Almost forty years ago, Charles Koch co-founded what is now known as the Cato Institute, the nation’s preeminent libertarian think tank. It had an unusual management structure for a non-profit: the five founders were made equal shareholders. Over time, Cato’s and Koch’s views drifted apart; Cato is relatively more committed to libertarian policies, while Koch is relatively more committed to Republican electoral victory. (In David Auerbach’s terms, Cato is nearly pure Type L, while Koch has a substantial undercurrent of Type C.) Although Charles Koch and his brother David are both now shareholders in Cato, Koch money is only a small portion of its annual operating budget.
Last week, the Koch brothers sued to take control of Cato. Their theory is that under the shareholder agreement, they hold an option to purchase the shares of the recently deceased William Niskansen, giving them an absolute majority of the extant shares. Cato’s current president, Ed Crane, has called the move a “hostile takeover” and argued that it’s an attempt to “transform Cato from an independent, nonpartisan research organization into a political entity that might better support [the Kochs’] partisan agenda.” Numerous prominent libertarian commentators—see, e.g., Jonathan Adler and Julian Sanchez—have weighed in against the move, on the grounds that it would at the least undermine Cato’s perceived independence, and at the worst pull the organization away from libertarian principles.
The irony is thick. And I don’t mean this in a tone of Go it, husband! Go it, bear! schadenfreude. As neither a libertarian nor a Koch brother, I have no direct stake in the fight, nor do I think public debate in this country will gain much if that fight is painful and protracted. I don’t know who is right as a matter of non-profit law; I can say only that whoever is right on the law ought to win. I think Adler is correct that it’s not in the Kochs’ own interest to take over Cato this way—but even as a liberal, I can say that this is their own mistake to make.
No. The irony here is that the nation’s preeminent libertarians—who ought to be exquisitely attentive to freedom of contract, institutional design, and observing the letter of the law—couldn’t get their rights right. They built this Streeling of libertarian thought, with its $20+ million annual budget and world-wide reputation, on a shareholding structure that is either actually or nearly under the control of people who do not share many of their values and have not for decades. The entire enterprise may well have been for years only one death away from Koch domination. If so many libertarians are now so worried about a Koch takeover, one has to ask, why have they spent so many years building a brand with an unshielded thermal exhaust port?
The answers are obvious, and completely understandable. Because few people knew about Cato’s unusual share-based ownership structure. Because those few who knew didn’t think the Kochs’ power play was a serious possibility. Because Cato was there, and so it made sense as a coordination point, whatever its weaknesses. Because each individual project made sense, regardless of the long term. Because they never even thought to ask. All completely human, all quite arguably reasonable, and all things any of us would likely have done in the same position. And yet the end result could well be to deliver one of the world’s most recognizably libertarian institutions into the hands of men who would use it for other purposes.
I could not tell you how many times I’ve encountered libertarian arguments about law that assume that individuals can and ought to use contracts to protect themselves against just this sort of contingency. Don’t worry about users clicking “I agree” to overreaching terms of service; if they truly cared about the terms, they’d negotiate for better ones. Don’t worry about people who refuse to buy health insurance; they’re making a rational choice for themselves. Don’t worry about minority shareholders, don’t worry about franchisees, don’t worry about all the other groups that find themselves on the wrong end of a bargain that always seems to tip against them in the long run—if they wanted better protections, they could and should have negotiated for them up front.
Except they don’t. They never do. And really. If the uber-libertarians of the Cato institute can’t watch out for themselves, what hope is there for the rest of us?