Friday, April 27, 2018
Music star/clothing designer Kanye West stirred up controversy on Wednesday when he began tweeting about his support of Donald Trump, calling him his “brother,” discussing their shared “dragon energy,” and showing off his MAGA hat, autographed by President Trump himself. The President thanked West for the support, and some level of outrage ensued among liberal pundits and many in the black community about West’s actions. A number of marketing experts opined that West’s vocal support had the potential to adversely affect sales of his Yeezy line of clothing and sneakers, which had already suffered a decline of late, even though earlier releases of his product sold out in minutes online. In the past, Yeezy sneakers’ assoication with Adidas helped that company double its stock price.
As fans threatened to get rid of their Yeezy gear, news outlets wondered if West had killed his brand. But a funny thing happened. GQ Magazine reported today that Yeezy sales are actually up and West has even more Twitter followers than ever. The article described the backlash and boycott threats that other sneaker companies faced after their executives supported President Trump. Even Kim Kardashian, West’s wife and marketing, urged him to cease his public support.
What’s the explanation? Is West a marketing genius? Are a number of Yeezy consumers secret Trump supporters? It’s actually likely more simple than that. As a founder of a sneaker retailer stated in October 2017 during earlier threats of boycotts of high end sneakers, “Our consumer is pretty superficial. They’re driven by hype, so I think a very small margin of our consumer base is insightful enough to come up with their own opinions on these types of things. Most would rather just see a trend happening on social media and go by that.”
Yeezy shoppers tend to be millennial with a lot of disposable income. A recent study indicated that 60% of millennials buy on the basis of their beliefs. The West/Trump saga provides an example to challenge some of those statistics. As I have written in the past, people often claim that ethical consumerism drives them (not that supporting Trump is unethical), but in practice, most consumers actually purchase what they want. Perhaps West’s consumer base is just more transparent. Will other CEOs follow West’s example and voice their support of President Trump? It’s doubtful, especially if they run public companies, but I will be watching.
Friday, April 6, 2018
Within the next few weeks, the Supreme Court will decide a trio of cases about class action waivers, which I wrote about here. The Court will decide whether these waivers in mandatory arbitration agreements violate the National Labor Relations Act (which also applies in the nonunion context) or are permissible under the Federal Arbitration Act.
I wonder if the Supreme Court clerks helping to draft the Court's opinion(s) are reading today's report by the Economic Policy Institute about the growing use of mandatory arbitration. The author of the report reviewed survey responses from 627 private sector employers with 50 employees or more. The report explained that over fifty-six percent of private sector, nonunion employees or sixty million Americans must go to arbitration to address their workplace rights. Sixty-five percent of employers with more than one thousand employees use arbitration provisions. One-third of employers that require mandatory arbitration include the kind of class action waivers that the Court is looking at now. Significantly, women, low-wage workers, and African-Americans are more likely to work for employers that require arbitration. Businesses in Texas, North Carolina, and California (a pro-worker state) are especially fond of the provisions. In most of the highly populated states, over forty percent of the employers have mandatory arbitration policies.
Employers overwhelmingly win in arbitration, and the report proves that the proliferation of these provisions has significantly reduced the number of employment law claims filed. According to the author:
The number of claims being filed in employment arbitration has increased in recent years. In an earlier study, Colvin and Gough (2015) found an average of 940 mandatory employment arbitration cases per year being filed between 2003 and 2013 with the American Arbitration Association (AAA), the nation’s largest employment arbitration service provider. By 2016, the annual number of employment arbitration case filings with the AAA had increased to 2,879 (Estlund 2018). Other research indicates that about 50 percent of mandatory employment arbitration cases are administered by the AAA (Stone and Colvin 2015). This means that there are still only about 5,758 mandatory employment arbitration cases filed per year nationally. Given the finding that 60.1 million American workers are now subject to these procedures, this means that only 1 in 10,400 employees subject to these procedures actually files a claim under them each year. Professor Cynthia Estlund of New York University Law School has compared these claim filing rates to employment case filing rates in the federal and state courts. She estimates that if employees covered by mandatory arbitration were filing claims at the same rate as in court, there would be between 206,000 and 468,000 claims filed annually, i.e., 35 to 80 times the rate we currently observe (Estlund 2018). These findings indicate that employers adopting mandatory employment arbitration have been successful in coming up with a mechanism that effectively reduces their chance of being subject to any liability for employment law violations to very low levels.
This data makes the Court's upcoming ruling even more critical for American workers- many of whom remain unaware that they are even subject to these provisions.
Friday, March 30, 2018
Corporate Boycotts, A Change of Heart from CEOs, and H & M's Diversity Initiative- A Roundup of The Week's News Stories
Within the past 24 hours, I've seen at least three news article that led me to reflect on my past blog posts. Rather than write a full post on each article, I've decided to note some observations.
The Tweet That Launched A Boycott (And Maybe a Buycott)
I've been skeptical in the past about whether boycotts work. Perhaps times are changing. This week, Parkland shooting survivor David Hogg tweeted that advertisers on Laura Ingraham's cable show should pull out after she tweeted, "David Hogg Rejected By Four Colleges To Which He Applied and whines about it. (Dinged by UCLA with a 4.1 GPA...totally predictable given acceptance rates.) https://www.dailywire.com/news/28770/gun-rights-provocateur-david-hogg-rejected-four-joseph-curl …" On March 28th, the 17-year old activist responded with "Soooo
@IngrahamAngle what are your biggest advertisers ... Asking for a friend. #BoycottIngramAdverts." He then provided a list of her top twelve sponsors.
As of 8:00 p.m. tonight, the following companies dumped the Fox show, eleven after the talk show host had apologized, stating “On reflection, in the spirit of Holy Week, I apologize for any upset or hurt my tweet caused him or any of the brave victims of Parkland... For the record, I believe my show was the first to feature David immediately after that horrific shooting and even noted how ‘poised’ he was given the tragedy ... As always, he’s welcome to return to the show anytime for a productive discussion.”
The companies that have pulled their advertising include Nutrish, Office Depot, Jenny Craig, Hulu, TripAdvisor, Expedia, Wayfair, Stitch Fix, Nestlé, Johnson & Johnson, Jos A Bank, Miracle Ear, Liberty Mutual and Principal. But will they ever return to the show after the attention moves to something else? Will the sponsors face a "buycott," where Ingraham's fans boycott the boycotters or increase their support of the advertisers that Hogg specifically named but have chosen to stay with Ingraham? Time will tell.
Silicon Valley CEOs Warm to President Trump
Last year, I posted about various CEOs choosing to distance themselves from President Trump by resigning from advisory councils because they disagreed with his actions or positions on everything from immigration to his reaction to the events in Charlottesville. Today, the New York Times reported that some of the same CEOs that bemoaned Trump's election and/or publicly condemned him have now had a change of heart. Apparently, they have more common ground than they thought on areas of tax reform, infrastructure, and looser regulation. I look forward to seeing whether any of these companies or CEOs refrain from criticizing him in the future or, more tellingly, whether they choose to use PAC money or personal funds to support his re-election.
H & M Asks One of Its Lawyers To Lead Diversity Initiative
H & M has lots of problems from underperforming designs (billions in unsold clothes) to continued fallout from its "coolest monkey in the jungle" hoodie. As you may recall, in January, a number of consumers, public figures, and other called for a boycott of the company after a young black boy advertised a green hoodie with the word "monkey." H & M even had to close its store in South Africa. The fast fashion company has now turned to one of its in-house lawyers to lead a 4-person team to focus on diversity and inclusiveness. The lawyer will report directly to the CEO in Stockholm. Notably, the board is all white. Should the board diversify as well? It's hard to say. While I support diversity in the executive ranks and the boardroom, there is no evidence that the monkey hoodie led to the 62% drop in operating profit in Q1. Instead, experts note that consumers just didn't like the selections, even at steep discounts. Further, the average H & M customer probably has no idea about this new diversity initiative and even if the customer knew, it'sdoubtful that would change buying habits. Even so, I applaud H & M for taking concrete steps. The company already produces a compelling Sustainability Report. I look forward to seeing if the company can return to profitabiity while keeping its commitment to diversity.
Tuesday, March 6, 2018
Prof. Jena Martin's New Human Rights Paper: Applying Bystander Intervention Training to Corporate Conduct
Friend and colleague Jena Martin has posted her new paper, Easing "the Burden of the Brutalized": Applying Bystander Intervention Training to Corporate Conduct. And when I say new, I mean new. It went on SSRN within the last hour.
Prof. Martin is an expert in business and human rights, and her new paper offers a new framework for corporations that are seeking to reduce or eliminate human rights violations. Her paper is designed to help corporation beyond due diligence and reporting to allow them to "engage with either the oppressor or the oppressed in a way that directly minimizes human rights abuses." It is a timely piece with some interesting and innovative suggestions. I look forward to seeing where the final version ends up.
The last few years have borne witness to a shift regarding how to address issues of oppression and social injustice. Across many different advocacy points - from police brutality to sexual violence - there seems to be a consensus that simply engaging the oppressor or the victim is not enough to affect real social change. The consensus itself is not new: it has been at the heart of many social justice movements over the years. However, what is new is the explicit evocation of the bystander within this framework. Too often, in conversations on conflicts generally (and negative human rights impact specifically), bystanders have been relegated to the sidelines, with no defined, specific role to play and no discussion within the larger narrative. Now, however, -- through the use of bystander intervention training -- these actors are taking on a more prominent role.
In previous articles, I have stated that the rhetoric and posture that transnational corporations (TNCs) maintain vis-à-vis human rights impacts is that of a bystander. Frequently, when human rights abuses occur, TNCs find themselves in the position of having to acknowledge their presence in the area of the underlying conflict, while profusely maintaining that none of their actions caused the harm against the community. Building off this prior work, this article seeks to answer the following question: are there lessons that can be learned from bystander intervention training in other contexts, that can be used for the benefits of TNCs within the field of business and human rights? I conclude that what is lacking in the current discourse on corporate policies regarding addressing negative human rights impacts is an articulation regarding when, and under what circumstances, it is appropriate for corporations to intervene in negative human rights disputes. This goes beyond the current proposals for human rights due diligence frameworks in that, rather than merely undergoing an assessment and then reporting this information out (as is required by most current legal frameworks that address business and human rights reporting) this would help corporations – informed by a bystander intervention framework – to engage with either the oppressor or the oppressed in a way that directly minimizes human rights abuses.
Friday, March 2, 2018
I live in South Florida and have friends who live in Parkland, Florida, the site of the most recent school shooting. Like many, I've found solace and inspiration in the young survivors and their families who have taken to the streets and visited Washington, D.C. to demand action to prevent the next tragedy. Who knows whether they will succeed where others have failed. I certainly hope so.
I'm more surprised though, with the reactions of major companies such as WalMart, Dicks, REI, United Airlines, Hertz, Symantec and others that have cut ties with the National Rifle Association or have changed their sales practices. Skeptics have observed that corporations take "controversial" stances only when it's cheap or easy and that this stance against the NRA isn't even that controversial. But, it certainly hasn't been "cheap" for Delta Airlines. Notwithstanding the fact that the airline employs 33,000 people in the state, Georgia has passed a bill to eliminate a proposed $50 million tax break because Delta announced plans to end its discount for NRA members.
The gun control issue is the latest in a string of public policy debates that have divided corporations over the past year. CEOs have taken positions on the travel ban, Charlottesville, the NFL protests, the Paris Climate Accord, transgender bathroom laws, and immigration. Some of these positions are more closely tied to their core business than others, and some have been driven by social media activism.
Cautious companies have guidance and momentum on their side when deciding whether to weigh in on social issues. According to the Conscious Capitalism credo, “.. business is good because it creates value, it is ethical because it is based on voluntary exchange, it is noble because it can elevate our existence and it is heroic because it lifts people out of poverty and creates prosperity. Free enterprise capitalism is the most powerful system for social cooperation and human progress ever conceived. It is one of the most compelling ideas we humans have ever had. But we can aspire to even more.” This movement focuses on a higher purpose than generating profits; a stakeholder orientation; leaders that cultivate a culture of care and consciousness; and a conscious culture that permeates the people, purpose, and process.
Blackrock, with $1.7 trillion under management, made that even more clear in its January 2018 letter to CEOs, which stated, among other things:
Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth...
Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world? Are we using behavioral finance and other tools to prepare workers for retirement, so that they invest in a way that will help them achieve their goals?
What does this mean for the future? Is corporate social responsibility more of a business imperative than ever? Boards are now entering proxy season. Will shareholders demand more? Will state and federal governments use their power, as Georgia has, to send a message to the C-Suite? Will consumers engage in boycotts or buycotts? (See here, here, here, here) for my views on boycotts). I look forward to seeing how whether the corporations sustain this conscious capitalism over the long term even when it is no longer "cheap" and "easy."
Friday, February 23, 2018
I love the Kardashians. I don't watch the reality show, but I do keep up with them because I use them in hypotheticals in class and in exams for entity selection questions. The students roll their eyes, but invariably most of them admit to knowing everything about them. When the students can relate to the topic, it makes my job easier. That's why I used the SNAP IPO last year as our case study on basic securities law. Every year I pick a "hot" offering to go through some of the key principles and documents, and Snap was the logical choice because the vast majority of the students love(d) the Snapchat app. The company explained as its first risk factor "... the majority of our users are 18-34 years old. This demographic may be less brand loyal and more likely to follow trends than other demographics. These factors may lead users to switch to another product, which would negatively affect our user retention, growth, and engagement." I used myself as an example to explain that risk factor in class. I have over 100 apps on my smartphone, and I have a son in the target demographic, but I never open Snapchat unless my six-year-old goddaughter sends me something. I just don't get the appeal even though millions of celebrities and even mainline companies use it for marketing. My students were aghast when I told them that I wouldn't invest in any stock that depended on the vagaries of their ever-changing taste.
Enter Kylie Kardashian. She's the youngest Kardashian (20 years old), is worth at least $50 million, runs a cosmetics empire on track to earn a billion dollars, has 95 million followers on Instagram, and has 24 million followers on Twitter.
After she offhandedly tweeted that she doesn't really open Snapchat anymore yesterday, Snap lost $1.3 billion (6%) in value. This plunge added to an already bad week for Snap after Citi issued a sell rating and the company confirmed to 1.2 million change.org petition signers that its new redesign was here to stay. But it was Kylie's tweet that caused the real damage. Perhaps one of Kylie's lawyers or business managers alerted her to the fallout because she later tweeted out, "still love you tho snap... my first love." Kylie probably forgot how much power she really has. When she released a video about her pregnancy and childbirth, 24 million people watched in less than 24 hours because she had refused to allow any of her followers to see pictures of her belly. She knows marketing.
Meanwhile, after seeing Kylie's first tweet, cosmetics competitor Maybelline went on Twitter to ask its users if it should stay on Snapchat, noting that its Snapchat views had dropped dramatically. The company later deleted the tweet, but users had already voted 81% to 19% to leave on the Twitter poll.
Snap appears determined to stick to its unpopular redesign, and its CEO received a $637 million bonus last year after the IPO. Perhaps the CEO should use some of that money to pay for a new Kylie tweet. In 2016, when Kylie earned only $18 million, 20% of that haul came from social media endorsements. It looks like the President isn't the only one who can move markets with a tweet.
Friday, February 16, 2018
Corporate Governance, Compliance, Social Responsibility, and Enterprise Risk Management in the Trump/Pence Era
This may be obsolete by the time you read this post, but here are my thoughts on Corporate Governance, Compliance, Social Responsibility, and Enterprise Risk Management in the Trump/Pence Era. Thank you, Joan Heminway and the wonderful law review editors of Transactions: The Tennessee Journal of Business Law. The abstract is below:
With Republicans controlling Congress, a Republican CEO as President, a “czar” appointed to oversee deregulation, and billionaires leading key Cabinet posts, corporate America had reason for optimism following President Trump’s unexpected election in 2016. However, the first year of the Trump Administration has not yielded the kinds of results that many business people had originally anticipated. This Essay will thus outline how general counsel, boards, compliance officers, and institutional investors should think about risk during this increasingly volatile administration.
Specifically, I will discuss key corporate governance, compliance, and social responsibility issues facing U.S. public companies, although some of the remarks will also apply to the smaller companies that serve as their vendors, suppliers, and customers. In Part I, I will discuss the importance of enterprise risk management and some of the prevailing standards that govern it. In Part II, I will focus on the changing role of counsel and compliance officers as risk managers and will discuss recent surveys on the key risk factors that companies face under any political administration, but particularly under President Trump. Part III will outline some of the substantive issues related to compliance, specifically the enforcement priorities of various regulatory agencies. Part IV will discuss an issue that may pose a dilemma for companies under Trump— environmental issues, and specifically shareholder proposals and climate change disclosures in light of the conflict between the current EPA’s position regarding climate change, the U.S. withdrawal from the Paris Climate Accord, and corporate commitments to sustainability. Part V will conclude by posing questions and proposing recommendations using the COSO ERM framework and adopting a stakeholder rather than a shareholder maximization perspective. I submit that companies that choose to pull back on CSR or sustainability programs in response to the President’s purported pro-business agenda will actually hurt both shareholders and stakeholders.
February 16, 2018 in Compliance, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Employment Law, Marcia Narine Weldon, Securities Regulation, Shareholders | Permalink | Comments (0)
Tuesday, February 13, 2018
I suspect click-bait headline tactics don't work for business law topics, but I guess now we will see. This post is really just to announce that I have a new paper out in Transactions: The Tennessee Journal of Business Law related to our First Annual (I hope) Business Law Prof Blog Conference co-blogger Joan Heminway discussed here. The paper, The End of Responsible Growth and Governance?: The Risks Posed by Social Enterprise Enabling Statutes and the Demise of Director Primacy, is now available here.
To be clear, my argument is not that I don't like social enterprise. My argument is that as well-intentioned as social enterprise entity types are, they are not likely to facilitate social enterprise, and they may actually get in the way of social-enterprise goals. I have been blogging about this specifically since at least 2014 (and more generally before that), and last year I made this very argument on a much smaller scale. Anyway, I hope you'll forgive the self-promotion and give the paper a look. Here's the abstract:
Social benefit entities, such as benefit corporations and low-profit limited liability companies (or L3Cs) were designed to support and encourage socially responsible business. Unfortunately, instead of helping, the emergence of social enterprise enabling statutes and the demise of director primacy run the risk of derailing large-scale socially responsible business decisions. This could have the parallel impacts of limiting business leader creativity and risk taking. In addition to reducing socially responsible business activities, this could also serve to limit economic growth. Now that many states have alternative social enterprise entity structures, there is an increased risk that traditional entities will be viewed (by both courts and directors) as pure profit vehicles, eliminating directors’ ability to make choices with the public benefit in mind, even where the public benefit is also good for business (at least in the long term). Narrowing directors’ decision making in this way limits the options for innovation, building goodwill, and maintaining an engaged workforce, all to the detriment of employees, society, and, yes, shareholders.
The potential harm from social benefit entities and eroding director primacy is not inevitable, and the challenges are not insurmountable. This essay is designed to highlight and explain these risks with the hope that identifying and explaining the risks will help courts avoid them. This essay first discusses the role and purpose of limited liability entities and explains the foundational concept of director primacy and the risks associated with eroding that norm. Next, the essay describes the emergence of social benefit entities and describes how the mere existence of such entities can serve to further erode director primacy and limit business leader discretion, leading to lost social benefit and reduced profit making. Finally, the essay makes a recommendation about how courts can help avoid these harms.
February 13, 2018 in Business Associations, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Joshua P. Fershee, Law and Economics, Lawyering, Legislation, LLCs, Management, Research/Scholarhip, Shareholders, Social Enterprise, Unincorporated Entities | Permalink | Comments (0)
Tuesday, November 14, 2017
Plaintiff alleges that Sinsky violated 15 U.S.C. § 1125(a)(1)(A) and engaged in unfair and deceptive trade practices, in violation of Maryland common law. ECF 1, ¶¶ 17-22, 23-26. At its core, plaintiff's contention is that “Sinsky is the resident agent and incorporator” of Farm Fresh Home (ECF 1, ¶¶ 12-13), and in that capacity she “filed” the articles of organization for Farm Fresh Home, creating a name for the “competing company” that is “intentionally confusing” because of its similarity to Farm Fresh Direct. ECF 1, ¶ 12.
. . . .
*4 Farm Fresh Home is a limited liability company. As a threshold matter, I must determine whether Sinsky is subject to suit in light of Farm Fresh Home's status as a limited liability company.
The question here is not whether plaintiff will ultimately prevail. Its allegations as to Sinsky border on thin. But, for purposes of the Motion, plaintiff adequately alleges sufficient facts and inferences that Sinsky participated in the creation of Farm Fresh Home for the purpose of using a confusingly similar name to compete with Farm Fresh Direct. See A Society Without a Name, 655 F.3d at 346. Therefore, plaintiff is not entitled to the protection of the corporate shield at this juncture.
Sunday, November 12, 2017
I am putting together a panel or discussion group (depending on how many folks respond positively) for the SEALS conference for next summer, which is scheduled to be held August 5-11, 2018, at the Marriott Harbor Beach Resort & Spa in Fort Lauderdale, Florida (details here).
Here is the proposed title and a brief draft description (which may have to be shortened for the submission):
The Role of Corporate Personhood in Masterpiece Cakeshop
The United States Supreme Court is scheduled to hear arguments in the case of Masterpiece Cakeshop, Ltd. v. Colorado Civil Rights Commission on Dec. 5, 2017 (SCOTUSblog summary here). The issue presented in that case is: “Whether applying Colorado's public accommodations law to compel the petitioner to create expression that violates his sincerely held religious beliefs about marriage violates the free speech or free exercise clauses of the First Amendment.” A group of corporate law professors have filed an amicus brief in support to the CCRC (available here). One of the two arguments in that brief is: “Because Of The Separate Legal Personality Of Corporations And Shareholders, The Constitutional Interests Of Shareholders Should Not Be Projected Onto The Corporation.” This [panel] [discussion group] features [paper presentations] [a dialogue] on the pros and cons of this argument, together with related analysis and observations. Please note that the Supreme Court will likely have issued its opinion in the case by the time of the panel/discussion.
Please email me at email@example.com if you would like to participate in this program, letting me know if you are interested in presenting a paper, participating in a discussion, or both. Also, let me know if you know of anyone else who may want to participate—or just pass this on to others. I must file the proposal soon in order to ensure its consideration (the “best practices” deadline for submissions has already passed).
November 12, 2017 in Business Associations, Call for Papers, Conferences, Constitutional Law, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Family Business, Stefan J. Padfield | Permalink | Comments (0)
Wednesday, November 1, 2017
Every year, the United Nations holds a symbolic but important vote on a resolution condemning the U.S. embargo against Cuba and every year the United States and Israel are the only two countries to vote against it. Last year, the United States abstained in accordance with the rapprochement that the Obama administration began in 2014. A few hours ago, the U.S. and Israel stood alone and voted once again against the UN resolution, while 192 other nations voted for it. Ambassador Haley explained that the vote demonstrated, “continued solidarity with the Cuban people and in the hope that they will one day be free to choose their own destiny.” Prior to the vote she announced to the General Assembly that "today, the crime is the Cuban government's continued repression of its people and failure to meet even the minimum requirements of a free and just society… The United States does not fear isolation in this chamber or anywhere else. Our principles are not up for a vote … We will stand for respect for human rights and fundamental freedoms that the member states of this body have pledged to protect, even if we have to stand alone." The United States is indeed isolated in its thinking. Furthermore, the vote and the embargo inflame tensions with allies in Latin America that the U.S. needs for the war on terror and drug smuggling.
I feel strongly about this issue having visited the island three times in the past two years to research business and human rights issues. I’ve sat on a panel with Cuban lawyers and judges in Havana to discuss the embargo. I’ve attended countless seminars and meetings with lawyers and businesses who want to trade with Cuba. At the American Bar Association International Law Section meeting last week there were at least 6 sessions on Cuba. The world wonders why the United States places so much attention on this tiny island nation.
A few minutes ago, I put my finishing touches on my third law review article on Cuba (I had to wait to add in the UN vote). I argue that if and when the U.S. lifts the embargo and considers a bilateral investment treaty, it should require human rights provisions as a condition precedent for investor-state dispute resolution. I will post more about the article when it’s finally published but here’s a sneak peek of an argument relevant to today’s UN vote and the United States’ purported concern about the lack of human rights in Cuba:
[P]rior to lifting the embargo, the United States needs to examine its own record on human rights and how it treats other violators, otherwise it will have no credibility with the Cuban government. The U.S. Congress demands human rights reform in Cuba but has not been consistent in its own business dealings with other authoritarian or socialist regimes. For example, although the U.S. Department of State has criticized Cuba’s human rights record, China, another communist country with a poor human rights record, is the United States’ third largest trading partner. The United States lifted its trade embargo with Communist Vietnam twenty years ago and major U.S. companies now operate there today even though the U.S. government has leveled some of the same human rights criticism against Vietnam as it has against Cuba. The communist government of Laos did not fare much better than Cuba in human rights states department reports, but the U.S. government actively promotes potential investment opportunities there. This inconsistency in approach to human rights violators diminishes the U.S. government’s integrity in negotiating with Cuba. Tellingly, in its 2017 World Report, Human Rights Watch, a respected NGO, warned of the dangers of the Trump Administration from a human rights perspective. This hardly puts the U.S. in a strong bargaining position with Cuba when discussing the conditions on lifting the embargo.
The Trump Administration still has not released its official changes to the trade rules that it announced in June. In the meantime, although it’s hardly easy to do business in Cuba or with the Cuban government, U.S. businesses now remain in limbo until the implementing rules come into force. To be clear, I do not condone the human rights violations that the Cuban government commits against its people. In my upcoming article, I propose mechanisms to prevent foreign investors from perpetuating violations themselves. However, these same businesses that cannot do business with Cuba have no problem doing business with Russia, China, or other regimes with oppressive human rights records. Perhaps the Trump administration has not read State Department and NGO reports on those countries, but I have. Today, the hypocrisy was once again on full display for the world community to see.
Wednesday, October 11, 2017
Earlier this week, I had the pleasure of hearing a talk about universal proxies from Scott Hirst, Research Director of Harvard’s Program on Institutional Investors.
By way of background, last Fall under the Obama Administration, the SEC proposed a requirement for universal proxies noting:
Today’s proposal recognizes that few shareholders can dedicate the time and resources necessary to attend a company’s meeting in person and that, in the modern marketplace, most voting is done by proxy. This proposal requires a modest change to address this reality. As proposed, each party in a contest still would bear the costs associated with filing its own proxy statement, and with conducting its own independent solicitation. The main difference would be in the form of the proxy card attached to the proxy statement. Subject to certain notice, filing, form, and content requirements, today’s proposal would require each side in a contest for the first time to provide a universal proxy card listing all the candidates up for election.
The Council of Institutional Investors favors their use explaining, “"Universal" proxy cards would let shareowners vote for the nominees they wish to represent them on corporate boards. This is vitally important in proxy contests, when board seats (and in some cases, board control) are at stake. Universal proxy cards would make for a fairer, less cumbersome voting process.”
The U.S. Chamber of Commerce has historically spoken out against them, arguing:
Mandating a universal ballot, also known as a universal proxy card, at all public companies would inevitably increase the frequency and ease of proxy fights. Such a development has no clear benefit to public companies, their shareholders, or other stakeholders. The SEC has historically sought to remain neutral with respect to interactions between public companies and their investors, and has always taken great care not to implement any rule that would favor one side over the other. We do not understand why the SEC would now pursue a policy that would increase the regularity of contested elections or cause greater turnover in the boardroom.
I can't speak for the Chamber, but I imagine one big concern would be whether universal proxies would provide proxy advisors such as ISS and Glass Lewis even more power than they already have with institutional investors. When I asked Hirst about this, he did not believe that the level of influence would rise significantly.
Hirst’s paper provides an empirical study that supports his contention that reform would help mitigate some of the distortions from the current system. It’s worth a read, although he acknowledges that in the current political climate, his proposal will not likely gain much traction. The abstract is below:
Contested director elections are a central feature of the corporate landscape, and underlie shareholder activism. Shareholders vote by unilateral proxies, which prevent them from “mixing and matching” among nominees from either side. The solution is universal proxies. The Securities and Exchange Commission has proposed a universal proxy rule, which has been the subject of heated debate and conflicting claims. This paper provides the first empirical analysis of universal proxies, allowing evaluation of these claims.
The paper’s analysis shows that unilateral proxies can lead to distorted proxy contest outcomes, which disenfranchise shareholders. By removing these distortions, universal proxies would improve corporate suffrage. Empirical analysis shows that distorted proxy contests are a significant problem: 11% of proxy contests at large U.S. corporations between 2001 and 2016 can be expected to have had distorted outcomes. Contrary to the claims of most commentators, removing distortions can most often be expected to favor management nominees, by a significant margin (two-thirds of distorted contests, versus one-third for dissident nominees). A universal proxy rule is therefore unlikely to lead to more proxy contests, or to greater success by special interest groups.
Given that the arguments made against a universal proxy rule are not valid, the SEC should implement proxy regulation. A rule permitting corporations to opt-out of universal proxies would be superior to the SEC’s proposed mandatory rule. If the SEC chooses not to implement a universal proxy regulation, investors could implement universal proxies through private ordering to adopt “nominee consent policies.
Wednesday, September 27, 2017
You couldn't pay me enough to be the owner of an NFL team right now. I almost feel sorry for them. Even if you're not a fan, by now you've heard about the controversy surrounding NFL free agent Colin Kaepernick, and his decision to kneel during the national anthem last year. You've also probably heard about the President's call for NFL owners to fire players who don't stand while the anthem is played and his prediction of the league's demise if the protests continue. Surprisingly, last Sunday and Monday, some of the same owners who made a business decision to take a pass on Kaepernick despite his quarterback stats (citing among other things, the potential reactions of their fans) have now themselves made it a point to show solidarity with their players during the anthem. The owners are locking arms with players, some of whom are now protesting for the first time.
Football is big business, earning $13 billion last year, and the owners are sophisticated businessmen with franchises that are worth on average $2.5 billion dollars each. They care about their fans of course, and I'm sure that they monitor the various boycotts. They are also reading about lawmakers calling for funding cuts for teams that boycott. But they also care about their sponsors. Fortunately for the NFL (and for the players who have lucrative deals), most sponsors that have made statements have walked a fine line between supporting both the flag and free speech. The question is, how long will all of this solidarity last? There is no clear correlation between the rating shifts and the protests but as soon as there is definitive proof or sponsors start to pull out, I predict the owners will do a difficult cost-benefit analysis. Most teams aren't like the Green Bay Packers, which has no "owner," but instead has over 100,000 shareholders. Most teams don't have boards of directors or shareholders to answer to. Most of these owners used their own money or have very few business partners.
The NFL teams owners' decision to maintain support of the players will likely be more difficult than those of the many CEOs who have expressed their disagreement with the President over race-related matters by quitting his advisory boards (see my previous post ). Those CEOs could point to their own corporate codes of conduct or social responsibility statements. Those CEOs considered the reputational ramifications with their employees and their consumers, and the choice was relatively straightforward, especially because there was a more unified public outrage. The NFL owners, on the other hand, have highly skilled "employees" from a finite pool of talent who have been called SOBs by the President but who are also being booed by the fans, their consumers. The owners can't be fired, and it's very difficult to remove them. Should the owners stick with the players (some of whom are brand new to the protest scene) or should they wait to see the latest polls about what fans think about the leadership of America's favorite sport? Should they fire players, as they probably could under their contracts? The big test may come during a planned boycott by veterans during Veteran's Day Weekend. Perhaps I will be proven wrong, and maybe boycotts will have an effect on what the NFL owners and players do, but I predict the players and owners will want to get back to the business of playing football sooner rather than later. I'll keep monitoring the situation this Sunday and for the rest of the season.
Wednesday, September 20, 2017
What keeps general counsels and compliance officers up at night? Here's what boards should be discussing
No one had a National Compliance Officer Day when I was in the job, but now it’s an official thing courtesy of SAI Global, a compliance consulting company. The mission of this one-year old holiday is to:
- Raise awareness about the importance of ethics and compliance in business and shine a spotlight on the people responsible for making it a reality.
- Provide resources to promote the wellness and well-being of ethics and compliance professionals so they can learn how to overcome stress and burnout.
- Grow the existing ethics and compliance community and help identify and guide the next generation of E&C advocates.
Although some may look at this skeptically as a marketing ploy, I’m all for this made-up holiday given what compliance officers have to deal with today.
Last Saturday, I spoke at the Business Law Professor Blog Conference at the University of Tennessee about corporate governance, compliance, and social responsibility in the Trump/Pence era. During my presentation, I described the ideal audit committee meeting for a company that takes enterprise risk management seriously. My board agenda included: the impact of climate change and how voluntary and mandatory disclosures could change under the current EPA and SEC leadership; compliance budgetary changes; the rise of the whistleblower; the future of the DOJ’s Yates Memo and corporate cooperation after a recent statement by the Deputy Attorney General; SEC and DOJ enforcement priorities; data protection and cybersecurity; corporate culture and the risk of Google/Uber- type lawsuits; and sustainability initiatives and international governance disclosures. I will have a short essay in the forthcoming Transactions: The Tennessee Journal of Business Law but here are a few statistics that drove me to develop my model (and admittedly ambitious) agenda:
- According to an ACC survey of over 1,000 chief legal officers:
- 74% say ethics and compliance issues keep them up at night
- 77% handled at least one internal or external compliance-related investigation in their department
- 33% made policy changes in their organizations as a result of geopolitical events.
- 28% were targeted by regulators in the past two years
- Board members polled in September 2016 were most concerned about the following compliance issues:
- Regulatory changes and scrutiny may heighten
- Cyber threats
- Privacy/identity and information security risks
- Failure of corporate culture to encourage timely identification/escalation of significant risk issues
- During the 2017 proxy season, shareholders submitted 827 proposals (down from 916 in 2016):
- 112 related to proxy access,
- 87 related to political contributions and lobbying,
- 35 focused on board diversity (up from 28 in 2016),
- 34 proposals focused on discrimination or diversity-related issues (up from 16 in 2016),
- 69 proposals related to climate change (3 of those passed, including at ExxonMobil)
- 19 proposals focused on the gender pay gap (up from 13 in 2016)
General counsels are increasingly taking on more of a risk officer role in their companies, and compliance officers are in the thick of all of these issues. The government has also recently begun to hold compliance officers liable for complicity with company misdeeds. My advice- if it’s not against your company/school policy, take SCCE’s suggestion and hug your compliance officer. I’m sure she’ll appreciate it.
Wednesday, August 16, 2017
Business leaders probably didn’t think the honeymoon would be over so fast. A CEO as President, a deregulation czar, billionaires in the cabinet- what could possibly go wrong?
When Ken Frazier, CEO of Merck, resigned from one of the President’s business advisory councils because he didn’t believe that President Trump had responded appropriately to the tragic events in Charlottesville, I really didn’t think it would have much of an impact. I had originally planned to blog about How (Not) To Teach a Class on Startups, and I will next week (unless there is other breaking news). But yesterday, I decided to blog about Frazier, and to connect his actions to a talk I gave to UM law students at orientation last week about how CEOs talk about corporate responsibility but it doesn’t always make a difference. I started drafting this post questioning how many people would actually run to their doctors asking to switch their medications to or from Merck products because of Frazier’s stance on Charlottesville. Then I thought perhaps, Frazier’s stance would have a bigger impact on the millennial employees who will make up almost 50% of the employee base in the next few years. Maybe he would get a standing ovation at the next shareholder meeting. Maybe he would get some recognition other than an angry tweet from the President and lots of news coverage.
By yesterday afternoon, Under Armour’s CEO had also stepped down from the President’s business advisory council. That made my draft post a little more interesting. Would those customers care more or less about the CEO's position? By this morning, still more CEOs chose to leave the council after President Trump’s lengthy and surprising press conference yesterday. By that time, the media and politicians of all stripes had excoriated the President. This afternoon, the President disbanded his two advisory councils after a call organized by the CEO of Blackstone with his peers to discuss whether to proceed. Although Trump “disbanded” the councils, they had already decided to dissolve earlier in the day.
I’m not teaching Business Associations this semester, but this is a teachable moment, and not just for Con Law professors. What are the corporate governance implications? Should the CEOs have stayed on these advisory councils so that they could advise this CEO President on much needed tax, health care, immigration, infrastructure, trade, investment, and other reform or do Trump’s personal and political views make that impossible? Many of the CEOs who originally stayed on the councils believed that they could do more for the country and their shareholders by working with the President. Did the CEOs who originally resigned do the right thing for their conscience but the wrong thing by their shareholders? Did those who stayed send the wrong message to their employees in light of the Google diversity controversy? Did they think about the temperament of their board members or of the shareholder proposals that they had received in the past or that they were expecting when thinking about whether to stay or go?
Many professors avoid politics in business classes, and that’s understandable because there are enough issues with coverage and these are sensitive issues. But if you do plan to address them, please comment below or send an email to firstname.lastname@example.org.
August 16, 2017 in Business Associations, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Law School, Marcia Narine Weldon, Shareholders, Teaching | Permalink | Comments (1)
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.
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.
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.