Friday, August 19, 2016
The concept of private prisons has always seemed off to me. Prisons have a role in society, but the idea of running such institutions for profit, it seems to me, aligns incentives in an improper way. The U.S. Justice Department apparently agrees and said yesterday that it plans to end the use of private prisons. The announcement sent stocks tumbling for two private prison companies, Corrections Corp. of America (CCA) and GEO. Both dropped as much as 40% and remain down more than 30% from where they were before the announcement.
Obviously, this can't make shareholders happy, but I figured this had to be a known risk. I was right -- CCA's 10-K makes clear that such government decisions related to future contracts could lead to a reduction in their profitability. So, the disclosure seems proper from a securities regulation perspective. Still, reading the disclosure raises some serious questions for me about the proper role of government. I frankly find this kind of outsourcing chilling. For example, CCA states:
Our results of operations are dependent on revenues generated by our jails, prisons, and detention facilities, which are subject to the following risks associated with the corrections and detention industry.
We are subject to fluctuations in occupancy levels, and a decrease in occupancy levels could cause a decrease in revenues and profitability. . . . We are dependent upon the governmental agencies with which we have contracts to provide inmates for our managed facilities.
. . . .
We are dependent on government appropriations and our results of operations may be negatively affected by governmental budgetary challenges. . . . [and] our customers could reduce inmate population levels in facilities we own or manage to contain their correctional costs. . . .
The idea of "customers" in this contest simply does not sit well with me. It suggests a desire for something that is not a positive. CCA's 10-K continues:
Competition for inmates may adversely affect the profitability of our business. We compete with government entities and other private operators on the basis of bed availability, cost, quality, and range of services offered, experience in managing facilities and reputation of management and personnel. While there are barriers to entering the market for the ownership and management of correctional and detention facilities, these barriers may not be sufficient to limit additional competition. In addition, our government customers may assume the management of a facility that they own and we currently manage for them upon the termination of the corresponding management contract or, if such customers have capacity at their facilities, may take inmates currently housed in our facilities and transfer them to government-run facilities. . . .
Competition is a good thing in many (I think most), but this is not one of them. These companies are responding to the existing demand for prison services, but there can be no question the real opportunity for market growth is to increase demand for such services (e.g., increase the number of prisoners, seek longer sentences). This, too, is made clear in the disclosures:
Our growth is generally dependent upon our ability to obtain new contracts to develop and manage new correctional and detention facilities. This possible growth depends on a number of factors we cannot control, including crime rates and sentencing patterns in various jurisdictions, governmental budgetary constraints, and governmental and public acceptance of privatization. The demand for our facilities and services could be adversely affected by the relaxation of enforcement efforts, leniency in conviction or parole standards and sentencing practices or through the decriminalization of certain activities that are currently proscribed by criminal laws. For instance, any changes with respect to drugs and controlled substances or illegal immigration could affect the number of persons arrested, convicted, and sentenced, thereby potentially reducing demand for correctional facilities to house them. Immigration reform laws are currently a focus for legislators and politicians at the federal, state, and local level. Legislation has also been proposed in numerous jurisdictions that could lower minimum sentences for some non-violent crimes and make more inmates eligible for early release based on good behavior. Also, sentencing alternatives under consideration could put some offenders on probation with electronic monitoring who would otherwise be incarcerated. Similarly, reductions in crime rates or resources dedicated to prevent and enforce crime could lead to reductions in arrests, convictions and sentences requiring incarceration at correctional facilities.
CCA does note that their "policy prohibits [them] from engaging in lobbying or advocacy efforts that would influence enforcement efforts, parole standards, criminal laws, and sentencing policies." These disclosures, though, sure make clear what kind of policies their shareholders would want to support.
I don't have any illusion that government run prisons are much (if any) better, but I do think that government's incentives are at least supposed to be aligned with the public good when it comes to the prison system. I often think government should take a more limited role than it does when it comes to regulations. That is especially true when it comes to criminal law. But privatizing prisons is not reducing the role of government in our lives -- it is simply outsourcing one key portion of the government's role. Private prisons do not equate to smaller government. Fewer laws, or relaxed enforcement and punishment, do. If the government is paying for it, it's still a government program.
Here's hoping that the reduction in use of private prisons leads to a reduction in the use of all prisons. Let's save those for truly the dangerous folks.
Thursday, August 18, 2016
There has been a lot of debate online about Ryan Lochte (#LochteGate or #LochMess) and whether he and his swimming friends were actually robbed in Rio after their Olympic events had finished. See here, here, and here for some of the commentary.
While I agree that jail time is unlikely based on the facts available at this time, Lochte's endorsements could be at risk. Earlier this year, I blogged about morals clauses in endorsement contracts. If Lochte's contracts include morals clauses (as many do), and if he lied about the robbery, it is possible that he may lose some lucrative endorsements deals. It is still not clear what the motive for lying was (if they did lie). I assume we will learn more in the next few days.
Update: Speedo and Ralph Lauren dropped (or are not renewing) sponsorship of Ryan Lochte. Spokespeople for both companies cited Lochte's statements about the occurrence in Rio. My wife let me know that some are now calling Lochte "Swim Shaddy."
Friday, August 12, 2016
In the spring of 2012, around the time that Facebook purchased Instagram for roughly $1 billion, I was teaching an M&A class.
At the time, I had difficulty explaining why Facebook would pay that amount of money for a company that was not only not profitable, but also had no revenue. I spoke as someone trained to use multiples EBITDA and as someone who did not (and still does not) have an Instagram account.
Now, over four years later, Forbes estimates Instagram's value at $25billion to $50billion. That valuation still requires some creativity, as Instagram had sales of "only" $630 million in 2015. Instagram, however, has added roughly 100 million new users in the last 9 months and is projected to have revenue of $1.5billion this year. While there is reason to be wary of projections, the projected sales for Instagram in 2018 is an impressive $5billion.
This drives home that valuation is as much art as science, and the conventional valuation methods will not work well for every company. In that deal, I imagine Instagram's technology, brand, and the user base were all large value drivers. With the benefit of hindsight, Instagram is looking like a good acquisition for Facebook, even if the current projections end up being a bit optimistic.
Tuesday, August 9, 2016
I am not the first to notice that law professors, and academics generally, have their own jargon and favorite buzzwords. Some websites do a nice job of highlighting (or mocking) many of the odds turns of phrase many of us use. Lawyers in the practicing bar do this, too, of course, and other professionals, especially business people (see, e.g., Dilbert) and public relations professionals.
I try not to be too jargon-y, but I have caught myself more than a few times. I am big on “incentivize,” for example. After attending a great SEALS Conference (likely more on that to come), I came away with a bunch of new ideas, a few new friends, and some hope for future collaboration. I also came away noticing that, sometimes, as a group, “we talk funny.” On that front, two words keep coming to my mind: “unpack” and “normative.”
So, when did we all “need” to start “unpacking” arguments?
This seemed like a relatively recent phenomenon to me, so I checked. A Westlaw search of “adv: unpack! /3 argument” reveals 140 uses in Secondary Sources. The first such reference appears in a 1982 law review article: Michael Moore, Moral Reality, 1982 Wis. L. Rev. 1061 (1982). The phrase doesn’t appear again until 1988, in this article: Jeffrey N. Gordon, Ties That Bond: Dual Class Common Stock and the Problem of Shareholder Choice, 76 Cal. L. Rev. 1 (1988). Of the 140 citations, 113 (or 80%) of those have appeared since January 1, 2000 (69, or nearly 50%, have appeared since 2010). Relatively modest numbers, frankly, compared to how often I think I heard it said, but maybe we're just getting ramped up.
And when did things become “normative?”
It also seemed to me that it’s relatively recent that the things we expect to happen (or people to do) became “normative” in legal academic circles. Before that, I think we called things the standard or the norm, but it was far less common that legal academics discussed “normative” behavior in the way we do now.
A Westlaw search bears this out, too. A search of all secondary sources on Westlaw before January 1, 2000, revealed that the term had been used in 2,668 pieces. Since that date, normative has shown up in 7,270. The term has obviously been around for a long time, and has value in many contexts, but saying “normative” is the new normal.
To be clear, I don’t think the use of all jargon is bad, and I appreciate that as law professors do more interdisciplinary work, we will expand our jargon into other fields. Sometimes specific words help us communicate more precisely in a way that increases usefulness and understanding. I like terms of art and specificity. (See, e.g., any of my rants about LLCs.) I’m just observing what seems like a shift in how we talk. That’s not necessarily a bad thing. Maybe it’s just a thing.
I welcome any comments on these terms, or even better, a list of other words or phrases I missed. I know there's a lot more out there.
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.
Wednesday, August 3, 2016
The Federal Reserve Board announced its enforcement actions against Goldman Sachs from 2012-2014 events where a Goldman Sachs banker, a former NY Fed employee, received confidential documents from a NY Fed employee. The individuals involved plead guilty to the resulting charges and Goldman Sachs paid fines in New York. The Federal Reserve Board took separate actions this week based upon evidence that the banker "repeatedly obtained, used and disseminated [confidential supervisory information or CSI] ... including CSI concerning financial institutions’ confidential CAMELS ratings, non-public enforcement actions, and confidential documents prepared by banking regulators." Even though Goldman Sachs terminated the banker involved and reported the matter to authorities, apparently the misconduct was sustained over a long-enough period of time and used to "solicit business" in a way that compelled Federal Reserve Board Action.
The Fed's release and copies of the orders are available here. The sanctions against Goldman Sachs include the monetary fine as well a requirement to 'Within 90 days of this Order, ...submit to the Board of Governors an acceptable written plan, and timeline for implementation, to enhance the effectiveness of the internal controls and compliance functions regarding the identification, monitoring, and control of confidential supervisory information."
Financial press coverage of the matter is available in a variety of outlets:
Thursday, July 21, 2016
Jamie Dimon (JP Morgan Chase), Warren Buffet (Berkshire Hathaway), Mary Barra (General Motors), Jeff Immet (GE), Larry Fink (Blackrock) and other executives think so and have published a set of "Commonsense Principles of Corporate Governance" for public companies. There are more specifics in the Principles, but the key points cribbed from the front page of the new website are as follows:
Truly independent corporate boards are vital to effective governance, so no board should be beholden to the CEO or management. Every board should meet regularly without the CEO present, and every board should have active and direct engagement with executives below the CEO level;
■ Diverse boards make better decisions, so every board should have members with complementary and diverse skills, backgrounds and experiences. It’s also important to balance wisdom and judgment that accompany experience and tenure with the need for fresh thinking and perspectives of new board members;
■ Every board needs a strong leader who is independent of management. The board’s independent directors usually are in the best position to evaluate whether the roles of chairman and CEO should be separate or combined; and if the board decides on a combined role, it is essential that the board have a strong lead independent director with clearly defined authorities and responsibilities;
■ Our financial markets have become too obsessed with quarterly earnings forecasts. Companies should not feel obligated to provide earnings guidance — and should do so only if they believe that providing such guidance is beneficial to shareholders;
■ A common accounting standard is critical for corporate transparency, so while companies may use non-Generally Accepted Accounting Principles (“GAAP”) to explain and clarify their results, they never should do so in such a way as to obscure GAAP-reported results; and in particular, since stock- or options-based compensation is plainly a cost of doing business, it always should be reflected in non-GAAP measurements of earnings; and
■ Effective governance requires constructive engagement between a company and its shareholders. So the company’s institutional investors making decisions on proxy issues important to long-term value creation should have access to the company, its management and, in some circumstances, the board; similarly, a company, its management and board should have access to institutional investors’ ultimate decision makers on those issues.
I expect that shareholder activists, proxy advisory firms, and corporate governance nerds like myself will scrutinize the specifics against what the signatories’ companies are actually doing. Nonetheless, I commend these business leaders for at least starting a dialogue (even if a lot of the recommendations are basic common sense) and will be following this closely.
Wednesday, July 13, 2016
Professor William Birdthistle at Chicago-Kent College of Law is publishing his new book, Empire of the Fund with Oxford University Press. A brief introductory video for the book (available here) demonstrates both Professor Birdthistle’s charming accent and talent for video productions (this is obviously not his first video rodeo). Professor Birdthistle has generously provided our readers with a window into the book’s thesis and highlights some of its lessons. I’ll run a second feature next week focusing on the process of writing a book—an aspiration/current project for many of us.
Empire of the Fund is segmented into four digestible parts: anatomy of a fund describing the history and function of mutual funds, diseases & disorders addressing fees, trading practices and disclosures, alternative remedies introducing readers to ETFs, target date funds and other savings vehicles, and cures where Birdthistle highlights his proposals. For the discussion of the Jones v. Harris case alone, I think I will assign this book to my corporate law seminar class for our “book club”. As other reviewers have noted, the book is funny and highly readable, especially as it sneaks in financial literacy. And now, from Professor Birdthistle:
Things that the audience might learn:
The SEC does practically zero enforcement on fees. [pp. 215-216] Even though every expert understands the importance of fees on mutual fund investing, the SEC has brought just one or only two cases in its entire history against advisors charging excessive fees. Section 36(b) gives the SEC and private plaintiffs a cause of action, but the SEC has basically ignored it; even prompting Justice Scalia to ask why during oral arguments in Jones v. Harris? Private plaintiffs, on the other hand, bring cases against the wrong defendants (big funds with deep pockets but relatively reasonable fees). So I urge the SEC to bring one of these cases to police the outer bounds of stratospheric fund fees.
The only justification for 12b-1 fees has been debunked. [pp. 81-83] Most investors don't know much about 12b-1 fees and are surprised by the notion that they should be paying to advertise funds in which they already invest to future possible investors. The industry's response is that spending 12b-1 fees will bring in more investors and thus lead to greater savings for all investors via economies of scale. The SEC's own financial economist, however, studied these claims and found (surprisingly unequivocally for a government official) that, yes, 12b-1 fees certainly are effective at bringing in new investment but, no, funds do not then pass along any savings to the funds' investors. I sketch this out in a dialogue on page 81 between a pair of imaginary nightclub denizens.
Target-date funds are more dangerous than most people realize. [pp. 172-174] Target-date funds are embraced by many as a panacea to our investing problem and have been extremely successful as such. But I point out some serious drawbacks with them. First, they are in large part an end-of-days solution in which we essentially give up on trying to educate investors and encourage them simply to set and forget their investments; that's a path to lowering financial literacy, not raising it (which may be a particularly acute issue if my second objection materializes). Second, TDFs rely entirely on the assumption that the bond market is the safety to which all investors should move as they age; but if we're heading for a historic bear market on bonds (as several intelligent and serious analysts have posited), we'll be in very large danger with a somnolent investing population
Thursday, July 7, 2016
SEC disclosures are meant to provide material information to investors. As I hope all of my business associations students know, “information is material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision.”
Regulation S-K, the central repository for non-financial disclosure statements, has been in force without substantial revision for over thirty years. The SEC is taking comments until July 21st on on the rule however, it is not revising “other disclosure requirements in Regulation S-K, such as executive compensation and governance, or the required disclosures for foreign private issuers, business development companies, or other categories of registrants.” Specifically, as stated in its 341-page Comment Release, the SEC seeks input on:
- whether, and if so, how specific disclosures are important or useful to making investment and voting decisions and whether more, less or different information might be needed;
- whether, and if so how, we could revise our current requirements to enhance the information provided to investors while considering whether the action will promote efficiency, competition, and capital formation;
- whether, and if so how, we could revise our requirements to enhance the protection of investors;
- whether our current requirements appropriately balance the costs of disclosure with the benefits;
- whether, and if so how, we could lower the cost to registrants of providing information to investors, including considerations such as advancements in technology and communications;
- whether and if so, how we could increase the benefits to investors and facilitate investor access to disclosure by modernizing the methods used to present, aggregate and disseminate disclosure; and
- any challenges of our current disclosure requirements and those that may result from possible regulatory responses explored in this release or suggested by commenters.
As of this evening, thirty comments had been submitted including from Wachtell Lipton, which cautions against “overdisclosure” and urges more flexible means of communicating with investors; the Sustainability Accounting Standards Board, which observes that 40% of 10-K disclosures on sustainability use boilerplate language and recommends a market standard for industry-specific disclosures (which SASB is developing); and the Pension Consulting Alliance, which agrees with SASB’s methodology and states that:
[our] clients increasingly request more ESG information related to their investments. Key PCA advisory services that are affected by ESG issues include:
- Investment beliefs and investment policy development
- Manager selection and monitoring
- Portfolio-wide exposure to material ESG risks
- Education and analysis on macro and micro issues
- Proxy voting and engagement
This is an interesting time for people like me who study disclosures. Last week the SEC released its revised rule on Dodd-Frank §1504 that had to be re-written after court challenges. That rule requires an issuer “to disclose payments made to the U.S. federal government or a foreign government if the issuer engages in the commercial development of oil, natural gas, or minerals and is required to file annual reports with the Commission under the Securities Exchange Act.” Representative Bill Huizenga, the Chairman of the House Financial Services Subcommittee on Monetary Policy and Trade, introduced an amendment to the FY2017 Financial Services and General Government (FSGG) Appropriations bill, H.R. 5485, to prohibit funding for enforcement for another governance disclosure--Dodd-Frank conflict minerals.
SEC Chair White has herself questioned the wisdom of the SEC requiring and monitoring certain disclosures, noting the potential for investor information overload. Nonetheless, she and the agency are committed to enforcement. Her fresh look at disclosures reflects a balanced approach. If you have some spare time this summer and think the SEC’s disclosure system needs improvement, now is the time to let the agency know.
Sunday, July 3, 2016
The University of Akron Law Review recently published its Symposium on Law and SocioEconomics. You can find a full list of the contributions here (Volume 49, Issue 2). As one of the organizers of the symposium, I had the honor of writing a conclusion to the issue, titled Socio-Economics: Challenging Mainstream Economic Models and Policies. I provide the abstract below, and you can read the entire piece here.
At a time when many people are questioning the ability of our current system to provide economic justice, the Socio-Economic perspective is particularly relevant to finding new solutions and ways forward. In this relatively short conclusion to the Akron Law Review’s publication, Law and Socio-Economics: A Symposium, I have separated the Symposium articles into three groups for review: (1) those that can be read as challenging mainstream economic models, (2) those that can be read as challenging mainstream policy conclusions, and (3) those that provide a good example of both. My reviews essentially take the form of providing a short excerpt from the relevant article that will give the reader a sense of what the piece is about and hopefully encourage those who have not yet done so to read the entire article.
Friday, July 1, 2016
Today a number of athletes will compete in various track & field events in the Olympic Trials.
One of those events is the qualifying round of the 800m, and one of the 800m runners, Boris Berian, was recently caught in a legal dispute with his old shoe sponsor (Nike) because of his attempt to sign with a new shoe sponsor (New Balance). The story of the dispute even made The Wall Street Journal.
As I understand the timeline from the reporting and legal filings:
- After the 2012 season, Boris dropped out of his division II college (Adams State) to pursue pro-running.
- For a couple of years, Boris struggled to find world class success, and he worked at McDonald's.
- Boris didn't have a real breakthrough until mid-2015, when he ran the fastest time for an American that year.
- On June 17, 2015, shortly after his breakthrough race, Boris signed a short-term exclusive sponsorship deal with Nike (chosen from among many suitors).
- On December 31, 2015, the Nike-Boris contract expired, though the contract gave Nike the right to match any competitor's bona fide offer within 180 days of 12/31/15.
- On January 20, 2016, Boris' agent notified Nike than New Balance had made Boris a 3 year, $375,000 offer ($125,000 per year guaranteed).
- Nike's response to New Balance offer is disputed and at the center of a breach of contract lawsuit that Nike filed on April 29.
- Nike supposedly served Boris with notice of the lawsuit at a track meet.
- In short, Boris claimed that New Balance's $375,000 offer was guaranteed, while Nike's "match" was full of potential reductions. Nike claims that the contract they sent was simply a standard form. Nike claimed that guaranteed money is unusual in track contracts and Boris' agent had not shown proof of the lack of reductions in New Balance's offer, and that if the lack of reductions was proven, Nike would have matched those terms within the deadline.
- On June 7, a judge granted Nike's TRO, restraining Boris from competing in non-Nike gear until June 21.
- On June 22, a judge declined to extend the TRO and stated that he would rule on June 29.
- On June 23, Nike dropped its lawsuit (without prejudice), claiming that they wanted to "eliminate this distraction for Boris" given the upcoming Olympic Trials.
- On June 30, Boris Berian signed with New Balance.
In the fall of 2014, Robert Bird (UConn) and David Orozco (Florida State) published a nice short article in the MIT Sloan Management Review entitled Finding the Right Corporate Legal Strategy. This has been a key article in the growing Law & Strategy area. The article notes five main legal strategies; "The five, in order of least to greatest strategic impact, are: (1) avoidance, (2) compliance, (3) prevention, (4) value and (5) transformation."
This Nike v. Boris Berian situation, in my opinion, is an interesting example of the use of corporate legal strategy. In particular, Nike appears to be using litigation as a move for firm-wide value (#4 on the Bird & Orozco list).
Why did Nike sue? In my opinion, Nike likely sued not just because they believed Boris breached the contract, but also to send a message to its other athletes that Nike "plays hardball." This message may have been especially important given Kara Goucher's doping allegation against the Nike Oregon Project and its coach; a number of prized Nike athletes may have been watching Boris' situation and may have defected (right before the Olympics!) if Boris was treated with a light touch. Also, especially given that Boris claimed that he would rather sit out that run for Nike, perhaps Nike was simply trying to distract what could soon be a potential star for its competitor New Balance. While Nike has a number of track athletes with the star power of Boris, New Balance has a shallow bench of star track athletes and a good bit would ride on Boris' performance for NB. If Boris medals, especially with his McDonald's to track star story, that could be a huge deal for New Balance. Nike, on the other hand, has a absurd number of track stars with good stories and a high likelihood of medaling.
Why did Nike drop its lawsuit? I think the press was getting worse for Nike than Nike originally imagined. Also, perhaps the case was not resolving as quickly as Nike had guessed, and if Nike pursued the lawsuit into the Olympic Trials, the negative coverage may have exploded. That said, Nike must have known the coverage was going to be negative, so I imagine that factored into their original calculation, to some degree. Their lawyers might have gotten the impression that the judge was not going to rule in their favor when he decided against extending the TRO, so maybe Nike decided to try to win back some fans by dropping the lawsuit voluntarily. I agree with this author, eliminating the distraction for Boris was likely not Nike's main motivation, if so, they would have not sued him during the Olympic Trials build-up. As any runner knows, the months before a meet are much more important than the week before (at least as a physical matter). More likely, and perhaps unanticipated at the filing of the lawsuit, 19-year old Donavan Brazier of Texas A&M announced that he was turning pro just a few days before Nike dropped its lawsuit. Brazier, who had recently won the NCAA championships in the 800m in record time, was probably even a bigger signing target for Nike than Boris. By dropping the lawsuit, Nike may have been able to come off as altruistic to Brazier (saying something like - we had legal grounds to pursue the Boris lawsuit, but we want to do what is best for our current and former athletes). A few days after Nike dropped the lawsuit, Brazier signed with Nike. In addition, around the same time, Nike also signed another 800m star, Clayton Murphy. Both Braizer and Murphy were underclassmen and it was uncertain, until recently, whether they would turn pro. Not only did dropping the lawsuit against Boris likely help Nike in pursuing these two young athletes, but the recent strength of these athletes in the 800m made it possible that Boris would not even make the team, much less medal in Rio.
Personally, I think Boris is going to race well today (we will know in a few hours) and over the next few days, but maybe the stress of the legal battle took a toll. Brazier and Murphy and the entire field will both be tough, but the field will be a bit more open given that two-time Olympian Nick Symmonds scratched from the 800m Olympic Trials field with an injured ankle. Boris has the best qualifying time (1:43:34 v. 1:43:55), but Brazier has the best time this season (1:43:55 v. 1:44.20). Should be exciting to watch and now you know the legal background.
Finally, perhaps of interest to some readers, Boris Berian was using crowdfunding to pay for his legal defense. Boris even got this shout-out from Malcolm Gladwell on Twitter: "Nike earned 30 billion in 2015. Berian was flipping burgers at McDonalds two years ago. Isn't one bully in American public life enough?"
Update #1: In one of the biggest surprises of the Trials, Donavan Brazier was knocked out in the first round of the 800m, running roughly 5 big seconds slower than he did in the NCAA Championships. Boris Berian won his heat. Nike was diversified with Clayton Murphy who won his heat, and Nike also had four others who qualified for the next round in the 800.
Update #2: Boris Berian led his 800m semi-final from start to finish. Looked strong. Clayton Murphy won the second semi-final race, in a bit slower race, but he also looked strong. Finals are Monday.
Update #3: In the finals, Boris Berian grabbed the lead around 400m and held on until the final 10m or so. He placed second to Clayton Murphy (Nike) who out-kicked him. Charles Jock (Nike OTC) finished third. Those top three finishers will represent the US in Rio in the 800m.
Update #4: After getting 4th in one of his heats and needing to qualify on time rather than automatically, Clayton Murphy won the U.S.A.'s first medal in the 800m in 24 years. Murphy grabbed third place over the last 50m, and Boris Berian faded to 8th after going out fast. Berian looked strong in his heats, qualifying automatically for the final, but perhaps he did not have the necessary endurance. Clayton Murphy's specialty was the 1500m prior to the Olympics, so he likely had a stronger base. Looks like Nike hedged well and got quite the payoff from signing Murphy. All of that said, Dave Wottle (former Dean of Admissions at my alma mater, Rhodes College) still ran the most exciting 800m race ever. Watch Dave Wottle come from last place to win gold in the 1972 Olympics.
This post concerns the rights and responsibilities of whistleblowers. I sit on the Department of Labor Whistleblower Protection Advisory Committee. These views are solely my own.
Within a week of my last day as a Deputy General Counsel and Chief Compliance Officer for a Fortune 500 company and shortly before starting my VAP in academia, I testified before the House Financial Services Committee on the potential unintended consequences of the proposed Dodd-Frank whistleblower law on compliance programs. I blogged here about my testimony and the rule, which allows whistleblowers who provide original information to the SEC related to securities fraud or violations of the Foreign Corrupt Practices Act to receive 10 to 30 percent of the amount of the recovery in any action in which the Commission levies sanctions in excess of $1 million dollars. During my testimony in 2011, I explained to some skeptical members of Congress that:
…the legislation as written has a loophole that could allow legal, compliance, audit, and other fiduciaries to collect the bounty although they are already professionally obligated to address these issues. While the whistleblower community believes that these fiduciaries are in the best position to report to the SEC on wrongdoing, as a former in house counsel and compliance officer, I believe that those with a fiduciary duty should be excluded and have an “up before out” requirement to inform the general counsel, compliance officer or board of the substantive allegation or any inadequacy in the compliance program before reporting externally.
Thankfully, the final rule does have some limitations, in part, I believe because of my testimony and the urgings of the Association of Corporate Counsel, the American Bar Association and others. In a section of the SEC press release on the program discussing unintended consequences released a few weeks after the testimony, the agency stated:
However, in certain circumstances, compliance and internal audit personnel as well as public accountants could become whistleblowers when:
- The whistleblower believes disclosure may prevent substantial injury to the financial interest or property of the entity or investors.
- The whistleblower believes that the entity is engaging in conduct that will impede an investigation.
- At least 120 days have elapsed since the whistleblower reported the information to his or her supervisor or the entity’s audit committee, chief legal officer, chief compliance officer – or at least 120 days have elapsed since the whistleblower received the information, if the whistleblower received it under circumstances indicating that these people are already aware of the information.
At least two compliance officers or internal audit personnel have in fact received awards—one for $300,000 and another for $1,500,000. When I served on a panel a couple of years ago with Sean McKessy, Chief of the Office of the Whistleblower, he made it clear that he expected lawyers, auditors, and compliance officers to step forward and would not hesitate to award them.
Compliance officers have even more incentive to be diligent (or become whistleblowers) because of the DOJ Yates Memo, which requires companies to serve up a high ranking employee in order for the company to get cooperation credit in a criminal investigation. I blogged about my concerns about the Memo’s effect on the attorney-client relationship here, stating:
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?
The US Chamber of Commerce shares my concerns and issued a report last month that echoes the thoughts of a number of defense attorneys I know. I will be discussing these themes and the Dodd-Frank Whistleblower aspect at the International Legal Ethics Conference on July 14th at Fordham described below:
Current Trends in Prosecutorial Ethics and Regulation
Ellen Yaroshefsky, Cardozo School of Law (US) (Moderator); Tamara Lave, University of Miami Law School (US); Marcia Narine, St. Thomas University School of Law (US);Lawrence Hellman, Oklahoma City University School of Law (US); Lissa Griffin, Pace University Law School (US); Kellie Toole, Adelaide Law School (Australia); and Eric Fish,Yale Law School (US)
Nationally and internationally, prosecutors' offices face new, as well as ongoing, challenges and their exercise of discretion significantly affects individuals and entities. This panel will explore a wide range of issues confronting the modern prosecutor. This will include certain ethical obligations in handling cases, organizational responsibility for wrongful convictions, the impact of the exercise of prosecutorial discretion in whistleblower cases, and the cultural shifts in prosecutors' offices.
To be clear, I believe that more corporate employees must go to jail to punish if not deter abuses. But I think that these mechanisms are the wrong way to accomplish that goal and may have a chilling effect on the internal investigations that are vital to rooting out wrongdoing. If you have any thoughts about these topics, please leave them below or email me at email@example.com. My talk and eventual paper will also address the relationship between Sarbanes-Oxley, the state ethical rules, and the Catch-22 that in house counsel face because of the conflicting rules and the realities of modern day corporate life.
July 1, 2016 in Compliance, Conferences, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Lawyering, Marcia Narine, Securities Regulation, White Collar Crime | Permalink | Comments (1)
Tuesday, June 28, 2016
SEC Chair Mary Jo White yesterday presented the keynote address, for the International Corporate Governance Network Annual Conference, "Focusing the Lens of Disclosure to Set the Path Forward on Board Diversity, Non-GAAP, and Sustainability." The full speech is available here.
In reading the speech, I found that I was talking to myself at various spots (I do that from time to time), so I thought I'd turn those thoughts into an annotated version of the speech. In the excerpt below, I have added my comments in brackets and italics. These are my initial thoughts to the speech, and I will continue to think these ideas through to see if my impression evolves. Overall, as is often the case with financial and other regulation, I found myself agreeing with many of the goals, but questioning whether the proposed methods were the right way to achieve the goals. Here's my initial take:
June 28, 2016 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Joshua P. Fershee, Securities Regulation, Shareholders, Social Enterprise | Permalink | Comments (1)
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 firstname.lastname@example.org 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, 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, Securities Regulation | Permalink | Comments (0)
Tuesday, June 14, 2016
The New York Times ran the article How Donald Trump Bankrupted His Atlantic City Casinos, but Still Earned Millions last weekend. It's an interesting piece that provides a look at Donald Trump's east coast casino experience. The article is, as one might expect, critical of his dealings and notes that Trump made money even when his ventures when bankrupt.
Though I will not defend any of Trump's dealings, there are few issues raised that I think are worthy of a some discussion and clarification.1 The post that follows suggests how to consider Trump's business history and place that history in a political context.
Friday, June 10, 2016
I have been following Professor Angela Duckworth's work on grit for well over a year, so I was eager to read her new book, Grit: The Power of Passion and Perseverance. In fact, I can't remember the last time I bought and read a book within a few weeks of it being published.
The book is an easy read, written for a for a popular audience, and I was able to finish it in three relatively short sittings.
Below, I reflect on the book, hopefully in a balanced way.
Thesis. As may be evident from previous posts of mine, I like Duckworth's thesis - essentially, that passion and perseverance in pursuit of long-term goals are important in achieving success. Duckworth is careful to caveat her thesis, noting at hard work and passion are important, but are not the only factors that matter in achieving success. With this caveat, her thesis seems rather obvious and uninteresting.
Grit Scale. The Grit Scale Duckworth created for her studies seems easy to fake, and to her credit, she admits that it can be faked, like most self-reporting measures. Given the ability to fake the Grit Scale, I am not sure that it would be of much use in practical settings where the stakes are high (such as admissions or hiring). In one of the more interesting studies, Duckworth discusses how they gave the Grit Scale to West Point cadets before going through Beast Barracks (described as the toughest part of the four years). Supposedly, Grit scores did a nice job predicting who would stay and who would drop out. Given that the scale is easy to fake, maybe the interesting finding is not "those who actually have more grit perform better" but rather "those who think they have more grit (or are willing to lie that they have more grit) perform better.
Parenting and Teaching. As a parent, I appreciated her chapter on parenting for Grit (though she admits that these are just her thoughts, and unlike other parts of the book, the parenting chapter is lacking directly applicable scientific studies). In particular, she notes the importance of being both supportive and demanding. This is also fairly obvious, but easy to forget, hard to consistently apply, and important to remember. This instruction applies to teachers as well -- make clear that you have high expectations, but also communicate you are there to help and believe the students can meet the expectations with work. For a skeptics view, at least on the point of whether grit can be taught, see here.
Creativity, Talent, Structural Barriers: While Duckworth admits that there are other factors that contribute to success, I didn't think she made a strong case for grit being more important than creativity or talent. In fact, most of the gritty people she mentioned had certain natural advantages over many others. While grit may be needed to get things done, it seems like creativity and talent and access are all necessary and may be even more important than grit in some cases.
Anecdotes. There are a number of anecdotes in the book. The stories are less convincing than the academic studies, but the stories help illustrate her points. I especially liked the sports stories, including the ones about the UNC women's soccer team and the Seattle Seahawks. The coach of the UNC soccer team, for example, had his team memorize passages related to each team core value, and then also integrated the values into practices and games. Much better than a meaningless organization vision statement.
All in all, I think the book was worth reading, if only to stay current on some of the theories that are likely to be talked about by educators at all levels, and to inspire more passion and perseverance in general.
For a fair and thoughtful critique of Grit see here.
Friday, June 3, 2016
Next week, I will post some reflections on the contents of the book, but for now, I would like to discuss professors publishing for a popular audience. Tongue-twisting alliteration unintended.
I am thankful that Duckworth wrote this book for a popular audience rather than in a way that would target a narrow slice of academia. Even as a professor myself, I find books written for popular audience easier to digest, especially if in a different discipline. While popular press books often oversimplify, I would rather a professor author a popular press book on her studies (and studies in her field) than have a journalist attempt to explain them. Also, while a popular press book may oversimplify, professors tend to be intentional about avoiding claims that are too sweeping. Note that in this interview, like the book, Duckworth is careful to state that grit is not the only thing that contributes to success. Finally, especially when the professor has done the background academic work first, as Duckworth did in many peer-reviewed journal articles, a popular press book can reach more people and inspire change and may eventually lead to broader engagement with the underlying academic articles.
Grit, as a popular press book, has already reached a large audience. Grit was published by Scribner: An Imprint of Simon & Schuster (not a university press) and jumped into the top-5 of The New York Times best-seller list for hardcover non-fiction. Duckworth had already reached well over a million people with her TED talk, and the book allowed her to be much more nuanced than she could be in a 6 minute speech. The TED talk was a gateway to her popular press book and perhaps her popular press book with be a gateway to the academic research she cites.
One problem with engaging a large, popular audience is that the professor may lose control of her message, and people may misinterpret the findings. Duckworth looks like she is staying engaged in the conversation, however, and has, for example, written to argue against grading schools on grit.
In short, there are certainly potential problems when writing about academic topics for a popular audience, but I am glad Duckworth took on the challenge and spread her research in this way. That said, as I will discuss next week, Grit does have weaknesses, in addition to its strengths.