Corporate Governance Reform: Increasing the Power of the Shareholder Emboldens the Non-Economic Investor

With the Enron trial jury selection set to begin, we have begun hearing calls again for corporate reform by increasing the power of the shareholder over that of the board of directors. I reject the logic of such calls because shareholders are not a monolithic group that mainly has one shared interest. The resulting variety of divergent shareholder interests necessarily results in conflict.

As a direct shareholder in several companies and as an indirect shareholder in the market in general (through mutual funds), I may be categorized as a long-term investor. I, along with those similar to me, have at our interest the long-term growth and return of the shares that we own. I disregard short-term swings in profit as a decision point in determining whether the sell or purchase shares. Thus, my interests directly conflict with those who would drive the company to eschew long term growth in favor of short term gains (or losses for short-sellers) as much as those who would use the power of their investment to force the firm to make non-economic decisions.

As institutional shareholders own the majority of shares in the market, they have the power to balance each other and prevent or mitigate the impacts of other powerful shareholders seeking economic interests in conflict with their own. For example, a large S&P mutual fund, with a primary goal of long-term growth for its investors, likely has the power to prevent a large hedge fund, with a primary goal of short-term profits through active trading, from influencing and forcing the firm to focus on short-term profitability. Similarly, firms that focus upon short-term profits may damage their long-term return by foregoing investment and dispersing capital to shareholders in the form of dividends instead of into growing the firm. The market would punish these firms, so that they would no longer be viable investments for those seeking long-term returns. Of course, investors would be hurt in the short term, but those who invest “in the market,” would not notice since they would see return in other areas of their portfolio. Thus, I do not see increased shareholder control for shareholders with varied economic interests as being the major focus for improved corporate governance.

Most “social” investors are placed in the context of Public and Private Union pension funds. Anectdotally, the public union pension funds are able to use their large holdings to pressure firms to accede to the demands of private unions. The use of pressure was not attributed to linked economic interests, but rather for “moral support” and retribution. When Safeway’s CEO attempted to take a hard-line stance against the United Food and Commercial Workers (UFCW), the California Public Employees’ Retirement System (CalPERS) intervened and withheld support for the board reelection of the CEO. CalPERS retaliated against a CEO who likely was acting in the best interest of his company and its shareholders in not caving into union demands. CalPERS had no interest in the matter other than also representing union workers (albeit unaffiliated with UFCW). In my opinion, examples such as these highlight the dangers of placing increased corporate management responsibilities onto the shareholder instead of the board.

Another area of activist investor is the “social activist.” Many proposals for increased shareholder power derive from the desires of these activists to use their status as shareholders to use the firm’s name, power, and treasury to advance their causes. Terms such as “Democratic Governance” and “social responsibility” come to mind when describing such shareholders. While lacking the power of the larger institutional investors (including the previously described pension funds), the social activist wields tremendous power in his ability to use apparently socially worthwhile causes to shame the corporation to become involved. Shareholder resolutions such as divestment, climate change, or unionization are often goals of socially active investors. As the public’s attention is focused on these issues (often by the social activists themselves), it becomes hard for the firm to reject these resolutions. Thus, increasing shareholder power over the board threatens to strip away the firm’s focus from economic interests.

I would argue that such shareholder activism not only carries risks to the firm, but also is distracting to the passive investor (of which the vast majority of investors are). It is also irrelevant because if the market wishes to reward those firms for being socially responsible, then the firm will act in that regard. Passive investors want to watch their investments grow under the care of the Board of Directors; they do not want to have to engage in political or social debates with other investors. Of course, I could be falling into the same trap previously mentioned - characterizing investors into just two camps – those who seek to use the firm for social activism and those who do not.

Overall, increasing shareholder power likely will not increase the firm’s performance. There are just too many conflicting interests and groups. The desires for those calling to increase shareholder power simply make too many assumptions about how shareholders will act in a collective fashion.

"Earmarking the Bridge to Nowhere"

An earmark is a Congressional funds appropriation that the money go to a specific individual, for a specific project. For Congressmen, trying to grab a portion of the more than 14,000 annual pork projects consumes nearly all of their time. Besides the billions in government waste, government has exploded in size with little improvement in basic services. Congressmen and Senators have come to believe that the path to reelection is paved with who can “bring home the most bacon” in order to appease thier voters and lobbiests. Would a farm bill filled with hundreds of millions in subsidies for ethanol buy farm votes? Prescription drugs to buy senior votes? Highway bill to buy union and labor votes?

The entire earmark process is ripe with quid pro quo: the more senior congressmen control the earmarks attached to it by requiring support for the entire bill. The result: the American public gets saddled with a massive and wasteful $250 billion highway bill, supported by a Congressman who would have voted against it, but for the inclusion of $10 million for his district.

As the Heritage Foundation recently noted:

"What’s the solution? Lawmakers assert that they, rather than federal bureaucrats and state governments, are qualified to distribute government grants in their districts. If so, why not dissolve the federal bureaucracy and relevant state agencies? Lobbying reform is also helpful, but as long as lawmakers continue to distribute government grants, organizations will find a way to lobby and financially influence them."

Why not just ban all pork and earmarks? Congress could ban any legislation that specifies which businesses, organizations or locations will receive federal monies. Thus, those who seek to earn money contained in a bill will have to go through the awards process to obtain such an award.

Hobbes v. Machiavelli - A Comparison

Of all the great political thinkers, few were more unique than Thomas Hobbes and Niccoló Machiavelli. Hobbes believed that the states should be authoritarian and ensure stability. In contrast, Machiavelli asserted that the sovereign ruler should possess unlimited power and was justified in any action to protect that power. Accepting this view of the state as reality, he assigned no good or bad to the rule of the state. Though their conclusions differ, they do have some similarities. What is the implication of their philosophies on modern government?

The State of Man and Nature
The two philosophers shared similar feelings about the premises underlying society. First, they agreed about the state of nature in which man exists. According to Hobbes, the absence of a control authority leads to “a condition of war of everyone against everyone…and there is nothing he can make use of that may not be a help unto him in preserving his life against his enemies…therefore, as long as this natural right of every man to everything endures, there can be no security to any man.” Absent government, Hobbes’s society is anarchic; every man protects himself and uses any tool to protect himself.

Machiavelli and Hobbes share similar views on the nature of man; Hobbes observes the three reasons for man’s quarrels: competition, difference, and glory. Since man fights wars for gain, safety, or reputation, Hobbes infers from this that man is inherently selfish in his action. Machiavelli senses that lacking order, man is violent. A prince needs cruelty “for he will be more merciful than those who, from excess of tenderness, allow disorders to arise, from whence spring bloodshed.” Therefore, the sovereign has to guard against a very hostile populace. These similarities lead both to draw relatively different conclusions about the construction of government.

Machiavelli’s state of nature exists as one of perpetual war that a sovereign constantly fights. Machiavelli divides nature into two camps “because there is no comparison whatever between an armed and disarmed man, it is not reasonable to suppose that one who is armed will obey willingly one is unarmed; or that any unarmed man will remain safe among armed servants…it is not possible for them to act well together.” A sovereign checks this state by maintaining a balance between both sides and owning the order necessary to preserve this balance.

The Role of Government
Both philosophers disagreed over the role of a government. Machiavelli believed that the goal of a sovereign ruler should be the maintenance of power. Unlike Hobbes, who focuses on power as a means to an end, Machiavelli believes it to be the end in and of itself since “a prince should aim at conquering and maintaining the state, and the means will always be praised by everyone.” Machiavelli’s prince can maintain order by imposing his will on a conquered society; without power lying in the hands of the individual, man becomes subservient to the sovereign ruler.
Hobbes, however, draws a different conclusion to the goal of a society. Hobbes focuses on stability as the role of government, and power as the means to achieve that result. The sovereign’s end “is the peace and defense of them all, and whosoever has right to the end has right to the means, and also of the hindrances and disturbances of the same, and to do whatsoever he shall think necessary to be done.” In essence, Hobbes feels that absent this stabilizing effect, society plunges back into the anarchy.

More importantly, the two philosophers disagreed on the methodology of forming society’s government. Focusing strongly on the legitimacy of governorship, Hobbes believed strongly in a contractual system between people. In this contract, man “voluntarily transfers his right or renounces it, in consideration of some right reciprocally transferred to himself…and of the voluntary acts of every man the object is some good to himself.” In this system, the people voluntarily give up their rights in order to allow the sovereign to achieve some measure of stability. Hobbes states. “Because the right to make him sovereign is by covenant only of one to another, and not of him to any of them, there can be no breach of covenant on the part of the sovereign.” The sovereign does not break the contract out of greed or glory, and the society achieves stability.

Machiavelli felt that the ruler should take those steps deemed necessary to preserve his reign. Believing that the prince must rule through two kinds of fear, “one internal as regards his subjects, and one external as regards foreign powers,” the prince maintains order and stability while the people obey every wish. Fearing tyrannicide, Machiavelli also proposed, “above all a prince must endeavor in every action to obtain fame.” Not only do the people fear him, but legitimize and love him as well; they follow without question.

Implications & Conclusion
These similarities and differences lead to some important implications about the nature of government. Since both agree that the nature of man is inherently dangerous, a ruler has justification to enact laws to protect the people from each other and danger. Thus, he can increase his own power through a powerful police or militia in order “to prevent” society from collapsing. Second, Hobbes’ contractual system forces people to give up their individual rights for the sovereign to rule successfully. This frees rulers to exercise power in their own interest and ignore the individuals and over society as a whole. However, Hobbes believed that man’s nature is enough of a safeguard to prevent abuses from a ruler. He stated, “No man can transfer, or lay down, his right to save himself from death, wounds, and imprisonment…For man by nature chooses the lesser evil, which is danger of death in resisting, rather than the greater, which is certain and present death in not resisting.” If a ruler seizes too much power and begins to deprive his people of their safety, then they have the right to resist all of his laws and oppression.

Machiavellian rulers use any means necessary to acquire, maintain, and expand their power. Eventually, many rulers may see themselves over the state and people. As a ruler gains more power, he may become transfixed by it and lies to or kills those who would endanger his rule. Hobbes’ system, while theoretically more benevolent than Machiavelli’s, can still lead to a government that abuses its people. Without a doubt, Machiavelli’s system inherently leads to an abusive and powerful government. Both philosophies, while owning some similarities, lead to different conclusions about the role of a sovereign in governing the masses.

Tax Rates and the Laffer Curve

With tax season upon us, I began to think about the massive yearly deficit and accumulated national debt. Should taxes be raised to raise more money or should taxes be cut to grow the economy? Hence, the Laffer curve:

What is it? Basically, it shows the relationship to the income tax rate (marginal) and how much money a government can expect to raise. Raise the tax rate too high, and you begin to fall on the downward slope - the laws of diminishing returns and unintended consequences. The higher you raise taxes, the less incentive there is for people to work that extra hour over their minimum requirement ("why should I? The government is just going to take most of it"). Additionally, those in the upper brackets then find it optimal to seek evasive shelters and schemes to lower their taxes. For them, it makes sense to spend almost $600,000 to shield $1m of income to save $600,000 in taxes on that income (assuming a 60% marginal tax rate). Thus, the goverment loses money.

As an historical note, prior to the Reagan tax cuts of '82, the uber-rich rarely paid taxes. Real estate tax shelters provided huge shelters for income and the government lost taxes. Cutting taxes in 1981 added nearly 21 million jobs over 8 years; those additional workers expanded the economy, thereby funding massive defense spending increases.

Currently, the marginal tax rate stands at 36%. However, Russia and the Baltic states that have recently instituted a lower than 35% flat tax rate experienced massive growth immediately. Thus, a reasonable reduction in the top marginal tax rate could generate increased GNP growth similiar to the newly developed deomcracies of Eastern Europe.

For additional analysis of the historical impact of lowering taxes and the applicability of the Laffer Curve, see the Heritage Foundation's excellent analysis on the three eras of marginal rate reductions in the United States.

Why Campaign Finance is Doomed to Fail

The Congressional sponsors of the Bi-Partisan Campaign Finance Reform Act (“BCRA”) intended that the act would stem the flow of soft, or unregulated, money to the national political parties. However, soft money quickly found a new channel to influence national elections through “Section 527” groups. 26 U.S.C. § 527 defines political organizations as a party, committee, or association that is organized and operated primarily for the purpose of influencing the selection, nomination or appointment of any individual to any federal, state or local public office, or office in a political organization. While § 527 also governs the formation of political candidate’s election and political action committees, special interest groups may form political organizations that are exempt from many of the campaign finance regulations imposed by the Federal Election Commission (“FEC”). These special-interest political organizations are those that most now refer to as “527’s”.

Several efforts are currently underway to limit the ability of 527’s to raise and spend soft money to influence national elections. These efforts have included applying pressure on the FEC to enact new regulations to capture 527 organizations within the scope of the current campaign finance laws. Parallel efforts within the Senate and House of Representative are attempting to restrict 527’s with new regulations or, alternatively, to include them within the current laws. Finally, a lawsuit, filed by the Bush-Cheney ’04 reelection committee, is slowly working its way through the Federal District Court for the District of Columbia. That suit seeks to force the FEC to adopt standards for 527’s that meet Congress’ intent in passing the BCRA and in the Supreme Court’s decision upholding most of the BCRA’s major provisions in McConnell v. FEC. However, even if each of these efforts proves successful at stopping 527’s from raising soft money, other means of raising soft money to finance campaigns exist for donors to exploit in future elections.
Benefits of 527’s Instead of Other Organizations

Under Internal Revenue Service (“IRS”) rulings issued in the 1990’s, 527’s may engage in voter mobilization efforts, issue advocacy, and other activities that fall short of expressly advocating the election or defeat of a candidate for federal office. IRS rulings do not limit how much 527’s can raise to fund those activities because they are “exempt function” activities. Under these rulings, the IRS considers 527’s to be political organizations and not political committees; the distinction removes 527’s from FEC campaign finance regulation. As long as the 527 does not spend more than $1000 for a federal candidate, the FEC or courts will not consider a 527 to be a political committee. However, that limit does not prevent 527’s from behaving like a political committee. Groups organized as 527’s may buy political ads or other communications mentioning a political candidate as long as the communication is not coordinated with a national party committee or candidate. Furthermore, the communication cannot “expressly advocate” the election or defeat of any candidate for federal office.

527’s and their Role in the 2004 Election

In the spring prior to the 2004 Presidential election, liberal groups, such as America Coming Together (ACT) ("mobilizing voters to defeat George W. Bush"), The Media Fund ("media buying organization supporting a progressive message and defending Democrats from attack ads") and the MoveOn.org Voter Fund engaged in a major campaign similar to that of the presumptive Democratic Presidential nominee, Senator John Kerry. Many of these funds received financial contributions both from billionaires, such as George Soros, and from average Americans. In response, the GOP loudly protested to the FEC by claiming that 527’s violated the campaign finance regulations in the BCRA and the original Federal Election Campaign Act (“FECA”). The FEC frustrated the GOP efforts when, on May 13, 2004, the FEC voted to delay a decision on regulating 527 committees under the BCRA until after the election. Thus, Republicans began vigorously to pursue their own 527 fundraising efforts and quickly matched the Democratic-leaning groups with 527 organizations such as the Swift Boat Veterans for Truth.

Both sides were tremendously successful in raising soft money through their 527’s. According to the Center for Public Integrity, at least fifty-three 527’s that focused "largely or exclusively on the Presidential election" raised over $246 million. In total, 527’s spent over $500 million during the 2004 election. Ten donors gave at least $4 million each to various 527’s, and two donors each contributed over $20 million.

The FEC has Attempted to Limit § 527 Soft-Money Donations

The FEC attempted to respond to complaints from both parties about rampant fundraising abuse 527’s during the 2004 election. The FEC approved, in August 2004, new regulations that effect during the upcoming 2006 election cycle. These regulations would require “nonparty political organizations” to cover at least half of their operating and administrative costs with federally regulated, or “hard,” money. Within these rules, the FEC also stated that it considers any group that raises money by announcing their support or opposition of a federal candidate to be political committees. Being designated as a political committee subjects those groups to a contribution limit of $5000 per donor.

Supporters of campaign-finance reform argue that these regulations are inadequate because they do not address two important issues. First, the new FEC rules fail to define when a group has a primary purpose under § 26 U.S.C. § 527 to influence federal elections. Without this definition, groups that state that their primary purpose is not to influence federal elections do not have to register as a political committee and therefore escape finance regulation. Second, these rules apply only to groups that operate both a Section 527 political committee and a political action committee; these regulations do not apply to 527’s that lack an affiliated political action committee. The FEC rejected other proposed restrictions that had specified when nonparty groups must register with the FEC as political committees.

Congress’ Attempts at Passing § 527 Reform have Stalled

Because the FEC rules failed to allay campaign finance reform supporter’s concerns, Senators McCain and Feingold, the two sponsors of the original Senate version of the BCRA, introduced, in February 2005, s.271 (“the 527 Reform Act”). The 527 Reform Act imposed a more stringent requirement on 527’s than the FEC’s rules by requiring all of them to register as political committees unless they fell within a few, narrow exceptions. By classifying all 527’s as political committees, courts and the FEC would avoid the detailed fact-finding and time-consuming administrative costs that otherwise would be required in determining whether the group falls within the FECA and BCRA. All 527’s would be subject to the campaign finance requirements that PAC’s and election committees must adhere. The 527 Reform Act also would have required those groups that engage in activities that affect both state and federal elections to pay for those activities with at least 50% hard money. Furthermore, s.271 would cap annual contributions to the soft money accounts of federal political committees at $25,000, thereby eliminating multi-million dollar soft money contributions.

One of the most important exceptions exempts non-partisan § 501(c) interest groups because they deal exclusively with issue advocacy and not on attempting to influence federal or state elections. Thus, the 527 Reform Act fails to eliminate a possible future loophole for soft money to influence national elections: the §501(c)(4) group (described infra).

Action on s.271 has stalled, however. After clearing the Senate Rules Committee in April, the legislation failed to appear on the schedule for floor action. Two similar bills, H.R. 513 and H.R. 1316, also stalled in the House of Representatives because House Republican leaders decided to postpone action on the issue. Neither the House nor the Senate is considering any current bills to regulate 527’s.

§ 527 Cases in District Courts have been Delayed

On September 17, 2004, the Bush-Cheney '04 election team filed a complaint in the U.S. District Court for the District of Columbia. This complaint challenged the FEC's failure to issue regulations interpreting the phrase “for the purpose of influencing a federal election” which appears in the statutory definitions of “contribution” and “expenditure.” In its plaintiff’s brief, the Bush-Cheney ’04 team requested that the court require the FEC “to commence proceedings to promulgate such regulations and, by extension, to address whether certain so-called 527 organizations are ‘political committees’ under the Act.”

Bush-Cheney ‘04’s complaint alleged that FECA defined a “political committee” as “any club, committee, association or other group of persons” that receives contributions or makes expenditures aggregating in excess of $1,000 during a calendar year. Under FECA, political committees must register and report with the FEC, and are limited in the sources and amounts of contributions they may make and receive. FECA further defines “contribution” and “expenditure” in terms of funds raised or spent “for the purpose of influencing any election for federal office.” Yet, 527’s are exempt from these provisions as they are not included in the definition of political committees.

In McConnell v. FEC, the Supreme Court expanded FECA’s standard “for the purpose of influencing” beyond merely “express advocacy.” According to Bush-Cheney ’04, the FEC failed to respond to the Court's decision by not adopting any regulations setting forth clear standards for when 527’s must register as political committees.

Bush-Cheney ’04 further alleged that the FEC failed to address this issue through the administrative agency rulemaking process. On March 11, 2004, the FEC published a “Notice of Proposed Rulemaking” that suggested a revision to the definition of political committee that would define 527’s as political committees under FECA. However, Bush-Cheney ’04 contends that the FEC passed fatally weak regulations. The FEC only promulgated rules on two collateral matters and “refused to issue any rule addressing the central question that had prompted the rulemaking in the first place: the definition of a political committee and the requirement for Section 527 groups to register as political committees.”

Bush-Cheney ’04 thus argues that the FEC’s failure to issue rules addressing the activities of 527’s is “arbitrary and capricious, an abuse of discretion and not in accordance with law.” Bush-Cheney ’04 seeks declarative remedies that the FEC’s failure to issue appropriate regulations implementing the statutory phrase “for the purpose of influencing a federal election” constitutes an unlawfully withheld agency action and an abuse of the FEC's discretion. In addition, Bush-Cheney ’04 wants the court to order the FEC to define political committees under the BCRA and FECA.

Even if successful, the case will not prevent 527’s from influencing the 2006 mid-term elections. The district court has scheduled oral arguments for December 13, 2005. This late date makes it extremely unlikely that the court will be able to rule in enough time for the FEC to create and implement new regulations before the 2006 mid-term Congressional elections.

Regulating 527’s will not stop the Raising of Soft Money

Campaign finance is analogous to a leaking dam: when repairs plug a leak in one location, water flows through another leak in a different part of the dam. In the campaign finance world, when regulations close one of soft money’s loopholes, another loophole opens. The recent negative public focus on 527’s, even with the apparent difficulty in implementing new regulations, has made 527’s less attractive for soft-money donors. In response to the several attempts at regulating 527’s, soft-money donors have begun utilizing a new vehicle for their donations.


The new vehicle for soft money-funded political advocacy is the § 501(c)(4) group, which is a tax-exempt group that is allowed to engage in unlimited lobbying. Groups organized under §501(c)(4) are not the educational, religious, or charitable groups that fall under the traditional §501(c)(3) tax-exempt status. Although the tax code classifies “C4’s” as social welfare organizations and not political organizations, C4’s may engage in partisan campaigning as long as the groups state that partisan campaigning is not the group’s “primary purpose.” C4’s are even more attractive than 527’s because donors are not required to disclose their identities. Thus, C4’s ensure anonymity by major, multi-million dollar contributors. Additionally, as long as the C4 does not receive contributions from unions or corporations, the C4 can claim a special status known as the MCFL exemption that allows the group to run issue advertising in the weeks immediately preceding a national election. The BCRA bans this tactic for many other groups.

The MCFL exemption refers to the United States Supreme Court decision in FEC v. Massachusetts Citizens for Life. There, the Court ruled FEC regulations could not prohibit, under constitutional reasons, a social welfare organization from engaging in express advocacy. As long as the social welfare organization was formed for the purpose of promoting political ideas, did not engage in business activities, had no shareholders or other persons who had a claim on its asset or earnings, and did not receive contributions from corporations and unions, it was able to advocate expressly for a candidate. The Court reasoned that these types of organizations received their financial support only from individuals who knew that the organizations would use those funds to support a particular ideological and political agenda. C4’s thus did not present the danger, which justified the general ban on corporations engaging in express advocacy, of a corporation using wealth accumulated from business activities to promote a political agenda.

Because of rulings such as these, C4’s may supplant and eventually replace 527’s as a means to channel soft money donations into advocating for or against a national candidate. However, C4’s still must have a primary purpose other than express advocacy for such candidates. C4’s could create their own political action committee, however, but those committees would be subject to the same restrictions currently existing within the BCRA.

Conclusion

Although 527’s had a prominent role in the 2004 election, 527’s may not be as prevalent and active in the future. Congress continues to debate legislation to curtail the ability of 527’s to raise unlimited soft money. The FEC may respond to political pressure and implement regulations that explicitly define 527’s as political committees, thereby subjecting them to campaign finance regulations. The federal courts even may hold that the FEC failed properly to draft regulations that would have included 527’s within the scope of the BCRA.
Anecdotal evidence suggests that this focus has resulted in 527’s not meeting their fundraising goals for 2005. For example, America Coming Together, a very active 527 organization during the 2004 election, raised only $4.4 million during 2005 as compared to the nearly $80 million that it raised in 2004. The visibility and importance of the 2004 election as compared to 2005 could explain part of the difference. Another likely explanation, though, is that the amount of attention that 527’s have created, even absent legislation has caused politically active donors to seek alternative means to raise vast amounts of soft money. The 2004 election may have been the year of the 527 group, but the ability of 527’s openly to raise soft money in the future is doubtful. Regulations, legislation, or judicial action eventually will plug that leak. If the goal of campaign finance reform is to ban or restrict all soft-money donations, the regulation of all 527 groups will only close one loophole. It remains open where the next leak will spring from the soft-money dam.

The truth about body armor

There seems to be a lot of press lately about the Army and Marine's failure to provide side protective inserts for the interceptor body armor. What do the soldiers and marines currently have? What would issuing these inserts provide?

Each soldier or marine receives the outer tactical protective vest with the chest and back inserts. The outer vest is made of a kevlar-like material that provides limited protection against shrapnel and small caliber pistol rounds. The plates that get inserted are made of a hard ceramic. For an earlier version, see the movie Black Hawk Down, where, prior to the mission, one ranger removes his back protective plate (only later to be shot in the back). The plate inserts provide protection for rifle rounds (but not sniper or machine gun rounds).

Army doctrine prior to the invasion separated soldiers into three groups of branches: combat arms, combat support, and combat service support. In a conventional conflict (which Operation Iraqi Freedom was until the insurgency rose), the combat arms branches receive the heaviest armor: tanks, personnel carriers, armored humvees, and the ceramic plates. All other branches received kevlar vests, because the largest threat to them was perceived to be artillery strikes, which kevlar vests have a great record in protecting from shrapnel.

Yet, as soon as the insurgency began, the army and marines pushed interceptor plates to all soldiers as it became clear that every soldier was on the front line.

History teaches us that he who creates a better armor will soon be defeated by a way to beat that armor. Insurgents, realizing that they could no longer shoot a soldier from the front or back and wound him or her, began shifting to soft points: namely the deltoids, shoulders, and side rib cage. Marine studies have shown that approximately 80 marines and soldiers died from such rifle wounds.

The solution? Provide deltoid/shoulder, and side protective inserts. However, what is the cost to the individual solider of adding this additional armor?

Soldiers on foot patrol already carry over 100lbs in their weapon, armor, ammunition, communications, rations, water, navigation equipment, and any other mission-specific requirements. The weight of this additional armor is almost 15-20 lbs extra. For anyone ever to hump several miles, twenty more pounds is incredible. The heat trapped by the armor also poses a problem for soldiers exerting themselves in sprints to cover and in an effort to close with and destroy the enemy. The bulkiness of the armor also cuts into the soldier's flexibility and maneuverability. Again, we are talking about "light" infantry - not tanks.

Nevertheless, the Army and Marines should procure and issue this equipment - which they are. But the issue here is not that the "President refuses to give our troops what they need" but that issuing this armor will not significantly reduce our casualties. I suspect that many commanders will not demand that their soldiers wear a complete interceptor outfit on foot patrols. This armor will be of best use for mounted soldiers (although it will probably just prevent them from ducking down in the hatch or jumping out) or for soldiers on stationary guard. Don't believe that this armor will protect a soldier from an IED, though, because if an IED can destroy an M1 tank, then no amount will protect the infantryman.

As always, the mission and commander will dictate what the solider will bring on patrol.

Its just another non-issue that the MSM and various pols want to make the issue of the day.

Why do small firms need to go public?

For many small firms, one of the best ways to raise capital, and a lot of it quickly, is through the IPO process. Especially in the post tech-bubble era, venture capital (at least temporarily) dried up, leaving small firms only able to raise capital through the IPO or debt financing (bank loans) process. Alternatively, even with VC funding, VC usually want their small firms to go public, thereby allowing the VC an easy exit for their investment (ie, being able to sell their investment in the capital markets). Thus, without the ability to go public / remain public, small firms will remain just that - small firms. They'll lack the funding to expand, offer key employees equity compensation, or develop the next Google.

SOX has real costs to the capital market...but what are they?

As a largely symbolic measure meant to reassure the investing public that the Congress was “solving” the problem of corporate corruption, the use of SOX is akin to wielding a sledgehammer to solve a very specific problem. Without the highly publicized (overhyped?) corporate scandals in 2000 and 2001, Congress likely never would have implemented SOX "reforms." Congress again, in its efforts to "solve" a problem, may have created a solution that has unintended consequences. Small public firms are burdened to the point where they are no longer able to compete with large, entrenched firms in the raising of investment funds from the public markets. Even private firms face SOX costs.
Most assume that SOX has led to many smaller firms going private, the larger question is “why.” One oft-mentioned major reason as to why he believes that small firms go private when faced with SOX requirements, e.g., increased auditing cost and the resulting minor benefits of remaining public. However, I think this is the area in which needs to be addressed. Without this analysis, the Congress may (1) assume that SOX is working well, (2) believe that minor “tweaks” could fix the reasons that small firms are exiting the public markets, or (3) repeal SOX completely. While a complete repeal is extremely unlikely to occur, the more dangerous scenario would be that Congress does not understand either why small firms are exiting because of SOX or what the implications of that exiting will occur, with a result that no SOX fixes are ever implemented.
Most focus as to “why” small firms go private is the enormous cost associated with meeting the increased auditing burdens. For large firms, this cost is proportionally much smaller than that for the small firm – which can be as high as 3% of the firms’ budget. In highlighting the costs of auditor attestation fees, small firms lacked the accounting staff necessary to deal with increased auditing requirements and certification of internal controls.
I am not so sure, though, that this would be as significant of a cost to SOX reporting. When SOX appeared, both small and large firms, as well as the supporting legal and accounting firms, lacked any experience on exactly what SOX required. Everyone had to learn, and learn quickly. As with the launch of anything new, initial operating costs are high due to the steep learning curve involved. Over time, costs decrease as experience grows, standardized procedures are developed and best practices implemented, and comfort levels increase. I am sure public firms experienced similar “pains” when the SA and the SEA were implemented in ’33 and ’34.
Thus, in order to effect change in SOX to remove its burdens upon entrepreneurship, I feel that those who study SOX should focus on not the costs at implementation, but the costs that one may reasonably expect to occur going forward. Only by exploring the continuing costs of SOX can the market, pundits, and the Congress decide if the benefits, if any, outweigh the costs to American competitiveness. It may very well be true that the implementation of SOX caused a large amount of small firms to go private. Eric Talley, in his most recent scholarship, concludes that the implementation of SOX:
“[I]nduced small firms to exit the public capital market…represent[ing] a burden on entrepreneurship that transcends the immediate effects we have estimated. Creating an environment in which entrepreneurship can flourish is seen by many as a fundamental virtue of the American economy.”
However, as I stated above, the continuing costs of SOX should be measured. If costs decrease over time to an acceptable level, though, small firms may find that the public markets remain a viable means to raise capital. If costs remain high, then it becomes more imperative for Congress to repeal or at least amend SOX to reduce or eliminate the regulatory burden imposed on entrepreneurship. Without the rise of small firms and their ability to raise expansion capital, large firms become entrenched and unthreatened by competition from small firms. Of course, by the time that Congress decides that it needs to “fix” its previous “fix”, many business may have lost the ability to expand and the consuming public will have lost the resulting innovation that small firms provide to the marketplace.
It appears that these arguments have been heard by the SEC. The SEC's Advisory Committee on Smaller Public Companies will issue in April a final report on possible exemptions from 404 requirements for companies of under $125 million in market capitalization and under $125 million in annual revenue.

Welcome

Welcome to my new blog. I hope to post my thoughts on the free market, liberty, and national security, especially as it relates to current "hot topics" in the mainstream media (MSM).