Former Secretary of the Treasury Larry Summers recently learned that making business decisions can be hard even if you’re an economist. Or, alternatively, Summers has again proven to be a real-life embodiment of an economic “rational individual;” willing to do whatever maximizes his personal interests, regardless of broader consequences. If true, this further demonstrates why the press needs to end their reliance on Summers for economic speculation – because his judgment is for sale.
In an entertaining lawsuit brought against him and the rest of the board of Block Inc., a judge ruled that Summers and company made “by all accounts, a terrible business decision.” That decision? Purchasing an over 80% stake in Jay-Z’s floundering music streaming company Tidal for over $230 million. The City of Coral Springs Police Officers’ Pension Plan had alleged in a lawsuit that Block’s board violated their fiduciary duty to shareholders by approving a deal (despite apparent reservations)allegedly supported by only one executive at Block: CEO Jack Dorsey.
The purchase of the streaming platform raised red flags to Block’s shareholders as Tidal has not only failed to build a large subscriber base but has been under investigation by Norwegian authorities for misreporting subscription numbers. Not to mention that Tidal came with $50 million in debt (owed to Jay-Z personally). Despite these bleak prospects, Block’s Transaction Committee and Block’s board of directors approved the purchase–something the plaintiff alleges violated the board members’ fiduciary duty.
Fortunately for Summers, the judge dismissed the case based on a longstanding precedent in Delaware law that judges cannot second-guess business decisions unless there is a clear conflict of interest or brazen carelessness. Though the plaintiff alleged that the deal was carried out to ensure Dorsey could maintain his friendship with Jay-Z, (the two were seen vacationing in Hawaii together a few days after Block and Tidal agreed to a term sheet) the case still failed to meet the burden required to prove a breach of fiduciary duty. In her dismissal, Judge McCormick summed up her opinion, stating “Under Delaware law, however, a board comprised of a majority of disinterested and independent directors is free to make a terrible business decision.” Essentially, the judge dismissed the case on the grounds that while the decision was idiotic, we must presume stupidity rather than malice under state law because the plaintiff lacked sufficient evidence to prove that Block’s board made the decision for untoward reasons.
This is also the latest instance of Summers, who infamously accused those he disagreed with on antitrust policy of economic illiteracy, demonstrating a disastrous disinterest in actual economics. In a world with Spotify and Apple Music (and Google Music and Pandora and iHeartRadio to boot), pretty much anyone could tell you that Jay-Z’s business is not worth nearly $300 million (the amount Block is on the hook for after accounting for the debt they assumed). Summers either felt compelled to agree to Dorsey’s bad deal because of his employment relationship (as is alleged in the lawsuit) or he simply did not understand what anyone else could have seen was a bad financial agreement.
In either case, Summers’ economic expertise and commentary should be questioned. Summers has major financial interests in several fields, including cryptocurrency and fintech. If his employment distorted his judgment on the acquisition of Tidal, why would his financial conflicts of interest not distort his economic punditry more broadly, where he doesn’t even have the same fiduciary obligations as he did in the case of Block. If it was not a conflict of interest, but instead Summers simply failed to see why the Tidal deal was a bad business decision, his economic judgment should be questioned. After all, what good is an economist who cannot foresee what everyone else knows to be “a terrible business decision.”
After a year of calling for millions of Americans to lose their jobs, perhaps Summers will take a small dose of his own medicine by losing one of his many corporate advisory jobs on account of this blunder. Of course, Summers will most likely face zero consequences for his error in judgment, and ignore his role in this incident as he has often done when confronted with his role in promoting cryptocurrencies.