Friday, June 24, 2016
Recently, I came across this discussion on Poverty Inc. by Bill Easterly (NYU Economics) and the film's creators (Michael Matheson Miller and Mark Weber). I posted on one of Bill Easterly's books here.
In the discussion at NYU, I especially liked this quote from Michael Matheson Miller: "We tend to treat poor people as objects--as objects of our charity, objects of our pity, objects of our compassion.--instead of subjects...Poor people are not objects; they are subjects and they should be the protagonists in their own stories of development." The personal story Mark Weber tells of his trip while he was studying at Notre Dame was moving, but you will have to watch the discussion to hear it, as it would be tough to summarize. Some of the audience questions are a bit long-winded, but I think the panel does a nice job deciphering and answering.
The film's trailer, the discussion, and the Q&A with the audience are all worth watching.
Thursday, June 23, 2016
The Cuba Conundrum: Corporate Governance and Compliance Challenges for U.S. Publicly-Traded Companies
My latest article on Cuba and the US is out. Here I explore corporate governance and compliance issues for US companies. In May, I made my third trip to Cuba in a year to do further research on rule of law and investor concerns for my current work in progress.
In the meantime, please feel free to email me your comments or thoughts at firstname.lastname@example.org on my latest piece
The abstract is below:
The list of companies exploring business opportunities in Cuba reads like a who’s who of household names- Starwood Hotels, Netflix, Jet Blue, Carnival, Google, and AirBnB are either conducting business or have publicly announced plans to do so now that the Obama administration has normalized relations with Cuba. The 1962 embargo and the 1996 Helm-Burton Act remain in place, but companies are preparing for or have already been taking advantage of the new legal exemptions that ban business with Cuba. Many firms, however, may not be focusing on the corporate governance and compliance challenges of doing business in Cuba. This Essay will briefly discuss the pitfalls related to doing business with state-owned enterprises like those in Cuba; the particular complexity of doing business in Cuba; and the challenges of complying with US anti-bribery and whistleblower laws in the totalitarian country. I will also raise the possibility that Cuba will return to a state of corporatism and the potential impact that could have on compliance and governance programs. I conclude that board members have a fiduciary duty to ensure that their companies comply with existing US law despite these challenges and recommend a code of conduct that can be used for Cuba or any emerging markets which may pose similar difficulties.
June 23, 2016 in Comparative Law, Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, International Business, Law Reviews, Marcia Narine, Research/Scholarhip | Permalink | Comments (0)
Wednesday, June 22, 2016
Today is the rare day where I feel like a professor. Dressed in jeans and drinking coffee in my office, I have been reading Colin Mayer's book Firm Commitment in advance of the Berle VIII Symposium in Seattle next week (you can also see Haskell's post & Joan's post about Berle). That's not a typo, my agenda for the day is reading. And not for a paper or to prep for class, I am just reading a book--cover to cover. I can hardly contain my joy at this.
I have been struck by the elegantly simple idea that corporations' true benefit is to advance (and therefore) balance commitment and control. I have long viewed the corporate binary as between accountability and control. Under my framework the two are necessary to balance and contribute to the checks and balances within the corporate power puzzle of making the managers, who control the corporation, accountable to the shareholders. Colin Mayer posits that the one directional accountability of the corporation to shareholders without reciprocity of commitment from the shareholders to the corporation is a corrosive element in corporate design.
"The most significant source of failure is the therefore that we have created a system of shareholder value driven companies who detrimental effects regulation is supposed to but fails to correct, and in response we week greater regulation as the only instrument that we believe can address the problem. We are therefore entering a cycle of the pursuit of ever-narrower shareholder interests moderated by steadily more intrusive but ineffective regulation."
In developing the notions of commitment and control, I have found the following passages particularly thought-provoking:
"The financial structure of the corporation is of critical importance...The commitment of owners derives from the capital that is employed in the corporation. What is held within it is fundamentally different from what remains outside as the private property of its owners. What is distributed to owners as dividends is no longer available as protection against adverse financial conditions and what is provided in the form of debt from banks and bondholders as against equity form shareholders is secure only as long as the corporation has the means with which to service it."
"While incentives and control are centre stage in conventional economics, commitment is not. Enhancing choice, competition, and liquidity is the economist's prescription for improving social welfare, and legal contracts, competition policy and regulation are their basic toolkit for achieving it. Eliminate restrictions on consumers' freedom to choose, firms' ability to compete, and financial markets' provision of liquidity and we can all move closer to economic nirvana. Of course, economics recognizes the problems of time inconsistency in us doing today what yesterday we promised we would not conceive of doing today; of reputations in us continuing to do today what we promised to do yesterday for fear of not being able to do it tomorrow, and of capital and collateral in making it expensive for us to deviate from what we said yesterday we would do today and tomorrow. But these are anomalies. Economics does not recognize the fundamental role of commitment in all aspects of our commercial as well as our social lives and the way in which institutions contribute to the creation and preservation of commitment. It does not appreciate the full manner in which choice, competition and liquidity undermine commitment or the fact that institutions are not simply mechanisms for reducing costs of transaction, but on the contrary means to establish and enhance commitment at the expense of choice, competition, and liquidity. Commitment is the subject of soft sentimental sociologists, not of realistic rational economists. The sociologists' are the words of Shakespeare's 'Love all, trust few. Do wrong to none', the economists' those of Lenin: 'Trust is good, control is better.'"
Monday, June 20, 2016
Having helped a few Tennessee bar applicants get straight on their knowledge of agency, unincorporated business associations, and personal property law last Friday at my BARBRI lecture (such a nice group present at the taping to keep me company!), it's now time for me to wrap up my June Scholarship and Teaching Tour with a twofer--a week of travel to two of my favorite U.S. cities: Chicago, for the National Business Law Scholars Conference and Seattle for Berle VIII. At both events, I will present my draft paper (still in process today, unfortunately) on publicly held benefit corporations, Corporate Purpose and Litigation Risk in Publicly Held U.S. Benefit Corporations. Here's the bird's-eye view from the introduction:
Benefit corporations—corporations organized for the express purpose of realizing both financial wealth for shareholders and articulated social or environmental benefits—have taken the United States by storm. With Maryland passing the first benefit corporation statute in 2010, legislative growth of the form has been rapid. Currently, 31 states have passed benefit corporation statutes.
The proliferation of benefit corporation statutes and B Corp certifications can largely be attributed to the active promotional work of B Lab Company, a nonprofit corporation organized in 2006 under Pennsylvania law that supports social enterprise (“B Lab”). B Lab works with individuals and interest groups to generate attention to social enterprise generally and awareness of and support for the benefit corporation form and B Corp certification (a social enterprise seal of approval, of sorts) specifically. B Lab also supplies model benefit corporation legislation, social enterprise standards that may meet the requirements of benefit corporation statutes in various states, and other services to social enterprises.
Benefit corporation statutes have not, by and large, been the entity law Field of Dreams. Despite the legislative popularity of the benefit corporation form, there have not been as many benefit corporation incorporations as one might expect. In the first four years of benefit corporation authority, for example, Maryland reported the existence of fewer than 40 benefit corporations in total. Tennessee’s benefit corporation statute came into effect in January 2016, and as of May 2, 2016, Secretary of State filings evidence the organization of 26 for-profit benefit corporations. However, a review of these filings suggests that well more than half were erroneously organized as benefit corporations. Colorado, another recent adopter of the benefit corporation, does appear to have a large number of filings (90 in total as of June 12, 2016 based on the list of Colorado benefit corporations on the B Lab website). However, as with Tennessee, a number of these listed corporations appear to be erroneously classified. These anecdotal offerings indicate that published lists of benefit corporations—even those constructed from state filings—over-count the number of benefit corporations significantly.
Research for this article identified no publicly held U.S. benefit corporations. For these purposes (and as referenced throughout this article), the term “publicly held” in reference to a corporation is defined to mean a corporation (a) with a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (“1934 Act”), or (b) otherwise required to file periodic reports with the Securities and Exchange Commission under Section 13 of the 1934 Act. Yet, benefit corporations may be subsidiaries of publicly held corporations (as Ben & Jerry's Homemade Inc., New Chapter Inc., and Plum, PBC have demonstrated), and corporations certified as B Corps have begun to enter the ranks of publicly held corporations (perhaps Etsy, Inc. being the most well known to date). It likely is only a matter of time before we will see the advent of publicly held U.S. benefit corporations.
With the likely prospect of publicly held U.S. benefit corporations in mind, this article engages in a thought experiment. Specifically, this article views the publicly held U.S. benefit corporation from the perspective of litigation risk. It first situates, in Part I, the U.S. benefit corporation in its structural and governance context as an incorporated business association. Corporate purpose and the attendant managerial authority and fiduciary duties are the key points of reference. Then, in Part II, the article seeks to identify the unique litigation risks associated with publicly held corporations with the structural and governance attributes of a benefit corporation. These include both state and federal causes of action. The reflections in Part III draw conclusions from the synthesis of the observations made in Parts I and II. The closing thoughts in Part III are intended to be of use to policy makers, academic observers, and advisers of corporations, among others.
As Haskell mentioned in an earlier post, he and Anne and I will be together at the Berle VIII event. What a great way to end my June tour--with my friends and colleagues from the Business Law Prof Blog! I look forward to it.
Friday, June 17, 2016
On Wednesday, the EU finally outlined its position on conflict minerals. The proposed rule will affect approximately 900,000 businesses. As I have discussed here, these “name and shame” disclosure rules are premised on the theories that: 1) companies have duty to respect human rights by conducting due diligence in their supply chains; 2) companies that source minerals from conflict zones contribute financially to rebels or others that perpetuate human rights abuses; and 3) if consumers and other stakeholders know that companies source certain minerals from conflict zones they will change their buying habits or pressure companies to source elsewhere.
As stated in earlier blog posts, the US Dodd- Frank rule has been entangled in court battles for years and the legal wranglings are not over yet. Dodd-Frank Form SD filings were due on May 31st and it is too soon to tell whether there has been improvement over last year’s disclosures in which many companies indicated that the due diligence process posed significant difficulties.
I am skeptical about most human rights disclosure rules in general because they are a misguided effort to solve the root problem of business’ complicity with human rights abuses and assume that consumers care more about ethical sourcing than they report in surveys. Further, there are conflicting views on the efficacy of Dodd-Frank in particular. Some, like me, argue that it has little effect on the Congolese people it was designed to help. Others such as the law’s main proponent Enough, assert that the law has had a measurable impact.
The EU's position on conflict minerals is a compromise and many NGOs such as Amnesty International, an organization I greatly respect, are not satisfied. Like its US counterpart, the EU rule requires reporting on tin, tantalum, tungsten, and gold, which are used in everything from laptops, cameras, jewelry, light bulbs and component parts. Unlike Dodd-Frank, the rule only applies to large importers, smelters, and refiners but it does apply to a wider zone than the Democratic Republic of Congo and the adjoining countries. The EU rule applies to all “conflict zones” around the world.
Regular readers of my blog posts know that I teach and research on business and human rights, and I have focused on corporate accountability measures. I have spent time in both Democratic Republic of Congo and Guatemala looking at the effect of extractive industries on local communities through the lens of an academic and as a former supply chain executive for a Fortune 500 company. I continue to oppose these disclosure rules because they take governments off the hook for drafting tough, substantive legislation. Nonetheless, I look forward to seeing what lessons if any that the EU has learned from the US when the member states finally implement and enforce the new rule. In coming weeks I will blog on recent Form SD disclosures and the progress of the drafting of the final EU rule.
June 17, 2016 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, International Law, Legislation, Marcia Narine, Securities Regulation | Permalink | Comments (0)
Thursday, June 16, 2016
8th Annual Berle Symposium - Benefit Corporations and the Firm Commitment Universe - June 27-28, 2016 - Seattle, WA
Three Business Law Prof Blog editors (myself included) are presenting at the upcoming Berle Symposium on June 27-28 in Seattle.
Colin Mayer (Oxford) is the keynote speaker, and I look forward to hearing him present again. I blogged on his book Firm Commitment after I heard him speak at Vanderbilt a few of years ago. The presenters also include former Chancellor Bill Chandler of the Delaware Court of Chancery. Given that Chancellor Chandler's eBay v. Newmark decision is heavily cited in the benefit corporation debates, it will be quite valuable to have him among the contributors. The author of the Model Benefit Corporation Legislation, Bill Clark, will also be presenting; I have been at a number of conferences with Bill Clark and always appreciate his thoughts from the front lines. Finally, the list is packed with professors I know and admire, or have read their work and am looking forward to meeting.
More information about the conference is available here.
June 16, 2016 in Anne Tucker, Business Associations, Conferences, Corporate Governance, Corporations, CSR, Delaware, Financial Markets, Haskell Murray, Joan Heminway, Law School, Social Enterprise | Permalink | Comments (0)
Tuesday, June 14, 2016
The New York Times ran the article How Donald Trump Bankrupted His Atlantic City Casinos, but Still Earned Millions last weekend. It's an interesting piece that provides a look at Donald Trump's east coast casino experience. The article is, as one might expect, critical of his dealings and notes that Trump made money even when his ventures when bankrupt.
Though I will not defend any of Trump's dealings, there are few issues raised that I think are worthy of a some discussion and clarification.1 The post that follows suggests how to consider Trump's business history and place that history in a political context.
Wednesday, June 8, 2016
If you've been slamming away on a writing deadline then perhaps you've missed the opportunity (like me) to dive into the recent Chancery Court of Delaware Dell appraisal rights opinion (downloadable here). Have no fear, your summary is here.
Vice Chancellor Laster valued Dell’s common stock at $17.62 per share, reflecting a 28% premium above the $13.75 merger price that was paid to Dell shareholders in October 2014 in a going private transaction lead by company-founder Michael Dell. Dell's going private transaction was opposed by Carl Icahn and this juicy, contentious transaction has its own required reading list. When conceding defeat, Carl Icahn sent the following letter to Dell Shareholders:
New York, New York, September 9, 2013
Dear Fellow Dell Inc. Stockholders:
I continue to believe that the price being paid by Michael Dell/Silver Lake to purchase our company greatly undervalues it, among other things, because:
1. Dell is paying a price approximately 70% below its ten-year high of $42.38; and
2. The bid freezes stockholders out of any possibility of realizing Dell’s great potential.
Fast forward nearly 3 years later and it seems Vice Chancellor Laster agrees. VC Laster reached his undervaluation decision despite no finding of significant fault with the company’s directors' conduct or a competing bidder. Instead, VC Laster focused on the fall in the company’s stock price, and a failure to determine the intrinsic value of Dell before negotiating the buyout. The business press and law blogs have exploded with articles, a few of which are highlighted below:
- For a good summary of the ruling see this succinct Delaware Chancery Court blog post and Andrew Ross Sorkin's NY Times article.
- For a good discussion of how appraisal remedies were applied in Dell, see Steven Davidoff Solomon's NY Times article here.
- For a discussion of the increase in shareholder appraisal actions and contributing factors (arbitrage) and the future of appraisal rights, see this ABA article.
Monday, May 30, 2016
This year, my research and writing season has started off with a bang. While grading papers and exams earlier this month, I finished writing one symposium piece and first-round-edited another. Today, I will put the final touches on PowerPoint slides for a presentation I give the second week in June (submission is required today for those) and start working on slides for the presentation I will give Friday.
All of this sets into motion a summer concert conference, Barbri, and symposium tour that (somewhere along the line) got a bit complicated. Here are the cities and dates:
New Orleans, LA - June 2-5
Atlanta, GA - June 10-11
Nashville, TN - June 17
Chicago, IL - June 23-24
Seattle, WA - June 27
I know some of my co-bloggers are joining me along the way. I look forward to seeing them. Each week, I will keep you posted on current events as best I can while managing the research and writing and presentation preparations. The topics of my summer research and teaching run the gamut from insider trading (through by-law drafting, agency, unincorporated business associations, personal property, and benefit corporations) to crowdfunding. A nice round lot.
This coming week, I will be at the Law and Society Association annual conference. My presentation at this conference relates to an early-stage project on U.S. insider trading cases. The title and abstract for the project and the currently envisioned initial paper (which I would, of course, already change in a number of ways) are as follows:
May 30, 2016 in Business Associations, Conferences, Corporate Finance, Corporate Governance, Corporations, Joan Heminway, Research/Scholarhip, Securities Regulation, Social Enterprise, Teaching, White Collar Crime, Writing | Permalink | Comments (0)
Saturday, May 28, 2016
A former law student of mine who practices in Delaware just alerted me to this Delaware Online article.
The article describes the proposed bill as follows:
House Bill 371 would restrict the number of corporate shareholders who can petition the court for a stock appraisal to only those who own $1 million or more of a company's stock or 1 percent of the outstanding shares, depending on which is less. Currently, any shareholder can ask the court to appraise their shares. Those motions are typically filed when a company is the target of an all-cash acquisition and the shareholder wants to ensure the buyer is paying a fair price for the stock. (emphasis added)
Corporate governance expert Charles Elson is quoted as saying:
. . . he understands the argument on both sides. "Anytime you attempt to restrict the rights of a smaller shareholder, it is going to be controversial whether or not the approach is warranted"
The article cites co-authored work by my Nashville neighbor, Randall Thomas (Vanderbilt Law):
A study published earlier this month by four noted corporate law professors, including Wei Jang of Columbia Business School and Randall S. Thomas of Vanderbilt Law School, found that hedge funds have accounted for nearly 75 percent of the amount awarded in all appraisal actions over the last few years. The study also found that 32 percent of the cases involved stakes below $1 million or 1 percent of a company's stock.
Go read the entire article.
Friday, May 13, 2016
Yesterday, I presented on negotiation theory and stakeholder engagement at the Center for Nonprofit Management's Bridge to Excellence Conference.
At a session after mine, I was directed to a PowerPoint entitled What Every Board Member Should Know: A Guide for Tennessee Nonprofits. The PowerPoint was authored by the Tennessee Attorney General, the Tennessee Secretary of State, and the President of the Center for Nonprofit Management. The document is rather simple, but might be useful as a primer for nonprofit board members in Tennessee.
The conference attendees appeared to be a few hundred nonprofit practitioners and only about three or four professors, two of whom were among the presenters. After my morning presentation, I stuck around and listened to some of the other speakers and enjoyed an excellent lunch. I am a sucker for free food.
At the conference, I was struck by how nonprofit board members were discussed by some of the speakers and attendees. One question that was posed was - "how do you deal with a board member who is not pulling his or her weight as a fundraiser?" I guess I knew that nonprofit board members were chosen, at least in part, for their ability to give or raise money, but I never really saw fundraising as a major or primary role. The blunt phrase used was "give, get, or get off." Most of my thinking has been on for-profit board members and their role in governance, so this significant focus on another role was a bit unexpected.
Another question asked was - "how do you deal with a board member that is over-involved and thinks he or she is the executive director of the nonprofit?" Again, because of my focus on for-profit boards, this question hasn't been one that surfaced for me; I am usually thinking about how to get board members more involved. In fairness, I do recognize that officers are responsible for the day-to-day running of the organization, and I could see how a board member might overstep. Thankfully, the flip-side, the problem of the under-involved board member, was also discussed.
I left the conference wondering how effective nonprofit board members will be in governing when so much emphasis is put on their fundraising role, and when they are warned to not become over-involved in the operational side of the organization.
Board diversity was also a major topic - race and gender, and also age (there is evidently a push to get the next generation involved on nonprofit boards instead of just the "same old suspects") and skills and even personality type and political views. I didn't hear any discussion, outside of my session, on socio-economic diversity on boards, which is interesting given the communities that are often served by nonprofits, but maybe not surprising giving the role of fundraising. In my session, I did discuss the role of stakeholder boards, which I am writing on in the for-profit context, as a way to give voice to all major constituents, not just donors.
I may reflect further on this conference in future posts as it was certainly an interesting and useful day.
Tuesday, May 10, 2016
This is just to give everyone a "heads up" on a symposium being held this fall (Friday, October 21 and Saturday, October 22) to honor Lyman Johnson and David Millon. The symposium is being sponsored by the Washington & Lee Law Review (which will publish the papers presented), and I am thrilled to be among the invited speakers. I will have more news on the symposium and my paper for it as the date draws nearer. But I wanted everyone to know about this event so that folks could plan accordingly if they want to attend. I understand Lexington, Virginia is lovely in late October . . . . Actually, it's always been lovely when I have been up there! And the honorees and contributors are a stellar group (present company notwithstanding). I hope to see some of you there.
Monday, May 9, 2016
Thought Josephine Sandler Nelson's recent Oxford Business Law Blog post on Volkswagen might be of interest to our readers. It is reposted here with permission.
Fumigating the Criminal Bug: The Insulation of Volkswagen’s Middle Management
New headlines each day reveal wide-spread misconduct and large-scale cheating at top international companies: Volkswagen’s emissions-defeat devices installed on over eleven million cars trace back to a manager’s PowerPoint from as early as 2006. Mitsubishi admits that it has been cheating on emissions standards for the eK and Dayz model cars for the past 25 years—even after a similar scandal almost wiped out the company 15 years ago. Takata’s $70 million fine for covering up its exploding air bags in Honda, Ford, and other car brands could soon jump to $200 million if a current Department of Justice probe discovers additional infractions. The government has ordered Takata’s recall of the air bags to more than double: one out of every five cars on American roads may be affected. Now Daimler is conducting an internal investigation into potential irregularities in its exhaust compliance.
A recent case study of the 2015-16 Volkswagen (‘VW’) scandal pioneers a new way to look at these scandals by focusing on their common element: the growing insulation and entrenchment of middle management to coordinate such large-scale wrongdoing. “The Criminal Bug: Volkswagen’s Middle Management” describes how VW’s top management put pressure on the rest of the company below it to achieve results without inquiring into the methods that the agents would use to achieve those results. The willing blindness of top executives to the methods of the agents below them is conscious and calculated. Despite disclosure-based regulation’s move to strict-liability prosecutions, the record of prosecutorial failure at trial against top executives in both the U.S. and Germany demonstrates that assertions of plausible deniability succeed in protecting top executives from accountability for the pressure that they put on agents to commit wrongdoing.
Agents inside VW receive the message loud and clear that they are to cheat to achieve results. As even the chairman of the VW board has admitted about the company, “[t]here was a tolerance for breaking the rules”. And, contrary to VW’s assertion, no one believes that merely a “small group of engineers” is responsible for the misconduct. Only middle management at the company had the longevity and seniority to shepherd at least three different emissions-control defeat devices through engine re-designs over ten years, to hide those devices despite heavily documented software, and to coordinate even across corporate forms with an outside supplier of VW’s software and on-board computer.
The reason why illegal activity can be coordinated and grow at the level of middle management over all these years is rooted in the failure of the law to impose individual accountability on agents at this level of the corporation. Additional work by the same author on the way in which patterns of illegal behavior in the 2007-08 financial crisis re-occur in the 2015-16 settlements for manipulations of LIBOR, foreign currency exchange rates, and other parts of the financial markets indicates that middle management is further protected from accountability by regulators’ emphasis on disclosure-based enforcement. In addition, U.S. law has lost the ability to tie together the behavior of individuals within a corporation through conspiracy or other types of prosecutions.
Previous research has shown that the more prominent the firm is, and the higher the expectations for performance, the more likely the firm is to engage in illegal behavior. Now we understand more about the link between the calculated pressure that top executives put on their companies and the protection of middle management that supports the patterns of long-term, large-scale wrongdoing that inflict enormous damage on the public. It is not solely VW that needs to fumigate this criminal bug: the VW case study suggests that we need to re-think the insulation from individual liability for middle management in all types of corporations.
This post originally appeared on the Oxford Business Law Blog, May 5, 2016.
Wednesday, May 4, 2016
In follow up to my post yesterday, my trusted and valued co-blogger Joan Heminway asked a good question (as usual) based one of my comments. My response became long enough that I thought it warranted a follow-up post (and it needed formatting). Joan commented:
you say: "there should be no problem if, for example, Delaware corporate law did not allow a for-profit entity to exercise religion for the sole sake of religion. I think that is the case right now: that’s not a proper corporate purpose under my read of existing law." Are you implying that a corporate purpose of that kind for a for-profit corporation organized in Delaware would be unlawful? Can you explain?
My response: I am suggesting exactly that, though I concede one might need a complaining shareholder first. My read of eBay, and Chief Justice Strine’s musing on the subject, suggest that an entity that is run for purposes of religion (not shareholder wealth maximization) first and foremost, is an improper use of the Delaware corporate form. (“I simply indicate that the corporate law requires directors, as a matter of their duty of loyalty, to pursue a good faith strategy to maximize profits for the stockholders.”) Chancellor Chandler explained in eBay:
The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment.
I think this definition of philanthropic easily includes religious ends (or should).
Chancellor Chandler continued:
Jim and Craig opted to form craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.
I don’t see how this should play any differently if it applied to religion. Consider, for example, this possible spin:
Jane and Carrie opted to form Religion, Inc., as a for-profit Delaware corporation and voluntarily accepted millions of dollars from BigCo as part of a transaction whereby BigCo became a stockholder. Having chosen a for-profit corporate form, the Religion directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.
Further to the point, Chancellor Chandler added:
I cannot accept as valid . . . a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders—no matter whether those stockholders are individuals of modest means or a corporate titan of online commerce.
Thus, a for-profit business can be religious in nature—e.g., make religious books or products or sponsor religious seminars—but as a Delaware corporation, the purpose of the entity must be to “promote the value of the corporation for the benefit of its stockholders.”
This is the potential problem with the Hobby Lobby case as to Delaware law. There, the companies had a lot to lose:
If they and their companies refuse to provide contraceptive coverage, they face severe economic consequences: about $475 million per year for Hobby Lobby, $33 million per year for Conestoga, and $15 million per year for Mardel. And if they drop coverage altogether, they could face penalties of roughly $26 million for Hobby Lobby, $1.8 million for Conestoga, and $800,000 for Mardel.
These losses were justified in that case as being necessary to exercise religion, and not to further a corporate purpose. Of course, they had to make that claim, because otherwise they couldn’t get the benefit of RFRA, which requires demonstrating “an honest conviction,” which could be problematic if the reason was couched in business terms, and not religious ones.
Incidentally, I think the business judgment rule should probably protect this decision, anyway, but I don’t know that Delaware law would support that view. In fact, it shouldn't based in recent case law, and I think plainly eBay says no on that one. The Supreme Court says RFRA protects the right to pursue religious ends. It doesn't mean Delaware law does. (Note: Hobby Lobby is not a Delaware entity, so the rules are admittedly different.)
Thus, my fix seek to balance these competing possible outcomes. Tell shareholders your plan, and they can’t question it later, even if that plan costs the company $475 million in losses. Where the law has evolved, I don't think it's fair to suggest it was part of the bargain for all companies, thought maybe investors in Hobby Lobby did know. But it doesn't matter. I thought craigslist’s long-standing business plan was sufficient notice, too. Chancellor Chandler disagreed.
Friday, April 29, 2016
Earlier this month, B Lab, the 501(c)(3) nonprofit organization that oversees the certification of B corps, announced that it will move its October 2016 retreat from North Carolina because of North Carolina’s controversial House Bill 2 (“HB2”).
In an April 12 e-mail to “Friends of the B Corp Community,” the B Lab team wrote:
Standing for inclusion, the global B Corp community has decided to relocate the 2016 B Corp Champions Retreat and related events from North Carolina in light of the newly-enacted State law HB2 which limits anti-discrimination protections, particularly for members of the LGBT community.
Immediately, B Lab will work with the North Carolina B Corp community and others to get HB2 off the books and make North Carolina more inclusive and business-friendly.
B Lab also linked to this longer statement in that e-mail.
The Model Benefit Corporation Legislation and the laws following the Model require that a third-party standard be used by benefit corporations to measure their social and environmental impact. B Lab’s standard is currently the most popular standard, but it is not required or even mentioned by the benefit corporation statutes. Allowing for various third-party standards helps prevent the benefit corporation law from being overly political. I do wonder, however, if B Lab’s public stand on this issue will make the benefit corporation laws harder to pass in more conservative states, because of B Lab’s large role in cultivating both the certified B corp and benefit corporation communities.
Further, this situation leads to a question I asked in 2012 --- would B Lab exercise their veto power and deny certification to Chick-fil-A, if Chick-fil-A applied for certification and managed the required social score? As I wrote in 2012, I don’t see anything in the benefit corporation laws that would prevent Chick-fil-A from becoming a benefit corporation, but I am less sure if Chick-fil-A would be successful in obtaining certification from B Lab. B Corp certification is separate from the entity formation process, and the certification is under the control of B Lab rather than the government.
Also, I am not a nonprofit expert, but I wonder whether B Lab is flirting with the lobbying restrictions for 501(c)(3)s, especially when it promises to “work with the North Carolina B Corp community and others to get HB2 off the books.” They also seem to be involved in the attempts to pass benefit corporation laws in states across the country. (Thoughts from nonprofit lawyers or professors welcomed in the comments or by e-mail...I am told that 501(c)(3)s are allowed to do an "insubstantial" amount of lobbying).
In any event, in seems that non-profits, social enterprises, and traditional for-profits are becoming more and more active in social and political debates. And these organizations are often powerful, influential players.
Friday, April 15, 2016
I'm at the MALSB Conference in Chicago, but saw Anita Krug's recently posted book chapter entitled Toward Better Mutual Fund Governance. Worth reading. Abstract below.
This chapter evaluates the implications of an emerging model of mutual fund governance for effective oversight and regulation. As in the traditional model, in which a board of directors or trustees serves as the board of multiple discrete funds managed by a single investment adviser, this alternative model similarly contemplates the creation of multiple funds, but it eschews a single investment adviser charged with managing each fund’s assets. Rather, there are numerous advisers, each managing one or a small number of funds within the group. Although the new model may portend an improvement over the traditional model in some respects, questions arise as to whether it introduces concerns of its own and whether those concerns are more or less manageable than those to which the traditional model gives rise. The chapter contends that, although the new model produces risks not associated with the traditional model, there are reasons to believe, at least preliminarily, that it is at least as effective as the traditional model.
Thursday, April 14, 2016
Today in my Business and Human Rights class I thought about Ann's recent post where she noted that socially responsible investor Calpers was rethinking its decision to divest from tobacco stocks. My class has recently been discussing the human rights impacts of mega sporting events and whether companies such as Rio Tinto (the medal makers), Omega (the time keepers), Coca Cola (sponsor), McDonalds (sponsor), FIFA (a nonprofit that runs worldwide soccer) and the International Olympic Committee (another corporation) are in any way complicit with state actions including the displacement of indigenous peoples in Brazil, the use of slavery in Qatar, human trafficking, and environmental degradation. I asked my students the tough question of whether they would stop eating McDonalds food or wearing Nike shoes because they were sponsors of these events. I required them to consider a number of factors to decide whether corporate sponsors should continue their relationships with FIFA and the IOC. I also asked whether the US should refuse to send athletes to compete in countries with significant human rights violations.
Because we are in Miami, we also discussed the topic du jour, Carnival Cruise line's controversial decision to follow Cuban law, which prohibits certain Cuban-born citizens from traveling back to Cuba on sea vessels, while permitting them to return to the island by air. Here in Miami, this is big news with the Mayor calling it a human rights violation by Carnival, a County contractor. A class action lawsuit has been filed seeking injunctive relief. This afternoon, Secretary of State John Kerry weighed in saying Carnival should not discriminate and calling upon Cuba to change its rules.
So back to Ann's post. In an informal poll in which I told all students to assume they would cruise, only one of my Business and Human Rights students said they would definitely boycott Carnival because of its compliance with Cuban law. Many, who are foreign born, saw it as an issue of sovereignty of a foreign government. About 25% of my Civil Procedure students would boycott (note that more of them are of Cuban descent, but many of the non-Cuban students would also boycott). These numbers didn't surprise me because as I have written before, I think that consumers focus on convenience, price, and quality- or in this case, whether they really like the cruise itinerary rather than the ethics of the product or service.
Tomorrow morning (Friday), I will be speaking on a panel with Jennifer Diaz of Diaz Trade Law, two members of the US government, and Cortney Morgan of Husch Blackwell discussing Cuba at the ABA International Law Section Spring Meeting in New York. If you're at the meeting and you read this before 9 am, pass by our session because I will be polling our audience members too. And stay tuned to the Cuba issue. I'm not sure that the Carnival case will disprove my thesis about the ineffectiveness of consumer pressure because if the Secretary of State has weighed in and the Communist Party of Cuba is already meeting next week, it's possible that change could happen that gets Carnival off the hook and the consumer clamor may have just been background noise. In the meantime, Carnival declared a 17% dividend hike earlier today and its stock was only down 11 cents in the midst of this public relations imbroglio. Notably, after hours, the stock was trading up.
April 14, 2016 in Ann Lipton, Conferences, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Human Rights, International Law, Law School, Marcia Narine, Teaching | Permalink | Comments (0)
Wednesday, April 13, 2016
SEC Concept Release on Financial Disclosures in form S-K: Risk, Reporting Frequency and Sustainability
Today (April 13, 2016), the SEC made public a much anticipated concept release regarding financial disclosures in form S-K. The release seeks public comment on "modernizing certain business and financial disclosure requirements in Regulation S-K." The comment period is open for the next 90 days.
The release is 341 pages, so needless to say, I haven't gotten through the document. In it's entirety at least. By my initial count there are over 35 substantive issues in the release and many more technical/procedures ones. I've highlighted 3 issues that are relevant to prior BLPB discussions: Risk, Reporting Frequency and Sustainability.
Risk management and risk reporting in item 503(c) and 305 are addressed starting on page 146.
"[W]e consider whether requiring additional disclosure of management’s approach to risk and risk management and consolidating risk-related disclosure would, on balance, be beneficial to investors and registrants. We also seek to better understand how our disclosure requirements could be updated to enhance investors’ ability to evaluate a registrant’s risk exposures. We are especially interested in feedback on how we can improve the content and readability of the risk factors included in a filing as well as the potential advantages and disadvantages of different approaches to risk-related disclosure."
Reporting frequency as a component of the investor time horizons (aka short/long term investment) are discussed on page 280. The Commission questioned the frequency of financial reporting noting the adoption of semi-annual reporting in 1955 and quarterly reporting in 1970. Summarizing the current debate on quarterly reporting, the Commission states:
"The value of quarterly financial reporting has been the subject of debate. Opponents of quarterly reporting argue that frequent financial reporting may lead management to focus on short-term results to meet or beat earnings targets rather than on long-term strategies. Consequently, some have argued that quarterly reports should be discontinued or made voluntary in the United States.
Wednesday, April 6, 2016
Five years ago I blogged about Massey Energy, one of most tragic mining disasters in US history. Just a few minutes ago its CEO Donald Blankenship was sentenced to the maximum one year in prison. The prison term is unusual for a corporate executive, but should it be?
The Department of Justice under Eric Holder came under fire for prosecuting thousands of low level mortgage brokers and analysts but no C-Suite individuals after the financial crisis. Perhaps in response to that, the DOJ released the Yates Memo, which I blogged about in September. There are already some interesting takeaways on the Memo, which you can read about here or you can hear about when I present if you attend the International Legal Ethics Conference in New York in July.
I'm not sure whether the Yates memo will prevent corporate crime or get the "right" people to go to jail. Actually, I am pretty sure that it won't. According to news reports, the Massey CEO was unusually involved in daily operations, which made convicting him easier (that along with hours of taped conversations). I do believe that the Yates Memo (if it's even constitutional) will fundamentally change the relationship between attorneys, compliance officers, and their internal clients. I will blog more about that in coming months. In the meantime, I hope that today's sentencing provides some measure of comfort to the families of the fallen miners.
Tuesday, March 29, 2016
The Rock Center for Corporate Governance at Stanford University seeks to hire a resident academic fellow to begin in September or October 2016 for a 12-month or one-academic-year term, with the possibility of renewal for a second year. The fellow will pursue his or her own independent research, as well as work closely with Stanford Law School faculty on a range of projects related to corporate governance, securities regulation, vehicles for public and private investment, and financial market reform. The ideal candidate has excellent academic credentials and experience in relevant fields of practice. The position is particularly well suited to a practicing attorney, with either a litigation or transactional background, seeking a transition to academia, or a post-doctoral economics or finance student with interests in corporate governance. More information can be found at https://stanfordcareers.stanford.edu/job-search?jobId=70496.