Monday, July 28, 2014
As many readers (and all of my friends) know, I am a bit of a sports fan. Having been a college athlete (field hockey, at Brown University, for trivia buffs), I focus most of my attention on college games. I even served on The University of Tennessee's Athletics Board for a few years. But my Dad and I used to watch professional football and baseball a lot together when I was a kid (still do, when we are in the same place at the right time), so I also maintain a casual interest in professional sports.
I also have an interest in fashion, especially women's fashion (maybe less well known, except by close friends). I have friends in the industry and find aspects of it truly fascinating. I even used to subscribe to Women's Wear Daily, the fashion industry trade rag. I am the faculty advisor to the College of Law's Fashion and Business (FAB) Law student organization.
This personal background is prelude to my interest in two current events stories that I see as parallels. I am trying to sort them through on a number of levels. Maybe you can help. Here are the top lines of each story.
- Last Thursday, the National Football League (NFL) suspended Baltimore Ravens running back Ray Rice for two games, fined him $58,000 dollars, and asked him to seek counseling after its investigation of an incident relating to a video in which Rice was depicted dragging his then-fiance, now wife, by her hair after punching her in the face (allegedly rendering her unconscious).
- The very same day, American Apparel (AA) announced a new slate of directors who will assume positions on the AA board in early August as a result of investor intervention and a boardroom blood bath following on lagging profits and continuing investigations of allegations of sexual misconduct (most of it, as I understand it, not new news) against AA's founder and former CEO and director, Dov Charney, whose management roles at the firm were suspended by the board back in June.
Sunday, July 27, 2014
An Updated Draft of “Corporate Social Responsibility & Concession Theory” and Some Further Thoughts on Hobby Lobby
I have posted an updated draft of my latest piece, “Corporate Social Responsibility & Concession Theory” (forthcoming __ Wm. & Mary Bus. L. Rev. __) on SSRN (here). Here is the abstract:
This Essay examines three related propositions: (1) Voluntary corporate social responsibility (CSR) fails to effectively advance the agenda of a meaningful segment of CSR proponents; (2) None of the three dominant corporate governance theories – director primacy, shareholder primacy, or team production theory – support mandatory CSR as a normative matter; and, (3) Corporate personality theory, specifically concession theory, can be a meaningful source of leverage in advancing mandatory CSR in the face of opposition from the three primary corporate governance theories. In examining these propositions, this Essay makes the additional claims that Citizens United: (A) supports the proposition that corporate personality theory matters; (B) undermines one of the key supports of the shareholder wealth maximization norm; and (C) highlights the political nature of this debate. Finally, I note that the Supreme Court’s recent Hobby Lobby decision does not undermine my CSR claims, contrary to the suggestions of some commentators.
I expect to have at least one more meaningful round of edits, so all comments are welcome and appreciated.
As to the last point of the abstract, let me explain why I don’t think Hobby Lobby has meaningfully expanded the ability of corporations to pursue socially responsible actions lacking in any colorable shareholder wealth justification, which, in light of the business judgment rule, is where I believe much of the interesting CSR action is taking place. I’ll first briefly go through my understanding of what the Court held in Hobby Lobby, and then see if anything new is added to our understanding of corporations’ ability to pursue CSR activities. My analysis proceeds roughly as follows:
1. Are corporations capable of exercising religion?
As a matter of statutory construction, determining whether corporations can exercise religion for purposes of the RFRA requires looking to the Dictionary Act, which includes corporations under the definition of "person" unless the context indicates otherwise. I agree with Justice Ginsburg that the context of exercising religion is one that properly excludes corporations. In addition, due to my view of the corporation as being fundamentally a creature of the state, I have Establishment Clause concerns about allowing the recipients of the state’s corporate subsidy to further religious ends via that grant. (I address some of the related unconstitutional conditions arguments here.) But in the end, the Court said corporations can exercise religion, so that’s likely the final word till a Justice retires.
2. Is the exercise of religion by corporations ultra vires?
Given that the Court has deemed corporations capable of exercising religion, the next question is whether they have been granted the power to do so by the state legislatures that created them. In other words, is the exercise of religion ultra vires? When Justice Alito says that “the laws … permit for-profit corporations to pursue ‘any lawful purpose’ or ‘act,’ including the pursuit of profit in conformity with the owners' religious principles,” I believe he is best understood as affirming that religious exercise, like charitable giving, is not ultra vires, nothing more.
3. Can corporations sacrifice shareholder wealth to further religious exercise?
So, corporations have the ability to exercise religion and it is not ultra vires for them to do so. None of that, however, should change the fact that if the religious exercise does not somehow advance shareholder wealth and any shareholder legitimately complains, then a viable waste or fiduciary duty claim has been asserted. Alito seems to recognize this point when he qualifies his conclusion about the viability of abandoning profit-maximization with: “So long as its owners agree ….” As Jay Brown put it (here), “this is a rule of unanimity…. it doesn't actually alter the board's legal duties.” In other words, I agree with my co-blogger Josh Fershee when he argues (here) that Hobby Lobby should not be read to create some new First Amendment defense for controlling shareholders or directors facing viable claims of waste of corporate assets or duty of loyalty violations.
Assuming all the foregoing is correct, I don’t see anything new in Hobby Lobby vis-à-vis a corporation’s ability to engage in CSR activities. Obviously, it doesn’t take much to satisfy the business judgment rule, but that’s not the issue. If there is any new ground here it should arguably create a defense where no rational business purpose is asserted (I don’t believe Hobby Lobby has redefined “business” for purposes of the waste doctrine). That’s precisely what makes benefit corporations special and necessary – they provide such a defense for corporations pursuing activities with a public benefit but open to the challenge that there is no concomitant shareholder wealth benefit. As Robert T. Esposito & Shawn Pelsinger put it (here), “the principal argument for social enterprise forms rests on the assumption that corporate law and its duty to maximize shareholder wealth could not accommodate for-profit, mission-driven entities.”
So, has Hobby Lobby somehow meaningfully shifted the playing field when it comes to CSR? I don’t think so.
Friday, July 25, 2014
We welcome Eric Orts (Wharton) to the "blawgosphere." Professor Orts has begun blogging at Ortsian Thoughts and Theories. I have already added his blog to my favorites, and I am sure I will become a regular reader. His new book, Business Persons: A Legal Theory of the Firm should be in my mailbox soon, and I am looking forward to reading it as well. (H/T David Zaring at the Conglomerate).
Thursday, July 24, 2014
As many have celebrated or decried, Dodd-Frank turned four-years old this week. This is the law that Professor Stephen Bainbridge labeled "quack federal corporate governance round II" (round I was Sarbanes-Oxley, as labeled by Professor Roberta Romano). Some, like Professor Bainbridge, think the law has gone too far and has not only failed to meet its objectives but has actually caused more harm than good (see here, for example). Some think that the law has not gone far enough, or that the law as drafted will not prevent the next financial crisis (see here, for example). The Council on Foreign Relations discusses the law in an accessible manner with some good links here.
SEC Chair Mary Jo White has divided Dodd-Frank’s ninety-five mandates into eight categories. She released a statement last week touting the Volcker Rule, the new regulatory framework for municipal advisors, additional controls on broker-dealers that hold customer assets, reduced reliance on credit ratings, new rules for unregulated derivatives, additional executive compensation disclosures, and mechanisms to bar bad actors from securities offerings.
Notwithstanding all of these accomplishments, only a little over half of the law is actually in place. In fact, according to the monthly David Polk Dodd-Frank Progress Report:
As of July 18, 2014, a total of 280 Dodd-Frank rulemaking requirement deadlines have passed. Of these 280 passed deadlines, 127 (45.4%) have been missed and 153 (54.6%) have been met with finalized rules. In addition, 208 (52.3%) of the 398 total required rulemakings have been finalized, while 96 (24.1%) rulemaking requirements have not yet been proposed.
Many who were involved with the law’s passage or addressing the financial crisis bemoan the slow progress. The House Financial Services Committee wrote a 97-page report to call it a failure. So I have a few questions.
1) When Dodd-Frank turns five next year, how far behind will we still be, and will we have suffered another financial blip/setback/recession/crisis that supporters say could have been prevented by Dodd-Frank?
2) How will the results of the mid-term elections affect the funding of the agencies charged with implementing the law?
3) What will the SEC do to address the Dodd-Frank rules that have already been invalidated or rendered otherwise less effective after litigation from business groups such as §1502, Conflict Minerals Rule (see here for SEC response) or §1504, the Resource Extraction Rule (see here for court decision)?
4) Given the SEC's failure to appeal after the proxy access litigation and the success of the lawsuits mentioned above, will other Dodd-Frank mandates be vulnerable to legal challenge?
5) Will the whistleblower provision that provides 10-30% of any recovery over $1 million to qualified persons prevent the next Bernie Madoff scandal? I met with the SEC, members of Congress and testified about some of my concerns about that provision before entering academia, and I hope to be proved wrong.
Let's wait and see. I look forward to seeing how much Dodd-Frank has grown up this time next year.
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!
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
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.
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:
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….
Tuesday, July 1, 2014
The following is a contribution from guest blogger Sarah Haan, Associate Professor of Law at the University of Idaho College of Law.
Business law professors no doubt felt relief yesterday when the news media corrected course and stopped distilling Hobby Lobby into a sound bite about “family-owned” corporations. The three corporations challenging the Affordable Care Act in the case – Conestoga, Hobby Lobby, and Mardel – happen to be family-owned, but the majority opinion, penned by Justice Alito, was careful to articulate its holding as applying to “closely held” corporations, of which family-owned corporations are just a subset.
Commentators (like the Business Law Profs Blog’s Anne Tucker) have noted that the Court’s failure to define what it meant by “closely held” is significant. By using the ambiguous phrase, and by suggesting that the opposite of a closely held corporation is a “publicly held corporation,” Justice Alito was opening the door to RFRA free exercise claims by a wide range of companies, the vast majority of which will bear no likeness to mom-and-pop businesses. Generally, a “closely held” corporation is one that has a “small number” of shareholders (ALI Principles of Corporate Governance), or, under an alternate theory, one in which the identity of owners and managers is “substantially identical.” Importantly, there is no consensus about how many shareholders a “closely held” corporation can have. Under Delaware law, a statutory “close” corporation (a subset of closely-held corporations) can have as many as 30 shareholders. Under Maryland law, there is no limit. “’Closely held’ is not synonymous with ‘small,’” Justice Ginsberg rightly pointed out in her dissent.
But there is more to Justice Alito’s slight-of-hand than the murky distinction between a “closely held” corporation and a “family-owned” one. The government argued that giving corporations free exercise rights under RFRA will lead to religious battles among shareholders that distract from the economic objectives of the corporation. In a paragraph that echoed the majority’s discussion of the “mechanisms of corporate democracy” in Citizens United, Justice Alito explained why shareholders’ religious disagreements are little cause for concern:
The owners of closely held corporations may – and sometimes do – disagree about the conduct of business. And even if RFRA did not exist, the owners of a company might well have a dispute about religion. For example, some might want a company’s stores to remain open on the Sabbath in order to make more money, and others might want the stores to close for religious reasons. State corporate law provides a ready means for resolving any conflicts by, for example, dictating how a corporation can establish its governing structure. Courts will turn to that structure and the underlying state law in resolving disputes.
In this paragraph, the Court acknowledges that shareholders in a closely held corporation might not have the same religious views, but assumes that such a corporation can still exercise a religion under RFRA. All shareholders at each of the three corporations in Hobby Lobby held the same set of religious views, but nowhere does the Court suggest that this is a requirement of RFRA personhood. To the contrary, this passage reveals that the Court does not mean to limit corporate religious exercise to only those closely held corporations whose shareholders all agree about religion. In fact, the Court anticipates that shareholders of companies exercising a religion under RFRA will have religious disputes, and it views the mechanisms of state corporate law as the proper means for sorting out those disagreements.
And here’s the rub: The most basic principles of state corporate law allow a controlling shareholder to, well, control the corporation. So what the Court has really decided is that a single controlling shareholder, or a sub-group of shareholders with voting control, can make religious exercise decisions for the corporation, even over the objections of minority shareholders. Because that is how state corporate law resolves intra-corporate disputes.
In other words, the sincerely-held religious beliefs of a closely held corporation may just be the sincerely-held religious beliefs of its controlling shareholder.
Monday, June 30, 2014
Today, the body of former Senator Howard H. Baker Jr. lay in repose across the street from my office in the building that houses the academic center benefacted by and named after him. (The building itself also bears his name.) His coffin, draped elegantly in the American flag, is a reminder of a political era essentially gone--but not forgotten (at least by me).
Senator Baker was a distinguished alumnus and benefactor of The University of Tennessee and the College of Law. Our main rotunda on the first floor of the law building is named for him. I dropped by today at the Baker Center for Public Policy to say goodbye to this revered statesman. I did not make the trip across the street to pay my respects primarily because he was a UT alumnus or benefactor--or even because I knew him (although we shook hands and chatted pleasantly at least once that I can remember) or knew any member of his family. I went because I deeply admire him and what he did with his public life. He was the kind of guy--known as "The Great Conciliator"--who exhibited political patience, valued compromise, and didn't let party politics or ideology stand in the way of what he knew in his gut was right.
In the obituary published by the American Bar Association in the ABA Journal, the following quote caught my eye:
“We are doing the business of the American people,” Baker said in a 1998 speech to members of Congress, explaining his philosophy of government. “And if we cannot be civil to one another, and if we stop dealing with those with whom we disagree, or that we don’t like, we would soon stop functioning altogether.”
Of course, the last bit stings a bit in light of the recent government shutdown. But . . . doing the business of the American people. Hmm. This part of the quote reminded me of the public fiduciary arguments that Donna Nagy raises in her 2011 Boston University Law Review article entitled "Insider Trading, Congressional Officials, and Duties of Entrustment." A great read, for those who haven't yet set aside the time.
However, the quote also made me think about Senator Baker's engagements over the years with legal issues impacting businesses. He was certainly pro-business, but he also fought for environmental protection and civil rights, among other things, even when those issues appeared, at least in the short term, to be a net negative for businesses. What, then, would Senator Baker have said about today's decision in Hobby Lobby? Well, we'll never know. But I will take a few guesses, and those who knew him or know his politics better than I can feel free to question and correct my prognostications.
From Anne Tucker (who is off filming academic videos this afternon--whatever that means!):
Today’s Supreme Court decision in Burwell v. Hobby Lobby Stores Inc. et al. exempted closely held corporations from complying with the contraceptive mandate in the Affordable Care Act. There is plenty to debate about the opinion—corporations are persons under RFRA and can exercise religion as well as a host of choice quotes from the SCOTUS about “modern corporate law”—and I will leave that fun for another time. I want to highlight three initial reactions:
- There is no definition of closely held in today’s opinion. Will we draw lines based on state corporate codes and elections to be S corp? Will we rely upon the IRS definition of a closely held company? It is unclear. There is NOTHING in the opinion that prevents today’s ruling from applying to publically traded, closely held corporations like Wal-Mart. The line drawing engaged by the SCOTUS in Hobby Lobby is not such a neatly drawn, tight circle, but is a wide net. I discussed this briefly in a HuffPost Live segment earlier today—here.
- This is a statutory, not a constitutional ruling. On its face. Of course Congress could amend RFRA and exclude corporations, but there are exactly zero people holding out hope for that solution, at least in our present climate. The language of the opinion, however, gives strong dicta supporting religious rights and identities of corporations, whether for profit or not. [“Any suggestion that for-profit corporations are incapable of exercising religion because their purpose is simply to make money flies in the face of modern corporate law.”]
- Today, the Court weighed in on the moral dilemma of performing an “innocent” act (i.e., providing health care coverage) that enables an “immoral” act (i.e., using an IUD whether for family planning or medical reasons). May companies object to coverage that includes screening for sexually transmitted diseases because unwed employees may use it ensure safe, premarital sex? The answer would seem to be yes. Of course, we can imagine that the Court would find a compelling interest here like they did with contraceptives, but what about the least restrictive means? In Hobby Lobby, the Court found the existing program for the government to pay for contraceptives (for exempted nonprofit entities) as evidence of a less restrictive alternative. So the government pays for the thing that for-profit corporations don’t want to pay for. In other words, we now subsidize corporate religious beliefs. And if you are a corporation do you want to pay for something that competitors don’t have to? The sincerity of the belief might be an issue, but if corporate law teaches us one thing, it is how to build a record.
Formatting changes/errors are all mine.
Great work, Anne!
Thursday, June 26, 2014
I always enjoy reading Bryan Cave partner Scott Killingsworth's comments in various LinkedIn groups. In addition to practicing law, he’s a contributing editor to a treatise on the duties of board members. He’s just published a short but thorough essay on "The Privatization of Compliance." It reminds me of some of the comments that Dean Colin Scott made at Law and Society about tools of private transnational regulation, which include self-regulation, contracts, consumers, industry initiatives, corporate social responsibility programs and meta-regulators. Killingsworth’s abstract is below.
Corporate Compliance is becoming privatized, and privatization is going viral. Achieving consistent legal compliance in today’s regulatory environment is a challenge severe enough to keep compliance officers awake at night and one at which even well-managed companies regularly fail. But besides coping with governmental oversight and legal enforcement, companies now face a growing array of both substantive and process-oriented compliance obligations imposed by trading partners and other private organizations, sometimes but not always instigated by the government. Embodied in contract clauses and codes of conduct for business partners, these obligations often go beyond mere compliance with law and address the methods by which compliance is assured. They create new compliance obligations and enforcement mechanisms and touch upon the structure, design, priorities, functions and administration of corporate ethics and compliance programs. And these obligations are contagious: increasingly accountable not only for their own compliance but also that of their supply chains, companies must seek corresponding contractual assurances upstream, causing a chain reaction of proliferating and sometimes inconsistent mandates.
This essay examines the origins and the accelerating growth of the privatization of compliance requirements and oversight; highlights critical differences between compliance obligations imposed between private parties and those imposed by governmental actors; and evaluates the trend's benefits, drawbacks and likely direction. Particular attention is given to the use of supplier codes of conduct and contractual compliance mandates, often in combination; to the issue of contractual remedies for social, process-oriented, or vague obligations that may have little direct bearing on the object of the associated business transaction; to the proliferating trend of requiring business partners to "flow down" required conduct and compliance mechanisms to additional tiers within the supply chain; and to this trend's challenging implications for the corporate compliance function's role and its interaction with operations, procurement, and sales groups. Recommendations are made for achieving efficiencies and reducing system dysfunction by seeking a broad consensus on generally accepted principles for business-partner codes of conduct, compliance-related contract clauses, and remedies appropriate to each.
Thursday, June 19, 2014
Regular readers of this blog have seen several posts discussing the materiality of various SEC disclosures. See here and here for recent examples. I have been vocal about my objection to the Dodd-Frank conflict minerals rule, which requires US issuers to disclose their use of tin, tungsten, tantalum and gold deriving from the Democratic Republic of Congo and surrounding nations, and describe the measures taken to conduct audits and due diligence of their supply chains. See this post and this law review article.
Last year SEC Chair Mary Jo White indicated that she has concerns about the amount and types of disclosures that companies put forth and whether or not they truly assist investors in making informed decisions. In fact, the agency is undergoing a review of corporate disclosures and has recently announced that rather than focusing on disclosure “overload” the agency wants to look at “effectiveness,” duplication, and “holes in the regulatory regime where additional disclosure may be good for investors.”
I’m glad that the SEC is looking at these issues and I urge lawmakers to consider this SEC focus when drafting additional disclosure regulation. One possible test case is the Business Supply Chain Transparency on Trafficking and Slavery Act of 2014 (H.R. 4842) by Representative Carolyn Maloney, which would require companies with over $100 million in gross revenues to publicly disclose the measures they take to prevent human trafficking, slavery and child labor in their supply chains as part of their annual reports.
The sentiment behind Representative Maloney’s bill is similar to what drove the Dodd-Frank conflict minerals rule (without the extensive audit requirements) and the California Transparency in Supply Chains Act (CTSA). In her announcement she stated,
“Every day, Americans purchase products tainted by forced labor and this bill is a first step to end these inhumane practices. By requiring companies with more than $100 million in worldwide receipts to be transparent about their supply chain policies, American consumers can learn what is being done to stop horrific and illegal labor practices. This bill doesn’t tell companies what to do, it simply asks them to tell us what steps they are already taking. This transparency will empower consumers with more information that could impact their purchasing decisions.”
While the Conflict Minerals and CTSA are “name and shame” laws, which aim to change corporate behavior through disclosure, the proposed federal bill has a twist. It requires the Secretary of Labor, the Secretary of State and other appropriate Federal and international agencies, independent labor evaluators, and human rights groups, to develop an annual list of the top 100 companies complying with supply chain labor standards.
I don’t have an issue with the basic premise of the proposed federal law because human trafficking is such a serious problem that the American Bar Association, the Department of Labor, and others have developed resources for corporations to tackle the problem within their supply chains. A number of states have also enacted laws, and in fact Republican Florida Governor Rick Scott, hardly the poster child for liberals, announced his own legislation this week (although it focuses on relief for victims).
Further, to the extent that companies are using the 2011 UN Guiding Principles on Business and Human Rights to develop due diligence processes for their supply chains, this disclosure should not be difficult. In fact, the proposed bill specifically mentions the Guiding Principles. I don’t know how expensive the law will be to comply with, and I’m sure that there will be lobbying and tweaks if the bill gets out of the House. But If Congress wants to add this to the list of required corporate disclosures, legislators should monitor the SEC disclosure review carefully so that if the human trafficking bill passes, the agency’s implementing regulations appropriately convey legislative intent.
I know that corporations are interested in this issue because I spoke to a reporter yesterday who was prompted by recent articles and news reports to write about what boards should know about human trafficking in supply chains. As I told the reporter, although I applaud the initiatives I remain skeptical about whether these kinds of environmental, social and governance disclosures really affect consumer behavior and whether these are the best ways to protect the intended constituencies. That’s what I will be writing about this summer.