Sunday, August 12, 2018

Why Lawyers, Law Professors, and Judges Should Care About Blockchain

We’re a month away from our second annual Business Law Professor Blog CLE, hosted at the University of Tennessee on Friday, September 14, 2018. We’ll discuss our latest research and receive comments from UT faculty and students. I’ve entitled my talk Beyond Bitcoin: Leveraging Blockchain for Corporate Governance, Corporate Social Responsibility, and Enterprise Risk Management, and will blog more about that after I finish the article. This is a really long post, but it’s chock full of helpful links for novices and experts alike and highlights some really interesting work from our colleagues at other law schools.

Two weeks ago, I posted some resources to help familiarize you with blockchain. Here’s a relatively simple definition from John Giordani at Forbes:

Blockchain is a public register in which transactions between two users belonging to the same network are stored in a secure, verifiable and permanent way. The data relating to the exchanges are saved inside cryptographic blocks, connected in a hierarchical manner to each other. This creates an endless chain of data blocks -- hence the name blockchain -- that allows you to trace and verify all the transactions you have ever made. The primary function of a blockchain is, therefore, to certify transactions between people. In the case of Bitcoin, the blockchain serves to verify the exchange of cryptocurrency between two users, but it is only one of the many possible uses of this technological structure. In other sectors, the blockchain can certify the exchange of shares and stocks, operate as if it were a notary and "validate" a contract or make the votes cast in online voting secure and impossible to alter. One of the greatest advantages of the blockchain is the high degree of security it guarantees. In fact, once a transaction is certified and saved within one of the chain blocks, it can no longer be modified or tampered with. Each block consists of a pointer that connects it to the previous block, a timestamp that certifies the time at which the event actually took place and the transaction data.

These three elements ensure that each element of the blockchain is unique and immutable -- any request to modify the timestamp or the content of the block would change all subsequent blocks. This is because the pointer is created based on the data in the previous block, triggering a real chain reaction. In order for any alterations to happen, it would be necessary for the 50%-plus-one of the network to approve the change: a possible but hardly feasible operation since the blockchain is distributed worldwide between millions of users.

In case that wasn’t clear enough, here are links to a few of my favorite videos for novices. These will help you understand the rest of this blog post.

To help prepare for my own talk in Tennessee, I attended a fascinating discussion at SEALS on Thursday moderated by Dean Jon Garon of Nova Southeastern University Shepard Broad College of Law called Blockchain Technology and the Law.

For those of you who don’t know how blockchain technology can relate to your practice or teaching, I thought I would provide a few questions raised by some of the speakers. I’ve inserted some (oversimplified)links for definitions. The speakers did not include these links, so if I have used one that you believe is incomplete or inaccurate, do not attribute it to them.

Professor Del Wright, University of Missouri-Kansas City School of Law;

Del started the session by talking about the legal issues in blockchain consensus models. He described consensus models as the backbones for users because they: 1) allow users to interact with each other in a trustless manner; 2) ensure the integrity of the ledger in both normal and adversarial situations; and 3) create a “novel variety of networks with extraordinary potential” if implemented correctly. He discussed both permissioned (e.g. Ripple) and permissionless (Bitcoin) systems and how they differ. He then explained Proof of Work blockchains supported by miners (who solve problems to add blocks to the blockchain) and masternodes (who provide the backbone support to the blockchain). He pointed out how blockchains can reduce agency costs and problems of asymmetrical information and then focused on their utility in financial markets, securities regulation, and corporate governance. Del compared the issues related to off-chain governance, where decisionmaking first takes place on a social level and is then actively encoded into the protocol by the developers (used by Bitcoin and Ethereum) to on-chain governance, where developers broadcast their improvement protocols on-chain and then, once approved, those improvements are implemented into the code. He closed by listing a number of “big unanswered issues” related to regulatory guidance, liability for the performance of the technology and choice of consensus, global issues, and GDPR and other data privacy issues.

Professor Catherine Christopher, Texas Tech University School of Law;

Catherine wants to help judges think about smart contracts. She asked, among other things, how judges should address remedies, what counts as substantial performance, and how smart contract audits would work. She questioned whether judges should use a consumer protection approach or instead follow a draconian approach by embracing automation and enforcing smart contracts as drafted to discourage their adoption by those who are not sophisticated enough to understand how they work.

Professor Tonya Evans, University of New Hampshire School of Law (follow her on Twitter; see her blog on blockchain here);

Tonya focuses on blockchain and intellectual property. Her talked raised the issues of non-fungible tokens generated through smart contracts and the internet of value. She used the example of cryptokitties, where players have the chance to collect and breed digital cats. She also raised the question of what kind of technology can avoid infringement. For more on how blockchain can disrupt copyright law, read her post here.

Professor Rebecca Bratspies, CUNY School of Law;

In case you didn’t have enough trust issues with blockchain and cryptocurrency, Rebecca’s presentation focused on the “halo of immutability” and asked a few central questions: 1) why should we trust the miners not to collude for a 51% attack 2) why should we trust wallets, which aren’t as secure as people think; and 3) why should we trust the consensus mechanism? In response, some members of the audience noted that blockchain appeals to a libertarian element because of the removal of the government from the conversation.

Professor Carla Reyes, Michigan State University College of Law- follow her on Twitter at Carla Reyes (@Prof_CarlaReyes);

Carla talked about crypto corporate governance and the potential fiduciary duties that come out of thinking of blockchains as public trusts or corporations. She explained that governance happens on and off of the blockchain mechanisms through social media outlets such as Redditt. She further noted that many of those who call themselves “passive economic participants” are actually involved in governance because they comment on improvement processes. She also noted the paradox that off chain governance doesn’t always work very well because participants don’t always agree, but when they do agree, it often leads to controversial results like hard forks. Her upcoming article will outline potential fiduciaries (miner and masternode operators for example), their duties, and when they apply. She also asked the provocative question of whether a hard fork is like a Revlon event.

Professor Charlotte Tschider, William Mitchell College of Law (follow her on Twitter);

As a former chief privacy officer, I have to confess a bias toward Charlotte’s presentation. She talked about blockchain in healthcare focusing on these questions: will gains in cybersecurity protection outweigh specific issues for privacy or other legal issues (data ownership); what are the practical implications of implementing a private blockchain (consortium, patient-initiated, regulatory-approved); can this apply to other needed uses, including medical device applications; how might this technology work over geographically diverse regulatory structures; and are there better applications for this technology (e.g. connected health devices)? She posited that blockchain could work in healthcare because it is decentralized, has increased security, improves access controls, is more impervious to unauthorized change, could support availability goals for ransomware attacks and other issues, is potentially interoperable, could be less expensive, and could be controlled by regulatory branch, consortium, and the patient. She closed by raising potential legal issues related to broad data sharing, unanswered questions about private implementations, privacy requirements relating to the obligation of data deletion and correction (GDPR in the EU, China’s cybersecurity law, etc); and questions of data ownership in a contract.

Professor Eric Chason, William & Mary Marshall-Wythe School of Law;

Eric closed by discussing the potential tax issue for hard forks. He explained that after a hard fork, a new coin is created, and asked whether that creates income because the owner had one entitlement and now has two pieces of ownership. He then asked whether hard forks are more like corporate reorganizations or spinoffs (which already have statutory taxation provisions) or rather analogous to a change of wealth. Finally, he asked whether we should think about these transactions like a contingent right to do something in the future and how that should be valued.

Stay tuned for more on these and other projects related to blockchain. I will be sure to post them when they are done. But, ignore blockchain at your peril. There’s a reason that IBM, Microsoft, and the State Department are spending money on this technology. If you come to UT on September 15th, I’ll explain how other companies, the UN, NASDAQ, and nation states are using blockchain beyond the cryptocurrency arena.

 

August 12, 2018 in Commercial Law, Compliance, Conferences, Contracts, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, Human Rights, Law School, Lawyering, Legislation, Marcia Narine Weldon, Research/Scholarhip, Securities Regulation, Shareholders, Teaching, Technology, Writing | Permalink | Comments (0)

Friday, July 27, 2018

Beyond Bitcoin: Why You Should Care About Blockchain and Smart Contracts-Part 1

Pura vida from Costa Rica. Between recovery from carpal tunnel surgery a few weeks ago and an ATV flip two days ago, I don’t have much mental or physical energy to do a full post. I haven’t mastered dictation so I’m typing this on an iPad with one hand. Next week, I’ll provide more substance as well as a preview on my September talk at our second annual BPLB symposium at the University of Tennessee. Today, I want to pass on some resources for those who don’t know anything about blockchain. 

For those who want to provide resources for students, Walter Effross has put together a great site:

http://blockchainforlawstudents.com/

The following sources come from Professor Tonya Evans at UNH, who has developed an online curriculum on blockchain:

Use Cases: 

https://medium.com/fluree/blockchain-for-2018-and-beyond-a-growing-list-of-blockchain-use-cases-37db7c19fb99

https://www.mycryptopedia.com/16-promising-blockchain-use-cases/

Education:

https://medium.com/universablockchain/blockchain-in-education-49ad413b9e12

Blockchain + Law:

http://www.abajournal.com/news/article/lawyers_can_contribute_to_the_rise_of_blockchain_by_understanding_it

https://abovethelaw.com/2018/02/blockchain-can-smart-contracts-replace-lawyers/

https://www.mycase.com/blog/2017/09/bitcoin-blockchain-lawyers-need-know/

Next week, I’ll talk about my research into how blockchain is used in corporate governance, compliance, supply chain management, enterprise risk management, cybersexurity, and human rights. 

July 27, 2018 in Compliance, Conferences, Contracts, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, Law School, Lawyering, Marcia Narine Weldon | Permalink | Comments (0)

Saturday, April 21, 2018

Can Contract Clauses Stop Human Trafficking?

Last week, I blogged blogged about lawsuits against chocolate makers alleging unfair and deceptive trade practices for failure to disclose that the companies may have used child slaves to harvest their products. Today, I want to discuss steps that the Business Law Section of the American Bar Association is taking to provide more transparency in supply chain practices.

In 2014, the ABA House of Delegates adopted Model Principles on Labor Trafficking and Child Labor developed by over 50 judges, in-house counsel, outside counsel, academics, and NGOs. The Model Principles address the UN Guiding Principles on Business and Human Rights and other hard and soft law regimes. At last week’s ABA Business Law Spring Meeting, academics David Snyder and Jennifer Martin presented on human rights issues in supply chains alongside practicing lawyers and in-house executives. Many of them (and several others) had formed a Working Group to Draft Human Rights Protections in Supply Contracts. The Group aims to provide contract clauses that are “legally effective” and “operationally likely.”

As a former Deputy GC for a supply chain management company, I can attest that the ABA’s focus is timely as companies answer questions from customers, regulators, shareholders, and other stakeholders. Human rights issues play out in dozens of regulations, including, but not limited to: the Foreign Corrupt Practices Act, Trafficking Victims Protection Act, Dodd-Frank Conflict Minerals Act, California Transparency in Supply Chains Act, the UK Modern Slavery Act, the Trade Facilitation and Trade Enforcement Act, and the updated Federal Acquisition Regulations. Australia and at least seven EU countries are currently working on their own regulations. Savvy lawyers have use the Alien Tort Statute, RICO, negligence, and false advertising allegations to state claims, with varying success.

The following statistics may provide some context. Thanks to e. Christopher Johnson, Jr., CEO of the Center for Justice, Rights, and Dignity.
- there are 21 million victims of human trafficking
- Human trafficking provides $150 billion in profit
- Women and girls are 55% of the victims, and children 17 and under are 26%

To help companies mitigate their supply chain risks, the Business Law and UC Article 1 and Article 2 Committees have drafted more specific model clauses to incorporate human rights provisions in certain contracts. The Committees are also establishing an information exchange with NGOs and developing a Toolkit for Canadian lawyers.

One of the most practical features of the Group’s work is Schedule P, the warranties and remedies to protect human rights in the supply chain. The Working Group’s Report provides guidance on how to use the clauses as well as potential limitations. It’s a long read but I recommend that you look at the report and consider whether the model clauses and Schedule P, an appendix to supplier agreements, will help in the fight to combat human trafficking and forced labor. 

April 21, 2018 in Compliance, Contracts, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, Marcia Narine Weldon | Permalink | Comments (0)

Friday, April 13, 2018

Can a CSR Report Be Used Against A Company in Court?

Greetings from the ABA Business Law Meeting in sunny Orlando, Florida. Today, I attended an excellent program on Protecting Human Rights in Supply Chains; Moving from Policy to Action. I plan to blog more about the meeting next week, highlighting the work surrounding draft human rights clauses for supplier contracts. The project was spearheaded by David Snyder of American University and corporate lawyer Susan Maslow. In this post, I want to address one of the topics Susan Maslow discussed-- the recent spate of lawsuits brought by consumers who allege unfair trade practices based on what companies say (or don’t say) about their human rights records.

I’ve blogged (incessantly for the past five years) and written longer articles about the various ESG disclosure regimes. I’ve argued that in theory, disclosure is a good thing. But without meaningful financial penalties from regulators for violations, many corporations won’t do anything more than the bare minimum for human rights, even with the threat of (often short-lived) consumer boycotts. Further, most consumers suffer from disclosure overload or don’t understand or remember what they read.

The disclosure issue has now reached the courts. In 2015, a law firm filed cases in California under unfair competition and false advertising laws against the Hershey Company, Mars, and Nestle. The firm likely chose those causes of action because there’s no private right of action under the California Transparency in Supply Chain Act.  The suits claimed, among other things that:

  • in violation of California law, Hershey’s, Mars and Nestle failed to disclose that their suppliers in the Ivory Coast relied on child laborers and profitted from the child labor that supplies the chocolate sold to American consumers,
  • the children subjected to the forced labor are victims of hazardous work involving dangerous tools, transport of heavy loads and exposure to toxic substances, and,
  • “sometimes extremely poor people sell their own children into slavery for as little as $30. Children that are sometimes not even 10 years old carry huge sacks that are so big that they cause them serious physical harm. Much of the world’s chocolate is quite literally brought to us by the back-breaking labor of child slaves.”

Plaintiffs lost those cases because the court found that these companies had no legal duty to disclose on their labels that African child slaves might have been involved in manufacturing their cocoa. Had the plaintiffs won, I imagine that the First Amendment argument that prevailed in the Dodd-Frank conflicts minerals litigation would have played a prominent role in the appeal.

Fast forward a few years and the same law firm has now filed a similar class action lawsuit against Hershey in Massachusetts. This claim alleges unjust enrichment in violation of the state’s consumer protection law. According to plaintiffs, “much of the world’s chocolate is quite literally brought to us by the back-breaking labor of children, in many cases under conditions of slavery.” Moreover, they claim, “Hershey’s material omissions and failure to disclose at the point of sale [are] all the more appalling considering that Hershey’s Corporate Social Responsibility Report state[s] that ‘Hershey has zero tolerance for the worst forms of child labor in its supply chain.’ But Hershey does not live up to its own ideals.”

Hershey, like many companies, produces a CSR report showcasing its efforts and progress in accordance with the Global Reporting initiative, the gold standard for CSR. Companies like Hershey also report on their CSR initiatives in good faith with the knowledge that their statements are generally not legally binding, at least not in the United States. I’ll be following this case closely. If the court grants class certification, this could have a chilling effect on what companies say in their CSR reports, and that would be a shame.

April 13, 2018 in Compliance, Conferences, Corporate Finance, Corporations, CSR, Current Affairs, Human Rights, Marcia Narine Weldon | Permalink | Comments (0)

Friday, March 16, 2018

Do the Benefits of Regulation Outweigh the Costs?

Matt Kelly of Radical Compliance has posted on the costs and benefits of regulation. His post is timely considering this week's rollback of certain Dodd-Frank banking provisions by the Senate. Among other things, Kelly notes that according to a draft OMB report, "across 133 major rules, the average annualized cost (in 2015 dollars) was $92.8 billion, average annualized benefit $554.8 billion. Benefits were six times larger than costs." He further writes, with some skepticism, that the OMB is seeking comment from "peer reviewers with expertise... in regulatory policy" on its cost-benefit analysis as it finalizes its report. 

He also cited GW public policy professors who looked at over two hundred major rules adopted between 2007-2010 and found that "The design of the rulemaking process can both increase the pace with which rules are promulgated and reduce the level of detail in which they are presented, but only when care is taken to ensure the individuals intimately involved have greater breadth – relative to depth – in the competencies they bring to the endeavor." As Kelly, observed, " Teams with more “breadth of competencies” (one subject matter expert, one lawyer, one economic analyst, one regulatory affairs specialist, and so forth) tended to write rules more quickly and keep them simpler. In contrast, teams with depth of competency (a whole bunch of lawyers, or policy analysts, or subject matter experts) tended to take more time and, as the authors wonderfully phrased it, “elongated the resulting rules.”'

Although Kelly looks at these issues through the lens of a compliance expert, his post is worth a read as Congress and the SEC look at regulatory reform. He correctly focuses on the need to look at the quality rather than the quantity of regulation.

March 16, 2018 in Compliance, Corporations, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (0)

Friday, February 16, 2018

Corporate Governance, Compliance, Social Responsibility, and Enterprise Risk Management in the Trump/Pence Era

This may be obsolete by the time you read this post, but here are my thoughts on Corporate Governance, Compliance, Social Responsibility, and Enterprise Risk Management in the Trump/Pence Era. Thank you, Joan Heminway and the wonderful law review editors of Transactions: The Tennessee Journal of Business Law. The abstract is below:

With Republicans controlling Congress, a Republican CEO as President, a “czar” appointed to oversee deregulation, and billionaires leading key Cabinet posts, corporate America had reason for optimism following President Trump’s unexpected election in 2016. However, the first year of the Trump Administration has not yielded the kinds of results that many business people had originally anticipated. This Essay will thus outline how general counsel, boards, compliance officers, and institutional investors should think about risk during this increasingly volatile administration. 

Specifically, I will discuss key corporate governance, compliance, and social responsibility issues facing U.S. public companies, although some of the remarks will also apply to the smaller companies that serve as their vendors, suppliers, and customers. In Part I, I will discuss the importance of enterprise risk management and some of the prevailing standards that govern it. In Part II, I will focus on the changing role of counsel and compliance officers as risk managers and will discuss recent surveys on the key risk factors that companies face under any political administration, but particularly under President Trump. Part III will outline some of the substantive issues related to compliance, specifically the enforcement priorities of various regulatory agencies. Part IV will discuss an issue that may pose a dilemma for companies under Trump— environmental issues, and specifically shareholder proposals and climate change disclosures in light of the conflict between the current EPA’s position regarding climate change, the U.S. withdrawal from the Paris Climate Accord, and corporate commitments to sustainability. Part V will conclude by posing questions and proposing recommendations using the COSO ERM framework and adopting a stakeholder rather than a shareholder maximization perspective. I submit that companies that choose to pull back on CSR or sustainability programs in response to the President’s purported pro-business agenda will actually hurt both shareholders and stakeholders.

February 16, 2018 in Compliance, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Employment Law, Marcia Narine Weldon, Securities Regulation, Shareholders | Permalink | Comments (0)

Saturday, February 3, 2018

Time's Up for Board Members: Sexual Misconduct Allegations Against CEOs of Wynn and the Humane Society Should Send a Message

Perhaps I'm a cynic, but I have to admit that I was stunned when the news of hotelier  Steve Wynn's harassment allegations at the end of January caused a double-digit drop in stock price.  What began as an unseemly story of a $7.5 million settlement to a manicurist at one his of his resorts later morphed into a story about his resignation as head of the finance chair of the Republican National Committee. Not only did he lose that job, he also lost at least $412 million (the company at one point lost over $3 billion in value). His actions have also led regulators in two states to scrutinize his business dealings and settlements to determine whether he has violated "suitability standards."  Nonetheless, Wynn has asked his 25,000 employees to stand by him and think of him as their father. The question is, will the board stand by him as it faces potential liability for breach of fiduciary duty?

The Wynn board members should take a close look at what happened with the Humane Society yesterday. That board chose to retain the CEO after ending an investigation into harassment allegations. A swift backlash ensued. Major donors threatened to pull funding, causing the CEO to resign. A number of board members also reportedly resigned. However, not all of the board members resigned out of principle. One female director resigned after stating, " Which red-blooded male hasn’t sexually harassed somebody? ... [w]omen should be able to take care of themselves.” Unfortunately, the reaction of this board member did not surprise me. She's in her 80s and in my twenty years practicing employment law on the defense side, I've heard similar sentiments from many (but not all) men and women of that generation. Indeed, French actress Catherine Deneuve initially joined other women in denouncing the #MeToo movement before bowing to public pressure to apologize. We have five generations of people in the workplace now, and as I have explained here, companies need to reexamine the boundaries. What may seem harmless or "normal" for some may be traumatic or legally actionable to someone else. 

As the Wynn and the Humane Society situations illustrate, the sexual harassment issue is now front and center for boards so general counsels need to put the issue on the next board agenda. As I wrote here, boards must scrutinize current executives as well as those they are reviewing as part of their succession planning roles to ensure that the executives have not committed inappropriate conduct. Because definitions differ, companies must clarify the gray areas and ensure everyone knows what's acceptable and what's terminable (even if it's not per se illegal).This means having the head of human resources report to the board that company policies and training don't just check a box. In fact, board members need to ask about the effectiveness of policies and training in the same way that they ask about training on bribery, money laundering, and other highly regulated compliance areas. Boards as part of their oversight obligation must also ensure that there are no uninvestigated allegations against senior executives. Prudent companies will review the adequacy of investigations into misconduct that were closed prematurely or without corroboration.Companies must spend the time and the money with qualified, credible legal counsel to investigate claims that they may not have taken seriously in the past. Because the #MeToo movement shows no signs of abating, boards need to engage in these uncomfortable, messy conversations. If they don't, regulators, plaintiffs' counsel, and shareholders will make sure that they do. 

February 3, 2018 in Compliance, Corporate Governance, Corporations, Current Affairs, Employment Law, Ethics, Marcia Narine Weldon, Shareholders | Permalink | Comments (3)

Monday, January 29, 2018

Teaching Disclosure Law to 3Ls - Sexual Misconduct and Risk Management

At The University of Tennessee College of Law, we have a four-credit-hour, four-module course called Representing Enterprises that is one of three capstone course offerings in our Concentration in Business Transactions.  In Representing Enterprises, each course module focuses on a different aspect of transactional business law, often a specific transaction or task.  We try to both ask the enrolled students to apply law that they have learned in other courses (doctrinal and experiential) and also introduce the students to applied practice in areas of law to which they have not or may not yet have been exposed.

I have been teaching the first module over the past few weeks.  We finish up tomorrow.  My module focuses on disclosure regulation.  I have five class meetings, two hours for each meeting, to cover this topic.  Each class engages students with a hypothetical that raises disclosure questions.

The first class focused on general rule identification regarding the applicable laws governing disclosure in connection with the purchase of limited liability membership interests.  Specifically, our client had bought out his fellow members of a member-managed Tennessee limited liability company at a nominal price and without giving them full information about a reality television opportunity our client had with his wife.  As things turned out, the television show was picked up and popularized the brand name of the limited liability company, making the husband and wife, over the next few years, significant income.  Now, of course, the former limited liability company members are contending that, had they known the complete facts, they would have demanded a higher price for their limited liability membership interests from our client.  The students did some nice, creative thinking here in identifying applicable legal rules, pointing to Tennessee limited liability company fiduciary duty law (although they missed our closely held limited liability company doctrine), federal and state securities law, business torts, potential contract law issues, etc.

Subsequent class meetings broke disclosure law down into component pieces commonly seen in a business transactional law context.  The second class centered on work for another client, a Delaware corporation, concerning fiduciary duty disclosure issues under Delaware corporate law in connection with a merger.  The third class focused on a client's obligations under mandatory disclosure and antifraud elements of the federal securities laws.  The fourth class involved a hypothetical that raises specialized disclosure regulation questions for a talent agency that is an indirect subsidiary of a New York Stock Exchange ("NYSE") listed company.  I may post later about the fifth class meeting, which will take place tomorrow.  It involves Uber's recently publicized data security breach and related disclosure matters.

I want to focus today on the fourth class meeting.  In that class, one of the things the students had to wrestle with was determining how the parent's status and regulation as a NYSE-listed firm might impact or be impacted by disclosure compliance at the subsidiary level.  The NYSE Listed Company Manual provides, e.g., 

202.03 Dealing with Rumors or Unusual Market Activity

The market activity of a company's securities should be closely watched at a time when consideration is being given to significant corporate matters. If rumors or unusual market activity indicate that information on impending developments has leaked out, a frank and explicit announcement is clearly required. If rumors are in fact false or inaccurate, they should be promptly denied or clarified. A statement to the effect that the company knows of no corporate developments to account for the unusual market activity can have a salutary effect. It is obvious that if such a public statement is contemplated, management should be checked prior to any public comment so as to avoid any embarrassment or potential criticism. If rumors are correct or there are developments, an immediate candid statement to the public as to the state of negotiations or of development of corporate plans in the rumored area must be made directly and openly. Such statements are essential despite the business inconvenience which may be caused and even though the matter may not as yet have been presented to the company's Board of Directors for consideration. . . .

Having identified this and other related rules, we posited situations in which operations or activities at the subsidiary level might require disclosure by the parent company under the NYSE listed company rules.  We dug in most specifically on what might lead to market rumors or cause unusual market activity.  Having just discussed in the prior class meeting disclosure standards under the federal securities laws, the students understood that materiality was a distinct, separate disclosure-triggering standard and that the parent firm might have different--even conflicting--disclosure obligations under the federal securities laws and the NYSE listed company rules.  With these observations as a foundation, I asked the students what types of conduct or information at the subsidiary level might generate market rumors or unusual market activity.

Given that the firm was a talent agency, I was not surprised when one of the first answers referenced the allegations against Harvey Weinstein.  The disparate pay issues relating to the Mark Wahlberg/Michelle Williams affair that I wrote about in a different context a few weeks ago (w/r/t which the same talent agency advised both actors) also came up.  In each case we tried to envision what the subsidiary should be disclosing to the parent, and when, to enable the parent to satisfy its NYSE obligations.  Among other things, we discussed the financial and non-financial impacts of the facts we were generating on the trading price and volume of parent's stock.  It was a great brainstorming session, imv.  By the end of class, we could see that a communication-oriented compliance plan for the subsidiary seemed to be in order.

Interestingly, the Steve Wynn story then broke the next day.  I was pleased in the aftermath to see this article in The New York Times that validated the nature of our discussion and the complexity involved in assessing market risk in these kinds of situations.

The question, though, is what specifically investors are now pricing in. One risk is that regulators make it difficult for Wynn Resorts to expand. The Massachusetts gaming watchdog said on Friday that it would review plans for a new casino in Boston.

The threat of parting ways with an influential executive, until now a reasonable steward of shareholder value, is also potent. Over the past decade, Wynn Resorts’ average 10.5 percent shareholder return is a shade higher than that of the Standard & Poor’s 500-stock index — despite a slump in 2014 after China toughened rules on holiday gamblers.

Investors’ strong response to the reports is now the problem of Wynn Resorts’ 10-person board, which contains just one woman. Others surely will learn from how the Wynn board responds.

My students did identify regulatory risk (and the rest of the class was spent talking about California and New York laws regulating talent agencies, which are regulated and require licensure) and the risks associated with an iconic founder or chief executive at the heart of a controversy.  I love it when current events dovetail with classroom activities!

Have any of you taught a course or course component like this before?  I would be interested to know.  I found it hard to teach the securities regulation issues to the students who were not interested in securities regulation work.  I tried to break the legal foundations down into relatively small policy and doctrinal chunks, and I told them that every business lawyer needs to know a little bit about securities regulation, whether advising or litigating in connection with business transactions.  But those who had not taken and were not taking our Securities Regulation course (a majority of the class) seemed to mentally almost shut down.  Some of that may be 3L-itis.  But I am rethinking how to engage students more happily with this part of the course.  I will be asking the students for help on this.  But any thoughts you have from your own experience (or otherwise) would be a great help to me as I think this through.

January 29, 2018 in Compliance, Current Affairs, Joan Heminway, Securities Regulation | Permalink | Comments (0)

Friday, January 26, 2018

Should a Board Have Access To A CEO's Health Information?

On Wednesday, I spoke with Kimberly Adams, a reporter for NPR Marketplace regarding CSX's decision to require its CEO to disclose health information to the board. I don't have a link to post, sorry. As you may know, CSX suffered a significant stock drop in December when its former CEO died shortly after taking a medical leave of absence and after refusing to disclose information about his health issues. CSX has chosen the drastic step of requiring an annual CEO physical in response to a shareholder proposal filed on December 21st stating, “RESOLVED, that the CEO of the CSX Corporation will be required to have an annual comprehensive physical, performed by a medical provider chosen by the CSX Board, and that results of said physical(s) will be provided to the Board of Directors of the CSX Corporation by the medical provider.” Adams asked my thoughts about a Wall Street Journal article that outlined the company's plans. 

I'm not aware of any other company that asks a CEO to provide the results of an annual physical to the board. As I informed Adams, I hope the board has good counsel to avoid running afoul of the Americans with Disabilities Act, HIPAA, the Genetic Information Nondiscrimination Act of 2008, and other state and federal health and privacy laws. While I believe that the board must ensure that it takes its role of succession planning seriously, I question whether this is the best means to achieve that. I also remarked that although a CEO would know in advance that this is a condition of employment and would negotiate with the aid of counsel what the parameters would be, I was concerned about the potential slippery slope. How often would the CEO have to update the board on his/her health condition? Who else would have access to the information? Will this deter talented executives from seeking the top spot at a corporation?

One could argue that the health of the CEO is material information. But if that's the case, why haven't more shareholders made similar proposals? Perhaps there haven't been more of these proposals because the CSX situation was extreme. Shareholders were asked to bless the $84 million compensation package of a man who was so ill that he required a portable oxygen tank but who refused to disclose his condition or prognosis. Hopefully, other companies won't take the same approach. 

 

 

January 26, 2018 in Compliance, Corporate Governance, Corporations, Current Affairs, Employment Law, Marcia Narine Weldon, Shareholders | Permalink | Comments (1)

Wednesday, January 3, 2018

Sex and Succession Planning- A New Agenda Item for Boards?

At a time when many boards may be thinking of tax planning and possible M & A deals, they may have to start focusing more on the unseemly topic of their executives' sex lives because the flood of terminations and resignations due to sexual misconduct shows no signs of slowing down. One of the most shocking but underreported terminations in 2017 related to VISA. The CEO, one year into the role, chose to terminate one of his most valuable executives after an anonymous tip about sexual misconduct.  He wanted his employees to know that the corporate culture and values mattered. Board members should look closely at the VISA example.

We will continue to see the rise of the #MeToo movement spurred on in part by the messaging from a star-studded task force  formed to address Hollywood issues and the establishment of a multimillion-dollar legal defense fund to help blue-collar workers. Even Supreme Court Chief Justice Roberts addressed sexual harassment in the court system in his Year-End Report on the Federal Judiciary.  More people than ever may now choose to come forward with claims of harassment or assault. Whether companies choose to terminate wrongdoers or the accused choose to resign "to spend more time with their families," it's a new day. As I've written here, companies will need to re-evaluate policies and training to navigate these landmines.

Board members will need to step up too. Boards of any size institution (including nonprofits) need to take the job of CEO succession planning seriously because the chief executive could leave, retire, or die. Boards must not only consider the possibility of a harassment scandal in the C-Suite but they must also worry about their fellow board members. Unfortunately, a KPMG study revealed that only 14% of board members believe they have a detailed succession plan for themselves. Members of the C-suite will also need to think more clearly about succession planning in the lower ranks. HR may have to redouble efforts to ensure that high-potential employees have no skeletons in the closet that have been swept under the rug. 

In the meantime, I and other former members of the Department of Labor Whistleblower Protection Advisory Committee have written an op-ed in the Boston Globe. Even if I had not co-authored the piece, as a former defense-side employment lawyer and compliance officer, I would recommend that company leaders take a look at it. Some of our recommendations for strengthening corporate culture are below:

1) have a trustworthy, independent system, with multiple reporting mechanisms, staffed with the proper skills to conduct swift, full, and fair investigations and to carry them to a just resolution, observing principles of confidentiality and discretion, and including ongoing protection of those who report;

2) make sure that there is a clear, credible anti-retaliation policy that protects accusers and witnesses who come forward in good faith;

3) require strong accountability for all levels of management for reporting and responding to complaints;

4) implement specific policies that direct bonuses, raises, and other incentives and opportunities to those who, in addition to meeting business targets, actively prevent and respond appropriately to harassment, retaliation, and other compliance problems. Consider clawbacks if unsupportive behavior later comes to light. Call out injurious behavior (without necessarily naming names) and credit exemplary behaviors;

5) periodically assess the culture and require an independent outside entity to confidentially administer anonymous surveys and interviews. The best of these use benchmarked and validated questions that can provide insight into the effectiveness of the compliance program and whether employees trust the system; and

6) make sure to involve unions and other formal and informal employee groups in developing new policies.

I wish all of our readers a happy and healthy new year. I wish board members and company executives good luck. 

January 3, 2018 in Compensation, Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Employment Law, Ethics, Marcia Narine Weldon | Permalink | Comments (0)

Thursday, December 7, 2017

Will More Women on Boards Change Corporate Culture and Stem the Tide of Harassment Complaints?

Two weeks ago, I asked whether companies were wasting time on harassment training given the flood of accusations, resignations, and terminations over the past few weeks. Having served as a defense lawyer on these kinds of claims and conducted hundreds of trainings, I know that most men generally know right from wrong before the training (and some still do wrong). I also know that in many cases, people look the other way when they see or hear about the complaints, particularly if the accused is a superstar or highly ranked employee. Although most men do not have the power and connections to develop an alleged Harvey Weinstein-type "complicity machine" to manage payoffs and silence accusers, some members of management play a similar role when they ignore complaints or rumors of inappropriate or illegal behavior. 

The head in the sand attitude that executives and board members have displayed in the Weinstein matter has led to a lawsuit arguing that Disney knew or should have known of Weinstein's behavior. We may see more of these lawsuits now that women have less fear of speaking out and Time honored the "Silence Breakers" as the Person of the Year. As I read the Time  article and watched some of the "silence breakers" on television, it reminded me of 2002, when Time honored "The Whistleblowers." Those whistleblowers caused Congress to enact sweeping new protection under Sarbanes-Oxley.  Because of all of the publicity, companies around the country are now working with lawyers and human resources experts to review and revamp their antiharassment training and complaint mechanisms. As a result, we will likely see a spike in internal and external complaints. But do we need more than lawsuits? Would more women in the boardroom and the C-Suite make a difference in corporate culture in general and thereby lead to more gender equity?

Last week, Vĕra Jourová, the EU Commissioner for Justice and Gender Equality put forth some proposals to redress the gender pay gap in Member States’ businesses. She recommends an increase in the number of women on boards for companies whose non-executive Boards are more than 60% male. These companies would be required to “prioritize” women when candidates of “equal merit” are being considered for a position. Germany, Sweden, and the Netherlands have already previously rejected a similar proposal.

I'm generally not in favor of quotas because I think they produce a backlash. However, I know that many companies here and abroad will start to recruit more female directors and executives in an effort to appear on top of this issue. Will it work? We will soon see. After pressure from institutional investors such as BlackRock and State Street to increase diversity, women and minorities surpassed 50% of  S & P open board seats in 2017. Stay tuned. 

 

December 7, 2017 in Compliance, Corporate Governance, CSR, Current Affairs, Employment Law, Ethics, Marcia Narine Weldon, Shareholders | Permalink | Comments (1)

Thursday, October 5, 2017

Should Employees Have Their Day in Court? The Supreme Court and Mandatory Arbitration

On Monday, the Supreme Court heard argument on three cases[1] that could have a significant impact on an estimated 55% of employers and 25 million employees. The Court will opine on the controversial use of class action waivers and mandatory arbitration in the employment context. Specifically, the Court will decide whether mandatory arbitration violates the National Labor Relations Act or is permissible under the Federal Arbitration Act. Notably, the NLRA applies in the non-union context as well.

Monday’s argument was noteworthy for another reason—the Trump Administration reversed its position and thus supported the employers instead of the employees as the Obama Administration had done when the cases were first filed. The current administration also argued against its own NLRB’s position that these agreements are invalid.

In a decision handed down by the NLRB before the Trump Administration switched sides on the issue, the agency ruled that Dish Network’s mandatory arbitration provision violates §8(a)(1) of the NLRA because it “specifies in broad terms that it applies to ‘any claim, controversy and/or dispute between them, arising out of and/or in any way related to Employee’s application for employment, employment and/or termination of employment, whenever and wherever brought.’” The Board believed that employees would “reasonably construe” that they could not file charges with the NLRB, and this interfered with their §7 rights.

The potential impact of the Supreme Court case goes far beyond employment law, however. As the NLRB explained on Monday:

The Board's rule here is correct for three reasons. First, it relies on long-standing precedent, barring enforcement of contracts that interfere with the right of employees to act together concertedly to improve their lot as employees. Second, finding individual arbitration agreements unenforceable under the Federal Arbitrations Act savings clause because are legal under the National Labor Relations Act gives full effect to both statutes. And, third, the employer's position would require this Court, for the first time, to enforce an arbitration agreement that violates an express prohibition in another coequal federal statute. (emphasis added).

This view contradicted the employers' opening statement that:

Respondents claim that arbitration agreements providing for individual arbitration that would otherwise be enforceable under the FAA are nonetheless invalid by operation of another federal statute. This Court's cases provide a well-trod path for resolving such claims. Because of the clarity with which the FAA speaks to enforcing arbitration agreements as written, the FAA will only yield in the face of a contrary congressional command and the tie goes to arbitration. Applying those principles to Section 7 of the NLRA, the result is clear that the FAA should not yield.

My co-bloggers have written about mandatory arbitration in other contexts (e.g., Josh Fershee on derivative suits here, Ann Lipton on IPOs here, on corporate governance here, and on shareholder disputes here, and Joan Heminway promoting Steve Bradford’s work here). Although Monday’s case addresses the employment arena, many have concerns with the potential unequal playing field in arbitral settings, and I anticipate more litigation or calls for legislation.  

I wrote about arbitration in 2015, after a New York Times series let the world in on corporate America’s secret. Before that expose, most people had no idea that they couldn’t sue their mobile phone provider or a host of other companies because they had consented to arbitration. Most Americans subject to arbitration never pay attention to the provisions in their employee handbook or in the pile of paperwork they sign upon hire. They don’t realize until they want to sue that they have given up their right to litigate over wage and hour disputes or join a class action.

As a defense lawyer, I drafted and rolled out class action waivers and arbitration provisions for businesses that wanted to reduce the likelihood of potentially crippling legal fees and settlements. In most cases, the employees needed to sign as a condition of continued employment. Thus, I’m conflicted about the Court’s deliberations. I see the business rationale for mandatory arbitration of disputes especially for small businesses, but as a consumer or potential plaintiff, I know I would personally feel robbed of my day in court.

The Court waited until Justice Gorsuch was on board to avoid a 4-4 split, but he did not ask any questions during oral argument. Given the questions that were asked and the makeup of the Court, most observers predict a 5-4 decision upholding mandatory arbitrations. The transcript of the argument is here. If that happens, I know that many more employers who were on the fence will implement these provisions. If they’re smart, they will also beef up their compliance programs and internal complaint mechanisms so that employees don’t need to resort to outsiders to enforce their rights.

My colleague Teresa Verges, who runs the Investor Rights Clinic at the University of Miami, has written a thought-provoking article that assumes that arbitration is here to stay. She proposes a more fair arbitral forum for those she labels “forced participants.” The abstract is below:

Decades of Supreme Court decisions elevating the Federal Arbitration Act (FAA) have led to an explosion of mandatory arbitration in the United States. A form of dispute resolution once used primarily between merchants and businesses to resolve their disputes, arbitration has expanded to myriad sectors, such as consumer and service disputes, investor disputes, employment and civil rights disputes. This article explores this expansion to such non-traditional contexts and argues that this shift requires the arbitral forum to evolve to increase protections for forced participants and millions of potential claims that involve matters of public policy. By way of example, decades of forced arbitration of securities disputes has led to increased due process and procedural reforms, even as concerns remain about investor access, the lack of transparency and investors’ perception of fairness.

I’ll report back on the Court’s eventual ruling, but in the meantime, perhaps some policymakers should consider some of Professor Verges’ proposals. Practically speaking though, once the NLRB has its full complement of commissioners, we can expect more employer-friendly decisions in general under the Trump Administration.

 

[1] Murphy Oil USA v. N.L.R.B., 808 F.3d 1013 (5th Cir. 2015), cert. granted, 137 S. Ct. 809, 196 L. Ed. 2d 595 (2017); Lewis v. Epic Sys. Corp., 823 F.3d 1147 (7th Cir. 2016), cert. granted, 137 S. Ct. 809, 196 l. Ed. 2d. 595 (2017); Morris v. Ernst & Young, LLP, 834 F.3d 975 (9th Cir. 2016), cert. granted, 137 S. Ct. 809, 196 L. Ed. 2d 595 (2017)

October 5, 2017 in Compliance, Corporate Governance, Corporations, Current Affairs, Employment Law, Legislation, Litigation, Marcia Narine Weldon | Permalink | Comments (0)

Friday, September 29, 2017

Pollman and Barry on Regulatory Entrepreneurship

I recently finished Elizabeth Pollman and Jordan Barry's article entitled Regulatory Entrepreneurship. The article is thoughtfully written and timely. I highly recommend it. 

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This Article examines what we term “regulatory entrepreneurship” — pursuing a line of business in which changing the law is a significant part of the business plan. Regulatory entrepreneurship is not new, but it has become increasingly salient in recent years as companies from Airbnb to Tesla, and from DraftKings to Uber, have become agents of legal change. We document the tactics that companies have employed, including operating in legal gray areas, growing “too big to ban,” and mobilizing users for political support. Further, we theorize the business and law-related factors that foster regulatory entrepreneurship. Well-funded, scalable, and highly connected startup businesses with mass appeal have advantages, especially when they target state and local laws and litigate them in the political sphere instead of in court.

Finally, we predict that regulatory entrepreneurship will increase, driven by significant state and local policy issues, strong institutional support for startup companies, and continued technological progress that facilitates political mobilization. We explore how this could catalyze new coalitions, lower the cost of political participation, and improve policymaking. However, it could also lead to negative consequences when companies’ interests diverge from the public interest.

September 29, 2017 in Business Associations, Compliance, Current Affairs, Entrepreneurship, Haskell Murray, Management, Research/Scholarhip, Technology | Permalink | Comments (1)

Wednesday, September 20, 2017

What keeps general counsels and compliance officers up at night? Here's what boards should be discussing

No one had a National Compliance Officer Day when I was in the job, but now it’s an official thing courtesy of SAI Global, a compliance consulting company. The mission of this one-year old holiday is to:

  • Raise awareness about the importance of ethics and compliance in business and shine a spotlight on the people responsible for making it a reality.
  • Provide resources to promote the wellness and well-being of ethics and compliance professionals so they can learn how to overcome stress and burnout.
  • Grow the existing ethics and compliance community and help identify and guide the next generation of E&C advocates.

Although some may look at this skeptically as a marketing ploy, I’m all for this made-up holiday given what compliance officers have to deal with today.

Last Saturday, I spoke at the Business Law Professor Blog Conference at the University of Tennessee about corporate governance, compliance, and social responsibility in the Trump/Pence era. During my presentation, I described the ideal audit committee meeting for a company that takes enterprise risk management seriously. My board agenda included: the impact of climate change and how voluntary and mandatory disclosures could change under the current EPA and SEC leadership; compliance budgetary changes; the rise of the whistleblower; the future of the DOJ’s Yates Memo and corporate cooperation after a recent statement by the Deputy Attorney General; SEC and DOJ enforcement priorities; data protection and cybersecurity; corporate culture and the risk of Google/Uber- type lawsuits; and sustainability initiatives and international governance disclosures. I will have a short essay in the forthcoming Transactions: The Tennessee Journal of Business Law but here are a few statistics that drove me to develop my model (and admittedly ambitious) agenda:

  • According to an ACC survey of over 1,000 chief legal officers:
    • 74% say ethics and compliance issues keep them up at night
    • 77% handled at least one internal or external compliance-related investigation in their department
    • 33% made policy changes in their organizations as a result of geopolitical events.
    • 28% were targeted by regulators in the past two years
  • Board members polled in September 2016 were most concerned about the following compliance issues:
    • Regulatory changes and scrutiny may heighten
    • Cyber threats
    • Privacy/identity and information security risks
    • Failure of corporate culture to encourage timely identification/escalation of significant risk issues
  • During the 2017 proxy season, shareholders submitted 827 proposals (down from 916 in 2016):
    • 112 related to proxy access,
    • 87 related to political contributions and lobbying,
    • 35 focused on board diversity (up from 28 in 2016),
    • 34 proposals focused on discrimination or diversity-related issues (up from 16 in 2016),
    • 69 proposals related to climate change (3 of those passed, including at ExxonMobil)
    • 19 proposals focused on the gender pay gap (up from 13 in 2016)

General counsels are increasingly taking on more of a risk officer role in their companies, and compliance officers are in the thick of all of these issues. The government has also recently begun to hold compliance officers liable for complicity with company misdeeds. My advice- if it’s not against your company/school policy, take SCCE’s suggestion and hug your compliance officer. I’m sure she’ll appreciate it.

September 20, 2017 in Compliance, Conferences, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Marcia Narine Weldon | Permalink | Comments (0)

Thursday, August 31, 2017

Does Uber Need to Learn from Walmart about the FCPA?

Uber has a new CEO. Perhaps his first task should be to require one of his legal or compliance staff to attend the FCPA conference at Texas A & M in October given the new reports of an alleged DOJ investigation.. I might have some advice, but Uber needs to hear the lessons learned from Walmart, who will be sending its Chief Compliance Officer. Thanks to FCPA expert, Mike Koehler, aka the FCPA Professor, for inviting me. Mike has done some great blogging about the Walmart case (FYI- the company has reported spending $865 million on fees related to the FCPA and compliance-related costs). Details are below:

 

THE F​CPA TURNS 40:
AN ASSESSMENT OF FCPA ENFORCEMENT POLICIES AND PROCEDURES

FCPA ConferenceThursday, October 12, 2017
Texas A&M University School of Law
Fort Worth, Texas

This conference brings together Foreign Corrupt Practices Act enforcement officials, experienced FCPA practitioners, and leading FCPA academics and scholars to discuss the many legal and policy issues relevant to the current FCPA enforcement and compliance landscape.

Register here

AGENDA

[Click here to download agenda pdf]

Registration, 8:30 a.m.

Morning Session, 9:00 a.m. to Noon

FCPA Legal and Policy Issues

  • Daniel Chow, Professor, Ohio State School of Law
    China’s Crackdown on Government Corruption and the FCPA
  • Mike Koehler, Professor, Southern Illinois School of Law
    Has the FCPA Been Successful In Achieving Its Objectives?
  • Peter Reilly, Associate Professor, Texas A&M School of Law
    The Fokker Circuit Court Opinion and Deferred Prosecution of FCPA Matters
  • Juliet Sorensen, Professor, Northwestern School of Law
    The Phenomenon of an Outsize Number of Male Defendants Charged with Federal Crimes of Corruption
  • Marcia Narine Weldon, Professor, Univ. of Miami School of Law
    What the U.S. Can Learn from Enforcement in Other Jurisdictions and What Other Jurisdictions Can Learn from Us

Luncheon, Noon to 1:00 p.m.

Afternoon Session, 1:00 to 3:00 p.m.

FCPA Conference JorgensenKeynote address

(1:00 to 2:00 p.m.)

  • Jay Jorgensen
    Executive Vice President, Global Chief Ethics and Compliance Officer, Walmart

Follow-up panel (2:00 to 3:00 p.m.):

FCPA Enforcement and Compliance Landscape: Past, Present, and Future

  • Kit Addleman, Attorney, Haynes and Boone LLP, Dallas and Fort Worth Offices
  • Jason Lewis, Attorney, Greenberg Traurig LLP, Dallas Office

CLE Credit for Attendees

All attendees are eligible for ​​5 hours of CLE credit. The morning session offers ​3 CLE credits. The afternoon session offers 2 CLE credits, one of which will be an Ethics credit. Forms will be provided to attendees at the conference. CLE ​credit is free for all attendees.
 
 
 

August 31, 2017 in Compliance, Conferences, Corporate Governance, Corporations, Current Affairs, Ethics, Marcia Narine Weldon, White Collar Crime | Permalink | Comments (0)

Wednesday, August 2, 2017

How (Not) To Teach A Course in Compliance and Corporate Social Responsibility

Good morning from gorgeous Belize. I hope to see some of you this weekend at SEALS. A couple of weeks ago, I posted about the compliance course I recently taught. I received quite a few emails asking for my syllabus and teaching materials. I am still in the middle of grading but I thought I would provide some general advice for those who are considering teaching a similar course. I taught thinking about the priorities of current employers and the skills our students need.

1) Picking materials is hard- It's actually harder if you have actually worked in compliance, as I have, and still consult, as I do from time to time. I have all of the current compliance textbooks but didn't find any that suited my needs. Shameless plug- I'm co-authoring a compliance textbook to help fill the gap. I wanted my students to have the experience they would have if they were working in-house and had to work with real documents.  I found myself either using or getting ideas from many primary source materials from the Society of Corporate Compliance and Ethics, the  Institute of Privacy ProfessionalsDLA Piper, the Federal Sentencing Guidelines for Organizational Defendants, policy statements from various governmental entities in the US (the SEC, DOJ Banamex case, and state regulators), and abroad (UK Serious Frauds Office and Privacy Office). Students also compared CSR reports, looked at NGO materials, read the codes of conducts of the guest speakers who came in, and looked at 10-Ks, the Carbon Disclosure Project, and other climate change documents for their companies. I also had students watch YouTube videos pretending that they went to CLEs and had to write a memo to the General Counsel so that s/he could update the board on the latest developments in healthcare compliance and risk assessments. 

2) This should be a 3-credit course for it to be an effective skills course- My grand vision was for guest speakers to come in on Mondays  for an hour and then I would lecture for the remaining time or I would lecture for two hours on Monday and then students would have simulations on Wednesday.This never happened. Students became so engaged that the lecturers never finished in an hour. We were always behind. Simulations always ran over. 

3) Don't give too much reading- I should have known better. I have now taught at three institutions at various tiers and at each one students have admitted- no, actually bragged- that they don't do the reading. Some have told me that they do the reading for my classes because I grade for class participation, but I could actually see for my compliance course how they could do reasonably well without doing all of the reading, which means that I gave too much. I actually deliberately provided more than they needed in some areas (especially in the data privacy area) because I wanted them to build a library in case they obtained an internship or job after graduation and could use the resources. When I started out in compliance, just knowing where to look was half the battle. My students have 50 state surveys in employment law, privacy and other areas that will at least give them a head start.

4) Grading is hard- Grading a skills course is inherently subjective and requires substantive feedback to be effective.  40% of the grade is based on a class project, which was either a presentation to the board of directors or a training to a group of employees. Students had their choice of topic and audience but had to stay within their industry and had the entire 6-week term to prepare. Should I give more credit to the team who trained the sales force on off-label marketing for pharmaceuticals because the class acting as the sales force (and I) were deliberately disrespectful (as some sales people would be in real life because this type of  training would likely limit their commissions)? This made their training harder. Should I be tougher on the group that trained  the bored board on AML, since one student presenter was in banking for years? I already know the answers to these rhetorical questions. On individual projects, I provide comments as though I am a general counsel, a board member, or a CEO depending on the assignment. This may mean that the commentary is "why should I care, tell me about the ROI up front." This is not language that law students are used to, but it's language that I have tried to instill throughout the course. I gave them various versions of the speech, "give me less kumbaya, we need to care about the slave labor in the factories, and less consumers care about company reputation, and more statistics and hard numbers to back it up."  Some of you may have seen this recent article about United and the "non-boycott, which validates what I have been blogging about for years. If it had come out during the class, I would have made students read it because board members would have read it and real life compliance officers would have had to deal with it head on.

5) Be current but know when to stop- I love compliance and CSR. For the students, it's just a class although I hope they now love it too. I found myself printing out new materials right before class because I thought they should see this latest development. I'm sure that  what made me think of myself as cutting edge and of the moment made me come across to them as scattered and disorganized because it wasn't on the syllabus.

6) Use guest speakers whenever possible- Skype them in if you have to. Nothing gives you credibility like having someone else say exactly what you have already said.

If you have any questions, let me know. I will eventually get back to those of you who asked for materials, but hopefully some of these links will help. If you are teaching a course or looking at textbook, send me feedback on them so that I can consider it as I work on my own. Please email me at mweldon@law.miami.edu.

Next week, I will blog about how (not) to teach a class on legal issues for start ups, entrepreneurs, and small businesses, which I taught last semester.

August 2, 2017 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Employment Law, Human Rights, Law School, Lawyering, Marcia Narine Weldon, Teaching | Permalink | Comments (0)

Monday, July 24, 2017

Hot Off the Press: Russell and Heminway on Representing the Organizational Client on Environmental Matters

ABABookCover

My good friend and long-time mentor Irma Russell and I wrote a chapter for the recently released ABA book, Ethics and the Environment: A Lawyer's Guide.  Irma also is a co-editor of the book (with Vicki Wright).  In our joint contribution, the chapter entitled "Representing the Organizational Client on Environmental Matters," Irma and I cover issues involving professional responsibility, corporate governance, and environmental compliance.  Guess which part was my primary responsibility . . . ?!)  Covering some 37 pages of the 242-page book, the rules we cover and the observations we make are fairly wide-ranging.  We hope, as we noted in our conclusion to the chapter, that we supply legal counsel representing corporations and other organizations with "foundational tools to assist them in providing advisory and advocacy-oriented services to organizational clients in the environmental law context."  Irma and I received our copies last week.  The book soon will be available through the ABA and other outlets.


 
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July 24, 2017 in Books, Compliance, Ethics, Joan Heminway, Lawyering | Permalink | Comments (0)

Wednesday, July 12, 2017

Should we be steering more law students to compliance careers?

Prior to joining academia, I served as a compliance officer, deputy GC, and chief privacy officer for a Fortune 500 company. I had to learn everything on the job by attending webinars and conferences and reading client alerts. Back then, I would have paid a law school graduate a competitive salary to work in my compliance group, but I couldn’t find anyone who had any idea about what the field entailed.

The world has changed. Now many schools (including mine) offer relevant coursework for this JD-advantage position. I just finished teaching a summer skills course in compliance and corporate social responsibility, and I’m hoping that I have encouraged at least a few of the students to consider it as a viable career path. Compliance is one of the fastest growing corporate positions in the country, and the number of compliance personnel has doubled in the past 6 years. Still, many business-minded law students don’t consider it in the same vein as they consider jobs with Big Law.

This summer, my twelve students met twice a week for two hours at 7:30 pm. In the compressed six-week course, they did the following:

  • Heard from compliance officers and outside counsel for public companies and government entities
  • Read the same kinds of primary source material that compliance officers and counsel read in practice (such as the Federal Sentencing Guidelines, the Yates Memo, deferred prosecution agreements, and materials from the EU on the upcoming changes to data protection regulation)
  • Compared and contrasted CSR reports from WalMart and Target, and reviewed the standards for the Global Reporting Initiative and the UN Global Compact
  • Advocated before a board as a worker safety NGO for a company doing business in Bangladesh
  • Served as a board member during a meeting (using actual board profiles)
  • Wrote a reflection paper on the ideal role and reporting structure of compliance officers
  • Considered top employment law and data protection risks for fictional companies to which they were assigned
  • Looked at the 10-Ks and CDP report for climate change disclosures after examining the role of socially responsible investors and shareholder resolutions
  • Drafted industry-specific risk assessment questionnaires
  • Drafted three code of conduct policies
  • Wrote a short memo to the GC on health care compliance and the DOJ Yates memo
  • Did a role play during a crisis management simulation acting as either a board member, SEC or DOJ lawyer, the CEO, compliance officer or GC and
  • Conducted a 20-minute board presentation or employee compliance training (worth the biggest part of the grade).

Perhaps the most gratifying part of the semester came during tonight’s final presentations. The students could pick any topic relevant to the fictional company that they were assigned. They chose to discuss child labor in the supply chain for a clothing company, off-label marketing in the pharmaceutical industry, anti-money laundering compliance in a large bank, and environmental and employment law issues for a consumer product conglomerate. Even though I was not their BA professor, I was thrilled to hear them talk about the Caremark duty, the duty of care, and the business judgment rule in their presentations. Most important, the students have left with a portfolio of marketable skills and real-world knowledge in a fast growing field.

If you have your own ideas on how to teach compliance and CSR, please leave them below or email me at mweldon@law.miami.edu.

July 12, 2017 in Compliance, Corporate Governance, Corporate Personality, Corporations, CSR, Law School, Marcia Narine Weldon, Teaching | Permalink | Comments (0)

Wednesday, June 21, 2017

Is This the End of Uber's PR Nightmare?

Yesterday, during a conversation with a law student about whether corporate social responsibility is a mere marketing ploy to fool consumers, the student described her conflict with using Uber. She didn’t like what she had read in the news about Uber’s workplace culture issues, sex harassment allegations, legal battles with its drivers, and leadership vacuum. The student, who is studying for the bar, probably didn’t even know that the company had even more PR nightmares just over the past ten days--- the termination of twenty employees after a harassment investigation; the departure of a number of executives including the CEO’s right hand man; the CEO’s “indefinite” leave of absence to “mourn his mother” following a scathing investigative report by former Attorney General Eric Holder; and the resignation of a board member who made a sexist remark during a board meeting (ironically) about sexism at Uber. She clearly hadn’t read Ann Lipton’s excellent post on Uber on June 17th.

Around 1:00 am EST, the company announced that the CEO had resigned after five of the largest investors in the $70 billion company issued a memo entitled “Moving Uber Forward.” The memo was not available as of the time of this writing. According to the New York Times:

The investors included one of Uber’s biggest shareholders, the venture capital firm Benchmark, which has one of its partners, Bill Gurley, on Uber’s board. The investors made their demand for Mr. Kalanick to step down in a letter delivered to the chief executive while he was in Chicago, said the people with knowledge of the situation.

… the investors wrote to Mr. Kalanick that he must immediately leave and that the company needed a change in leadership. Mr. Kalanick, 40, consulted with at least one Uber board member, and after long discussions with some of the investors, he agreed to step down. He will remain on Uber’s board of directors.

This has shades of the American Apparel controversy with ousted CEO Dov Charney that I have blogged about in the past. Charney also perpetuated a "bro culture" that seemed unseemly for a CEO, but isn't all that uncommon among young founders. The main difference here is that the investors, not the Board, made the decision to fire the CEO. As Ann noted in her post this weekend, there is a lot to unpack here. I’m not teaching Business Associations in the Fall, but I hope that many of you will find a way to use this as a case study on corporate governance, particularly Kalanick’s continuation as a board member. That could be awkward, to put it mildly. I plan to discuss it in my Corporate Compliance and Social Responsibility course later today. As I have told the students and written in the past, I am skeptical of consumers and their ability to change corporate culture. Sometimes, as in the case of Uber, it comes down to the investors holding the power of the purse.

June 21, 2017 in Ann Lipton, Compliance, Corporate Governance, Corporate Personality, CSR, Current Affairs, Marcia Narine Weldon, Teaching | Permalink | Comments (0)

Wednesday, April 26, 2017

What's next for conflict minerals legislation? My views and the GAO report

Last week, a reporter interviewed me regarding conflict minerals.The reporter specifically asked whether I believed there would be more litigation on conflict minerals and whether the SEC's lack of enforcement would cause companies to stop doing due diligence. I am not sure which, if any, of my remarks will appear in print so I am posting some of my comments below:

I expect that if conflict minerals legislation survives, it will take a different form. The SEC asked for comments at the end of January, and I've read most of the comment letters. Many, including Trillium Asset Management, focus on the need to stay the course with the Rule, citing some success in making many mines conflict free. Others oppose the rule because of the expense. However, it appears that the costs haven't been as high as most people expected, and indeed many of the tech companies such as Apple and Intel have voiced support for the rule. It's likely that they have already operationalized the due diligence. The SEC has limits on what it can do, so I expect Congress to take action, unless there is an executive order from President Trump, which people have been expecting since February. 
 
The Senate Foreign Relations subcommittee on Africa held a hearing on conflict minerals on April 5, and some of the witnesses and Senators talked about what hasn't worked with the rule. Although the situation has improved, the violence continues, most notably with the murder of a member of the UN Group of Experts just last week. Rick Goss from the Information Technology Council testified the while the Rule has had some benefits such as increased transparency and raising global awareness, there are also things that don't work. He discussed fact that the illicit trade in gold continues and criminal elements are still exploiting other resources. A number of his and other witness' proposed solutions were more holistic and geopolitical and went beyond the SEC's purview, and I think that's where the government should look when trying to address these issues. You may see a push toward a safe harbor, which came up in some of the comment letters, and which was a point of discussion during the Senate testimony. With a safe harbor, the issuer could rely on supplier certifications.
 
Lack of enforcement or less enforcement could cause more issuers to continue to do business or start doing business there because it will be less onerous. On the other hand, with with the EU's conflict mineral rules, which will come into play in 2021 and which covers the same minerals (but is not limited in geography) you may find that the big issuers decide to stay the course with due diligence.
 
I have been focusing my research on the consumer aspect of these name and shame laws. While there have been conflict-free campuses and conflict-free cities (and some of them sent letters to the SEC), I haven't seen solid evidence that shows that consumers are boycotting the companies that aren't doing the full due diligence that 1502 requires or rewarding those that do. Apple is a stand-out in conflict minerals compliance but they also happen to sell something that people really want.
 
Although firms like Trillium state that investors like the transparency, they are likely benefitting from an improved supply chain in general because companies that attempted to follow 1502 by necessity had to upgrade systems and supplier protocols.
 
So in sum, I think that the firms that are already doing what they are supposed to may continue to do so (or scale back just a little) and may tout these voluntary efforts in their CSR reports. Those who have been unable to determine the origin of their minerals won't likely do any more than they have to or may just source their minerals elsewhere.
 
If Congress keeps the rule, I recommend that the SEC:
 
1) limit reporting obligations to those companies that manufacture products;
2) add a de minimis exception to the Conflict Minerals Rule; and
3) include a safe harbor provision to allow issuers to rely upon defined contract provisions and supplier certifications.
 
Ideally, theTrump government should take the onus of the responsibility for solving this human rights crisis off the private sector and instead work with the Congolese government, other governments, and NGOs on holistic solutions, especially as it relates to the members of the armed forces, who are also involved in illegal mineral trade and human rights abuses.
 

Just today, the GAO issued a report on conflict minerals. Dodd-Frank requires an annual report on the effectiveness of the rule "in promoting peace and security in the DRC and adjoining countries." Of note, the report explained that:

After conducting due diligence, an estimated 39 percent of the companies reported in 2016 that they were able to determine that their conflict minerals came from covered countries or from scrap or recycled sources, compared with 23 percent in 2015. Almost all of the companies that reported conducting due diligence in 2016 reported that they could not determine whether the conflict minerals financed or benefited armed groups, as in 2015 and 2014. (emphasis added).

The Trump Administration, some SEC commissioners, and many in Congress have already voiced their concerns about this legislation. I didn't have the benefit of the GAO report during my interview, but it will likely provide another nail in the coffin of the conflict minerals rule. 

 

 

 

April 26, 2017 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, International Law, Legislation, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (1)