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Friday, June 21, 2013

Governmental Paralysis in Illinois: Behind the Underfunded Pension Crisis

Sometimes when a government’s fiscal matters get bad enough, dysfunction in the real power-relations at the highest level can suddenly become painfully obvious, or transparent, as when Toto pulls the curtain away to reveal the man behind the “all and powerful” Wizard of Oz. 

The complete essay is at Essays on Two Federal Empires.

Thursday, June 20, 2013

E.U. & U.S.: A Picture Is Worth 1000 Words

E.U. and U.S. Counterparts Meet
President Barak Obama of the U.S. and Presidents Herman Van Rompuy and José Barroso of the E.U. at a news conference following the EU-US Summit at Lisbon in 2010. Even though the E.U. and U.S. are both empire-scale federal unions of states, and thus are equivalent in terms of political type or genre, they differ in terms of how their respective federal offices are arranged and constituted. Interestingly, the alternative of having more than one president (e.g., a presidential council) was debated in the U.S. Constitutional Convention in 1787.

Image source:  European Pressphoto Agency. 2010.                   

Rhetorical Analysis:
The personal belief stresses E.U. and U.S. equivalence politically (i.e., empire-level federal unions) and in terms of scale (i.e., empire-scale). It follows that the two E.U. presidents—of the European Council and the Commission—are together the counterpart of the U.S. president. We see this visually in the picture, even down to the podiums and manner of dress. The respective flags are also visually equivalent, being the same size and contiguous (an early American flag would be more equivalent visually and in terms of federal development). Lastly, “EU-US” illustrates equivalence, and in a font that indicates that the equivalence is modern, rather than traditional. Accordingly, I chose the Arial font, which is modern yet official-looking, for my title. The title itself highlights the theme of equivalence by “EU and US” and “counterparts.”


The following picture also shows the full presidential equivalence (while showing how the EU is not a replica of the US):

The three men look more "governmental" here. Also, the flags show a symmetry that supports to motif of equivalence. 
Image source:
AFP. 2013.

Here is a very symbolic, "abstract art," way of depicting the equivalence:

Image source: Atlantic Council. 2012

Slightly less symbolic, showing that the equivalence is symbolically represented somewhere in practice, what does this picture imply regarding the flags of Germany, Britain, or France, or for that matter, California, New York, and Texas?

EU and US Flags in front of an E.U. building in Brussels
Image source: AFP/Getty Images. 2012. 
Actually, to compare the early U.S. with the early E.U., the flags should be from the early U.S. and the early E.U., respectively. Interestingly, an early U.S. flag bears astonishing resemblance to the first E.U. flag.

The E.U. flag was designed by Arsène Heitz and Paul Lévy for the Council of Europe in 1955. The EC and the E.U. would subsequently adopt the flag as their own. The "Betsy Ross" U.S. flag was in use by 1777. Regarding the number of stars, whereas the 13 on the U.S. flag represent the original 13 states in the U.S. alliance, the 12 stars on the E.U. flag were chosen when the Council of Europe had 15 members (10 of which were founding members). Even so, the similarity between the two flags is striking, especially as both the U.S. and E.U. have added states since their respective foundings.  
Image sources:  Flickr and IATA, respectively.

Out of all of the pictures above, which one (or two) do you think best depicts the motif of equivalence?

Monday, June 17, 2013

European Federalism in E.U.-U.S. Trade Negotiations

When U.S. President Barak Obama and the E.U. Presidents José Barroso and Herman Van Rompuy announced that talks would begin on a free trade agreement between the E.U. and U.S., the hope was that a sweeping deal would “largely eliminate trade tariffs and harmonize regulations across a broad range of industries” in “the world’s biggest two-way economic relationship.”[1] That E.U. ministers meeting days earlier had decided to protect the “cultural exception” to international trade rules “for the sake of preserving” the distinctive cultures of the E.U. states was cause for concern, should the U.S. seek to exempt the financial sector in exchange.[2] France had long been concerned that the English-speaking California film industry would swamp smaller French studios to the detriment of the French language and culture. Even though exceptions threatening a broader trade deal are indeed protectionist, in this case European federalism is also at issue. This factor could legitimate the exemption such that a countering U.S. exemption would not be equivalent and thus justified.

The complete essay is at Essays on Two Federal Empires.

1. Matthew Dalton, “
EU Deal Paves Way for US Trade Talks
,” The Wall Street Journal, June 14, 2013.
2. Ibid.

Protecting Minority Stockholder Rights: On Perelman’s Conflict of Interest at Revlon

The principle of majority rule is a staple of democratic theory. Typically the victor of a close election is quick to proclaim that “the people” have spoken. That “the people” corresponds to 51% of those who voted is beside the point. What about the 49% who voted against the victor? What about the minority’s rights? In the U.S. Senate, the fact that it takes 60 out of 100 votes to end a filibuster means that a large minority can halt a majority’s bill. In the European Council, the qualified majority rule means that for a bill to pass, the states in the majority must be at least 55% of the total number of states and must have at least 55% of the E.U.’s population between them.  A large minority can therefore stop a small majority. In both of these “intergovernmental” bodies, the implication is that 51% of a vote is not as significant as the principle of majority rule suggests. What about the rights of a minority of shares of stock in corporate governance? When a majority stockholder has control of management, the interests of the minority stockholders can be shirked. This is particularly true when a majority stockholder proposes a going-private transaction with the aid of management.

“Going-private transactions create opportunities for shareholder abuse and can have coercive effects on minority shareholders,” Antonia Chion, a director in the S.E.C.’s enforcement division insists. A majority shareholder can propose a buy-out that is unfair to other stockholders, and a collusive management can keep those shareholders in the dark concerning independent assessments. This is not the case of a CEO who is controlling the board at stockholder expense; rather, the majority stockholder uses the management to circumvent the board and other stockholders at their expense and even that of the company.

On June 13, 2013, Revlon “agreed to pay an $850,000 penalty to settle accusations that it deceived shareholders and its independent directors in connection with” Ronald Perelman’s attempt to get the other stockholders to convert their common stock to preferred in what is called an exchange transaction.[1] As in the case of Perelman’s earlier attempt to take the company private, an independent assessment found that the other stockholders as well as the company would lose out in the deal. Perhaps because the other stockholders had had access to the information to reject the first proposal, Revlon, undoubtedly at Perelman’s urging, “went to great lengths to hide” the bad news of the assessment on the exchange transaction from the minority stockholders.[2] In fact among “other deceitful maneuvers,” Revlon “altered the agreement with the trustee to ensure that the trustee would not share the advisor’s opinion with” the minority stockholders.[3] In its filings with the S.E.C., the management lied that the board’s process had been “full, fair and complete.”[4] In actuality, the company’s board was “unable to fairly evaluate the adequacy of the exchange offer.”[5] The controlling stockholder, Ronald Perelman, had used the management of the company to go against the company’s own interest! That is, the company was acting against its own best interest simply because doing so was in the controlling stockholder’s interest. Surely this suggests that the majority stockholder had too much influence. Given the conflict of interest, having such influence at the expense of other stockholders and the board can be regarded as unethical.

Perhaps it could be argued that because Perelman’s investment firm, MacAndrews & Forbes, controlled about three-quarters of Revlon’s shares at the time, the company’s management had a fiduciary duty to act in Perelman’s interest even if it was not in the company’s interest. Stockholders are the owners, after all.

However, Perelman’s investment firm did not control all of the stock. It cannot be assumed that the interests of the other stockholders mirrored that of the stock Perelman owned or controlled. Furthermore, that the exchange transaction would have helped Revlon pay off a loan to Perelman’s investment firm only added to the majority stockholder’s conflict of interest. According to the New York Times, because “Perelman stood on both sides of the deal, there was a question about the transaction’s fairness.”[6] This is the reason the company asked its independent board members to assess the exchange transaction in the first place. For the company to turn around and require the independent assessor to hide the findings from the board is utterly contradictory, as well as unfair to the independent directors (as well as the other stockholders).

Therefore, even if the principle of majority rule applied to corporate governance supports Perelman’s influencing the management to the benefit of the stock that he controls, the conflict of interest suggests that the principle should not completely shut down the property rights of the other stockholders. Interestingly, not even the U.S. Senate’s 60 votes or the European Council’s qualified majority voting applied to corporate governance could have stopped the 75% of the shares that Perelman controlled at the time from directing the company’s management. Because the independent directors are designed to be free of pressure from management, they could be controlled by a majority stockholder in such a case.

Perhaps independent directors ought to be tasked with not only checking the corporation’s management, but also protecting the interests of the minority stockholders when those interests differ from that of the majority. At the very least, a majority stockholder should not be permitted to be situated in a conflict of interest with regard to the company. Merely being so situated can be argued to be unethical because even having the opportunity to exploit a conflict of interest causes harm (e.g., anxiety) to those who would be harmed financially. Additionally, the temptation is just too great, given the influence that the majority stockholder has over the company’s management. Even in terms of democracy, majority rule is not an absolute.

1. Peter Lattman, “To Perelman’s Failed Revlon Deal, Add Rebuke From S.E.C.,” The New York Times, June 14, 2013.
2. Ibid.
3. Ibid.
4. Ibid.
5. Ibid.
6. Ibid.