Hedge Funds, Insiders, and the Decoupling of Economic and Voting Ownership: Empty Voting and Hidden (Morphable) Ownership
HENRY T.C. HU
University of Texas at Austin - School of Law
BERNARD S. BLACK
University of Texas at Austin School of Law; McCombs School of Business, University of Texas at Austin; European Corporate Governance Institute (ECGI)
Most U.S. public companies have a single class of voting common shares: voting power is proportional to economic ownership. Linking votes to shares is often thought to be desirable, because, as residual claimants, shareholders have an incentive to exercise voting power well. The linkage also facilitates the market for corporate control. On the other hand, decoupling is efficient in some situations. Equity derivatives and other capital market developments now allow shareholders to readily decouple voting rights from economic ownership of shares, often without public disclosure. Hedge funds are prominent users of decoupling. Sometimes they hold more votes than economic ownership (a situation we term empty voting). Sometimes they hold undisclosed economic ownership without votes, but often with the de facto ability to acquire votes if needed (a situation we term hidden (morphable) ownership). This Article analyzes empty voting and hidden (morphable) ownership, which we term the new vote buying. We offer a framework for unpacking its functional elements and assess its potential benefits and costs. Two companion legal articles (Hu and Black, 2006a, 2006b) provide more details on current disclosure rules and offer a disclosure reform proposal.
John Calvin The Predestinator
“God preordained, for his own glory and the display of His attributes of mercy and justice, a part of the human race, without any merit of their own, to eternal salvation, and another part, in just punishment of their sin, to eternal damnation”
Calvinists hold a belief
that God has already preordained every single thing that happens in the world. Most importantly, even one's own salvation or condemnation to hell is already a done deal as far as God is concerned. By this philosophical scheme, human will is not involved in changing the course of history. All that is left for the "righteous" to do is to play out their pre- ordained role, including their God-given right to dominate everyone else.
Calvinism arose in Europe centuries ago in part as a reaction to Roman Catholicism's heavy emphasis on priestly authority and on salvation through acts of penance. One of the classic works of sociology, Max Weber's -- Protestant Ethic and the Spirit of Capitalism, links the rise of Calvinism to the needs of budding capitalists to judge their own economic success as a sign of their preordained salvation. The rising popularity of Calvinism coincided with the consolidation of the capitalist economic system. Calvinists justified their accumulation of wealth, even at the expense of others, on the grounds that they were somehow destined to prosper. (emphasis mine-jb) It is no surprise that such notions still find resonance within the Christian Right which champions capitalism and all its attendant inequalities.
The hitch comes in the Calvinists' unyielding predestinarianism, the cornerstone of Reconstructionism and something at odds with the world view of evangelical Christians.
The problem is that evangelicals (a category including pentecostal charismatics and fundamental Baptists) believe that God's will works in conjunction with free human will. They believe that salvation is not by the grace of God only but by the faith of individual believers who freely choose to surrender to Jesus. In fact, the cornerstone of the Western religions is the view that God's will and human will work together. Evangelicals believe strongly that humans freely choose sin or salvation and that those already converted have the duty to go out and offer the choice they have made to others. Calvinism, in contrast, undercuts the whole motivation for missionary work, and it is the missionary zeal to redeem sinners that motivates much of the Christian Right's political activism. Calvinism is an essentially reckless doctrine. If God has already decided what's going to happen, then the Dominionists do not have to take responsibility for their actions. (They can kill abortion doctors "knowing" it is the right thing to do.) Evangelicals, even those on the Right, still believe they as individuals are capable of error.
From Let There Be Markets: The Evangelical Roots of Economics, GORDON BIGELOW, Harper's Magazine, May, 2005
These [evangelicals] were middle-class reformers who wanted to reshape Protestant doctrine. For them it was unthinkable that capitalism led to class conflict, for that would mean that God had created a world at war with itself. The evangelicals believed in a providential God, one who built a logical and orderly universe, and they saw the new industrial economy as a fulfillment of God's plan. The free market, they believed, was a perfectly designed instrument to reward good Christian behavior and to punish and humiliate the unrepentant.
At the center of this early evangelical doctrine was the idea of original sin: we were all born stained by corruption and fleshly desire, and the true purpose of earthly life was to redeem this. The trials of economic life-the sweat of hard labor, the fear of poverty, the self-denial involved in saving-were earthly tests of sinfulness and virtue. While evangelicals believed salvation was ultimately possible only through conversion and faith, they saw the pain of earthly life as means of atonement for original sin."
The Calvinists, or the Reformed divinity were less bound to precedent and adjusted itself rapidly to the new economy. With this protestant work ethic of practicing thrift, temperance, honesty, and consideration for others, they became a successful merchant class. As wealth accumulated and the system spread, Puritan restraints began to wane. Righteousness, however, degenerated into a white-washed excuse to get rich by exploiting those not of the same faith. They took advantage of the poor because they had not been granted God's favor of prosperity and squandered their income on worldy pleasures. The countries in which capitalism had made the greatest headway were prevailingly Protestant countries. Ruthlessness itself became a virtue when Darwin's theory of the survival of the fittest gained popularity.
The tougher and the more aggressive a man was in business, the more he reached the top by whatever means. As social values declined, imperialism by the "Christian" countries gained a divine mandate where exploitation of the world's resources was justified. Little thought was given to the realities of international order or a social gospel and assumptions were made that world-wide markets would run of their own accord. This new attitude toward economic matters manifested itself among businessmen and may be called the capitalist spirit.
Luther was opposed to the spirit of capitalism and attributed the rise of prices to the rapacity of the capitalists. The great scandal for Marx was that the capitalist system produced surplus goods, and yet the producers themselves, the workers, were unable to purchase them and reap what they had sown. Marxists denounced democracy but not as an ideology, but rather the vulgar and evil manipulation of democracy by the capitalist profiteer, vulgar because he shares the public's bad taste, evil because he perpetuates it.
Tracing today's capitalism to the church leaves an evil mark. The Reformation in its Calvinist version made religion a thing of this world and achieved the miracle of identifying blessings with the accumulation of riches. The shame of profiteering was wiped away and what was formerly lust for wealth became the fulfillment of God's purposes on earth. Capitalism gave birth to the luke-warm church. Since money was no longer loaned primarily to assist those who were in need but for profit, the Biblical, canonical and other restrictions upon usury and mammon worship were either circumvented or ignored. Even church offices and means of grace were frequently viewed in terms of financial returns. Sin piled upon avarice until deregulation and the anarchy of the market created an environment where greed became a virtue and religious way of life. Pretentious saints would pray for financial reward and giving became a means to expect a blessing in return. Hireling pastors preached prosperity from the pulpit to gain more money and faith became a seed for accumulation.
................all Mister Bush and Cheney and the Republican Party have left: the hope and prayer that -- between now and November, 2008 -- terrorists will attack the United States. They aren't exactly hiding their desire. Certainly FOX News's John Gibson isn't hiding his hope for another 9/11-like attack. The administration and their surrogates have said things like, "Boy, how soon the American people forget what happened on 9/11," or "When the next 9/11 happens, then the people will learn," or "After the next big terror attack, then the people will see the wisdom of George W. Bush's war in Iraq."
I noticed over at www.ontheborderline.nut a post on the upcoming screening of the documentary Indoctrination U. It definitely sounds and something I will make it a point to see.
The focus of the film is that there's a liberal bias that has taken over our nations universities - public and private. Listeners of conservative talk radio will be quite familiar with this theme. I hear Limbaugh, Hannity, Levine and Jason Lewis harp on this regularly. Lewis calls the University of Minnesota "a Marxist Think tank."
The right wing point is that the liberals are trying to indoctrination the innocent minds of today's college students with Marxist/communist/socialist/liberal doctrine and trying to silence the conservative voice.
By the way, I recently watched a History channel documentary on the 1964 Mississippi Voter Rights Drive. It was interesting to see the Klansmen protesting the northern White students coming to spend a summer in Mississippi to help Blacks exercise their Constitutional right to vote. The Klansmen were carrying signs with slogans like "Keep The Commies Out Of Mississippi!!!" and "Commies Go Home!!!" Hello OTBL bloggers...does that sound familiar?
Anyway, I especially find it interesting the bloggers like those at ontheborderline.nut would be trying to promote a documentary about stifling freedom of speech. They do it all the time and are proud of it! They are afraid of open discussion and debate.
Another point about colleges dampening freedom of speech. I think it's bullshit. I think we have a majority of a generation of college students who are used to having mommy and daddy fight their battles for them. These are the "bubble warpped" kids that Conservative Charlies Sekes speaks of. "Helicopter parents" is a phrased used to describe their parents who won't quit hovering around their kids. They don't have the balls to stand up and fight for what they believe in. Or maybe it's the conservative students who don't have the balls...probably because they don't really believe in what they are fighting for.
If a student is afraid to express his or her opinion because it might affect their grade, I say they don't really believe in what they are afraid to debate. One bad grade does not a college career make. Believe me, I've been there and done that and proudly took my GPA lumps. Besides, you can take your case to the college dean, if you think you are getting a raw deal. This is all part of the great learning experience of college.
At the top of this post, I put a trailer of the documentary. At the bottom, I posted a clip of Sean Hannity interviewing Evan Coyne Maloney, the maker of Indoctrination U. I think Hannity shows the hypocrisy of his flimsy ideological spew. FOX News talking about "fair and balanced?" Have you ever heard Vice President Dick Cheney interviewed on anything about conservative radio or TV?
And so it goes...
Read what is being said about Indoctrination U around the Internet.
For times and screenings of the Twin City showings, check out Indcotrination-U.
at 10/19/2007 Posted by EastWing
RETORT TO OTBL
"Jay P. Greene and Marcus A. Winters have an op-ed in today's Wall Street Journal suggesting that teachers aren't really underpaid at all. "Public school teachers earned $34.06 per hour in 2005, 36% more than the hourly wage of the average white-collar worker and 11% more than the average professional specialty or technical worker," they write. So should teachers stop their whining? Are we all misguided in our beliefs that teachers are underpaid for the critical work that they do? I don't think so. (In addition to being the ball-and-chain of one of the regular Plank denizens, I'm an education policy and research consultant, and I also teach a remedial reading class at a charter school.)
There are three big problems with their op-ed. The first is their assumptions. They assume that teachers work a 35-hour work week. Yes, that may be the number of hours they spend in the classroom, but as any teacher knows, preparation, grading, and maintaining relationships with parents are extremely time consuming activities. Greene and Winters discount this additional work, arguing that in other careers, people take home work as well. But its not fair to compare teachers' planning and preparation to "take-home work" in other careers, since these additional activities are an integral and necessary part of teaching. Especially in the elementary grades, teachers have very little planning time built into their days and planning is an essential part of teaching. Unless we want unprepared teachers who get up and wing it every day, planning time needs to be considered an essential part of a teacher's duties.
In an ideal world, teachers would have about half of their time for planning and preparation. In reality, the National Education Association has conducted research on teacher working conditions and found that teachers spend an average of 50 hours per week on all teaching duties. When that assumption is figured into the calculation, teachers' hourly wage drops to an average of $24. ....
Third, Greene and Winters insist that teacher pay doesn't matter because urban areas with the highest teacher pay have the most abysmal outcomes. This is a ridiculous argument. As decades of research has shown, a whole host of demographic and socioeconomic factors affect student achievement, particularly in high-poverty urban districts. If we wanted a true test of the effects of teachers' salaries on the quality of teaching in urban districts, we'd have to randomly assign teachers with higher salaries to socio-economically similar districts and see if the higher paid teachers have a greater impact on student achievement."
"Finally, saying that teachers earn "enough" misses the point. Enough for what? Everybody agrees that we don't have enough high-quality teachers, particularly in high-poverty districts. Of course it's not all about money--working conditions and the professionalization and respect afforded the profession matter a great deal. On the other hand, if we paid teachers $150,000 per year, they'd probably be willing to endure the poor working conditions. Conservatives like to think the market works for everything else except teachers' salaries. I say we conduct an experiment and see how it works--let's double teachers' salaries in a random sample of districts and see if we don't get top quality teachers."
Click on image for larger view.
at 10/18/2007 Posted by Andy Rand
So I went to this taxpayer rally today...
The crowd of anti-taxers was smaller than I'd hoped, and way outnumbered by the public employee unions. AFSCME, SEIU, AFT, and TAA were all there. Probably others. They crowded around the entrance to the rally, yelling things at people on their way in. "Let the rich white women in," "step on a state employee on your way in, why doncha," and "you should be ashamed!"
Stuff like that. I went in and out three times, the last time just for fun. Exchanged a few pleasant words.
Read more @ Badger Blog Alliance.
Below is a couple of reactionary bloggers from southeastern Wisconsin disguised as a couple of local bloggers. See more at More Scummy Eggs.
at 10/17/2007 Posted by Sunny Badger
And now that Mr. Bush has proved himself utterly the wrong man for the job — to be, in fact, the best president Al Qaeda’s recruiters could have hoped for — the symptoms of Gore derangement syndrome have grown even more extreme.
The worst thing about Mr. Gore, from the conservative point of view, is that he keeps being right. In 1992, George H. W. Bush mocked him as the “ozone man,” but three years later the scientists who discovered the threat to the ozone layer won the Nobel Prize in Chemistry. In 2002 he warned that if we invaded Iraq, “the resulting chaos could easily pose a far greater danger to the United States than we presently face from Saddam.” And so it has proved.
Read more @ New York Times.
at 10/17/2007 Posted by Sunny Badger
...Kitty Rhoades is committed to compromise and consensus. By definition this is the negation of leadership. But leadership implies a philosophical foundation and a true sense of morality and an honest attempt at conviction - Kitty Rhoades has none of these traits...
Folks there can be no compromise, when compromise is a losing game for you and me. Every "compromise" is another loss of liberty - run for your life from the compromising elected representative for it is the calling card of an approaching looter. Kitty Rhoades is a pathetic, ineffective, compromising RINO who has no intentions of even raising the debates that are needed in this state (same holds true for the farm girl Senator) - don't let anyone tell you otherwise. And if you are smart you'll vote both of these representatives out of office and elect true fiscal conservatives who have fundamental, market based, change foremost in their minds, not consensus and compromise."
North Hudson, WI
“The greatness of Christianity did not lie in attempted negotiations for compromise with any similar philosophical opinions in the ancient world, but in its inexorable fanaticism in preaching and fighting for its own doctrine”
-bewilderment: confusion resulting from failure to understand
-mystification: the activity of obscuring people's understanding, leaving them baffled or bewildered
-darkening or obscuring the sight of something
at 10/16/2007 Posted by Sunny Badger
Pre 9/11 Data Mining Of Phones
The National Security Agency and other government agencies retaliated against Qwest because the Denver telco refused to go along with a phone spying program, documents released Wednesday suggest.
The documents indicate that likely would have been at the heart of former CEO Joe Nacchio's so-called "classified information" defense at his insider trading trial, had he been allowed to present it.
The secret contracts - worth hundreds of millions of dollars - made Nacchio optimistic about Qwest's future, even as his staff was warning him the company might not make its numbers, Nacchio's defense attorneys have maintained. But Nacchio didn't present that argument at trial.
Read more @ Rocky Mountain News.
at 10/15/2007 Posted by EastWing
Who Stole The Common Good?
The Shadow of Ayn Rand
by Julian Edney
"...It's the shared benefit people get from being in a group. If you're on a soccer team you cooperate to share the thrill of winning. Special rewards are possible. Another: two people are just two people. But if a friendship grows, the two people are a tiny collective. They work together and share a common outlook. Trust grows, they support each other, later there may grow an unspoken sense of obligation to each other, and so big things become possible. More examples: ships' crews, marriages, business partnerships, military units, countries; each involves a "with" or an "us." In a nation that has a common good, everybody mucks in together, and society takes care of its own."
"...Ayn Rand's ideology was that force. Ayn Rand was a public flamboyant who wrote, lectured, and harangued from the 1940s to the 1970s. She mounted vaulting attacks on the common good. Her point: that "mutual obligation" stuff robs you of your personal freedom. To get ahead, she argued, you have to break the bonds of obligation. Selfishness is actually virtue. Altruism toward the less able, she said, is a vice. If you have real talent you should avoid groups, teams, and organizations. You should work on solo flight, not stopping to help average people who are hopelessly mired in conformity. Her two novels, The Fountainhead and Atlas Shrugged, have heroes who are pioneering, productive loners. And a free market, she argues, needs such heroes; because it is a dog-eat-dog world in which people with excellence propel themselves to the top and do more good for their nation in their selfishness than all the welfare and social programs can. Welfare programs just perpetuate mediocrity."
at 10/15/2007 Posted by Sunny Badger