Saturday, November 28, 2015
A short while ago, some commentators declared that the Treasury had successfully ended corporate inversions. But after several recent corporate migrations, reports of the inversion’s death appear to have been greatly exaggerated.
A corporate inversion is a complicated and costly transaction used by American corporations to avoid particularly burdensome aspects of the U.S. tax code. The United States not only enforces the OECD’s highest corporate tax rate (the tax rate for most U.S. corporations ranges between 35% to 39%) but also worldwide taxation. This latter feature subjects an American corporation’s entire revenue stream to the United States’ extraordinary tax rate, whereas most countries tax only what is earned inside their territorial borders. In simplified terms, a corporation hoping to invert must merge with a foreign corporation—while satisfying some very idiosyncratic conditions—in order to reorganize in the foreign company’s country. After inverting, a company’s foreign generated income becomes subject to more favorable foreign tax rates, though it must still pay U.S. taxes on domestically generated revenue.
The rhetoric surrounding inversions has been heating up lately since Pfizer announced its intentions to invert into an Irish entity after acquiring Allegran in a $160 billion deal. The chief complaint against inversions is that inverted companies avoid their “fair share” of taxes (the United States likely lost 33.6 billion in tax revenue in 2014 alone). Not only that, the inversion trend perhaps shifts research and development and intellectual property innovation to foreign countries (see this excellent article by Omri Marian). President Obama famously declared that inversions are “unpatriotic,” Jon Stewart warned his viewers of the “Inversion of the Moneysnatchers,” and countless politicians have proposed ending the inversion loophole.
But why should we demonize inverted companies. First, consider an old Learned Hand quote: “[a]nyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose the pattern which best pays the treasury.” And considering that inverted companies must still pay U.S. taxes on U.S. generated income, the process shields only foreign-based revenue with which the United States has limited association. In fact, if the internal affairs doctrine incentivizes companies to incorporate in whichever U.S. state they wish, why should this policy not include foreign countries?
In the end, what to do about inversions presents a number of complex issues. Critics offer very accurate arguments concerning the deleterious effects of inversions. However, in light of previous attempts, it seems quite unlikely that the tax code could be amended to prohibit future companies from inverting. As of a couple days ago the Treasury just added new inversion restrictions with the caveat that there is only so much that the Treasury can do. Indeed either lowering the corporate tax rate or ending worldwide taxation would likely be the most effective anti-inversion policy. Or the United States could take better aim at the income shifting transactions that corporations use to repatriate foreign income into the United States. But probably the best first step is for us to quit viewing inversions normatively; any well-informed policy prescription should avoid the very commonly used rhetoric of “good” guys and “bad” guys. After all, companies are just following incentivizes that the law offers.
For an excellent discussion of inversions, please read this Virginia Law Review article by Eric Talley.
Friday, November 20, 2015
This past Sunday afternoon, I attended a screening of the film Poverty, Inc.
The trailer is available here.
I share a few, somewhat disconnected, thoughts on Poverty, Inc. under the page break.
Tuesday, November 17, 2015
The defense for Don Blankenship, former CEO of Massey Coal, rested today without putting on any witnesses. Blankenship is on trial because he is charged with conspiring to violate federal safety standards. Investigators believe that Blankenship's methods contributed to a mine disaster that killed 29 people at the Upper Big Branch mine in West Virginia.
One part of the trial has an interesting business law component. Prosecutors have tried to show the Blankenship's interest in making more money was a key factor in cutting corners. One West Virginia news paper reported it this way:
“The government is using his compensation package as an indication of how much production mattered to Don,” said Mike Hissam, partner at Bailey & Glasser. “They’re using his compensation to establish a motive for him lying and making false statements to investors, their theory being his compensation was so tied up with company stock he had a motive for lying to the SEC and the public to protect his own personal net worth.”
It's possible that this is accurate, but I am leery of that line of thinking. It's not that I don't think it's possible Blankenship cut corners because it cost money, but it's not clear to me that would be the main of even a significant reason, if he did. The problem with this line of thinking is that Don Blankenship has tons and tons of money. So the risk is that the jury looks at and says, "Nope -- he's already rich. Why would that motivate him so much?" Further, while Blankenship stood to make money when things went well, his net worth was tied to company stock, so bad outcomes hurt him, too. The incentive story is not as easy as it seems.
My theory for the jury on this point would be more like this: Blankenship played the game to win. He liked winning, and he was used to winning, and he would not stop. His winning made him rich. And what was it that made him a winner? More coal coming out of the ground. His coal. Coal, not money, earned points. Coal, not protecting lives, earned points. Safety measures and slow downs or shut downs lost points. And Blankenship was about scoring points. If the rules didn't help him, he tried to change the rules. And who was hurt along the way did not matter. Because hurt people don't score points. Only coal matters in Blankenship's game.
Anyway, there's a reason I'm not a prosecutor, but I put my theory forth because I am a little skeptical that the money-as-the-goal message will resonate with a jury the way prosecutors hope. (To be clear, this is not the only theory prosecutors put forth -- it's just the one I am focusing on.) My colleague Pat McGinley explained the challenges with Blankenship this way:
"There are a considerable number of people who view Mr. Blankenship in his role as the Massey CEO as arrogant and dismissive of criticism," he said. "But the jury hasn't seen that side of him. And don't forget he's embraced by many people, including many powerful people; he's not universally viewed as arrogant or in a negative light. What's important here is what assessment is the jury going to have?
Had Blankenship testified, we'd have a better sense of what the jury might think of him, because we'd at least have his testimony to assess. We'd know at least part of what the jury knows. But he didn't. No witnesses for the defense, and no insight for those watching.
It should be an interesting few days.
Tuesday, November 10, 2015
Missouri’s president recently resigned amid protests about how his institution responded to racist and other deplorable acts on his campus. A graduate student staged a hunger strike, and players from the Missouri football team threatened to sit out their next game if the president did not resign.
Some have worried that the threat sets bad precedent, in that they think now a president can be forced to resign based on the racist acts of someone beyond his or her control. I don’t buy that, but more on that later. Others are upset that it took the football team to make the protests have legs. I don’t buy this one, either, though I give this one more credence.
As someone working in an academic environment, I will say that I would be sympathetic if the resignation really happened because of things that were out of the control of the university president. That is, if he were really being held accountable for what was said by an idiot racist student, I'd be supportive of him and think it was wrong he was being forced out. Based on what I have seen, though, the criticisms were valid about the institution's response to the racists acts, and specifically the president’s response, to issues of racism on campus.
I have seen administrations respond well and respond poorly to such events, and how they respond does a lot for how people feel about their institution. My read on this is that this president did not seem to care about an institutional response, when he did respond it was dismissive, and when he came under fire, he lashed back.
One of this things that struck me was that the football coach publicly supported his players. To me, it seems that when high-level folks step out front like that, it's likely the problems were recognized deeply and across boundaries.
Beyond that, personally, I had little patience with the president, based on reports of his responses. The one that sealed the deal for me was his description of “systematic oppression,” which goes as follows: "Systematic oppression is because you don’t believe that you have the equal opportunity for success.” Um, no, that's exactly wrong.
As such, I don’t think this was an issue where the president of a university was being held accountable for the racist behavior of some students. Unfortunately, that kind of behavior unavoidable, but worth trying to avoid. How we respond the racist behavior of others, though, is within our control, and we’re accountable for how we respond.
Furthermore, I don’t think it was just the potential $1 million loss a forfeit of a football game was the sole reason this resignation happened. I do think it accelerated the process, but I also get the sense this was a problem across the campus. I think the football players astutely noted that the time was right to join the movement, and knew they had support. Notoriously conservative football coaches (and I don’t mean politically) don’t jump out in front of things like this very often, at least not if they have a question about which way the wind is blowing. This seems more to me like a case where the lack of an adequate response -- meaning mostly that the administration was not showing they cared or noticed the problems -- was recognized by a critical mass as problematic. And things moved forward quickly.
I am responding only to my perception of reports, and maybe I am getting this wrong, but I get the sense the outcome here was right. And I think it is more complex than the fact that the football players complained, so change happened. That undercuts the work of the initial protestor, who did motivate change, and it underestimates how deep the lack of support for the administration seemed to go. And, sorry, it was more than financial, even if that was part of the story.
Frankly, I worry more about the gendered aspect of this, as colleges and universities are notoriously bad in how they handle Title IX violations, and I don’t know of many (read: any) protests like this leading to successful change on that front. But maybe, just maybe, we’re on the cusp of something like that. In a proper case, I sure wouldn’t mind if a football team took the lead on that, too.
Friday, November 6, 2015
REI recently announced that they will close their stores on the busiest day in retail, Black Friday. They are encouraging their customers and employees to spend time outside. REI is also paying their employees on Black Friday even though their stores will be closed.
At first, I was proud of REI for this move; Black Friday can be materialism at its worst.
But I think REI made a poor strategic move by over-promoting this announcement and buying numerous social media advertisements for their #OptOutside campaign. REI's self-congratulatory ads have been following me around the internet for the past few days.
Advertising about your social responsibility is really difficult to do well.
Convincing customers that you are socially responsible through advertising is like trying to convince your friends you are generous through social media posts. Both are likely to backfire. As Wharton professor Adam Grant recently wrote, you shouldn't say "I'm a giver;" that determination is for others to make.
In my opinion, praise of a company's socially responsible behavior should come primarily from its stakeholders. REI received plenty of third-party press regarding their announcement (see, e.g., here, here, and here), but their self-promotion has convinced me that this is primarily a financially-focused marketing ploy, not mainly a move to benefit society at large.
Next week, I will look at some companies that I think do a better job of building their socially responsible brand.
Wednesday, November 4, 2015
The Department of Labor issued new interpretive guidelines for pension investments governed by ERISA. A thorny issue has been to what extent can ERISA fiduciaries invest in environmental, social and governance-focused (ESG) investments? The DOL previously issued several guiding statements on this topic, the most recent one in 2008, IB 2001-01, and the acceptance of such investment has been lukewarm. The DOL previously cautioned that such investments were permissible if all other things (like risk and return) are equal. In other words, ESG factors could be a tiebreaker but couldn't be a stand alone consideration.
What was the consequence of this tepid reception for ESG investments? Over $8.4 trillion in defined benefit and defined contribution plans covered by ERISA have been kept out of ESG investments, where non-ERISA investments in the space have exploded from "$202 billion in 2007 to $4.3 trillion in 2014."
The new guidance admits that previous interpretations may have
"unduly discouraged fiduciaries from considering ETIs and ESG factors. In particular, the Department is concerned that the 2008 guidance may be dissuading fiduciaries from (1) pursuing investment strategies that consider environmental, social, and governance factors, even where they are used solely to evaluate the economic benefits of investments and identify economically superior investments, and (2) investing in ETIs even where economically equivalent."
Under the new interpretive guidelines, the DOL takes a much more permissive stance regarding the economic value of ESG factors.
"Environmental, social, and governance issues may have a direct relationship to the economic value of the plan's investment. In these instances, such issues are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary's primary analysis of the economic merits of competing investment choices. Similarly, if a fiduciary prudently determines that an investment is appropriate based solely on economic considerations, including those that may derive from environmental, social and governance factors, the fiduciary may make the investment without regard to any collateral benefits the investment may also promote. Fiduciaries need not treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social, or other such factors."
In other words, ESG factors may be economic factors and such investments are not automatically suspect under ERISA fiduciary duty obligations.
Sunday, November 1, 2015
I teach both Civil Procedure and Business Associations. As a former defense-side commercial and employment litigator, I teach civ pro as a strategy class. I tell my students that unfortunately (and cynically), the facts don’t really matter. As my civil procedure professor Arthur Miller drilled into my head 25 ago, if you have procedure on your side, you will win every time regardless of the facts. Last week I taught the seminal but somewhat inscrutable Iqbal and Twombly cases, which make it harder for plaintiffs to survive a motion to dismiss and to get their day in court. In some ways, it can deny access to justice if the plaintiff does not have the funds or the will to re-file properly. Next semester I will teach Transnational Business and Human Rights, which touches on access to justice for aggrieved stakeholders who seek redress from multinationals. The facts in those cases are literally a matter of life and death but after the Kiobel case, which started off as a business and human rights case but turned into a jurisdictional case at the Supreme Court, civil procedure once again "triumphed" and the doors to U.S. courthouses closed a bit tighter for litigants.
This weekend, the New York Times published an in depth article about how the corporate use of arbitration clauses affects everyone from small businesses to employees to those who try to sue their cell phone carriers and credit card companies. Of course, most people subject to arbitration clauses don’t know about them until it’s too late. On the one hand, one could argue that corporations would be irresponsible not to take advantage of every legal avenue to avoid the expense of protracted and in some cases frivolous litigation, particularly class actions. On the other hand, the article, which as one commenter noted could have been written by the plaintiffs bar, painted a heartbreaking David v. Goliath scenario.
I see both sides and plan to discuss the article and the subsequent pieces in the NYT series in both of my classes. I want my students to think about what they would do if they were in-house counsel, board members, or business owners posed with the choice of whether to include these clauses in contracts or employee handbooks. For some of them it will just be a business decision. For others it will be a question of whether it’s a just business decision.
Thursday, October 22, 2015
Regular readers know that I write a lot about business and human rights and that I have posted about a number of lawsuits brought in California alleging violations of consumer protection statutes and false advertising claiming that companies fail to disclose the use of child slavery on their packaging. The complaints allege that consumers are deceived into "supporting" the child slave labor trade. The latest class action has been filed against Hershey, Mars, and Nestle. Back in 2001, these companies and several others signed the Engel-Harkin Protocol (drafted by Congressman Engel) in an effort to avoid actual FDA legislation regarding "slave-free" labeling. Nestle has touted its work with some of the world's biggest NGOs to help clean up its supply chain for all of its human rights issues, not just in the cocoa industry. Nestle denies the allegations and actually has an extensive action plan related to child labor. Mars and Hershey also denied the allegations.
I am curious as to whether shareholders demand action from the boards of these companies or if the steady stream of litigation being filed in California causes companies to invest more in supply chain due diligence or to change where and how they source their materials. The real question is whether consumers actually care. Today I conducted an unscientific poll. I asked my business associations and civil procedure students to vote on whether they would continue to buy their favorite chocolate if they knew that child slaves were used in the cocoa harvesting. I made them close their eyes so they wouldn't feel self-conscious about their answers and asked for their honest feedback. About 90% of students in both classes said that they wouldn't buy the products. We will see what happens to their moral outrage if I bring in Halloween candy next week. My business associations students also believed that shoppers who saw signs in grocery stores about child slaves wouldn't buy the candy either. This is in fact the theory behind many of the name and shame campaigns such as Dodd-Frank conflict minerals.
Maybe it does work. I am against the Dodd-Frank legislation for a variety of reasons, but when one of my students came in my office a few minutes ago and pointed out my Soda Stream bottle she said "you know that there is a huge conflict with that company and Israel, right"? I admitted that I knew. And yes, I am going to Bed, Bath, and Beyond this weekend to buy another brand. I have been shamed, even if she didn't intend to so do.
Tuesday, October 20, 2015
Wednesday, October 14, 2015
I am happy to report that Tamika Montgomery-Reeves, currently a partner in Wilson Sonsini Goodrich & Rosati's Wilmington, DE office, has been nominated to become a Vice Chancellor on the Delaware Court of Chancery.
Tamika and I first met as summer associates at Miller & Martin after our 1L years. We both clerked on the Delaware Court of Chancery, albeit for different judges and during different years. We then worked together in the same practice group, as fellow associates, at Weil Gotshal in NYC.
All of that to say, I have worked with Tamika, or I guess I will soon be saying "Vice Chancellor Montgomery-Reeves," on a number of occasions and think she will do an excellent job. Tamika has both the intelligence and personality to be a global ambassador for the court, as a number of Delaware judges before her have been. She will be a great addition to the Delaware Court of Chancery. I look forward to reading her opinions and following her career.
Sunday, October 11, 2015
Between the US Supreme Court's decision to let Newman stand and the Delaware Supreme Court's Sanchez decision, the intersection of friendship and corporate governance has been a hot topic this past week. While the commentary has been enlightening, it's always good to reflect on the primary sources. To that end, I have collected below a series of what I perceive to be interesting quotes from the relevant opinions as follows (I also included an excerpt from a law review article referencing Reg FD, which has something to say about the extent to which we need to protect insider communications with analysts):
1. Dirks v. S.E.C.,
2. United States v. Newman,
3. United States v. Salman,
4. Delaware Cnty. Employees Ret. Fund v. Sanchez,
5. Dirks v. S.E.C. (dissent, excerpt 1),
6. Dirks v. S.E.C. (dissent, excerpt 2), and
7. Donna M. Nagy & Richard W. Painter, Selective Disclosure by Federal Officials and the Case for an Fgd (Fairer Government Disclosure) Regime.
Obviously, Sanchez may be viewed as an outlier here, but perhaps this will spur some creative work on how the standard for director independence might inform the standard for improper tipping or vice versa.
Friday, October 9, 2015
Like many of you, I have been discussing the Volkswagen emission scandal in my business law classes.
Yesterday, Michael Horn, President and CEO of Volkswagen Group of America testified before the House Committee on Energy and Commerce Subcommittee on Oversight and Investigations. Horn's testimony is here.
West Virginia University, home of co-blogger Joshua Fershee, is featured on the first page of the testimony as flagging possible non-compliance issues in the spring of 2014.
The testimony includes multiple apologies, acceptance of full responsibility, and the statement that these "events are fundamentally contrary to Volkswagen’s core principles of providing value to our customers, innovation, and responsibility to our communities and the environment."
I plan to follow this story in my classes as the events continue to unfold.
My wife and I both have many close family members in South Carolina, so the recent flood has been on our minds recently.
My first thoughts are with all of those affected by the flood.
Relevant to this blog, the flood also reminds me of one of the opening passages in Conscious Capitalism by Whole Food's co-CEO John Mackey. In that passage, Mackey recalls the massive flood in Austin, TX in 1981. At that time, Whole Foods only had one store, and the flood filled that store with eight feet of water. Whole Foods had loses of $400,000 and no savings and no insurance.
Mackey notes that "there was no way for [Whole Foods] to recover with [its] own resources" and then:
- "[a] wonderfully unexpected thing happened: dozens of our customers and neighbors started showing up at the store....Over the next few weeks, dozens and dozens of our customers kept coming in to help us clean up and fix the store...It wasn't just our customers who helped us. There was an avalanche of support from our other stakeholders as well [such as suppliers extending credit and deferring payment]. . . . It is humbling to think about what would have happened if all of our stakeholders hadn't cared so much about our company then. Without a doubt, Whole Foods Market would have ceased to exist. A company that today has over $11 billion in sales annually would have died in its first year if our stakeholders hadn't loved and cared about us--and they wouldn't have loved and cared for us had we not been the kind of business we were." pgs. 5-7
I have two questions. First, what decisions lead to that sort commitment from stakeholders? Second, does this sort of commitment only attach to small businesses?
Asked another way, would Whole Foods still have that sort of stakeholder turnout today? If not, is it because they have not continued to make decisions that inspire stakeholders or simply because they have grown so large that stakeholders assume the company can fend for itself.
It is seemingly easier to make connection with a small, local business than with a large chain, but there do seem to be a few larger companies that still reach their stakeholders on an individual and personal level. Companies, of all sizes, seem to reach stakeholders through making thoughtful decisions in hiring, training, producing, and giving. Authenticity seems to be quite important, as does listening to stakeholders and taking action to address stakeholder needs.
Tuesday, October 6, 2015
As a life-long Detroit Lions fan, last night's loss to the Seattle Seahawks was largely expected. How they lost was new, though the fact that the Lions lost in a creative way, was also to be expected. As actor Jeff Daniels said, being a Lions fan is more painful than being a Cubs fan.
In recent years, there is ample evidence that random and uncommon rules have shown up to hurt my already mediocre team. This got me to thinking, though, of the old adage, bad facts make bad law. For the Lions, I think that's not necessarily apt. It may be that bad football makes for better football later.
To understand how one might get there, one needs to know a little what it's like to be a Lions fan, so here's a little insight into how life as a Lions fan works:
I watched the start of the game last night with my ten-year-old son. Part of the pre-game programming is all of the announcers and studio people make their pick for the game. The ten or so predictions were unanimously for the Seahawks. I turned to my son and said, "Well, the Lions will probably make a game of it then." He asked why. I replied, "Because the Lions have a better chance to win when absolutely no one objective expects them to. I don't know why. It's just true."
He went to bed shortly after kickoff. Lest anyone think I am cruel, I am not trying too hard to make him a Lions fan. I have tried to raise him and his little sister also as Saints fans. I am not going to bandwagon an make them Pats fans or anything, but New Orleans was home for three years, so I can reasonably adopt the Saints. I have been questioned on that choice as an alternative, and this year doesn't look too hot, but in my defense, my kids' team has a Super Bowl win in their lifetimes. More than I can say for me.
As the game went on, there was lost of social media complaining between me and my fellow Lions fans. Most of it along the lines of: "Did they forgot how to throw downfield?" "This is awful." "Where's Barry Sanders?" Then I posted something witty like, "Matt Stafford just checked down to me on my couch."
Despite an awful game, the Lions had a chance. With time running out, the team seemed to learned they could throw the ball down the field more than three yards.
The Lions were losing 13-10 with 1:51 left in the game when Stafford passed to Calvin Johnson, who dove for a touchdown. Just before the goal line, Seahawks safety Kam Chancellor punched the ball out of his hands, and the ball tumbled into the end zone. Another Seahawks play clearly hit the ball out of the back of the end zone. The play was call a touchback, giving Seattle the football at their own 20 yard line. The problem is that NFL rules make batting the ball illegal, and the ball should have been awarded to the Lions at the 1 yard line.
No call, and the Lions go on to lose. And yes, there were lots of other chances the Lions had to win, and you can't hope a refs call won't go against you. But it still stunk. Again, a social media glimpse into the life of a Lions fan.
Friend 1: Could an ending be more Lions than that?
Me: If you're going to screw it up, do it with panache. And no.
Friend 2: did you see the latest on ESPN.. apparently, it looks like it shouldn't have been a touchback, but 1 and goal at the 6 inch line
Me: That would be as about as Lions as it gets.
That's a long-winded bit of rambling, but it's cheaper than therapy.
All teams run into odd rules, but mediocre teams have more ways of finding challenges. The Lions find challenges like no one else. They have a history of struggling with (i.e., losing, in part, because of) arcane rules, as this article explains: Illegal bat continues Lions' proud tradition of getting hosed by the NFL rulebook. The Illegal Bat now joins the Calvin Johnson Rule and the Jim Schwartz rule.
This mediocrity can have value, though. Finding all these weird challenges can help make the game better by helping highlight risks for future games that matter. Better officiating and better rules will not make the Lions a better football team, but the challenges they seem to goof into might make for more aware officials and better rules for playoff games, which usually feature better teams.
Of course, the Lions finally made the playoffs last year, only to lose, in part, because of an oddly changed call. Nonetheless, if the Lions can't be good, at least some good is coming from their games. Right?
You don't need to answer that.
Friday, October 2, 2015
Today I will present on a panel with colleagues that spent a week with me this summer in Guatemala meeting with indigenous peoples, village elders, NGOs, union leaders, the local arm of the Chamber of Commerce, a major law firm, government officials, human rights defenders, and those who had been victimized by mining companies. My talk concerns the role of corporate social responsibility in Guatemala, but I will also discuss the complex symbiotic relationship between state and non-state actors in weak states that are rich in resources but poor in governance. I plan to use two companies as case studies.
The first corporate citizen, REPSA (part of the Olmeca firm), is a Guatemalan company that produces African palm oil. This oil is used in health and beauty products, ice cream, and biofuels, and because it causes massive deforestation and displacement of indigenous peoples it is also itself the subject of labeling legislation in the EU. REPSA is a signatory of the UN Global Compact, the world's largest CSR initiative. Despite its CSR credentials, some have linked REPSA with the assassination last month of a professor and activist who had publicly protested against the company's alleged pollution of rivers with pesticides. The "ecocide," that spread for hundreds of kilometers, caused 23 species of fish and 21 species of animals to die suddenly and made the water unsafe to drink. REPSA has denied all wrongdoing and has pledged full cooperation with authorities in the murder investigation. The murder occurred outside of a local court the day after the court ordered the closing of a REPSA factory. On the same day of the murder other human rights defenders were also allegedly kidnaped by REPSA operatives although they were later released. Guatemala's government is reportedly one of the most corrupt in the world-- the President resigned a few weeks ago and went to jail amidst a corruption scandal-- and thus it is no surprise that the government has allegedly done little to investigate either the ecocide or the murder.
The other case study concerns Tahoe, a Canadian mining company with a US subsidiary that used private security forces who shot seven protestors. Tahoe is facing trial in a Canadian court, a case that is being watched worldwide by the NGO community. Interestingly, the company's corporate social responsibility and the board's implementation are indirectly at issue in the case. Tahoe feels so strongly about CSR that it has a CSR blog and quarterly report online touting its implementation of international CSR standards, including its compliance with the UN Guiding Principles on Business and Human Rights, the Voluntary Principles on Security and Human Rights, the Equator Principles (related to risk management for project finance in social risk projects), the IFC Performance Standards and a host of other initiatives related to grievance mechanisms for those seeking an access to remedy for human rights abuses. Tahoe is in fact a member of the CSR Committee of the International Bar Association. Nonetheless, despite these laudable achievements, none of the families that my colleagues and I met with in the mining town mentioned any of this nor talked about the "Cup of Coffee With the Mine" program promoted in the CSR report. Of course, it's possible that Tahoe has made significant reforms since the 2013 shootings and if so, then it should be applauded, but the families we met in June did not appear to give the company much credit. Instead they talked about the birth defects that their children have and the fact that they and their crops often go for days without water. They may not know the statistic, but some of the mining processes use the same amount of water in one hour that a family of four would use in 20 years.
Of note, the Guatemalan government only requires a 1% royalty for the minerals mined in the country rather than the 30% that other countries require, although legislation is pending to change this. Guatemala also provides its police and military as guards for the mines to protect the Canadian company from its own citizens. Guatemala probably helps shore up security because even though 98% of the local citizens voted against the mine, the mine commenced operations anyway despite both international and Guatemalan human rights law that requires free, prior, and informed consent (see here).
Given this turmoil, perhaps it was actually the more risky climate of mining in Guatemala that caused Goldcorp to sell a 26% stake in Tahoe earlier this year rather than the stated goal of focusing on core assets. Norway's pension fund had already divested in January due to Tahoe's human rights record in Guatemala. Maybe these investors hadn't read the impressive Tahoe CSR report. With the background provided above, my abstract for my book chapter and today's talk is below. I welcome your thoughts in the comment section or by email at firstname.lastname@example.org.
North Americans and Europeans have come to expect even small and medium sized enterprises to engage in some sort of corporate social responsibility (“CSR”). Large companies regularly market their CSR programs in advertising and recruitment efforts, and indeed over twenty countries require companies to publicly report on their environmental, social and governance (“ESG”) efforts. Definitions differ, but some examples may be instructive for this Chapter. For example, the Danish government, which mandates ESG reporting, defines CSR as “considerations for human rights, societal, environmental and climate conditions as well as combatting corruption in … business strategy and corporate activities.” The United States government, which focuses on responsible business conduct, has explained, “CSR entails conduct consistent with applicable laws and internationally recognised standards. Based on the idea that you can do well while doing no harm, RBC is a broad concept that focuses on two aspects of the business-society relationship: 1) the positive contribution businesses can make to economic, environmental, and social progress with a view to achieving sustainable development, and 2) avoiding adverse impacts and addressing them when they do occur.”
Business must not only have a legal license to operate in a country, they must also have a social license. In other words, the community members, employees, government officials, and those affected by the corporate activities—the stakeholders—must believe that the business is legitimate. It is no longer enough to merely be legally allowed to conduct business. Corporate social responsibility activities can thus often add a veneer of “legitimacy.”
With this in mind, what role does business play in society in general and in a country as complex as Guatemala in particular? Guatemalan citizens, including over two dozen different indigenous groups, have gone from fighting a bloody 36-year civil war to fighting corrupt leadership that often appears to put the interests of local and multinational businesses above that of the people. For example, although the Canadian Trade Commission has an office with resources related to CSR in Guatemala, some of the most egregious allegations of human rights abuses relate to mining companies from that country. Similarly, many of the multinationals that proudly publish CSR reports and even use the buzzwords “social license” in slick videos on their websites are the same corporations accused in lawsuits by human rights and environmental defenders. How do these multinationals reconcile these acts? How and when will consumers and socially-responsible investors hold corporations accountable for these acts? Is the Guatemalan government abdicating its responsibility to its own people or is the government in fact complicit with the multinationals? And finally, do foreign governments bear any responsibility for the acts of multinationals acting abroad? This chapter will explore this continuum from corporate social responsibility to corporate accountability using the case study of Guatemala in general and the extractive and palm oil industries in particular.
October 2, 2015 in Commercial Law, Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, International Business, International Law, Litigation, Marcia Narine | Permalink | Comments (0)
Friday, September 18, 2015
For many businesses a good online reputation can significantly increase revenue.
Kashmir Hill, who I know from my time in NYC, has done some interesting reporting on businesses buying a good online reputation.
Earlier this week Kashmir posted the results of her undercover investigation into the problem of fake reviews, followers, and friends. When asking questions as a journalist, those selling online reviews insisted they only did real reviews on products they actually tested.
Kashmir then created a make-believe mobile karaoke business, Freakin’ Awesome Karaoke Express (a/k/a F.A.K.E), and found how easy it was to artificially inflate one's online reputation. She writes:
For $5, I could get 200 Facebook fans, or 6,000 Twitter followers, or I could get @SMExpertsBiz to tweet about the truck to the account’s 26,000 Twitter fans. A Lincoln could get me a Facebook review, a Google review, an Amazon review, or, less easily, a Yelp review.
All of this for a fake business that the reviewers had, obviously, never frequented. Some of the purchased fake reviews were surprisingly specific. In a time when many of us rely on online reviews, at least in part, this was a sobering story. It was somewhat encouraging, however, to see Yelp's recent efforts to combat fake reviews, albeit after a 2015 article by professors from Harvard Business School and Boston University showed roughly 16% of the Yelp reviews to be suspicious or fake.
Go read Kashmir's entire article, it will make you even more skeptical of reviews you read online and small businesses with tens of thousands of friends/followers.
Tuesday, September 15, 2015
The New York Times reports that Facebook may add a "dislike" button. I am with the many people (probably now all or mostly over 35) who use Facebook and have thought a dislike button would be a nice option.
"Just had a car accident." "Lovely dog just passed." "Kids barfing wildly." Dislike.
But I assume Facebook has skipped this for a reason. That is, it could be used in a terrible manner.
"Proud to announce we're engaged." "Welcome to our new baby boy." "This is my new painting." Dislike.
I understand the desire for symmetry, but dislike is probably not the button for a good experience with Facebook. Maybe an "I'm sorry" or "That's too bad" button, would work better. I don't know, but when I put this blog post on Facebook, a little part of me will be happy there's no dislike button.
Not that the lack of such a button ever stopped a snarky comment or six.
Thursday, September 10, 2015
Are Crooked Executives Finally Going to Jail? DOJ’s New White Collar Criminal Guidelines and the Questions for Compliance Officers and In House Counsel
I think my life as a compliance officer would have been much easier had the DOJ issued its latest memo when I was still in house. As the New York Times reported yesterday, Attorney General Loretta Lynch has heard the criticism and knows that her agency may face increased scrutiny from the courts. Thus the DOJ has announced via the “Yates Memorandum” that it’s time for some executives to go to jail. Companies will no longer get favorable deferred or nonprosecution agreements unless they cooperate at the beginning of the investigation and provide information about culpable individuals.
This morning I provided a 7-minute interview to a reporter from my favorite morning show NPR’s Marketplace. My 11 seconds is here. Although it didn’t make it on air, I also discussed (and/or thought about) the fact that compliance officers spend a great deal of time training employees, developing policies, updating board members on their Caremark duties, scanning the front page of the Wall Street Journal to see what company had agreed to sign a deferred prosecution agreement, and generally hoping that they could find something horrific enough to deter their employees from going rogue so that they wouldn’t be on the front page of the Journal. Now that the Yates memo is out, compliance officers have a lot more ammunition.
On the other hand, the Yates memo raises a lot of questions. What does this mean in practice for compliance officers and in house counsel? How will this development change in-house investigations? Will corporate employees ask for their own counsel during investigations or plead the 5th since they now run a real risk of being criminally and civilly prosecuted by DOJ? Will companies have to pay for separate counsel for certain employees and must that payment be disclosed to DOJ? What impact will this memo have on attorney-client privilege? How will the relationship between compliance officers and their in-house clients change? Compliance officers are already entitled to whistleblower awards from the SEC provided they meet certain criteria. Will the Yates memo further complicate that relationship between the compliance officer and the company if the compliance personnel believe that the company is trying to shield a high profile executive during an investigation?
I for one think this is a good development, and I’m in good company. Some of the judges who have been most critical of deferred prosecution agreements have lauded today’s decision. But, actions speak louder than words, so a year from now, let’s see how many executives have gone on trial.
September 10, 2015 in Compliance, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Ethics, Financial Markets, Lawyering, Marcia Narine, Securities Regulation, White Collar Crime | Permalink | Comments (1)
Thursday, September 3, 2015
Has Wal-Mart reformed? Last week I blogged about whether conscious consumers or class actions can really change corporate behavior, especially in the areas of corporate social responsibility or human rights. I ended that post by asking whether Wal-Mart, the nation’s largest gun dealer, had bowed down to pressure from activist groups when it announced that it would stop selling assault rifles despite the fact that gun sales are rising (not falling as Wal-Mart claims). Fellow blogger Ann Lipton did a great post about the company’s victory over shareholder Trinity over a proposal related to the sale of dangerous products (guns with high capacity magazines). There doesn’t appear to be anything in the 2015 proxy that would necessitate even the consideration of a change that Wal-Mart fought through the Third Circuit to avoid.
So why the change? Is it due to the growing public weariness over mass shootings? Did they feel the sting after Senator Chris Murphy praised them for ceasing the sale of Confederate flags but called them out on their gun sales? Even the demands of a Senator won’t overcome the apparent lack of political will to enact more strict gun control, so fear of legislation is not a likely factor either. Selling guns doesn't even conflict with the very specific initiatives in their comprehensive GRI-referenced global responsibility report.
Maybe the CEO just wants to do what he believes is the right thing. After all, he announced to great fanfare in February that the retailer would be raising minimum wages for associates. But just this week the chain announced that it would be cutting back on worker hours in many stores. Was the pay raise a “cruel PR stunt” as some have complained or it good business sense for a company that has failed to live up to investor expectations and needs to retain good talent and reduce turnover?
A few weeks ago when I did a crash course in US corporate law and governance in Panama, I had a lengthy debate with the head of CSR for a Latin American company. I (cynically) told her that in my ideal(ist) world, companies should adopt a stakeholder view and look beyond profit maximization. However, I believed that most large companies in fact implemented CSR programs to enhance reputation, avoid onerous legislation, and mitigate enterprise risks. The company that builds the school or the drinking well in a remote area of a third-world country does good for the community but it also has workers who can send their children to school, educates the next generation of employees, and makes sure that the community has potable water so that workers don't get sick. Its CSR builds good will in the community that can be worth more than gold. The smart company makes sure that it has a social license to operate as well as legal license.
So back to Wal-Mart. Does the retailer need a social license to boost sagging sales or does it just need different merchandise? In other words is the retailer trying to get more customers by stopping the sale of assault rifles? Was that announcement timed to blunt the effect of the announcement about cutting back hours? Or is Doug McMillon simply doing what he believes makes sense for the shareholders and the stakeholders? The cynic in me says that there’s a business reason other than low sales for the change in position on guns and that there was always a business reason for the rise in wages.
September 3, 2015 in Ann Lipton, Commercial Law, Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, Legislation, Marcia Narine, Shareholders | Permalink | Comments (1)
Friday, August 28, 2015
I’m the socially-conscious consumer that regulators and NGOs think about when they write disclosure legislation like the Dodd-Frank conflict minerals law that I discussed last week. I drive a hybrid, spend too much money at Whole Foods for sustainable, locally-farmed, ethically-sourced goods, make my own soda at home so I minimize impacts to the environment with cans and plastic bottles, and love to use the canvas bags I get at conferences when I shop at the grocery store. As I (tongue in cheek) pat myself on the back for all the good I hope to do in the world, I realize that I may be a huge hypocrite. I know from my research that consumers generally tell survey takers that they want ethically sourced goods, but they in fact buy on quality, price, and convenience.
I thought about that research when I read the New York Times expose and CEO Jeff Bezos’ response about Amazon’s work environment. As a former defense-side employment lawyer and BigLaw associate for many years, I wasn’t in any way surprised by the allegations (and I have no reason to believe they are either true or false). I have both provided legal defenses and lived the life alleged by some former and current Amazonians. But now that I research and teach on corporate social responsibility and strive to be more socially conscious myself, can I in fact shop at Amazon? I considered this because I ordered almost a dozen packages to be delivered to me over the past weeks. I was literally about to click “order now” for another delivery when I was reading the article. And then I clicked anyway.
I confess that I may be the consumer discussed in an article I cite in my research entitled “Sweatshop Labor is Wrong Unless the Shoes are Cute: Cognition Can Both Help and Hurt Moral Motivated Reasoning.” As the authors point out, “Our findings show that consumers will actually change what they believe if they strongly desire a product … As long as companies continue to create value and maintain loyalty, it is likely store shelves won’t see ‘sweatshop-free’ products.”
I’ve argued that for that reason, consumers generally don’t have as much impact as people think. While hashtag activism in an era of slacktivism may raise awareness in social movements, I’m not sure that it does much to change company behavior, with the notable exception of SeaWorld, which has seen a drop in attendance after a CNN story about treatment of killer whales and subsequent calls for boycott.
Maybe I’m wrong. I look forward to seeing what, if anything, Costco shoppers do when/if they learn about the putative class action lawsuit filed this week in California claiming that Costco knowingly sold shrimp farmed by Thai slaves and misled consumers. According to the complaint (which has graphic pictures), “this case arises from the devaluing of human life. Plaintiff and other California consumers care about the origin of the products they purchase and the conditions under which the products are farmed, harvested or manufactured. Slavery, forced labor and human trafficking are all practices which are considered to be abhorrent, morally indefensible and acts against the interests of all humanity.” The complaint also cites Costco’s supplier code of conduct and notes that its practices are inconsistent with its statement of compliance with the California Transparency in Supply Chain Act, another name and shame disclosure law meant to root out slavery and human trafficking. This is the first US lawsuit related to these kinds of disclosures, but may not be the last.
Costco was supposed to be one of the good guys with its fair wages and benefits compared to its competitors and its “reasonable” CEO salary. This favorable PR has likely cloaked Costco with the CSR halo effect, where consumers believe that when a company does something good for workers, for example, the company also cares about the environment, even though there may be no relationship between the two. This may cause them to spend more money with the company, and some believe, may cause regulators to look more favorably upon a firm.
Will socially conscious consumers stop buying at Costco? Will they stand their ground and rush over to Whole Foods? Although I don’t have a Costco card, I admit I have considered it because I liked the labor practices and for years have refused to shop in another big box retailer because of its treatment of workers. I’m also interested to see what investors think of Costco. What will the shareholders resolutions look like next year? In 2015, the only shareholder proposal in the proxy concerned “reducing director entrenchment.” How will this lawsuit affect the stock price, if at all?
Next week I will explore the Wal-Mart decision to stop selling assault rifles. Did Trinity and other socially-responsible investors get their way after all?? Wal-Mart’s CEO says no, but I’m not so sure.