Friday, March 24, 2017
In the latest Impact Esq. newsletter, Kyle included a link to the Kickstarter’s 2016 Benefit Statement. Kyle wrote that he had “never seen [a benefit report] as strong as Kickstarter’s.” Personally, I am not sure I would go that far. I think Greyston Bakery’s Report and Patagonia’s Report are at least as good. I do think the Kickstarter report is relatively good, but the bar is incredibly low, as many benefit corporations are ignoring the statutory reporting requirement or doing a pathetically bad job at reporting.
While the Kickstarter report is more detailed than most, it still reads mostly like a PR piece to me. The vast majority of the report is listing cherry-picked, positive statistics. That said, Kickstarter did note a few areas for possible improvement, which is extremely rare in benefit report. Kickstarter stated that they could do more to promote “sustainability,” that they could do more to encourage staff to “take advantage of the paid time off we provide for volunteering,” and that they wanted to “encourage greater transparency from creators, better educate backers about the risks and rewards of this system, and further empower our Integrity team in their work to keep Kickstarter safe and trusted.” These “goals” for improvement are quite vague, and I would have liked to see more specific goals.
A few other things to note:
- University of Pennsylvania produced a study, which was cited and used in the report. I think involving universities in the creation of these reports could be a good idea, though possible conflicts should be considered.
- “Including both salary and equity, our CEO's total compensation equaled 5.52x the median total compensation of all non-CEO, non-founder employees in 2016. For context, a 2015 study examining the executive pay gap found that the average CEO earns 204 times that of the median worker for the same company.” I would be interested in how Kickstarter’s number compares to companies in their industry, especially direct competitors. I imagine the CEO/Employee compensation ratio is lower in the technology industry, where the market demands fairly high employee compensation, but even considering the industry, Kickstarter's ratio still seems quite low.
- “Kickstarter overall team demographics: 53% women; 47% men. 70% White/Caucasian; 12% Asian; 12% two or more races; 4% Hispanic or Latino; 2% Black/African American.” This seems to be a good bit more diverse, especially as to gender, than other technology companies who have released similar data.
- “Everyone who works at Kickstarter receives an annual Education Stipend to explore their interests outside the office. In 2016, our employees used their stipends towards blacksmithing classes, a bookmaking class, a synthesizer, pottery courses, an herbal medicine workshop, art supplies, improv classes, a neon light making seminar, and embroidery.” I didn’t see how much the education stipend was, but this seems like a good perk.
- “We donated 5% of our after-tax profits to six organizations working to build a more creative and equitable world.” Profits are easier to manipulate than revenues; I’d like to see a revenue floor (as Patagonia does – donating the greater of 10% of profits and 1% of revenues). That said 5% of profits can be significant and does show some commitment to these causes.
Wednesday, March 22, 2017
What does the EU know that the U.S. Doesn’t About the Effectiveness of Conflict Minerals Legislation?
Earlier this month, the EU announced plans to implement its version of conflict minerals legislation, which covers all “conflict-affected and high-risk areas” around the world. Once approved by the Council of the EU, the law will apply to all importers into the EU of minerals or metals containing or consisting of tin, tantalum, tungsten, or gold (with some exceptions). Compliance and reporting will begin in January 2021. Importers must use OECD due diligence standards, report on their progress to suppliers and the public, and use independent third-party auditors. President Trump has not yet issued an executive order on Dodd-Frank §1502, aka conflict minerals, but based on a leaked memo, observers believe that it's just a matter of time before that law is repealed here in the U.S. So why is there a difference in approach?
In response to a request for comments from the SEC, the U.S Chamber of Commerce, which led the legal battle against §1502, claimed, “substantial evidence shows that the conflict minerals rule has exacerbated the humanitarian crisis on the ground in the Democratic Republic of the Congo…The reports public companies are mandated to file also contribute to ―information overload and create further disincentives for businesses to go public or remain public companies. Accordingly, the Chamber strongly supports Congressional repeal of Section 1502 due to its all-advised and fundamentally flawed approach to solving a geopolitical crisis, and the substantial burden it imposes upon public companies and their shareholders.”
The Enough Project, which spearheaded the passage of §1502, submitted an eight-page statement to the SEC last month stating, among other things, that they “strongly oppose any suspension, weakening, or repeal of the current Conflict Minerals Rule, and urge the SEC to increase enforcement of the Rule….The Rule has led to improvements in the rule of law in the mining sectors of Congo, Rwanda, and other Great Lakes countries, contributed to improvements in humanitarian conditions in Congo and a weakening of key insurgent groups, and resulted in tangible benefits for U.S. corporations and their supply chains.”
I agree that the Rule has led to increased transparency and efficiency in supply chains (although some would differ), and less armed control of mines. But I’m not sure that the overall human rights conditions have improved as significantly as §1502’s advocates (and I) would have liked.
As Amnesty International’s 2016/2017 report on DRC explains in graphic detail, “armed groups committed a wide range of abuses including: summary executions; abductions; cruel, inhuman and degrading treatment; rape and other sexual violence; and the looting of civilian property... various ... armed groups (local and community-based militias) were among those responsible for abuses against civilians. The Lord’s Resistance Army (LRA) continued to be active and commit abuses in areas bordering South Sudan and the Central African Republic. In… North Kivu, civilians were massacred, usually by machetes, hoes and axes. On the night of 13 August, 46 people were killed … by suspected members of the Allied Democratic Forces (ADF), an armed group from Uganda that maintains bases in eastern DRC…Hundreds of women and girls were subjected to sexual violence in conflict-affected areas. Perpetrators included soldiers and other state agents, as well as combatants of armed groups…Hundreds of children were recruited by armed groups...”
Human Rights Watch’s 2017 report isn’t any better. According to HRW, “dozens of armed groups remained active in eastern Congo. Many of their commanders have been implicated in war crimes, including ethnic massacres, killing of civilians, rape, forced recruitment of children, and pillage. In … North Kivu, unidentified fighters continued to commit large-scale attacks on civilians, killing more than 150 people in 2016 … At least 680 people have been killed since the beginning of the series of massacres in October 2014. There are credible reports that elements of the Congolese army were involved in the planning and execution of some of these killings. Intercommunal violence increased as fighters … carried out ethnically based attacks on civilians, killing at least 170 people and burning at least 2,200 homes.
Finally, according to a February 17, 2017 statement from the Trump Administration, “the United States is deeply concerned by video footage that appears to show elements of the armed forces of the Democratic Republic of Congo summarily executing civilians, including women and children. Such extrajudicial killing, if confirmed, would constitute gross violations of human rights and threatens to incite widespread violence and instability in an already fragile country. We call upon the Government of the Democratic Republic of Congo to launch an immediate and thorough investigation, in collaboration with international organizations responsible for monitoring human rights, to identify those who perpetrated such heinous abuses, and to hold accountable any individual proven to have been involved.”
Most Americans have no idea of the atrocities occurring in DRC or other conflict zones around the world. I have spent the past few years researching business and human rights, particularly in conflict zones in Latin America and Africa. I filed an amicus brief in 2013 and have written and blogged about the failure of disclosure regimes a dozen times because I don’t believe that name and shame laws stop the murder, rape, conscription of child soldiers, and the degradation of innocent people. I applaud the EU and all of the NGOs that have attempted to solve this intractable problem. But it doesn't seem that enough has changed since my visit to DRC in 2011 where I personally saw 5 massacre victims in the road on the way to visit a mine, and met with rape survivors, village chiefs, doctors, members of the clergy and others who pleaded for help from the U.S. Unfortunately, I don’t think this legislation has worked. Ironically, the U.S. and EU legislation go too far and not far enough. I hope that if the U.S. and EU focus on a more holistic, well-reasoned geopolitical solution with NGOS, stakeholders, and business.
Friday, March 10, 2017
On of the many interesting things discussed during the social enterprise law workshop at Notre Dame Law School was the "FairShares Model." Nina Boeger (University of Bristol-UK) brought the model to the group's attention, and the model was new news to me.
The FairShares Model was "created during a research programme on democratising charities, co-operatives and social enterprises involving academics at Sheffield Hallam University and Manchester Metropolitan University in the UK."
The FairShares Model cites the "Social Enterprise Europe Ltd" when noting that social enterprises "aim to generate sustainable sources of income, but measure their success through:
Specifying their purpose(s) and evaluating the impact(s) of their trading activities;
Conducting ethical reviews of their product/service choices and production/consumption practices;
- Promoting socialized and democratic ownership, governance and management."
To address theses aims, the FairShares Model offers social audits and suggests the issuing some combination of (1) founder shares, (2) labour shares, (3) investor shares, (4) user shares.
While I agree that significant corporate governance changes should be considered, at first glance this model seems a bit unwieldy if all four types of shares are issued. Still, I am interested in learning more.
Thursday, March 9, 2017
In 2016, the Securities and Exchange Commission (SEC) for the first time sought public comment on whether financial disclosure reform should address indicators of firms’ sustainability risks and practices. Securities disclosure reform now appears poised to take a deregulatory turn, and innovations at the intersection of sustainability and finance appear unlikely in the face of new policy priorities. Whether the SEC should take any steps to improve how sustainability-related information is disclosed to investors is also deeply contested.
This Article argues that the SEC nonetheless faces a sustainability imperative, first to address this issue in the near term as part of its ongoing review of the reporting framework for financial disclosure, and second, to promote disclosure of material sustainability information within financial reports in furtherance of its core statutory mandate. This conclusion rests on evidence that the current state of sustainability disclosure is inadequate for investment analysis and that these deficiencies are largely problems of comparability and quality, which cannot readily be addressed by private ordering, nor by deference to policymaking at the state level. This Article highlights the costs of agency inaction that have been largely ignored in the debate over the future of financial reporting and concludes by weighing potential avenues for disclosure reform and their alternatives.
Friday, February 24, 2017
A few weeks ago I blogged about the spate of boycotts and buycotts responding to President Trump’s travel ban. Since that time, the #grabyourwallet campaign has taken credit for a number of stores dropping Ivanka Trump’s merchandise. In response, celebrities and others flocked to Nordstrom after criticism by the President’s surrogates about the retailer’s decision to drop the products, even though Nordstrom cited falling sales. Within days, news outlets reported that her perfume was a top seller on Amazon, and that many reviewers indicated that they had bought the product to show support for the President.
Yesterday, NPR reported that the United Auto Workers will revive its 1980s Buy American campaign, which will not only promote American-made products but will also encourage the boycott of cars made by American companies overseas. I’ve argued in the past that boycotts don’t work, and the NPR story provided some support from a professor who noted, “these campaigns, even with catchy song lyrics, almost never work. For instance, garment work essentially left the U.S. almost completely a few years after [the look for the union label ad] ran, and after the last UAW campaign, the American car companies continued to lose market share.” The New York Times has also examined whether these boycotts have long term effect.
The back and forth between boycotts and buycotts related to the President’s family may prove conventional wisdom wrong. It may be time for an empirical study (not by me) of when and how the boycott/boycott movement can sustain itself.
Thursday, February 16, 2017
This post does not concern President Trump’s own business empire. Rather, this post will be the first of a few to look at how the President retains, repeals, or replaces some of the work that President Obama put in place in December 2016 as part of the National Action Plan on Responsible Business Conduct. Many EU nations established their NAPS year ago, but the U.S. government engaged in two years of stakeholder consultations and coordinated with several federal agencies before releasing its NAP.
Secretary of State Tillerson will play a large role in enforcing or revising many of the provisions of the NAP because the State Department promotes the Plan on its page addressing corporate social responsibility. Unlike many federal government pages, this page has not changed (yet) with the new administration. As the State Department explained in December, “the NAP reflects the government's commitment to promoting human rights and fighting corruption through partnerships with domestic and international stakeholders. An important part of this commitment includes encouraging companies to embrace high standards for responsible business conduct.” Over a dozen federal agencies worked to develop the NAP.
We now have a new Treasury Secretary and will soon have a new Secretary of Labor, presumably FIU Law Dean and former US Attorney Alex Acosta, a new SEC Chair, presumably Jay Clayton, and a new Secretary of Commerce, presumably Wilbur Ross. These men, along with Attorney General Jeff Sessions and Secretary of State Tillerson will lead the key agencies enforcing or perhaps revising the country’s commitment to responsible business conduct.
The following list of priorities and initiatives comes directly from the Fact Sheet:
Strengthening laws preventing the import of goods produced by forced labor to ensure products made under exploitative conditions do not gain U.S. market access.
Updating social and environmental standards criteria for financing through the Overseas Private Investment Corporation, to promote high standards through U.S.-supported private investment.
Creating guidance on social safeguards for USAID’s development programs.
Funding efforts to promote awareness and implementation of the United Nations Guiding Principles on Business and Human Rights.
Publishing, for the first time, an annual report by the U.S. National Contact Point for the OECD Guidelines.
Identifying means through trade agreements to encourage companies to engage in RBC.
Enhancing information sharing with sub-national governments on public procurement best practices, to ensure that governments at all levels promote RBC through purchasing.
Collaboration with Stakeholders
In order to achieve shared RBC goals, it is essential for governments to work with the private sector, as well as with civil society, labor, and other stakeholders, to leverage each other’s resources and strengths. The USG’s measures to collaborate with such stakeholders include:
Establishing a formal mechanism for increased government participation in “multi-stakeholder initiatives” that promote RBC in various sectors and regions.
Convening stakeholders to develop and promote effective metrics for measuring and managing labor rights impacts in supply chains.
Facilitating a dialogue with stakeholders on implementation of the Sustainable Development Goals.
Promoting worker voice and empowerment in global supply chains via new tools that allow workers in national supply chains to directly report potential labor abuses and workplace safety violations, as well as leveraging public-private partnerships to more fully incorporate the perspectives of workers.
Facilitating RBC by Companies
The USG encourages companies to follow the best domestic and international practices and is supportive of company efforts to voluntarily report on certain aspects of their operations. The USG produces a number of reports that can be useful for companies as they seek to uphold high standards, sometimes in challenging environments. The NAP sets forth an illustrative list of USG initiatives to further that work, including the following commitments:
Creating an online database containing government reports on issues such as human rights, human trafficking including forced labor, child labor, and investment climates so that companies can more effectively make investment decisions and mitigate risk.
Providing new and increased training for USG officers and officials, including those who serve abroad, on RBC issues so that government officials are well-equipped to advise companies on considerations such as the status of labor rights, human rights and transparency, in a particular operating environment.
Training for USG officials on the Foreign Corrupt Practices Act and related issues.
Updating country-level public land governance profiles that explain land laws, land use patterns, gender concerns, land administration, and land markets within a given country. These profiles are an important tool for businesses making responsible land-based investments in a given country.
Recognizing Positive Performance
U.S. companies make tremendous contributions to communities around the world by generating economic growth, creating jobs, spurring innovation, and providing solutions to pressing challenges such as access to clean energy, healthcare, and technology. The USG recognizes and highlights when companies achieve high standards with meaningful results for workers and communities. Such items include...
Developing an online mechanism to identify, document, and publicize lessons learned and best practices related to corporate actions that promote and respect human rights.
Providing Access to Remedy
Even when governments and companies seek to act responsibly, challenges can arise. Both governments and companies should have mechanisms in place by which affected parties can raise concerns, report problems, and seek remedies, as appropriate. Through the NAP, the USG is furthering its commitment to this objective by:
Improving the performance of the U.S. National Contact Point for the OECD Guidelines for Multinational Enterprises, including by announcing a fall 2017 peer review, organizing workshops to promote RBC, and publishing an outreach plan.
Hosting a forum for dialogue with stakeholders on opportunities and challenges regarding issues of remedy, as well as how the USG can best support effective remedy processes.
I will continue to follow up on this issue as well as how corporate compliance and governance may change under the Trump Administration.
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 5, 2017
As regular readers of this blog know, I am skeptical of many disclosure regimes, particularly those related to conflict minerals. I am, however, a fan of the Sustainability Accounting Standard Board’s (SASB's) efforts to streamline the disclosure process and provide industry-specific metrics that tie into accepted definitions of materiality.
Dr. Jean Rogers, the CEO and Founder of SASB, presented at the Association of American Law Schools yesterday with other panelists discussing the pros and cons of environmental, social, and governance disclosures. To prove SASB’s case that investors care about sustainability, Dr. Rogers noted that in 2016, sustainable investment strategies came into play in one out of every five dollars under professional management. She cited a number of key sustainability initiatives that investors considered including the United Nations Principles for Responsible Investments ($59 trillion AUM), the Carbon Disclosure Project ($95 trillion AUM), the International Corporate Governance Network ($26 trillion AUM), and the Investor Network on Climate Risk ($13 trillion AUM).
Despite this interest, SASB argues, investors lack information that equips them with an apples to apples comparison on material information related to sustainability. What might be material in the beverage industry such as water usage for example, may not be material in another industry.
Dr. Rogers cited a 2014 PwC study reporting that 89% of global institutional investors request sustainability information directly from companies, 67% are more likely to consider ESG information if it is based on a common framework or standard, and 50% are “very likely” to sponsor or co-sponsor a shareholder proposal.
Many who criticize the disclosure regime talk about disclosure overload and challenge the assumptions that investors care as much about sustainability as they care about earnings per share. On the flip side, companies experience what SASB acknowledges is “questionnaire fatigue.” GE for example, indicated that 75 people took months to answer 650 questionnaires with no value to the customers, shareholders, or the environment.
SASB is an independent 501(c)(3) with a who’s who of heavy hitters on the board, including Michael Bloomberg, former SEC Chair Mary Schapiro, the CEO of CalSTRS, and the former Chair of the FASB, among others. The organization first started this initiative in 2011 right after I left in-house life, and I remember thinking that this was an idea whose time has come. Over the years, SASB has worked to develop specific standards for 79 industries in 10 sectors to be used in Form 10-K and 20-F. Although it is a voluntary process, the goal is to allow investors to look at peers across an industry with standards that those industries have helped to develop.The SASB standards integrate into MD & As and risk factors without the requirement of any new regulation.
Some criticize SASB’s mission and fear more disclosure could lead to more lawsuits from investors or consumers. I don’t share this fear, but companies such as Nestle have been sued for fraud and other state law claims after disclosure required under the California Transparency in Supply Chain Act.
I’m a fan of SASB’s work so far. I hope that more organizations and advocacy groups continue to provide constructive feedback. Eventually, using the SASB methodology should become an industry standard that provides value to both investors and the company. Take a look at their 2016 State of Disclosure Report for more information and to find out how you can contribute to the effort.
Friday, November 25, 2016
It is not secret that Patagonia is one of the companies that I admire most; it may be my favorite company and is certainly in my top-five.
Patagonia's decision regarding its Black Friday sales adds to the reason I like the company. Patagonia will donate 100% of its Black Friday sales to grassroots environmental groups.
As I read it, the donations will be 100% of revenue, not profits, and the donations are estimated to be millions of dollars.
Patagonia is both a California benefit corporation and B corporation certified, but unlike many social enterprises, Patagonia often does things like the above that don't appear to be done just for the PR, and may actually hurt the company in the very short-term.
That said, Patagonia definitely has a good PR team and is probably getting millions of dollars of exposure out of this decision. And their apparel is quite expensive, so they may be able to afford to do things like this, based, in part, on the margins and goodwill built over time.
Thursday, November 24, 2016
Happy Thanksgiving from the Dominican Republic. I'm blogging from the Fathom Adonia, Carnival's fledgling social impact cruise line. I've spent the past few days in Puerto Plata teaching English in schools and local communities. Other passengers worked on reforestation projects, built water filtration systems, installed concrete floors in homes, worked with women on cocoa farms, and learned how to recycle paper with local workers. Passengers can also do typical excursions such as zip lining and snorkeling, or can lounge around in the $80 million dollar Amber Cove built up like a resort. But most people come on this cruise for the volunteer activities and don't expect frills (our bus got stuck in the mud and we needed pig farmers in a truck to help push us out on the way back from teaching English 75 minutes outside of town). Fathom has restaurants, a spa, dancing, bars, onboard activities such as wine and paint, extremely friendly staff, and enthusiastic, young "impact guides" but no Vegas-style shows and only carries approximately 700 passengers.
Carnival has banked on profiting from people's stated desire to do good in the world. Lots of surveys support this idea in theory. However, as regular readers of this blog know, I have written several posts skeptical of those who claim to care about corporate social responsibility, but choose to buy based on convenience, quality, and price. I have also repeatedly and publicly acknowledged that I am one of those people who selectively boycotts products and vendors. Although the idea of a social impact cruise line excited me, I wondered about whether It would succeed when I first heard of it because most people I know want to relax and not work on a vacation.
Unfortunately, it appears that Carnival's bet may not be paying off. Yesterday, the Miami Herald had an article discussing the future of the social impact product. Apparently, the Fathom, which also goes to Cuba, may stop doing these impact cruises, although Carnival promises that passengers will have "voluntourism" opportunities on its other cruise lines. Carnival also plans to continue its trips to Cuba on a different line starting next summer.
This change in direction, if true, does not surprise me. The Fathom trips to the Dominican Republic have never sold out, even at prices that are one third the price of the Cuba trip- my husband and I paid less than $1000 between the two of us for a seven day cruise, and were upgraded because they had capacity. We learned from one of Fathom's partners on the ground that there have been layoffs in Puerto Plata because they don't have enough volunteers traveling on the ship. Fathom has even had to cancel some of the sailings altogether.
Although the trips have not been popular with the masses, everyone that I have met on this trip has raved about their activities (particularly the English teaching) and the interactions with the warm Dominican people. Carnival may have hoped that word of mouth would suffice and that they wouldn't need heavy marketing. It's possible that Carnival believed all of the surveys of millennials who claim they want to change the world. Either way, it appears that there won't be a cruise line dedicated to social impact after next summer. That will be a huge loss for Puerto Plata and for those who want this kind of experience and are willing to pay to work with reputable, caring organizations.
I'm pulling for Fathom to survive in some form and for this idea to spread to other cruise lines. My husband and I both found that teaching English to 5th graders in a crowded classroom in a rain storm was the best Thanksgiving we have ever spent. When the students and volunteers spoke about the expeierence at the end of today's tutoring, there wasn't a dry eye in the house. That may not be profitable for Carnival, but it was priceless for those of us who experienced it.
Wednesday, November 9, 2016
Contrary to widespread belief, corporate directors generally are not under a legal obligation to maximise profits for their shareholders. This is reflected in the acceptance in nearly all jurisdictions of some version of the business judgment rule, under which disinterested and informed directors have the discretion to act in what they believe to be in the best long term interests of the company as a separate entity, even if this does not entail seeking to maximise short-term shareholder value. Where directors pursue the latter goal, it is usually a product not of legal obligation, but of the pressures imposed on them by financial markets, activist shareholders, the threat of a hostile takeover and/or stock-based compensation schemes.
Bainbridge take a contrary position, citing Delaware Supreme Court Chief Justice Strine, who says, "a clear-eyed look at the law of corporations in Delaware reveals that, within the limits of their discretion, directors must make stockholder welfare their sole end, and that other interests may be taken into consideration only as a means of promoting stockholder welfare." Strine further notes that "advocates for corporate social responsibility pretend that directors do not have to make stockholder welfare the sole end of corporate governance, within the limits of their legal discretion."
I read these positions as consistent, though I think the scope of what is permissible is certainly implicitly different. I agree that Strine is right to say that "directors must make stockholder welfare their sole end." But I also agree that "disinterested and informed directors have the discretion to act in what they believe to be in the best long term interests of the company as a separate entity." My read of the business judgment rule (BJR) is that, absent fraud, illegality, or self-dealing, courts should abstain from reviewing director decisions, meaning that the directors decide what"stockholder welfare" means and what ends to use in pursuit of that end. That is, I think it's wrong to say "directors generally are not under a legal obligation to maximise profits for their shareholders," but I do think directors usually get to decide what it means to "maximise profits."
I am a firm believer in director primacy, and I believe directors should have a lot of latitude in their choices, subject to the BJR requirements. Thus, if a plaintiff can show self dealing (like maybe via giving to a "pet charity" described in A.P. Smith v. Barlow), then the BJR might be rebutted (if the gift is inconsistent with state law and/or constituency statutes). But otherwise, it's the board's call. Furthermore, where a company builds its brand and acts consistently with its prior actions, that might expand the scope of permissible behavior for a company (i.e., not be evidence of self-dealing). Thus, companies like Tom's Shoes and Ben and Jerry's should be able to continue to operate as they always have when they bring in new directors, because what might look like self-dealing in another context, is consistent with the business model.
eBay v. Newmark (pdf here) is often used to rebut that notion, but I still maintain that case is really about self-dealing -- the actions taken by Jim and Craig were impermissible not because they were working toward "purely philanthropic ends," but because they took actions that benefited themselves to the detriment of their minority shareholder, such as use of poison pills).
Anyway, I am still a believer in the BJR as abstention doctrine. Show me some fraud, illegality, or self-dealing or I'm leaving the board's decision alone.
Friday, September 16, 2016
Earlier this week the House Financial Services Committee voted to repeal the Dodd-Frank Conflict Minerals Rule, which I last wrote about here and in a law review article criticizing this kind of disclosure regime in general.
Under the proposed Financial Choice Act (with the catchy tagline of "Growth for All, Bailouts for None"), a number of Dodd-Frank provisions would go by the wayside, including conflict minerals because:
Title XV of the Dodd-Frank Act imposes a number of overly burdensome disclosure requirements related to conflict minerals, extractive industries, and mine safety that bear no rational relationship to the SEC’s statutory mission to protect investors, maintain fair, orderly, and efficient markets, and promote capital formation. The Financial CHOICE Act repeals those requirements. There is overwhelming evidence that Dodd-Frank’s conflict minerals disclosure requirement has done far more harm than good to its intended beneficiaries – the citizens of the Democratic Republic of Congo and neighboring Central African countries. SEC Chair Mary Jo White, an Obama appointee, has conceded the Commission is not the appropriate agency to carry out humanitarian policy. The provisions of Title XV of the Dodd-Frank Act are a prime example of the increasing use of the federal securities laws as a cudgel to force public companies to disclose extraneous political, social, and environmental matters in their periodic filings.
The House report cites a number of scholars and others who raise some of the same issues that I addressed in an amicus brief when the case was litigated at the trial and appellate level years ago.
This weekend I am attending the Business and Human Rights Scholars Conference co-sponsored by the University of Washington School of Law, the NYU Stern Center for Business and Human Rights, the Rutgers Business School, the Rutgers Center for Corporate Law and Governance, and the Business and Human Rights Journal. I present on Cuba, human rights, and investor-state dispute resolution, but a number of papers concern conflict minerals and disclosure in general.
As I have argued in the past, I’m not sure that repeal is the answer. I do believe that the law should be re-examined and possibly reformed to ensure that the diligence and disclosure actually leads to tangible and sustained benefits for the Congolese people. In short, I want to see some evidence of linkages between this corporate governance disclosure and reductions in rape, violence, child slavery, pillaging of villages, and forced labor. I want to see proof that the individual ethical consumers who claim in surveys to care about human rights have actually changed their buying habits because of this name and shame campaign.
Although I do not agree with many of the proposals in the House report and I am not against all disclosure, I do not believe that the SEC is the appropriate agency to address these issues. The State Department and others can and should take the lead on the very serious security and justice reform issues that I witnessed firsthand in Goma and Bukavu when I went to the DRC to research this law five years ago. These issues and the violence perpetrated by rebel groups, police, and the military persist. I look forward to hearing how and if proponents of the conflict minerals rule address this report during the conference.
Friday, September 2, 2016
In his article, Making It Easier for Directors to "Do the Right Thing?" 4 Harv. Bus. L. Rev. 235, 237–39 (2014), Delaware Supreme Court Chief Justice Leo Strine wrote:
[E]ven if one accepts that those who manage public corporations may, outside of the corporate sales process, treat the best interests of other corporate constituencies as an end equal to the best interests of stockholders, and believes that stockholders should not be afforded additional influence over those managers, those premises do very little to actually change the managers’ incentives in a way that would encourage them to consider the interests of anyone other than stockholders. . . . even if corporate law supposedly grants directors the authority to give other constituencies equal consideration to stockholders outside of the sale context, it employs an unusual accountability structure to enable directors to act as neutral balancers of the diverse, and not always complementary, interests affected by corporate conduct. In that accountability structure, owners of equity securities are the only constituency given any rights. Stockholders get to elect directors. Stockholders get to vote on mergers and substantial asset sales. Stockholders get to inspect the books and records. Stockholders get the right to sue. No other constituency is given any of these rights. (emphasis added, citations omitted)
There has been a lot of anger and shock in the reporting over the price increases by EpiPen-maker Mylan. See, e.g., here, here, here, and here, but I think Chief Justice Strine's observation about the general accountability structure of corporate law is at least a partial explanation. (To be sure, there also appears to be an executive compensation story, though the executive compensation structure may be driven by the shareholder-centric accountability structure. That said, Mylan appears to be a Netherlands-incorporate company, and I know very little about the structure of its corporate law.)
The price for an EpiPen has increased a staggering amount since 2007 when pharmaceutical company Mylan acquired the product – wholesaling for $100 in 2007; $103.50 in 2009; $264.50 in 2013; $461 in 2015; $608.61 in 2016.
The general tone of the reporting in the mainstream media is one of outrage.
But isn't this to be expected? Granted, the business judgment rule provides a lot of leeway, and I would not argue that Mylan was "forced" to hike prices, even if Mylan were incorporated in Delaware. But if we give shareholders virtually all of the significant corporate governance tools, isn't it obvious that directors and officers will often seek shareholder interests even when it is harmful to communities? The bigger story here may be that certain norms and the fear of negative press have been able to keep plenty of other companies from following suit.
My article Adopting Stakeholder Advisory Boards, due out next semester in the American Business Law Journal, suggests giving some of the corporate governance accountability tools (such as certain voting rights) to a stakeholder advisory board made up of stakeholder representatives. The article argues that adoption of stakeholder advisory boards should be mandatory for large social enterprises (because they both chose a social entity form and have the resources) and should be voluntarily adopted by other serious socially-conscious companies. An accountability change of this sort might bring public expectations and the corporate law accountability structure into line.
Separately, are there certain industries - like the health care industry - that we want to be less profit-focused than others? For those industries, perhaps requiring (or making attractive through regulations/taxes) the choice of a social enterprise form (like benefit corporation) may make some sense. However, as noted in my article, the benefit corporation accountability structure is quite shareholder-centric, similar to the structure for traditional corporations. Granted, socially-motivated shareholders may exert some pressure on benefit corporations and the benefit corporation law may give them a somewhat better chance to do so, but if we want real change, I think the corporate accountability structure needs to be more completely redesigned.
Personal Note: When I was a child, my mom carried an EpiPen for me, following an incident involving plastic armor, a tennis racket, and whacking a big bee nest.
Thursday, August 4, 2016
Greetings from SEALS in lovely Amelia Island. On Wednesday I presented on a proposed bilateral investment treaty between the US and Cuba, and tomorrow I am part of a discussion group on Sustainable Business. I will focus on the roles and responsibilities of corporate sponsors of the Rio Olympics. According to the official Olympics website, “[m]ore than just providing products and services for the event, [the sponsors] ensure that sport always comes first and that the whole world is inspired alongside us.”
Sponsors can spend up to $200 million for the privilege to inspire us. For many sponsors, the chance to have over a billion people watch their commercials and logos appear repeatedly over a period of a few weeks on television is worth the tens of millions of dollars. They often invest in slick YouTube campaigns that show their real or imagined connections to young athletes finally achieving their lifelong dream of bringing home the gold for their country. Apparently, 54% of consumers surveyed felt more positive about Nike after the company sponsored the Olympics based on how it chose to advertise. Many companies use these kinds of sponsorships as part of their corporate social responsibility initiatives. Dow is the official “carbon” partner of the games.
As anyone who watches the news knows, the $12 billion Rio Olympics has been fraught with controversy. According to reports, the crime rate is soaring and the bay is so filthy that the athletes have been warned to keep their mouths closed during water events. Brazil was one of the ten largest economies in the world when it was awarded the games years ago and now is in free fall. As part of the deal to get the games, Brazil promised the IOC and its citizens gleaming new transportation systems, hospitals, and infrastructure but one in seven of Rio’s citizens still live in one of the 1,000 favelas and those have not improved at all. A number of people have actually lost their homes to make way for Olympic venues. Rio’s street children have asked the head of the IOC for assurances that their human rights will be respected.
Human Rights Watch prepared a report last year that outlines some key concerns about the human rights abuses that typically occur at mega sporting events. Although the Olympic Charter states at p. 14 that “the practice of sport is a human right,” the HRW report identified violations that typically occur at these kinds of events. Many have already been documented in Rio including: forced evictions without due process or compensation due to massive new infrastructure construction; environmental activism; threats, intimidation, and arrests of journalists; silencing of civil society and rights activists, and discrimination.What does any of this have to do with business? I have some questions about the role of business that I will explore tomorrow and in my research.
West Virginia Professor Jena Martin has written about the concept of the “corporate bystander.” She notes that, “TNCs often get involved in relationships with state actors who violate international human rights. TNCs then argue that they cannot be held accountable for the violations because they merely observed the underlying atrocities and did not participate in the acts that caused them.” The large corporate sponsors who tout their corporate social responsibility initiatives and who vehemently oppose human rights shareholder proposals because they already have a program in place will likely distance themselves from what is going on in Brazil. They are just sponsors after all. But is that an appropriate response? Should the IOC do more to require human rights safeguards? Should corporate sponsors conduct impact assessments or is their involvement too attenuated? Do the consumers who felt better about Nike after watching the Olympics commercials care about the street children in Brazil or the women who are displaced from their homes? Would they think twice about buying sneakers if they read some of the links in this blog? Does any of this move the share price in either direction? What is the actual business case for balancing the corporate sponsorship with the human rights impact?
The head of the IOC has signed on to work with the UN on the Sustainable Development Goals--seventeen economic, environmental, social, and governance initiatives that the private sector, government, and civil society aim to achieve by 2030. How does that square with conducting the Olympics in locales with human rights and environmental violations? Should the IOC only hold the Olympics in host countries with "perfect" human rights records and what would that even look like?
I will be discussing these issues tomorrow and will explore it more firsthand when I head to Rio on Saturday. In the meantime, corporate sponsors may hope that the press coverage on Friday evening focuses on panoramic shots of Sugarloaf and Copacabana Beach and not the planned protests before the opening ceremonies.
Friday, July 8, 2016
Like Anne and Joan, I enjoyed the Berle Symposium and found it incredibly valuable. As they have mentioned, former Chancellor Chandler's presentation was definitely a highlight, and it was affirming to hear Delaware law described as I understand it, if much more eloquently expressed than I have managed. Former Chancellor Chandler appeared to make clear that directors of Delaware firms could be at risk if they admit to taking an action that is not aimed at (eventually) meeting the short or long-term financial interests of shareholders.
Former Chancellor Chandler's description of Delaware law, both in the symposium and in his eBay case, coupled with the law review writings of Delaware Supreme Court Chief Justice Leo Strine, confirm, in my mind, that benefit corporations could be useful, at least in Delaware, for entrepreneurs who want to admit pursing strategies that are not aimed at benefiting shareholders in the short or long run. For example, I think some companies, like Patagonia, make decisions that benefit the environment, even though the directors may honestly believe that financial costs will far exceed financial benefits, even in the long-term.
Interestingly, however, much of what I heard from the B Lab representatives at the symposium was about how benefit corporations can do just as well, if not better, than traditional corporations from a financial perspective. This obviously poses an empirical question that we may get better answers to in the coming years. But if you can "do well by doing good" then then entrepreneurs, even under Delaware law, seem likely to avoid legal problems given the protection of the business judgment rule and the argument that financial benefits will eventually follow from their society-focused actions.
The benefitcorp.net website has a list of reasons to become a benefit corporation, which are:
Reduced Director Liability
Expanded Stockholder Rights
A Reputation For Leadership
An Advantage in Attracting Talent
Increased Access to Private Investment Capital
Increased Attractiveness to Retail Investors and Mission Protection as a Publicly Traded Company
I am a bit surprised that more of these reasons are not focused on societal and environmental benefit (and am not sure why mission protection is limited to publicly traded companies, especially when there are no stand-alone publicly traded benefit corporations today -- though there will likely soon be some soon.) I question whether all of these benefits are true. For example, I have heard mixed things about benefit corporations from investors, and the liability issue is completely untested. But if all of these things are true, and social entrepreneurs do get better access to capital and an advantage attracting employees, etc., then I think the benefit corporation form is less necessary as a legal matter. Maybe the thought is that benefit corporations have expressive value or that they provide an extra layer of protection. But, as a legal matter, if you can justify your social actions by pointing to potential long-term financial benefits, you do not really need a new form, even in Delaware (and, of course, many other states are even more permissive with social actions). Maybe benefit corporation proponents see the real value in the M&A context when facing Unocal/Revlon, but Page & Katz showed ways around those issues, especially if focused on long-term value. Entrepreneurs could also incorporate outside of Delaware, in a state that has expressly rejected Revlon.
Personally, while it is possible for some firms to do well by doing good, I think social entrepreneurs will often be openly sacrificing financial returns---they will be doing good through purposeful financial sacrifice. As such, an benefit corporation option, at least in states like Delaware.
There was quite a lot of good discussion at the Berle Symposium, and I may have more to write about it in later posts.
Monday, June 27, 2016
I am still at Berle VIII with Haskell Murray and Anne Tucker. One more day of my June Scholarship and Teaching Tour to go--and I have a final presentation to do. Then, back to Knoxville to stay until late in July. Whew!
As you may recall or know, my Berle appearance this week follows closely on the heels of a talk on the same work (on corporate purpose and litigation risk in publicly held U.S. benefit corporations) that I made at last week's 2016 National Business Law Scholars conference. While I am thinking about this conference, please join me in saving the date for the next one: the 2017 National Business Law Scholars conference. Next year's conference will be held June 8-9 at The University of Utah S. J. Quinney College of Law, with Jeff Schwartz hosting. I will post more information and the call for papers, etc. once I have it.
June 27, 2016 in Anne Tucker, Business Associations, Conferences, Corporate Finance, Corporate Governance, Corporate Personality, Corporations, CSR, Haskell Murray, Joan Heminway, Research/Scholarhip, Teaching | Permalink | Comments (0)
Friday, June 24, 2016
Recently, I came across this discussion on Poverty Inc. by Bill Easterly (NYU Economics) and the film's creators (Michael Matheson Miller and Mark Weber). I posted on one of Bill Easterly's books here.
In the discussion at NYU, I especially liked this quote from Michael Matheson Miller: "We tend to treat poor people as objects--as objects of our charity, objects of our pity, objects of our compassion.--instead of subjects...Poor people are not objects; they are subjects and they should be the protagonists in their own stories of development." The personal story Mark Weber tells of his trip while he was studying at Notre Dame was moving, but you will have to watch the discussion to hear it, as it would be tough to summarize. Some of the audience questions are a bit long-winded, but I think the panel does a nice job deciphering and answering.
The film's trailer, the discussion, and the Q&A with the audience are all worth watching.
Thursday, June 23, 2016
The Cuba Conundrum: Corporate Governance and Compliance Challenges for U.S. Publicly-Traded Companies
My latest article on Cuba and the US is out. Here I explore corporate governance and compliance issues for US companies. In May, I made my third trip to Cuba in a year to do further research on rule of law and investor concerns for my current work in progress.
In the meantime, please feel free to email me your comments or thoughts at email@example.com on my latest piece
The abstract is below:
The list of companies exploring business opportunities in Cuba reads like a who’s who of household names- Starwood Hotels, Netflix, Jet Blue, Carnival, Google, and AirBnB are either conducting business or have publicly announced plans to do so now that the Obama administration has normalized relations with Cuba. The 1962 embargo and the 1996 Helm-Burton Act remain in place, but companies are preparing for or have already been taking advantage of the new legal exemptions that ban business with Cuba. Many firms, however, may not be focusing on the corporate governance and compliance challenges of doing business in Cuba. This Essay will briefly discuss the pitfalls related to doing business with state-owned enterprises like those in Cuba; the particular complexity of doing business in Cuba; and the challenges of complying with US anti-bribery and whistleblower laws in the totalitarian country. I will also raise the possibility that Cuba will return to a state of corporatism and the potential impact that could have on compliance and governance programs. I conclude that board members have a fiduciary duty to ensure that their companies comply with existing US law despite these challenges and recommend a code of conduct that can be used for Cuba or any emerging markets which may pose similar difficulties.
June 23, 2016 in Comparative Law, Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, International Business, Law Reviews, Marcia Narine Weldon, Research/Scholarhip | Permalink | Comments (0)
Friday, June 17, 2016
By now, I am sure all readers are aware of the horrific, hateful mass shooting that occurred in Orlando earlier this week.
If your social media feeds are anything like mine, it did not take long for politicians, pundits, and friends to politicize this tragedy. The tragedy was quickly used, by people all along the political spectrum, as evidence supporting their views on guns, religion, sexuality, and immigration. There is certainly a time and need for solutions, but there needs to be space to mourn. Orin Kerr (George Washington Law) summarized my thoughts well when he tweeted:
It's impressive how national tragedies prove to everyone that they were right all along.— Orin Kerr (@OrinKerr) June 13, 2016
What could and should be done immediately after a tragedy? I am not entirely sure, but those who took steps to donate blood and financial resources should be commended.
Some local businesses also attempted to help. For example, it was reported that Chick-fil-A, which is famously closed on Sundays, cooked and gave away food to those waiting in line to donate blood. This is an admittedly small gesture, but at a time when our nation often seems hopelessly divided, I am thankful for the gesture. Chick-fil-A and its conservative Christian COO Dan Cathy were, of course, at the center of controversy regarding views on marriage. I have seen no indications that Dan Cathy has changed his views on marriage, though Chick-fil-A does appear to have made changes in its donations. In any event, I am so glad to see a business looking past differing views and caring for human beings in the aftermath of tragedy.
[Disclosure: While no company is perfect, my family and I are Chick-fil-A fans, and I have friends, including a former roommate, who work for the company.]
On Wednesday, the EU finally outlined its position on conflict minerals. The proposed rule will affect approximately 900,000 businesses. As I have discussed here, these “name and shame” disclosure rules are premised on the theories that: 1) companies have duty to respect human rights by conducting due diligence in their supply chains; 2) companies that source minerals from conflict zones contribute financially to rebels or others that perpetuate human rights abuses; and 3) if consumers and other stakeholders know that companies source certain minerals from conflict zones they will change their buying habits or pressure companies to source elsewhere.
As stated in earlier blog posts, the US Dodd- Frank rule has been entangled in court battles for years and the legal wranglings are not over yet. Dodd-Frank Form SD filings were due on May 31st and it is too soon to tell whether there has been improvement over last year’s disclosures in which many companies indicated that the due diligence process posed significant difficulties.
I am skeptical about most human rights disclosure rules in general because they are a misguided effort to solve the root problem of business’ complicity with human rights abuses and assume that consumers care more about ethical sourcing than they report in surveys. Further, there are conflicting views on the efficacy of Dodd-Frank in particular. Some, like me, argue that it has little effect on the Congolese people it was designed to help. Others such as the law’s main proponent Enough, assert that the law has had a measurable impact.
The EU's position on conflict minerals is a compromise and many NGOs such as Amnesty International, an organization I greatly respect, are not satisfied. Like its US counterpart, the EU rule requires reporting on tin, tantalum, tungsten, and gold, which are used in everything from laptops, cameras, jewelry, light bulbs and component parts. Unlike Dodd-Frank, the rule only applies to large importers, smelters, and refiners but it does apply to a wider zone than the Democratic Republic of Congo and the adjoining countries. The EU rule applies to all “conflict zones” around the world.
Regular readers of my blog posts know that I teach and research on business and human rights, and I have focused on corporate accountability measures. I have spent time in both Democratic Republic of Congo and Guatemala looking at the effect of extractive industries on local communities through the lens of an academic and as a former supply chain executive for a Fortune 500 company. I continue to oppose these disclosure rules because they take governments off the hook for drafting tough, substantive legislation. Nonetheless, I look forward to seeing what lessons if any that the EU has learned from the US when the member states finally implement and enforce the new rule. In coming weeks I will blog on recent Form SD disclosures and the progress of the drafting of the final EU rule.
June 17, 2016 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, International Law, Legislation, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (0)