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 (12)
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.
Tuesday, February 10, 2015
Business law is filled with a wide range of regulation and regulatory issues, and one of the main areas of business law for my research is energy law. Regulation impacts energy businesses at many levels. Energy companies have to deal land use regulations, air and water quality regulations, work place regulations, and (often) securities regulations.
On the land use and permitting side of things, oil and gas law has long been considered primarily a state issue, making such regulations relatively local (i.e., not federal). In recent years, with the increased use of high-volume hydraulic fracturing, many local governments have decided to restrict the process in their localities, splitting from state regulatory regimes that would allow the process. Interesting cases related to fracking bans from New York, Colorado, and Pennsylvania provide good examples of this process.
Texas Professor David B. Spence’s article about local hydraulic fracturing bans: The Political Economy of Local Vetoes, 93 Texas L. Rev. 351 (2015), discusses the debate about whether local governments should be ale to overrule the state law on oil and gas operations. Here's the abstract:
As the controversy over fracking continues to sweep the nation, many local communities have enacted ordinances banning the practice, creating conflicts between these ordinances and statewide regulation schemes. This has given rise to state–local preemption challenges within state courts. In this Article, Professor Spence analyzes these conflicts, focusing on the best way to distribute the costs and benefits of fracking and how courts have attempted to address these distributional concerns. He begins by describing the conflicts between state law and local ordinances and the court decisions that have resolved these preemption issues. He next discusses how future takings claims would affect the distribution of the costs and benefits of fracking.
I think Prof. Spence is right on a lot of the issues, though I have come to believe that, at least for most oil and gas issues, as long as state-level regulation is the primary regulation in the sector, whether localities have the ability to ban hydraulic fracturing in their jurisdictions is irrelevant. That is, I see oil and gas as a state-level issue, and if state's have or wish to grant counties or municipalities local control, then great. If the state chooses to maintain control, that's fine, too.
My main concern is that legislators and regulators, and courts who review their decisions, seek sufficient information to balance the costs and benefits of oil and gas operations. This is not an outcome driven analysis. That is, decision makers can, in my view, properly assess the costs and benefits of the hydraulic fracturing process and have different outcomes (such as one court upholding a ban and another striking a ban). But one must gather information and assess the broader range of issues raised by oil and gas operations, which are not that different from many other industrial operations, as I have argued previously, here.
I'll close with a shameless plug for my response to Prof. Spence's article, which appears in Texas Law Review See Also, along with responses from two outstanding scholars: Alexandra Klass (Fracking and the Public Trust Doctrine: A Response to Spence) and Hannah Wiseman (Governing Fracking from the Ground Up). I highly recommend these three pieces, and if you want more, you can check out mine.
Abstract:Professor Fershee responds to Professor David B. Spence’s article about local hydraulic fracturing bans: The Political Economy of Local Vetoes, 93 Texas L. Rev. 351 (2015). Professor Spence notes that the shale oil and gas debate provides an example of “an age-old political problem that the law is called upon to solve: the conflict between an intensely held minority viewpoint and a less intense, contrary view held by the majority.” In resolving such conflicts, Spence suggests that courts should resolve such “conflicts in ways that encourage states and local governments to regulate in ways that weigh both the costs and the benefits of shale oil and gas production fairly and fully.”
This Response suggests the Professor Spence’s test for local control is a sound, but adds another factor contributing to local control. As noted above, another way of considering local control over oil and gas operations is to view local control as state-level control. This Response proceeds under the premise that each state should decide whether it wishes to allow its municipalities to exercise oil and gas related vetoes. In analyzing whether local vetoes are efficient under Professor Spence’s test, this article analyzes recent decisions in New York, Pennsylvania, and Colorado.
This Response concludes that as long as state-level regulation is the primary basis for oil and gas regulation, Professor Spence’s overarching rule that state and local governments pursue regulations seeking to balance the costs and the benefits of shale oil and gas production “fairly and fully” is a foundation for good regulation. In this sense, local (meaning state or smaller subdivisions) vetoes are critical, but how “local” the vetoes are is less important. The key, then, is ensuring that courts and regulators are actually balancing costs and benefits.
Thursday, February 5, 2015
Many corporate governance professionals have been scratching their heads lately. In November, a federal judge in Delaware ruled that Wal-Mart had wrongfully excluded a shareholder proposal by Trinity Wall Street Church regarding the sale of guns and other products. Specifically, the proposal requested amendment of one of the Board Committee Charters to:
27. Provid[e] oversight concerning the formulation and implementation of, and the public reporting of the formulation and implementation of, policies and standards that determine whether or not the Company [i.e., Wal-Mart] should sell a product that:
1) especially endangers public safety and wellbeing;
2) has the substantial potential to impair the reputation of the Company; and/or
3) would reasonably be considered by many offensive to the family and community values integral to the Company's promotion of its brand.
Wal-Mart filed with the SEC under Rule 14a-8 indicating that it planned to exclude the proposal under the ordinary business operations exclusion. The SEC agreed that there was a basis for exclusion under 14a-8(i)(7), but the District Court thought otherwise because the proposal related to a “sufficiently significant social policy.” In mid-January Wal-Mart appealed to the Third Circuit arguing among other things that the district court should have deferred to the SEC’s precedents and guidance over the past forty years on these issues.
In an unrelated but relevant matter in December 2014, the SEC issued a no action letter to Whole Foods stating:
You represent that matters to be voted on at the upcoming stockholders' meeting include a proposal sponsored by Whole Foods Market to amend Whole Foods Market's bylaws to allow any shareholder owning 9% or more of Whole Foods Market's common stock for five years to nominate candidates for election to the board and require Whole Foods Market to list such nominees with the board's nominees in Whole Foods Market's proxy statement. You indicate that the proposal and the proposal sponsored by Whole Foods Market directly conflict. You also indicate that inclusion of both proposals would present alternative and conflicting decisions for the stockholders and would create the potential for inconsistent and ambiguous results. Accordingly, we will not recommend enforcement action to the Commission if Whole Foods Market omits the proposal from its proxy materials in reliance on rule 14a-8(i)(9).
In a startling turn of events, the SEC withdrew its no action letter on January 16, 2015 after a January 9th letter from the Council of Institutional Investors questioning the reasoning in the Whole Foods and similar no action letters. The withdrawal of the no action letter came on the same day as the release an official SEC statement declining “to express a view on the application of Rule 14a-8(i)(9) during the current proxy season” due to questions about the scope and application of the rule.
This announcement, a contradictory departure from a decision made just weeks earlier, benefits neither issuers nor investors and introduces an additional layer of uncertainty into an already complicated set of rules. The CCMC believes this reversal underscores why corporate governance policies must provide certainty for all stakeholders, not just to advance the goals of a small minority of special interest activists….[t]he January 16 announcement places many issuers in an untenable position, and presents them with a series of questions for which there may be no good answers. For those issuers wishing to present their own alternative proposal to shareholders for consideration, do they exclude a shareholder proposal in favor of their own and face the heightened risk of litigation with the proponent or the Commission? Do they risk shareholder confusion by including both their own proposal and a competing one from a proponent? Do they incur the added expense and distraction to management of seeking declaratory relief in federal district court? Are shareholders deprived of their right to include a proposal that is omitted because of the absence of SEC action? Far from encouraging private ordering, the recent announcement will only serve to stymie it.
The CCMC also recommends a review of the entire 14a-8 process because, as the letter claims, “it is well-known that the shareholder proposal process has been dominated by a small group of special interest activists, including groups affiliated with organized labor, certain religious orders, social and public policy advocates, and a handful of serial activists. These special interests use the shareholder proposal process to pursue their own idiosyncratic agendas, often far removed from the mainstream, as evidenced by the overall low approval rates of many shareholder proposals that are put to a vote. Indeed, mainstream institutional investors account for only one percent of shareholder proposals at the Fortune 250.”
Reasonable people may disagree on how the CCMC characterizes the motives behind the shareholder proposals, but there can be no disagreement that the current SEC silence doesn't serve any constituency. Steve Bainbridge also has an informative post on this topic. Proxy season is coming up and shareholders and companies alike are awaiting a decision from the Third Circuit in the Wal-Mart action that could dramatically alter the landscape for shareholder proposals, possibly flooding the courts with expensive, protracted litigation. The timing couldn’t be worse for the SEC’s lack of action on no action letters.
February 5, 2015 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Delaware, Financial Markets, Marcia Narine, Securities Regulation, Social Enterprise | Permalink | Comments (0)
Monday, February 2, 2015
On December 22 and again on January 9, I posted the first two installments of a three-part series featuring the wit and wisdom of my former student, Brandon Whiteley, who successfully organized a student group to draft, propose, and instigate passage of Invest Tennessee, a state crowdfunding bill in Tennessee. The first post featured Brandon's observations on the legislative process, and the second post addressed key influences on the bill-that-became-law. This post, as earlier promised, includes Brandon's description of the important role that communication played in the Invest Tennessee endeavor. Here's what he related to me in that regard (as before, slightly edited for republication here).
Thursday, January 29, 2015
I oppose the Dodd-Frank conflict minerals rule, which requires companies to conduct due diligence and report on their sourcing of certain minerals from the war-ravaged Democratic Republic of Congo and surrounding countries. As I have written before repeatedly on this blog, a law review article, and an amicus brief, it is a flawed “name and shame law” that assumes that consumers and investors will change their purchasing decisions based upon a corporate disclosure, which they may not read, understand, or care about. The name and shame portion of the law was struck down on First Amendment grounds, and the business lobby, the SEC, and the NGO community are eagerly awaiting a decision by the full DC Circuit Court of Appeals.
A disclosure law that does not take into account the true causes for the violence that has killed millions is not the most effective way to have a meaningful impact for the Congolese people. The Democratic Republic of Congo needs outside governments to provide more aid on security sector, criminal justice, education, and judicial reform at the very least. Indeed, the Congolese government is still trying to defeat the rebels that this law was meant to weaken (see here for example). I have strong feelings about the law as a former supply chain professional and an advisory board member of an NGO that operates in eastern DRC.
I am currently working on an article about the defects in disclosure laws that attempt to address human rights impacts, and the conflict minerals rule is one of them. In that context, I was excited to read a recent draft article entitled The Conflict Minerals Experiment by Professor Jeff Schwartz. Although I don't agree with his conclusion that the best way to fix the law is, among other things, to employ a disclose or explain approach and greater transparency (which I also discuss in my article), I do agree that reform and not necessarily repeal is in order. Schwartz’ article is particularly useful because he provides empirical evidence of the relative uselessness of the first round of corporate disclosures. I look forward to citing it in my upcoming piece. The abstract is below:
In Section 1502 of Dodd-Frank, Congress instructed the SEC to draft rules that would require public companies to report annually on whether their products contain certain Congolese minerals. This unprecedented legislation and the SEC rulemaking that followed have inspired an impassioned and ongoing debate between those who view these efforts as a costly blunder and those who view them as a measured response to human-rights abuses committed by the armed groups that control many mines in the Congo.
This Article for the first time brings empirical evidence to bear on this controversy. I present data on the inaugural disclosures that companies submitted to the SEC. Based on a quantitative and qualitative analysis of these submissions, I argue that Congress’s hope of supply-chain transparency goes unfulfilled, but amendments to the rules could yield useful information without increasing compliance costs. The SEC filings expose key loopholes in the regulatory structure and illustrate the importance of fledgling institutional initiatives that trace and verify corporate supply chains. This Article’s proposal would eliminate the loopholes and refocus the transparency mandate on disclosure of the supply-chain information that has come to exist thanks to these institutional efforts.
Friday, January 9, 2015
A few weeks ago, I described to you a really special extracurricular project undertaken by one of my students, Brandon Whiteley, now an alum, this past year. The project? Proposing and securing legislative passage of Invest Tennessee, a Tennessee state securities law exemption for intrastate offerings that incorporates key features of crowdfunding. The legislation became effective on January 1.
In that first post, I described the project and Brandon's observations on the legislative process. This post highlights his description of the influences on the bill that became law. Here they are, with a few slight edits (and hyperlink inserts) from me.
Wednesday, January 7, 2015
I had very limited time at AALS this year (unfortunately) but I still walked away with some great ideas (and a chance to say hello to a few, but not enough, friendly faces). I am borrowing from many ideas shared in the panel cited below, as well as a few of my own. As many of you prepare to teach BA/Corporations for the spring (or making notes on how to do it next time), here are a few fun new resources to help illustrate common concepts:
- HBO's The Newsroom. A hostile takeover, negotiations with a white knight-- all sorts of corporate drama unfolded on HBO's Season 3 of The Newsroom. I couldn't find clips on youtube, but episode recaps (like this) are available and provide a good reference point/story line/hypo/exam problem for class.
- Related, for those of you who teach or encourage the use of Bloomberg services, the Bloomberg terminal was even featured prominently in the season.
- This American Life-- Wake Up Now Act 2 (Dec. 26, 2014). This brief radio segment/podcast tells the story of two investors trying to reduce the pay of a company CEO. The segment discusses board of director elections, board duties, board functions and set up some large questions about whether or not shareholders are the owners of the corporation and their profit maximization is the ultimate goal for a company. This could be followed with Lynn Stout's 2012 NYT Dealbook article proposing the opposite view.
- HBO's Silicon Valley. For all things tech, start up, entrepreneurship and basic corporate formation, clips (you will want to find something without all of the swears, I suspect) and episode recaps from this popular show illustrate concepts and connect with students. Again, great for discussion, hypos, and exam fact patterns.
- The Shark Tank!. I have to thank Christyne Vachon at UD for this idea. There are tons of clips on youtube and most offer the opportunity to talk about investors bringing different things to the table, how to apportion control, etc. Here is an episode involving patent issues. I think that I am going to open my experiential Unincorporated/Drafting class with a Shark Tank clip on Monday.
- Start Up Podcasts. These 30-minute episodes cover a wide range of topics. Here is one podcast on how to value a small business. At a minimum, I will post some of these to my course website this spring. (Thank you Andrew Haile at Elon for this recommendation.).
- Planet Money. The podcasts are a great resource, but what I love is the Planet Money Twitter page because it is a great way to digest daily news, current events and topical developments that may be incorporated into your class.
- Wall Street Journal--TWEETS. (that felt like an oxymoron to write). Aside from the obvious, I find the Twitter feed to be the most useful way to use/monitor the WSJ. I will admit it, I don't "read" it every day, but this is my proxy.
Special thanks to the participants in the Agency, Partnership & the Law's panel on Bringing Numbers into Basic and Advanced Business Associations Courses: How and Why to Teach Accounting, Finance, and Tax
Moderator: Jeffrey M. Lipshaw, Suffolk University Law School
Lawrence A. Cunningham, The George Washington University Law School
Andrew J. Haile, Elon University School of Law
Usha R. Rodrigues, University of Georgia School of Law
Christyne Vachon, University of North Dakota School of Law
Eric C. Chaffee, University of Toledo College of Law
Franklin A. Gevurtz, University of the Pacific, McGeorge School of Law
And Happy New Year BLPB Readers!
Tuesday, December 23, 2014
Environmental groups and other opponents of high-volume hydraulic fracturing (also known as fracking) for oil and natural gas have roundly applauded Governor Cuomo’s decision to ban the process in the state of New York. The ban, which confirms New York’s more than five-year moratorium on the process, has been lauded as an environmental success and a model for other states. The ban is neither.
Oil and natural gas prices are at their lowest prices in years. Interest in expanding drilling in the Marcellus Shale, which is the geologic formation holding natural gas deposits under New York, Pennsylvania, and West Virginia, is correspondingly low. That makes the fracking ban an easy decision because there is relatively limited interest in drilling in state.
There are those with interest in drilling in New York, of course, but as long as prices are low and there are other places to drill (like Pennsylvania and West Virginia), that interest will remain modest. The ban also raises the value of Pennsylvania and West Virginia mineral rights by reducing competition, so companies with interests in the entire region have little reason to weigh in forcefully.
In this environment, then, an outright ban was easier to put in place than real and stringent regulations to help ensure the fracking process is done with minimal risk and maximum gain. An outright ban is the easy road because it minimizes the potential fight. Companies engaging in hydraulic fracturing around the country would object to new regulations in New York, even if they don’t have interest in drilling in the state because they are afraid the states where they drill would follow New York’s lead. But no one will fight about a ban in a state where they don’t want to drill.
When natural gas prices rebound – and they will rebound – money will flow into the state to overturn the ban and allow access to the natural gas. The economic pressure will be enormous and when the financial potential reaches the point that large and diverse groups in the state see the possibility of significant gain, it’s highly likely the ban will be reversed through legislative or other political action. At that point, the debate will not be about the quality of regulations or enforcement – it will be about whether the state will allow fracking or not.
Done properly, the risks of hydraulic fracturing are comparable to traditional oil and gas exploration and to other common extractive and industrial processes. The better course of action now would have been to put in place stringent safeguards that would made New York the leader in environmental protection in hydraulic fracturing. Such rules could have banned the process in areas that could put New York City’s water supply at risk, and allowed in the southwestern part of the state, as was proposed in 2012 for Broome, Chemung, Chenango, Steuben and Tioga Counties. The rules could have required significant recycling and cradle-to-grave tracking of waste water created by the process, added the highest level well casing standards, and enacted stringent air and water quality standards.
Such a set of rules would be expensive for those seeking to drill in the state and would have served as a model for other states (and nations around the world) in how best to regulate hydraulic fracturing. The rules would be expensive enough for exploration companies that few, if any, would start drilling in the state. But when prices reach the level where the cost of compliance becomes economic, the state would have been ready with strong and enforceable rules.
Creating stringent rules would also have forced companies to seek to rollback specific environmental protections, which would mean discussing and explaining specific risks. Instead, the governor has taken the easy path, and in doing so he pushed the real debate down the road. Rather than talking about the risks inherent in this and any industrial process, and seeking to address those risks, the ban reduces the discourse to a simple “yes” or “no.” A “no” answer is easy when prices are low, but “yes” is likely to follow when prices are high.
The governor had a chance to be a leader on this issue, and instead chose to score easy political points. That’s his and his administration’s prerogative, but time will show that the outright ban was a mistake because it was a missed opportunity in New York and beyond.
Monday, December 22, 2014
Effective as of January 1. 2015, Tennessee will allow Tennessee corporations to engage in intrastate offerings of securities to Tennessee residents over the internet without registration. The new law, adopted earlier this year, is the direct result of a law-student-led movement. The key student leader was one of my students, and he kept me informed about the effort as it moved along. (I was called upon for advice and commentary from time to time, but the bill is all their work.)
In my experience, this kind of effort--a student-initiated, non-credit, extracurricular engagement in business law reform--is almost unheard of. I was intrigued by the enterprise and impressed by its success. As a result, I asked the student leader, Brandon Whiteley, now an alumnus, to send me some of his perceptions about drafting and proposing the bill and getting it passed.
This is the first in a series of three posts that feature Brandon's observations on the legislative process, the key influences on the bill, and the importance of communication. This post highlights his commentary on the legislative process (which I have edited minimally with his consent). I think you'll agree that his wisdom and humor both shine through in this first installment (as well as the others). His organizational capabilities also are evident throughout.
Friday, December 19, 2014
In each of the classes I have taught I have offered extra credit for a reflection paper on how the media portrays the particular subject because most Americans, including law students, form their opinions about legal issues from television and the movies. Sometimes the media does a great job. I’m told by my friends who teach and practice criminal law that The Wire gets it right. Although I have never practiced criminal law, I assume that ABC’s How to Get Away With Murder, in which first-year students skip their other classes to both solve and commit murders, is probably less accurate. I do have some students who now watch CNBC because I show relevant clips in class. After a particularly heated on-air debate, one student called the network “the ESPN for business people.”
I’m looking for new fiction movies or TV shows to suggest to my students next semester. In addition to the standard business movies and documentaries, what makes your list of high-quality business-related shows? Friends, colleagues, and students have suggested the following traditional and nontraditional must-sees:
1) Game of Thrones (one student wrote about it in the partnership context)
2) House of Cards (not purely business, but shows how business and politics intersect)
3) House of Lies (a look at the world of management consulting)
4) Silicon Valley (one episode I saw talked about entity selection)
5) The Newsroom (during the last season writers tackled insider trading, hostile takeovers, and white knights)
6) Sons of Anarchy (I don’t watch this one so I can’t judge)
7) Shark Tank (not always a complete or accurate depiction but entertaining)
I look forward to your suggestions and to some binge-watching over the holidays.
Tuesday, December 16, 2014
In September, Myles Udland wrote an article citing Burton G. Malkiel and his book, A Random Walk Down Wall Street, noting, "The past history of stock prices cannot be used to predict the future in any meaningful way." This is a great point.
I also saw Udland's article from today, which notes oil prices (and stock prices) have gone bonkers. Both prices have fluctuated wildly, and oil has been mostly trending mostly downward. As I have said before, I don't expect prices to stay low (sub-$70 per barrel) for long, but time will tell.
Low oil and gas prices are certainly having an impact on markets and economies. The big one right now is Russia, which is struggling, in major part because of low oil prices. The ruble has taken a beating, and the nation's central bank raised interest rates from 10.5 to 17 percent. Wow.
The bulk of U.S. oil production appears safe well in the low- to mid-$40 per barrel price range, and I don't think it will stay below $55 for long. Then again, as much as I follow all of this, I am still a law professor, and not a financial analyst, so keep that in mind.
Anyway, having read all of this, I was reminded that people are sometimes inclined to view stock prices and commodities markets similarly. That would be wrong. Despite my views that oil is likely to go back up, at least some, it's also worth noting that using history as a predictor of markets is a dangerous game. It's reasonable to assume that, eventually, a market will go up, but whether it will take three weeks, three months, or three years (or more) is hard to say.
One recent report notes that oil price histories suggest we're near the bottom, and that (on average) prices should rebound significantly. The timing here is unpredictable, too, but the history of oil prices do suggest a rebound will happen sooner rather than later, even with global markets struggling.
Uland's articles keep the issues separate, but still, lest anyone get confused (and history suggest they might), it is worth noting that charting commodity markets is different than charting stock prices. As Professor Bainbridge's Safety Tip of the Day: Charting Doesn't Work from ten years ago notes, "Consistently, empirical studies have demonstrated that securities prices move randomly and, moreover, have shown that charting is not a long term profitable trading strategy." Bainbridge similarly cites Burton G. Malkiel, A Random Walk Down Wall Street (1996) in that post, and in an earlier one from 2003, Random stock traders and the ECMH; with a review of Malkiel's Random Walk.
I learned a lot about stock markets (and Business Organizations) from reading the good professor's writing, and I thought it worthwhile to continue to spread the message: Even though some people like to think that stock prices will follow historical trends and that stocks are like commodities and currencies, you follow their lead at your own peril.
Monday, December 15, 2014
. . . here's a relatively new Dodge Challenger commercial (part of a series) that you may find amusing. I saw it during Saturday Night Live the other night and just had to go find it on YouTube. It, together with the other commercials in the series, commemorate the Dodge brand's 100-year anniversary. "They believed in more than the assembly line . . . ." Indeed!
You also may enjoy (but may already have read) this engaging and useful essay written by Todd Henderson on the case. The essay provides significant background information about and commentary on the court's opinion. It is a great example of how an informed observer can use the facts of and underlying a transactional business case to help others better understand the law of the case and see broader connections to transactional business law generally. Great stuff.
On December 10, the press reported the Second Circuit's decision in the insider trading prosecution of Todd Newman and Anthony Chiasson (two of multiple defendants in the original case). In its opinion, the court reaffirms that tippee liability for insider trading is predicated on a breach of fiduciary duty based on the receipt of a personal benefit by the tipper and clarifies that insider trading liability will not result unless the tippee has knowledge of the facts constituting the breach (i.e., "knew that the insider disclosed confidential information in exchange for a personal benefit"). The court summarized its opinion, which addresses these matters in the context of the Newman case, a criminal case, as follows:
[W]e conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit. Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government’s evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.
Thursday, December 11, 2014
In many companies, executives and employees alike will give a blank stare if you discuss “human rights.” They understand the terms “supply chain” and “labor” but don’t always make the leap to the potentially loaded term “human rights.” But business and human rights is all encompassing and leads to a number of uncomfortable questions for firms. When an extractive company wants to get to the coal, the minerals, or the oil, what rights do the indigenous peoples have to their land? If there is a human right to “water” or “food,” do Kellogg’s, Coca Cola, and General Mills have a special duty to protect the environment and safeguard the rights of women, children and human rights defenders? Oxfam’s Behind the Brands Campaign says yes, and provides a scorecard. How should companies operating in dangerous lands provide security for their property and personnel? Are they responsible if the host country’s security forces commit massacres while protecting their corporate property? What actions make companies complicit with state abuses and not merely bystanders? What about the digital domain and state surveillance? What rights should companies protect and how do they balance those with government requests for information?
The disconnect between “business” and “human rights” has been slowly eroding over the past few years, and especially since the 2011 release of the UN Guiding Principles on Business and Human Rights. Businesses, law firms, and financial institutions have started to pay attention in part because of the Principles but also because of NGO pressures to act. The Principles operationalize a "protect, respect, and remedy" framework, which indicates that: (i) states have a duty to protect against human rights abuses by third parties, including businesses; (ii) businesses have a responsibility to comply with applicable laws and respect human rights; and (iii) victims of human rights abuses should have access to judicial and non-judicial grievance mechanisms from both the state and businesses.
Many think that the states aren’t acting quickly enough in their obligations to create National Action Plans to address their duty to protect human rights, and that in fact businesses are doing most of the legwork (albeit very slowly themselves). The UK, Netherlands, Spain, Italy and Denmark have already started and the US announced its intentions to create its Plan in September 2014. A number of other states announced that they too will work on National Action Plans at the recent UN Forum on Business and Human Rights that I attended in Geneva in early December. For a great blog post on the event see ICAR director Amol Mehra's Huffington Post piece.
What would a US National Action plan contain? Some believe that it would involve more disclosure regulation similar to the Dodd-Frank Conflict Minerals Rule, the Ending Trafficking in Government Contracting Act, Trafficking Victims Protection Act, the Burma Reporting Requirements on Responsible Investment, and others. Some hope that it will provide additional redress mechanisms after the Supreme Court’s decision in Kiobel significantly limited access to US courts on jurisdictional grounds for foreign human rights litigants suing foreign companies for actions that took place outside of the United States.
But what about the role of business? Here are five observations from my trip to Geneva:
1) It's not all about large Western multinationals: As the Chair of the Forum Mo Ibrahim pointed out, it was fantastic to hear from the CEOs of Nestle and Unilever, but the vast majority of people in China, Sudan and Latin American countries with human rights abuses don’t work for large multinationals. John Ruggie, the architect of the Principles reminded the audience that most of the largest companies in the world right now aren’t even from Western nations. These include Saudi Aromco (world’s largest oil company), Foxconn (largest electronics company), and India’s Tata Group (the UK’s largest manufacturing company).
2) It’s not all about maximization of shareholder value: Unilever CEO Paul Pollman gave an impassioned speech about the need for businesses to do their part to protect human rights. He was followed by the CEO of Nestle. (The opening session with both speeches as well as others from labor and civil society was approximately two hours long and is here). In separate sessions, representatives from Michelin, Chevron, Heinekin, Statoil, Rio Tinto, Barrick, and dozens of other businesses discussed how they are implementing human rights due diligence and practices into their operations and metrics, often working with the NGOs that in the past have been their largest critics such as Amnesty International, Human Rights Watch and Oxfam. The US Council for International Business, USCIB, also played a prominent role speaking on behalf of US and international business interests.
3) Investors and lenders are watching: Calvert; the Office of Investment Policy at OPIC, the US government’s development finance institution; the Peruvian Financial Authority; the Supervision Office of the Banco Central do Brasil; the Vice Chair of the Banking Association of Colombia; the European Investment Bank; and Swedfund, among others discussed how and why financial institutions are scrutinizing human rights practices and monitoring them as contractual terms. This has real world impact as development institutions weigh choices about whether to lend to a company in a country that does not allow women to own land, but that will provide other economic opportunities to those women (the lender made the investment). OPIC, which has an 18 billion dollar portfolio in 100 countries, indicated that they see a large trend in impact investing.
4) Integrated reporting is here to stay: Among other things, Calvert, which manages 14 billion in 40 mutual funds, focused on their commitment to companies with solid track records on environmental, social, and governance factors and discussed the benefits of stand alone or integrated reporting. Lawyers from some of the largest law firms in the world indicated that they are working with their clients to prepare for additional non-financial reporting, in part because of countries like the UK that will mandate more in 2016, and an EU disclosure directive that will affect 6,000 firms.
5) Is an International Arbitration Tribunal on the way?: A number of prominent lawyers, retired judges and academics from around the world are working on a proposal for an international arbitration tribunal for human rights abuses. Spearheaded by lawyers for better business, this would either supplement or possibly replace in some people’s view a binding treaty on business and human rights. Having served as a compliance officer who dealt extensively with global supply chains, I have doubts as to how many suppliers will willingly contract to appear before an international tribunal when their workers or members of indigenous communities are harmed. I also wonder about the incentives for corporations, the governing law, the consent of third parties, and a host of other sticking points. Some raised valid concerns about whether privatizing remedies takes the pressure off of states to do their part. But it’s a start down an inevitable road as companies operate around the world and want some level of certainty as to their rights and obligations.
On another note, I attended several panels in which business executives, law firm partners, and members of NGOs decried the lack of training on business and human rights in law schools. Even though professors struggle to cover the required content, I see this area as akin to the compliance conversations that are happening now in law schools. There is legal work in this field and there will be more. I look forward to integrating some of this information into an upcoming seminar.
In the meantime, I tried to include some observations that might be of interest to this audience. If you want to learn more about the conference generally you can look to the twitter feed on #bizhumanrights or #unforumwatch, which has great links. I also recommend the newly released Top 10 Business and Human Rights Issues Whitepaper.
December 11, 2014 in Business Associations, Conferences, Corporate Finance, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, International Business, Jobs, Law School, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (0)
Tuesday, December 9, 2014
The New York Times reports that LLCs have the ability to do things in New York politics that corporations cannot do:
For powerful politicians and the big businesses they court, getting around New York’s campaign donation limits is easy.
. . .
Corporations like Glenwood are permitted to make a total of no more than $5,000 a year in political donations. But New York’s “LLC loophole” treats limited-liability companies as people, not corporations, allowing them to donate up to $60,800 to a statewide candidate per election cycle. So when Mr. Cuomo’s campaign wanted to nail down what became a $1 million multiyear commitment — and suggested “breaking it down into biannual installments” — the company complied by dividing each payment into permissible amounts and contributing those through some of the many opaquely named limited-liability companies it controlled, like Tribeca North End LLC.
It may appear unseemly to allow LLCs to do things corporations cannot do, but (as usual) I bristle at the implication that LLCs should be treated like corporations just because they are limited-liability entities. Perhaps LLCs and corporations should be treated the same for campaign purposes (and I am inclined to think they should be), but there are lots of reasons to treat LLCs differently than corporations, and it is not inherently "a loophole" when they are treated differently.
A loophole is an ambiguity or inadequacy in the law. Here, the different treatment is not an ambiguity, though it is inadequate to limit funding in campaigns. However, it is not at all clear that the intent was to limit funding through LLCs. The law was likely passed so that the legislature could say it did something to reform finance. It did -- it closed the door for corporations and opened the door for LLCs. Playing entity favorites is permissible, even if it's not sensible.
LLCs and corporations are different entities, and different rules for different entities often makes a whole lot of sense. And even when it doesn't make sense, the idea that different entities should have different rules still does. Let's not conflate the two concepts, even when decrying the impact.
Thursday, November 27, 2014
As regular readers know, I research and write on business and human rights. For this reason, I really enjoyed the post about corporate citizenship on Thanksgiving by Ann Lipton, and Haskell Murray’s post about the social enterprise and strategic considerations behind a “values” message for Whole Foods, in contrast to the low price mantra for Wal-Mart. Both posts garnered a number of insightful comments.
As I write this on Thanksgiving Day, I’m working on a law review article, refining final exam questions, and meeting with students who have finals starting next week (being on campus is a great way to avoid holiday cooking, by the way). Fortunately, I gladly do all of this without complaint, but many workers are in stores setting up for “door-buster” sales that now start at Wal-Mart, JC Penney, Best Buy, and Toys R Us shortly after families clear the table on Thanksgiving, if not before. As Ann pointed out, a number of protestors have targeted these purportedly “anti-family” businesses and touted the “values” of those businesses that plan to stick to the now “normal” crack of dawn opening time on Friday (which of course requires workers to arrive in the middle of the night). The United Auto Workers plans to hold a series of protests at Wal-Mart in solidarity with the workers, and more are planned around the country.
I’m not sure what effect these protests will have on the bottom line, and I hope that someone does some good empirical research on this issue. On the one hand, boycotts can be a powerful motivator for firms to change behavior. Consumer boycotts have become an American tradition, dating back to the Boston Tea Party. But while boycotts can garner attention, my initial research reveals that most boycotts fail to have any noticeable impact for companies, although admittedly the negative media coverage that boycotts generate often makes it harder for a companies to control the messages they send out to the public. In order for boycotts to succeed there needs to be widespread support and consumers must be passionate about the issue.
In this age of “hashtag activism” or “slacktivism,” I’m not sure that a large number of people will sustain these boycotts. Furthermore, even when consumers vocalize their passion, it has not always translated to impact to lower revenue. For example, the CEO of Chick-Fil-A’s comments on gay marriage triggered a consumer boycott that opened up a platform to further political and social goals, although it did little to hurt the company’s bottom line and in fact led proponents of the CEO’s views to develop a campaign to counteract the boycott.
Similarly, I’m also not sure of the effect that socially responsible investors can have as it relates to these labor issues. In 2006, the Norwegian Pension Fund divested its $400 million position (over 14 million shares in the US and Mexico operations) in Wal-Mart. In fact, Wal-Mart constitutes two of the three companies excluded for “serious of systematic” human rights violations. Pension funds in Sweden and the Netherlands followed the Fund’s lead after determining that Wal-Mart had not done enough to change after meetings on its labor practices. In a similar decision, Portland has become the first major city to divest its Wal-Mart holdings. City Commissioner Steve Novick cited the company’s labor, wage and hour practices, and recent bribery scandal as significant factors in the decision. Yet, the allegations about Wal-Mart’s labor practices persist, notwithstanding a strong corporate social responsibility campaign to blunt the effects of the bad publicity. Perhaps more important to the Walton family, the company is doing just fine financially, trading near its 52-week high as of the time of this writing.
I will be thinking of these issues as I head to Geneva on Saturday for the third annual UN Forum on Business and Human Rights, which had over 1700 companies, NGOs, academics, state representatives, and civil society organizations in attendance last year. I am particularly interested in the sessions on the financial sector and human rights, where banking executives and others will discuss incorporation of the UN Guiding Principles on Business and Human Rights into the human rights policies of major banks, as well as the role of the socially responsible investing community. Another panel that I will attend with interest relates to the human rights impacts in supply chains. A group of large law firm partners and professors will also present on a proposal for an international tribunal to adjudicate business and human rights issues. I will blog about these panels and others that may be of interest to the business community next Thursday. Until then enjoy your holiday and if you participate in or see any protests, send me a picture.
November 27, 2014 in Ann Lipton, Conferences, Corporate Finance, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Haskell Murray, International Business, Marcia Narine, Securities Regulation, Social Enterprise | Permalink | Comments (0)