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:
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 firstname.lastname@example.org 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 email@example.com.
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 firstname.lastname@example.org.
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.
Wednesday, May 24, 2017
On June 8, I will answer this and other questions during an interactive session for a group of social entrepreneurs at Venture Cafe in Miami. Fortunately, I will have an accountant with me to talk through some of the tax issues. I was invited by the director of Radical Partners, a social impact accelerator. We estimate that 75% of the audience members will work for a nonprofit and the rest will work in traditional for profit entities with a social mission.
Many entrepreneurs in South Florida have an interest in benefit corporations, but don't really know much about them. Our job is to provide some guidance on entity selection and demystify these relatively new entities. Some of the issues I plan to address in my 20 minutes are:
1) the differences between nonprofits, for profits, and benefit corporations
2) the differences between benefit and social purpose corporations (focusing on Florida law)
3) the biggest myths about benefit corporations (such as perceived tax benefits)
4) tax issues (for the accountant)
5) director duties
6) funding- changing funding model from donors to investors; going public
7) reporting, auditing, and certification requirements
8) benefit enforcement proceedings
9) the role of B Lab and the difference between a B Corp and a benefit corporation (currently 15 Florida companies are certified through B Lab)
10) transparency and accountability issues
We plan to leave about 45 minutes for questions. Not many lawyers in Florida have experience with benefit or social purpose corporations, so I am seeking guidance from our readers. If you are a practitioner and have dealt with these entities in your states, I'm interested in your thoughts. Are a lot of your clients asking about these entities? Have they converted? How do you help them decide whether this change is good for them? I'm also fortunate to have colleagues on this blog who are real thought leaders in the area, and am looking forward to their comments. Personally, I believe that for many business owners, benefit corporations may provide a perceived marketing edge, but not much more, Author Tina Ho has raised concerns about greenwashing. If I'm wrong, let me know below or send me an email at email@example.com.
Tuesday, May 23, 2017
Last weekend, retired NFL receiver Calvin Johnson made news when he revealed that he was not pleased with the Detroit Lions and how they handled his retirement. Johnson is apparently frustrated that the Lions required him to pay back about 10% of the unearned $3.2 million remaining on his $16 million signing bonus from his 2012 contract. This is apparently a thing for the Lions, who sought all of the unearned signing bonus money remaining on Barry Sanders' contract when he abruptly retired in 1999.
This is in contrast to Tony Romo's retirement, in which the Dallas Cowboys released him, making the $5 million remaining on the signing bonus Romo's. Cowboys owner Jerry Jones said he was following the “Do Right Rule” when he allowed the team to release him. The Seattle Seahawks made a similar decision with Marshawn Lynch.
Some have argued that Johnson is being "pettier" than the Lions in this spat. Mike Florio, a sports writer and graduate of WVU College of Law, where I teach, argued that "while Johnson has every right to be miffed at the Lions, Johnson also should be miffed at himself. Or at whoever advised him to retire instead of biding his time until the Lions would have released him." Florio correctly notes that Johnson had a big cap number likely to come due had he not retired or accepted a restructured deal, so he was coming from a position of power in negotiating, which would have likely forced the Lions to cut him. Still, that doesn't mean Johnson is wrong to be frustrated.
Perhaps Johnson didn't ever want to be cut in his career, even at that point in his carerr. Maybe he just wanted to retire. The Lions were worried, perhaps about "precedent" that other players could use to walk away without paying back the bonus, though there is already such precedent out there, as discussed above, and the Lions have non-binding precedent already in the Barry Sanders case, where an arbitrator said Sanders had to pay back some of his signing bonus. Beyond that, the response to most players would simply be, "I know we didn't ask Calvin Johnson for any money back. You're not Calvin Johnson."
It is true that the Lions could seek money from Johnson, and that Johnson almost certainly, from a legal sense, owed the money. But having a legal right to something doesn't always mean it is a good idea. And that is important for lawyers to remember. The question I would have asked the Lions front office is this: "Is it really worth $320,000 when it is possible that one of your greatest players will feel disrespected by the process? Especially when you already created a rift with one of you other greatest players fifteen years ago?"
Maybe it was asked, and the answer was yes, but I just don't see the upside. My guess is that the Lions asked for a lot more and the two sides negotiated to this figure. But that process, not the payment, is likely what irked Johnson. Why does it matter? Because it tells future people the team wants, especially coaches and free agents, how the Lions do business. And when choosing between two similar offers, that could very well lead one to choose the other team.
I often use these kinds of issues facing a business when teaching the importance of the business judgment rule and allowing a board of directors not to pursue claims it can win (as long as there is no fraud or self dealing). Sometimes, it is better for the entity to let a claim go than to extend a bad story or scare off potential talent. Back in 2007, for example, Billy Donovan was hired to leave his head coaching job at the University of Florida to lead the NBA's Orlando Magic. Just days later, Donovan decided he did not want to leave Florida, and asked the Magic to let him return to the college game. The Magic decided to let him do so without any financial penalty, though they did ask him to agree not to coach in the NBA for five years.
Why let Donovan back out and return to Florida without a payment? For one, the Magic needed to hire a new coach, and you want to send a message that you are a good employer. Second, Donovan was beloved in Florida. He had won two NCAA championships in a key market for the team. Don't irritate your prime audience is always a good bit of advice. There was little upside to being difficult. The team was almost certainly irritated, but there is little value in letting that lead to bad publicity and unnecessary public spats. This principle extends well beyond the sports realm, but it is especially important in any area where employers fight for talent, which is common in the sports and entertainment areas.
In assessing the legal (and business) options for the Calvin Johnson situation, good lawyering requires a recognition that key issues were likely related to perception and respect, not money. As such, the fact that there was an argument about repayment at all was the issue that made Johnson frustrated (and now could have repercussions in the future free agent market). It is certainly possible the Lions assessed this risk and decided it was worth it. I disagree that it was worth it, but that would be a reasonable decision. (As a life-long Lions fan, I will need more evidence the problem was properly assessed, though I do hold out hope for the new front office.)
Such decisions, if made simply on the legal merits (e.g., Would I win in court?), run the risk of what Jeff Lipshaw calls "pure lawyering," which is essentially legal reasoning without context or assessment of non-legal impacts or opportunities. As Lipshaw explains in the preface to his book, Beyond Legal Reasoning, A Critique of Pure Lawyering:
Legal reasoning is merely one way of creating meaning out of circumstances in the real world. In its pure form, it does nothing more than convert a real-world narrative to a set of legal conclusions that have no necessary connection either to truth or morality.
Or the ability to recruit free agents.
Wednesday, May 17, 2017
I try to watch at least one Ted Talk a day. I learn new substantive topics and I also learn from listening to the speakers break down complex topics in an engaging way--a key skill for the classroom. I don’t know that any of the videos in a recent article written for business people really transformed my thinking about business, but I did find some parts interesting and inspiring.
Here they are for your viewing pleasure:
- Myths of Entrepreneurship
- Why Work Doesn't Happen at Work
- 10 Things to Know Before You Pitch to a Venture Capitalist
- What Consumers Want
- What Makes us Feel Good about Our Work
- The Power of Time Off
- Build a Tower, Build a Team
Tuesday, March 21, 2017
I write often about how courts often incorrectly treat LLCs as corporations. Last week, I reported on a case about a court that misstated, in my view, the state of the law regarding LLCs and veil piercing. When I do so, I often get comments about how veil piercing should go away. Prof. Bainbridge replies similarly here.
I am on record as being open to the elimination of veil piercing (I am actually, at least in theory, working on an article tentatively called Abolishing Veil Piercing Without Abolishing Equity), and I am especially open to the idea of abolishing veil piercing with regard to contract-based claims. (Texas largely does this by requiring "actual fraud" for cases arising out of contract. For a great explanation of Texas law on the subject, please see Elizabeth Miller's detailed description here.)
Several courts over the years, most notably the Wyoming court in Flahive, have extended the concept of veil piercing to LLCs, even where a statute did not explicitly provide the concept of veil piercing. Although I think these courts got it wrong, now that concept of veil piercing is well established for corporations and LLCs in virtually all (if not all) U.S. jurisdictions, I think any rollback must properly be done by statute.
In the past, I have been critical of courts like the one in Flahive, because I agree with Prof. Bainbridge and others who argue that veil piercing, when not expressly stated, may well have not been intended. Minnesota, for example, has at least made the concept clear. Minnesota LLC law provides:
322B.303 PERSONAL LIABILITY OF MEMBERS AS MEMBERS.
Subdivision 1. Limited liability rule.
Subject to subdivision 2, a member, governor, manager, or other agent of a limited liability company is not, merely on account of this status, personally liable for the acts, debts, liabilities, or obligations of the limited liability company.
Subd. 2. Piercing the veil.
The case law that states the conditions and circumstances under which the corporate veil of a corporation may be pierced under Minnesota law also applies to limited liability companies. . . . .
Like most states, Minnesota courts are willing to pierce the corporate veil where (1) an entity ignores corporate formalities and serves as the alter ego of a shareholder and (2) enforcing the liability limitations of the corporate form leads to injustice or is fundamentally unfair. I have often used this example of how a state should, if they want to have LLC veil piercing, proceed. That is, although I would not advocate for doing so, if a state is going to have veil piercing of LLCs, it should be expressly stated. The statute may be flawed in concept, but that's a call for the legislature.
The Minnesota statute is well crafted to achieve its apparent goals, in that it makes clear that one can, in fact, be "personally liable for the acts, debts, liabilities, or obligations of the limited liability company" merely on account of being a member of an LLC. That is, the general rule is that members are not liable for the LLC's debts, but where an LLC veil is pierced, all members become personally liable for the debts, regardless of the their actions. In Minnesota, this includes "corporate formalities" as a factor for corporate veil piercing and thus it applies to LLCs, even though LLCs have few, if any, statutory formalities (and many states disclaim formalities as an obligation to maintain limited liability for an LLC).
This seems wrong to me, especially the part about making those who did not participate in the bad behavior potentially liable and adding a corporate-formalities requirement to an entity that is not supposed to have them. As Prof. Bainbridge argues in Abolishing Veil Piercing, "Abolishing veil piercing would refocus judicial analysis on the appropriate question-did the defendant-shareholder do anything for which he or she should be held directly liable." I agree.
Still, because veil-piercing of entities is well-settled law, I don't think judges have latitude to eliminate it. Judges must focus on proper limitations and clarity of the law that is still subject to interpretation (or plainly inconsistent with the law), where possible. At this point, abolishing veil piercing must be done by statute. Maybe some bold legislators will heed the call.
Thursday, February 2, 2017
Donald Trump has had a busy two weeks. Even before his first official day on the job, then President-elect Trump assembled an economic advisory board. On Monday, January 23rd, President Trump held the first of his quarterly meetings with a number of CEOs to discuss economic policy. On January 27th, the President issued what some colloquially call a “Muslim ban” via Executive Order, and within days, people took to the streets in protest both here and abroad.
These protests employed the use of hashtag activism, which draws awareness to social causes via Twitter and other social media avenues. The first “campaign,” labeled #deleteuber, shamed the company because people believed (1) that the ride-sharing app took advantage of a work stoppage by protesting drivers at JFK airport, and (2) because they believed the CEO had not adequately condemned the Executive Order. Uber competitor Lyft responded via Twitter and through an email to users that it would donate $1 million to the ACLU over four years to “defend our Constitution.” Uber, which is battling its drivers in courts around the country, then established a $3 million fund for drivers affected by the Executive Order. An estimated 200,000 users also deleted their Uber accounts because of the social media campaign, and the CEO resigned today from the economic advisory board.
Other CEOs, feeling the pressure, have also issued statements against the Order. In response, some companies such as Starbucks, which pledged to hire 10,000 refugees, have faced a boycott from many Trump supporters, which in turn may lead to a “buycott” from Trump opponents and actually generate more sales. This leads to the logical question of whether these political statements are good or bad for business, and whether it's better to just stay silent unless the company has faced a social media campaign. Professor Bainbridge recently blogged about the issue, observing:
The bulk of Lyft's business is conducted in large coastal cities. In other words, Obama/Clinton country. By engaging in blatant virtue signaling, which it had to know would generate untold millions of dollars worth of free coverage when social media and the news picked the story up, Lyft is very cheaply buying "advertising" that will effectively appeal to its big city/blue state user base.
Bainbridge also asks whether “Uber's user base is more evenly distributed across red and blue states than Lyft? And, if so, will Uber take that into account?” This question resonates with me because some have argued on social media (with no evidentiary support) that Trump supporters don’t go to Starbucks anyway, and thus their boycott would fail.
All of this boycott/boycott/CEO activism over the past week has surprised me. I have posted in the past about consumer boycotts and hashtag activism/slacktivism because I am skeptical about consumers’ ability to change corporate behavior quickly or meaningfully. The rapid response from the CEOs over the past week, however, has not changed my mind about the ultimate effect of most boycotts. Financial donations to activist groups and statements condemning the President’s actions provide great publicity, but how do these companies treat their own employees and community stakeholders? Will we see shareholder proposals that ask these firms to do more in the labor and human rights field and if so, will the companies oppose them? Most important, would the failure to act or speak have actually led to any financial losses, even if they are not material? Although 200,000 Uber users deleted their accounts, would they have remained Lyft customers forever if Uber had not changed its stance? Or would they, as I suspect, eventually patronize whichever service provided more convenience and better pricing?
We may never know about the consumers, but I will be on the lookout for any statements from shareholder groups either via social media or in shareholder proposals about the use or misuse of corporate funds for these political causes.
Thursday, January 19, 2017
Bernard Sharfman, a prolific author on corporate governance, has written his fourth article on the business judgment rule. The piece provides a thought-provoking look at a subject that all business law professors teach. He also received feedback from Myron Steele, former Chief Justice of the Delaware Supreme Court, and William Chandler III, former Chancellor of the Delaware Court of Chancery during the drafting process. I don’t think I will assign the article to my students, but I may take some of the insight when I get to this critical topic this semester. Sharfman has stated that he aims to change the way professors teach the BJR.
The abstract is below:
Anyone who has had the opportunity to teach corporate law understands how difficult it is to provide a compelling explanation of why the business judgment rule (Rule) is so important. To provide a better explanation of why this is so, this Article takes the approach that the Aronson formulation of the Rule is not the proper starting place. Instead, this Article begins by starting with a close read of two cases that initiated the application of the Rule under Delaware law, the Chancery and Supreme Court opinions in Bodell v. General Gas & Elec. By taking this approach, the following insights into the Rule were discovered that may not have been so readily apparent if the starting point was Aronson.
First, without the Rule, the raw power of equity could conceivably require all challenged Board decisions to undergo an entire fairness review. The Rule is the tool used by a court to restrain itself from implementing such a review. This is the most important function of the Rule. Second, as a result of equity needing to be restrained, there is no room in the Rule formulation for fairness; fairness and fiduciary duties must be mutually exclusive. Third, there are three policy drivers that underlie the use of the Rule. Protecting the Board’s statutory authority to run the company without the fear of its members being held liable for honest mistakes of judgment; respect for the private ordering of corporate governance arrangements which almost always grants extensive authority to the Board to make decisions on behalf of the corporation; and the recognition by the courts that they are not business experts, making deference to Board authority a necessity. Fourth, the Rule is an abstention doctrine not just in terms of precluding duty of care claims, but also by requiring the courts to abstain from an entire fairness review if there is no evidence of a breach in fiduciary duties or taint surrounding a Board decision. Fifth, stockholder wealth maximization (SWM) is the legal obligation of the Board and the Rule serves to support that purpose. The requirement of SWM enters into corporate law through a Board’s fiduciary duties as applied under the Rule, not statutory law. In essence, SWM is an equitable concept.