Business Implications of Power in Mergers: The Case of the New United Airlines

Ideally, a merger combines the best features of one company with those of another company such that the whole is of greater value than the sum of the two parts. Optimal combination as such may imply or at least depend on a rough power-balance between the two adjoining companies, for otherwise distended dominance could translate into the worst of one company (i.e., the dominate one) being foisted onto the merged entity. The opportunity cost, or benefit lost in going with the worst of the dominant company, could be measured by the extent to which the same function in the other company is better than that of the dominant company. Put another way, it would make no sense to go into a merger planning to let each company continue to do what it does worse than the other. Sadly, power can eclipse economic criteria even in a company. The merger of Continental Airlines and United Airlines provides a case in point.

According to The New York Times, “The merger . . . was supposed to combine Continental’s reputation for solid customer service with the broader reach of United’s domestic and international network. Instead, [the merger turned into] an exercise in frustration for [the] fliers, with frequent delays, canceled flights, and lost bags.”[1] Customer unhappiness is a pretty good indication that something went horribly wrong in the formation of the combined company.

One business passenger, a frequent flier, provides us with a synopsis. “Continental was probably the best airline . . . that you could travel on pre-United. I would say United is one of the lowest.”[2] Specifically, he cited poor service, bad wifi connections, and cut-backs on perks and upgrades that evince little appreciation for frequent fliers. “I feel that at 100,000 miles, somebody should care and make me feel like a valued customer. You’re treated as just a commodity, and it’s a race to the bottom. They don’t really appreciate me at all.”[3] He would have quickly switched to another carrier, but the new United held 70 percent of all routes in and out of Newark, his main hub, at the time. Monopoly in a market, and perhaps even oligopoly, may enable sub-optimal merged companies to continue when they otherwise would have gone bankrupt.

United's "Love in the Air" promotion highlighting couples who met in the air. The case of the winning couple pictured here just happens to involve an "upgrade." The love in the air does not refer here to the employees on board or at the gate, even though the impression intended may be that flying United is a loving experience. (United Airlines)

In any case, the poor service of the pre-merger United somehow trumped Continental’s excellent service in the combined airline; the sordid mentality survived the salubrious one. Behind this dynamic lies dominance, or power, disproportional, I submit, from the standpoint of an optimized merged company according to business criteria—that is to say, power over effectiveness. Lest it be presumed that business principles and calculation play a predominate role mergers, the management of the power dynamics should not be left out of the equation.

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[1] Jad Mouawad and Martha White, “Despite Shake-Up at Top, United Faces Steep Climb,” The New York Times, September 15, 2015.

[2] Ibid.

[3] Ibid.

Great Lakes Water in the U.S.: Treating a Union as a State

Squabbling amongst states in a federal system may be an inherent feature of federalism. How much the jealousies and petty interests manifest in terms of policies may depend on the balance of power between the federation itself and its member-states. In the case of the E.U., the spat at the state level over how to allocate the tens of thousands of refugees from the Middle East and Northern Africa effectively stymied federal action that could have assuaged the angst. It is no accident that the state governments hold most of the governmental sovereignty in the E.U. federal system. By contrast, the case of the U.S. demonstrates that nearly consolidated power at a federal level can obviate, or stifle, strife between state governments. This alternative is not optimal either, for interstate differences tend to be ignored, resulting in increasing pressure on the federal system itself. How to handle municipal requests for drinking water from Lake Michigan is a case in point.


The complete essay is at Essays on Two Federal Empires.

The basins of the five Great Lakes. Wisconsin is to the left of Lake Michigan (the lake to the southwest in the picture). (wikipedia)

A Subtle Conflict of Interest in Obama’s Nominee for FDA Commissioner

Robert Califf, U.S. President Barak Obama’s nominee in 2015 to head the federal Food and Drug Administration (FDA), had received consulting fees of roughly $205,000 between 2009 and early 2015 from drug companies and a medical-device maker.[1] He donated the money he had made since around 2005 to nonprofit groups, and he had ceased all such work before he became the FDA deputy commissioner for medical products and tobacco. The question is whether he would have a conflict of interest in taking the helm at the regulatory agency that puts the public’s interest above those of the regulated companies. I contend that such a conflict is indeed entailed, though not on account of the money he received or any relationships he had developed with people at the companies.

As a clinical-trial researcher at Duke before joining the FDA, Robert Califf was a founder of the Duke Clinical Research Center Institute, which helped pharmaceutical companies run clinical studies. Such facilitation is oriented to helping companies, and, if ethically done, ultimately to helping the public too. In other words, he was not oriented to an area in which the respective interests of a drug company and the public are apt to be at odds. He could thus safely assume a mentality favorable to the companies. Such a mentality is at odds with that of a regulator of companies. Government regulation itself presupposes a tension between the interests of the regulated and the wider public. The mentality fitting the regulator’s role puts the public interest above the interests of the companies possibly to be regulated or already being regulated. A regulator, or an entire agency, captured by one or more of the companies being regulated, regulates sub-optimally because the public interest is valued less than a private interest (including the regulator’s own personal interests).

Public Citizen, a nonpartisan public-health group, urged the U.S. Senate to reject the nomination because “it would accelerate a trend of FDA decision-making that is more aligned with industry than with patients.”[2] Interestingly, the group did not highlight the fact that Robert Califf had received money from drug companies for consulting work, such as participating at an AstraZeneca employee-education session about cardiovascular disease. Rather, the complaint is oriented to the impact of a mentality aligned with the drug companies.

In the language of conflicts of interest, a regulator acting in line with his or her mentality assumes one role. Acting in line with the public interest above that of company interests to the contrary, can be considered another role. Both roles pertain to the regulator’s exercise of his office—for our purposes, the FDA Commissioner. The roles conflict. Robert Califf could reasonably be expected to be tempted to make decisions in line with his mentality (i.e., a private benefit to himself, and a broader private benefit to the companies involved) at the expense of his office’s duty to put the public interest above the two private interests (which include that of his mentality, or orientation). Herein lies the personal conflict of interest—personal in that he could be expected to be tempted on an ongoing basis to put his personal mentality (i.e., a personal benefit, psychologically) above the duty of his office to put the public’s welfare first.

To be sure, we cannot assume that Robert Califf would give into the temptation as Commissioner of the regulatory agency. Sanjay Kaul, a cardiologist, asserted that Califf had demonstrated his ability to act with independence. “Even though I have not always agreed with him on many issues, I respect him for his intellect and integrity. There is no doubt in my mind that he will leverage his inside knowledge of how the industry works to promote innovation without compromising public safety.”[3] Although I suspect that Kaul overstates the congruence of the respective interests of the industry and the public, we cannot assume that a predisposition to help drug companies necessarily wins out.

Even so, I contend that to have a person with a mentality or at least habit of helping companies in the regulated industry as a regulator necessarily involves an ongoing tension for the person, and furthermore that submitting said person to such a tension (or temptation) is itself unethical because of the subtle harm done on him or her. More simplistically, a regulator ought to have a mentality or bias that is aligned with putting the public interest above the interests of the regulated.

Even a subtle bias gained from substantial work-experience, which itself points to an underlying orientation and may even extenuate it, can be reckoned as a personal role. That role can be in tension with another role to be performed—a role oriented to a wider-held benefit (e.g., that going to the public). A personal conflict of interest can therefore exist even without any hint of personal financial benefits (e.g., bribery, extortion, etc.) being likely in a person’s position/office. Even as we tend to limit our recognition of personal conflicts of interest to the superficial level of money—such conflicts being much more extensive—the good news is that more of those conflicts are avoidable than we surmise. Merely in matching a mentality or predilection of a potential office-holder to the role having a wider rather than narrow distribution of benefits (i.e., acting for the public welfare), we can reduce the incidences of such conflicts.

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[1] Drug companies spent an additional $21,000 reimbursing the cardiologist for travel, meals, and other expenses. Joseph Walker, “FDA Nominee Received Industry Fees,” The Wall Street Journal, September 19-20, 2015.

[2] Ibid.

[3] Ibid.

Bank of America Board Ignores a Binding Resolution: Fiduciaries Seizing Power from Shareholders

Corporate board directors have a fiduciary duty to act in the shareholders’ financial interest. What if a board’s directors think they know better that the stockholders as to their interest? In such a case, the directors would be acting like elected representatives who vote contrary to the wishes of their constituents for their own good. While valid from the standpoint of representative democracy, I’m not sure the principle has legitimacy in the corporate context, wherein property-rights are being represented. Simply put, an owner gets to decide how his or her wealth is used, within legal parameters of course. The case of Bank of America’s board may suggest that directors essentially work for their managements while being shamelessly dismissive of even binding directives from the stockholders as a group.

“At the bank’s 2009 annual meeting, shareholders passed a bylaw requiring that the board be overseen by an independent “chairman.” The bylaw passed by a whisker, but it was nonetheless binding.” In the fall of 2014, however, “the board abruptly overturned the bylaw” by electing Brian Moynihan, the bank’s CEO, as chairman of the board.[1] In other words, the directors shamelessly dismissed a binding shareholder directive. The directors claimed that the bank’s governance structure—that is, whether to have the same person occupy both the CEO and chair positions or not—should be allowed to vary “depending on the strategy and environment in which [the bank] operates.”[2] I’m not convinced, however, that this is a valid point.

Firstly, the duality of the chair and CEO (i.e., having the two positions held by two people) is not oriented to particular business strategies or environments; rather, the governance device is intended to prevent a CEO, whose supervisor is the board, from dominating it and thus impairing its overseeing role. Such a situation is like an employee coming to dominate his boss. It doesn’t matter what the business is, the structure itself is problematically both ethically and in terms of the performance of the board and its management. That the board brazenly contradicted the stockholders’ binding bylaw in appointing the sitting CEO as chairman of the board may suggest that the CEO already had too much power over the board responsible for holding him accountable.

The man of the hour. Brian Moynihan, Chair and CEO of Bank of America as of 2015. His power exceeded even that of the stockholders, whose concentrated wealth he managed. Lest it be maintained that a CEO with such power optimizes corporate earnings, consider that his predecessor, Ken Lewis, had the bank purchase Countrywide, whose fraudulent mortgages played a vital role in bringing about the financial crisis of 2008. Perhaps CEO/chair duality is of value simply in reducing a corporation's systemic risk. Hence, Congress may legitimately intervene.(Simon Dawson/Getty Images)

Were governance structure to be so malleable as to change according to strategy and environment, corporate governance would be more like a policy than something worthy of a corporate charter. By analogy, the argument that a corporation’s governance structure should depend on strategy and the business environment treats a constitutional clause as if it were a mere statute alterable by a legislature rather than a constitutional amendment. The structure, in other words, is too easily changed, and thus subject to the power-agenda a CEO or chair.

Lest it be objected that corporations are merely economic entities and thus subject only to the criteria of efficiency and effectiveness, I submit that power was alive and well among the directors, the CEO, and even the stockholders as the matter of the binding bylaw came to a head in 2015. “Power is the only issue here, Bob Monks, a governance expert at ValueEdge Advisors, a shareholder-activist firm. The board’s appointment of the CEO as chair “is simply saying power is with the C.E.O. and any structural arrangement that purports to dilute his power will be driven out.”[3] The question is whether the stockholders as a group would have and be able to exercise enough power to hold the board and CEO accountable.

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[1] Gretchen Morgenson, “At Bank of America, a Vote to Give Shareholders Due Respect,” The New York Times, September 18, 2015.

[2] Ibid.

[3] Ibid.

Gay Marriage: God’s Law, Legal Reasoning, and Ideology

Mixing religion, jurisprudence, and ideology together is one potent drink. Ingestion can cause palpable heart-burn as well as migraine headaches. In the case of gay marriage in the U.S., sorting out and evaluating the three elements can be rife with controversy and thus confusion. In this essay, I discuss the county clerk in Kentucky who refused to grant marriage licenses to gay couples because doing so would violate God’s law and thus betray Jesus. Her religious rationale makes for interesting legal reasoning. I then look at the U.S. Supreme Court’s gay-marriage decision. I contend that a natural-right (and thus human right) basis clashes with ideological anger. Human nature itself is on display throughout, particularly as it wades into religion, legal reasoning, and ideology.

The complete essay is at “Gay Marriage: God’s Law, Legal Reasoning, and Ideology.”

Why the E.U. is Compromised in Handling the Refugee Crisis

At least four E.U. states, including Hungary, the Czech Republic, Slovakia, and Poland, rejected a federal plan on September 11, 2015 that would have imposed refugee quotas on the states. The failure to come up with a fair allocation of migrants by state threatened to undo the borderless travel within the E.U. The tremendous influx of mostly Syrian refugees exacerbated differences between the states; given their power even at the federal level of the E.U., the infighting was a risk to the viability of the E.U. itself. I contend that structural flaws in the E.U. itself unnecessarily compromised the Union from quashing the risk to itself by solving the refugee problem. The state governments were clearly not in unison in dealing with the problem themselves.


The complete essay is at Essays on Two Federal Empires.

Refugees held up in Hungary because the state's government was overwhelmed. Why didn't the E.U. step in to help? (Mauricio Limo/NYT).

Corbyn as Labour Party Leader in Britain: Are Increased Deficits Implied or Avoidable?

The notion that a political party oriented to redressing the widening economic inequality during the years following the financial crisis of 2008 and the subsequent debt-crisis in the E.U. necessarily must increase government deficits to do so is, I submit, faulty. That is to say, being especially oriented to the plight of the poor, with the goal being the elimination of extreme poverty, can be consistent with fiscal responsibility. The election of a socialist as leader of Britain’s Labour party presents us with an interesting case of assumed fiscal irresponsibility.

Jeremy Corbyn upon being elected as leader of the British Labour Party (Jeff Mitchell/Getty)

Jeremy Corbyn was elected leader of Britain's opposition Labour party in September 2015. He won 59.5 percent of the ballots cast, or 251,417 votes, in the leadership, winning in the first round. He vowed to work toward justice for the poor. "I say thank you in advance to us all working together to achieve great victories, not just electorally for Labour, but emotionally for the whole of our society to show we don't have to be unequal, it doesn't have to be unfair, poverty isn't inevitable," he said.[1] He a impressed many Labour party members by repudiating the pro-business consensus of former leader Tony Blair—going instead with wealth taxes, nuclear disarmament and ambiguity about EU membership." Additionally, he promised to increase government investment though money-printing and renationalising vast swathes of the state’s economy. The Tories have used the economic crisis of 2008 to impose terrible burden on the poorest people in this country," he said. All this would not come without a cost.

For his part, Prime Minister David Cameron assumed that Corybn’s platform would mean larger government budget deficits—a problem the E.U. has struggled to address by levying penalties on wayward state governments. Cameron said—and this is crucial—"It's arguing at the extremes of the debate, simply wedded to more and more spending, more and more borrowing and more and more taxes. And in that regard they pose a clear threat to the financial security of every family in Britain." He is using rhetoric in characterizing Corbyn’s platform as extreme. In any case, Corybn said nothing about borrowing more and thus increasing the state’s public debt, yet Cameron assumed that it goes along with such a platform. To be sure, Cameron has a political incentive to make the inference, at least publically. According to Reuters, “The likely abandonment of the political center ground, particularly on the subject of balancing Britain's books, is seen by many as a gift for the Conservative Party that could herald a prolonged spell in power for the center-right party.” For the media to take the Prime Minister’s inference at face value, as if Corybn himself had said it, is hardly fair not only to him, but also to the residents of Britain.

I contend that the inference is invalid—that is to say, fiscal irresponsibility is not necessarily part of the mix in going with policies oriented to relieving poverty and even socialist policies—socialism being having the government own the means of production (regulation being government control over private property).  Corybn mentioned wealth taxes; he could also have pledged to reduce or end corporate tax-subsidies and even increase other taxes, including on business. He could also have vowed to decrease government spending in areas that do not affect the poor. Obviously, a downside goes with each of these measures, but this is not my point here. Rather, I submit that increasing government revenues and even decreasing government spending overall is consistent with having policies oriented to relieving and even eliminating the scourge of poverty, which dehumanizes people and limits them in so many ways, including in productiveness. Accordingly, Corybn could have said that he would work on behalf of human rights within Britain.

Regarding nationalizing economic sectors by printing money, government debt would not increase; rather, the means is inflationary. Were Corybn to change his position on using monetary policy for a large-scale fiscal purpose, we would be wrong in assuming that he must increase the state’s deficits to do so. Alternatively, he could prioritize the sectors to be nationalized and do so gradually. If even this approach would strain government finances, he could float government bonds specific to the government investments and use the revenue from them to pay off the bonds. This use of debt is acceptable in the business world, and thus qualitatively different than simply adding to the state’s deficit without a tie to future revenue. For anti-debt purists, the nationalization policy could be subordinated to the anti-poverty spending such that nationalizations occur only when the government can afford to pay for them—say from running a surplus, which I contend is consistent with an emphasis on anti-poverty measures.

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[1] William James and Michael Holden, “Socialist Elected UK Opposition Labour Leader,” Reuters, September 12, 2015. Source of all quotes in this essay.

Fewer Blue-Collar Lawmakers in Maine’s Legislature: Public Financing Cut by the U.S. Supreme Court on Free Speech Grounds

In 1996, Maine became the first American state to enact a public financing system for statewide elections. Voters passed a referendum by which the government provides money to candidates who meet a threshold of fundraising in $5 increments from voters in their districts. Before 2011, candidates got matching funds from the government if an opponent was funding his or her campaign with their own money, or if an outside group was spending money on the race over a certain amount.[1] The reason for the discontinuance of the matching funds and the subsequent impact on the number of blue-collar people running for office and being in the legislature demonstrate that the public financing of political campaigns can have a huge impact on both political campaigns and representation in a legislative chamber.

By 2008, 85 percent of lawmakers in the Maine legislature were running with public funds. Passage of the referendum allowed waitresses, teachers, firefighters, convenience store clerks and others to run for office and win. Women benefited especially, running in greater numbers than had been possible before. Thanks to public funding, Maine soon had the most blue-collar legislature in the U.S. The gap between Maine’s citizens and their representatives was effectively narrowed.

Historically, the American Founding Fathers knew that the legislatures of the member-states were closer to the people—and not just geographically—than the U.S. House of Representatives. Hence, some delegates at the Constitutional Convention decried the aristocratic nature of the proposed U.S. House. For one thing, the legislative districts of a state representative are smaller. Partly for this reason, citizen-legislators would be more likely. By design, the total number of legislators at the state level dwarfs the number of representatives in the U.S. House. The Founders thus understood that the vast repository of self-governance in the “extended republic” and the republics within would be mostly in the state legislatures. Hence, most authority over domestic matters was constitutionally assigned to the states, with the governmental institutions at the federal level enjoying only limited, or enumerated, powers. The impact of Maine’s referendum suggests that representative democracy has greater potential at the state level than at the federal level. To be sure, Madison’s theory that political minorities are less protected in smaller republics represents a downside to state government relative to federal. However, the greater presence of blue-collar people in Maine’s legislature may mean that Madison’s theory need not apply, at least concerning economic minorities. Unfortunately, the Maine experiment was rather severely clipped in 2011.

Specifically, the U.S. Supreme Court decided that providing public funds to match outside groups and self-funding candidates was a limit on their free-speech rights. Participation in Maine's public funding system dropped to 51 percent by the 2014 election. How increasing the money-as-speech of one person limits the free-speech of others is utterly perplexing to me, unless the context is of two people in close proximity using loudspeakers. At the very least, the American doctrine of free-speech had traversed a few curves—the 2010 Citizens United case being a major case in point.

Moreover, the court’s decision may point to a basic bias in the American political elite in favor of great wealth. Corporate donors would quite naturally want to squash the influx of blue-collar lawmakers—preferring instead “professional” politicians intent on being re-elected. My basic point is that public financing can have a huge impact not only on campaigns, but also on the composition of legislatures. That is to say, Americans need not assume that “deep pockets” entrenched in the status quo necessarily enjoy the overwhelming advantage in representative democracy.

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[1] Paul Blumenthal, “Maine Voters Hope to Restore Their Revolutionary Election System,” The Huffington Post, September 4, 2015.