The “business judgment rule” refers to the legal principle that corporate directors are presumed to have acted on an informed basis, in good faith, and in the interests of the corporation when making business decisions.  Yuppies have leveraged knowledge of this legal presumption while conducting their business dealings for decades.  What does this rule mean? Where does it come from? Why should I care?  On this episode We Break down The Business Judgement Rule and Expose a bit of what goes on behind the scenes of the corporate veil.

Included below, is a very rough transcription copy of this episode for your consideration.

 

Today, We’re going to discuss the transunion case; however, first, it would help to discuss the backstory regarding what was going on at this particular time period and what was going on with corporate America.

THe nineteen eighties, of course, is generally known as the Regan Era and that tells us a little something right there. Recall that the Regan era followed the presicdeny of jimmy carter; and for a number of reasons, not all necessarily jimmy carters fault, the US was under a lot of stress, in particular, a lot of economic stress.

With 2020 hindsight, what had happed was that the Fed. Reserve had, as it has done recently, over stimulated the American economy. The American Economy in general was expanding during the 1970’s.  The artificial stimulus went a bit too far.  The chairman of the Fed. Reserve at the time said that the Role of the federal reserve is to take away the punch bowl right as the party is getting going and that they didn’t take away the punch bowl in time. So, as aresult of a sort of “easy money” policy, what was happening was that the American Economy was heating up, and in particular, in the 1970’s something was occuring that Mellinials have virtually no experience with; living in an economy where inflation, price inflation, is occuring on a massive scale.

Back in the late 1970’s – early 1908’s, the CPI, consumer Price Index, was increasing every year by double digit amounts.  So, in general, prices of goods were increasing at a rate of about 10% per year. Now, imagine that, year after year paying 10% more for all of the goods you buy, whatever yoyur paying for now would be 10% higher and then 10% highger. Now, the problem with this type of High inflation is that if a person, for example, is thinking about buying a car and they think that prices are going to go up; what are they going to do?  Well, typically, they are going to buy it sooner rather than later.  Well, naturally, if you have an economy where everything is over heating and everyone is buying, what does that do? It makes it overheat even more; it feeds on itself, and that was a problem. A second problem was the fact that in the fall of 1973 there was an Arab – Israeli war that broke out that led, in October of 1973 to what came to be known as the Arab oil boycott.  The organization responsible for this was known as OPEC, or the Organization of Petroleum Exporting Countries.  In a very short period of time, the price of oil, which had been very stable for a reasonably long period of time, maybe perhaps about 20 years or more, the price of oil went from $4 a  barrel to about $24 a barrell in a period of about 4 months. Well, of course, think of everything that requires oil.  Not only gasoline, but petro chemical products, plastics, Things of that sort. So that rapid increase in the price of oil and oil related products Resulted in a huge increase In prices Within the American economy and drove up prices again.  And then of course there was the Iranian hostage crisis and the attempts to rescue the hostages turned into a fiasco. At the time, the United States had this feeling of being a helpless giant . . .So people were very frustrated at the time. Well, all this of began to work against the Democrats in general and Jimmy Carter in particular, so the Democrats weren’t very popular when Ronald Reagan got into office.  Once Regan, who wasnt known for his economic expertise, assumed office,  He relied on a team of people to basically get rid of inflation.

Alas this skews the transition into Smith versus Von Gorkem for what had happened was upon taking office, the Federal Reserve, pulled a 180. Instead of promoting low interest rates and an expansive economy, And started increasing rates dramatically.  It climaxed right around the time Of September 1981.  At this time the prime interest rate,  which currently rests at about 5%, increased astronomically.   You might be asking yourself what is the prime interest rate.  Well, the prime interest rateIs the interest rate that Is charged by money center banks to their best customers.  This would include the very best possible bank clients you can think of which today would be companies like Apple Computer or Amazon or even Alphabet Corporation, also known as Google.  Back in the day it would’ve been companies like General Motors but that’s besides the point. Regardless, the prime interest rate Currently sits at about 5%, Well, Back Then, during September 1981, The prime interest rate was 21%.  So if a company like General Motors for example wanted to borrow money from Citibank They would pay 21% annual interest on a short-term loan. Moreover, Mere mortals such as yourself and I would expect to pay 3 or 4 % over the prime rate. So, If you wanted to buy a car for example, You wouldn’t get the prime interest rate you would get a rate higher than that. Well, What did this do?  Well, It is as if someone slammed the brakes on the whole American economy Because there are very few businesses, Aside from say the cocaine trade, that can pay those sorts of interest rates. Let’s say you’re running a restaurant or a bakery or whatever, It’s very tough to make the numbers work if you’re paying around 25% interest Because those are practically loanshark rates.

The federal government, which now can sell 10 year bonds for 2% roughly,  Back then the federal government was having to pay 12% to get someone to buy A 10 year bond.  Now This was quite an extraordinary situation and most people living today have no experience with living in a world, much less an America, experiencing that type of inflation.

During the 1980’s the running joke was that teachers would no longer teach Anti-trust law; rather, they would teach the History of Antitrust law.  The idea was that there would no Longer be any prosecution Of American companies and so fourth. So, In retrospect, This is an era That we can characterize as the triumph of University of Chicago Style Economics associated with Dr. Milton Friedman.  Friedman, during the late 70’s had taken on a certain mission. That mission was to convince the American people That government regulation was bad, that government regulation had a Tremendous costs that affected the growth of the economy, economic performance, and so on and so forth.  Milton accomplished his goal very effectively. He had a program I believe was on Public television where he would contrast certain economic systems and ideas.  One such examoks is the requirement of Having to aqucire a taxi medallion, that could costs hundreds of thousands of dollars, in order to operate a taxi cab in New York City.   Dr. Friedmnan would Contrast this with the situation in Hong Kong in the 1980’s, which At the time was a small, British controlled enclave Surrounded by Communist China.  Now the British are taking a very laissez-faire approach to having the Hong Kong people decide what sort of regulation The government should Engage in To control The free market.  The situation in Hong Kong can be analogized to an early discovery or anticipation of Uber; they had seen the whole possibility of providing transportation services to people on an unregulated basis. Essentially, people decided The nature and extent of regulations that would control them As they traded goods and services in the free-market.  Ultimately, Friedman convinced alot of people that the best government is the least government.  Now, of course, this dovetailed very nicely with what president Regan had been preaching for a while.

Now, it is worthwhile To consider this information In conjunction with a couple of caveats.  One caveat is that this trend towards deregulation of areas of the economy That people attribute to Reagan actually began before Reagan. Jimmy Carter, a Southern Democrat,  Was someone who was somewhat sympathetic to a certain amount of deregulation.  So, It was really under the administration of Jimmy Carter that say, for example, Wall Street became less regulated.

Now, Let’s put this into perspective.  Say you wanted to sell 100 Shares of stock On the New York Stock Exchange.   Back before the deregulation that began to occur under Jimmy Carter’s administration began to occur, It made no difference with stockbroker you used.  They all had to charge you the exactly the same cost and fee to trade 100 shares of stock.  So, There was no price competition whatsoever.  The only way that they competed was Maybe how nice they were to you or how responsive they were to your concerns or whatever but there was no price competition; it was a regulated industry.

You’ll probably find this hard to believe, But the same is true for the airline industry. If you are to go from New Orleans to Boston it made no difference whatsoever what airline you flew on, you paid the same price.  So you might be asking yourself how did airlines compete with each other back in the day.  Well, They competed with things like more leg room or giving you a better complement