Koch v. Cato Follow Up

Since yesterday’s post, I’ve been hearing from folks on various sides of the conflict and hope to be able to report some additional details shortly, including news on recent changes to Cato’s Board of Directors — changes that relate to the current conflict.  In the meantime, Laurie Bennett has more coverage at Forbes (including a graphic showing Cato’s Board of Directors up until this past week) and Skip Oliva has a series of posts, including several that dig into the details of the legal dispute over the late Bill Niskanen’s shares.  Here’s another analysis of the legal issues and a comment by Steve Chapman of the Chicago Tribune.

In response to comments, I also wanted to elaborate briefly on a few points from yesterday’s post.  Given some readers may not care about this intra-libertarian movement stuff, I’ve placed the discussion below the fold.

Several have wondered why I would question the Koch brothers efforts to vindicate their rights as shareholders.  As I tried to make clear, my comments are not focused on whether the Koch brothers are legally entitled to take control of Cato.  They may well be.  It’s also possible that Cato President Ed Crane is just as much at fault for the current conflict.  I don’t know, but the answer to that question is not particularly relevant to the point I was trying to make.  My concerns are independent of the legal merits of the claim and  are not dependent upon any assumption about whether or not the Koch brothers or Ed Crane have been acting in a more reasonable or conciliatory fashion up to this point.

The question  here is not what the Kochs can do, but what they should do, and what they should do depends on what their goals are.  If their aim is to oust Ed Crane, then seeking to obtain majority control may be a good idea. Ditto if their aim is to reorient the Institute’s priorities.  But taking control of Cato in order to take such actions will still come at a serious cost to the organization, costs that may outweigh whatever benefits could come from these steps.  Further, if their ultimate goal is to preserve or enhance the ability of Cato to advance the cause of individual liberty, I think they are making a mistake, and this is true even if they know better than Cato’s current leadership what advancing individual liberty requires.  Cato’s biggest asset is its credibility as an independent libertarian voice.  This reputation has been enhanced over the years when Cato has refused to alter its position at the request of major donors, even if it meant those donors withdrew support, as happened with the first Gulf War.  (And this is particularly significant for an organization that relies upon annual contributions for its operating budget.) If Cato were to become controlled by any single donor or donor group, this credibility would be undermined.

That an individual has a legal right to do something does not mean they should do it.  Sometimes, it is in one’s interest to exercise forbearance.  Discretion is not only the better part of valor, it can also be the better part of wisdom.  In corporate law, we see examples all the time in which a shareholder’s insistence on enforcing and exercising legal rights is to the detriment of the corporation or other interests.  A better analogy for the current dispute may come from family law.  In the case of a divorce or custody fight, what one spouse is legally entitled to do is not the same as what they should do, particularly if they care about other things, such as the interests of their children or other family members. So, for instance, it may be contrary to the interests of the child to strictly enforce  a custody agreement. Maximal enforcement of a legal entitlement is not always a good idea because it can compromise other interests.

A second question raised has been whether this is just about “optics.”  Yes and no. As noted above, the primary asset of an organization like Cato is its reputational capital. This, in turn, is based on various factors, including its perceived independence.  Insofar as the goal of an organization like Cato is to influence public policy, public perception matters.  There is a fundamental difference between the credibility of someone who receives funding from source X, on the one hand, and the agent or employee of source X, on the other.  I firmly believe that arguments should be evaluated on their merits, not on who funds the person making the argument.  But I also know that journalists and others care about funding sources, particularly when investigating complex issues where facts and other claims are hard to verify.  In such cases, it makes perfect sense to place more faith in, for example, the economist who works in a think tank that happens to receive money from Exxon than in the economist who is on Exxon’s payroll.  Exxon is likely to fund groups that advance positions Exxon likes.   No quid pro quo is necessary.  But Exxon employees can be expected to advance positions because they are Exxon’s.  In other words, the credibility of an organization that is “Exxon-funded” is less at risk than an organization that is “Exxon-controlled.”  Substitute “Koch” for “Exxon” and you can see the reasons for my concern.

Some have asked what I think the Koch brothers should do if the their intent and interest is in upholding the shareholder agreement while also preserving the Institute’s independence and reputational capital and serving the broader cause of limited government and individual liberty. First and foremost, they should recognize that battles over control of a mission-oriented organization are bit more like a child custody battle than a fight for control of a for-profit corporate entity because their are other interests at stake.  Second, if they value Cato’s independence, as they claim, they should take actions that demonstrate that they care more about Cato’s independence than either obtaining control for themselves or diminishing that of Ed Crane.  One possibility would be to state up-front what they would do if they obtained majority control to ensure Cato’s independence.  So, for instance, they could commit to adding two more shareholders that are fully independent from them, so that neither they nor Ed Crane would have majority.  This would show that, whatever their interest, it’s not in making Cato a Koch-controlled entity.