Wednesday, July 12, 2017
Prior to joining academia, I served as a compliance officer, deputy GC, and chief privacy officer for a Fortune 500 company. I had to learn everything on the job by attending webinars and conferences and reading client alerts. Back then, I would have paid a law school graduate a competitive salary to work in my compliance group, but I couldn’t find anyone who had any idea about what the field entailed.
The world has changed. Now many schools (including mine) offer relevant coursework for this JD-advantage position. I just finished teaching a summer skills course in compliance and corporate social responsibility, and I’m hoping that I have encouraged at least a few of the students to consider it as a viable career path. Compliance is one of the fastest growing corporate positions in the country, and the number of compliance personnel has doubled in the past 6 years. Still, many business-minded law students don’t consider it in the same vein as they consider jobs with Big Law.
This summer, my twelve students met twice a week for two hours at 7:30 pm. In the compressed six-week course, they did the following:
- Heard from compliance officers and outside counsel for public companies and government entities
- Read the same kinds of primary source material that compliance officers and counsel read in practice (such as the Federal Sentencing Guidelines, the Yates Memo, deferred prosecution agreements, and materials from the EU on the upcoming changes to data protection regulation)
- Compared and contrasted CSR reports from WalMart and Target, and reviewed the standards for the Global Reporting Initiative and the UN Global Compact
- Advocated before a board as a worker safety NGO for a company doing business in Bangladesh
- Served as a board member during a meeting (using actual board profiles)
- Wrote a reflection paper on the ideal role and reporting structure of compliance officers
- Considered top employment law and data protection risks for fictional companies to which they were assigned
- Looked at the 10-Ks and CDP report for climate change disclosures after examining the role of socially responsible investors and shareholder resolutions
- Drafted industry-specific risk assessment questionnaires
- Drafted three code of conduct policies
- Wrote a short memo to the GC on health care compliance and the DOJ Yates memo
- Did a role play during a crisis management simulation acting as either a board member, SEC or DOJ lawyer, the CEO, compliance officer or GC and
- Conducted a 20-minute board presentation or employee compliance training (worth the biggest part of the grade).
Perhaps the most gratifying part of the semester came during tonight’s final presentations. The students could pick any topic relevant to the fictional company that they were assigned. They chose to discuss child labor in the supply chain for a clothing company, off-label marketing in the pharmaceutical industry, anti-money laundering compliance in a large bank, and environmental and employment law issues for a consumer product conglomerate. Even though I was not their BA professor, I was thrilled to hear them talk about the Caremark duty, the duty of care, and the business judgment rule in their presentations. Most important, the students have left with a portfolio of marketable skills and real-world knowledge in a fast growing field.
If you have your own ideas on how to teach compliance and CSR, please leave them below or email me at email@example.com.
Friday, July 7, 2017
Bernard Sharfman has written another interesting article on shareholder empowerment. I wish I had read A Private Ordering Defense of a Company's Right to Use Dual Class Share Structures in IPOs before I discussed the Snap IPO last semester in business associations.
The abstract is below:
The shareholder empowerment movement (movement) has renewed its effort to eliminate, restrict or at the very least discourage the use of dual class share structures in initial public offerings (IPOs). This renewed effort was triggered by the recent Snap Inc. IPO that utilized non-voting stock. Such advocacy, if successful, would not be trivial, as many of our most valuable and dynamic companies, including Alphabet (Google) and Facebook, have gone public by offering shares with unequal voting rights.
This Article utilizes Zohar Goshen and Richard Squire’s “principal-cost theory” to argue that the use of the dual class share structure in IPOs is a value enhancing result of the bargaining that takes place in the private ordering of corporate governance arrangements, making the movement’s renewed advocacy unwarranted.
As he has concluded:
It is important to understand that while excellent arguments can be made that the private ordering of dual class share structures must incorporate certain provisions, such as sunset provisions, it is an overreach for academics and shareholder activists to dictate to sophisticated capital market participants, the ones who actually take the financial risk of investing in IPOs, including those with dual class share structures, how to structure corporate governance arrangements. Obviously, all the sophisticated players in the capital markets who participate in an IPO with dual class shares can read the latest academic articles on dual class share structures, including the excellent new article by Lucian Bebchuk and Kobi Kastiel, and incorporate that information in the bargaining process without being dictated to by parties who are not involved in the process. If, as a result of this bargaining, the dual class share structure has no sunset provision and perhaps even no voting rights in the shares offered, then we must conclude that these terms were what the parties required in order to get the deal done, with the risks of the structure being well understood.… capital markets paternalism is not required when it comes to IPOs with dual class share structures.
Please be sure to share your comments with Bernard below.
Thursday, July 6, 2017
Wisniewski, Yekini, and Omar on “Psychopathic Traits of Corporate Leadership as Predictors of Future Stock Returns”
Tomasz Piotr Wisniewski, Liafisu Sina Yekini, and Ayman M. A. Omar posted “Psychopathic Traits of Corporate Leadership as Predictors of Future Stock Returns” on SSRN on June 13, 2017. You can find their abstract here.
I was particularly interested in how the authors measured psychopathy. Here is a relevant excerpt:
Using UK data, we construct a number of corporate psychopathy indicators and link them to the returns that ensue over the next 250 trading days - a period roughly equivalent to one calendar year.
Even if clear guidance exists on how to diagnose psychopathic personality disorder in humans (Hare 1991, 2003), the practical difficulty is that executives will be generally unwilling to participate in time consuming surveys, particularly those that are likely to expose the dark side of their character. We choose to follow a more pragmatic approach and, similarly to Chatterjee and Hambrick (2007), collect information in an unobtrusive way by going through company-related archives and data. Firstly, using automated content analysis we assess to what extent the language in annual report narratives is symptomatic of psychopathy. This is done by counting the frequency of words that are aggressive, characteristic of speakers who are self-absorbed and who have the tendency to assign blame to others. Secondly, we look at likely correlates of managerial integrity. More specifically, we try to identify companies whose auditors have expressed reservations in the Emphasis of Matter section of the annual report and those that have experienced a publicized Financial Reporting Council (FRC) intervention. Thirdly, we consider a measure that derives from the observation that psychopaths require stronger external stimuli to experience emotions and, therefore, have the tendency to take high risks. We assume that excessive exposure in a corporation will result in a high degree of idiosyncratic risk. This type of risk, which is entirely company-specific and unrelated to the broader economy, is measured in our empirical inquiry. Lastly, we construct a variable to capture the reluctance of a company to donate to charitable causes.
Our empirical investigation documents a negative association between the presence of managerial psychopathic traits and future return on common equity.
Wednesday, June 21, 2017
Yesterday, during a conversation with a law student about whether corporate social responsibility is a mere marketing ploy to fool consumers, the student described her conflict with using Uber. She didn’t like what she had read in the news about Uber’s workplace culture issues, sex harassment allegations, legal battles with its drivers, and leadership vacuum. The student, who is studying for the bar, probably didn’t even know that the company had even more PR nightmares just over the past ten days--- the termination of twenty employees after a harassment investigation; the departure of a number of executives including the CEO’s right hand man; the CEO’s “indefinite” leave of absence to “mourn his mother” following a scathing investigative report by former Attorney General Eric Holder; and the resignation of a board member who made a sexist remark during a board meeting (ironically) about sexism at Uber. She clearly hadn’t read Ann Lipton’s excellent post on Uber on June 17th.
Around 1:00 am EST, the company announced that the CEO had resigned after five of the largest investors in the $70 billion company issued a memo entitled “Moving Uber Forward.” The memo was not available as of the time of this writing. According to the New York Times:
The investors included one of Uber’s biggest shareholders, the venture capital firm Benchmark, which has one of its partners, Bill Gurley, on Uber’s board. The investors made their demand for Mr. Kalanick to step down in a letter delivered to the chief executive while he was in Chicago, said the people with knowledge of the situation.
… the investors wrote to Mr. Kalanick that he must immediately leave and that the company needed a change in leadership. Mr. Kalanick, 40, consulted with at least one Uber board member, and after long discussions with some of the investors, he agreed to step down. He will remain on Uber’s board of directors.
This has shades of the American Apparel controversy with ousted CEO Dov Charney that I have blogged about in the past. Charney also perpetuated a "bro culture" that seemed unseemly for a CEO, but isn't all that uncommon among young founders. The main difference here is that the investors, not the Board, made the decision to fire the CEO. As Ann noted in her post this weekend, there is a lot to unpack here. I’m not teaching Business Associations in the Fall, but I hope that many of you will find a way to use this as a case study on corporate governance, particularly Kalanick’s continuation as a board member. That could be awkward, to put it mildly. I plan to discuss it in my Corporate Compliance and Social Responsibility course later today. As I have told the students and written in the past, I am skeptical of consumers and their ability to change corporate culture. Sometimes, as in the case of Uber, it comes down to the investors holding the power of the purse.
Friday, June 9, 2017
In August, 2015, Chinese conglomerate, Wanda Group, acquired IRONMAN (primarily known for its long distance triathlon races) from a private equity group for $650 million.
To start, I had no idea organizing endurance sports had become such big business, but given the increasing popularity and the increasing entry fees, perhaps I should have known.
Personally, I have mixed feelings about big corporations dominating endurance sports, which, previously, had been much less commercial. On one hand, because of their scale, larger corporations like Competitor Group can conduct their events in a very professional manner, produce slick event shirts, measure the courses precisely, host impressive expos before the races and impressive after-parties, maintain plenty of insurance, take proper precautions, and market effectively to bring new participants into the events.
On the other hand, the big corporations often seem focused on a single, financial line. They raise entry fees as high as they can and often seem to spend an incredible amount on marketing. The races organized by big corporations often lack the individual touch of local races. That said locally organized races are a mixed bag. Sometimes they are organized by complete amateurs, and their lack of experience or financial backing shows in things like poorly measured and marked courses. Other times, when organized by devotees of the sport, locally organized races can provide a superior event without the marketing, frills, and shiny gadgets. Perhaps there will be room all types of organizers, especially because the locally organizers are usually nonprofit operations, and therefore are a bit of a different animal.
This strategic acquisition by IRONMAN may be telling regarding the trajectory of races. The long distance races like the IRONMAN (2.4 mile swim, 112 mile bike, 26.2 mile run) had skyrocketed in popularity, but, while those races are still currently popular, I think that many people are starting to realize they don't have the time or the money (the entry fee is often over $500) for that kind of event. Competitor Group brings not only a portfolio of marathons (26.2 miles) to the table, but also half marathons (13.1 miles, which is growing in popularity), 5Ks (3.1 miles), and even 1 mile races.
In any case, I do wish IRONMAN the best with this acquisition, and I hope they will consider all stakeholders as they move forward.
Thursday, June 8, 2017
ICYMI: Eric Chaffee's "The Origins of Corporate Social Responsibility" Makes SSRN Top Downloads For Corporate Governance Network List
The paper can be downloaded here: https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2957820
A portion of the abstract:
[T]his Essay and my other works introduce a new theory of the firm, collaboration theory. This theory views the corporation as a collaborative effort among a state government and those individuals organizing, operating, and owning the business entity to pursue economic development and economic gain. This theory is superior to the prevailing essentialist theories of the corporation because it explains both how and why the corporation exists.
Under this theory, corporations are obligated to seek profit based on the deal struck among the state and individuals owning, operating, and organizing the corporation, but the co-adventurers in the corporation are obligated to treat each other in good faith whenever possible. This means corporations should only engage in socially irresponsible ways in which the financial benefit to the corporation is clear. Because of the uncertainty of life, this is only going to be the rarest of circumstances. In these rare circumstances, to control bad behavior on the part of the corporation, the government must engage in affirmative lawmaking and regulation to alter the cost–benefit analysis to force corporations to be ethical.
Wednesday, June 7, 2017
In 2016, a number of news outlets focused on Wal-Mart’s reputation crisis and outdated management style. Many, including union leaders, doubted the sincerity behind the company’s motivation in raising wages last year. I’ve blogged about Wal-Mart before, but today, there appears to be a different story to tell. Wal-Mart, the bogeyman of many NGOs and workers’ rights groups, actually believes that “serving the customers and society is the same thing… [and] putting the customer first means delivering for them in ways that protect and preserve the communities they live in and the world they will pass on to future generations.” This comes from the company’s 148-page 2016 Global Responsibility Report. Target’s report is a paltry 43 pages in comparison.
What accounts for the difference? Both use the Global Reporting Initiative framework, which aims to standardize sustainability reporting using materiality factors and items in the 10-K. Key GRI disclosures include: a CEO statement; key impacts, risks, and opportunities; markets; collective bargaining agreements; supply chain description; organizational changes; internal and external CSR standards (such as conflict mineral policy, LEED etc); membership associations; governance structure; high-level accountability for sustainability; consultation between stakeholders and the board; board composition; board knowledge of sustainability; board pay; helplines or hotlines for reporting unethical or unlawful behavior; climate change risks; energy consumption; GhG emissions; employee benefits; health and safety; performance appraisal process; human rights assessments; wage and hour audits; supplier diversity; community engagement; PAC contributions by party; and more.
Whew! Companies can of course glean a lot of this information from their proxy, 10-K and other disclosures, but it still takes the average company months to complete. It may not even be worth it. Although 82% of consumers say they want to buy from a socially-responsible company, only 17% have actually read a CSR report, according to one study. To be honest, I’m surprised the number of CSR report readers is that high. My informal survey during Monday's class revealed that one student out of the 12 had read a CSR report, and this is in a group that chose to take a two-hour course in compliance and CSR that meets at 7:30 pm in the summer.
Here’s what I learned about Wal-Mart by reading the first four pages its report (it cleverly has big colorful picture blocks of statistics). I knew from press reports that Wal-Mart is currently facing numerous employment law class actions and may soon pay $300 million to the DOJ settle its bribery scandal. But the CSR report made Wal-Mart look like the model corporate citizen. The company earned 482 billion in revenue, employs 2.3 million employees, operates in 28 countries, and had 260 million weekly customer visits in 2016. It has invested 2.7 billion over 2 years in wages and benefits for its employees. It will train 1 million female farmers and factory workers around the world. It has eliminated 35.6 million metric tons of greenhouse gas emissions from its supply chain. Target, which has settled for 18.5 million with several states over data breaches, took a different approach for its report. Its first few pages has pictures and charts too but focuses on what it has achieved/exceeded and what it hasn’t based on its own 20 goals. The Target 2015 report is a decidedly more humble looking document than the Wal-Mart product (the next Target report is due this year).
I tend to believe that these CSR reports are designed for the consumption of regulators and lawmakers- hence the longer and more robust Wal-Mart report. Although Target claims in its report that CSR can enhance its reputation, the average Wal-Mart and Target consumer will not stop to read the report and many who boycott these stores will not likely change their minds be reading these reports. Instead, they may view them as an expensive marketing tool. Although Target doesn't face the same level of legal problems or reputational issues as Wal-Mart, it has still lost market share to Wal-Mart and Amazon, proving my theory that no matter what consumers say about shopping ethically, they really focus on convenience, quality, and price.
I look forward to hearing what my students think at tonight’s class. I fear I may already traumatize them with the videos they will see about Nike, fair trade, and whether boycotting sweatshops make sense.
Tuesday, June 6, 2017
More than two years ago, I posted Shareholder Activists Can Add Value and Still Be Wrong, where I explained my view on shareholder proposals:
I have no problem with shareholders seeking to impose their will on the board of the companies in which they hold stock. I don't see activist shareholder as an inherently bad thing. I do, however, think it's bad when boards succumb to the whims of activist shareholders just to make the problem go away. Boards are well served to review serious requests of all shareholders, but the board should be deciding how best to direct the company. It's why we call them directors.
Today, the Detroit Free Press reported that shareholders of automaker GM soundly defeated a proposal from billionaire investor David Einhorn that would have installed an alternate slate of board nominees and created two classes of stock. (All the proposals are available here.) Shareholders who voted were against the proposals by more than 91%. GM's board, in materials signed by Mary Barra, Chairman & Chief Executive Officer and Theodore Solso, Independent Lead Director, launched an aggressive campaign to maintain the existing board (PDF here) and the split shares proposal (PDF here). GM argued in the board maintenance piece:
Greenlight’s Dividend Shares proposal has the potential to disrupt our progress and undermine our performance. In our view, a vote for any of the Greenlight candidates would represent an endorsement of that high-risk proposal to the detriment of your GM investment.
Another shareholder proposal asking the board to separate the board chair and CEO positions was reported by the newspaper as follows: "A separate shareholder proposal that would have forced GM to separate the role of independent board chairman and CEO was defeated by shareholders." Not sure. Though the proposal was defeated, it's worth noting that the proposal would not have "forced" anything. The proposal was an "advisory shareholder proposal" requesting the separation of the functions. No mandate here, because such decisions must be made by the board, not the shareholders. The proposal stated:
Shareholders request our Board of Directors to adopt as policy, and amend our governing documents as necessary, to require the Chair of the Board of Directors, whenever possible, to be an independent member of the Board. The Board would have the discretion to phase in this policy for the next CEO transition, implemented so it did not violate any existing agreement. If the Board determines that a Chair who was independent when selected is no longer independent, the Board shall select a new Chair who satisfies the requirements of the policy within a reasonable amount of time. Compliance with this policy is waived if no independent director is available and willing to serve as Chair. This proposal requests that all the necessary steps be taken to accomplish the above.
GM argued against this proposal because the "policy advocated by this proposal would take away the Board’s discretion to evaluate and change its leadership structure." Also not true. It the proposal were mandatory, then this would be true, but as a request, it cannot and could not take away anything. If the shareholders made such a request and the board declined to follow that request, there might be repercussions for doing so, but the proposal would have kept in place the "Board’s discretion to evaluate and change its leadership structure."
These proposals appear to have been properly brought, properly considered, and properly rejected. As I suggested in 2015, shareholder activists can help improve long-term value, even when following the activists' proposals would not. That is just as true today and these proposals may well prime the pumpTM for future board or shareholder actions. That is, GM has conceded that its stock is undervalued and that change is needed. GM argues those changes are underway, and for now, most voting shareholder agree. But we'll see how this looks if the stock price has not noticeably improved next year. An alternative path forward on some key issues has been shared, and that puts pressure on this board to deliver. They can do it their own way, but they are on notice that there are alternatives. An shareholders now know that, too.
This knowledge underscores the value of shareholder proposals as a process. They can and should create accountability, and that is a good thing. I agree with GM that the board should keep control of how it structures the GM leadership team. But I agree with the shareholders that if this board doesn't perform, it may well be time for a change.
June 6, 2017 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Joshua P. Fershee, Management, Securities Regulation, Shareholders | Permalink | Comments (0)
Monday, May 22, 2017
I ask my Advanced Business Associations students to recognize and process theory and policy and relate them to doctrine at the practical level. This is, as most of you will recognize, a tall order of business for students who have just recently learned what business associations law is and may not yet (at the time they take the course) have applied the law in a practical context outside the classroom. (The course is open to 2L and 3L students who have already taken Business Associations.)
So, when it came time to lionize my friends Lyman Johnson and David Millon at a symposium honoring their work (which, as you may recall, I first heralded on the BLPB a year ago and wrote a bit about back in October), I decided to put my scholarship pen (keyboard) where my teaching mouth is. My goal for the symposium was to write something that linked theory and policy through doctrine to law practice and, at the same time, incorporated Lyman's and David's work. The essay I produced in fulfillment of these objectives was recently released and posted to SSRN. I excerpted from it in my post on Saturday. The full SSRN abstract follows.
In context, corporate law is often credited with creating, hewing to, or reinforcing a shareholder wealth maximization norm. The now infamous opinion in Dodge v. Ford Motor Co. describes the norm in a relatively bald and narrow way: “A business corporation is organized and carried on primarily for the profit of the stockholders." As a matter of theory and policy, commentators from the academy (law and business) and practice (lawyers and judges) have taken various views on this asserted norm—ranging from characterizing the norm as nonexistent or oversimplified to maintaining it as simple fact.
In an effort to broaden the conversation about the shareholder wealth maximization norm in an applied context, this essay describes shareholder wealth maximization under various state laws (in and outside Delaware) as a function of firm-level corporate governance—corporate law statutes, decisional law interpreting and filling gaps in that statutory law, and corporate charter and bylaw provisions—as applicable to both publicly held and privately held corporations in a variety of states. In this overall context, the essay considers the possibility that holders of shares in for-profit corporations may desire to maximize overall utility in their shareholdings of a particular firm, rather than merely the financial wealth arising from those holdings. To accomplish its purpose, the essay first briefly and generally addresses shareholder wealth maximization as a function of applicable statutory and decisional law and as a matter of private ordering (collecting, synthesizing, and characterizing, in each case, points made in the extant literature) before suggesting the broad implications of that analysis for corporate governance and shareholder wealth maximization and concluding. Ultimately, the essay makes a case for a more nuanced look at the shareholder wealth maximization norm. Given differences in doctrine and public policy among the states and variance in that doctrine and public policy among public, private, and statutory close or closely held corporations within individual states, answers to open questions are likely to (and should) depend on individualized facts assessed through the lens of specific statutory and decisional law and applicable public policy.
I fear that this short piece does not do the subject (or Lyman and David's amazing work) justice. But my biggest regret is that the essay went to press without the addition of thanks to two special folks in my author's footnote. I want to call those two colleagues out here.
Saturday, May 20, 2017
Loyalty has been in the news lately. The POTUS, according to some reports, asked former Federal Bureau of Investigation ("FBI") Director James Comey to pledge his loyalty. Assuming the basic veracity of those reports, was the POTUS referring to loyalty to the country or to him personally? Perhaps both and perhaps, as Peter Beinart avers in The Atlantic, the POTUS and others fail to recognize a distinction between the two. Yet, identifying the object of a duty can be important.
I have observed that the duty of government officials is not well understood in the public realm. Donna Nagy's fine work on this issue in connection with the proposal of the Stop Trading on Congressional Knowledge ("STOCK") Act, later adopted by Congress, outlines a number of ways in which Congressmen and Senators, among others, may owe fiduciary duties to others. If you have not yet been introduced to this scholarship, I highly recommend it. If we believe that government officials are entrusted with information, among other things, in their capacity as public servants, they owe duties to the government and its citizens to use that information in authorized ways for the benefit of that government and those citizens. In fact, Professor Nagy's congressional testimony as part of the hearings on the STOCK Act includes the following in this regard:
Given the Constitution's repeated reference to public offices being “of trust,” and Members’ oath of office to “faithfully discharge” their duties, I would predict that a court would be highly likely to find that Representatives and Senators owe fiduciary-like duties of trust and confidence to a host of parties who may be regarded as the source of material nonpublic congressional knowledge. Such duties of trust and confidence may be owed to, among others:
- the citizen-investors they serve;
- the United States;
- the general public;
- Congress, as well as the Senate or the House;
- other Members of Congress; and
- federal officials outside of Congress who rely on a Member’s loyalty and integrity.
There is precious little in federal statutes, regulations, and case law on the nature--no less the object--of any fiduciary the Director of the FBI may have. The authorizing statute and regulations provide little illumination. Federal court opinions give us little more. See, e.g., Banks v. Francis, No. 2:15-CV-1400, 2015 WL 9694627, at *3 (W.D. Pa. Dec. 18, 2015), report and recommendation adopted, No. CV 15-1400, 2016 WL 110020 (W.D. Pa. Jan. 11, 2016) ("Plaintiff does not identify any specific, mandatory duty that the federal officials — Defendants Hornak, Brennan, and the FBI Director— violated; he merely refers to an overly broad duty to uphold the U.S. Constitution and to see justice done."). Accordingly, any applicable fiduciary duty likely would arise out of agency or other common law. Section 8.01 of the Restatement (Third) of Agency provides "An agent has a fiduciary duty to act loyally for the principal's benefit in all matters connect with the agency relationship."
But who is the principal in any divined agency relationship involving the FBI Director?
Wednesday, May 10, 2017
I received this call for papers and wanted to pass it on.
This Call for Papers invites contributions to the Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability. Those tentatively selected to contribute will be invited to a Cambridge Handbook Symposium in Oslo on 12-14 March 2018, with draft chapters to be submitted to the editors beforehand. Participation at the Symposium is not a condition to contribute to the Handbook, but it is strongly encouraged. The Symposium is expected to enhance the quality of the contributions, reinforce the cohesive nature of the volume, and contribute to the timeliness of the manuscript.
The Handbook will be edited by Professor Beate Sjåfjell, University of Oslo, and Professor Christopher Bruner, Washington and Lee University. Final confirmation of contributions for the Handbook will be contingent on review of the chapters and will be decided by the editors. . . .
More information is available here. In case you need a bit of encouragement to make a proposal, I will add that (in case you do not know them) the editors are well-regarded scholars in the field and also great people.
Monday, May 1, 2017
A bit more than a year ago, I had the opportunity to participate in a conference on corporate criminal liability at the Stetson University College of Law. The short papers from the conference were published in a subsequent issue of the Stetson Law Review. This was the second time that Ellen Podgor, a friend and white collar crime scholar on the Stetson Law faculty, invited me to produce a short work on corporate criminal liability for publication in a dedicated edition of the Stetson Law Review. (The first piece I published in the Stetson Law Review reflected on corporate personhood in the wake of the U.S. Supreme Court's Citizen's United opinion. It has been downloaded and cited a surprising number of times. So, I welcomed the opportunity to publish with the law review a second time.)
For the 2016 conference, I chose to focus on the reckless conduct of employees and its capacity to generate corporate criminal insider trading liability for the employer. The abstract for the resulting paper, (Not) Holding Firms Criminally Responsible for the Reckless Insider Trading of their Employees (recently posted to SSRN), is as follows:
Criminal enforcement of the insider trading prohibitions under Section 10(b) and Rule 10b–5 is the root of corporate criminal liability for insider trading in the United States. In the wake of assertions that S.A.C. Capital Advisors, L.P. actively encouraged the unlawful use of material nonpublic information in the conduct of its business, the line between employer and employee criminal liability for insider trading becomes both tenuous and salient. An essential question emerges: when do we criminally prosecute the firm for the unlawful conduct of its employees?
The possibility that reckless employee conduct may result in the employer's willful violation of Section 10(b) and Rule 10b–5 (and, therefore, criminal liability for that employer firm) motivates this article. The article first reviews the basis for criminal enforcement of the insider trading prohibitions established in Section 10(b) and Rule 10b–5 and describes the basis and rationale for corporate criminal liability (a liability that derives from the activities of agents undertaken in the course of the firm’s business). Then, it reflects on that basis and rationale by identifying the potential for corporate criminal liability for the reckless insider trading violations of employees under Section 10(b) and Rule 10b–5, arguing against that liability, and suggesting ways to eliminate it.
I was not the only conference participant concerned about the criminal liability of an employer for the insider trading conduct of an employee. John Anderson, who co-led an insider trading discussion group with me at the 2017 Association of American Law Schools annual meeting back in January and also enjoys exploring criminal insider trading issues, contributed his research on the overcriminalization of insider trading at the conference. His paper, When Does Corporate Criminal Liability for Insider Trading Make Sense?, identifies the same overall problem as my article does (employer criminal liability for insider trading based on employee conduct). However, he views both the problem and the potential solutions more broadly.
Wednesday, April 26, 2017
Last week, a reporter interviewed me regarding conflict minerals.The reporter specifically asked whether I believed there would be more litigation on conflict minerals and whether the SEC's lack of enforcement would cause companies to stop doing due diligence. I am not sure which, if any, of my remarks will appear in print so I am posting some of my comments below:
Just today, the GAO issued a report on conflict minerals. Dodd-Frank requires an annual report on the effectiveness of the rule "in promoting peace and security in the DRC and adjoining countries." Of note, the report explained that:
After conducting due diligence, an estimated 39 percent of the companies reported in 2016 that they were able to determine that their conflict minerals came from covered countries or from scrap or recycled sources, compared with 23 percent in 2015. Almost all of the companies that reported conducting due diligence in 2016 reported that they could not determine whether the conflict minerals financed or benefited armed groups, as in 2015 and 2014. (emphasis added).
The Trump Administration, some SEC commissioners, and many in Congress have already voiced their concerns about this legislation. I didn't have the benefit of the GAO report during my interview, but it will likely provide another nail in the coffin of the conflict minerals rule.
April 26, 2017 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, International Law, Legislation, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (1)
More than a few legal blogs and scholars have taken note of a recent paper by Adam Bonica (Stanford University), Adam S. Chilton (University of Chicago), Kyle Rozema (Northwestern University) and Maya Sen (Harvard University), “The Legal Academy’s Ideological Uniformity.” The paper finds that those in the legal academy are more liberal than those in legal profession generally. Anecdotally, I have to say I am not surprised.
The abstract of the piece is as follows:
We find that approximately 15% of law professors are conservative and that only approximately one out of every twenty law schools have more conservative law professors than liberal ones. In addition, we find that these patterns vary, with higher-ranked schools having an even smaller presence of conservative law professors. We then compare the ideological balance of the legal academy to that of the legal profession. Compared to the 15% of law professors that are conservative, 35% of lawyers overall are conservative. Law professors are more liberal than graduates of top 14 law schools, lawyers working at the largest law firms, former federal law clerks, and federal judges. Although we find that professors are more liberal than the alumni at all but a handful of law schools, there is a strong relationship between the ideologies of professors from a law school and the ideologies of alumni from that school. However, this relationship is weaker for schools with more conservative alumni.
Jonathan Adler recently discussed the paper in a piece for The Volokh Conspiracy, How ‘ideologically uniform’ is the legal academy? Adler notes, that the paper's "findings are based upon an examination of reported political donations. While this is an admittedly imperfect measure of ideology, it does allow for comparisons across population groups." I agree on both counts.
I am particularly interested in (and a bit skeptical of) the use of political donations as the proxy for ideology. I understand why the authors used that proxy: the information is available and it does, as Adler says, provide for comparisons. My skepticism is not about their process or choice, but merely about whether it tells us very much about legal ideology. I think it tells us primarily about political party. And even there, in a primarily two-party system, it only tells us about preferences between those two parties, and if the data is primarily presidential, about those two specific candidates.
My point is that legal ideology is often different that political party choice. When choosing between two parties, we all have priorities of our views, too. For example, I am a far bigger believer in the ability of markets to solve problems than many of my colleagues. I am more skeptical of government intervention and increased regulation than many of my colleagues. But because of a few priorities that tip my balancing test, I would almost certainly come out "liberal" in using my modest contributions to political parties as the assessment of my ideology.
In assessing legal ideology, though, I would argue diversity comes more from how we view the law than particular candidates or certain social issues. Obviously, it is much harder to assess that, but I think it should matter when considering how law schools teach.
Some legal programs (like SEALS) have been seeking diversity of viewpoints, along with other measures of diversity, for panel and discussions groups. This is a good thing. It's not always easy to assess, though. Maybe we should just ask. Here's how I'd assess my own legal ideology: When it comes to economic regulation, my thinking is much more in line with former law professor and SEC Commissioner Troy A. Paredes than I am with, say, Elizabeth Warren. When it comes to business entities law, I am far more Bainbridge than Bebchuck. For environmental law, more Huffman or Adler than Parenteau. Of course, I have at various times agreed and disagreed with them all.
I, like many others, am very skeptical of an ideological litmus test or quota system. And yet I also think there is value in embracing different perspectives and viewpoints. Ultimately, I don't care how someone votes when I assess whether they are a good legal scholar, a good colleague, and a good teacher. I do care that they value diversity of all kinds (including ideological), and I care that they believe in encouraging and faciltitating productive discourse. There is little value in lockstep thinking in any arena, and that is particularly true in legal education. I'm glad this discussion is part of how we consider moving forward in legal education.
Monday, April 24, 2017
As a business lawyer in private practice, I found it very frustrating when the principals of business entity clients acted in contravention of my advice. This didn't happen too often in my 15 years of practice. But when it did, I always wondered whether I could have stopped the madness by doing something differently in my representation of the client.
Thanks to friend and Wayne State University Law School law professor Peter Henning, who often writes on insider trading and other white collar crime issues for the New York Times DealBook (see, e.g., this recent piece), I had the opportunity to revisit this issue through my research and present that research at a symposium at Wayne Law back in the fall of 2015. The law review recently published the resulting short article, which I have posted to SSRN. The abstract is set forth below.
Sometimes, business entity clients and their principals do not seek, accept, or heed the advice of their lawyers. In fact, sometimes, they expressly disregard a lawyer’s instructions on how to proceed. In certain cases, the client expressly rejects the lawyer’s advice. However, some business constituents who take action contrary to the advice of legal counsel may fall out of compliance incrementally over time or signal compliance and yet (paradoxically) act in a noncompliant manner. These seemingly ineffectual varieties of the lawyer/client relationship are frustrating to the lawyer.
This short article aims to explain why representatives of business entities who consider themselves law-abiding and ethical may nevertheless act in contravention of the business’s legal counsel and offers preliminary means of addressing the proffered reasons for these compliance failures. The article does not address willful noncompliance or even willful blindness. Rather, it makes observations about behavior that falls squarely into what the law typically recognizes as recklessness. An apocryphal lawyer-client story relating to insider trading compliance provides foundational context.
The exemplar story derives from things I witnessed in law practice. Perhaps some of you also have experienced clients or business entity client principals which/who act contrary to your advice in similar ways. Regardless, you may find this short piece of interest.
Monday, April 17, 2017
As Haskell earlier announced here at the BLPB, The first U.S. benefit corporation went public back in February--just before publication of my paper from last summer's 8th Annual Berle Symposium (about which I and other BLPB participants contemporaneously wrote here, here, and here). Although I was able to mark the closing of Laureate Education, Inc.'s public offering in last-minute footnotes, my paper for the symposium treats the publicly held benefit corporation as a future likelihood, rather than a reality. Now, the actual experiment has begun. It is time to test the "visioning" in this paper, which I recently posted to SSRN. Here is the abstract.
Benefit corporations have enjoyed legislative and, to a lesser extent, popular success over the past few years. This article anticipates what recently (at the eve of its publication) became a reality: the advent of a publicly held U.S. benefit corporation — a corporation with public equity holders that is organized under a specialized U.S. state statute requiring corporations to serve both shareholder wealth aims and social or environmental objectives. Specifically, the article undertakes to identify and comment on the structure and function of U.S. benefit corporations and the unique litigation risks to which a publicly held U.S. benefit corporation may be subject. In doing so, the article links the importance of a publicly held benefit corporation's public benefit purpose to litigation risk management from several perspectives. In sum, the distinctive features of the benefit corporation form, taken together with key attendant litigation risks for publicly held U.S. benefit corporations (in each case, as identified in this article), confirm and underscore the key role that corporate purpose plays in benefit corporation law.
Ultimately, this article brings together a number of things I wanted to think and write about, all in one paper. While many of the observations and conclusions may seem obvious, I found the exploration helpful to my thinking about benefit corporation law and litigation risk management. Perhaps you will, too . . . .
April 17, 2017 in Anne Tucker, Business Associations, Corporate Governance, Corporations, Current Affairs, Haskell Murray, Joan Heminway, Litigation, Management, Social Enterprise | Permalink | Comments (0)
Friday, March 24, 2017
In the latest Impact Esq. newsletter, Kyle included a link to the Kickstarter’s 2016 Benefit Statement. Kyle wrote that he had “never seen [a benefit report] as strong as Kickstarter’s.” Personally, I am not sure I would go that far. I think Greyston Bakery’s Report and Patagonia’s Report are at least as good. I do think the Kickstarter report is relatively good, but the bar is incredibly low, as many benefit corporations are ignoring the statutory reporting requirement or doing a pathetically bad job at reporting.
While the Kickstarter report is more detailed than most, it still reads mostly like a PR piece to me. The vast majority of the report is listing cherry-picked, positive statistics. That said, Kickstarter did note a few areas for possible improvement, which is extremely rare in benefit report. Kickstarter stated that they could do more to promote “sustainability,” that they could do more to encourage staff to “take advantage of the paid time off we provide for volunteering,” and that they wanted to “encourage greater transparency from creators, better educate backers about the risks and rewards of this system, and further empower our Integrity team in their work to keep Kickstarter safe and trusted.” These “goals” for improvement are quite vague, and I would have liked to see more specific goals.
A few other things to note:
- University of Pennsylvania produced a study, which was cited and used in the report. I think involving universities in the creation of these reports could be a good idea, though possible conflicts should be considered.
- “Including both salary and equity, our CEO's total compensation equaled 5.52x the median total compensation of all non-CEO, non-founder employees in 2016. For context, a 2015 study examining the executive pay gap found that the average CEO earns 204 times that of the median worker for the same company.” I would be interested in how Kickstarter’s number compares to companies in their industry, especially direct competitors. I imagine the CEO/Employee compensation ratio is lower in the technology industry, where the market demands fairly high employee compensation, but even considering the industry, Kickstarter's ratio still seems quite low.
- “Kickstarter overall team demographics: 53% women; 47% men. 70% White/Caucasian; 12% Asian; 12% two or more races; 4% Hispanic or Latino; 2% Black/African American.” This seems to be a good bit more diverse, especially as to gender, than other technology companies who have released similar data.
- “Everyone who works at Kickstarter receives an annual Education Stipend to explore their interests outside the office. In 2016, our employees used their stipends towards blacksmithing classes, a bookmaking class, a synthesizer, pottery courses, an herbal medicine workshop, art supplies, improv classes, a neon light making seminar, and embroidery.” I didn’t see how much the education stipend was, but this seems like a good perk.
- “We donated 5% of our after-tax profits to six organizations working to build a more creative and equitable world.” Profits are easier to manipulate than revenues; I’d like to see a revenue floor (as Patagonia does – donating the greater of 10% of profits and 1% of revenues). That said 5% of profits can be significant and does show some commitment to these causes.
Wednesday, March 22, 2017
What does the EU know that the U.S. Doesn’t About the Effectiveness of Conflict Minerals Legislation?
Earlier this month, the EU announced plans to implement its version of conflict minerals legislation, which covers all “conflict-affected and high-risk areas” around the world. Once approved by the Council of the EU, the law will apply to all importers into the EU of minerals or metals containing or consisting of tin, tantalum, tungsten, or gold (with some exceptions). Compliance and reporting will begin in January 2021. Importers must use OECD due diligence standards, report on their progress to suppliers and the public, and use independent third-party auditors. President Trump has not yet issued an executive order on Dodd-Frank §1502, aka conflict minerals, but based on a leaked memo, observers believe that it's just a matter of time before that law is repealed here in the U.S. So why is there a difference in approach?
In response to a request for comments from the SEC, the U.S Chamber of Commerce, which led the legal battle against §1502, claimed, “substantial evidence shows that the conflict minerals rule has exacerbated the humanitarian crisis on the ground in the Democratic Republic of the Congo…The reports public companies are mandated to file also contribute to ―information overload and create further disincentives for businesses to go public or remain public companies. Accordingly, the Chamber strongly supports Congressional repeal of Section 1502 due to its all-advised and fundamentally flawed approach to solving a geopolitical crisis, and the substantial burden it imposes upon public companies and their shareholders.”
The Enough Project, which spearheaded the passage of §1502, submitted an eight-page statement to the SEC last month stating, among other things, that they “strongly oppose any suspension, weakening, or repeal of the current Conflict Minerals Rule, and urge the SEC to increase enforcement of the Rule….The Rule has led to improvements in the rule of law in the mining sectors of Congo, Rwanda, and other Great Lakes countries, contributed to improvements in humanitarian conditions in Congo and a weakening of key insurgent groups, and resulted in tangible benefits for U.S. corporations and their supply chains.”
I agree that the Rule has led to increased transparency and efficiency in supply chains (although some would differ), and less armed control of mines. But I’m not sure that the overall human rights conditions have improved as significantly as §1502’s advocates (and I) would have liked.
As Amnesty International’s 2016/2017 report on DRC explains in graphic detail, “armed groups committed a wide range of abuses including: summary executions; abductions; cruel, inhuman and degrading treatment; rape and other sexual violence; and the looting of civilian property... various ... armed groups (local and community-based militias) were among those responsible for abuses against civilians. The Lord’s Resistance Army (LRA) continued to be active and commit abuses in areas bordering South Sudan and the Central African Republic. In… North Kivu, civilians were massacred, usually by machetes, hoes and axes. On the night of 13 August, 46 people were killed … by suspected members of the Allied Democratic Forces (ADF), an armed group from Uganda that maintains bases in eastern DRC…Hundreds of women and girls were subjected to sexual violence in conflict-affected areas. Perpetrators included soldiers and other state agents, as well as combatants of armed groups…Hundreds of children were recruited by armed groups...”
Human Rights Watch’s 2017 report isn’t any better. According to HRW, “dozens of armed groups remained active in eastern Congo. Many of their commanders have been implicated in war crimes, including ethnic massacres, killing of civilians, rape, forced recruitment of children, and pillage. In … North Kivu, unidentified fighters continued to commit large-scale attacks on civilians, killing more than 150 people in 2016 … At least 680 people have been killed since the beginning of the series of massacres in October 2014. There are credible reports that elements of the Congolese army were involved in the planning and execution of some of these killings. Intercommunal violence increased as fighters … carried out ethnically based attacks on civilians, killing at least 170 people and burning at least 2,200 homes.
Finally, according to a February 17, 2017 statement from the Trump Administration, “the United States is deeply concerned by video footage that appears to show elements of the armed forces of the Democratic Republic of Congo summarily executing civilians, including women and children. Such extrajudicial killing, if confirmed, would constitute gross violations of human rights and threatens to incite widespread violence and instability in an already fragile country. We call upon the Government of the Democratic Republic of Congo to launch an immediate and thorough investigation, in collaboration with international organizations responsible for monitoring human rights, to identify those who perpetrated such heinous abuses, and to hold accountable any individual proven to have been involved.”
Most Americans have no idea of the atrocities occurring in DRC or other conflict zones around the world. I have spent the past few years researching business and human rights, particularly in conflict zones in Latin America and Africa. I filed an amicus brief in 2013 and have written and blogged about the failure of disclosure regimes a dozen times because I don’t believe that name and shame laws stop the murder, rape, conscription of child soldiers, and the degradation of innocent people. I applaud the EU and all of the NGOs that have attempted to solve this intractable problem. But it doesn't seem that enough has changed since my visit to DRC in 2011 where I personally saw 5 massacre victims in the road on the way to visit a mine, and met with rape survivors, village chiefs, doctors, members of the clergy and others who pleaded for help from the U.S. Unfortunately, I don’t think this legislation has worked. Ironically, the U.S. and EU legislation go too far and not far enough. I hope that if the U.S. and EU focus on a more holistic, well-reasoned geopolitical solution with NGOS, stakeholders, and business.
Monday, March 20, 2017
No. This is not a travelogue. Rather, it's a brief additional bit of background on a case that business associations law professors tend to enjoy teaching (or at least this one does).
In Ringling Bros. Inc. v. Ringling, 29 Del. Ch. 610 (Del. Ch. 1947), the Delaware Chancery Court addresses the validity of a voting agreement between two Ringling family members, Edith Conway Ringling (the plaintiff) and Aubrey B. Ringling Haley (the defendant). The fact statement in the court's opinion notes that John Ringling North is the third shareholder of the Ringling Brothers corporation.
I spent two days in Sarasota Florida at the end of Spring Break last week. While there, I spent a few hours at The Ringling Circus Museum. It was fascinating for many reasons. But today I will focus on just one. I noted this summary in one of the exhibits, that seems to directly relate to the Ringling case:
Interestingly, 1938 is the year in which the plaintiff and defendant in the Ringling case created their original voting trust (having earlier entered into a joint action agreement in 1934). The agreement at issue was entered into in 1941. Could it be that, perhaps, the two women entered into this arrangement as a reaction to John Ringling North's desire to acquire--or successful acquisition of--management control of the firm? I want to do some more digging here, if I can. But I admit that the related history raised some new questions in my mind. John Ringling North was all but forgotten in my memory and teaching of the case, until the other day . . . . The case takes on new interest in my mind (more broadly as a close corporation case) because of my museum visit and discovery.
[Postscript - March 21, 2017: Since posting this, I have been blessed by wonderful, helpful email messages offering general support, PowerPoint slides (thanks, Frank Snyder), a video link (thanks, Frances Fendler), and referrals to/copies of Mark Ramseyer's article on the Ringling case, Ringling Bros.-Barnum & Bailey Combined Shows v. Ringling: Bad Appointments and Empty-Core Cycling at the Circus, which offers all the detail I could want (thanks, again, Frances, and thanks, Jim Hayes) to help fill in the gaps--while still creating a bit of mystery . . . . I am a much better informed instructor as a result of all this! Many thanks to all who wrote.]
Wednesday, March 15, 2017
I'm too busy to blog today because I am preparing a training presentation on governance duties for nonprofits. The audience will consist of high level staff, not board members. I have served on many nonprofits and have advised others but I would be interested in your thoughts. Do you teach nonprofit law? Do you sit on nonprofits? What issues do you think nonprofit board members and staffer should know? Among other things, I plan to focus on fiduciary duties, maintaining 501(c)(3) exemption status, agency issues, the implications of Sarbanes-Oxley, conflicts of interest, document retention, code of ethics/whistleblower (to comport with 990),why nonprofits get sued, compensation issues, lobbying, insurance and indemnification, the role of different committees (particularly the audit committee), how to take good minutes, etc. I plan to use hypotheticals to help make the points stick. If you can think of other matters for my 3 hour module or some good case studies, please comment below or inbox me at firstname.lastname@example.org.