Thursday, July 24, 2014
As I explore the future of Berkshire Hathaway in my forthcoming book Berkshire Beyond Buffett: The Enduring Value of Values, one topic I address for Berkshire post Buffett is whether the company should remain public or be taken private.
After all, once Bufffett is gone, you might expect activist shareholders to urge liberalizing its dividend policy (hasn't paid a dividend in fifty years), divest weaker subsidiaries (it has never sold a subsidiary in forty years), and break-up the diverse conglomerate (engages in hundreds of different lines of business).
Venture entrepreneurs and seasoned executives alike often weigh the pros and cons of a U.S. company being privately held or publicly listed. That goes for start-ups trying to decide to make an initial public offering as it does for listed companies trying to decide whether to go private.
Everyone considers the transaction costs of such a switch high because IPOs and going private transactions are complicated, requiring paying accountants, appraisers, lawyers and other professionals. They are also time-consuming.
So setting aside transaction costs, let’s highlight the usual pros and cons, to do an IPO or stay public:
● access to capital
● liquidity for shareholders
● a currency (stock) to pay managers or make acquisitions
● cache from the sign of business maturity or stature
● the public arena invites the threat of hostile takeovers via proxy battles or tender offers
● rigid governance requirements, especially board size, independence and oversight
● Wall Street analyst attention that drives focus on short-term results, not long-term prosperity
● required disclosure, posing direct administrative costs and potential indirect costs as to competitive matters
● exposure to securities lawsuits by disgruntled stockholders
Although disclosure may be a “con” to a company, from a social perspective, watchdogs value the transparency, especially as to matters of stewardship and corporate social responsibility of larger institutions.
Assuming such a list is roughly complete, how should you evaluate the situation for Berkshire Hathaway? Stipulate that it had good reasons for public company status in its early days, the 1970s and 1980s, even the 1990s. Is it still worth it today?
As to the usual advantages of being a U.S. public company, most are inapplicable to Berkshire or less valuable compared to other public companies:
● Berkshire is a net supplier of capital, generating oceans of it from 60+ insurance and non-insurance operations and investments in marketable securities
● if Berkshire needed or desired external capital, its decentralized structure would pinpoint the particular subsidiary of interest which could directly offer public debt to supply it, as its Mid-American Energy subsidiary does
● Berkshire shareholders, as a group and by self-selection, are long-term holders, the company boasting below-average share turnover, reducing the value of liquidity for existing holders and remitting the typical market liquidity value to aspiring shareholders
● Berkshire never uses its stock to compensate anyone
● Berkshire rarely uses its stock in acquisitions, strongly preferring cash to the associated dilutive effects, and limiting use to a component of consideration paid in very large acquisitions where it is valued such as for tax advantages (the $44 billion acquisition of BNSF rail is a good example)
● Berkshire does not need any cache from a public market listing (though it may have valued slightly being added to the S&P 500 in 2010 to replace BNSF after acquiring it)
As for cons, the threat of a hostile takeover effort at Berkshire is remote, either so long as Buffett (or The Gates Foundation succeeding him) remain controlling shareholder(s) or a concentrated group of Buffett-Berkshire traditionalists command majority voting power. (Built-in deterrence includes Berkshire’s ownership of large regulated subsidiaries in the fields of energy, insurance and rail.)
But other cons are more acute in Berkshire’s case than at most companies:
● part of its historic success is due to a board in place for several decades, a small, close-knit group of insiders, family members and friends, a structure made illegal by the Sarbanes-Oxley Act of 2002 which imposed rigid governance requirements on public company boards
●one of Berkshire’s most valuable traits is its long-term horizon (50 years by mandate of corporate headquarters), accepting quarterly and annual earnings swings that competitors avoid at the expense of long term value
Finally, even the watchdogs don’t get the usual payoff in disclosure quality, because so much of what happens at any subsidiary (even if highly material to any given one) is simply immaterial in the Berkshire context.
Among pros of a public listing that are peculiar to Berkshire: hundreds of thousands of shareholders available to attend Berkshire’s famous annual meeting, which would be reduced to fewer than 300 after a going private transaction.
But if such are the only reasons for a magnificent company such as Berkshire to stay public—stock for the occasional deal and a flock of holders—one moral is the need to reexamine our faith in rigid governance requirements and our allergies to earnings volatility.
Wednesday, July 23, 2014
As someone who teaches and researches both business law and energy law, I often focus on the overlap of the two areas, which I find to be significant. One of my most recent projects has been to write a new casebook, Energy Law: A Context and Practice Casebook, which will be available for courses taught this fall. I wrote a detailed description of the book in a guest post at the Energy Law Professor blog, but here I wanted to highlight the business aspects of the book.
The second chapter of my book is titled The Business of Energy Law. That chapter begins with some key vocabulary, and I then provide students with a client issue to frame the reading for the chapter. The issue:
Your firm has just taken on a new client who is a large shareholder in many companies. She is particularly concerned about her holdings in Energex, Inc., a publicly traded energy company. Energex was founded in 1977 by a oil and gas man from Louisiana who is still the CEO and a member of the board of directors. The client is concerned that the CEO is taking opportunities for himself that she thinks belong to Energex. As you read the following sections, consider: (1) What are the potential conflicts of interest the CEO might have? (2) Is it a conflict of interest if the activity is permitted under the CEO’s employment contract? (3) What kind of documents might be publicly available for review and where would you find them? (4) If it goes to litigation, what other information might you seek? From whom?
The first part of the chapter covers Business Organizations and Employment Law as Energy Law, including derivative suit and executive compensation contracts. The chapter also has the following sections: Antitrust as Energy Law, Mergers and Acquisitions, and Entity Structure and Fiduciary Duties.
Over the years, as I have taught my Energy Law Survey course and Business Organizations (as I do again this fall), I found that I can help make sense of things for students in each class when I borrow examples from the other class. My book helps make the connection concrete, and I hope it will help students understand more of the "why "to go along with the "what." As I often tell (preach to?) students, understanding business organizations is critical to all aspects of practice, regadless of where you intend to focus, whether it's energy law, environmental law, criminal law, or even family law.
This fall should be fun. For me, at least.
Steven Davidoff Solomon, a professor of law at the University of California, Berkeley, has an interesting article on antitrust in the DealBook today: Changing Old Antitrust Thinking for a New Gilded Age. Professor Solomon argues that a new wave of mergers in the tech and telecommunications industries mirror the consolidation wave of the Gilded Age a century ago which lead to our current antitrust laws. These mergers leave competition in tact, albeit among a few huge companies, and therefore facially meet the competition requirements under antitrust law. He argues that "[t]his calculus, however, excludes the political and other power that a concentrated industry can wield with government and regulators." Citing to industry-based nonprofits and the ability to participate in political spending in a post-Citizens United world, professor Solomon concludes that antitrust may become a question of power, not just competition.
"[R]ight now there is simply no real government ability to review the industry consolidation that is occurring today in which industries become dominated by a handful of major players. Yet it is becoming increasingly apparent that size and industry concentration affect American society even if competition still exists."
I think that this is an interesting lens through which to view, and teach, current market trends in mergers and acquisitions and related questions of antitrust law.
Tuesday, July 22, 2014
You may think of Warren Buffett as a savvy stock picker but his greater accomplishment is in configuring an exceptionally strong corporation that defies widespread conceptions of effective corproate governance.
Since early in his career, Buffett adopted what he calls the double-barreled approach to capital allocation, meaning both stock picking and business buying. He gained prominence primarily as an investor in stocks, championing a contrarian investment philosophy.
Attracting three generations of devoted followers to a school of thought called “value investing,” he doubted the market’s efficiency and deftly exploited it. Buffett bought stocks of good companies at a fair price, assembling a concentrated portfolio of large stakes in a small number of firms. Today, nearly three-fourths of Berkshire’s stock portfolio consists of just seven stocks.
But late in his career, beginning around 2000, Buffett shot more often through the other half of his double-barreled approach: buying 100 percent of companies run by trusted managers given great autonomy. True, Berkshire early on bought all the stock of companies such as Buffalo News and See’s Candies. But, through the 1990s, the first barrel dominated, with Berkshire consisting 80 percent of stocks and 20 percent owned companies. That mix gradually reversed and recently flipped, making subsidiary ownership the defining characteristic of today’s Berkshire.
Owning primarily subsidiaries rather than merely stocks gives Berkshire a different shape compared to its previous character as the holding company of a famed investor. After all, even for a buy-and-hold investor, stocks come and go. Berkshire has sold the stocks of many once-fine companies, including Freddie Mac, McDonald’s, and The Walt Disney Company.
In contrast, aside from a few Berkshire subsidiaries that it acquired from the Buffett Partnership in the 1970s, Berkshire has never sold a subsidiary and vows to retain them through thick and thin. Despite their variety, moreover, Berkshire companies are remarkably similar when it comes to corporate culture, which is the central discovery I document and elaborate in my upcoming book, Berkshire Beyond Buffett: The Enduring Value of Values.
When Berkshire consisted mostly of the stock portfolio of a famed stock picker, you could expect that, once that investor departed, the portfolio would naturally be unwound and the company dissolved. Now, however, with Berkshire made of companies not stocks, its life expectancy stretches out in multiple decades, not mere years. It certainly goes beyond the stock picker who founded it. That's not an accident either, as the dominant cultural motif at Berkshire and its subsidiaries is a sense of permanence--the longest possible time horizon imaginable.
Monday, July 21, 2014
As I promised on Friday, I am posting a question and answer segment with Larry Cunningham, author of the forthcoming book: Berkshire Beyond Buffett: The Enduring Value of Values. Larry will be guest blogging with us this week to talk more about the interesting findings he shares in the book and their implications for business and the research, teaching, and practice of business law.
Q: Why did you write this book and what did you find?
A: Widespread praise for Warren Buffett has become paradoxical: Buffett set out to build a permanent institution at Berkshire Hathaway and yet even great admirers, such as Steven Davidoff, doubt that the company can survive without him. I found that viewpoint intriguing since companies who are identified with iconic founders often have trouble after a succession, as Tom Lin has written. I wanted to investigate how the situation will look for Berkshire after Buffett leaves the scene, collapse and breakup or prosperity coupled with continued expansion? What I found was a culture so distinctive and strong, that the company’s future is bright well beyond Buffett.
Q: How did you reach that conclusion? What was your research method?
A: I focused on Berkshire’s fifty operating subsidiaries, which define the company today, representing 80 percent of its value. Incidentally, that is a flip from decades passed, when 80 percent of Berkshire’s value resided in minority stock investments. I began with Buffett’s historical statements about those subsidiaries and Berkshire’s corporate culture, research that in some ways dates to the 1997 Cardozo Law Review symposium I hosted on Buffett’s shareholder letters, which developed into my book, The Essays of Warren Buffett: Lessons for Corporate America. Still, for this project, focusing on the subsidiaries, I gathered and studied specific information about each—biographies, autobiographies, research reports, encyclopedic entries, press releases, public filings. Then, with Buffett’s permission, I surveyed all current Berkshire subsidiary chief executives and interviewed many, along with former managers and large shareholders of subsidiaries. In addition, I surveyed a large number of Berkshire shareholders to gain additional insight and to make sure I was asking the right questions.
Q: What culture did you find, what common traits do the subsidiaries share?
A: That’s the striking discovery. As I profiled each subsidiary, a pattern emerged in which the same traits began to appear repeatedly, nine altogether, including budget-consciousness, earnestness, kinship, entrepreneurship, autonomy, and a sense of permanence. Not every subsidiary had all nine, but many did, and the vast majority manifested at least five or six of the nine. A portrait of Berkshire culture crystalized, one that is distinctive and durable. And that culture, I argue in the book, will allow the company to thrive even after Buffett’s departure.
The discovery is suggested by the book’s subtitle: The Enduring Value of Values. “Value of values” refers to how the traits that bind Berkshire’s subsidiaries all share a common feature: all are intangible virtues that managers transform into economic gain. The most general manifestation of the “value of values” occurs in business acquisitions when the exchange of economic values measured using traditional standards leaves a wide gap—a price higher or lower than economic value.
A salient example from Berkshire’s history concerns Bill Child, patriarch of his family home furnishings company, RC Willey. He sold the company to Berkshire for $175 million, declining rival offers as high as $200 million. Why? Because his family valued the managerial autonomy and sense of permanence that define Berkshire culture.
The book contains more than one hundred examples of myriad ways that Berkshire subsidiaries translate intangible qualities into economic value, whether in research & development, customer service, employee compensation and benefits, corporate finance, or internal policies and practices.
Q: What makes the value of values enduring?
A: By reaping returns on capital from intangible virtues, Berkshire practices a philosophy of capitalism that does well by doing good, is sensitive but unsentimental, lofty yet pragmatic, and public-spirited but profitable. This attitude is neither altruistic nor moralistic, but practical, economic, and long-term. It’s a way of doing business that matches today’s zeitgeist, with its sense of stewardship and fair play, and also has a timeless horizon, as business leaders from Robert Mondavi to John Mackey of Whole Foods champion variations on these themes.
Q: What is the audience for the book?
A: Everyone involved in shaping American business: managers, entrepreneurs, owners, shareholders, directors, policymakers, scholars of corporate stewardship—and business lawyers and business law professors, of course. It’s a broad audience because Berkshire’s approach is distinctive but not inimitable and valuable yet underappreciated.
Q: What surprises did you find?
A: Many, mostly concerning the various subsidiaries, but several rising to the level of Buffett and Berkshire. As a recent headline in USA Today put it, “New Book Rewrites Buffett Legacy in Three Ways.” The book explains why Buffett’s place in American history is even more significant than currently assumed. Besides being a “legendary investor,” as he is often identified by journalists, Buffett has built a formidable corporation, demonstrated unsung managerial prowess, and chartered a course for American capitalism that widens the meaning of “value investing.”
While everyone knows that Buffett owes a lot to Ben Graham, his investments teacher at Columbia Business School, this book also makes clear his debt on the management side to Tom Murphy, the legendary corporate icon and head of ABC who is now a Berkshire director. When I asked Buffett who should write the foreword to this book, he instantly suggested Tom, and I’m grateful that Tom accepted the invitation—his foreword alone is worth the price of the book!
Q: Care to give us a thumbnail sketch of the book’s outline?
A: Sure. The opening chapters cover Berkshire’s origins and foundations, with surprises even for those most familiar with this terrain, including rich connections between Berkshire’s early acquisitions and the conglomerate today. While Berkshire appears vast, diverse, and sprawling, this synthesis of corporate culture shows instead a close-knit organization linked by discrete values.
The middle chapters, the heart of the book, take a series of deep dives into fifty Berkshire subsidiaries to illuminate each of the traits and how they give Berkshire its identity and destiny. I was delighted that, when circulating the manuscript for comment among Berkshire devotees, even the most avid readers found new facts, fresh insights, and a whole new way of thinking not only about Berkshire but about Buffett.
The closing chapters reflect on what Berkshire’s corporate culture means for Buffett’s legacy. They explore the elaborate succession plan at Berkshire, which most people misunderstand, and identify challenges Berkshire will face. I also draw specific lessons for investors, managers, and entrepreneurs who can benefit from Berkshire’s distinctive approach—lessons that business lawyers and policymakers will want to learn as well.
Q: Can Berkshire Beyond Buffett be assigned for any university classes?
A: Yes, and I think it will be a good companion to The Essays of Warren Buffett, which has been adopted at many law and business schools for courses on corporate governance, investments (portfolio management), and mergers & acquisitions. This book would suit those courses as well as courses in business ethics and corporate social responsibility. I am planning a seminar next spring in which these two books will be on the reading list, along with other contemporary books offering fresh examinations of venerable themes, such as Eric Orts’ Business Persons; Lynn Stout’s Shareholder Value Myth; or Curtis Milhaupt & Katharine Pistor’s Law & Capitalism.
Q: Berkshire Beyond Buffett appears to be full of lessons and important principles. Which do you propose to explore for us during the coming week?
A: I’m looking forward to sharing insights on topics such as corporate governance, corporate purpose, and succession planning. Among the book’s many lessons, these will likely be of greatest interest to readers of the Business Law Prof Blog, and I thank you for the opportunity to introduce the book and these themes here this week.
Q: Thanks so much, Larry. Those certainly are all topics that interest me (and infuse my ongoing scholarship and teaching). I look forward to your posts this week.
A: You're welcome. I am grateful for the opportunity to share what I have learned.
Friday, July 18, 2014
At the risk of overdoing what may have been a good thing, I contributed a disclosure-oriented post to the Hobby Lobby symposium on The Conglomerate earlier today. It includes new information about a U.S. Department of Labor Q&A posted yesterday, among other things. Enjoy or not, as you so please . . . .
The Business Law Prof Blog is delighted to have as a guest blogger next week our friend and colleague Lawrence A. Cunningham (known to me as Larry!), of George Washington University Law School, who has just finished writing a new book being released in October called Berkshire Beyond Buffett: The Enduring Value of Values. He will offer a few posts about aspects of the book during the week. We will kick it off Monday with some questions and answers.
Larry is the Henry St. George Tucker III Research Professor at GW. He teaches accounting, contracts, and corporate governance and has written extensively in all those areas. He previously taught at Boston College Law School, where he served a term as Academic Dean, and Cardozo Law School, where he directed the Samuel and Ronnie Heyman Center on Corporate Governance.
Among his most cited articles are these scholarly jewels:
The Sarbanes-Oxley Yawn Heavy Rhetoric, Light Reform (And it Might Just Work) (Connecticut Law Review, 2003)
All are great reads. Among his most notable books other than Berkshire Beyond Buffett (which is sure to be a hit!) are the following:
The Essays of Warren Buffett: Lessons for Corporate America (self-published and distributed by Carolina Academic Press, 3d ed. 2013)
Contracts in the Real World: Stories of Popular Contracts and Why They Matter (Cambridge University Press, 2012)
Berkshire Beyond Buffett is now in the production and pre-ordering phase, garnering early attention among readers in both the investing and corporate governance communities, including: The Motley Fool (which also posted a written interview and video interviews here, here, here, and here); BeyondProxy; and USA Today. We look forward to our Q&A with Larry next week followed by his posts!
James Woulfe, who was involved in the legislative process around Connecticut benefit corporations, and I have had a number of interesting conversations about social enterprise law over the past few years. Recently, I asked James to share his thoughts on the new Connecticut benefit corporation law for the blog. His contribution is below.
After two previous tries, Connecticut recently became the 24th state in the Union to pass benefit corporation legislation. While some may argue that the fact it took Connecticut so long to pass the bill is a sign of problems with the legislature, our state’s business climate, etc., coming a little late to the game was actually an asset. Waiting to pass the legislation gave lawmakers an opportunity to take a look at national and international trends in social enterprise legal structures, and experiment. As a result, Connecticut tweaked the “model” benefit corporation legislation passed in other states, and included an innovative first in the nation clause in Connecticut’s statute, called a “legacy preservation provision.”
Connecticut’s legacy preservation provision gives social entrepreneurs the opportunity to preserve their company’s status as a benefit corporation in perpetuity, despite changes in company leadership or ownership. In other words, the (optional) provision locks in the company’s social or environmental mission as a fundamental part of its legal operating structure. The provision may be adopted following a waiting period of two years and unanimous approval from all shareholders, regardless of their voting rights. Once the provision is adopted, it requires the company, if liquidated, to distribute all assets after the settling of debts to one or more benefit corporations or 501(c)3 organizations with similar social missions.
To learn more about Connecticut’s benefit corporation statute, and to take a look at the specific language of the legacy preservation provision, you can visit CTBenefitCorp.com.
About the Author:
James Woulfe is the Public Policy and Impact Investing Specialist at reSET - Social Enterprise Trust, a Hartford, Connecticut-based 501(c)3 non-profit organization whose mission is to promote, preserve and protect social enterprise as a viable concept and a business reality. You can contact James at Jwoulfe@socialenterprisetrust.org.
Cross-posted at SocEntLaw.
Tuesday, July 15, 2014
The Hobby Lobby decision states:
No known understanding of the term "person" includes some but not all corporations. The term "person" sometimes encompasses artificial persons (as the Dictionary Act instructs), and it sometimes is limited to natural persons. But no conceivable definition of the term includes natural persons and nonprofit corporations, but not for-profit corporations. 20 Cf. Clark v. Martinez, 543 U. S. 371 , 378 (2005) ("To give th[e] same words a different meaning for each category would be to invent a statute rather than interpret one").
The decision continues:
Under the Dictionary Act, "the wor[d] 'person' . . . include[s] corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals." Ibid .; see FCC v. AT&T Inc., 562 U.S. ___, ___ (2011) (slip op., at 6) ("We have no doubt that 'person,' in a legal setting, often refers to artificial entities. The Dictionary Act makes that clear"). Thus, unless there is something about the RFRA context that "indicates otherwise," the Dictionary Act provides a quick, clear, and affirmative answer to the question whether the companies involved in these cases may be heard.
Thus, unless otherwise stated, any place a person can recover claims, so can “corporations, companies, associations, firms, partnerships, societies, and joint stock companies.” There are opinions that have distinguished the “fictional person” from the “natural person.” See, e.g., All Comp Const. Co., LLC v. Ford, 999 P.2d 1122, 1123 (Okla. App. Div. 1 2000) (stating that an LLC was a "fictional 'person' for legal purposes and thus any damages due to the LLCs would be "due to it as a fictional person," and thus certain damages were not recoverable because LLCs are not "capable of experiencing emotions such as mental stress and anguish"). RFRA, per Hobby Lobby, though, does not make such a distinction.
As such, it seems to me there are places where federal law uses the term person that might now extend potential recovery to entities for things like pain and suffering or mental anguish. Maybe I am missing something here. Any ideas come to mind? Maybe civil rights laws?
The ripples, it seems, are just beginning.
Monday, July 14, 2014
My post last week spawned more commentary than usual--on the BLPB site and off. So, I am regrouping on the same issue for my post today and plan to push forward a bit on some of the areas of commentary. Also, since The Conglomerate is running a Hobby Lobby symposium this week, I thought it might be nice to offer some thoughts on disclosure up here and (maybe) later chime in at The Conglomerate on this or other issues relating to the Hobby Lobby case later in the week . . . .
Sunday, July 13, 2014
"How Hobby Lobby Undermined The Very Idea of a Corporation" http://t.co/Rq4F6LKpCr— Ian Bogost (@ibogost) July 5, 2014
"how the common law has personified the state and how those personifications affect ... state responsibility" http://t.co/faAgRTY8cR— Stefan Padfield (@ProfPadfield) July 10, 2014
ICYMI: "Hosanna-Tabor..appears to [=] religious groups are different from secular groups for constitutional purposes" http://t.co/rydH7PM1zr— Stefan Padfield (@ProfPadfield) July 10, 2014
"a corporation has no purposes..separate from those of the people who own and control it" & the state that created it http://t.co/J157qm2PTK— Stefan Padfield (@ProfPadfield) July 11, 2014
Friday, July 11, 2014
I've updated our business law professors on Twitter list here.
Below are tweets from some of the new additions to the list.
Bankruptcy bedtime stories and what's amazing about law school: http://t.co/VFvzHW2Naw— Stephanie Ben-Ishai (@SBIprof) October 17, 2013
Warren Buffett: The Babe Ruth of Good Business Today http://t.co/1g2UYLc81E— Lawrence Cunningham (@CunninghamProf) July 7, 2014
Oman & Meese offer an "epic take down" http://t.co/ndr8ptb5M1— Nathan B. Oman (@nate_oman) June 3, 2014
A New Business Model (and they make a fine deli sandwich too!) "At Zingerman’s, Pastrami and Partnership to Go" http://t.co/WgRiIXshk8— Len Rotman (@ProfessorRotman) July 7, 2014
Thursday, July 10, 2014
In last week’s post about the business of the World Cup, I indicated that I would review Christine Bader’s book, The Evolution of a Corporate Idealist: When Girl Meets Oil. I have changed my mind, largely because I don’t have much to add to the great reviews the book has already received. Instead I would like to talk about how lawyers, professors and students can use the advice, even if they have no desire to do corporate social responsibility work as Bader did, or worse, they think CSR and signing on to voluntary UN initiatives is really a form of "bluewashing."
Bader earned an MBA and worked around the world on BP’s behalf on human rights initiatives. This role required her to work with indigenous peoples, government officials and her peers within BP convincing them of the merits of considering the human rights, social, and environmental impacts. She then worked with the UN and John Ruggie helping to develop the UN Guiding Principles on Business and Human Rights, a set of guidelines which outline the state duty to protect human rights, the corporate duty to respect human rights, and both the state and corporations' duty to provide judicial and non-judicial remedies to aggrieved parties. She now works as a lecturer at Columbia University, where she teaches human rights and business and she also advises BSR, which focuses on making businesses more sustainable. Her book tells her story but also quotes a number of other CSR professionals and how they have navigated through some of the world’s largest multinationals.
Bader’s book has some important takeaways for all of us.
1) In order to have influence, we have to learn to speak the language that our audience understands and appreciates- I tell my students that when they write exams for me, it’s all about me. Other professors want their exams written with certain catchphrases using the IRAC method, and I may want something different. One size does not fit all. Attorneys learn (or get replaced) that some clients want long memos, others want executive summaries and bullet points and all want plain English. Talking to a venture capitalist is different than talking to a circuit court judge. Similarly, many law professors are behind the curve. If we only talk to each other in the jargon of the academy and insulate ourselves, the rest of the world won’t have the benefit of our research because they won’t understand or want to read it. Academics have a lot to contribute, but we need to adapt to our audience whether it’s policymakers, judges, our peers or law students.
2) Sometimes we have to be less passionate in making our arguments and appeal to what’s important to our audience- This point relates to Point 1. Bader regularly met with a number of constituencies and was understandably zealous in trying to convince others, internally and externally, about her positions. She and other “corporate idealists” from other firms often learned the importance of language- making a business case to certain internal stakeholders meant talking in terms of the bottom line rather than using the maxim “it’s the right thing to do” or “doing well by doing good.” Good attorneys know how to represent their clients without taking things personally because sometimes the passion can actually dilute effectiveness. As law professors, we need to teach our students to be more effective so that they know how and when to modulate their tone, and how to pivot and change the way they frame their arguments when they can’t convince the recipient of their message.
3) Almost everything comes down to risk management- Bader often had to focus on risk management and mitigation when her moral arguments fell on deaf ears. Those who teach business should make sure that students have a basic understanding of the pressure points that business people face. For some it may be tax liability. For others it may be the appropriate exit strategy. In essence, it all comes down to understanding the client’s risk profile and being able to advise accordingly. Litigators should also understand risk profiles so that they can develop an appropriate settlement strategy and help their client’s work their way through some of the unexpected pitfalls that may arise over the course of the case.
4) Building relationships is a critical skill- Bader learned that social interactions with her peers at BP and the external stakeholders after hours greatly increased her effectiveness in dealing with thorny issues that arose during business hours. Lawyers often believe that if they have the substantive knowledge, they are the smartest people in the room. Law firms don’t teach young associates about the importance of emotional intelligence and building relationships with peers, opposing counsel, and clients. In fact, many law students and lawyers believe that having the reputation as a “shark” is the best way to represent clients. We need to teach our students that it’s better to be respected than feared or hated, and that they can disagree without being disagreeable. Those of us in the academy should model that behavior more often.
5) We must learn to compromise and recognize that incremental changes are important too- Bader and other corporate idealists often want to change the world but quickly learn that internal and external stakeholders aren’t ready to move that fast. She discussed “nudging” her client toward the right direction. Law school and law-related television shows lead students to believe that the end game is to win and to win big. In the business world, sometimes there are no big wins. Lawyers and business advisors often take two steps forward and one step back, and that’s ok. Students and attorneys who take classes in alternative dispute resolution learn this valuable skill. Bader and other corporate idealists also realized that you have to work with people on the opposite side who feel just as strongly that their position is on the side of the angels. Lawyers who know how to build relationships and refocus their messaging can influence those on the other side if they are willing to listen, and when necessary compromise and accept small victories.
6) We can compromise but shouldn’t compromise our values- When Bader felt that her work was no longer fulfilling, she looked for other positions that aligned with her world view. With rising student debt and many lawyers living beyond their means, it’s difficult for lawyers to walk away from a job or client that they don’t like. That’s understandable. It’s more problematic to stay in a situation where there is criminal or ethical misconduct without speaking up or leaving because of the financial handcuffs. It’s also unacceptable to remain in a culture that stifles a lawyer’s ability to raise issues. In some cases, as alleged with some of the GM lawyers, failure to speak up could literally be a matter of life and death.
I enjoyed this quick read because it reminded me so much of my years in corporate life. Bader’s story can teach all of us, even the non corporate-idealists, valuable lessons about coping and thriving in the business world.
Monday, July 7, 2014
For those interested, the Delaware secretary of state's office informs me that there were 145 Delaware public benefit corporations (PBCs) as of 6/30/14.
The Court's Hobby Lobby decision, as noted in post-decision commentary (see, e.g., Sarah Hahn's guest post earlier this week), apparently relies in part on the fact that shareholders (and, potentially, employees and other relevant constituents of the firm) know that the firm has sincerely held religious beliefs and what those beliefs mean for business operations and legal compliance. The Court does not directly address this in its opinion. Rather, the opinion includes various references to owner engagement that imply buisness owner awareness. The Court states:
- For-profit corporations, with ownership approval, support a wide variety of charitable causes . . . . (Op. 23, emphasis added)
"So long as its owners agree, a for-profit corporation may take costly pollution-control and energy conservation measures that go beyond what the law requires." (Op. 23, emphasis added)
In making these statements and reasoning through this part of the opinion, the Court relies on state corporate law principles and allusions.
Importantly, the Court also indicates its views on how the policy underlying the RFRA favors an interpretation that includes corporations as persons:
An established body of law specifies the rights and obligations of the people (including shareholders, officers, and employees) who are associated with a corporation in one way or another. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people. For example, extending Fourth Amendment protection to corporations protects the privacy interests of employees and others associated with the company. Protecting corporations from government seizure of their property without just compensation protects all those who have a stake in the corporations’ financial well-being. And protecting the free-exercise rights of corporations like Hobby Lobby, Conestoga, and Mardel protects the religious liberty of the humans who own and control those companies.
(Op. 18, emphasis in original) Note how the last sentence reduces the protected category of persons under the RFRA to those who "own and control" the firm at issue. This represents an interesting narrowing of constituency groups from the more inclusive treatment in the first sentence of the paragraph. The reason for this narrowing may be (likely is) a practical one, evidencing judicial restraint. The plaintiffs in the Hobby Lobby actions were those who owned or controlled the corporation, and the decision likely will be limited in its application accordingly.
Given these breadcrumbs from the Court's opinion, should disclosure to shareholders or other constituencies be required, and if so, where would those disclosure rules reside as a matter of positive law? A blog post may be the wrong place to begin to address this issue (which is admittedly complex and involves, potentially, areas of law somewhat unfamiliar to me). But indulge me in a thought experiment here for a minute.
Sunday, July 6, 2014
Let me start by publicly announcing a forthcoming panel discussion at this year’s AALS Annual Meeting, tentatively titled “The Role of Corporate Personality Theory in Corporate Regulation.” As the organizer of this panel, I am extremely grateful to Stephen Bainbridge, Margaret Blair, Lisa Fairfax, and Elizabeth Pollman for agreeing to participate in what promises to be a thoroughly enjoyable discussion. For those of you who like to plan ahead, the panel is scheduled for Monday, Jan. 5, from 2:10 to 3:10 (part of the Section on Socio-Economics Annual Meeting program).
Given Stephen Bainbridge’s pending participation, I was interested to read a couple of his posts from a few weeks ago wherein he asked (here), “When was the last time anybody said anything new about corporate personhood?” and concluded (here), “I struggle to come up with anything new to say about the issue, when people have been correctly disposing of the legal fiction of corporate personality for at least 126 years!”
While I understand that asserting there is nothing new to say on a topic is not necessarily the same thing as saying it is not worth talking about, I still find myself motivated to explain why I think talking about corporate personality theory continues to constitute valuable scholarly activity (and, yes, I will connect all this to Hobby Lobby).
First of all, some qualifiers: (1) I distinguish corporate personality theory from corporate personhood because a thumbs up on corporate personhood (i.e., acknowledging that corporations can sue and be sued, etc.) still leaves a number of important questions regarding the nature of this “person,” which I believe theories of corporate personality (typically: artificial entity theory, real-entity theory, or aggregate theory) are well-positioned to answer. (2) While theories of corporate governance (typically: shareholder primacy, director primacy, or team-production theory) are distinct from theories of corporate personality, I believe there are at least some legal issues that are profitably analyzed by viewing both sets of theories as constituting a pool from which to choose an answer. With those introductory propositions in place, here are three reasons why I believe corporate personality theory still matters:
Saturday, July 5, 2014
The blogosphere has been a-twitter with commentary on Jamie Dimon's revelation earlier this week that he has throat cancer and will be undergoing treatments in the hope of eradicating it. From the public news, his prognosis sounds good. For that, I am sure all are grateful.
As some of you may know, my interest in issues relating to disclosures of facts from executives' private lives stems from my fascination, starting about 12 years ago, with the Martha Stewart disclosure cases (about which I wrote in law journals and in several chapters of a book that I edited). After co-writing the book about the basic concerns in Stewart's insider trading, misstatements/omissions securities fraud, and derivative fiduciary duty actions, I focused in additional articles on some finer points relating to her case. Two of these works covered the disclosure of private facts. Among the types of private facts covered are those relating to executive health concerns.
Friday, July 4, 2014
The title of this post refers to the thought-provoking book by former BP executive, Christine Bader, The Evolution of a Corporate Idealist: When Girl Meets Oil. I will save a review for next week in Part 2 of this post. Briefly, Bader discusses the internal and external struggles that she and other “corporate idealists” face when trying to provide practical, culturally appropriate, innovative ways to implement corporate social responsibility and human rights programs around the world. Much of what she said resonated with me based upon my years as a compliance and ethics officer for a multinational corporation and as a current consultant on these issues.
Like comedian/TV commentator John Oliver, I am torn about the World Cup and the significant power that soccer/futbol’s international governing body FIFA has over both Brazil and its residents. His hilarious but educational rant is worth a close watch, and I experienced the conflict he describes firsthand during my two recent trips to Salvador, Brazil. I went to watch what the rest of the world calls “the beautiful game” in a country where soccer is a religion. That's not an exaggeration by the way-- I bought a statuette of a monk holding a soccer ball in a local cathedral. The monk had a place of honor in the display case right next to the rosaries. The Cup has political consequences as well -- if Brazil doesn’t win the Cup at home, politicians will feel it in Fall’s election.
Trip one to Brazil was purely for pleasure with sixteen aficionados to experience one of the world's most diverse and beautiful cultures while catching two matches. Because I have spent the last couple of year’s researching and writing on business and human rights, when the US team advanced to the quarter finals, I took advantage of my frequent flyer miles, hastily organized some meetings with human rights activists that I had never met, snagged a ticket to the US v. Belgium match, and spent three days mixing business with pleasure.
I had done my homework of course (see e.g. this on the money aspect, this petition to vote for the worst sponsor, this on police response to protestors, and this from David Zirin on Brazil's actions with the World Cup and Olympics). I also knew that FIFA, the nonprofit with a one billion dollar reserve, pays no taxes to the host country. Indeed, while FIFA will earn several billions in profit from the 2014 Cup, Brazil will have spent over ten billion to host. Luckily Brazil loves soccer, but as you may have seen on the news, protests have erupted in the major cities about the perceived broken promises from the government to the people. The infrastructure, schools, hospitals and other projects have not materialized as promised. And while FIFA only requires eight stadiums for a World Cup, Brazil inexplicably built twelve. The Manaus Stadium in the middle of the Amazon cost $250 million and there is no soccer team there. At least the Salvador stadium, which cost $350 million to tear down and rebuild, can host its two teams as well as some of the soccer for the 2016 Olympics. The favelas where the poorest residents live are in clear view of the luxurious new facility in Salvador because they are within walking distance.
For the privilege of hosting the Cup, Brazil agreed to suspend its 2003 law banning alcohol in stadiums so that Budweiser could sell beer; institute World Cup courts to fast track convictions; exempt sponsor companies from some taxes; and establish exclusion zones 2 kilometers around FIFA-designated areas so that no local vendors can sell their wares—this in a country that is at the bottom 10% on the world for income inequality.
A few hours after I landed, I met with an organizer of the some of the protests in Salvador, Brazil’s third largest city. The next day I met with an activist for the homeless in the office of the Public Defender for Human Rights. Despite government funding, the Public Defender and activist communities in Salvador work closely together to address human rights abuses. I learned the following, among other things. Over 250,000 people throughout Brazil were displaced for the games, many with no compensation. Salvador, a city with over 4,000 homeless, only developed housing for 200 families despite knowing about the games for seven years. Homeless people who did not move when told were harassed by the police. If the harassment didn’t work, police confiscated their documentation and/or clothing and destroyed them. If that didn’t work, street cleaning trucks bombarded them with soap and water as though they were trash. Through the joint efforts of the Public Defender and activists, this activity, which started last September, largely stopped.
I also learned that religious groups can protest against abortion and drug use in exclusion zones but those protesting against FIFA must secretly hand out pamphlets in groups smaller than three people to avoid detection, arrest and jail time (sometimes charged as “terrorists.”). FIFA established almost a dozen agencies to ensure that the Cup went smoothly but most locals have experienced nothing but serious disruption. Hundreds of vendors who had eagerly staked out spaces to sell to tourists were banned and the government gave them no place else to go. People have died and suffered serious injury as FIFA has pressured the Brazilian government to complete projects on time. Although protestors have not focused on them, others have raised questions about the environmental impact of the Cup.
Sony, Johnson & Johnson, Budweiser, Coca-Cola, and McDonald's -- all key sponsors paying upwards of a minimum of $10 million-- tout their corporate social responsibility programs so I have the following ten questions about the business of the World Cup.
1) Is FIFA, the nonprofit corporation, really acting as a quasi-government and if so, what are its responsibilities to protect and respect local communities?
2) Does FIFA have more power than the host country and will it use that power when it requires voters to consider a bidding country’s human rights record when awarding the 2026 Cup as it has suggested?
3) If Qatar remains the site of the 2022 Cup after the various bribery and human rights abuse investigations, will FIFA force that country to make concessions about alcohol and gender roles to appease corporate sponsors?
4) Will/should corporate sponsors feel comfortable supporting the Cup in Russia in 2018 and Qatar in 2022 given those countries’ records and the sponsors’ own CSR priorities?
5) Does FIFA’s antidiscrimination campaign extend beyond racism to human rights or are its own actions antithetical to these rights?
6) Are the sponsors commenting publicly on the protests and human right violations? Should they and what could they say that has an impact? Should they have asked for or conducted a social impact analysis or is their involvement as sponsors too attenuated for that?
7) Should socially responsible investors ask questions about whether companies could have done more for local communities by donating to relevant causes as part of their CSR programs?
8) Are corporations acting as "bystanders", a term coined by Professor Jena Martin?
9) Is the International Olympic Committee, a nonprofit, nongovernmental organization, taking notes?
10) Do consumers, the beneficiaries of creative corporate commercials and viral YouTube videos, care about any of this?
I have thoughts but no answers to my questions and will spend my summer on these corporate responsibility issues. I definitely don’t envy the corporate idealists working for any of these sponsors.
Thanks to all for the interesting posts. I am sure there will be more to come, followed by a flurry of articles in the fall and spring cycles. Looking forward to reading more.
Wednesday, July 2, 2014
Earlier this week I asked Professor Lyman Johnson if he would care to share his thoughts on the Hobby Lobby case with us because I had so enjoyed his thoughtful posts on the Conglomerate before the decision was issued (see here and here). Professor Johnson's contribution is below.
I thank the good folks here at the Business Law Prof Blog for inviting me to share some thoughts about the Supreme Court’s decision in the high-profile Hobby Lobby cases. The Court held that a closely-held business corporation was a “person” under the Religious Freedom Restoration Act (RFRA), that such a for-profit corporation could indeed “exercise religion” under that Act, and that as applied to closely-held corporations the contraceptive mandate promulgated under the Affordable Care Act violated RFRA. Two days after the controversial decision, the sky has not fallen, although dire forecasts to that effect still abound. My post today makes a simple but basic point: quite apart from the decision’s implications for religious liberty in the corporate realm - no small thing, to be sure - and notwithstanding the still unfolding legal and political fallout, Hobby Lobby immediately became a landmark decision in which the Supreme Court spoke in unprecedented fashion to an issue going to the very foundation of corporate law, the question of corporate purpose.
Let’s begin with the notion of freedom, or liberty. The Court ruled that RFRA protected the free exercise rights of close corporations and of those humans who own stock in and control those companies. [Note: human beings are routinely described in their “corporate” capacity in the majority opinion; the “corporation” is emphasized throughout] In this way, the Court protected the “negative liberty” of those “corporate” persons, freeing them from the constraint of the federal contraceptive mandate. But where exactly, from a legal vantage point, did the corporations’ “positive liberty” to “exercise religion” even come from? Not from RFRA, which protects only against substantial governmental burdens on the exercise of religion. Even though RFRA includes (via the Dictionary Act) a “corporation” within its definition of “person,” it does not itself affirmatively empower corporations. The answer is that, as with all corporate attributes, this capacity to exercise religion is endowed by state corporate law.
The federal government did not - it could not - dispute the legal origins of corporateness as being rooted in state law. And the U.S. failed to convince the Court that corporations as such cannot exercise religion because, let’s face it, our nation is full of churches and other religious bodies where religion quite obviously is being exercised in and through the corporate form. But the Court also rejected the government’s attempted distinction of for-profit corporations from their non-profit counterparts because the Court rebuffed the government’s underlying view that “the purpose of such [for-profit] corporations is simply to make money,” stating that this position “flies in the face of modern corporate law.” This is where the Hobby Lobby opinion pries open the very heart of corporate law.
Justice Alito, for the Court, rejected the view that business corporations must (and do) singularly act to make money, even as he acknowledged making profits to be “a” (not “the” or “sole”) objective and one that is “central.” A few gems here: “[M]odern corporate law does not require for-profit corporations to pursue profit at the expense of everything else and many do not do so.” “[I]t is not at all uncommon for such corporations to further humanitarian and other altruistic objectives.” “Not all corporations that decline to organize as nonprofits do so in order to maximize profits. For example, organizations with religious and charitable aims might organize as for-profit corporations…” Alito then notes that “the objectives that may properly be pursued by the companies in these cases are governed by the laws of the states in which they are incorporated…” Given the breadth of objectives that can be pursued under state corporate law, it was easy for the Court to conclude that corporate liberty extended to “the pursuit of profit in conformity with the owners’ religious principles.” This liberating principle was pointedly germane to the Hobby Lobby case itself, as Alito cited to the record wherein the owners of that corporation calculated they lose millions of dollars annually by closing on Sundays - precisely because of religious beliefs. Doing so, that is, sacrificing profits, the Court ruled, is permitted and altogether proper under corporate law. Too bad former Chancellor William Chandler did not have the benefit of Alito’s recent primer when Chandler wrote the deeply-flawed eBay v. Craigslist decision in 2010.
To hold that close corporations were “free” from the contraceptive mandate of the Affordable Care Act, because of RFRA, the Court thus had to determine that, under state corporate law, such companies are likewise “free” from some imagined state legal mandate to maximize profits. Readily concluding that corporations clearly do have the liberty not to maximize profits, the Court concluded that, as a legal matter, they were necessarily “free” to exercise religion. But critically, that means business corporations, being free in this respect under state corporate law, can pursue a whole host of objectives other than making money. Those objectives include various humanitarian, social, and environmental objectives of the sort progressives have long championed. As one who for decades has favored a vision of corporations (and corporate law) as being utterly conducive to serving broad social purposes - as freely determined, of course, by the appropriate corporate decisionmakers - and as one who supported Hobby Lobby, I found it odd to see these companies opposed by so many corporate progressives. When one advocates for freedom on the corporate purpose front, just as is the case on the free speech front, one fights for those with whom one may disagree. Remember here Voltaire and his “I do not agree with what you have to say, but I will defend to the death your right to say it.” But take comfort: although progressives lost the Hobby Lobby battle, they gained (accidently) an ironic victory on the all-important corporate purpose war.
On the other hand, those in the corporate law academy who think corporate law mandates strict profit maximization now have a formidable judicial foe, and one that dwarfs the puny authority of Dodge v. Ford Motor Co. or eBay: i.e., the U.S. Supreme Court. Time to change the syllabus on corporate purpose… To those on the right who favored Hobby Lobby (me) but who also favor the now-discredited position that corporate law requires profit maximizing (not me) take note: you won the battle on religious freedom but to do so you had to suffer a major setback on corporate purpose.
Finally, this case shows me that those who seek corporate reform may do so either from progressive impulses or from religious impulses, and from the left or the right of our political and theoretical spectrums. The Hobby Lobby decision should, in that respect, ultimately be seen as a unifier for those in corporate law with reformist goals, not as a divider.
My longtime colleague and collaborator, David Millon, and I, who typify these two quite different reformist impulses, respectively, will have much more to say on this vital subject in an article now in the works….