Monday, July 21, 2014

Americans Voting With Their Feet for Red State Cities

Lone Star Juggernaut

The Census Bureau has released a report of the 15 fastest growing US cities with populations of 50,000 or more.  Here is the list.

1.    San Marcos, Texas
2.    Frisco, Texas
3.    South Jordan, Utah
4.    Cedar Park, Texas
5.    Lehi City, Utah
6.    Goodyear, Arizona
7.    Georgetown,  Texas
8.    Gaithersburg, Maryland
9.    Mount Pleasant, South Carolina
10.  Meridian, Idaho
11.  Odessa, Texas
12.  Gilbert, Arizona
13.  McKinney, Texas
14.  Franklin, Tennessee
15.  Pearland, Texas

Seven such cities are in Texas, and fourteen of fifteen are in so-called "red" states, that is, states that voted for Mitt Romney in 2012 and John McCain in 2008.  This concentration of fast-growing cities in such red states is not surprising.  After all, as previously explained on this blog, the Nation has to some extent embraced a constitutional system of competitive federalism, whereby individual states are free to embrace different philosophies of regulation and taxation.  Because individuals are free to travel between the states, jurisdictions that offer environments conducive to the creation of economic opportunity will attract individuals and capital, while those that impose undue regulatory burdens and taxation will deter in-migration and encourage their citizens to migrate elsewhere.  Indeed, previous posts on this blog have identified various policies, such as minimum wages (see here and here), high income taxes and associated over-spending (see here and here), and statutes authorizing so-called "closed shop" collective bargaining agreements (see here and here), that deter wealth-creating economic activity, stultifying economic growth and opportunity.   By contrast, of the red states represented in this list, only one (Arizona) has a minimum wage that exceeds the federal minimum.   (See here)  Two have no minimum wage at all.   Moreover, all such states are so-called "right to work" states that prevent unions from negotiating collective bargaining agreements that require employees to financially support a union against their will.  It is thus no surprise that cities from red states dominate this list, as they have dominated similar lists in the past.  Removal of federal policies that distort and dampen such competition, discussed here and here, would bolster such rivalry and further discipline those states that adopt policies that hamper growth and opportunity.  

Saturday, July 5, 2014

Hobby Lobby and Corporate Social Responsibility

Would He Endorse Hobby Lobby?

The Hobby Lobby decision has predictably resulted in a stream of academic commentary and punditry in the blogosphere, much of it addressing the Court's determination that business corporations are RFRA persons capable of exercising religion.   For instance, two thoughtful scholars, Usha Rodrigues and Lyman Johnson, have opined that Hobby Lobby rejects the view that corporations should maximize shareholder profits in favor of so-called "Corporate Social Responsibility."   Both scholars focus on the same passage of the decision, which Professor Rodrigues quotes in full in her post over at the blog Conglomerate.  (For Professor Johnson's views, go here.)
"Some lower court judges have suggested that RFRA does not protect for-profit corporations because the purpose of such corporations is simply to make money.  This argument flies in the face of modern corporate law. “Each American jurisdiction today either expressly or by implication authorizes corporations to be formed under its general corporation act for any lawful purpose or business.” 1 J. Cox & T. Hazen, Treatise of the Law of Corporations §4:1, p. 224 (3d ed. 2010) (emphasis added); see 1A W. Fletcher, Cyclopedia of the Law of Corporations §102 (rev. ed. 2010).  While it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so. For-profit corporations, with ownership approval support a wide variety of charitable causes, and it is not at all uncommon for such corporations to further humanitarian and other altruistic objectives. Many examples come readily to mind. So long as its owners agree, a for-profit corporation may take costly pollution-control and energy-conservation measures that go beyond what the law requires. A for-profit corporation that operates facilities in other countries may exceed the requirements of local law regarding working conditions and benefits. If for-profit corporations may pursue such worthy objectives, there is no apparent reason why they may not further religious objectives as well." 

Professor Rodrigues reads this passage as reflecting a rejection of the profit maximization norm in favor of Corporate Social Responsibility.  As she puts it:

"Shareholder wealth maximization does not rule with the majority, that's for sure.   Milton Friedman be damned,  CSR is alive and well on the Supreme Court."  Later in her post she concludes that: "the conservative majority [in Hobby Lobby] moves to embrace progressive CSR-style rhetoric[.]"

Speaking of the same passage, Professor Johnson opines as follows:

 "[T]hose in the corporate law academy who think corporate law mandates strict profit maximization now have a formidable judicial foe, and one that dwarfs the puny authority of Dodge v. Ford Motor Co. . . .  i.e., the U.S. Supreme Court.  Time to change the syllabus on corporate purpose…  To those on the right who favored Hobby Lobby (me) but who also favor the now-discredited position that corporate law requires profit maximizing (not me) take note:  you won the battle on religious freedom but to do so you had to suffer a major setback on corporate purpose."

Nobel Laureate Milton Friedman (pictured above), of course, famously contended that corporations should reject Corporate Social Responsibility, which he defined as the sacrifice of shareholder profits in favor of broader social objectives.  In his classic work "Capitalism and Freedom" (1962)  Friedman opined as follows on the question:

"[T]here is one and only one social responsibility of business --- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

Friedman repeated this assertion in a 1970 essay in the New York Times Magazine, where he elaborated his views of the subject.  (See here).

Both posts are thoughtful efforts to understand the role of Corporate Social Responsibility in the Court's thinking. There does seem to be some tension between the views of Professor Friedman and others (including this blogger) who believe that corporations should maximize shareholder profits, on the one hand, and the excerpt from Hobby Lobby that Professors Rodrigues and Johnson invoke. (See this essay contending that corporate law is best understood as requiring managers to maximize shareholder profits at the expense of other constituencies when necessary.)  

At the same time, I'd like to suggest that the excerpt from Hobby Lobby that Professors Rodrigues and Johnson invoke is entirely consistent with the views of Friedman and those like myself who believe in shareholder primacy and a background profit maximization norm.  It is important to note that the passage in question twice qualifies the Court's assertion that corporations may forgo profits in pursuit other objectives. For instance, the Court states that many for-profit corporations pursue charitable causes "with ownership approval." (emphasis added)  Moreover, the Court states that "so long as the owners agree, a for-profit corporation may take costly pollution-control and energy-conservation measures that go beyond what the law requires." (emphasis added)  Thus, as Stephen Bainbridge has suggested in response to Professor Johnson's post, this passage does not abandon profit maximization but instead treats the profit-maximization norm as a default rule, which shareholders may alter so as to pursue objectives that reduce profits.

This "default rule" account is well-grounded in corporate law.  As this blogger and co-author Nate Oman explained in a recent essay:

"Religiously motivated decisions may sometimes increase profits, though some such decisions may reduce them.  While some case law [e.g., Dodge], suggests that fiduciaries must unalterably maximize shareholder profits, we believe that shareholders can waive any such rule, like other default rules.  No decision of which we are aware holds that managers must maximize profit over the unanimous objection of the shareholders, who can amend the charter to validate any such choice. Indeed, corporate law even empowers shareholders, by unanimous vote, to ratify alleged corporate waste."

See Alan J. Meese and Nathan B. Oman, Hobby Lobby, Corporate Law and the Theory of the Firm: Why For-Profit Corporations are RFRA Persons, 127 Harv. L. Rev. Forum 273, 284-85 (May 2014).

What, though, about Friedman's wholesale rejection of Corporate Social Responsibility?  Doesn't Hobby Lobby's recognition that corporations  may forgo profits (albeit only after shareholder approval) necessarily contradict Friedman's view?  The answer, I think, is "no."  A careful reading of his 1970 essay reveals that Friedman directed his admonition to directors and managers, not shareholders.  As Friedman put it, "the manager is the agent of the individuals who own the corporation."  Forsaking profits in favor of social goals, Friedman said, contravened the requirements of faithful agency and rendered the manager a principal instead of an agent.  As Friedman put it:    "[t]he whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interest of his principal.  This justification disappears when the corporate executive imposes taxes [i.e., diverts profits away from shareholders] and spends the proceeds for 'social' purposes.").

Indeed, it is worth quoting a lengthy portion of Friedman's 1970 essay in full:

"In a free-enterprise, private-property sys­tem, a corporate executive is an employee of the owners of the business. He has direct re­sponsibility to his employers. That responsi­bility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. Of course, in some cases his employers may have a different objective. A group of persons might establish a corporation for an eleemosynary purpose–for exam­ple, a hospital or a school. The manager of such a corporation will not have money profit as his objective but the rendering of certain services.  In either case, the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation or establish the eleemosynary institution, and his primary responsibility is to them.  Needless to say, this does not mean that it is easy to judge how well he is performing his task. But at least the criterion of performance is straightforward, and the persons among whom a voluntary contractual arrangement exists are clearly defined."

It seems clear, then, that Friedman would be comfortable allowing shareholders  --- the "principals" who "employ" managers --- to alter the default profit-maximization norm, so long as courts could assure themselves that shareholders really did consent to such a modification.  If those who create enterprises can forgo the profit motive altogether, then they can also choose some combination of profit and other objectives.  While such a modification of the profit maximization norm would reduce shareholder profits, the modification would presumably enhance shareholder utility.  Put another way, the profit-maximization norm is not an end in itself, but instead a means of maximizing shareholder welfare, which may consist of values other than material wealth.   Indeed, in the same essay, Friedman expressly stated that "individual proprietors" should feel perfectly free to forgo profit in favor of other objectives.  As he put it:

"The situation of the individual proprietor is somewhat different.  If he acts to reduce the returns of his enterprise in order to exercise his 'social responsibility,' he is spending his own money, not someone else's.  If he wishes to spend his money on such purposes, that is his right, and I cannot see that there is any objection to his doing so."

One doubts that Friedman would treat closely held corporations like Hobby Lobby any differently from firms owned by such "individual proprietors."  In each case the same individuals both own and control the firm in question, with the result that the agency problem that Friedman identified would disappear.  Allowing shareholders of a closely held corporation to pursue certain objectives that reduce profits would thus seem indistinguishable from "allowing" individuals to give money to charity.  Both practices would reduce the material wealth of the donor or shareholder, but both would also presumably increase such individuals' utility.  Thus, shareholder-approved departures from profit maximization of the sort invoked by the Hobby Lobby majority do not, in my view, reflect a rejection of Friedman's views or an embrace of Corporate Social Responsibility.   



Friday, July 4, 2014

Happy Independence Day!

"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness."

The Declaration of Independence, July 4, 1776

Statue of Thomas Jefferson, William and Mary Class of 1762, at the College of William and Mary in Virginia.

Hobby Lobby, Business Corporations and Religious Liberty

Protected Liberty

Did Not

On Monday the Supreme Court announced its decision in Burwell v. Hobby Lobby Stores, Inc., 573 U.S. _____ (2014).  In an opinion by Justice Alito, pictured above, the Court held that the so-called "contraception mandate" imposed pursuant to the Affordable Care Act imposed a substantial burden on Hobby Lobby's exercise of religion.   The Court also identified a less restrictive means of achieving the very same objective as the mandate, a means that did not require Hobby Lobby to purchase those four contraceptives it declined to provide its employees. As a result, the Court concluded that the Administration's contraception mandate flunked RFRA's demanding test for evaluating regulations that infringe religious liberty.

The Court's decision depended upon two threshold determinations.  First, the Court concluded that for-profit corporations are "persons" within the meaning of the Religious Freedom Restoration Act.  Second, the Court also determined that closely-held firms such as Hobby Lobby are capable of "exercising religion" for purposes of RFRA.  The Court recognized that such corporate religious exercise enhances the religious freedom of individuals, who employ for-profit corporations and other artificial entities, including non-profits, to achieve their objectives in the real world.  The Court saw no reason in law or logic to distinguish for-profit corporations from non-profit corporations or other for-profit enterprises such as partnerships or sole proprietorships.  As the Court explained, modern corporate law empowers business corporations to pursue "any lawful purpose or business," and there is no indication that pursuit of a religious purpose at the behest of shareholders contravenes corporate law principles, even if such pursuit might reduce corporate profits.  Justice Ginsburg, joined on this point only by Justice Sotomayor, opined that individuals who choose to conduct business under the aegis of for-profit corporations thereby forfeit their ability to pursue religious objectives in the commercial context.

This blogger believes that the Hobby Lobby Court's determination that business corporations are RFRA persons was undoubtedly correct.  Indeed, in an essay published this past May, this blogger and co-author Nate Oman reached the same conclusion as the Court, based on a similar rationale.  See Alan J. Meese and Nate Oman, Hobby Lobby, Corporate Law and the Theory of the Firm: Why For-Profit Corporations are RFRA Persons, 127 Harv. L. Rev. Forum 273 (May 20 2014).  In particular, the essay explains that modern corporate law empowers shareholders to employ various tools that induce business corporations to engage in religiously-motivated practices, whether closing on the owners' Sabbath, declining to sell alcohol, or selling only Kosher food.  The essay also explains that state corporate law authorizes business corporations to pursue "any lawful business or purpose."  Thus, when it comes to the capacity to exercise religion, business corporations, particularly those that are closely held, are indistinguishable from sole proprietorships and partnerships.  All such entities are instrumentalities individuals may employ to achieve personal objectives, including religious ones.  Indeed, many scholars and courts have referred to closely held corporations as “chartered partnerships,” “incorporated partnerships,” or “corporations de jure and partnerships de facto.”  It is of course true that business corporations possess limited liability and entity status, legal attributes that distinguish such firms from sole proprietorships.  However, churches, synagogues and mosques also possess entity status, and their members enjoy limited liability.  Even the Obama Administration concedes that such entities are RFRA persons capable of exercising religion.

It is thus no surprise that business corporations, particularly those that are closely held, have been engaged in religiously-motivated practices for decades or more, or that such practices have passed without corporate law objection.   For instance, in 1961, the Supreme Court entertained a free exercise clause challenge to a Massachusetts Sunday closing law by a supermarket located in the Springfield, Massachusetts.  See Gallagher v. Crown Kosher Supermarket of Massachusetts, Inc., et al., 366 U.S. 617 (1961).  The Court reported that: "Appellees are Crown Kosher Super Market, a corporation whose four stockholders, officers and directors are members of the Orthodox Jewish faith."  The Court also reported that the corporate plaintiff did not conduct business "from sundown on Friday until sundown on Saturday" because "the Orthodox Jewish religion requires its members to refrain from any commercial activity on the Sabbath."  While the Court rejected the challenge on the merits by a divided vote, no Justice opined that the corporate plaintiff was legally incapable of exercising religion.  Moreover, so far as we are aware, no scholar or practitioner of corporate law has ever opined that the firm's religiously-motivated business practices contravened corporate law.

For a more detailed summary of this essay, see this post on the blog Conglomerate:   For a summary of reactions to this essay on various blogs and a video summarizing its conclusions, go here.

* * * * *

Human liberty includes the right to collaborate with other individuals in pursuit of common objectives, including religious ones. Society can encourage such liberty-enhancing collaboration by creating legal devices that facilitate such cooperation.  Corporate law is just such a device, and the Hobby Lobby Court bolstered individual liberty by recognizing that, like other artificial entities, business corporations are capable of furthering the religious beliefs of the individuals who create and own them.  

Wednesday, April 2, 2014

New Jersey v. Economic Liberty

Praised Vertical Integration; Won Nobel Prize 

Thinks It Knows Better

A free society allows its citizens to engage in voluntary commercial exchange, so long as such exchange does not impose economic harm on unconsenting third parties.    Unfortunately the State of New Jersey takes a different view.  Last month the Garden State's Motor Vehicle Commission announced that Tesla Motors may only sell its cars in New Jersey via franchised automobile dealers.  (See this story in the New Jersey Star-Ledger describing the new rule).  The rule effectively bans Tesla's strategy of forward vertical integration.  Pursuant to this strategy, the firm operates two company-owned show rooms in the state, thereby "eliminating the middleman" and taking direct responsibility for explaining the virtues, limitations and prices of its products   Such vertical integration is a widespread practice, to say the very least. 

For the first several decades of the 20th Century, economists were hostile to most vertical integration, preferring the more fragmented market structure endorsed by New Jersey.  Indeed, as previously explained on this blog,

"[Early in the 20th Century] economists identified two, and only two, possible reasons for complete vertical integration. First, such integration could create technological efficiencies and thus reduce production costs. Second, integration could foreclose rivals from important sources of inputs, thereby creating or fortifying the integrating party's market power.  Thus, when economists, or, for that matter, antitrust courts or enforcement agencies, could not identify any efficiency purposes for such integration, they naturally inferred that the conduct was anticompetitive."

However, as Ronald Coase (pictured above) explained long ago, such vertical integration can produce other, non-technological benefits as well.  In particular, such integration can eliminate the costs of relying upon more decentralized markets, that is, "transacting," to conduct economic activity.  Such "transaction costs" can take many forms, including the risk that one's trading partner will engage in opportunistic behavior.  Indeed, Tesla recently asserted that franchised automobile dealers have a vested interest in promoting the sales of gasoline-powered automobiles over electric powered vehicles like Tesla's, with the result that reliance upon a system of franchised retailers will result in under-promotion of Teslas.

To be sure, franchised dealers can provide valuable services to consumers both before and after the purchase of a new or used automobile.   It is thus no surprise that many consumers prefer to purchase automobiles from such dealers instead of from other individuals or from Tesla.  However, such services are not free.  Instead, dealers quite properly pass along the costs of such services to consumers by marking up the price of the vehicle sold.   Apparently Tesla and some consumers believe that these additional services are not worth the additional price, leading both to embrace a different method of distribution.

As previously explained on this blog when discussing a (failed) effort in North Carolina to impose similar limits, free societies respect the rights of entrepreneurs and consumers to make such choices absent any apparent harm to third parties.  Moreover, given Telsa' tiny share of the automobile market there is no plausible risk that such integration is an anticompetitive tactic designed to gain or maintain market power.  It thus makes sense to interpret Tesla's innovative approach to marketing as an effort to minimize the cost distribution, a result that would enhance Tesla's welfare and the welfare of the consumers it serves.    Tesla's appraisal of the relative costs and benefits of relying upon its own show rooms instead of independent dealers may turn out to be incorrect, but free societies leave such decisions to firms and consumers, without coercive paternalistic intervention by state legislatures.  (See also this excellent discussion by Daniel Crane, on the Truth on the Market Blog last summer, that makes some similar points.)

Nonetheless, some continue to claim that such interference with basic economic freedoms serves legitimate purposes.  For instance, a recent story in CNN Money cites unnamed "advocates of the law" saying it aims "to encourage price competition and ensure customers have access to warranty and recall services."    Last week, 70 economists and law professors, including this blogger, signed a letter condemning the ban on Tesla's direct distribution.  The letter expressly considers the various rationales that proponents of the legislation have proffered and concludes, quite properly, that:

"We have not heard a single argument for a direct distribution ban that makes any sense.  To the contrary, these arguments simply bolster our belief that the regulations in question are motivated by economic protectionism that favors dealers at the expense of consumers and innovative technologies."

I should add that banning Tesla's preferred method of distribution may also protect other manufacturers of automobiles, by forcing Tesla to employ a more expensive and less effective method of distribution and thus discouraging procompetitive entry into the New Jersey market.  If so,  the ban may produce even more harm than initially supposed. 

Hopefully New Jersey will rethink  this unjustified interference with basic economic liberty.

Saturday, March 8, 2014

Good Luck to the Tribe in the CAA Tournament!

First Baltimore and then ..... ???

Harbinger of Things to Come?

As most Tribe fans know, the CAA Tournament, which usually takes place in Richmond, has begun in earnest at the Baltimore Arena. (According to this story, the CAA has committed to holding the tournament in Baltimore, AKA "Charm City," for three years in a row.)   Let's hope the new and neutral venue is a good luck charm for the Tribe, which compiled an impressive 18-11 record this year (including a convincing win over JMU at Kaplan Arena), the fifth most season victories in team history. According to this story, the Tribe has appeared in two of the last five CAA championships, only to lose both times.  A victory in this year's championship game will earn the Tribe an automatic berth in the NCAA tournament, at a yet-undetermined location, the first such berth in school history.  Let's hope the Griffin gets a taste of "March Madness" after a successful trip to Charm City!

Update:  As many already know, the Tribe prevailed Saturday over the College of Charleston, 70-59, after trailing at half time.  (Go here for the box score.)  Today the Tribe takes on Towson State in the semi-finals.  Good luck to the Green and Gold!