, bridge down. But apparently neither the city nor the state Department of Transportation was up to the task, because they asked the federal government to create a revised drawbridge schedule for them. The result appears on pages 26,952 – 26,954 of the 2009 Federal Register.

Court Rebuffs Challenge to Illegal Chrysler Bailout and Takeover; Pension Funds Will Appeal to Supreme Court

by Hans Bader on June 5, 2009

in Bailout Watch, Deregulate to Stimulate, Economy, Employment, Labor, Legal, Mobility, Politics as Usual, Regulation

A federal appeals court has refused to block the Administration’s illegal auto bailout, which rips off taxpayers and pension funds to enrich the UAW union. The pension funds that challenged the bailout will now appeal to the U.S. Supreme Court. The bailout violates the federal TARP statute by diverting financial-system bailout funds to a takeover of the auto industry. And the government’s reorganization plan for Chrysler violates federal bankruptcy laws by ripping off lenders to give the company to the UAW union.

As I noted earlier, the Indiana State Teachers’ Retirement Fund is challenging the diversion of tens of billions of dollars of federal TARP bank bailout money to pay for auto bailouts in the Chrysler bankruptcy case. That diversion violates the law. It is part of the government’s unfair reorganization plan for Chrysler, which rips off pension funds to provide short-sighted, unsustainable preferential treatment for the UAW.

(The bailouts have been counterproductive. General Motors and Chrysler would actually have been better off if they had filed for bankruptcy last year, rather than taking federal money, since the bailouts have come with costly political strings attached, such as dropping opposition to costly CAFE regulations and other federal mandates, and bowing to political meddling in fundamental corporate decisionmaking, and have left the automakers with higher labor costs than if they had just ripped up their collective bargaining agreements in a standard bankruptcy. That endangers their long-run competitiveness. Indeed, the politicized auto bailouts resemble the failed British auto bailouts of the 1970s).

The Obama and Bush Administrations used money from the $700 billion financial system bailout for an auto industry bailout. To do that, they have seized on the fact that the bailout statute contains a broad definition of “financial institution,” which the Administration claims includes virtually any institution, financial or not. The bailout statute defines “financial institutions” eligible for the bailout as “including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company.” Never mind that Congress listed as examples of “financial institutions” only entities that were banks, insurance companies, or financial institutions, not automakers. (Congress rejected auto bailout legislation last year precisely because it lacked safeguards against the use of bailout money to prop up uncompetitively high UAW wages — exactly what the Obama Administration is using the money for now. During the debate over the auto bailout legislation, the Treasury Department admitted that automakers are not financial institutions covered by the bank bailout statute).

Legal scholars at the Heritage Foundation, former Labor Secretary Robert Reich and many other commentators have argued that using the money for auto bailouts violates the financial bailout statute under the principle of statutory construction known as ejusdem generis, which says that when a term’s definition includes examples that are all of a similar kind, it limits the meaning of the term to things similar in kind to such examples.

But if that’s not so, and the bailout was just a big slush fund for the Administration to dispense with as it chooses, then the bailout law itself was unconstitutional, since it conferred unbridled discretion in the hands of the President to do whatever he wanted with it. The Supreme Court ruled in the Schechter Poultry case that giving the executive uncabined discretion violates the constitutional separation of powers between different branches of government, by giving the president essentially legislative powers. (An earlier version of the bailout law was even more clearly a violation of separation of powers, since it failed to provide for judicial review of the vast discretion it gave the president, unlike past delegations of power upheld in cases like the Amalgamated Meat Cutters case). The government’s incredibly broad reading of the bank bailout statute should be rejected, since it violates the canon of constitutional doubt.

Indiana Treasurer Richard Mourdock was right to raise these important legal questions in court. Mourdock correctly notes that the unfair plan for Chrysler pushed by the Administration violates the bankruptcy laws and rips off Indiana residents by leaving state employee pension funds and construction funds with a tiny fraction of what they are owed by Chrysler, far less than the UAW is getting, even though the pension funds are secured lenders and the UAW is not. By cheating Chrysler’s lenders, the government’s plan discourages lending, and sets a dangerous precedent that makes it harder for companies like Chrysler to raise money to create jobs in the future, as newspapers like USA Today have noted.

The federal government’s poorly-conceived bailouts will also endanger Indiana jobs in the long run by leaving Chrysler and General Motors with uncompetitive work rules and compensation.

On June 2, the Second Circuit Court of Appeals entered a temporary stay of the bankruptcy judge’s ruling rubberstamping the government’s plans for Chrysler, in an appeal brought by the Indiana State Teachers’ Retirement Fund. On June 5, however, it refused to block the government’s plan for Chrysler. The case is In re Chrysler, LLC, Docket # 09-2311-mb.

As a lawyer who has handled both constitutional cases, and bankruptcy-related cases, I think that Indiana’s position has merit, and that the Supreme Circuit should rule in favor of its appeal. The Supreme Court should grant review, since the issues are of overriding national importance, and the Second Circuit has created a circuit split by countenancing circumvention of the bankruptcy laws as long applied in circuits across the country.

Regulation of the Day: Taxpayer-Funded Advertising for Mushrooms

by Ryan Young on June 5, 2009

in Deregulate to Stimulate, Regulation, Regulation of the Day

This is the first installment of an occasional series that shines a little light on what the regulatory state is up to.

Today’s Regulation of the Day comes to us from the Agricultural Marketing Service (5,500 employees, $1.3 billion 2008 budget). Farmers are apparently unique among businesses in being unable to promote themselves, and therefore need help from the federal government.

Page 26,984 of the 2009 Federal Register contains a proposed rule titled “Amendments to Mushroom Promotion, Research, and Consumer Information Order and Referendum Order.”

Basically, large mushroom producers will vote in a referendum to decide if they like proposed changes in federal mushroom policy. Also at issue is membership apportionment on the all-important Mushroom Council.

LibertyWeek 45: Save the Beer Barns!

by Richard Morrison on June 5, 2009

in CEI Projects, Podcast

Your host Richard Morrison welcomes back special guest co-host Jeremy Lott and technical producer Ryan Young for Episode 45 (listen here!). The program starts with the bankruptcy of General Motors, amending the California state constitution and Greg Conko’s opinions on the state of FDA reform. We then move on to Nancy Pelosi’s global warming comments in China, scantily clad women selling beer, electoral scandal in Connecticut and some very English Olympic News.

Public Utility Land Grab Hits a Snag

by Marc Scribner on June 4, 2009

in Legal, Personal Liberty, Politics as Usual, Zeitgeist

In Springfield, Missouri, the city-owned utility provider–City Utilities–recently attempted to seize a parcel of downtown property in order to build a bus terminal. The owner, Becky Spence, planned to build a luxury hotel that would have been the tallest building in Springfield if completed. KOLR/KSFX reports:

Spence says when CU made it known it wanted to take her land, she tried to compromise.  She says she met with CU managers, offering a portion of the land for the bus terminal.  The rest would be for her hotel.

Spence says City Utilities rejected the offer.  She says she was surprised when CU brought up eminent domain because a study commissioned by CU to find an ideal piece of land ranked her property pretty low on the list.  That’s because the land sits 22 feet below street level.  The bus station is required to be on street level.

Spence says she declared bankruptcy as a last resort, knowing that eminent domain cannot touch a land protected by bankruptcy.

“It provides one more legal step that they have to go through, one more hoop that they have to jump, before they take my land,” says Spence.

It is a sad state of affairs when property owners must declare bankruptcy in order to prevent government theft. Adding insult to injury, her property–being 22 feet below street level–is completely inadequate for the “public purpose” of the proposed project. However, things may be looking up for Ms. Spence. The Springfield City Council has taken an interest in her case, and City Utilities has announced it is now considering building on land already owned by the city.

Green Power Collides with Endangered Species

by Angela Logomasini on June 4, 2009

in Environment, Private Conservation

The greens are getting a taste of their own medicine. For years, they have used the Endangered Species Act to regulate use of private and public property around the nation, and now one species listing could undermine one of their sacred cows: green power. A story in today’s Land Letter, highlights the fact that windmill operations in Wyoming—which are subsidized by the feds under the global warming agenda of the Obama Administration as embodied in the American Recovery and Reinvestment Act–may imperil the sage grouse. The Department of Interior is considering a listing of the bird, which could throw a wrench into federally subsidized development of a network of windmills on key sage grouse territory in Wyoming. According to the Land Letter, 54 percent reside of sage grouse population reside in Wyoming.

This story is quite ironic for two reasons. First is the green’s push for windmills is futile. It won’t save the world from global warming even if all the greens dire predictions about global warming were true, which of course is a huge assumption. Second, the greens are finally being caught in their own snares. CEI has shown over the years how the Endangered Species Act had been used to ensnare property owners all around the nation, costing billions of dollars, while it has achieved little to actually help species.

It’s time to look for new approaches in both areas. See globalwarming.org for information on that issue. On the species front, a much better approach would be to make species an asset not a liability by allowing people to own them and by removing punitive aspects of the law. Currently the act punishes anyone for doing anything (including farming, ranching, or construction) that might affect endangered species on their property. Accordingly, no one wants to have these species on their property! So rather than cultivate them, they make property less habitable for them. Even conservation efforts can be considered a crime. The punitive regulatory approach of the law is not good for species and not good for people. We made this case many years ago, but lawmakers continue to get it wrong.

Photo coursey of Raymond Shobe.

Sutter’s Paper Addresses the Perfect Storm of Timely Issues: Climate Change, Hurricanes, and Homeowners Insurance

by VerlanLewis on June 4, 2009

in Bailout Watch, Global Warming, Insurance

June has arrived and so has the nation’s official hurricane season. The New York Times called attention, last week, to the political battles associated with hurricanes and the increasing cost of homeowners insurance. Daniel Sutter, professor of economics at the University of Texas Pan American, published a timely paper with CEI yesterday that examines the relationship between climate change, government regulation of homeowners insurance, and property damage caused by hurricanes. Sutter’s important findings show that the increasing cost of homeowners insurance, and increasing costs of property damage caused by tropical storms, has more to do with the unintended consequences of government policy than with global warming:

“Existing public policies—including insurance regulation, government-subsidized flood insurance, improper mitigation, and faulty building code enforcement—contribute to unnecessarily risky and inefficient development along coastal areas by shifting the cost of hurricane damage ultimately onto third parties—mainly taxpayers. Poor policies lead to excessive vulnerability to hurricanes and would exacerbate the cost of any increase in storm activity, whether due to climate change or any other factor.”

Sutter’s paper is especially noteworthy right now as Congress debates whether to bailout beach house owners at U.S. taxpayer expense.

Twenty Years since Tiananmen Square

by Ryan Young on June 4, 2009 · 1 comment

in Culture, International, Personal Liberty

China is a very different place than it was twenty years ago. It was on this day in 1989 that one anonymous, brave soul halted those tanks in their tracks during the Tiananmen Square protests.

Slow but steady economic liberalization has lifted as many as half a billion people out of poverty in China since Mao’s death. Most of that progress has happened since the Tiananmen massacre. And the process has accelerated in recent years.

Economist Alex Tabarrok, speaking at a TED conference, described China’s new economic freedom as “the world’s greatest antipoverty program of the past three decades.”

But not everything has changed since Tiananmen. China still does not have a free press. There is no freedom of speech or religion. In many ways, the Chinese government is as repressive as ever. If China is to be a great nation again, it must be free. If the Chinese people follow the peaceful example of the Tiananmen Tank Man, it will happen.

Illegal, Unfair Auto Bailout That Harms Retirees and Taxpayers Challenged in Chrysler Bankruptcy

by Hans Bader on June 4, 2009 · 2 comments

in Bailout Watch, Deregulate to Stimulate, Economy, Employment, Labor, Legal, Mobility, Politics as Usual, Regulation

The Indiana State Teachers’ Retirement Fund is rightly challenging the diversion of tens of billions of dollars of federal TARP bank bailout money to pay for auto bailouts in the Chrysler bankruptcy case. That diversion violates the law. It is part of the government’s unfair reorganization plan for Chrysler, which rips off pension funds to provide short-sighted, unsustainable preferential treatment for the UAW.

(The bailouts are doing no good. General Motors and Chrysler would actually have been better off if they had filed for bankruptcy last year, rather than taking federal money, since the bailouts have come with costly political strings attached, such as dropping opposition to costly CAFE regulations and other federal mandates, and bowing to political meddling in fundamental corporate decisionmaking, and have left the automakers with higher labor costs than if they had just ripped up their collective bargaining agreements in a standard bankruptcy, endangering their long-run competitiveness. Indeed, the politicized auto bailouts resemble the failed British auto bailouts of the 1970s).

The Obama and Bush Administrations used money from the $700 billion financial system bailout for an auto industry bailout. To do that, they have seized on the fact that the bailout statute contains a broad definition of “financial institution,” which the Administration claims includes virtually any institution, financial or not. The bailout statute defines “financial institutions” eligible for the bailout as “including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company.” Never mind that Congress listed as examples of “financial institutions” only entities that were banks, insurance companies, or financial institutions, not automakers. During the debate over the auto bailout legislation, the Treasury Department admitted that automakers are not financial institutions covered by the bank bailout statute.

Legal scholars at the Heritage Foundation, former Labor Secretary Robert Reich and many other commentators have argued that this violates the financial bailout statute under the principle of statutory construction known as ejusdem generis, which says that when a term’s definition includes examples that are all of a similar kind, it limits the meaning of the term to things similar in kind to such examples.

But if that’s not so, and the bailout was just a big slush fund for the Administration to dispense with as it chooses, then the bailout law itself was unconstitutional, since it conferred unbridled discretion in the hands of the President to do whatever he wanted with it. The Supreme Court ruled in the Schechter Poultry case that giving the executive uncabined discretion violates the constitutional separation of powers between different branches of government, by giving the president essentially legislative powers. (An earlier version of the bailout law was even more clearly a violation of separation of powers, since it failed to provide for judicial review of the vast discretion it gave the president, unlike past delegations of power upheld in cases like the Amalgamated Meat Cutters case). The government’s incredibly broad reading of the bank bailout statute should be rejected, since it violates the canon of constitutional doubt.

Indiana Treasurer Richard Mourdock is to be commended for raising these important legal questions in court. Mourdock rightly notes that the unfair plan for Chrysler pushed by the Administration violates the bankruptcy laws and rips off Indiana residents by leaving state employee pension funds and construction funds with a tiny fraction of what they are owed by Chrysler. By cheating Chrysler’s lenders, the government’s plan discourages lending, and sets a dangerous precedent that makes it harder for companies like Chrysler to raise money to create jobs in the future, as newspapers like USA Today have noted.

The federal government’s poorly-conceived bailouts will also endanger Indiana jobs in the long run by leaving Chrysler and General Motors with uncompetitive work rules and compensation.

Earlier, a panel of the U.S. Court of Appeals for the Second Circuit, including Chief Judge Dennis Jacobs, and Judges Amalya Kearse and Robert Sack, entered a temporary stay of the bankruptcy judge’s ruling rubberstamping the government’s plans for Chrysler, in an appeal brought by the Indiana State Teachers’ Retirement Fund. The case is In re Chrysler, LLC, Second Circuit Docket # 09-2311-mb.

As a lawyer who has handled both constitutional cases, and bankruptcy-related cases, I think that Indiana’s position has merit, and that the Second Circuit should rule in favor of its appeal.

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