Sunday, May 24, 2015
"corporations..no longer..fairly characterized as an identifiable group of people acting in association" 56 Wm. & Mary L. Rev. 1673 #corpgov— Stefan Padfield (@ProfPadfield) May 19, 2015
"Orthodox economists ... use ... modelling ... that must produce ... error in the presence of ... control fraud" http://t.co/lhIjDv1fAo— Stefan Padfield (@ProfPadfield) May 19, 2015
"World’s Largest Banks Admit to Massive Global Financial Crimes, But [No One Goes to] Jail (Again)" http://t.co/GFSASslMyL— Stefan Padfield (@ProfPadfield) May 21, 2015
Saturday, May 23, 2015
Judge Diane Wood of the Seventh Circuit has published an essay in the Yale Law Journal that surveys citations to legal scholarship emerging from the Seventh Circuit. She argues that movements like Legal Realism and its descendants challenge the concept of “judging” as a distinct activity from lawmaking, and as a result, scholarship that emerges from these traditions is not helpful to a sitting judge attempting to identify “what the law is.” She further argues that within the academy, the effect is exacerbated by a norm that values theoretical scholarship over practical “doctrinal” work, and hypothesizes that the type of doctrinal scholarship that judges are most likely to find useful is also more likely to be found in journals that carry less prestige.
Interestingly, Jeffrey Lynch Harrison and Amy Rebecca Mashburn reached similar conclusions. They studied judicial citations and found that judges – far less than academics – do not appear sensitive to the prestige in which an article appears, thus kicking off a debate regarding the purpose and value of legal research (see posts here and here). Among other things, Michael Risch defends legal scholarship on the grounds that its usefulness – to judges, to practitioners – is not the point; it is a good in and of itself.
I’m a recent convert from practice to academia, and that’s a sentiment I’ve frequently heard (usually as I’m being advised to write less like a practitioner). And while I don’t disagree with it, I also can’t help but notice that academics take quite a bit of pride in having their articles cited in judicial opinions – suggesting that their, um, revealed preferences are perhaps more nuanced.
In any event, I was recently thinking about how very often, both in my current research and earlier in my practice, I’ve found that some of the most interesting and helpful law review articles are the most thoroughly doctrinal – the ones that carefully synthesize and explain existing law, regardless of whether they also offer a more abstract theoretical framework, a realist attack on existing precedent, or recommend bold new path for change.
But beyond that, I think the indictment of legal scholarship as too theoretical is at least somewhat unfair. As Deborah Merritt points out, the citation counts actually aren’t all that bad, especially if one assumes a greater number of articles are consulted but not cited. Certainly, there are plenty of highly theoretical works out there that may not be of immediate relevance in a particular dispute, and thus don't end up being cited in judicial opinions, but I also found that when I was practicing, I was able to find a number of more concrete pieces in my area (possibly it’s easier when you practice business law). Sometimes I cited them in my briefing, which I assume increased their chances of being cited by judges (I know of at least one case where that occurred).
In my experience, however, the biggest impediments to citation of legal scholarship from the practice end were twofold: First, in any brief, space is at a premium. I often could not afford to cite a law review article and possibly edge out court decisions that the judges might find more authoritative. (And space may soon become even more scarce)
Second, and relatedly, I often found that legal scholarship was a few years behind the issues in which I was enmeshed. Law review articles were most helpful to me when they dealt with a cutting-edge issue on which precedent had not hardened, but it can take years for an issue to bubble up in judicial opinions to the point where academics notice it. From a practitioner’s perspective, by then it may be too late; the existing judicial opinions are what you want to address. The solution to that, I suppose, is for academics to maintain contact with practitioners, so they can be alerted to new legal developments.
Friday, May 22, 2015
I haven’t met Hollywood producer Edward Zwick, who brought the movie and the concept of Blood Diamonds to the world’s attention, but I have had the honor of meeting with medical rock star, and Nobel Prize nominee Dr. Denis Mukwege. Both Zwick and Mukwege had joined numerous NGOs in advocating for a mandatory conflict minerals law in the EU. I met the doctor when I visited Democratic Republic of Congo in 2011 on a fact finding trip for a nonprofit that focuses on maternal and infant health and mortality. Since Mukwege works with mass rape victims, my colleague and I were delighted to have dinner with him to discuss the nonprofit. I also wanted to get his reaction to the Dodd-Frank conflict minerals regulation, which was not yet in effect. I don’t remember him having as strong an opinion on the law as he does now, but I do remember that he adamantly wanted the US to do something to stop the bloodshed that he saw first hand every day.
The success of the Dodd-Frank law is debatable in terms of stemming the mass rape, use of child slaves, and violence against innocent civilians. Indeed, earlier this month, over 100 villagers were raped by armed militia. A 2014 Human Rights Watch report confirms that both rebels and the Congolese military continue to use rape as a weapon of war to deal with ethnic tensions. I know this issue well having co-authored a study on the use of sexual and gender-based violence in DRC with a medical anthropologist. With all due respect to Dr. Mukwege (who clearly know the situation better than I), that research on the causes of rape, but more important, my decade of experience in the supply chain industry have lead me to believe that the US Dodd-Frank law was misguided. The law aims to stem the violence by having US issuers perform due diligence on their supply chains. I have spoken to a number of companies that have told me that it would have been easier for the US to just ban the use of minerals from Congo because the compliance challenges are too high. Thus it was no surprise that last year’s SEC filings were generally vague and uninformative. It remains to be seen whether the filings due in a few weeks will be any better.
To me Dodd-Frank is a convenient way for the US government to outsource human rights enforcement to multinational corporations. Due diligence and clean supply chains are good, necessary, and in my view nonnegotiable, but they are not nearly enough to deal with the horrors in Congo. Nonetheless, in a surprise move, the EU Parliament voted this week to go even farther than the US law. According to the Parliament’s press release:
Parliament voted by 400 votes to 285, with 7 abstentions, to overturn the Commission's proposal as well as the one adopted by the international trade committee and requested mandatory compliance for "all Union importers" sourcing in conflict areas. In addition, "downstream" companies, that is, the 880, 000 potentially affected EU firms that use tin, tungsten, tantalum and gold in manufacturing consumer products, will be obliged to provide information on the steps they take to identify and address risks in their supply chains for the minerals and metals concerned… The regulation applies to all conflict-affected high risk areas in the world, of which the Democratic Republic of Congo and the Great Lakes area are the most obvious example. The draft law defines 'conflict-affected and high-risk areas' as those in a state of armed conflict, with widespread violence, the collapse of civil infrastructure, fragile post-conflict areas and areas of weak or non-existent governance and security, characterised by "widespread and systematic violations of human rights".
(emphasis mine). I hope this proposed law works for the sake of the Congolese and all of those who live in conflict zones around the world. The EU member states have to sign off on it, so who knows what the final law will look like. Some criticize the law because the list of “conflict-affected areas” is constantly changing. Although that’s true, I don’t think that criticism should affect passage of the law. The bigger flaw in my view is that there are a number of natural resources from conflict-affected zones- palm oil comes to mind- that this regulation does not address. This law, like Dodd-Frank does both too much and not enough. In an upcoming book chapter, I propose that governments use procurement and other incentives and penalties related to executive compensation and clawbacks to drive human rights due diligence and third-party audits (sorry, I'm prohibited from posting a link to it but it's forthcoming from Cambridge University Press).
In the meantime, I will wait for the DC Circuit to rule on constitutional aspects of the Dodd-Frank bill. I will also be revising my most recent law review article on the defects of the disclosure regime to address the EU development. I will post the article next week from Havana, Cuba, where I will spend 10 days learning about the Cuban legal system and culture. Given my scholarship and the recent warming of relations between the US and Cuba, I may sneak a little research in as well, and in two weeks I will post my impressions on the challenges and opportunities that US companies will face in the Cuban market once the embargo is lifted. Adios!
May 22, 2015 in Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, International Business, Legislation, Marcia Narine, Securities Regulation, Travel | Permalink | Comments (0)
Although my guest blogging has been focused on white collar rationalizations, I can't help but mention that, just about any way you cut it,* ninety days have passed since former Attorney General Holder asked U.S. Attorneys investigating the financial crisis to report back on whether they could make criminal cases against any individuals. I'm guessing that since we didn't hear any big announcements, there are no indictments sitting on current Attorney General Loretta Lynch's desk. Or maybe the currency trading guilty pleas were the announcement. Of course, those were charges against corporations, not individuals . . . and deals with the regulators have ensured the banks will continue to basically operate as usual . . . and hinky currency trading isn't what caused the financial crisis . . . and the banks involved weren't the biggest players in MBS in the run up to the collapse. You get the point. It looks like Wall Street executives may truly and forever be off the hook for what happened in 2008.
* If AG Holder was speaking generally, three months since his February 17 announcement was last Sunday. If he actually meant a hard ninety days, that elapsed last Monday. If he's a kind boss and has been giving his AUSA's weekends off for the past seven years, there's still hope!
In my first post of this series, I asked whether business leaders had unknowingly provided the legal industry with a long-term solution to declining interest in the legal profession and potential waning influence. I suggested that business leaders may be the driving force that ends up saving the legal profession, and its "respectability". In my second post, I discussed the current state of in-house attorneys. In this post, I would like to look at the current state of private firms as it relates to the in-house attorney discussion. My view is that the competitive marketplace reactions of a growing number of firms are partially contributing to the dimming of their own future prospects. Firms will need to evolve rather quickly; how they can, I’ll discuss in a future post. However, because of the firms’ relatively weaker position compared to corporations, many firms are in very precarious circumstances.
In this interim period between past firm dominance and the future corporate acceptance of Professors Bird and Orozco’s “corporate legal strategy” (in which attorneys are fully accepted and integrated as part of business teams in corporations, resulting in greater legal opportunities), firms are struggling. From my discussions with attorneys, I have learned that many private firms are beginning to intentionally screen out attorneys that even appear to be on a path to in-house corporate life in the future. They feel less inclined to provide expensive training for someone that has (in their perception) little intention of making a career of private practice, especially their private practice. This diminishes the number of opportunities for new lawyers. Firms have a harder time training the new lawyers they have, because much of the basic business work is now taken up by in-house counsel. Corporations, for their part, have exacerbated the lack of work for new associates by using their increased influence and wealth to insist that only the most senior firm attorneys handle their corporate work—perhaps shortsightedly robbing firms of talent continuity that has historically benefitted the corporations in the end. Expensive summer clerkships and recruiting drives have all but disappeared.
Additionally, firms have become focused on hiring attorneys with portable business for the “quick hit” of income and are less concerned about hiring new law graduates. This cannibalization of mature legal talent has always occurred, but it now seems to be a much greater part of firm business plans. It has resulted in some lawyers commoditizing themselves, rather than some of their clients doing so, perhaps further weakening the profession's "respectability". Of course, because the legal industry is currently well staffed, this “horse-trading” approach will work for the present. However, it will eventually be unsustainable—as lawyers retire, there will be fewer talented lawyers to replace them or have the capacity to buy out retiring partners’ percentages. Of those, even fewer still will invite the rigors of private practice if the rewards diminish.
I, for one, am not a complete believer in the “end of Big Law”, or any size "Law", for that matter. (The late Professor Larry Ribstein discussed the subject here--disappointingly, he only briefly touched on the in-house counsel effect, and instead, focused on the firms themselves.) However, I do believe in the necessary evolution of “All Law”—where the legal industry (firm, in-house, and academia) evolves to a point of natural and mutual support which benefits society as a whole (creating greater “respectability” for all lawyers)—and businesses will initially play a dominant role. How will businesses do so? More soon in a post coming your way!
--Marcos Antonio Mendoza
Each summer, I try to read a few books related to work and a few books not related to work.
This summer, I have tagged Tamar Frankel's Trust and Honesty: America's Business Culture at a Crossroad and Flannery O'Connor's Everything That Rises Must Converge.
Open to other reading suggestions in the comments. I have a pretty deep "want to read" list, but am always looking for more additions.
I am also listening to a Yale online course called Philosophy and the Science of Human Nature, taught by Tamar Gendler. I am already more than halfway finished with the course - mostly listening in the car or while doing various chores. While I did not take any Philosophy courses in college, much of the material is more familiar than I would have thought. These open courses have been fun, and I am open to suggestions of other good courses.
Thursday, May 21, 2015
My former research assistant Sam Moultrie and his colleague Andrea Schoch Brooks have authored a short article entitled "Defining a Proper Purpose for Books and Records Actions in Delaware."
The article unpacks two recent Delaware books and records cases: AbbVie and Citigroup. Worthwhile reading for those who wish to stay current on this area of the law.
My last post outlined the criminological and behavioral ethics theories that help explain why corporate executives commit unethical and illegal acts. I’d like to unpack that a bit more by providing some specific rationalizations used by white collar offenders. This list includes the first five rationalizations to be identified by researches (sometimes called the “famous five”), and then supplements three others that are particularly relevant. Not surprisingly, there are disagreements as to exactly how many rationalizations there are and precisely how they operate. But, as one team of researchers put it, what is interesting about rationalization theory is what rationalizations do, “not the flavors they come in.”
Denial of Responsibility. Called the “master account,” the denial of responsibility rationalization occurs when the offender defines her conduct in a way that relieves her of responsibility, thereby mitigating “both social disproval and a personal sense of failure.” Generally, offenders deny responsibility by claiming their behavior is accidental or due to forces outside their control. White collar offenders deny responsibility by pleading ignorance, suggesting they were acting under orders, or contending larger economic conditions caused them to act illegally.
Denial of Injury. This rationalization focuses on the injury or harm caused by the illegal or unethical act. White collar offenders may rationalize their behavior by asserting that no one will really be harmed. If an act’s wrongfulness is partly a function of the harm it causes, an offender can excuse her behavior if no clear harm exists. The classic use of this technique in white collar crime is an embezzler describing her actions as “borrowing” the money—by the offender’s estimation, no one will be hurt because the money will be paid back. Offenders may also employ this rationalization when the victim is insured or the harm is to the public or market as a whole, such as in insider trading or antitrust cases.
Denial of the Victim. Even if a white collar offender accepts responsibility for her conduct and acknowledges that it is harmful, she may insist that the injury was not wrong by denying the victim in order to neutralize the “moral indignation of self and others.” Denying the victim takes two forms. One is when the offender argues that the victim’s actions were inappropriate and therefore he deserved the harm. The second is when the victim is “absent, unknown, or abstract,” which is often the case with property and economic crimes. In this instance, the offender may be able to minimize her internal culpability because there are no visible victims “stimulat[ing] the offender’s conscience.” White collar offenders may use this rationalization in frauds against the government, such as false claims or tax evasion cases, and other crimes in which the true victim is abstract.
Condemning the Condemners. White collar offenders may also rationalize their behavior by shifting attention away from their conduct on to the motives of other persons or groups, such as regulators, prosecutors, and government agencies. By doing so, the offender “has changed the subject of the conversation”; by attacking others, “the wrongfulness of [her] own behavior is more easily repressed.” This rationalization takes many forms in white collar cases: the offender calls her critics hypocrites, argues they are compelled by personal spite, or asserts they are motivated by political gain. The claim of selective enforcement or prosecution is particularly prominent in this rationalization. In addition, white collar offenders may point to a biased regulatory system or an anticapitalist government.
Appeal to Higher Loyalties. The appeal to higher loyalties rationalization occurs when an individual sacrifices the normative demands of society for that of a smaller group to which the offender belongs. The offender does not necessarily reject the norms she is violating; rather, she sees other norms that are aligned with her group as more compelling. In the white collar context, the group could be familial, professional, or organizational. Offenders rationalizing their behavior as necessary to provide for their families, protect a boss or employee, shore up a failing business, or maximize shareholder value are employing this technique. Notably, female white collar offenders have been found to appeal to higher family loyalties more than their male counterparts.
Metaphor of the Ledger. White collar offenders may accept responsibility for their conduct and acknowledge the harm it caused, yet still rationalize their behavior by comparing it to all previous good behaviors. By creating a “behavior balance sheet,” the offender sees her current negative actions as heavily outweighed by a lifetime of good deeds, both personal and professional, which minimizes moral guilt. It seems likely that white collar offenders employ this technique, or at least have it available to them, as evidenced by current sentencing practices—almost every white collar sentencing is preceded by a flood of letters to the court supportive of the defendant and attesting to her good deeds.
Claim of Entitlement. Under the claim of entitlement rationalization, offenders justify their conduct on the grounds they deserve the fruits of their illegal behavior. This rationalization is particularly common in employee theft and embezzlement cases, but is also seen in public corruption cases.
Claim of Relative Acceptability/Normality. The final white collar rationalization entails an offender justifying her conduct by comparing it to the conduct of others. If “others are worse” or “everybody else is doing it,” the offender, although acknowledging her conduct, is able to minimize the attached moral stigma and view her behavior as aligned with acceptable norms. In white collar cases, this rationalization is often used by tax violators and in real estate and accounting frauds.
I’ve identified the use of these rationalizations by white collar offenders such as Rajat Gupta, Peter Madoff, Allen Stanford, and others. But I’d be interested to hear from readers where they’ve seen “vocabularies of motive” in the white collar world. (If you’re not sure, try starting with Bloomberg's oral history of Drexel Burnham Lambert, in what has to be the largest collection of rationalizations ever assembled.)
Business and Human Rights Junior Scholars Conference
Wednesday, May 20, 2015
Some of you may recall that I blogged last summer about a SEALS (Southeastern Association of Law Schools) discussion group on "publicness." That post can be found here. My contribution to the discussion group was part of a paper that then was a work-in-process for the University of Cincinnati Law Review that I earlier had blogged about here.
That paper now has been released in electronic and hard-copy format. I just uploaded the final version to SSRN. The abstract for the paper reads as follows:
Conceptions of publicness and privateness have been central to U.S. federal securities regulation since its inception. The regulatory boundary between public offerings and private placement transactions is a basic building block among the varied legal aspects of corporate finance. Along the same lines, the distinction between public companies and private companies is fundamental to U.S. federal securities regulation.
The CROWDFUND Act, Title III of the JOBS Act, adds a new exemption from registration to the the Securities Act of 1933. In the process, the CROWDFUND Act also creates a new type of financial intermediary regulated under the Securities Exchange Act of 1934 and amends the 1934 Act in other ways. Important among these additional changes is a provision exempting holders of securities sold in crowdfunded offerings from the calculation of shareholders that requires securities issuers to become reporting companies under the 1934 Act.
This article attempts to shed more light on the way in which the CROWDFUND Act, as yet unimplemented (due to a delay in necessary SEC rulemaking), interacts with public offering status under the 1933 Act and public company status under the 1934 Act. Using the analytical framework offered by Don Langevoort and Bob Thompson, along with insights provided in Hillary Sale’s work, the article briefly explores how the CROWDFUND Act impacts and is impacted by the public/private divide in U.S. securities regulation. The article also offers related broad-based observations about U.S. securities regulation at the public/private divide.
I hope that you are motivated to read the article--and that you get something out of it if you do read it. The thinking involved in creating the article was often challenging (even if the expressed ideas may not reflect or meet that challenge). Yet, writing the article, in light of the super work already done by Don Langevoort, Bob Thompson, and Hillary Sale, was joyful and illuminating for me in many ways.
I often say that I stand on the shoulders of giants in my teaching and scholarship. That was transparently true in this case. If only all academic research and writing could be so rewarding.
The centerpiece of the Florange Law is a mandate that French companies give two votes to any share held for longer than two years. This goes against the historical one-vote-for-every-share system that most countries have. The law allows an opt-out if two-thirds of shareholders approve one by March 31, 2016.
ISS issued a guide (Download Impact-of-florange-act-france) opposing the law and encouraging investors to pressure directors to opt out of the law (through amendments to corporate bylaws) before the deadline.
Professor Davidoff Solomon questions the strength of the one-share-one-vote corporate democracy in the U.S., noting that recent IPOs, like Facebook, went public with two classes of stock as a anti-takeover measure. There is also the related question of what impact a law like this would have given the turnover rates of many institutional investors.
From the industrious editors at Chapman Law Review soliciting papers for their 2016 Symposium on Cybesecurity:
Cybersecurity has become a critical national security and corporate security problem in the last fifteen years. Examples include hackings of the Pentagon, SONY, Target, JPMorgan Chase, Home Depot, various universities, and hospitals. A lively debate is now raging in Congress, academia, and in the corporate world over what steps should be taken. Attorneys are at the forefront of the problem in advising clients and securing confidential information. What duties do attorneys and corporations have to prevent a cyberattack? What duties do attorneys and corporations owe to their clientele? What actions should attorneys and corporations take to mitigate a cyberattack once it occurs? What measures can businesses take to respond in the future? What steps should the U.S. Government take to protect its public and private entities? How can the U.S. Government respond to attacks on private entities? What domestic law governs cyberattacks and their responses?
The Chapman Law Review will explore these and other questions at our next symposium on January 29, 2016, to be held at the Dale E. Fowler School of Law at Chapman University. We invite interested scholars and practitioners to submit abstracts for papers to present at the symposium on the topic of cybersecurity, focusing on cyberattacks, corporate hackings, available government responses, and attorneys’ corresponding ethical duties.
We are looking for papers between 10,000 and 15,000 words. If you would like to apply to participate in the Symposium, please submit an abstract of no more than 500 words by June 22, 2015. The deadline for the completed paper will likely be in October 2015. Selected papers will be published in a special issue of the Chapman Law Review in approximately April 2016, and the authors will participate in the 2016 Chapman Law Review Symposium on Friday, January 29, 2016.
If you have questions about the Symposium, please contact Alexa Stephenson, Senior Symposium Editor, at email@example.com.
Tuesday, May 19, 2015
Vice Chancellor Laster recently issued an opinion in In re Carlisle Etcetera, LLC (available here), that has the potential to encourage (or at least fail to punish) sloppy practices and unnecessarily expands equitable standing for judicial dissolution. In doing so, the case increases litigation risk for LLCs.
The case involves an LLC made up of two member parties that formed Carlisle Etcetera, LLC. (Carlisle): WU Parent and Tom James Co. (James). The LLC agreement called for a manager-managed board, that would serve as sole manager. WU Parent appointed two board designees, as did James. Board decisions required "unanimous approval." At some point, for tax reasons, WU Parent assigned its membership interest to WU Sub. Thereafter, Carlisle identified WU Sub as a 50% member interest in tax filings and the LLC's accountants referred to WU Sub as "an equal member" of the LLC. The parties discussed an updated LLC agreement that would have made clear that an initial member of the LLC could transfer ownership to a wholly owned affiliate that would retain membership status, though that agreement was never finalized.
[Please click below to read more.]
In my last post, I asked whether business leaders had unknowingly provided the legal industry with a long-term solution to declining interest in the legal profession (based on the drop in applications to law school) and potential waning influence. I suggested that business leaders (inadvertently or otherwise) may be the driving force that ends up saving the legal profession. I would like to take the discussion one step further.
There is no doubt in my mind that, historically, companies rarely did much legal training for the lawyers they hired. They simply bought talent—usually by offering employment to attorneys with private practice experience that was valuable to the corporation. Sometimes this worked extremely well, and sometimes it failed miserably. Why? Business leaders sometimes possess only basic knowledge of what quality legal talent really looks like (after all, they usually are not lawyers themselves). Moreover, they often have difficulty finding a lawyer who can operate in a corporate environment and have high-level legal skills. The “a lawyer is a lawyer” mentality still prevails.
Adding to the difficult situation is that private firm attorneys often view corporate attorneys as those who could not flourish in private practice (for whatever reason—lack of skill, drive, ability, focus, etc.), and they consequently may be perceived at times by their own companies as somewhat suspect (“If they were really good attorneys, wouldn’t they be practicing with a firm?”). It becomes a Kobayashi Maru-type of character test for such in-house attorneys—virtually, a no-win situation. They are hired to help, but at times not fully trusted to do so because they are on staff. Professional respect, and compensation, for in-house attorneys lags behind that for lawyers in private firms.
Corporations are struggling with the concept of attorneys as part of entrepreneurial teams. Few companies hire law students directly out of law school for the very same reasons that firms are currently limiting their new-hires—lack of return on their dollar. Lawyers take 5-15 years to build the experience necessary to obtain the “gravitas” needed for a high level of trust, depending on the field. Many lawyers never achieve this status; they are simply caught in an eddy of repeating activity. (Perhaps this issue is worthy of a separate post!)
At this juncture, the in-house path remains precarious, and pursued at one’s peril. At most companies, there is no specified legal track, unlike the well-worn management paths. Many corporate legal positions are much lower paying than firm jobs, and often of the “J.D. preferred” type of position—helpful to be a lawyer, but not necessary. Graduating law students usually do not choose this corporate path—it is chosen for them, as they graduate from lower tier law schools, have less than stellar grades, or perhaps due to personal obligations involving location or family. Perhaps such students never had a great desire to be lawyers, drifting into professional school through lack of other opportunities. Additionally, inside companies, non-lawyers often feel that their in-house attorneys are a form of threat, and sometimes attempt to undermine them.* Advanced education continues to be viewed, probably irrationally, with some suspicion in the business environment. Perhaps because the lawyers presently in-house have offered little to benefit the business operations, or because they are just not well understood.
These attitudes appear to be changing. As the legal environment continues evolve, students may actually enter law school for the specific purpose of being in-house counsel, perhaps even having a specific company or industry in mind prior to taking their first class. Law schools are well advised to shift their focus to accommodate this new reality. Law schools that play the game well will again become a dominant option for bright college students. What does this future look like? That will be the subject of my next post. More soon!
--Marcos Antonio Mendoza
*Interestingly, I have never heard a single MBA joke (has anyone?), but frequently hear lawyer jokes. However, many millennials report to me that lawyer jokes are no longer de rigueur around them—in other words, people feel sorry for them and the challenges they face!
Monday, May 18, 2015
You may recall my blog post this fall about the Delaware Chancery Court opinion in In Re Nine Systems Corporation Shareholders Litigation. That case discusses what happens when a self-dealing transaction results in a fair price, thus causing no damage to the corporation, but the process followed was fair. The court held that the plaintiff could still recover attorneys' fees and costs. I noted that the only people likely to be satisfied with that result were plaintiffs' attorneys. (It makes no difference to the plaintiffs in the case because they had a contingent fee agreement with their attorneys-no recovery, no attorneys' fees to be paid.)
The Chancery Court just entered its order awarding plaintiffs' counsel, Jones Day, $2 million dollars in attorneys' fees and expenses. That's right, the attorneys get $2 million even though, as the Vice Chancellor notes, "the quantifiable benefit obtained in this litigation was $0." Thus, the defendants have to pay $2 million to counsel for helping the court determine that nothing they did harmed the corporation or its shareholders.
It could have been worse; plaintiffs' counsel asked for $11 million.
I'm afraid that this opinion will give plaintiffs' attorneys an incentive to search for problems with the process in conflict-of-interest cases just so they can get in on the Nine-Systems action and collect attorneys' fees. No harm to the corporation? No problem!
Sunday, May 17, 2015
"'The Wealth of Nations,' is not fully intelligible without ... first reading ... 'The Theory of Moral Sentiments.'” http://t.co/iwoSM3JtVN— Stefan Padfield (@ProfPadfield) May 10, 2015
"Should Business Appraisers Rely on Case Precedent for [lack of marketability] Discounts?" http://t.co/Pb9jKd6ZxD— Stefan Padfield (@ProfPadfield) May 13, 2015
"The Great Global Financial Crises: official investigations, past and present, 1929-2011" http://t.co/7Bp1ZoHHrw— Stefan Padfield (@ProfPadfield) May 16, 2015
Saturday, May 16, 2015
So the big securities news this week was the “hoax” bid to buy Avon Products.
Apparently, a hoaxster filed a fake offer to take over Avon Products with EDGAR, the SEC’s online database.
The filing caused a brief spike in the price of Avon shares. (As of the drafting of this blog post, Avon shares were still trading slightly higher than they were before the offer was filed). The details of the filing are as yet unknown, but presumably, whoever filed the release profited off the spike.
DealBook points out that this kind of incident may prompt the SEC to conduct some kind of preliminary vetting of filings with EDGAR, but one of the more interesting questions – as Matt Levine argues – concerns the definition of “materiality” for securities laws purposes. Ordinarily, false statements (such as a false representation concerning a takeover bid) are only prohibited to the extent they are “material” to a “reasonable” investors. Most human investors would likely have recognized the dubiousness of the offer (it named a law firm that doesn’t exist, and misspelled the name of the offeror); computerized traders, however, did not. (And perhaps humans then followed on, seeking to capitalize on the chaos caused by computers.) Indeed, a previous spike occurred when Tesla filed an April Fool’s Day press release announcing the release of a (fictional) new product.
Margaret Sachs has previously recognized that courts tend to vary their notion of the “reasonable investor” given the context in which a fraud occurs. Courts tend to assume a very high degree of sophistication for fraud on the market claims concerning widely-traded securities, but when it comes to Ponzi schemes and other frauds aimed at vulnerable populations, courts lower the bar.
Which of course raises the question whether we need a whole new definition of materiality aimed at the computers who do the majority of today’s trading. Tom C.W. Lin has recently published an article on precisely this topic, arguing, among other things, that computerized trading and algorithmic investors should be considered as a type of reasonable investor at whom regulations are aimed.
Friday, May 15, 2015
Low pay, however, is only one of many problems facing low-wage earners.
After hearing Charlotte Alexander (Georgia State) present on this co-authored paper - Stabilizing Low-Wage Work: Legal Remedies for Unpredictable Work Hours and Income Instability – I have become convinced that unpredictable work hours is a significant issue. The article is well worth reading.
Unpredictable work hours can be problematic for many people – attorneys in BigLaw for example – but low-wage earners do not have disposable income to throw at the problem. Childcare and transportation, for example, become even more of a challenge when work hours are not stable and not set in advance. Unpredictable, inconsistent work hours also hamper economic mobility by making it difficult or impossible to take classes or get a second job.
For more on this issue, listen to MIT Operations Management Professor Zeynep Ton’s talk at the Aspen Institute. Her discussion of Mercadona, a low-cost supermarket based in Spain (discussion starts at 14:50), and QuickTrip, a convenience store with gas stations (discussion starts at 17:30) was quite interesting. Corporate social responsibility often seems dominated by high-end companies like Patagonia and Whole Foods. It is easier to be socially responsible when you are charging $700 for a jacket or 39% more on certain food items (according to one study in Boston). Mercadona, however, offers some of the lowest prices in Spain. Mercadona employees receive their schedules one month in advance and have stable schedules. Mercadona also pays almost double the minimum wage (plus a bonus). As a result, Mercadona’s turnover is an extremely low 3.4%. Likewise, QuickTrip seems to compete well on price, but also appears to take relatively good care of its employees.
Individual firms could and should address this issue of unpredictable work hours voluntarily, but the market may prove ineffective in this area and legislative action may be needed.
Thursday, May 14, 2015
Last week, I looked lovingly at a picture of a Starbucks old-fashioned grilled cheese sandwich. It had 580 calories. I thought about getting the sandwich and then reconsidered and made another more “virtuous” choice. These calorie disclosures, while annoying, are effective for people like me. I see the disclosure, make a choice (sometimes the “wrong” one), and move on.
Regular readers of this blog know that I spend a lot of time thinking about human rights from a corporate governance perspective. I thought about that uneaten sandwich as I consulted with a client last week about the California Transparency in Supply Chains Act. The law went into effect in 2012 and requires retailers, sellers, and manufacturers that exceed $100 million in global revenue that do business in California to publicly disclose the degree to which they verify, audit, and certify their direct suppliers as it relates to human trafficking and slavery. Companies must also disclose whether or not they maintain internal accountability standards, and provide training on the issue in their direct supply chains. The disclosure must appear prominently on a company’s website, but apparently many companies, undeterred by the threat of injunctive action by the state Attorney General, have failed to comply. In April, the California Department of Justice sent letters to a number of companies stating in part:
If your company has posted the required disclosures on its Internet website or, alternatively, takes the position that it is not required to comply with the Act, we request that – within 30 days of this letter’s date – you complete the form accessible at http://oag.ca.gov/sb657 and provide this office with (1) the web links (URLs) to both your company’s Transparency in Supply Chains Act disclosures and its homepage containing a link to the disclosures; and/or (2) information demonstrating your company is not covered by the Act.
There are no financial penalties for noncompliance. Rather, companies can face reputational damage and/or an order from the Attorney General to post something on their websites. A company complies even if that disclosure states that the company does no training, auditing, certification, monitoring or anything else related to human trafficking or slavery. The client I spoke to last week is very specialized and all of its customers are other businesses. Based on their business profiles, those “consumers” are not likely to make purchasing decisions based on human rights due diligence. I will be talking to another client in a few weeks on the California law. That client is business to consumer but its consumers specifically focus on low cost—that’s the competitive advantage for that client. Neither company-- the B2B nor the B2 (cost conscious)C-- is likely to lose significant, if any business merely because they don’t do extensive due diligence on their supply chains. Similarly, Apple, which has done a great job on due diligence for the conflict minerals law will not set records with the sale of the Apple Watch because of its human rights record. I bet that if I walked into an Apple Store and asked how many had seen or heard of Apple’s state of the art conflict minerals disclosure, the answer would be less than 1% (and that would be high).
People buy products because they want them. The majority of people won’t bother to look for what’s in or behind the product, although that information is readily available through apps or websites. If that information stares the consumer in the face (thanks Starbucks), then the consumer may make a different choice. But that assumes that (1) the consumer cares and (2) there is an equally viable choice.
To be clear, I believe that companies must know what happens with their suppliers, and that there is no excuse for using trafficked or forced labor. But I don’t know that the use of disclosures is the way to go. Some boards will engage in the cost benefit analysis of reputational damage and likelihood of enforcement vs cost of compliance rather than having a conversation about what kind of company they want to be. Many board members will logically ask themselves, “should we care if our customers don’t care?”
My most recent law review article covers this topic in detail. I’ll post it in the next couple of weeks because I need to revise it to cover the April development on the California law, and the EU’s vote on May 19 on their own version of the conflict minerals law. In the meantime, ignorance is bliss. I’m staying out of Starbucks and any other restaurant that posts calories- at least during the stressful time of grading exams.
May 14, 2015 in Corporate Finance, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, International Business, Law Reviews, Marcia Narine, Securities Regulation | Permalink | Comments (3)
My post from last week posed the question of why corporate executives do what they do. Why do they commit unethical and illegal acts? If you ask almost anyone this, the answer comes back the same: corporate executives are greedy. That’s why they lie, cheat, and steal. Follow that up with the question of what should be done about it, and most people say that more law and more prison time is the solution.
I’ve never bought into that thinking (as to the cause or the fix). Sure, some of us are greedy. And some small percentage of us are looking to break the law to advance our own interests at every opportunity. But I’ve seen too many good people do bad things, and vice versa, to think that the cause of illegal corporate behavior (or almost any behavior) is somehow an inherently binary condition—good or bad, right or wrong, greedy or selfless. The reality is that many of us are both good and bad at the same time. But how does that actually work? How can someone like Rajat Gupta, the former managing director of Goldman Sachs, spend his time chairing three international humanitarian organizations and positively impacting “humanity writ large” (can you say that?), while also passing boardroom secrets to his billionaire hedge fund pal, Raj Rajaratnam?
Criminological and behavioral ethics theories help explain this duality. In the 1960’s, a criminologist named Donald Cressey conducted a study of hundreds of convicted embezzlers. Cressey determined that three key elements are necessary for violations of trust—the essence of almost all white-collar crime—to occur: (1) an individual possesses a “nonshareable problem,” i.e., a problem the individual feels cannot be solved by revealing it to others; (2) the individual believes the problem can be solved in secret by violating a trust, which is usually tied to their employment; and (3) the individual “verbalizes” the relationship between the nonshareable problem and the illegal solution in “language that lets him look on trust violation as something other than trust violation.” Put another way, the individual uses words and phrases during an internal dialogue that makes the behavior acceptable in his mind, such as by telling himself he is “borrowing” the embezzled money and will pay it back. Cressey believed that these verbalizations—what we commonly call rationalizations—were “the crux of the problem” of white collar crime, because they allowed an offender to keep his perception of himself as an honest citizen intact while acting in a criminal manner. This, in essence, is the psychological mechanism that allows good people to do bad things.
Importantly, Cressey (and others after him) found that rationalizations were not simply after-the-fact excuses offenders used to lessen their culpability upon being caught. Instead, rationalizations were “vocabularies of motive,” words and phrases that existed as group definitions labeling deviant behavior as appropriate, rather than excuses invented by the offender “on the spur of the moment.” In other words, offender rationalizations are drawn from larger society and put into use prior to the commission of criminal acts. This insight—that offenders rationalize their unethical or criminal conduct before they act, which then allows their conduct to proceed—is considered a key insight into white collar criminal behavior and has greatly influenced criminologists and behavioral ethicists alike.
In the next post, I will set out some of the most common rationalizations used by white collar offenders. And we’ll see that these rationalizations are present in many, if not most, of today’s headline-grabbing cases of corporate wrongdoing.