Tuesday, September 6, 2016

How Law and Organization Interact

John D. Morley ’06 received tenure and was promoted to the title of Professor of Law at Yale Law School on July 1, 2016. His teaching and research interests focus on organizational law and investment management. His most recent writing has focused on large law firms and why they tend to suddenly collapse. In addition to being an alumnus of Yale Law School, Morley was the John R. Raben/Sullivan & Cromwell Executive Director of the Yale Law School Center for the Study of Corporate Law from 2007–2010. He returned to Yale as a member of the faculty in 2013.

On the occasion of Morley’s promotion, we asked him a few questions about his research and teaching.

What are your research interests?
I’m broadly interested in organization. I want to know how the law helps and hinders the process of coming together for collective enterprise. I’m interested not just in big, investor-owned businesses like Microsoft and General Electric, but also in less obvious forms of organization, like charities, law firms, trusts, and even marriages. I’m especially interested in investment funds, which are organized very differently from ordinary companies.

Tell us more about your research on law firms.
Law firms have an unusual tendency to collapse. Like Dewey & LeBoeuf and Heller Ehrman, law firms often blow up and disappear with incredible speed. Other businesses don’t do this. Chrysler, for example, went bankrupt, but it’s still in business. I’ve argued that the reason law firms are so fragile is that they are owned by partners, rather than investors, and the partners can freely leave. This pattern of ownership creates the potential for a spiral of withdrawal that looks kind of like a bank run. Basically, when one partner leaves a law firm, the firm’s profits can decline. And since partners are paid in shares of these profits, the decline in profits increases the odds that another partner will leave. When the second partner leaves, a third partner will be more likely to leave, and then a fourth, and so on, until the firm has completely collapsed.

What do you enjoy about teaching in general and teaching Yale Law students in particular?
More than anything, I enjoy learning from my students. I often learn a lot from the student research papers that I supervise, and the students in my lecture courses always help me to see the course material in a new way. Yale Law students are so bright that they sometimes feel like faculty colleagues. It’s a privilege to teach such brilliant and hard-working students.

What skills do future transactional lawyers need?
Every future transactional lawyer needs to know the basics of corporate organization and income taxation. In addition, it’s also helpful to know the basics of finance and accounting. Interestingly, securities regulation is less important than it used to be. More and more new companies—like Uber—are choosing to avoid securities regulation by remaining private. The financial work that drives Wall Street transactional practice is therefore increasingly happening of outside the boundaries of the securities laws. Securities regulation is still important, but it’s not as central to the practice of transactional law as it once was.

Most of your writing has been about mutual funds. Many people invest in mutual funds but few of us think about mutual fund regulation. What should a layperson know about the law of mutual funds?
Although mutual fund regulation does a good job of making sure your fund adviser doesn’t steal from you, it doesn’t do very much to stop your manager from charging high fees or investing badly. The law has tried to regulate fees and quality, but these things are tremendously difficult to control by law. And so the best way to protect your investments is to be vigilant. Check your investments at least once a year and withdraw your money if your adviser’s fees have increased.