Copyright (c) Yeshiva University 1997. Cardozo Law Review
September / November, 1997
19 Cardozo L. Rev. 221
LENGTH: 7918 words
INTRODUCTION TO THE WARREN BUFFETT SYMPOSIUM PAPERS
Lawrence A. Cunningham *
* Professor of Law, Director, The Samuel and Ronnie Heyman Center on Corporate Governance, Benjamin N. Cardozo School of Law, Yeshiva University. Professor Cunningham was visiting the George Washington University Law School when this piece was written.
SUMMARY: ... For over twenty years, he has written robust and thoughtful Chairman's letters to shareholders of Berkshire Hathaway Inc., presenting profound and sensible, but not uncontroversial positions on a broad range of issues that confront corporate America. ... Buffett identifies three types of corporate governance structures in which boards of directors must operate, defined in terms of the nature of the shareholders and management: (1) those with a controlling shareholder who is also the manager; (2) those with a controlling shareholder who is not a manager; and (3) those without a controlling shareholder. ... They resist or fail to inquire about third-party acquisition proposals; they resist replacement of inefficient managers; and they spend too little time with increasingly complex businesses. ... Hu hails the clarity of Berkshire's statement of its corporate objective as a model of frank, plain English disclosure that should set the standard for corporate America. ... in calling for availability of the appraisal remedy in unequal treatment cases, while Professor Dale Arthur Oesterle reevaluates the 1980s in calling for an overhaul of the Williams Act to even out the playing field between takeover bidders and their overly-protected targets. ... Recognizing that Berkshire complies with GAAP in showing its acquisitions by using the purchase method when required, Johnson contends that it disserves investor interests also to show how things would look if the pooling method were used. ...
TEXT: [*221]
Warren Buffett is usually described as one of the most successful investors of all time. It is equally correct to say that he is one of the most prolific and instructive chief executive officers of all time. For over twenty years, he has written robust and thoughtful Chairman's letters to shareholders of Berkshire Hathaway Inc., presenting profound and sensible, but not uncontroversial positions on a broad range of issues that confront corporate America. The scholarship that follows in this Issue is an in-depth dissection of the letters, prepared for a symposium at the Benjamin N. Cardozo School of Law that brought together dozens of the country's leading corporate law scholars, as well as Mr. Buffett and Berkshire Vice Chairman Charles Munger.
The scope of Buffett's letters is reflected in the scope of the symposium. Two panels on corporate governance tackled questions about the corporate mission, board structures and duties, and the role of relationships in investing and management. A mergers and acquisitions panel examined corporate culture, leveraged raiders in takeovers, the role of shareholder choice, and the equal treatment rule. Major papers on corporate finance offered solutions to the dividend puzzle and to unraveling mysteries of stock market pricing anomalies. An accounting and taxation panel took stock of disclosure rules and practice, tax law effects on earnings retention, and the ultimate purposes and effects of Generally Accepted Accounting Principles ("GAAP").
This Issue contains a total of nineteen pieces, n1 many of them major articles. It also includes an edited transcript of the vibrant dialogue at the conference, n2 a collection of Warren Buffett's essays, and an introduction to them. n3 Taken in parts or as a whole, this [*222] symposium makes important contributions to descriptive and normative corporate law and practice. The following overview of the papers is intended as a guide to the principal points developed at this occasion.
Corporate Governance
Buffett identifies three types of corporate governance structures in which boards of directors must operate, defined in terms of the nature of the shareholders and management: (1) those with a controlling shareholder who is also the manager; (2) those with a controlling shareholder who is not a manager; and (3) those without a controlling shareholder. n4 Professor Melvin A. Eisenberg takes note of these, but is then able to develop a general prescription for all boards in various governance structures to assume substantive responsibility for the implementation and maintenance of a system of internal control. n5 Drawing on the same observations about governance varieties, Professor Jill E. Fisch denies the possibility of prescribing rules of general applicability; she favors instead permissive regimes that allow selection of appropriate operational guidelines to meet particular needs. n6
Eisenberg positions his thesis in a monitoring model of board duties, which he believes has come to dominate thinking about board functions. Noting that current theory has been devoted to delineating structural accommodations to the concept of monitoring, Eisenberg announces what he calls the "most crucial implication" of the monitoring model - the need for substantive board responsibility for the "existence, integrity and efficacy of the corporation's internal control." n7
Elaboration of this new theme of substantive board duties takes Eisenberg to three issues. First, internal controls are defined as processes designed to provide reasonable assurance regarding the achievement of corporate operational objectives, the adequacy of financial reporting, and the compliance with law. Second, boards, rather than managers, must bear internal control responsibility because they have a comparative informational advantage and greater motivation to police managerial opportunism. Third, [*223] the required board duties entail supervising the design of internal control systems and supporting their administration.
Eisenberg draws his theme together by emphasizing not only its efficiency benefits but also its legal justifications, including those from the Foreign Corrupt Practices Act, n8 the Federal Sentencing Guidelines, n9 and the duty of care as articulated in major cases such as Graham v. Allis-Chalmers Manufacturing Co. n10 and In re Caremark International, Inc. n11
While Fisch acknowledges that Eisenberg may be right that there is now widespread acceptance of the monitoring model of corporate boards, she argues that such universal acceptance of any generalized model of a board is mistaken. Even though the increasing degree to which boards are taken seriously has been a major development in corporate governance in recent years, n12 Fisch laments that the costs and benefits of board functions have not been given adequate attention in recent debates about corporate governance. n13
Drawing on Buffett's three varieties of governance situations, Fisch contends that, for different governance situations, both the costs and the benefits of the monitoring model are uncertain. Accordingly, Fisch concludes, corporate lawyers should be wary of broad reform proposals advancing general governance requirements. Rather, board composition and structure should be tailored based on business needs. Otherwise, Fisch fears that the board's capacity to improve corporate performance will be diminished. n14
Of the three governance varieties Buffett identifies, his own position at Berkshire is the kind that enables exercise of the greatest power: as Berkshire's controlling shareholder and manager, Buffett has the power to compel significant change when necessary. That power does not exist in the commonest governance situation, most memorably described by a Delaware court as involving a fluid aggregation of shareholders, rather than a controlling shareholder. n15 To generate Buffett-like power for such undifferentiated shareholder masses, Mr. James P. Holdcroft, Jr. and Professor [*224] Jonathan R. Macey propose giving such shareholders power each year to (1) vote "no-confidence" in management and thus require the board to replace management, and (2) vote to put the company up for sale in a board-run auction contest. n16
Some may see the Macey-Holdcroft proposal as radical, but Macey and Holdcroft argue that it is modest and incremental. n17 They advance the proposal based on a theory of corporate governance that identifies two general aspects of problems facing most large public corporations. On the board side, directors are too solicitous of management. They resist or fail to inquire about third-party acquisition proposals; they resist replacement of inefficient managers; and they spend too little time with increasingly complex businesses. On the shareholder side, rational apathy and collective action problems impair shareholder ability to replace managers. These major problems would diminish dramatically in the two contexts Macey and Holdcroft select for stepped-up shareholder power. In that sense, the proposal may be incremental, at least theoretically.
Buffett has been heralded - incorrectly, Buffett believes - as a "relational" investor. Professor Deborah A. DeMott explores what that concept really means as a matter of practice and of law, and shows reasons to be skeptical about the stability of any "relationship" investment as commonly understood. n18 Most crucially, DeMott notes that present law imposes no duty on large-block shareholders to act as agents for fellow shareholders. Yet such a duty would have to be imposed in order for relational investing to fulfill its promise of enhancing value for all shareholders.
Were agency law to apply to large-block holders, DeMott elaborates, it would necessarily impose new restrictions on management's ability to furnish the holder with confidential information, and on the holder's right to effect transactions not available to others. To implement such a true agency regime would also require addressing tough issues such as the identity of the principal (for example, as some of, a majority of, or all of the other shareholders) and the terms under which the principal so defined could alter the agent's duties by private agreement, as well as when formation of the relationship would occur. [*225]
DeMott observes that a regime treating large-block holders as agents would also have to work out the costs the holder incurs because of free riding by other shareholders and the reduced liquidity of the agent's holdings. In short, not only is there a great distance between prevailing legal norms governing large-block holders and the terms of any plausible relational bargain, the distance would remain unless net benefits of a large-block holding were proven. DeMott thus regards relational investment as "intrinsically unstable," and doubts whether more of it would benefit shareholders. n19 On the other hand, she notes that while Buffett and Munger do not consider themselves or Berkshire to be relational investors, their success and commitments do suggest the possibility of "a stable, agency-based relationship among shareholders," n20 and that "long-term mutual gain is fully compatible with undertaking to act as a fiduciary toward fellow shareholders." n21
Taking the meaning of relationships more seriously and further than previous corporate law scholars, Professor Lawrence E. Mitchell identifies in Buffett's essays a central theme that underscores the fundamental importance of human relationships in corporate governance. n22 Mitchell integrates numerous aspects of Buffett's essays that contain this theme to advance a general theory of corporate governance. Mitchell's theory evokes a model drawn more substantially from traditional trust-based notions of director, shareholder, and corporate responsibility than does the prevailing model's emphasis on abstract and rational profit maximizers who bear no broader social responsibilities.
Two sets of relationships are key to Mitchell's elaboration of Buffett's theme: those between managers and stockholders and those between stockholders and property. Picturing, as Buffett does, stockholders as a diverse group of people with a potentially wide variety of goals n23 contrasts strikingly with the prevalent legal picture of "the stockholder [as] a monolithic, undifferentiated mass of profit maximizers." n24 Mitchell argues that in Buffett's picture, loyalty, rather than profit maximization, emerges as the standard of managerial responsibility. [*226]
Buffett's other picture sees the corporation not as the owner of its assets, but as a partnership among shareholders providing a conduit through which shareholders own the assets. As with the picture of shareholders as complex human beings, Mitchell deploys this picture to generate a corporate governance model in which social responsibility in its broad sense plays a much greater role than it plays in prevailing legal models that limit the corporate mission to profit maximization.
Mitchell's thesis at first may seem to be at odds with that of Professor Bevis Longstreth's. Longstreth suggests that Buffett would oppose other-constituency statutes and broad-based incentives to promote corporate social responsibility. n25 Through an imaginary conversation between himself and Buffett, Longstreth contends that Buffett would oppose these positions as inconsistent with his fundamental view of shareholders as owners, and that Buffett would regard as sleight of hand trickery efforts to promote greater "corporate responsibility" through tax-based carrots and sticks, as championed by Secretary of Labor Robert Reich in the Clinton Administration. n26
The surface tension between Mitchell's piece and Longstreth's can be resolved by a reading of Professor Henry T.C. Hu's article. n27 Hu emphasizes one of Buffett's owner-related business principles - the long-term economic goal of maximizing "the average annual rate of gain in intrinsic value on a per share basis." n28 But Hu also observes that Buffett's discussion of the anxieties of plant closings shows that Buffett also recognizes the long-term economic value of nurturing community relationships, and that such activity is itself socially responsible. n29
Hu hails the clarity of Berkshire's statement of its corporate objective as a model of frank, plain English disclosure that should set the standard for corporate America. This is equally true of Berkshire's disclosure relating to the standards by which performance is to be measured. In that part of his paper, Hu echoes Buffett's skepticism about modern finance theory, pointing out that the distinction Buffett repeatedly draws between market price and [*227] intrinsic value is similar to the distinction Hu has drawn between stock price and blissful price. n30
Corporate Finance and Investing
Stronger skepticism about modern finance theory underlies the separate contributions to this Issue by Professor Lynn A. Stout and Professor William W. Bratton. Following a distinct trend in corporate law scholarship that rejects efficient market theory and the capital asset pricing model ("CAPM"), these two major papers fully embrace Buffett's main theme of debunking that dogma. n31 Stout says it is based on tautology and flawed assumptions; n32 Bratton says modern finance theory is "gone." n33
Stout points out that CAPM is tautological, resting on an incorrect assumption that all investors make identical estimates of risks and returns, and on a further prediction that markets reflect those identical estimates. Stout offers instead a model of capital market behavior that encompasses heterogenous expectations. It posits that investors disagree about estimates of future risks and returns of securities. Stout uses this model to explain numerous anomalies that modern finance theory could not explain: the anomalous risk-return ratio of various classes of stock, the pricing effects of share repurchases, issuances and dividends, why investors do not diversify, why takeover premiums go disproportionately to targets and how certain investors - chiefly including Berkshire - can consistently outperform the market.
Jettisoning modern finance theory to examine another puzzle, Bratton draws on recent finance and economics literature to re-evaluate prevailing thought on why some corporations persistently violate Buffett's policy and practice on dividends. Buffett's dividend rule is to retain a dollar of earnings if and only if doing so creates at least a dollar of increased market value. Hardly anyone other than Buffett and Berkshire follows that rule. Others tend to pay regular dividends that increase incrementally and steadily over time with no or little regard to their relationship to increased value.
Quickly dispatching standard explanations of this behavior, such as the signaling effect and the agency costs account as inade- [*228] quate, Bratton presents a different theoretical model. Highlighting the "incomplete contracts approach" in optimal capital structuring, Bratton's model observes that short-term borrowing is a strong deterrent to empire building, but with adverse side-effects. n34 Dividends are a second-best deterrent that disable empire-building and avoid the negative side-effects while keeping down the costs of observation and verification of managerial claims. Bratton then uses this model to evaluate three legal strategies that have been advanced to address the problem of sub-optimal earnings retention: the mandatory payout option, heightened institutional investor activism, and stepped-up disclosure of payout versus plowback policy. n35
Two shorter pieces in this section examine Berkshire's equity structure and offer a counterpoint to Buffett's criticisms of junk bonds. Professor Robert W. Hamilton, through a summary of Berkshire's goal of attracting long-term investors and minimizing transactions costs, explains Berkshire's high stock price and analyzes the company's motivation in effecting its 1996 recapitalization. n36 Professor William A. Klein argues that junk bonds have gotten an undeserved bad rap, and sums up the reasons why they may be beneficial to issuers and appropriate for certain investors - at least those who do not hold Buffett's investment philosophy. n37
Mergers and Acquisitions
The four papers on mergers and acquisitions furnish a particularly rich reexamination of several fundamental issues in takeovers. Professors Jeffrey N. Gordon and Charles M. Yablon both address Delaware law in particular: Gordon focuses on the distribution ofpower between shareholders and boards in the takeover defense setting, n38 and Yablon on the role of corporate culture in mer- gers. n39 Professor James D. Cox exhumes and reexamines Jones v. H.F. Ahmanson & Co. n40 in calling for availability of the appraisal [*229] remedy in unequal treatment cases, n41 while Professor Dale Arthur Oesterle reevaluates the 1980s in calling for an overhaul of the Williams Act n42 to even out the playing field between takeover bidders and their overly-protected targets. n43
In addressing the problem of shareholder choice in corporate takeovers, Gordon notes that Buffett believes that "shareholders should have the final word on how to dispose of an offer to buy the company." n44 Because of differences between stock prices and business value, however, giving shareholders that power can cause two problems: it can promote revolving-door stock ownership, and enable buyers to obtain companies at bargain prices. The latter problem may be answered, Gordon suggests, by judicial rules and takeover defense mechanisms, such as the poison pill, that enable target managers to extract higher prices from bidders. But if so, a different problem arises - buyers in takeovers may pay too much. Gordon says the resulting tension between these positions is an "arguable weakness in Buffett's analytic system." n45
Gordon then reviews a series of recent Delaware takeover cases involving mergers-of-equals, which in their doctrinal awkwardness, may simply reflect this tension. Delaware courts have not reviewed these cases using the rigorous standard announced in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., n46 but instead have given substantial deference to director decisions. One rationale for the deference is based on director independence and the possibility that if "last dollar auctions" would tend to "create a rickety financial structure for the new combination, then the benefit to the fortunate shareholders of the target may be outweighed by increased risk of private and social loss of business failure." n47
Gordon pursues a more intriguing possibility, one that more directly reconciles these cases with Buffett's principle of shareholder choice, only with a slight wrinkle: "shareholders should also want the power to choose a regime that maximizes the negotiating position of the board, even if it might entail surrendering the im- [*230] mediate power to accept a tender offer." n48 Though perhaps not the sort of shareholder choice model proposed by Macey and Holdcroft, Gordon applies this account to the distribution of power to adopt and maintain poison pills. The analysis addresses three separate circumstances: the just-say-no defense, the deadhand poison pill, and the shareholder power to amend by-laws to limit board power to adopt and maintain poison pills. Gordon argues that this sort of shareholder choice principle is consistent with corporate law doctrine and ideology, as well as with capital market signals about corporate performance.
Yablon takes a fresh view of the longstanding debate over the role of corporate culture in takeovers. He identifies three basic positions in the debate that have swayed not only scholars but also Delaware justices: some, such as Justice Horsey in Paramount Communications, Inc. v. Time Inc., n49 believe in corporate culture; others, like Justice Moore in Revlon do not; n50 and some, like Chief Justice Veasey in Paramount Communications Inc. v. QVC Network Inc., are agnostic. n51 Despite the apparent inconsistencies in these theological stances on Delaware takeover defense law, Yablon demonstrates how the cases can be reconciled on doctrinal grounds. The harder question Yablon tackles, however, is whether the doctrinal reconciliation is defensible, a question requiring an inquiry into what corporate culture really means and how it can contribute to shaping the doctrinal framework.
To pursue this inquiry, Yablon draws on Buffett's essays. He concludes that Buffett is a believer in corporate culture and elucidates Buffett's understanding of its meaning. Yablon finds underlying Buffett's basic acquisition principles "an interesting theory about the relationship between managers and the businesses they run," n52 a theory that identifies "a complex, somewhat ineffable and fundamentally organic relationship between managers and their businesses." n53 In those terms, what management resisting corporate takeovers on grounds of corporate culture is really saying is that a threat is posed by virtue of the character and fitness of the [*231] raider. It is possible, Yablon concludes, that this is the deeper axis that unites the seemingly different degrees of faith that Delaware justices, and others, have reposed in corporate culture when evaluating the legality of takeover defenses in particular situations.
Drawing extensively on Buffett's essays as exemplars of collective cultural appraisals of 1980s bidders as either con artists or fools, Oesterle proclaims such judgements too harsh, and the laws intended to regulate them as entailing enormous social costs. Oesterle argues that it would be more accurate to describe these leveraged-cash bidders as visionaries, who paid too great a price in the undeserved negative cultural image drawn by their critics, and who were robbed of their fair share of the gains generated by anti-bidder laws - especially those requiring bidders to reveal their strategies early about timing, price, financing, and other matters.
These laws must be eradicated, Oesterle argues, because of the disciplining effect that financial takeovers have on managers who made mistakes in strategic acquisitions. He argues that the financial takeovers of the 1980s were a correction of failed strategic acquisitions of the 1970s. Emphasizing the cyclicality of merger and acquisition activity, Oesterle worries that the legal regime that emerged from the 1980s will impair the correction process that will probably be necessary in the coming decade to correct the mistakes made in strategic acquisitions of the current one. In short, Oesterle says, the social costs of current takeover laws are an enormous reduction in aggregate economic horsepower.
Cox reviews the rule of equal treatment, first formulated by Justice Traynor in the famous Ahmanson case, n54 but recently killed in Delaware in cases like Nixon v. Blackwell n55 and Williams v. Geier. n56 Traynor had held liable majority stockholders who had sold their shares in a deal that excluded the minority because of what Traynor called lack of equal treatment. Cox parses the Traynor opinion to show just how novel this rule was, and yet how simple it would have been to make it appear less novel. Alas, Traynor's ingenuity was expensive - the equal treatment rule has not caught on widely.
This is unfortunate, according to Cox, for there remains a need to furnish some sort of equal treatment to protect minority shareholders from opportunistic majorities. To search for support in the current doctrinal framework, Cox turns to the appraisal remedy [*232] and seeks to unmoor it from its ancient roots as a cure for lack of liquidity of minority shares. The appraisal remedy would be particularly effective in corporations with one class of stock in which members of that class are treated unequally. It would be of obvious use on the facts of Ahmanson, and would obviate the need for considering the motives of the majority as it would rest on a more fundamental principle of equal treatment, dislodged from rationalizations about why a transaction was done.
Accounting and Taxation
The purposes of GAAP, its promise, and its limits are major themes of Buffett's essays, n57 and also of the three accounting pieces in this section, by Professor Calvin H. Johnson, Professor Edmund W. Kitch, and Professor Elliott J. Weiss. Johnson's piece operates at a general level, articulating a model of financial accounting theory and practice predicated on the related principles of loyalty to the investor and fidelity to the market; n58 Kitch particularizes the theme to consider questions about financial reporting that go beyond GAAP requirements; n59 and Weiss looks at the usefulness of accounting in understanding corporate law issues in the law school classroom. n60 The final piece, by Professor James R. Repetti, brings the symposium to a close by examining how tax policy impairs, but could improve, corporate performance and governance in America. n61
Drawing the lines of battle as pitting investors and the market on one hand against managers desiring spin control on the other, Johnson expresses frustration with the role the Financial Accounting Standards Board ("FASB") has played in mediating the war, and gives mixed reviews of Buffett's contributions to accounting discourse. After warming up to applaud Buffett's characterization of management stock option awards as compensation, which are properly treated as an expense, Johnson decries Buffett's willingness to use the pooling method or to ignore purchase price adjust- [*233] ments in his accounting presentation of some of Berkshire's acquisitions.
Recognizing that Berkshire complies with GAAP in showing its acquisitions by using the purchase method when required, Johnson contends that it disserves investor interests also to show how things would look if the pooling method were used. According to Johnson, it is all right to ignore amortization of goodwill acquired in an acquisition, n62 but not all right to do so for purchase-price adjustments of acquired balance sheet assets. The latter, Johnson says, should be reported at their stepped-up costs, and the income statement burdened accordingly.
Johnson also challenges as theoretically unsound and unfeasible Buffett's calculation of owner earnings as an alternative to calculation and valuation of cash flow. Buffett calculates owner earnings as: (a) net income minus (b) deprecation charges plus (c) the required capitalized costs to maintain the business's current position and unit volume. n63 Johnson complains that (c) is way more than is appropriate for calculating value - its value would require the business to spring as "a very rapidly rising escalator." n64 Defending more commonly used cash flow numbers, Johnson concisely summarizes net present value concepts to contend that the cash flow approach remains a superior valuation technique to Buffett's owner earnings concept.
An especially important contribution of Johnson's piece is his observation that GAAP and valuation techniques based on price-earnings ratios are built on outmoded models that treat financial information as a perpetuity. Once a necessarily limiting assumption, it is now outdated by spreadsheet technology, Johnson says.
While Johnson has some reservations about Buffett's use of alternative methods of presentation, Kitch highlights Buffett's willingness to do so as the distinguishing feature of Berkshire's disclosure practice, and recommends more of it. After all, the fundamental problem with GAAP is that it tries to do too much, or at least cover too much ground as a highly general set of broad [*234] principles intended for application to an infinite variety of particularized contexts. n65 It would be better to abandon GAAP's dream of universality, and seek more variety in financial reporting in the direction that Berkshire's reporting leads. Kitch suggests, for example, presenting multiple summary statements of financial condition or performance, or presenting earnings according to a number of different assumptions. What is interesting to Kitch about Berkshire's disclosure is that it presents financial issues as Munger and Buffett see them, not solely how GAAP tells people to look at them.
A couple of problems of special interest to lawyers stand in the way of overcoming the limiting power of GAAP's pipe dream and promoting more disclosure of the kind Buffett volunteers. First, many securities lawyers would be nervous including these additional presentations, n66 which is an unfortunate result of securities disclosure laws that create excessive incentives to adhere strictly to GAAP, and not go beyond it. n67 Second, there is an "unfortunate cultural divide" between the legal and accounting professions about financial statement disclosure. n68 Third, there is inadequate teaching of accounting disclosure documents in law schools.
Building on such insights, Weiss offers more fundamental reasons why it is important to teach accounting and valuation as part of the basic corporations course in law schools. Accounting is important because lawyers in a wide variety of practice areas are substantial consumers of financial data, which cannot be understood without basic training in the subject. As for valuation, the significant limits of GAAP tend to obscure economic reality in many instances, and a mastery of basic principles of valuation is necessary to enable a lawyer, as well as others, to pierce the financial statements to estimate underlying business value. An understanding of both subjects, more particularly, is often necessary to appreciate the significance of many corporate law principles and cases that implicate them, as Weiss illustrates with several classic opinions found in most corporate law casebooks. n69 [*235]
Drawing out the tax implications of many of Buffett's themes, Repetti links tax policy to corporate governance. Echoing some of Buffett's positions, Repetti argues that in numerous ways management pursues its own objectives at shareholder expense, such as through excessive compensation, value decreasing acquisitions, and sub-optimal earnings retention. He observes that the tax system has adopted numerous mechanisms that attempt to reverse these inefficiencies by more nearly aligning managerial and shareholder interests, including favorable taxation of incentive stock options and unfavorable treatment of certain golden parachute payments, greenmail payments, and excessive compensation.
Repetti argues that these attempts are ineffective, however, because they fail to appreciate the diversity and complexity of management-shareholder relationships and contexts, which Congress cannot fully anticipate or legislate upon. For example, while exercise of an incentive stock option does not call for recognizing income for the regular income tax, it often triggers the alternative minimum tax, an odd mix perhaps reflecting Congressional ambivalence as to whether stock options really do help align management shareholder interests. Similarly, nondeductibility of golden parachute payments and heavy taxes on greenmail payments fail to recognize that in certain contexts social welfare may be improved by these payments, and that nondeductibility of certain executive compensation over a million dollars per year has had little effect on executive compensation levels - many companies simply pay the freight, and their shareholders effectively eat the deduction.
Repetti argues that these moves all reflect in various degrees Congressional schizophrenia, and should all be jettisoned in favor of a different approach to the question of alignment. He believes that the current impulse to motivate management through particularized tax policies should be scrapped, and the focus placed on eliminating tax provisions that encourage stockholders to tolerate managerial inefficiencies in the first place. In particular, current tax law subsidizes inefficient retention of earnings by: (1) corporate tax rates that are lower than individual rates; (2) a capital gains preference for non-corporate taxpayers; and (3) a stepped-up basis in stock upon a stockholders' death. Repetti concludes that to increase stockholder incentive to monitor managerial earnings retention decisions, the capital gains preference and the step-up in basis provisions should be abolished, and corporate and individual tax rates should be equalized. [*236]
Conclusion
A symposium gives people an opportunity to exchange ideas, to debate them, and to learn. Thanks to the intellectual firepower of this distinguished group of scholars, as well as to the active participation of Mr. Buffett and Mr. Munger, this symposium exploits all three opportunties. n70 The elaborate dissection of hundreds of pages of original text provoked dialogue, disagreement, and debate that produced fresh and fruitful insights and important new contributions to prevailing ways of understanding corporate America and its governance challenges. This Issue furnishes countless lessons, not only for corporate lawyers, but for corporate America.
FOOTNOTES:
n1. The Articles begin at 19 Cardozo L. Rev. 237 (1997).
n2. See Lawrence A. Cunningham, Editor, Conversations from the Warren Buffett Symposium, 19 Cardozo L. Rev. 719 (1997) [hereinafter Buffett Conversations].
n3. See Lawrence A. Cunningham, Compilation, The Essays of Warren Buffett: Lessons for Corporate America, 19 Cardozo L. Rev. 1 (1997) [hereinafter Buffett Essays].
n4. See id. at 9.
n5. See Melvin A. Eisenberg, The Board of Directors and Internal Control, 19 Cardozo L. Rev. 237 (1997).
n6. See Jill E. Fisch, Taking Boards Seriously, 19 Cardozo L. Rev. 265 (1997).
n7. Eisenberg, supra note 5, at 240.
n8. 15 U.S.C.A. 78dd-1 to -2 (West 1997).
n9. U.S. Sentencing Guidelines Manual 8A1.2 cmt. 3(k) (1997).
n15. See In re Time Inc. Shareholder Litig., C.A. No. 10670, 1989 WL 79880, at *21 (Del. Ch. July 14, 1989).
n16. See James P. Holdcroft, Jr. & Jonathan R. Macey, Flexibility in Determining the Role of the Board of Directors in the Age of Information, 19 Cardozo L. Rev. 291 (1997).
n17. See Buffett Conversations, supra note 2, at 722.
n18. See Deborah A. DeMott, Agency Principles and Large Block Shareholders, 19 Cardozo L. Rev. 321 (1997).
n19. See id. at 324.
n20. Id. at 340.
n21. Id. On Buffett's, Munger's, and Berkshire's success, see generally Buffett Essays, supra note 3.
n22. See Lawrence E. Mitchell, The Human Corporation: Some Thoughts on Hume, Smith, and Buffett, 19 Cardozo L. Rev. 341 (1997).
n23. See Buffett Essays, supra note 3, at 29.
n24. Mitchell, supra note 22, at 344.
n25. See Bevis Longstreth, Warren E. Buffett on Corporate Constituency Laws and Other Newfangled Ideas: An Imaginary Conversation, 19 Cardozo L. Rev. 363 (1997).
n26. See Robert B. Reich, How to Avoid These Layoffs?, N.Y. Times, Jan. 4, 1996, at A21.
n27. See Henry T.C. Hu, Buffett, Corporate Objectives, and the Nature of Sheep, 19 Cardozo L. Rev. 379 (1997).
n28. Id. at 390.
n29. See id. at 390-92.
n30. See id. Part III.
n31. That theme is elaborated in Buffett Essays, supra note 3, Part IV.
n32. See Lynn A. Stout, How Efficient Markets Undervalue Stocks: CAPM and ECMH Under Conditions of Uncertainty and Disagreement, 19 Cardozo L. Rev. 475 (1997).
n33. William W. Bratton, Dividends, Noncontractability, and Corporate Law, 19 Cardozo L. Rev. 409 (1997).
n34. See id. at 421-49.
n35. See id. at 449-67.
n36. See Robert W. Hamilton, Reflections on the Pricing of Shares, 19 Cardozo L. Rev. 493 (1997). Additional discussion of this point may be found in Buffett Essays, supra note 3, Part III.F.
n37. See William A. Klein, High-Yield ("Junk") Bonds As Investments and As Financial Tools, 19 Cardozo L. Rev. 505 (1997).
n38. See Jeffrey N. Gordon, "Just Say Never?" Poison Pills, Deadhand Pills, and Shareholder-Adopted Bylaws: An Essay for Warren Buffett, 19 Cardozo L. Rev. 511 (1997).
n39. See Charles M. Yablon, Corporate Culture in Takeovers, 19 Cardozo L. Rev. 553 (1997).
n40. 460 P.2d 464 (Cal. 1969).
n41. See James D. Cox, Equal Treatment for Shareholders: An Essay, 19 Cardozo L. Rev. 615 (1997).
n42. 15 U.S.C.A. 78m-78n (West 1997).
n43. See Dale Arthur Oesterle, Revisiting the Anti-Takeover Fervor of the '80s Through the Letters of Warren Buffett: Current Acquisition Practice Is Clogged by Legal Flotsam from the Decade, 19 Cardozo L. Rev. 565 (1997).
n44. Gordon, supra note 38, at 517.
n45. Id. at 520.
n46. 506 A.2d 173 (Del. 1986).
n47. Gordon, supra note 38, at 520.
n48. Id. at 522.
n49. 571 A.2d 1140 (Del. Ch. 1989) (emphasizing corporate culture as basis for deferring to director takeover defense decisions).
n50. See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) (deeming arguments about corporate culture essentially irrelevant).
n51. Paramount Communications, Inc. v. QVC Network Inc., 637 A.2d 34 (Del. 1993) (the middle ground opinion between Time and Revlon, exhibiting some ambivalence about corporate culture).
n52. Yablon, supra note 39. at 560.
n53. Id.
n54. Jones v. H.F. Ahmanson & Co., 460 P.2d 464 (Cal. 1969).
n55. 626 A.2d 1366 (Del. 1993).
n56. 671 A.2d 1368 (Del. 1996).
n57. See Buffett Essays, supra note 3, Part VI.
n58. See Calvin H. Johnson, Accounting in Favor of Investors, 19 Cardozo L. Rev. 637 (1997).
n59. See Edmund W. Kitch, Berkshire Hathaway's Uncommon Accounting, 19 Cardozo L. Rev. 669 (1997).
n60. See Elliott J. Weiss, Teaching Accounting and Valuation in the Basic Corporation Law Course, 19 Cardozo L. Rev. 679 (1997).
n61. See James R. Repetti, The Misuse of Tax Incentives to Align Management-Shareholder Interests, 19 Cardozo L. Rev. 697 (1997).
n62. Indeed, Johnson has forcibly argued that no tax deduction for amortization of goodwill should be allowed. See Johnson, supra note 58, at 654-57.
n63. More precisely, in Buffett's definition (c) is equal to: "The average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume." See Buffett Essays, supra note 3, at 184.
n64. Johnson, supra note 58, at 665.
n65. See generally Kitch, supra note 59.
n66. See id. at 673.
n67. See id.
n68. See id.
n69. See Weiss, supra note 60 (discussing Francis v. United Jersey Bank, 432 A.2d 814 (N.J. 1981); Kamin v. American Express Co., 383 N.Y.S.2d 807 (Sup. Ct.), aff'd, 387 N.Y.S.2d 993 (App. Div. 1976); Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125 (Del. 1963)).
Document 4 of 27. 