Friday, May 1, 2015
I’ve been thinking a lot about whistleblowers lately. I serve as a “management” representative to the Department of Labor Whistleblower Protection Advisory Committee and last week we presented the DOL with our recommendations for best practices for employers. We are charged with looking at almost two dozen whistleblower laws. I've previously blogged about whistleblower issues here.
Although we spend the bulk of our time on the WPAC discussing the very serious obstacles for those workers who want to report safety violations, at the last meeting we also discussed, among other things, the fact that I and others believed that there could be a rise in SOX claims from attorneys and auditors following the 2014 Lawson decision. In that case, the Supreme Court observed that: “Congress plainly recognized that outside professionals — accountants, law firms, contractors, agents, and the like — were complicit in, if not integral to, the shareholder fraud and subsequent cover-up [Enron] officers … perpetrated.” Thus, the Court ruled, those, including private contractors, who see the wrongdoing but may be too fearful of retaliation to report it should be entitled to SOX whistleblower protection.
We also discussed the SEC's April KBR decision, which is causing hundreds of companies to revise their codes of conduct, policies, NDAs, confidentiality and settlement agreements to ensure there is no language that explicitly or implicitly prevents employees from reporting wrongdoing to the government or seeking an award.
Two weeks ago, I spoke in front of a couple hundred internal auditors and certified fraud examiners about how various developments in whistleblower laws could affect their investigations, focusing mainly on Sarbanes-Oxley and Dodd-Frank Whistleblower. I felt right at home because in my former life as a compliance officer and deputy general counsel, I spent a lot of time with internal and external auditors. Before I joined academia, I testified before Congress on what I thought could be some flaws in the law as written. Specifically, I had some concerns about the facts that: culpable individuals could receive awards; individuals did not have to consider reporting wrongdoing internally even if there was a credible, functioning compliance program; and that those with fiduciary responsibilities were also eligible for awards without reporting first (if possible), which could lead to conflicts of interest. The SEC did make some changes to Dodd-Frank. The agency now weighs the whistleblower’s participation in the firm’s internal compliance program as a factor that may increase the whistleblower’s eventual award and considers interference with internal compliance programs to be a factor that may decrease any award. It also indicated that compliance or internal audit professionals should report internally first and then wait 120 days before going external.
Before I launched into my legal update, I gave the audience some sobering statistics about financial professionals:
- 23% have seen misconduct firsthand
- 29% believe they may have to engage in illegal or unethical conduct to be successful
- 24% would engage in insider trading if they could earn $10 million and get away with it
I also shared the following awards with them:
- $875,000 to two individuals for “tips and assistance” relating to fraud in the securities market;
- $400,000 to a whistleblower who reported fraud to the SEC after the employee’s company failed to address internally certain securities law violations;
- $300,000 to an employee who reported wrongdoing to the SEC after the company failed to take action when the employee reported it internally first;
- $14 million- tip about an alleged Chicago-based scheme to defraud foreign investors seeking U.S. residency; and
- More than $30 million to a tipster living in a foreign country, who would have received more if he hadn't delayed reporting
I also informed them about a number of legal developments that affect those that occupy a position of trust or confidence. These white-collar whistleblowers have received significant paydays recently. Last year the SEC paid $300,000 to an employee who performed “audit or compliance functions.” I predicted more of these awards, and then to prove me right, just last week, the SEC awarded its second bounty to an audit or compliance professional, this time for approximately 1.4 million.
I asked the auditors to consider how this would affect their working with their peers and their clients, and how companies might react. Will companies redouble their efforts to encourage internal reporting? Although statistics are clear that whistleblowers prefer to report internally if they can and don’t report because they want financial gain, will these awards embolden compliance, audit, and legal personnel to report to the government? Will we see more employees with fiduciary duties coming forward to report wrongdoing? Does this conflict with any ethical duties imposed upon lawyers or compliance officers with legal backgrounds? SOX 307 describes up the ladder reporting requirements, but what happens to the attorney who chooses to go external? Will companies consider self-reporting to get more favorable deferred and nonprosecution agreements to pre-empt the potential whistleblower?
I don’t have answers for any of these questions, but companies and boards should at a minimum look at their internal compliance programs and ensure that their reporting mechanisms allow for reports from outside counsel and auditors. In the meantime, it’s now entirely possible that an auditor, compliance officer, or lawyer could be the next Sherron Watkins.
And by the way, if you were in Busan, South Korea last Wednesday, you may have heard me on the morning show talking about whistleblowers. Drop me a line and let me know how I sounded.
Wednesday, April 29, 2015
OK. So, Tennessee is not Delaware. But the Tennessee legislature and Supreme Court have been busy bees this spring on business law matters. Here's the brief report.
In the last week of the legislative term, the Tennessee Senate and House adopted the For-Profit Benefit Corporation Act, about which I earlier blogged here, here, and here. Although I remain skeptical of the legislation, it looks like the governor will sign the bill. So, we will have benefit corporations in Tennessee. We'll see where things go from there . . . .
The Tennessee legislature also passed a technical corrections bill for the Tennessee Business Corporation Act. The bill was drafted by the Tennessee Bar Association's Business Entity Study Committee (on which I serve and to which I have referred in the past), a joint project of the Tennessee Bar Association's Business Law Section and Tax Law Section. The governor has already signed this bill into law.
Separately, in a bit of a stealth move (!), the Tennessee Supreme Court recently announced the establishment of a business court, an institution many other jurisdictions already have. The court is being introduced as a pilot project in Davidson County (where Nashville resides)--but only, as I understand it, to iron the kinks out before introducing the court on a permanent basis. Interestingly, the Tennessee Bar Association Business Law Section Executive Council was not informed about the new court project until its public announcement in the middle of March. Although we found that a bit odd, the "radio silence" is apparently attributable to the excitement of the Tennessee Supreme Court to get the project started effective as of May 1 and the deemed lack of need for a study on the subject before proceeding. Regardless, I think it's safe to say that the bar welcomes the introduction of a court that specializes in business law cases as a matter of principle. Again, we'll see where it goes from here.
A few reflections on all this follow.
Wednesday, April 22, 2015
Last week the New York Times hosted a debate about the Public Corporation's Duty to Shareholders. Contributors include corporate law professors Stephen Bainbridge, Tamara Belinfante, Lynn Stout, David Yosifan and Jean Rogers, CEO of Sustainability Accounting Standards Board.
This collection of essays is not only more interesting than anything that I could write, but it is also the type of short, assessable debate that would be a great starting point for discussion in a seminar or corporations class.
Thursday, April 16, 2015
Regular readers know that I have blogged repeatedly about my opposition to the US Dodd-Frank conflict minerals rule, which aims to stop the flow of funds to rebels in the Democratic Republic of Congo. Briefly, the US law does not prohibit the use of conflict minerals, but instead requires certain companies to obtain an independent private sector third-party audit of reports of the facilities used to process the conflict minerals; conduct a reasonable country of origin inquiry; and describe the steps the company used to mitigate the risk, in order to improve its due diligence process. The business world and SEC are awaiting a First Amendment ruling from the DC Circuit Court of Appeals on the “name and shame” portion of the law, which requires companies to indicate whether their products are DRC Conflict Free.” I have argued that it is a well-intentioned but likely ineffective corporate governance disclosure that depends on consumers to pressure corporations to change their behavior.
The proposed EU regulation establishes a voluntary process through which importers of certain minerals into the EU self-certify that they do not contribute to financing in “conflict-affected” or “high risk areas.” Unlike Dodd-Frank, it is not limited to Congo. Taking note of various stakeholder consultations and the US Dodd-Frank law, the EU had originally limited the scope to importers, and chose a voluntary mechanism to avoid any regional boycotts that hurt locals and did not stop armed conflict. Those importers who choose to certify would have to conduct due diligence in accordance with the OECD Guidance, and report their findings to the EU. The EU would then publish a list of “responsible smelters and refiners,” so that the public will hold importers and smelters accountable for conducting appropriate due diligence. The regulation also offers incentives, such as assistance with procurement contracts.
One of the problems with researching and writing on hot topics is that things change quickly. Two days after I submitted my most recent article to law reviews in March criticizing the use of disclosure to mitigate human rights impacts, the EU announced that it was considering a mandatory certification program for conflict minerals. That meant I had to change a whole section of my article. (I’ll blog on that article another time, but it will be out in the Winter issue of the Columbia Human Rights Law Review). Then just yesterday, in a reversal, the European Parliament’s International Trade Committee announced that it would stick with the original voluntary plan after all.The European Parliament votes on the proposal in May.
Reaction from the NGO community was swift. Global Witness explained:
Today the European Parliament’s Committee on International Trade (INTA) wasted a ground-breaking opportunity to tackle the deadly trade in conflict minerals. […] Under this proposal, responsible sourcing by importers of tin, tantalum, tungsten and gold would be entirely optional. The Commission’s proposed voluntary self-certification scheme would be open to approximately 300-400 companies—just 0.05% of companies using and trading these minerals in the EU, and would have virtually no impact on companies’ sourcing behaviour. The law must be strengthened to make responsible sourcing a legal requirement for all companies that place these minerals on the European market–in any form. This would put the European Union at the forefront of global efforts to create more transparent, responsible and sustainable business practices. It would also better align Europe with existing international standards on responsible sourcing, and complement mandatory requirements in the US and in twelve African countries.
I’m all for due diligence in the supply chain and for forcing companies to minimize their human rights impacts. Corporations should do more than respect human rights-- they must pay when they cause harm. I plan to spend part of my summer researching and writing in Latin America about stronger human rights protections for indigenous peoples and the deleterious actions of some multinationals.
But a mandatory certification scheme on due diligence is not the answer because it won’t solve deep, intractable problems that require much more widespread reform. To be clear, I don't think the EU has the right solution either. Reasonable people can disagree, but perhaps the members of the EU Parliament should look to Dodd-Frank. SEC Chair Mary Jo White disclosed last month that the agency had spent 2.75 million dollars, including legal fees, and 17,000 hours writing and implementing the conflict minerals rule. A number of scholars and activists have argued that the law has in fact harmed the Congolese it meant to help and news reports have attempted to dispel some of the myths that led to the passage of the law.
So let’s see what happens in May when the EU looks at conflict minerals again. Let’s see what happens in June when the second wave of Dodd-Frank conflict minerals filings come in. As I indicated in my last blog post about Dodd-Frank referenced above, the first set of filings was particularly unhelpful. And let’s see what happens in December when parents start the holiday shopping—how many of them will check on the disclosures before buying electronics and toys for the members of their family? Most important, let's see if someone can actually tie the money and time spent on conflict minerals disclosure directly to lower rates of rape, child slavery, kidnapping, and forced labor-- the behaviors these laws intend to stop.
April 16, 2015 in Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, International Business, Law Reviews, Marcia Narine, Securities Regulation | Permalink | Comments (0)
Tuesday, April 14, 2015
Energy is big business, and there is evidence that renewables are starting to play along with the more traditional big-time players. The Economist recently published the article, Renewable Energy: Not a Toy, which reports that renewable energy installations are continuing to increase even as subsidies fall because prices are continuing to drop. The energy sector is likely to continue to diversify, in part because diversification is good for resilience and for financial management. The Economist article notes:
Nearly half of last year’s investment was in developing countries, notably China, whose energy concerns have more to do with the near term than with future global warming. It worries about energy security, and it wants to clean up its cities’ air, made filthy partly by coal-burning power plants.
Sometimes lost in the discussion about cleaner energy is that climate concerns are not the only reasons to consider other resources. Cleaner air, more stable prices, and locally sourced energy can all be good reasons to consider renewable energy sources along side more traditional resources. Prices, are the big one, of course, but when it's close, other considerations can more easily be part of the analysis. It appears we're approaching that point, which means more opportunity, along with more upheaval. That's why some of us like the energy business so much. If nothing else, it's usually interesting,
Thursday, April 9, 2015
It’s that time of year again where I have my business associations students pretend to be shareholders and draft proposals. I blogged about this topic last semester here. Most of this semester’s proposals related to environmental, social and governance factors. In the real world, a record 433 ESG proposals have been filed this year, and the breakdown as of mid-February was as follows according to As You Sow:
Environment/Climate Change- 27%
Political Activity- 26%
Summaries of some of the student proposals are below (my apologies if my truncated descriptions make their proposals less clear):
1) Netflix-follow the UN Guiding Principles on Business and Human Rights and the core standards of the International Labour Organization
2) Luxottica- separate Chair and CEO
3) DineEquity- issue quarterly reports on efforts to combat childhood obesity and the links to financial risks to the company
4) Starbucks- provide additional disclosure of risks related to declines in consumer spending and decreases in wages
5) Chipotle- issue executive compensation/pay disparity report
6) Citrix Systems-add board diversity
7) Dunkin Donuts- eliminate the use of Styrofoam cups
8) Campbell Soup- issue sustainability report
9) Shake Shack- issue sustainability report
10) Starbucks- separate Chair and CEO
11) Hyatt Hotels- institute a tobacco-free workplace
12) Burger King- eliminate GMO in food
13) McDonalds- provide more transparency on menu changes
14) Google-disclose more on political expenditures
15) WWE- institute funding cap
One proposal that generated some discussion in class today related to a consumer products company. As I skimmed the first two lines of the proposal to end animal testing last night, I realized that one of my friends was in-house counsel at the company. I immediately reached out to her telling her that my students noted that the company used to be ”cruelty-free,” but now tested on animals in China. She responded that the Chinese government required animal testing on these products, and thus they were complying with applicable regulations. My students, however, believed that the company should, like their competitors, work with the Chinese government to change the law or should pull out of China. Are my students naïve? Do companies actually have the kind of leverage to cause the Chinese government to change their laws? Or would companies fail their shareholders by pulling out of a market with a billion potential customers? This led to a robust debate, which unfortunately we could not finish.
I look forward to Tuesday’s class when we will continue these discussions and I will show them the sobering statistics of how often these proposals tend to fail. Hopefully we can also touch on the Third Circuit decision, which may be out on the Wal-Mart/Trinity Church shareholder proposal issue.These are certainly exciting times to be teaching about business associations and corporate governance.
April 9, 2015 in Business Associations, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Law School, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (1)
Tuesday, April 7, 2015
So, Duke is the 2015 NCAA Men's Basketball champion. As a Michigan State basketball fan, this was at least mildly gratifying because the Spartans final losses the past two seasons have been to the eventual champion. (MSU's final two losses this season: Wisconsin and Duke.) Hardly the same as winning the whole thing, but after a loss, one takes what one can get.
This semester I am teaching Sports Law for the first time, and it has been an interesting and rewarding experience. As our recent guest, Marc Edelman, recently noted, there is a lot going on right now in college sports (there probably always is), with questions about paying NCAA players and players' rights to unionize, among other things, leading the way.
I am a big fan of college sports, and I generally prefer college sports to professional sports. I don't, however, have any illusion that big-time college sports are, in any real sense, pure or amateur. (For that matter, I don't know what "pure" means, but I hear complaints that colleges sports are "no longer pure," so it appears there is some benchmark somewhere.) College sports are a modified form of professional sports or, as the term I used to hear from time to time in other contexts, semi-pro sports.
What College Sports Are
College sports, in the simplest sense, are highly talented young people competing on behalf of educational institutions in exchange for the opportunity to pursue a mostly funded college education, if they so choose and can make it fit in with their athletic obligations. The athletes are compensated for their efforts with opportunities that are varied and wide ranging, depending on the athlete and the institution for which they compete.
Obviously, the experience for the high-profile college athlete -- generally football and men's and women's basketball -- is different from that of the less-watched sports, such as gymnastics, track, and golf. But in all instances, the athletes represent their institution on and off the field, and they all have significant obligations that come along with their participation on their team. (Not all athletes have full or even partial scholarships, which can vary the obligations, though often all athletes have similar requirements.)
(To read more, please click below)
Wednesday, April 1, 2015
On March 25, 2015, the SEC Commissioners unanimously adopted final rules amending Regulation A, effective in 60 days, extending an existing exemptions for smaller issues as required under Title IV of the Jumpstart Our Business Startups (JOBS) Act. SEC information on the new regulations are available here and commentary is available here.
The SEC Release states that:
The updated exemption will enable smaller companies to offer and sell up to $50 million of securities in a 12-month period, subject to eligibility, disclosure and reporting requirements.
The final rules, often referred to as Regulation A+, provide for two tiers of offerings: Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Both Tiers are subject to certain basic requirements while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements.
The final rules pre-empt states from reviewing and approving Tier 2 offerings to "qualified purchasers." For a further discussion on merit review and preemption, see The SEC's New 'Regulation A+' and the States' 'M' Word, posted on JDSupra.
Supporters have commended the change as decreasing reliance on costly gate keepers to capital such as investment bankers, and facilitating an easier path to raise capital by allowing qualifying companies to offer their stock directly to the public. Initial reaction quotes in the alternative finance world are available here.
Thursday, March 26, 2015
Below is a call for papers and description of a weeklong project on business and human rights. If you are interested, please contact one of the organizers below. I plan to participate and may also be able to answer some questions.
Lat Crit Study Space Project in Guatemala
Corporations, the State, and the Rule of Law
We are excited to invite you to participate in an exciting Study Space Project in Guatemala. Study Space, a LatCrit, Inc. initiative, is a series of intensive workshops, held at diverse locations around the world. This 2015 Study Space project involves a 7 working day field visit to Guatemala between Saturday June 27 (arrival date) and Saturday July 4, 2015 (departure date). We are reaching out to you because we believe that your interests, scholarship, and service record align well with the proposed focus of our trip.
This call for papers proposes a trip to Guatemala to study more closely the phenomena of failed nations viewed from the perspective of the relationship of the state of Guatemala with corporations. With the recent surge of Central American unaccompanied minors and children fleeing with their mothers, the United States has had to confront the human face of children and women whose claim to asylum or other immigration relief is rooted in the dire reality that the countries from which they flee cannot or will not protect them. Largely, these fleeing migrants are escaping violence perpetuated by private actors, at times gang members or even their own parents or spouses. Their stories of flight cannot be disengaged from the broader context in which the violence occurs. Theirs is also the story of failed nations, characterized by ineptitude, weakness, and even worse, indifference or at times even complicity.
This story of failed nations applies beyond the reign of private “rogues” whom everyone agrees are bad actors (i.e., gangs, drug traffickers, violent criminals). The other side of the coin, invisible in this new wave of Central American refugees, is a more nuanced story about the failing role of some of these Central American nations in regulating the acts of corporations, whether owned by the oligarchy or operated by transnational actors. Corporations are entities with great potential to promote and further the public good, such as through job creation and economic development. Corporations, however, can also be the cause of social ills, particularly when left unregulated or at times even supported by the state to pursue private interests that conflict with the public good. In Guatemala, examples of deeply problematic unregulated arenas abound-- from the lack of antitrust legislation to the absence of meaningful environmental protections to protect even the most precious of natural resources, such as water. There is also the misuse of public institutions and laws to shield corporations from their public and fiscal responsibility or to aid them in capitalizing on public goods, including minerals or land. Ironically, here, the state apparatus functions quite effectively to exert its authority in the execution of laws. The failure, however, rests in the illegitimacy of law, not in its execution.
Guatemala is a nation that is experiencing tremendous social upheaval from the acts of corporations on issues that include mining, water uses, deforestation, genetically modified seeds, free-trade zones, and maquiladoras, to name a few. Caught between the state and corporations are the communities most deeply affected by both the absence and the presence of law in ways that appear to conflict with the public interest. The questions that arise include how law can and should restore the balance between the promotion of investment and economic development with the protection of the public interest and the preservation of the public good. These inquiries also involve issues related to the protection of rights, whether of individuals or communities in the collective, including the right to self-determination, the right to food and water, or the right to dignified work.
The purpose of this trip is not to single out Guatemala for scrutiny. The reality is that the bilateral and multilateral relations that Guatemala is forced to sustain with other more powerful nations aggravate many of its pressing problems. Questions about Guatemala’s regulation of corporations must also address the relationship between the powerful transnational forces of globalization and the domestic laws of Guatemala, including those related to trade liberalization and intellectual property. This inquiry must also acknowledge how the absence of accountability of transnational corporations operating in Guatemala in the corporation’s own nation-state – including the power these corporations have to influence law-making-- should lead us to a discussion of shared responsibility and a proposal for solutions that are transnational and international in character.
Should you decide to participate, you would be encouraged and welcomed to suggest specific topics (and field visits) you would like to be included as part of this project. While we are still working on a precise itinerary (which you can help us shape), our projected goals right now are to visit with government officials, non-profits, community groups and the private sector with a special focus on labor and environment. The trip would include time in Guatemala City but also time in key rural sectors. For example, we are planning to visit a transnational mining site and the free-trade zone where maquiladoras are concentrated in Guatemala. As part of the trip, we will include orientations and debriefings with the group so we can share knowledge, impressions, and insights as the trip progresses.
The cost of your participation (excluding flight) is $1,900. This fee will cover housing, food, in-country transportation, conference space, and other fees that we will pay such as to translators, community groups assisting with logistics, and a modest fee to Luis Mogollón (a Guatemalan lawyer with significant law school academic program development experience in Guatemala) who will spend countless hours making this trip safe and enjoyable for all of us. The flight to Guatemala from the United States should range between $600 to $800.
Our aim is to publish essays from this project as a book in Spanish and English. We hope to have between 15-20 contributions. While ideally participants will speak Spanish, we can accommodate non-Spanish speakers (or those who only speak “un poquito”) and will hire interpreters to work with you during the trip to Guatemala. Keep in mind that you may need to conduct some research in Spanish (at least for primary sources) depending on the focus on your project. We also hope to present papers about this project at several conferences upon the completion of our project, including at LatCrit, Inc. and ideally in Guatemala.
The organizing Committee is comprised of Raquel Aldana, Associate Dean for Faculty Scholarship at Pacific McGeorge School of Law; Steven Bender, Associate Dean for Research and Faculty Development at Seattle University School of Law; José R. Juárez, Professor of Law and Director of the Spanish for Lawyers Program at the University of Denver, Sturm College of Law; Beth Lyon, Director of the Farmworker Legal Aid Clinic and Professor of Law at Villanova University School of Law; Mario Mancilla, Technical Assistant of the Secretariat of Environmental Matters, CAFTA-DR; Luis Mogollón, Adjunct Professor and Consultant of the Inter-American Program from Pacific McGeorge; Rachael Salcido, Professor of Law at Pacific McGeorge School of Law; and Enrique Sánchez-Usera, Chair of the Inter-Disciplinary Studies at the University of Rafael Landívar Law School.
Please do not hesitate to contact any of us with questions. We do hope you decide to join us in this great project.
March 26, 2015 in Business Associations, Call for Papers, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, International Business, Law Reviews, Marcia Narine, Travel | Permalink | Comments (0)
Wednesday, March 25, 2015
The Economist has a helpful brief outline -- here -- of why oil prices are so low. I continue to think that oil prices will stabilize in the $55-$65 range, but now that it's apparent that most Bakken oil is profitable around $42, I would not be surprised to see prices bounce around in that range periodically for a while, too.
A few things to keep in perspective when you hear about how the energy sector is suffering:
(1) It's not very often through the years that anyone would be upset by low energy prices. That usually is a sign of good things to come in terms of markets because low energy prices can reduce costs of manufacturing, they tend to increase demand (in energy and beyond), and it tends to mean more money in consumers' pockets. Those are usually very good things.
(2) Despite layoffs are some energy sector companies, and a dramatic slow down of drilling, if you looked back to 2005 0r 2006 (an even more recently) people would have been thrilled to see the sector with this many jobs. Even another 20-30% slow down represents a strong and viable industry.
(3) Legal work for the sector is likely to carry on at a strong pace. A slow down will mean a slower pace in many sectors, and mineral leasing and other title work will likely slow significantly, but slow downs can lead to increases in M&A, restructuring, and litigation.
There are concerns, but it's always helpful to keep things in perspective. It's fair to raise questions and highlight the rapid changes, but it's not all gloom and doom.
Over at the Faculty Lounge, Kim Krawiec (Duke) is hosting an interesting mini-symposium on board diversity entitled “What’s The Return On Equality?”
The posts to date are linked to at the bottom of this recent post.
Friday, March 20, 2015
Bernard Sharfman has posted a new article entitled “Activist Hedge Funds in a World of Board Independence: Long-Term Value Creators or Destroyers?" In the paper he makes the argument that hedge fund activism contributes to long-term value creation if it can be assumed that the typical board of a public company has an adequate amount of independence to act as an arbitrator between executive management and the activist hedge fund. He also discusses these funds’ focus on disinvestment and attempts to challenge those in the Marty Lipton camp, who view these funds less charitably. In fact, Lipton recently called 2014 “the year of the wolf pack.” The debate on the merits of activist hedge funds has been heating up. Last month Forbes magazine outlined “The Seven Deadly Sins of Activist Hedge Funds,” including their promotion of share buybacks, aka “corporate cocaine.” Forbes was responding to a more favorable view of these funds by The Economist in its February 7, 2015 cover story.
Whether you agree with Sharfman or Lipton, the article is clearly timely and worth a read. The abstract is below:
Numerous empirical studies have shown that hedge fund activism has led to enhanced returns to investors and increased firm performance. Nevertheless, leading figures in the corporate governance world have taken issue with these studies and have argued that hedge fund activism leads to long-term value destruction.
In this article, it is argued that an activist hedge fund creates long-term value by sending affirming signals to the board of directors (Board) that its executive management team may be making inefficient decisions and providing recommendations on how the company should proceed in light of these inefficiencies. These recommendations require the Board to review and question the direction executive management is taking the company and then choosing which path the company should take, the one recommended by executive management, the one recommended by the activist hedge fund or a combination of both. Critical to this argument is the existence of a Board that can act as an independent arbitrator in deciding whose recommendations should be followed.
In addition, an explanation is given for why activist hedge funds do not provide recommendations that involve long-term investment. There are two reasons for this. First, the cognitive limitations and skill sets of those individuals who participate as activist hedge funds. Second, and most importantly, the stock market signals provided by value investors voting with their feet are telling the rest of the stock market that a particular public company is poorly managed and that it either needs to be replaced or given less assets to manage. These are the kind of signals and information that activist hedge funds are responding to when buying significant amounts of company stock and then making their recommendations for change. Therefore, it is not surprising that the recommendations of activist hedge funds will focus on trying to reduce the amount of assets under current management.
Tuesday, March 17, 2015
On the floor later Friday evening, the House put an amendment in a bill designed to shore up car dealers’ legal standings in dealings with auto manufacturers that effectively blocks innovative electric car manufacturer Tesla from doing business in the state.
The floor debate is best left forgotten: Several delegates played the crony capitalism card, talking about how their local car dealers are generous in sponsoring Little League teams and community events (not to mention campaign contributions), while other sneered about the company being owned by California billionaire Elon Musk (some called him “Monk,” but fortunately no one referred to him as “Elton”), and claiming the company relies on federal subsidies.
Never mind that it was stated that fewer than a dozen West Virginians own Teslas, or that a boom in demand for electric-powered cars might just be a good thing for a state that provides coal for electric power plants.
If you're about a free (or at least more free) markets, why stop a competitor from competing? Sorry, but the federal subsidy argument for the auto industry went out the window when the government bailed out GM and Chrysler.
Beyond that, for the life of me, I can't understand why coal friendly constituencies seem so often to be hostile to electric vehicles. (In fairness, Kentucky just added a Tesla charging station.) If it uses electricity, you should be all for it. Why is running a car on electricity any different than leaving the lights on all night? If you're for consumption, who cares who does it?
There is some debate about whether electric cars are better for the environment than gasoline powered cars. This remains an open question. But there's little doubt that increased demand for electricity is generally good for the coal industry.
More important, though, if consumers want to buy a Tesla, why not let them? What's the value in blocking consumers from buying the vehicles they want? Oh yeah, rent seeking and cronyism. By the way, the West Virginia legislature knows we can buy cars in other states, right?
Friday, March 6, 2015
Ten days from now will mark the start of the 2015 NCAA men's basketball tournament -- one of the most watched sporting events of the year. Recently, the NCAA sold 14 years worth of television broadcast rights to the NCAA Tournament for $10.8 Billion. On an annual basis, that comes to an annual sum of $770 Million per year.
The athletes who play in these games, by contrast, do not receive any share of the derived revenues, nor are they allowed to endorse products or sign autographs for money. In addition, the most successful teams in this tournament will have athletes that are required to miss upwards of nine class days based on a tournament schedule that is created to accommodate television broadcasts.
As a guest blogger for the month of March, I will be discussing the legal issues related to NCAA amateurism and the economic realities of the NCAA men's basketball tournament. Some of the topics I will discuss include why the NCAA is indeed an economic cartel, why the U.S. district court's decision in O'Bannon v. NCAA does not go far enough to protect college athletes, why perhaps the National Labor Relations Board should grant college athletes the right to unionize, and how the NCAA men's basketball tournament could be structured differently if student education, rather than athletic revenues, were truly a top priority.
Thank you to Haskell Murray for providing me with this wonderful forum to share my ideas and scholarship. And to all of the Business Law Prof Blog readers, please do not worry: I have no plans to be a Debbie Downer. I will, however, talk seriously about the economic and legal realities of college sports and how we, as academics, can make a difference.
It’s always nice to be validated. Day two into torturing my business associations students with basic accounting and corporate finance, I was able to post the results of a recent study about what they were learning and why. "Torture" is a strong word-- I try to break up the lessons by showing up to the minute video clips about companies that they know to illustrate how their concepts apply to real life settings. But for some students it remains a foreign language no matter how many background YouTube videos I suggest, or how interesting the debate is about McDonalds and Shake Shack on CNBC.
My alma mater Harvard Law School surveyed a number of BigLaw graduates about the essential skills and coursework for both transactional and litigation practitioners. As I explained in an earlier post, most of my students will likely practice solo or in small firms. But I have always believed that the skills sets are inherently the same regardless of the size of the practice or resources of the client. My future litigators need to know what documents to ask for in discovery and what questions to ask during the deposition of a financial expert. My family law and trust and estates hopefuls must understand the basics of a business structure if they wish to advise on certain assets. My criminal law aficionados may have to defend or prosecute criminal enterprises that are as sophisticated as any multinational corporation. Those who want to be legislative aides or go into government must understand how to close loopholes in regulations.
What are the top courses students should take? The abstract is below:
We report the results of an online survey, conducted on behalf of Harvard Law School, of 124 practicing attorneys at major law firms. The survey had two main objectives: (1) to assist students in selecting courses by providing them with data about the relative importance of courses; and (2) to provide faculty with information about how to improve the curriculum and best advise students. The most salient result is that students were strongly advised to study accounting and financial statement analysis, as well as corporate finance. These subject areas were viewed as particularly valuable, not only for corporate/transactional lawyers, but also for litigators. Intriguingly, non-traditional courses and skills, such as business strategy and teamwork, are seen as more important than many traditional courses and skills.
Did you take these courses? Has your school started adding more of this type of coursework and does your faculty see the value? Do you agree with the results of this survey? Let me know in the comments or email me at email@example.com.
March 6, 2015 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Jobs, Law School, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (2)
Thursday, February 26, 2015
Last week, I posted about Walmart’s ballyhooed wage hike and asked whether boycotts and activism actually work. Apparently, the President was so impressed that he called the company’s CEO to thank him. Some Walmart workers, however, aren’t as pleased because without more hours, they still can’t make ends meet. Nonetheless, TJX, the parent company of retailers TJ Maxx and Home Goods announced yesterday that its employees would also receive a pay raise. Is this altruism? Have the retail giants caved to pressure?
As some commented on the blog last week and to me privately, it’s more likely that these megaretailers have implemented these “pro-employee” moves to reduce turnover, raise morale, and most important compete in a tightening job market. But one LinkedIn commenter from Australia believes that boycotts in general can work, stating:
My experience with having organised boycotts is that they work, but they take time. They create the conditions for public awareness of corporate activities, and put pressure on the company to change. They are effectively the 'bad cop' of civil society pressure. Consequently, they do not work on their own, requiring also the 'good cop' - civil society organisations and market conditions that allow the subject of the boycott to shift behaviour. Market conditions include a broader 'meta boycott' in which companies needing access to supply chains must change because supply chains have changed, only accepting product that is acceptable to CSOs (the 'good' CSOs, who have certification programmes, and other initiatives for the company to opt for. If you are looking for a case study of these conditions, I suggest you follow the Tasmanian forest industry debate in Australia. Here, an entire industry was worn down after years of boycotts, market campaigns, and demands from purchasers for FSC certified product only. The fascinating addendum to this case study is the state government (and the Federal government, unsuccessfully), are still advocating behaviours that not even the companies want. They want to sign the 'peace deal' and the government(s) are trying to prolong the 'war' - for political, election-related issues. All this indicates that boycotts do not work in isolation, and if they do they are less likely to work.
Investors too are putting pressure on companies. Just yesterday, a group of 60 investors with four trillion in assets under management called for companies to do more for workers' human rights, including wages. Because I study business and human rights with a special emphasis on labor issues, I will wait to see what happens with all of this pressure. I will also monitor the share price, shareholder proposals, and whether there is any evidence that consumers reward Walmart and TJX for their better treatment of workers.
Tuesday, February 24, 2015
President Obama just vetoed the bill approving construction of the Keystone XL pipeline. The President has said the veto is not about the value of the pipeline, but that it represents the President's view the pipeline should not go around the State Department evaluation process.
The veto comes at a time when oil transportation is a increasingly an area of concern, especially in light of recent rail accidents in Quebec and West Virginia. I was recently part of a news story discussing the rail safety concerns in my part of country -- here -- and pipeline transportation tends to be much safer for human safety, though it raises other environmental concerns.
It's not clear whether Keystone XL would be built any time soon, in light of low oil prices, but the veto will certainly keep people talking. More on this soon.
Monday, February 23, 2015
I serve on the Tennessee Bar Association Business Entity Study Committee (BESC) and Business Law Section Executive Committee (mouthfuls, but accurately descriptive). The BESC was originated to vet proposed changes to business entity statutes in Tennessee. It was initially populated by members of the Business Law Section and the Tax Law Section, although it's evolved to mostly include members of the former with help from the latter. The Executive Committee of the Business Law Section reviews the work of the BESC before Tennessee Bar Association leadership takes action.
Just about every legislative session of late, these committees of the Tennessee Bar Association have been asked to review proposed legislation on benefit corporations (termed variously depending on the sponsors). A review request for a bill proposed for adoption for this session recently came in. Since I serve on both committees, I get to see these proposed bills all the time. So far, the proposals have pretty much tracked the B Lab model from a substantive perspective, as tailored to Tennessee law. To date, we have advised the Tennessee Bar Association that we do not favor this proposed legislation. Set forth below is a summary of the rationale I usually give.
February 23, 2015 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, Haskell Murray, Joan Heminway, Social Enterprise | Permalink | Comments (18)
Friday, February 20, 2015
I have just finished a draft of an article arguing that disclosures don’t work because consumers and investors don’t read them, can’t understand them, don't take any real action when they do pay attention to them, and fail to change corporate behavior when they do threaten boycott. I specifically pointed out the relative lack of success of consumer protests over the years. I also noted that Wal-Mart continues to get bad press for how it treats its employees despite the fact the Norwegian Pension Fund divested hundreds of millions of dollars due to the company’s labor practices, prompting other governments and cities to follow. My thesis—it takes a lot more than divestment and threats of boycott to change company behavior. But perhaps I’m wrong. Yesterday, Wal-Mart CEO Doug McMillon announced a significant wage increase declaring:
We’re strengthening investments in our people to engage and inspire them to deliver superior customer experiences… We will earn the trust of all Walmart stakeholders by operating great retail businesses, ensuring world-class compliance, and doing good in the world through social and environmental programs in our communities.
The letter to Wal-Mart associates is here. I don’t know which was more striking, the $1 billion dollar move to $9 and then eventually $10 per hour or the fact that he used the word “stakeholders.” Wal-Mart also announced changes that would affect health insurance and shift scheduling, but the main headline concerned the wage hike. Main Street may be happy but Wall Street was not, and the stock price fell after the announcement. Others pointed out that the pay raise is still not enough to pull workers out of poverty.
Does this move mean that boycotts and advocacy really do work and that we will see more of them? Do I have to edit my article or will this be an anomaly? Will other big retailers or fast food chains follow? Will socially responsible investors reinvest in Wal-Mart? Is Wal-Mart trying to pre-empt government regulation on the minimum wage? Is Wal-Mart signaling to regulators in foreign countries that it cares about workers so should be allowed to operate there more freely?
I will be teaching a course in transnational business and international human rights in the Fall and Wal-Mart will be a case study. A few years ago, I used the company’s CSR report in my corporate governance, compliance, and social responsibility seminar. I asked the students to consider why Wal-Mart’s report looked and felt so different from Target’s, which essentially has many of the same labor issues. I wanted them to think about the marketing behind CSR from a reputational and regulatory perspective. I posited that Wal-Mart’s CSR report was written for regulators. Two weeks later, the company announced its massive and still ongoing bribery investigation. I’m happy for the workers but a bit curious as to what caused the company to make this announcement now. In the meantime, I will be watching the reaction from advocates, the markets, and other companies closely.
Wednesday, February 11, 2015
Only 23 women lead companies in the Standard & Poor’s 500-stock index. Yet at least a quarter of them have fallen into the cross hairs of activist investors.
The article references Patricia Sellers observations in Fortune last month regarding corporate raider Nelson Peltz and his targeted attacks on PepsiCo lead by Indra Nooyi and Mondelez International lead by CEO Irene Rosenfeld as well as his current demands on DuPont, with Ellen Kullman as chairman and CEO.
In the absence of correlating data about female CEO's and weaker company performance, the question lingers is there something besides performance that prompts the targeting of these companies? To explain the question the article references several studies that report perception differences in competence, risk and performance based solely on gender, with, women on the losing end of these perception biases.
As I think is a common tendency, I gravitate towards information that relates to what I am personally thinking about, experiencing or interested in at the moment. Earlier on this blog, I wrote about gender issues in the classroom. On my current reading list, is the book What Works for Women at Work written by Joan Williams and Rachel Dempsey, that (1) reviews the existing literature about pervasive gender bias, (2) articulates how unconscious bias influences outcomes (acknowledging that for the most part society has moved past explicit and overt gender discrimination), (3) identifies four patterns where these biases consistently emerge based in part on her interviews with 127 "successful" women, and (4) discusses how the workplace (meaning men and women) can move beyond the limitations of these implicit biases. Several colleagues and friends are reading this book along with me as well. And the best part: not everyone reading the book is (and not everyone should be) a women.