The Law and Other Anomalies

There may be a death-knell coming for Twinkies and I know this is true because this week’s Fortune magazine tells me that the corporate parent may not emerge from bankruptcy.  The article explores the allegedly intransigent positions of the private equity owners, the secured lenders and the labor unions.  The broader ramifications have escaped Fortune, of course.  Fortune is the People Magazine of business, and its reportage is about as deep as Cape Cod Bay at dead low tide.

The first ramification is social.  We are talking about an American institution here.  People have dropped Twinkies from office towers and made movies about them.  Lawyers have built insanity defenses around their sugar content.  Generations of New Yorkers, and business travelers in New York making the taxi trek to LaGuardia Airport, have looked at, around and past the Wonderbread sign dominating the Jamaica, Queens skyline and marking the hallowed ground where the Twinkies were, er, manufactured.  Blog posters are uniformly claiming to be crushed, as if the Twinkie were an FDA-approved universal cure-all being lost to mankind through some colossal business error.

The broader ramification is anti-American and surely anti-Fortune.  It is the fact that, when you look at the Hostess Company, now in its second bankruptcy in fewer years than one hand has fingers, you see the raw Darwinian logic of our economic system.  It is hard to believe that good business or social planning would include the Hostess scenario as a success story.

The culprit is capitalism.

I am not against capitalism.  I am not smart enough to be against capitalism.  I am sure there are numerous analyses proving it the best system net on a utilitarian basis, far superior to other forms of social organization (many of which I cannot, no doubt, even name).  My point is so much simpler: the failure of this company appears to be a disaster for absolutely everyone involved and it was accomplished in about four years by people we consider to be smart, and we are about to brush it off and forget about it.

When one openly says that our economic  system unexplainably produces failures,  the typical  reactions to such a statement  are these: clucks of condescension from business folk who look at such remarks as so painfully naïve as to be below reply; reports to government agencies that subversives are in our midst; well-trained functionaries in the capitalist system who are well enough off, and poorly enough educated, think that this must be Valhalla.  Classify me what you will for saying that the emperor has bad clothes and for not knowing the address of another tailor who can cut a better fit to human need, but as Hostess joins an almost unmeasurable parade of failures that bring economic tragedy one has a choice: to casually observe that such is the nature of free enterprise; OR to say that there is a problem if this is the best we can do.

And why write this blog post when it fails to advance our thinking on anything?  It at least advances our understanding of what we do not understand.

Well, you know how it goes.   That’s how the Twinkie crumbles….

Midst this summer’s preoccupation with vacations, London and (around here) the collapse/revival/recollapse of the Red Sox, a fascinating corporate-social experiment is bubbling just below the lead headlines: Chick-fil-A.

We do not, here in Massachusetts,  know much about this company, a large restaurant chain that is privately owned and has its locations South and, to some extent, West of New England.  I am not even sure whether it is a fast food outfit like a Wendy’s or a casual dining chain like Olive Garden.  But all reporting indicates that its food is really good and that the chain is growing rapidly.

The nub of the issue is the active assertions of management that gay marriage is wrong.  The question is, what impact will this activism on a social issue have upon the company.  Reportage on the opinion pages of the Globe suggested this week-end that gay marriage supporters are wasting their time trying to make an issue of this, or trying to get people to not eat at these restaurants (I gather there are only two locations that are within driving distance from Greater Boston).  The argument seems to be: the food is good so do not deprive us; social positions of management have nothing to do with the food; why single out this one company and this social issue, and isn’t it wrong to do so — for example, would liberals be happy about a social boycott of restaurants owned by Muslims, or devout Catholics?

Today’s Wall Street Journal (B-1) jumps into the fray, noting that for the short term Chick-fil-A is not likely to be badly hurt; the vast bulk of their stores are in regions that most strongly oppose gay marriage in the first place.  One of those helpful little WSJ maps attempts to demonstrate graphically the locations of stores and of anti-gay-marriage sentiment.  But the Journal is of course a finance-centric publication with urban Eastern overtones, and speculates that with the power of social media, Chick-fil-A is making what is perhaps an existential mistake, dooming its company in areas of potential major expansion at the hands of liberal tweets and blog posts.

The debate can be viewed from the standpoint of corporate governance.  Recent governance theory has suggested that the traditional focus on damage control and crisis management is an outdated concept in today’s social media world, where major brand damage can occur with lightning speed that outstrips almost any after-the-fact response strategy.  Today, this theory holds, the only game worth playing is up-front prevention of brand deterioration.  Boards are encouraged to approach this element of risk management by making sure that their company is out ahead of social media pitfalls, avoiding positions that might create a furor and becoming active in the social media world so as to continually monitor what is being said and to help shape the dialog.

Surely, based on this view of the world, what the Cathy family (management of Chick-fil-A) is doing is, as the Journal suggests, “swimming against the tide.”

There are lots of ways to think about the problem from a social standpoint. The Cathys have a right to free speech.  We do not think about the social or political views of virtually all companies we deal with (unless one of those views creates a physical or economic disaster, a palpable result which may be driven by those ideas but which is different in kind from the ideas themselves).  But the partisan sorting out of American life, reflected by our current politics, the Tea Party (and counterparts on the Left), the constant elevation of social debates to a degree that undercuts tolerance of other views, and the very democratization of the instrumentalities of communication through the internet and social media, are categorically and fundamentally altering the manner and content of how we think about decisions.

That change is the social issue which Chick-fil-A is testing.  Is this the first case where, in the long run, the mere content of social ideas espoused by a company management, social ideas which are subject to debate and not clearly abhorent across the board, will harm a company in a significant way?  Aside from the social experiment, the case should be watched by those in corporate America to inform how one must think about risk management.  Does the new corporate checklist include a review to make sure that a company and its principal players are “vanilla” on social issues?  Political issues?

Should boards police their corporations to meet the standard that our parents taught us when invited to someone’s house for dinner?  “Use the forks starting from the outside in, and whatever you say do NOT discuss politics or religion!”

Regrettably, the reading of Supreme Court opinions often falls only to lawyers.  There is much that is technical in them, but most (in cases such as the Affordable Care Act) relates to policy, to the nature of our social contract with each other, and the application of close logical analysis to a given set of facts.

Some opinions soar with rhetoric, or with literary allusion.  Some opinions purport to expose the essence of the American experience.  Some anger and offend.  Some are just really good to read so as to inform the current debate.  Chief Justice Roberts’ decision in the Affordable Care Act case is in that last category.

I pause to speculate as to how many have read it.  I suspect many who comment on it have not; although it is possible that the misstatement of its contents by politicians is manipulative and purposeful, relying on the near-certainty that the average voter is not going to read the sixty pages (almost 200 pages with syllabus and dissents).

I submit that anyone truly interested in bringing an open mind to the current election must be a reader.  That class of people may be quite small, of course; research has shown that very few people ever change their mind during an election, and (although this is speculation and not supported by research) I suspect that those few who do change their minds are not usually driven by what candidates say about Supreme Court opinions.

All this is a pity.  Justice Roberts, much maligned as a tool of partisan politics, has for whatever reason written an elucidating and wholly enjoyable opinion, and one that informs our understanding of just what our government is all about.  Cynics may say that Roberts was forced to swing in favor of the statute, at least in part, in order to assure his Court’s legacy and save himself from the historical judgment of partisanship at the expense of jurisprudence.  That suspicion may be bolstered by Justice Kennedy’s view of the unconstitutionality of the Act, but whatever the reason the majority opinion itself is satisfying to read, subtle to think about, and destined to be over-simplified for political gain in the current election environment.

What does it say?  Really say?

The individual mandate of the statute says that the vast majority of people without other health insurance coverage must pay annually what is called a “shared responsibility payment” to the IRS, to be collected like a tax and to be measured based on income (but never below $695 nor more than the cost of a certain model health insurance policy which covers far less than most solvent Americans would consider to be adequate).  There never was serious question of whether the Congress could do this and call it a tax.  But Congress (the Democrats, to be fair) called it a penalty and based it not on the Constitutional power to tax but on the Constitutional power to regulate commerce.  (States have general powers to do anything not delegated to the Federal government by the Constitution and we call these State functions “police powers.”  The Feds have ONLY the powers granted [enumerated] by the Constitution.)

Citing ample prior authority, the majority opinion held that the power to regulate commerce presupposed there was commercial activity.  Someone who did not buy insurance was not engaged in an act of commerce.  The majority rejected the argument, embraced by the more liberal justices, that sooner or later everyone goes for health care and thus being in the commerce of health care is never an “if,” only a “when.”  The majority was concerned that if the Federal government could regulate doing nothing by calling it commerce, there was nothing it could not pass laws about.

Citing other ample authority, and noting that something is what it is, and not what its label says it is, the majority found that the payment required of the uninsured was in fact a tax.  (They did not even find it was a tax for all purposes, there is a fascinating analysis much ignored as to why it is NOT a tax as a matter of legislation; they just found that it was a tax in the Constitutional sense of the word.)

The second part of the law subject to review extended Medicaid coverage.  Previously, such coverage benefited pregnant women, children, people over 65, and people earning 2/3rds of the Federal poverty level.  The extension covers everyone in a family earning less than 133% of the poverty level.  Many states brought suit to declare this provision unconstitutional, as forcing the states to cover this expanded population.  Their basis was this: if a State refused to provide such coverage, it would lose all funding for all other Medicaid programs now existing, which result was coercive.  The majority said that this was indeed coercive, in effect forcing the States to adhere to a Federal policy by a grossly disproportionate penalty imposed in an unrelated area.  The majority struck the requirement that States adopt the expansion, leaving them the option to do so voluntarily.

While State resistance to the Medicaid expansion is to my mind difficult to understand, particularly since the Federal government will pay initially 90% of the cost and never less than 80% in exchange for which virtually all State residents will be insured (thereby improving the public health of the population, protecting the economics of local hospitals, and protecting the taxpayer base from having to pay for uninsured medical expenses incurred by the uncovered), the Court was deciding Constitutionality, not policy, and found the expansion unconstitutional.

There is much embedded philosophy in the Roberts opinion and indeed speculation had been that if Justice Kennedy had been in favor of the mandate premised on the Commerce Clause (so that it would have been found Constitutional by a 5-4 vote anyway), then Roberts would have surely voted that way also, making the vote 6-3 but ensuring that he (Roberts) could write the majority opinion.  The Roberts opinion is full of reassuring signals to conservative  constituencies, indicating the limited reading Roberts wants this opinion to have.  Witness the following among others (all internal punctuation and references to cases are omitted):

* “The Federal Government may enact a tax on an activity that it cannot authorize, forbid, or otherwise control.”

* “Proper respect for the co-ordinate branch of the government requires that we strike down an Act of Congress only if the lack of constitutional authority to pass the act in question is clearly demonstrated.  Members of this Court are vested with the authority to interpret the law; we possess neither the expertise nor the prerogative to make policy judgments.”

* “The Framers created a Federal Government of limited powers, and assigned to this Court the duty of enforcing those limits.  The Court does so today.  But the Court does not express any opinion on the wisdom of the Affordable Care Act.  Under the Constitution, that judgment is reserved to the people.”

I omit discussion of the dissents which are, in the aggregate, twice as long as the majority opinion.  They are not the law of the land, and political debate will revolve around spinning and misrepresenting the majority; it is ambitious enough here to attempt to state clearly that which WAS DECIDED, as a point of reference in what will become a sea of distortion.  Indeed, already Democrats are ignoring the unconstitutional finding on the Medicaid part of the Act which leaves 50 Million people potentially uncovered, and the Republicans are  trumpeting the startling revelation that what we have here is a tax imposed by Democrats, even if patterned after Governor Romney’s successful Massachusetts legislation.

The opinions (majority and dissents) discuss at a fundamental level the theories of American democracy and the pressure that the Constitution is placed under by a country infinitely more populous and sophisticated and modern that the colonies at the end of the 18^th Century.  Some of the more arcane discussions are not even touched upon here, and may be too lawyer-ly to be of general interest.  But rather than sitting on the beach this summer with Fifty Shades of Grey, I suggest instead reading Fifty Shades of Governance, as written by Chief Justice Roberts.  It is, in its own way, far sexier.