Thursday, July 24, 2014

Dodd-Frank Grows Up- Or Does It?

As many have celebrated or decried, Dodd-Frank turned four-years old this week. This is the law that Professor Stephen Bainbridge labeled "quack federal corporate governance round II" (round I was Sarbanes-Oxley, as labeled by Professor Roberta Romano). Some, like Professor Bainbridge, think the law has gone too far and has not only failed to meet its objectives but has actually caused more harm than good (see here, for example).  Some think that the law has not gone far enough, or that the law as drafted will not prevent the next financial crisis (see here, for example). The Council on Foreign Relations discusses the law in an accessible manner with some good links here.

SEC Chair Mary Jo White has divided Dodd-Frank’s ninety-five mandates into eight categories. She released a statement last week touting the Volcker Rule, the new regulatory framework for municipal advisors, additional controls on broker-dealers that hold customer assets, reduced reliance on credit ratings, new rules for unregulated derivatives, additional executive compensation disclosures, and mechanisms to bar bad actors from securities offerings. 

Notwithstanding all of these accomplishments, only a little over half of the law is actually in place. In fact, according to the monthly David Polk Dodd-Frank Progress Report:

As of July 18, 2014, a total of 280 Dodd-Frank rulemaking requirement deadlines have passed. Of these 280 passed deadlines, 127 (45.4%) have been missed and 153 (54.6%) have been met with finalized rules. In addition, 208 (52.3%) of the 398 total required rulemakings have been finalized, while 96 (24.1%) rulemaking requirements have not yet been proposed.

Many who were involved with the law’s passage or addressing the financial crisis bemoan the slow progress. The House Financial Services Committee wrote a 97-page report to call it a failure. So I have a few questions.

1) When Dodd-Frank turns five next year, how far behind will we still be, and will we have suffered another financial blip/setback/recession/crisis that supporters say could have been prevented by Dodd-Frank?

2) How will the results of the mid-term elections affect the funding of the agencies charged with implementing the law?

3) What will the SEC do to address the Dodd-Frank rules that have already been invalidated or rendered otherwise less effective after litigation from business groups such as §1502, Conflict Minerals Rule (see here for SEC response) or §1504, the Resource Extraction Rule (see here for court decision)?

4) Given the SEC's failure to appeal after the proxy access litigation and the success of the lawsuits mentioned above, will other Dodd-Frank mandates be vulnerable to legal challenge?

5) Will the whistleblower provision that provides 10-30% of any recovery over $1 million to qualified persons prevent the next Bernie Madoff scandal? I met with the SEC, members of Congress and testified about some of my concerns about that provision before entering academia, and I hope to be proved wrong. 

Let's wait and see. I look forward to seeing how much Dodd-Frank has grown up this time next year.

July 24, 2014 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation | Permalink | Comments (0)

Wednesday, July 23, 2014

Antitrust as a Question of Power, Not Competition

Steven Davidoff Solomon, a professor of law at the University of California, Berkeley, has an interesting article on antitrust in the DealBook today:  Changing Old Antitrust Thinking for a New Gilded Age. Professor Solomon argues that a new wave of mergers in the tech and telecommunications industries mirror the consolidation wave of the Gilded Age a century ago which lead to our current antitrust laws.  These mergers leave competition in tact, albeit among a few huge companies, and therefore facially meet the competition requirements under antitrust law.  He argues that "[t]his calculus, however, excludes the political and other power that a concentrated industry can wield with government and regulators."  Citing to industry-based nonprofits and the ability to participate in political spending in a post-Citizens United world, professor Solomon concludes that antitrust may become a question of power, not just competition. 

"[R]ight now there is simply no real government ability to review the industry consolidation that is occurring today in which industries become dominated by a handful of major players. Yet it is becoming increasingly apparent that size and industry concentration affect American society even if competition still exists."

I think that this is an interesting lens through which to view, and teach, current market trends in mergers and acquisitions and related questions of antitrust law.

-Anne Tucker

July 23, 2014 in Business Associations, Anne Tucker, Corporations, Current Affairs, Merger & Acquisitions | Permalink | Comments (0)

Tuesday, July 22, 2014

Berkshire 2.0

Amazon BBB Book Cover
You may think of Warren Buffett as a savvy stock picker but his greater accomplishment is in configuring an exceptionally strong corporation that defies widespread conceptions of effective corproate governance.  

Since early in his career, Buffett adopted what he calls the double-barreled approach to capital allocation, meaning both stock picking and business buying. He gained prominence primarily as an investor in stocks, championing a contrarian investment philosophy.

Attracting three generations of devoted followers to a school of thought called “value investing,” he doubted the market’s efficiency and deftly exploited it. Buffett bought stocks of good companies at a fair price, assembling a concentrated portfolio of large stakes in a small number of firms. Today, nearly three-fourths of Berkshire’s stock portfolio consists of just seven stocks.     

But late in his career, beginning around 2000, Buffett shot more often through the other half of his double-barreled approach: buying 100 percent of companies run by trusted managers given great autonomy. True, Berkshire early on bought all the stock of companies such as Buffalo News and See’s Candies. But, through the 1990s, the first barrel dominated, with Berkshire consisting 80 percent of stocks and 20 percent owned companies. That mix gradually reversed and recently flipped, making subsidiary ownership the defining characteristic of today’s Berkshire.

Owning primarily subsidiaries rather than merely stocks gives Berkshire a different shape compared to its previous character as the holding company of a famed investor. After all, even for a buy-and-hold investor, stocks come and go. Berkshire has sold the stocks of many once-fine companies, including Freddie Mac, McDonald’s, and The Walt Disney Company.

In contrast, aside from a few Berkshire subsidiaries that it acquired from the Buffett Partnership in the 1970s, Berkshire has never sold a subsidiary and vows to retain them through thick and thin.  Despite their variety, moreover, Berkshire companies are remarkably similar when it comes to corporate culture, which is the central discovery I document and elaborate in my upcoming book, Berkshire Beyond Buffett: The Enduring Value of Values.

When Berkshire consisted mostly of the stock portfolio of a famed stock picker, you could expect that, once that investor departed, the portfolio would naturally be unwound and the company dissolved. Now, however, with Berkshire made of companies not stocks, its life expectancy stretches out in multiple decades, not mere years. It certainly goes beyond the stock picker who founded it.  That's not an accident either, as the dominant cultural motif at Berkshire and its subsidiaries is a sense of permanence--the longest possible time horizon imaginable.   

Continue reading

July 22, 2014 in Business Associations, Books, Corporate Governance, Corporations, Current Affairs, Merger & Acquisitions | Permalink | Comments (2)

Monday, July 21, 2014

Q & A With Larry Cunningham (Guesting With BLPB This Week)

As I promised on Friday, I am posting a question and answer segment with Larry Cunningham, author of the forthcoming book: Berkshire Beyond Buffett: The Enduring Value of Values.  Larry will be guest blogging with us this week to talk more about the interesting findings he shares in the book and their implications for business and the research, teaching, and practice of business law.

Q:  Why did you write this book and what did you find?

A:  Widespread praise for Warren Buffett has become paradoxical: Buffett set out to build a permanent institution at Berkshire Hathaway and yet even great admirers, such as Steven Davidoff, doubt that the company can survive without him. I found that viewpoint intriguing since companies who are identified with iconic founders often have trouble after a succession, as Tom Lin has written.  I wanted to investigate how the situation will look for Berkshire after Buffett leaves the scene, collapse and breakup or prosperity coupled with continued expansion? What I found was a culture so distinctive and strong, that the company’s future is bright well beyond Buffett.

Q:  How did you reach that conclusion?  What was your research method?

A:  I focused on Berkshire’s fifty operating subsidiaries, which define the company today, representing 80 percent of its value. Incidentally, that is a flip from decades passed, when 80 percent of Berkshire’s value resided in minority stock investments. I began with Buffett’s historical statements about those subsidiaries and Berkshire’s corporate culture, research that in some ways dates to the 1997 Cardozo Law Review symposium I hosted on Buffett’s shareholder letters, which developed into my book, The Essays of Warren Buffett: Lessons for Corporate America. Still, for this project, focusing on the subsidiaries, I gathered and studied specific information about each—biographies, autobiographies, research reports, encyclopedic entries, press releases, public filings.  Then, with Buffett’s permission, I surveyed all current Berkshire subsidiary chief executives and interviewed many, along with former managers and large shareholders of subsidiaries. In addition, I surveyed a large number of Berkshire shareholders to gain additional insight and to make sure I was asking the right questions.

Q:  What culture did you find, what common traits do the subsidiaries share?

A:   That’s the striking discovery. As I profiled each subsidiary, a pattern emerged in which the same traits began to appear repeatedly, nine altogether, including budget-consciousness, earnestness, kinship, entrepreneurship, autonomy, and a sense of permanence. Not every subsidiary had all nine, but many did, and the vast majority manifested at least five or six of the nine.  A portrait of Berkshire culture crystalized, one that is distinctive and durable.  And that culture, I argue in the book, will allow the company to thrive even after Buffett’s departure.

The discovery is suggested by the book’s subtitle: The Enduring Value of Values. “Value of values” refers to how the traits that bind Berkshire’s subsidiaries all share a common feature: all are intangible virtues that managers transform into economic gain. The most general manifestation of the “value of values” occurs in business acquisitions when the exchange of economic values measured using traditional standards leaves a wide gap—a price higher or lower than economic value.

A salient example from Berkshire’s history concerns Bill Child, patriarch of his family home furnishings company, RC Willey. He sold the company to Berkshire for $175 million, declining rival offers as high as $200 million. Why? Because his family valued the managerial autonomy and sense of permanence that define Berkshire culture. 

The book contains more than one hundred examples of myriad ways that Berkshire subsidiaries translate intangible qualities into economic value, whether in research & development, customer service, employee compensation and benefits, corporate finance, or internal policies and practices.  

Q:  What makes the value of values enduring?  

A:  By reaping returns on capital from intangible virtues, Berkshire practices a philosophy of capitalism that does well by doing good, is sensitive but unsentimental, lofty yet pragmatic, and public-spirited but profitable.  This attitude is neither altruistic nor moralistic, but practical, economic, and long-term. It’s a way of doing business that matches today’s zeitgeist, with its sense of stewardship and fair play, and also has a timeless horizon, as business leaders from Robert Mondavi to John Mackey of Whole Foods champion variations on these themes.

Q:  What is the audience for the book?

A:  Everyone involved in shaping American business: managers, entrepreneurs, owners, shareholders, directors, policymakers, scholars of corporate stewardship—and business lawyers and business law professors, of course. It’s a broad audience because Berkshire’s approach is distinctive but not inimitable and valuable yet underappreciated.

Q:  What surprises did you find?

A:  Many, mostly concerning the various subsidiaries, but several rising to the level of Buffett and Berkshire. As a recent headline in USA Today put it, “New Book Rewrites Buffett Legacy in Three Ways.”  The book explains why Buffett’s place in American history is even more significant than currently assumed. Besides being a “legendary investor,” as he is often identified by journalists, Buffett has built a formidable corporation, demonstrated unsung managerial prowess, and chartered a course for American capitalism that widens the meaning of “value investing.”

While everyone knows that Buffett owes a lot to Ben Graham, his investments teacher at Columbia Business School, this book also makes clear his debt on the management side to Tom Murphy, the legendary corporate icon and head of ABC who is now a Berkshire director.  When I asked Buffett who should write the foreword to this book, he instantly suggested Tom, and I’m grateful that Tom accepted the invitation—his foreword alone is worth the price of the book!

Q:  Care to give us a thumbnail sketch of the book’s outline?

A:  Sure. The opening chapters cover Berkshire’s origins and foundations, with surprises even for those most familiar with this terrain, including rich connections between Berkshire’s early acquisitions and the conglomerate today. While Berkshire appears vast, diverse, and sprawling, this synthesis of corporate culture shows instead a close-knit organization linked by discrete values. 

The middle chapters, the heart of the book, take a series of deep dives into fifty Berkshire subsidiaries to illuminate each of the traits and how they give Berkshire its identity and destiny. I was delighted that, when circulating the manuscript for comment among Berkshire devotees, even the most avid readers found new facts, fresh insights, and a whole new way of thinking not only about Berkshire but about Buffett. 

The closing chapters reflect on what Berkshire’s corporate culture means for Buffett’s legacy. They explore the elaborate succession plan at Berkshire, which most people misunderstand, and identify challenges Berkshire will face. I also draw specific lessons for investors, managers, and entrepreneurs who can benefit from Berkshire’s distinctive approach—lessons that business lawyers and policymakers will want to learn as well.

Q:  Can Berkshire Beyond Buffett be assigned for any university classes?

A:  Yes, and I think it will be a good companion to The Essays of Warren Buffett, which has been adopted at many law and business schools for courses on corporate governance, investments (portfolio management), and mergers & acquisitions. This book would suit those courses as well as courses in business ethics and corporate social responsibility. I am planning a seminar next spring in which these two books will be on the reading list, along with other contemporary books offering fresh examinations of venerable themes, such as Eric Orts’ Business Persons;  Lynn Stout’s Shareholder Value Myth; or Curtis Milhaupt & Katharine Pistor’s Law & Capitalism.

Q:  Berkshire Beyond Buffett appears to be full of lessons and important principles.  Which do you propose to explore for us during the coming week?

A:  I’m looking forward to sharing insights on topics such as corporate governance, corporate purpose, and succession planning.  Among the book’s many lessons, these will likely be of greatest interest to readers of the Business Law Prof Blog, and I thank you for the opportunity to introduce the book and these themes here this week.

Q:  Thanks so much, Larry.  Those certainly are all topics that interest me (and infuse my ongoing scholarship and teaching).  I look forward to your posts this week.

A:  You're welcome.  I am grateful for the opportunity to share what I have learned.

July 21, 2014 in Business Associations, Books, Business School, Corporate Governance, Current Affairs, Entrepreneurship | Permalink | Comments (0)

Friday, July 18, 2014

Ding! Hobby Lobby and Disclosure, Round Three . . . .

Cross-post alert!

At the risk of overdoing what may have been a good thing, I contributed a disclosure-oriented post to the Hobby Lobby symposium on The Conglomerate earlier today.  It includes new information about a U.S. Department of Labor Q&A posted yesterday, among other things.  Enjoy or not, as you so please . . . .

July 18, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Joan Heminway, Securities Regulation | Permalink | Comments (0)

Next Week: Larry Cunningham on Warren Buffett and Succession Planning!

The Business Law Prof Blog is delighted to have as a guest blogger next week our friend and colleague Lawrence A. Cunningham (known to me as Larry!), of George Washington University Law School, who has just finished writing a new book being released in October called Berkshire Beyond Buffett: The Enduring Value of Values.  He will offer a few posts about aspects of the book during the week. We will kick it off Monday with some questions and answers.   

Larry is the Henry St. George Tucker III Research Professor at GW.  He teaches accounting, contracts, and corporate governance and has written extensively in all those areas.  He previously taught at Boston College Law School, where he served a term as Academic Dean, and Cardozo Law School, where he directed the Samuel and Ronnie Heyman Center on Corporate Governance.

Among his most cited articles are these scholarly jewels:

A Prescription to Retire the Rhetoric of “Principles-Based Systems” in Corporate Law, Securities Regulation and Accounting (Vanderbilt Law Review, 2007)

The Sarbanes-Oxley Yawn Heavy Rhetoric, Light Reform (And it Might Just Work) (Connecticut Law Review, 2003)

From Random Walks to Chaotic Crashes: The Linear Genealogy of the Efficient Capital Market Hypothesis (GW Law Review, 1994)

All are great reads.  Among his most notable books other than Berkshire Beyond Buffett (which is sure to be a hit!) are the following:

The Essays of Warren Buffett: Lessons for Corporate America  (self-published and distributed by Carolina Academic Press, 3d ed. 2013)

Contracts in the Real World: Stories of Popular Contracts and Why They Matter (Cambridge University Press, 2012)

Berkshire Beyond Buffett is now in the production and pre-ordering phase, garnering early attention among readers in both the investing and corporate governance communities, including: The Motley Fool (which also posted a written interview and video interviews here, here, here, and here);  BeyondProxy; and USA Today.  We look forward to our Q&A with Larry next week followed by his posts!

July 18, 2014 in Business Associations, Books, Corporate Governance, Corporations, Current Affairs | Permalink | Comments (0)

Sunday, July 13, 2014

ICYMI: Tweets From the Week (July 13, 2014) [Hobby Lobby Edition]

July 13, 2014 in Business Associations, Books, Constitutional Law, Corporate Governance, Corporations, Current Affairs, Religion, Stefan J. Padfield | Permalink | Comments (0)

Friday, July 11, 2014

Business Law Professors on Twitter - Updated 7/11/14

I've updated our business law professors on Twitter list here.  

Below are tweets from some of the new additions to the list.  

 

July 11, 2014 in Business Associations, Current Affairs, Haskell Murray, Web/Tech | Permalink | Comments (0)

Thursday, July 10, 2014

What can lawyers, professors and students learn from a corporate idealist?

In last week’s post about the business of the World Cup, I indicated that I would review Christine Bader’s book, The Evolution of a Corporate Idealist: When Girl Meets Oil. I have changed my mind, largely because I don’t have much to add to the great reviews the book has already received. Instead I would like to talk about how lawyers, professors and students can use the advice, even if they have no desire to do corporate social responsibility work as Bader did, or worse, they think CSR and signing on to voluntary UN initiatives is really a form of "bluewashing."

Bader earned an MBA and worked around the world on BP’s behalf on human rights initiatives. This role required her to work with indigenous peoples, government officials and her peers within BP convincing them of the merits of considering the human rights, social, and environmental impacts. She then worked with the UN and John Ruggie helping to develop the UN Guiding Principles on Business and Human Rights, a set of guidelines which outline the state duty to protect human rights, the corporate duty to respect human rights, and both the state and corporations' duty to provide judicial and non-judicial remedies to aggrieved parties. She now works as a lecturer at Columbia University, where she teaches human rights and business and she also advises BSR, which focuses on making businesses more sustainable. Her book tells her story but also quotes a number of other CSR professionals and how they have navigated through some of the world’s largest multinationals.

 Bader’s book has some important takeaways for all of us.

1)   In order to have influence, we have to learn to speak the language that our audience understands and appreciates- I tell my students that when they write exams for me, it’s all about me. Other professors want their exams written with certain catchphrases using the IRAC method, and I may want something different. One size does not fit all. Attorneys learn (or get replaced) that some clients want long memos, others want executive summaries and bullet points and all want plain English. Talking to a venture capitalist is different than talking to a circuit court judge. Similarly, many law professors are behind the curve. If we only talk to each other in the jargon of the academy and insulate ourselves, the rest of the world won’t have the benefit of our research because they won’t understand or want to read it. Academics have a lot to contribute, but we need to adapt to our audience whether it’s policymakers, judges, our peers or law students.

 2)   Sometimes we have to be less passionate in making our arguments and appeal to what’s important to our audience- This point relates to Point 1. Bader regularly met with a number of constituencies and was understandably zealous in trying to convince others, internally and externally, about her positions. She and other “corporate idealists” from other firms often learned the importance of language- making a business case to certain internal stakeholders meant talking in terms of the bottom line rather than using the maxim “it’s the right thing to do” or “doing well by doing good.” Good attorneys know how to represent their clients without taking things personally because sometimes the passion can actually dilute effectiveness. As law professors, we need to teach our students to be more effective so that they know how and when to modulate their tone, and how to pivot and change the way they frame their arguments when they can’t convince the recipient of their message.

3)   Almost everything comes down to risk management- Bader often had to focus on risk management and mitigation when her moral arguments fell on deaf ears. Those who teach business should make sure that students have a basic understanding of the pressure points that business people face. For some it may be tax liability. For others it may be the appropriate exit strategy. In essence, it all comes down to understanding the client’s risk profile and being able to advise accordingly. Litigators should also understand risk profiles so that they can develop an appropriate settlement strategy and help their client’s work their way through some of the unexpected pitfalls that may arise over the course of the case.

4)   Building relationships is a critical skill- Bader learned that social interactions with her peers at BP and the external stakeholders after hours greatly increased her effectiveness in dealing with thorny issues that arose during business hours. Lawyers often believe that if they have the substantive knowledge, they are the smartest people in the room. Law firms don’t teach young associates about the importance of emotional intelligence and building relationships with peers, opposing counsel, and clients. In fact, many law students and lawyers believe that having the reputation as a “shark” is the best way to represent clients. We need to teach our students that it’s better to be respected than feared or hated, and that they can disagree without being disagreeable. Those of us in the academy should model that behavior more often.

5) We must learn to compromise and recognize that incremental changes are important too- Bader and other corporate idealists often want to change the world but quickly learn that internal and external stakeholders aren’t ready to move that fast. She discussed “nudging” her client toward the right direction. Law school and law-related television shows lead students to believe that the end game is to win and to win big. In the business world, sometimes there are no big wins. Lawyers and business advisors often take two steps forward and one step back, and that’s ok. Students and attorneys who take classes in alternative dispute resolution learn this valuable skill. Bader and other corporate idealists also realized that you have to work with people on the opposite side who feel just as strongly that their position is on the side of the angels. Lawyers who know how to build relationships and refocus their messaging can influence those on the other side if they are willing to listen, and when necessary compromise and accept small victories.

6)   We can compromise but shouldn’t compromise our values- When Bader felt that her work was no longer fulfilling, she looked for other positions that aligned with her world view. With rising student debt and many lawyers living beyond their means, it’s difficult for lawyers to walk away from a job or client that they don’t like. That’s understandable. It’s more problematic to stay in a situation where there is criminal or ethical misconduct without speaking up or leaving because of the financial handcuffs.  It’s also unacceptable to remain in a culture that stifles a lawyer’s ability to raise issues. In some cases, as alleged with some of the GM lawyers, failure to speak up could literally be a matter of life and death.

I enjoyed this quick read because it reminded me so much of my years in corporate life. Bader’s story can teach all of us, even the non corporate-idealists, valuable lessons about coping and thriving in the business world.

 

July 10, 2014 in Business Associations, Books, Corporate Governance, Corporations, Current Affairs, Ethics, Law School, Marcia L. Narine, Negotiation, Teaching | Permalink | Comments (0)

Sunday, July 6, 2014

The Role of Corporate Personality Theory in Hobby Lobby

Let me start by publicly announcing a forthcoming panel discussion at this year’s AALS Annual Meeting, tentatively titled “The Role of Corporate Personality Theory in Corporate Regulation.” As the organizer of this panel, I am extremely grateful to Stephen Bainbridge, Margaret Blair, Lisa Fairfax, and Elizabeth Pollman for agreeing to participate in what promises to be a thoroughly enjoyable discussion. For those of you who like to plan ahead, the panel is scheduled for Monday, Jan. 5, from 2:10 to 3:10 (part of the Section on Socio-Economics Annual Meeting program).

Given Stephen Bainbridge’s pending participation, I was interested to read a couple of his posts from a few weeks ago wherein he asked (here), “When was the last time anybody said anything new about corporate personhood?” and concluded (here), “I struggle to come up with anything new to say about the issue, when people have been correctly disposing of the legal fiction of corporate personality for at least 126 years!”

While I understand that asserting there is nothing new to say on a topic is not necessarily the same thing as saying it is not worth talking about, I still find myself motivated to explain why I think talking about corporate personality theory continues to constitute valuable scholarly activity (and, yes, I will connect all this to Hobby Lobby).

First of all, some qualifiers: (1) I distinguish corporate personality theory from corporate personhood because a thumbs up on corporate personhood (i.e., acknowledging that corporations can sue and be sued, etc.) still leaves a number of important questions regarding the nature of this “person,” which I believe theories of corporate personality (typically: artificial entity theory, real-entity theory, or aggregate theory) are well-positioned to answer. (2) While theories of corporate governance (typically: shareholder primacy, director primacy, or team-production theory) are distinct from theories of corporate personality, I believe there are at least some legal issues that are profitably analyzed by viewing both sets of theories as constituting a pool from which to choose an answer. With those introductory propositions in place, here are three reasons why I believe corporate personality theory still matters:

Continue reading

July 6, 2014 in Business Associations, Constitutional Law, Corporate Governance, Corporations, Current Affairs, Religion, Stefan J. Padfield | Permalink | Comments (0)

Saturday, July 5, 2014

Dimon and Disclosure

The blogosphere has been a-twitter with commentary on Jamie Dimon's revelation earlier this week that he has throat cancer and will be undergoing treatments in the hope of eradicating it.  From the public news, his prognosis sounds good.  For that, I am sure all are grateful.

As some of you may know, my interest in issues relating to disclosures of facts from executives' private lives stems from my fascination, starting about 12 years ago, with the Martha Stewart disclosure cases (about which I wrote in law journals and in several chapters of a book that I edited).  After co-writing the book about the basic concerns in Stewart's insider trading, misstatements/omissions securities fraud, and derivative fiduciary duty actions, I focused in additional articles on some finer points relating to her case.  Two of these works covered the disclosure of private facts.  Among the types of private facts covered are those relating to executive health concerns.

Continue reading

July 5, 2014 in Business Associations, Books, Current Affairs, Joan Heminway, Securities Regulation | Permalink | Comments (0)

Friday, July 4, 2014

A Corporate Idealist’s Conflict About Going to Brazil for the World Cup (Twice)- Part One

The title of this post refers to the thought-provoking book by former BP executive, Christine Bader, The Evolution of a Corporate Idealist: When Girl Meets Oil. I will save a review for next week in Part 2 of this post. Briefly, Bader discusses the internal and external struggles that she and other “corporate idealists” face when trying to provide practical, culturally appropriate, innovative ways to implement corporate social responsibility and human rights programs around the world. Much of what she said resonated with me based upon my years as a compliance and ethics officer for a multinational corporation and as a current consultant on these issues.

Like comedian/TV commentator John Oliver, I am torn about the World Cup and the significant power that soccer/futbol’s international governing body FIFA has over both Brazil and its residents. His hilarious but educational rant is worth a close watch, and I experienced the conflict he describes firsthand during my two recent trips to Salvador, Brazil. I went to watch what the rest of the world calls “the beautiful game” in a country where soccer is a religion. That's not an exaggeration by the way-- I bought a statuette of a monk holding a soccer ball in a local cathedral. The monk had a place of honor in the display case right next to the rosaries. The Cup has political consequences as well -- if Brazil doesn’t win the Cup at home, politicians will feel it in Fall’s election.

Trip one to Brazil was purely for pleasure with sixteen aficionados to experience one of the world's most diverse and beautiful cultures while catching two matches. Because I have spent the last couple of year’s researching and writing on business and human rights, when the US team advanced to the quarter finals, I took advantage of my frequent flyer miles, hastily organized some meetings with human rights activists that I had never met, snagged a ticket to the US v. Belgium match, and spent three days mixing business with pleasure.

I had done my homework of course (see e.g. this on the money aspect, this petition to vote for the worst sponsor, this on police response to protestors, and this from David Zirin on Brazil's actions with the World Cup and Olympics). I also knew that FIFA, the nonprofit with a one billion dollar reserve, pays no taxes to the host country. Indeed, while FIFA will earn several billions in profit from the 2014 Cup, Brazil will have spent over ten billion to host. Luckily Brazil loves soccer, but as you may have seen on the news, protests have erupted in the major cities about the perceived broken promises from the government to the people. The infrastructure, schools, hospitals and other projects have not materialized as promised. And while FIFA only requires eight stadiums for a World Cup, Brazil inexplicably built twelve. The Manaus Stadium in the middle of the Amazon cost $250 million and there is no soccer team there. At least the Salvador stadium, which cost $350 million to tear down and rebuild, can host its two teams as well as some of the soccer for the 2016 Olympics. The favelas where the poorest residents live are in clear view of the luxurious new facility in Salvador because they are within walking distance.

For the privilege of hosting the Cup, Brazil agreed to suspend its 2003 law banning alcohol in stadiums so that Budweiser could sell beer; institute World Cup courts to fast track convictions; exempt sponsor companies from some taxes; and establish exclusion zones 2 kilometers around FIFA-designated areas so that no local vendors can sell their wares—this in a country that is at the bottom 10% on the world for income inequality.

A few hours after I landed, I met with an organizer of the some of the protests in Salvador, Brazil’s third largest city. The next day I met with an activist for the homeless in the office of the Public Defender for Human Rights. Despite government funding, the Public Defender and activist communities in Salvador work closely together to address human rights abuses. I learned the following, among other things. Over 250,000 people throughout Brazil were displaced for the games, many with no compensation. Salvador, a city with over 4,000 homeless, only developed housing for 200 families despite knowing about the games for seven years. Homeless people who did not move when told were harassed by the police. If the harassment didn’t work, police confiscated their documentation and/or clothing and destroyed them. If that didn’t work, street cleaning trucks bombarded them with soap and water as though they were trash. Through the joint efforts of the Public Defender and activists, this activity, which started last September, largely stopped.

I also learned that religious groups can protest against abortion and drug use in exclusion zones but those protesting against FIFA must secretly hand out pamphlets in groups smaller than three people to avoid detection, arrest and jail time (sometimes charged as “terrorists.”). FIFA established almost a dozen agencies to ensure that the Cup went smoothly but most locals have experienced nothing but serious disruption. Hundreds of vendors who had eagerly staked out spaces to sell to tourists were banned and the government gave them no place else to go. People have died and suffered serious injury as FIFA has pressured the Brazilian government to complete projects on time. Although protestors have not focused on them, others have raised questions about the environmental impact of the Cup.

Sony, Johnson & Johnson, Budweiser, Coca-Cola, and McDonald's -- all key sponsors paying upwards of a minimum of $10 million-- tout their corporate social responsibility programs so I have the following ten questions about the business of the World Cup.

1)   Is FIFA, the nonprofit corporation, really acting as a quasi-government and if so, what are its responsibilities to protect and respect local communities?

2)   Does FIFA have more power than the host country and will it use that power when it requires voters to consider a bidding country’s human rights record when awarding the 2026 Cup as it has suggested?

3)   If Qatar remains the site of the 2022 Cup after the various bribery and human rights abuse investigations, will FIFA force that country to make concessions about alcohol and gender roles to appease corporate sponsors?

4)   Will/should corporate sponsors feel comfortable supporting the Cup in Russia in 2018 and Qatar in 2022 given those countries’ records and the sponsors’ own CSR priorities?

5)   Does FIFA’s antidiscrimination campaign extend beyond racism to human rights or are its own actions antithetical to these rights?

6)   Are the sponsors commenting publicly on the protests and human right violations? Should they and what could they say that has an impact? Should they have asked for or conducted a social impact analysis or is their involvement as sponsors too attenuated for that?

7)   Should socially responsible investors ask questions about whether companies could have done more for local communities by donating to relevant causes as part of their CSR programs?

8)   Are corporations acting as "bystanders", a term coined by Professor Jena Martin?      

9)   Is the International Olympic Committee, a nonprofit, nongovernmental organization, taking notes?

10)  Do consumers, the beneficiaries of creative corporate commercials and  viral YouTube videos, care about any of this?

I have thoughts but no answers to my questions and will spend my summer on these corporate responsibility issues. I definitely don’t envy the corporate idealists working for any of these sponsors.

 

 

July 4, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Marcia L. Narine, Television, Travel | Permalink | Comments (0)

Monday, June 30, 2014

Does Hobby Lobby Create a First Amendment Out for Fiduciary Duties?

So, the Hobby Lobby decision is out.  I wrote my thoughts here and here after oral arguments, and I think the court got this wrong.  Not the concept, but the execution. 

Rather than try to rehash what is now done, I will pose a different question: How does one reconcile this religious exercise with the profit-seeking mandate that the Delaware court imposes from time to time.  As Chancellor Chandler noted in eBay v. Newmark (more here):

The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. 

Note that “purely” is not an entirely accurate modifier here.  Craigslist made a profit and had some ventures that raised money.  They just did not monetize the majority of the endeavors

So what about an entity that operates for purely religious ends? Hobby Lobby and those similarly situated seem to be saying that religion trumps profit (see, e.g., Chik_Fil-A closing on Sundays).  This is not the argument that our business model is stronger because of our choices, which I have argued before should be protected, but this is saying we choose religion over profit. 

As Chancellor Chandler noted in eBay, if there are no shareholders to complain, then perhaps it is not an issue.  Still, as soon as a shareholder disagrees, will decisions such as limiting healthcare options (thus limiting the talent pool for employees) or closing on Sunday?  It seems to me the Hobby Lobby decision has opened the door for several fiduciary duty fights down the road. 

Can a corporation now choose to give a majority of its funds to a church, even if it harms the entity?  I think no, but I hope, for the sake of businesses everywhere, the Court did not just create a First Amendment out to such fiduciary duties.

June 30, 2014 in Business Associations, Corporations, Current Affairs, Joshua P. Fershee, Religion, Securities Regulation, Social Enterprise | Permalink | Comments (3)

Reflections on Howard Henry Baker Jr. and the Politics of Hobby Lobby

Today, the body of former Senator Howard H. Baker Jr. lay in repose across the street from my office in the building that houses the academic center benefacted by and named after him.  (The building itself also bears his name.)  His coffin, draped elegantly in the American flag, is a reminder of a political era essentially gone--but not forgotten (at least by me). 

Senator Baker was a distinguished alumnus and benefactor of The University of Tennessee and the College of Law.  Our main rotunda on the first floor of the law building is named for him.  I dropped by today at the Baker Center for Public Policy to say goodbye to this revered statesman.  I did not make the trip across the street to pay my respects primarily because he was a UT alumnus or benefactor--or even because I knew him (although we shook hands and chatted pleasantly at least once that I can remember) or knew any member of his family.  I went because I deeply admire him and what he did with his public life.  He was the kind of guy--known as "The Great Conciliator"--who exhibited political patience, valued compromise, and didn't let party politics or ideology stand in the way of what he knew in his gut was right.

In the obituary published by the American Bar Association in the ABA Journal, the following quote caught my eye:

“We are doing the business of the American people,” Baker said in a 1998 speech to members of Congress, explaining his philosophy of government. “And if we cannot be civil to one another, and if we stop dealing with those with whom we disagree, or that we don’t like, we would soon stop functioning altogether.”

Of course, the last bit stings a bit in light of the recent government shutdown.  But . . . doing the business of the American people.  Hmm.  This part of the quote reminded me of the public fiduciary arguments that Donna Nagy raises in her 2011 Boston University Law Review article entitled "Insider Trading, Congressional Officials, and Duties of Entrustment."  A great read, for those who haven't yet set aside the time.

However, the quote also made me think about Senator Baker's engagements over the years with legal issues impacting businesses.  He was certainly pro-business, but he also fought for environmental protection and civil rights, among other things, even when those issues appeared, at least in the short term, to be a net negative for businesses.  What, then, would Senator Baker have said about today's decision in Hobby Lobby?  Well, we'll never know.  But I will take a few guesses, and those who knew him or know his politics better than I can feel free to question and correct my prognostications.

Continue reading

June 30, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Joan Heminway | Permalink | Comments (2)

No clear lines in the sand

From Anne Tucker (who is off filming academic videos this afternon--whatever that means!):

Today’s Supreme Court decision in Burwell v. Hobby Lobby Stores Inc. et al. exempted closely held corporations from complying with the contraceptive mandate in the Affordable Care Act.  There is plenty to debate about the opinion—corporations are persons under RFRA and can exercise religion as well as a host of choice quotes from the SCOTUS about “modern corporate law”—and I will leave that fun for another time.  I want to highlight three initial reactions:    

  1. There is no definition of closely held in today’s opinion.  Will we draw lines based on state corporate codes and elections to be S corp?  Will we rely upon the IRS definition of a closely held company?  It is unclear.  There is NOTHING in the opinion that prevents today’s ruling from applying to publically traded, closely held corporations like Wal-Mart.  The line drawing engaged by the SCOTUS in Hobby Lobby is not such a neatly drawn, tight circle, but is a wide net.  I discussed this briefly in a HuffPost Live segment earlier today—here.
  2. This is a statutory, not a constitutional ruling.  On its face.  Of course Congress could amend RFRA and exclude corporations, but there are exactly zero people holding out hope for that solution, at least in our present climate.  The language of the opinion, however, gives strong dicta supporting religious rights and identities of corporations, whether for profit or not.  [“Any suggestion that for-profit corporations are incapable of exercising religion because their purpose is simply to make money flies in the face of modern corporate law.”]
  3. Today, the Court weighed in on the moral dilemma of performing an “innocent” act (i.e., providing health care coverage) that enables an “immoral” act (i.e., using an IUD whether for family planning or medical reasons).  May companies object to coverage that includes screening for sexually transmitted diseases because unwed employees may use it ensure safe, premarital sex?  The answer would seem to be yes. Of course, we can imagine that the Court would find a compelling interest here like they did with contraceptives, but what about the least restrictive means?  In Hobby Lobby, the Court found the existing program for the government to pay for contraceptives (for exempted nonprofit entities) as evidence of a less restrictive alternative.  So the government pays for the thing that for-profit corporations don’t want to pay for.  In other words, we now subsidize corporate religious beliefs. And if you are a corporation do you want to pay for something that competitors don’t have to?  The sincerity of the belief might be an issue, but if corporate law teaches us one thing, it is how to build a record.

-Anne Tucker

Formatting changes/errors are all mine.

Great work, Anne!

June 30, 2014 in Business Associations, Anne Tucker, Corporate Governance, Corporations, Current Affairs, Religion | Permalink | Comments (3)

Hobby Lobby

The Burwell v. Hobby Lobby opinion is here.  5-4 in favor of Hobby Lobby. 

"As applied to closely held corporations, the HHS regulations imposing the contraceptive mandate violate RFRA.”

Sure that a number of us will have thoughts to share. 

June 30, 2014 in Business Associations, Current Affairs, Haskell Murray, Religion | Permalink | Comments (2)

Thursday, June 26, 2014

Is corporate compliance being privatized?

I always enjoy reading Bryan Cave partner Scott Killingsworth's comments in various LinkedIn groups. In addition to practicing law, he’s a contributing editor to a treatise on the duties of board members. He’s just published a short but thorough essay on "The Privatization of Compliance." It reminds me of some of the comments that Dean Colin Scott made at Law and Society about tools of private transnational regulation, which include self-regulation, contracts, consumers, industry initiatives, corporate social responsibility programs and meta-regulators. Killingsworth’s abstract is below.

Corporate Compliance is becoming privatized, and privatization is going viral. Achieving consistent legal compliance in today’s regulatory environment is a challenge severe enough to keep compliance officers awake at night and one at which even well-managed companies regularly fail. But besides coping with governmental oversight and legal enforcement, companies now face a growing array of both substantive and process-oriented compliance obligations imposed by trading partners and other private organizations, sometimes but not always instigated by the government. Embodied in contract clauses and codes of conduct for business partners, these obligations often go beyond mere compliance with law and address the methods by which compliance is assured. They create new compliance obligations and enforcement mechanisms and touch upon the structure, design, priorities, functions and administration of corporate ethics and compliance programs. And these obligations are contagious: increasingly accountable not only for their own compliance but also that of their supply chains, companies must seek corresponding contractual assurances upstream, causing a chain reaction of proliferating and sometimes inconsistent mandates. 

This essay examines the origins and the accelerating growth of the privatization of compliance requirements and oversight; highlights critical differences between compliance obligations imposed between private parties and those imposed by governmental actors; and evaluates the trend's benefits, drawbacks and likely direction. Particular attention is given to the use of supplier codes of conduct and contractual compliance mandates, often in combination; to the issue of contractual remedies for social, process-oriented, or vague obligations that may have little direct bearing on the object of the associated business transaction; to the proliferating trend of requiring business partners to "flow down" required conduct and compliance mechanisms to additional tiers within the supply chain; and to this trend's challenging implications for the corporate compliance function's role and its interaction with operations, procurement, and sales groups. Recommendations are made for achieving efficiencies and reducing system dysfunction by seeking a broad consensus on generally accepted principles for business-partner codes of conduct, compliance-related contract clauses, and remedies appropriate to each.

 

June 26, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Marcia L. Narine, Securities Regulation | Permalink | Comments (0)

Friday, June 20, 2014

Nussbaum on Liberty of Conscience

In various airports and airplanes over the past few weeks I read University of Chicago professor Martha Nussbaum’s (University of Chicago) book on religious equality in America entitled Liberty of Conscience (2008).  Even though this book predates the Hobby Lobby case, it addresses a number of underlying issues at play in the case. 

Liberty of Conscience

More after the break.

Continue reading

June 20, 2014 in Books, Constitutional Law, Current Affairs, Haskell Murray, Religion | Permalink | Comments (0)

Thursday, June 19, 2014

Is a new SEC disclosure on the way?

Regular readers of this blog have seen several posts discussing the materiality of various SEC disclosures. See here and here for recent examples. I have been vocal about my objection to the Dodd-Frank conflict minerals rule, which requires US issuers to disclose their use of tin, tungsten, tantalum and gold deriving from the Democratic Republic of Congo and surrounding nations, and describe the measures taken to conduct audits and due diligence of their supply chains. See this post and this law review article.

Last year SEC Chair Mary Jo White indicated that she has concerns about the amount and types of disclosures that companies put forth and whether or not they truly assist investors in making informed decisions.  In fact, the agency is undergoing a review of corporate disclosures and has recently announced that rather than focusing on disclosure “overload” the agency wants to look at “effectiveness,” duplication, and “holes in the regulatory regime where additional disclosure may be good for investors.”

I’m glad that the SEC is looking at these issues and I urge lawmakers to consider this SEC focus when drafting additional disclosure regulation. One possible test case is the Business Supply Chain Transparency on Trafficking and Slavery Act of 2014 (H.R. 4842) by Representative Carolyn Maloney, which would require companies with over $100 million in gross revenues to publicly disclose the measures they take to prevent human trafficking, slavery and child labor in their supply chains as part of their annual reports.

The sentiment behind Representative Maloney’s bill is similar to what drove the Dodd-Frank conflict minerals rule (without the extensive audit requirements) and the California Transparency in Supply Chains Act (CTSA). In her announcement she stated,  

“Every day, Americans purchase products tainted by forced labor and this bill is a first step to end these inhumane practices. By requiring companies with more than $100 million in worldwide receipts to be transparent about their supply chain policies, American consumers can learn what is being done to stop horrific and illegal labor practices. This bill doesn’t tell companies what to do, it simply asks them to tell us what steps they are already taking. This transparency will empower consumers with more information that could impact their purchasing decisions.”

While the Conflict Minerals and CTSA are “name and shame” laws, which aim to change corporate behavior through disclosure, the proposed federal bill has a twist. It requires the Secretary of Labor, the Secretary of State and other appropriate Federal and international agencies, independent labor evaluators, and human rights groups, to develop an annual list of the top 100 companies complying with supply chain labor standards.

I don’t have an issue with the basic premise of the proposed federal law because human trafficking is such a serious problem that the American Bar Association, the Department of Labor, and others have developed resources for corporations to tackle the problem within their supply chains. A number of states have also enacted laws, and in fact Republican Florida Governor Rick Scott, hardly the poster child for liberals, announced his own legislation this week (although it focuses on relief for victims).

Further, to the extent that companies are using the 2011 UN Guiding Principles on Business and Human Rights to develop due diligence processes for their supply chains, this disclosure should not be difficult. In fact, the proposed bill specifically mentions the Guiding Principles. I don’t know how expensive the law will be to comply with, and I’m sure that there will be lobbying and tweaks if the bill gets out of the House. But If Congress wants to add this to the list of required corporate disclosures, legislators should monitor the SEC disclosure review carefully so that if the human trafficking bill passes, the agency’s implementing regulations appropriately convey legislative intent. 

I know that corporations  are interested in this issue because I spoke to a reporter yesterday who was prompted by recent articles and news reports to write about what boards should know about human trafficking in supply chains. As I told the reporter, although I applaud the initiatives I remain skeptical about whether these kinds of environmental, social and governance disclosures really affect consumer behavior and whether these are the best ways to protect the intended constituencies. That’s what I will be writing about this summer. 

 

June 19, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation | Permalink | Comments (0)

Tuesday, June 17, 2014

Voters Want (To Talk About) More Wall Street Regulations

A new poll, conducted by Greenberg Quinlan Rosner Research, suggests that the desire for new Wall Street regulations has not been maximized by candidates for political office.  Here are some of the poll's key findings.  The release about the poll states:

A strong, bipartisan majority of likely 2014 voters support stricter federal regulations on the way banks and other financial institutions conduct their business. Voters want accountability and do not want Wall Street pretending to police themselves: they want real cops back on the Wall Street beat enforcing the law.

As evidence, the release notes that David Brat's upset win over Eric Cantor in the Virginia 7th District Republican primary, may have been related to Brat's attack on Wall Street, sharing Brat's words from a radio interview: "The crooks up on Wall Street and some of the big banks — I'm pro-business, I'm just talking about the crooks — they didn't go to jail, they are on Eric's Rolodex."

The poll found that voters consider Wall Street and the large banks as "bad actors," with 64% saying,  “the stock market is rigged for insiders and people who know how to manipulate the system.”  Another 60% want “stricter regulation on the way banks and other financial institutions conduct their business.” Finally, 

Voters believe another crash is likely and that regulation can help prevent another disaster. An 83 percent majority of voters believe another crash is likely within the next 10 years, and 43 percent very likely. Another 55 percent, however, agree “Stronger rules on Wall Street and big financial institutions by the federal government will help prevent another financial collapse.”

I don't doubt that voters believe this, but I also don't think this poll data will lead to much (if any) significant change.  I concede the poll shows that the issue resonates with voters, but I think Brat's quote shows where the wiggle room is (and perhaps how other astute Republicans, particularly, may use the issue in their races).   That is, I think the majority of Americans are "pro-business" and anti-crooks. That's not news. When it comes time to vote on new regulation, though, I expected Mr. Brat (should he win the election) would find that the proposals before him would only "hurt business" and "not punish crooks."  

I could be wrong, of course, but I doubt it.  Like "energy independence" and "good schools," I think this poll shows us another one of those issues where voters care more about hearing that the system needs to be fixed rather than an issue where voters will be keeping score to see if progress is made.  

June 17, 2014 in Current Affairs, Financial Markets, Joshua P. Fershee, Securities Regulation | Permalink | Comments (0) | TrackBack (0)