Due Diligence has moved!

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Dissecting the Media: Trust and Transactions

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Dubious Distinction: CBS News

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Be Careful What You Wish For: Open Source and Off-Shoring

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The Year Three: Fault Lines

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Smart Mobs: Swarm Intelligence Takes On CBS

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It's Moving Day!!

This will be the last regular post on the pacificafund.com domain, though I will continue to post titles only, with links to the article on the new site, for a couple of weeks, in part to alert the apparent majority who are now reading DD via RSS. After that, I'll put up an automatic forwarder on the main page. The remainder of the site will remain, frozen in digital amber, in consideration of the number of inbound links that still generate some traffic.

So, remember, the links you have been following have been changed! The new ones are:

• Browser: http://due-diligence.typepad.com
• Reader: http://due-diligence.typepad.com/blog/index.rdf

The story continues, over here.
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Props to the Merc

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Connecting the Bots

Note that I'm appropriating and using the robot/bot concept in a way that may or may not be common to readers. I am not talking about Star Wars droids, Blade Runner replicants or I, Robot humanoids. I'm talking about something more limited here, a little closer to the remote controlled machines of Robot Wars, perhaps. They will often have a human in the command loop, and will almost always have one available for override control or priority setting. I don't particularly care about humanoid form - the 'bot functionality can be constructed of arbitrary physical or software components, often physically distributed. And 'big AI' is not on the critical path; a lot of this is the combination of cheap sensors and interconnect, lots of cycles, control theory and a limited operational context.

Let's start with man-machine interface. The most provocative thing going is the monkey-machine interface at North Carolina. This allows a trained macaque to remotely control a mechanical arm by thought. This project was partially funded by DARPA, and as noted in the second article (by blogger Carl Zimmer), it's dual use technology: it could be used as a prosthesis for injured soldiers, or perhaps eventually to control other systems.

Speaking of those other systems, here's part of DARPA's borg project, powered exoskeletons for humans. Being implemented in part by those noted militarists up at Berkeley. In its existing form, you could get a SOF soldier hauling huge pack loads (once you figure out the energy source). Integrate that monkey/machine technology, and you get the beginning of a fully integrated mobility prosthetic for the wounded, or the aging.

Whoops, the Japanese are already partly there, too. Stretching the form factor a little further, we've got a robotized bathtub for the elderly. (Not hard to believe, once you've seen Japanese cybertoilets.) This is all part of a broad trend towards robotic assistance for the aging in Japan [reg req'd, see BugMeNot]) - providing both physical and emotional aid. And I'm hardly the only futurist blogger noticing the demographic imperative for robotics.

Meanwhile, back at the fun loving DOD, their advanced semi-autonomous combat aircraft have progressed to multi-aircraft formations, and dropping dummy bombs (see the Block 2 videos). And just to make things even tougher, there's now a program to build an autonomous aircraft that can land itself on an aircraft carrier, no mean feat for the most skilled human pilots. This is also part of the distributed control system that I've blogged before. Now step back one, forget that the 'effectors' of this particular system are combat aircraft, and think about the sophistication of control system required to pull this off when the human intervention is often via lagged satellite link, or unavailable due to task overload. Then think 'dual use'.

Parallel and synergistic efforts. Fueled in both cases by the most fundamental driver out there: survival.
1:40:13 PM    trackback []  

WiMax plus 800 Pound Gorilla = ?

So the wave is now in sight of the beach. I'm hearing whisper numbers for CPE plus amortized base station expenses of $200 - 300. That's down to the range where prior experience in the bad old modem days suggests that end users will actually pay for the equipment. But if that doesn't happen, who will capitalize the competitive wireless overbuilds of the cable ops and telcos? There are some interesting rumors floating around out there.

Hat tip: Jeff Nolan.
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VC related reading

Seth Levine of Mobius guest blogs at Brad Feld's place, to explain the ins-and-outs of the VC jargon term 'pro rata'.

An oldie but a goodie, Fred Dotzler's 2003 article on tips for VCs was recently reprinted in TechComm Journal. Good reading for entrepreneurs as well. How do you make yourself a better partner for VCs trying to apply these best practices?
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Doppel-Arnies!

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Deepest Sympathies to the People of Baslem

"We need to face facts: We're not conducting an anti-terrorist operation in Chechnya. We're at war with terror and terrorists. And special forces units don't win wars, the people do.... If people in the privacy of their own homes are talking about Alexei Yermolov's° strategy for waging war in the Caucasus -- clans as a whole were held responsible for the actions of individual members -- the authorities should at least stop acting as though such ideas are not in the air. If the regime fails to take a stand, these ideas will spill into the streets on their own."

° Alexei Yermolov was a Russian general of the Napoleonic Wars, who became military governor of Chechnya after its conquest, and is renowned for his savagery. Quote: "Chechens can never be pacified. They can only be exterminated."
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Why Is Shareholder Liability Limited?

What is the best reasoning behind why shareholders have limited liability for a corporation's environmental and social costs? Not on a case by case basis, but why it is the blueprint for the most powerful pillar of society?

Before getting to a specific answer, I'm going to set background by turning back the clock to the origin of the corporation. (You can find a broader outlook on the corporate concept in the wikipedia.)

The embryonic form of the modern corporation emerged in Northern Europe in the late 16th and early 17th century. The Dutch and English were the most notable successful practitioners of the form. It is English common law that formed the basis for American law, so I'm going to focus there.

This key institution of capitalism was birthed by monarchy. It was the time of Elizabeth I. The European exploration and colonization of the world were underway, and England wanted its piece of the action. But the privy purse was in bad shape after a war with Spain and several rounds of internal struggle occasioned by the Protestant Reformation. The institution of the corporation was formed to mobilize private capital in pursuit of development goals that the government could not itself afford. (And it might have been noticeable, even then, that private initiative worked out better than government projects.)

To encourage men and families to put their wealth at risk, several notions were tied together:

1. The corporate form itself, from corpus, a body. To fit the new institution into common law, the fiction was created that the organization was itself a person, with many of the same rights. With two differences. First, it was immortal. This had the effect of encouraging investments and planning over longer terms than a natural life span, something that to then had been the province of the church and great noble houses - on their good days. Secondly, the corporation was controlled by owners who would receive the benefits of the business, and could pass on their share of ownership to others (the world's first "exit event.")
2. A charter. This was a grant from the throne that not only established the fictional person as a matter of law, but often extended some right or monopoly that would otherwise be held by the crown. The crown didn't have the resources to exploit that asset itself, so it turned it over to private interests, reserving the right to tax the profits.
3. And finally to our point: a shield from liability for the owners of the corporation. This was a partial extension of the sovereign's immunity (meaning: we have the guns/swords, so don't bother suing). It meant that the founders and owners of the corporation were at risk for only the amount of money they had put into the corporation. You could only lose what you had bet if the company was unprofitable and defaulted on its loans and other debts (and here the distinction between debt and equity holders first appeared), or became liable for damages. The alternative was joint and several liability, meaning that each of the venturers was potentially responsible for all of the liabilities. If you think investing in nanotech or unproven pharmaceuticals is dodgy, just imagine putting your money into a venture that literally promised to sail off the edge of the known world, hoping to find gold, trade, or profitable land. The grant of immunity was necessary to unlock the private money that would otherwise stay in real estate, government loans and other safer investments. No noble house or wealthy merchant family was going to put their whole fortune at risk on such a flyer, but they might have a flutter with part of their assets if they knew the bet was limited.

Like all surviving memes, the corporation has mutated through the years. Two changes are worth noting, as they particularly bear on the investing world of today:

The corporation was borne of colonialism and mercantilism, but it quickly spread out from there as the success became apparent. Soon there were chartered corporations building toll roads, then canals, and later railroads. The steam engine and railroad were punctuation points in a shift of the corporate role into technology development and other roles that had little to do with geographical territory or monopolies. As the early companies drove the British Empire, so the new ones brought Britain to the leadership position in the Industrial Revolution. In this shift, the notion of the royal charter began to fade, leaving behind two vestiges. One is the quaint 'purveyor of strawberry biscuits to Her Majesty' that still pops up to amuse. The second, and significant, is the shift of the monopoly right to the intangible: the appearance of letters patent on inventions, which also passed into American practice. And in passing brought along the Constitutional root of American intellectual property law: the encouragement of capital formation for investment in inventions.

The second change was in ownership patterns. The first companies were directly owned by 'adventurers' on their own account. But interests could be passed by inheritance or trade, and there slowly developed a market in the ownership of corporations. By the time of Samuel Pepys' Diary in the 1660s, shares were commonly traded in coffee shops in London. In 1698, a formal stock exchange (based on an idea from Holland), was given a royal charter. Within twenty years, that market had grown large enough to give rise to the famous South Sea bubble, which may remind one of more recent times. But the ability to trade in and out of shares encouraged even more wealth to flow into new ventures, more fuel for the Age of Steam.

The institutionalized exchange also came to the New World, to Wall Street in 1798. Well into the 20th century, the markets were dominated by individual investors pursuing individual stocks. The mutual fund was not created until 1924. By letting small investors spread their risk across larger portfolios, they encouraged further investment. This was just the beginning of a dramatic shift in ownership patterns. At this time, most American equities are owned and traded by so-called 'institutions', which include not only mutual funds, but pension funds, insurance pools, college endowments, and other large holders with great flexibility in where to place their funds. Along the way, this has greatly expanded the base of 'capitalists' - those citizens who directly or indirectly own shares.

So we've gone from colonialism to intangible inventions as the investments, and from gentlemen adventurers to the majority of citizens as the holders. Now let's imagine that world with the limitation on liability removed. Let's suppose that all the investors in all the institutions, as well as the individual shareholders, are jointly and severally liability for the debts or misdeeds of any company whose stock they hold directly or indirectly. Just how eager would you be to put your money in a mutual fund if you thought you could end up holding the bag from the next Enron or Worldcom or pets.com? The whole evolution of four centuries of capital formation would unwind rather quickly as wealth flowed back into land and bonds.

Actually, of course, nothing of the sort would happen. The institutional owners would quickly sell off shares and move their (your) resources to some place more friendly to business, like China or Russia. Share prices would go down the rat hole along with your 401k and the value of the US dollar. Fiddling with liability protections in the largest economy on Earth would unleash a storm that would make the Asian economic flu of several years past look like a picnic. In spite of occasional overheated rhetoric, all of the branches of government seem to understand this. Piercing the corporate veil of shareholders' liability protection is one of the harder legal acts to accomplish, and usually requires a finding that the corporation is but a sham shell, covering fraudulent acts of the 'owners'. (A lot of the Enron story hinged on the company's attempts to remove liabilities from its books by hiding them in such shells. Update for clarification: The 'veil' in the Enron case would be between Enron as controlling owner and the trading 'shells' as source of liability - not with respect to Enron shareholders.)

To sum up: The reason for the limit on liability is to encourage capital formation from as wide a swathe of society as possible, to undertake risky tasks that the government is unable to do well or at all. The competitive advantage of this form over monarchy or socialism is pretty well established.

So that's my answer. But now let's turn to the question. Some may not think I've answered it at all. Will didn't ask about liability in general, he specifically called out "liability for a corporation's environmental and social costs". Let's reiterate what we're talking about here. We're not talking about the corporation's liability for damages, we're talking about passing that liability through to its shareholders. And these are particular pernicious forms of liability to propose, because they are indeterminate now and in the future, in fact, theories being made up by those with a stake in the outcome.

For a small instance, let's consider the asbestos liability cases of the last decades. Without disputing that harm was done to individuals, one has to note that the medical effects of asbestos were in many cases not known at the time the harmful products were produced. Yet the costs of settlement have bankrupted more than one company, in many cases corporations that had purchased businesses which had once made asbestos products but had shut down those lines long ago. Now note that when I say 'bankrupt', I'm saying that the corporations themselves had their assets exhausted. If there was no corporate veil, then those billions of liability would pass through to all the shareholders, both direct and indirect. Would you have been one? Do you know? Now just think how likely I would be to put my and my investors' money into a nanoparticle corporation at this point in time, if I had to worry that decades hence, no matter how carefully those materials were fixed in plastic, there could a similar judgment against not only the corporation, but its owners. Think I'm still investing? Think again. And by the way, this is real and the company makes photovoltaics, about as green as it gets.

As to 'social costs', it's hard to even call this specious, since it's unspecified. But let's just take a swing at it. Well, there's work force displacement. Should the Ford Motor Company - and its shareholders - have borne the costs of all the laid-off buggy whip makers and stable hands? How about all those poor vacuum tube assembly workers knocked off by Fairchild? Isn't it just sickening, all the telephone operators that could have found jobs if it hadn't been for the automatic switch? Need I go on? This is nothing but a recipe for stasis.

And that may be just the point. It sounds rather humane and innocuous. But track down the presumptions, and it's a recipe for unwinding the free enterprise system and freezing the flow of investment into innovation. Truly, a question with an agenda.

(And Will, if you decide this is the winning entry, you can offer the GMail account to the first taker at Books for Soldiers.)

Update 9/9/04: Brian McDaniel of Wilson, Sonsini writes to point out:

"...limited liability does not always shield shareholders from environmental liability under the Superfund laws. In practice, shareholders of public companies aren't targeted with these laws because: (1) its too much damn trouble to track down individuals, and (2) few public corporations have Superfund liabilities that exceed their value. However, shareholders of privately held companies, including acquirors, can and have been held liable. (See PDF file for example.)

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New Takes on Online Advertising

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Relaxing on the Coastside

We took a long weekend's trip out to the San Mateo coastside, a shakedown cruise for a new toy, pictured above. Those not from around here may not realize there's plenty of open space within an hour's drive of the teeming Valley.

We stayed three nights at the Costanoa resort and camp, and made it our base for short excursions. These included a run down to Santa Cruz to help an old friend move house, visiting Storrs Winery (grand noir and petite sirah) and Rhythm Fusion on the return. In Pescadero, one of our favorite small towns, we dined at Duarte's Tavern, a local classic, and visited Phipps Ranch and Harley Farms goat cheese dairy for local provender. Also several hikes in the vicinity, including checking on the condition of one trail we had helped build several years ago.

This is a warmup for a longer trip in late September and early October. Travel blogging may occur, depending on the availability of campground and Internet cafe access in certain parts of California and Oregon.
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