Thursday, June 25, 2015
It’s always nice to blog and research about a hot topic. Last week I wrote about compliance challenges for those who would like to rush down to do business in Cuba- the topic of this summer’s research. Yesterday, Corporate Counsel Magazine wrote about the FCPA issues; one of my concerns. Earlier this week, I attended a meeting with the Greater Miami Chamber of Commerce and the United States International Trade Commission. Apparently, on December 17th, the very same day that President Obama made his surprise announcement that he wanted to re-open relations with Cuba, Senator Ron Wyden coincidentally sent a request to the USITC asking for an investigation and report on trade with Cuba and an analysis of restrictions. Accordingly, the nonpartisan USITC has been traveling around the country speaking to lawyers and business professionals conducting fact-finding meetings, in order to prepare a report that will be issued to the public in September 2015. Tomorrow the Miami Finance Forum is holding an event titled the New Cuba Revolution.
This will be my third and final post on business and Cuba and in this post I will discuss the focus of my second potential law review article topic. My working thesis is as follows: As relations between the United States and Cuba thaw, American businesses have begun exploring opportunities on the island. Cuba, however, remains a communist nation with a human rights record criticized by exiles, NGOs, and even members of the United States Congress. The EU has taken a "common position" on Cuba stating that the objective of the European Union in its relations with Cuba is to encourage a process of transition to a pluralist democracy, require a respect for human rights and fundamental freedoms, as well as sustainable recovery and improvement in the living standards of the Cuban people." Individual EU member states are free to conduct business with Cuba and many European companies have joined Canadian firms in investing through joint ventures and other state-sanctioned vehicles. This Article will examine whether the US should follow the EU's model in trying to spur reform or whether allowing American firms to do business in Cuba without human rights concessions will in fact perpetuate the status quo.
As I discussed in last week’s blog post, one reason that the U.S. is unlikely to lift the embargo is the nearly 7 billion in claims for confiscated US property. Another reason is Cuba’s human rights record. For example, the island is notorious for violations of rights to freedom of press, association, assembly, and imprisonment of political protesters. The Cuban government continues to control all media limiting the access to information on the Internet due to content-based restrictions and technical limitations. Independent journalists are systematically subjected to harassment, intimidation, and detention for reporting information that was not sanctioned by the state apparatus. My colleague Jason Poblete writes often and critically about the Obama administration’s rapprochement with Cuba. (I highly recommend him for legal advice about Cuba by the way).
Depending on whom you talk to the embargo will be lifted next year, in five year or in ten years. Personally, I don't know that the EU Common Position has been particularly effective in pressuring the Castro brothers to make human rights reforms. I don’t think the U.S. government will be any more successful either. The embargo is Exhibit A.
Most of my academic research thus far has been on what drives corporations to act in the absence of legal obligations vis a vis human rights. With that in mind, I plan to examine a few options related to Cuba. First, I am researching the effect of bilateral investment treaties. A bilateral investment treaty is an "agreement between two countries for the reciprocal encouragement, promotion and protection of investments in each other's territories by companies based in either country.” These typically grant significant rights to foreign investors, provide safeguards to investments against foreign governments, and allow foreign investors to have investment disputes adjudicated outside of the country, which will be critical for those investing in Cuba. The problem is that these BITS rarely have human rights conditions. Accordingly, some scholars have recommended that they require adherence to the Universal Declaration of Human Rights, the United Nations International Covenant on Civil and Political Rights, the ILO Declaration on Fundamental Principles and Rights at Work, the United Nations Convention Against Corruption, the and the Rio Declaration on Environment and Development. I would also recommend reference to the UN Guiding Principles on Business and Human Rights and the OECD Guidance.
Another option is to condition any renewal of a development bank such as the US’s Ex-Im Bank on requiring human rights impact assessments. The Ex-Im bank is the official export credit agency of the US. It’s used when private sector lenders are unable or unwilling to provide financing to companies entering politically or commercially risky countries. Its charter is set to expire on June 30th although its supporters claim that it financed billions in exports, which supported 200 thousand jobs last year. Opponents claim that it financed exports in countries with abysmal human rights records and/or that it supports corporate welfare. I propose that Ex-Im and other lenders follow the lead of many European financers that require human rights disclosures. I (naively?) believe labor may be the only human right remotely and partially in the control of US companies operating in Cuba in the future.
I have some other ideas but those will have to wait for the upcoming article. In the meantime, if you have some thoughts or critiques of these early ideas, please comment below or send me an email at email@example.com. I’m off to Guatemala on Saturday for a week with a group of academics studying business and human rights (another research topic for this summer). We will be exploring climate change, the extractive industries, maquiladoras, corporate social responsibility, and the effects on the rights of indigenous peoples. You can be sure I will be writing about that in a future post.
Thursday, June 18, 2015
Last week I posted the first of three posts regarding doing business in Cuba. In my initial post I discussed some concerns that observers have regarding Cuba’s readiness for investors, the lack of infrastructure, and the rule of law issues, particularly as it relates to Cuba’s respect for contracts and debts. Indeed today, Congress heard testimony on the future of property rights in Cuba and the claims for US parties who have had billions in property confiscated by the Castro government- a sticking point for lifting the embargo. (In 1959, Americans and US businesses owned or controlled an estimated 75-80% of Cuban land and resources). Clearly there is quite a bit to be done before US businesses can rush back in, even if the embargo were lifted tomorrow. This evening, PBS speculated about what life would be like post-embargo for both countries. Today I will briefly discuss the Cuban legal system and then focus the potential compliance and ethical challenges for companies considering doing business on the island.
Cuba, like many countries, does not have a jury system. Cuba’s court system has a number of levels but they have both professional judges with legal training, and non-professional judges who are lay people nominated by trade unions and others. Cubans have compulsory service to the country, including military service for males. Many law graduates serve part of their compulsory service as judges (or prosecutors) and then step down when they are able. The lay judges serve for five years and receive a full month off from their employer to serve at full pay. Although there is a commercial court, only businesses may litigate there and are then they are at the mercy of the lay judges, who have equal power to the professional jurists. This lay judge system exists even at the appellate level. Most lawyers and law firms are controlled by the Cuban government, unless they work for a non agcricultural cooperative. More important, although I have received differing opinions from counsel, it is possible that hiring and paying a local lawyer there could violate US law related to doing business in Cuba. Notwithstanding these obstacles, many companies are trying to get an OFAC license to do business in Cuba right away or are planning for the eventual life of the embargo. In my view, getting there is the easy part. The hard part will be complying with US law, not because Cuba is in a nascent state of legal and economic development, but because of the sheer complexity of doing business with a foreign government.
The first challenge that immediately comes to mind is compliance with the Foreign Corrupt Practices Act, which makes it illegal for a person or company to make “corrupt payments” or provide “anything of value” to a foreign official in order to obtain or retain business. Since almost everything is a state-owned enterprise or a joint venture with a state owned enterprise, US firms take a real risk entering into contracts or trying to get permits. There is no de minimis exception and facilitation payments- otherwise known as grease payments to speed things along- while customary in many countries- are illegal too. Legal fees and fines for FCPA violations are prohibitively expensive, and those companies doing business in Cuba will surely be targets.
Another concern for publicly-traded US companies is compliance with the Sarbanes-Oxley and Dodd-Frank whistleblower rules. Unless the law changes, most US companies will have to follow the model of Canadian and EU companies and enter into joint ventures or some contractual relationship with the Cuban government or a Cuban company (which may be controlled by the government). Most US employees are afraid to report on their own private employers in the US. How comfortable will a Cuban employee be using a hotline or some other mechanism to report wrongdoing when his employer is in some measure controlled by or affiliated with the Cuban government? As I will discuss next week, the biggest criticism of Cuba is its human rights record related to those who dissent. I have personally dealt with the challenge establishing and working with hotlines in China and in other countries where speaking out and reporting wrongdoing is not the cultural norm. I can imagine that in Cuba this could be a herculean task.
The last concern I will raise in this post relates to compliance with a company’s own code of conduct. If a company has a supplier code of conduct that mirrors its own, and those codes discuss freedom of association and workers’ rights that may be out of step with the Cuban law or culture, should the US firm conform to local rules? Even if that is legal, is it ethical? Google's code is famous for its “don’t be evil”credo and it has received criticism in the past from NGOs who question how it can do business in China. But Google was in Cuba last week testing the waters. Perhaps if Google is able to broaden access to the internet and the outside world, this will be a huge step for Cubans. (Of note, Cubans do not see the same TV as the tourists in their hotels and there are no TV commercials or billboards for advertisements).
There are a number of other compliance and ethics challenges but I will save that for my law review article. Next week’s post will deal with the role of foreign direct investment in spurring human rights reform or perpetuating the status quo in Cuba.
Friday, May 29, 2015
If you have been following my guest posts regarding white collar crime and how white collar offenders rationalize their conduct, you likely have noticed that the discussion thus far has been largely theoretical. In this post, I’d like to offer some more concrete uses of rationalization theory and discuss how it may (should?) impact lawmakers and business people.
But before doing that, I have to explain, just for a moment, a bit more theory. One of the most fascinating things about rationalizations, in addition to how they operate, is where they come from. Researchers have concluded that rationalizations are not created in a vacuum; offenders do not invent them in the spur of the moment. Instead, offenders find their “vocabularies of motive” within their own environments. Donald Cressey suggested that rationalizations are “taken over” from “popular ideologies that sanction crime in our culture.” He pointed to commonplace sayings that suggest wrongdoing is acceptable in certain situations: “Honesty is the best policy, but business is business” and “All people steal when they get in a tight spot.” (Warren Buffett once called the phrase “Everybody else is doing it,” which is a clear rationalization, the five most dangerous words in business.) Once rationalizations such as these have been “assimilated and internalized by individuals,” they form powerful constructs that allow illegal behavior to go forward.
Building on this idea, two other criminologists, Gresham Sykes and David Matza, found that offender rationalizations originate from an even more specific location: the criminal law itself. According to Sykes and Matza, great “flexibility” exists in criminal law; even if a defendant commits a bad act, he may avoid punishment if he provides a legally valid justification or defense. Citing defenses to criminal liability such as necessity, insanity, and self-defense, Sykes and Matza viewed application of the criminal law as variable, a circumstance they found offenders incorporate into their psychological processes. Sykes and Matza determined that most unethical and illegal behavior was based on “what is essentially an unrecognized extension of [legal] defenses to crimes, in the form of justifications for deviance that are seen as valid by the delinquent but not by the legal system or society at large.” Put another way, would-be lawbreakers rationalize their behavior in order to fit it within a “defense” to the law that they deem valid, but that society or a court may not.
These finding have important implications for how we consider controlling unethical and criminal behavior in corporations. Our preferred model has been to pass legislation criminalizing conduct in reaction to corporate scandals, e.g., Sarbanes-Oxley after Enron and Dodd-Frank after the financial crisis. As scandals continue to occur, we look for new ways to make the detection and prosecution of crime easier for the government. Unfortunately, this approach has led to overcriminalization in many spheres, including white collar crime. There are now over 5,000 federal criminal statutes and as many as 300,000 federal regulatory provisions carrying criminal penalties. While certainly not all relate to white collar crime, many do. In fact, white collar crime underwent the biggest expansion of federal law during the 1970s and 1980s, and it likely took the lead again in the early 2000s. Along with that expansion came reduced mens rea requirements for many white collar crimes, as well as increased punishments, all of which has had the effect of shifting lawmaking and adjudicatory powers to prosecutors. What this means, as many have observed, is that white collar crime suffers from the same ills as other overcriminalized areas of the law—its “depth and breadth” has led to inconsistent enforcement and arbitrary adjudication. (A great example of this is the recent Supreme Court case Yates v. United States, which dealt with a commercial fisherman who was convicted under the anti-document shredding provision of Sarbanes-Oxley for throwing a crate of undersized fish overboard. Yates was subject to at least five partially overlapping obstruction statutes; the prosecutor charged him with the one carrying a 20-year maximum sentence. The Court overturned Yates’ conviction, based partly on concerns of overcriminalization.)
While the arbitrary enforcement of white collar criminal law is problematic for many reasons, the most profound harm it causes is that it makes the law more uncoordinated and illogical, thereby lessening the law’s overall legitimacy. Why is the lessening of the legitimacy of the law so harmful? The answer comes from the interaction between the perceived illegitimacy of white collar criminal law and rationalizations. As discussed above, rationalizations are drawn from the white collar offender’s environment, including the law governing his conduct. As would-be offenders increasingly believe those laws to be illegitimate, more space is created for them to rationalize their conduct. They see “defenses” to the law all around them, which they then internalize and incorporate into their own thought processes. Once this occurs, there is little stopping an offender’s future criminal conduct from going forward. Instead of deterring crime, then, adding more criminal statutes and regulations to an already overcriminalized area of the law fosters the very conduct sought to be eliminated. Put simply, more laws aimed at white collar crime may actually be creating more white collar criminal behavior. (For a more complete discussion of this topic, please see here.) Lawmakers considering the next round of white collar criminal statutes should be mindful of the role of rationalizations play, or they may be inadvertently creating the conduct they are trying to stop.
In my final post, I’ll discuss how these same ideas impact corporate compliance efforts.
Thursday, May 21, 2015
My last post outlined the criminological and behavioral ethics theories that help explain why corporate executives commit unethical and illegal acts. I’d like to unpack that a bit more by providing some specific rationalizations used by white collar offenders. This list includes the first five rationalizations to be identified by researches (sometimes called the “famous five”), and then supplements three others that are particularly relevant. Not surprisingly, there are disagreements as to exactly how many rationalizations there are and precisely how they operate. But, as one team of researchers put it, what is interesting about rationalization theory is what rationalizations do, “not the flavors they come in.”
Denial of Responsibility. Called the “master account,” the denial of responsibility rationalization occurs when the offender defines her conduct in a way that relieves her of responsibility, thereby mitigating “both social disproval and a personal sense of failure.” Generally, offenders deny responsibility by claiming their behavior is accidental or due to forces outside their control. White collar offenders deny responsibility by pleading ignorance, suggesting they were acting under orders, or contending larger economic conditions caused them to act illegally.
Denial of Injury. This rationalization focuses on the injury or harm caused by the illegal or unethical act. White collar offenders may rationalize their behavior by asserting that no one will really be harmed. If an act’s wrongfulness is partly a function of the harm it causes, an offender can excuse her behavior if no clear harm exists. The classic use of this technique in white collar crime is an embezzler describing her actions as “borrowing” the money—by the offender’s estimation, no one will be hurt because the money will be paid back. Offenders may also employ this rationalization when the victim is insured or the harm is to the public or market as a whole, such as in insider trading or antitrust cases.
Denial of the Victim. Even if a white collar offender accepts responsibility for her conduct and acknowledges that it is harmful, she may insist that the injury was not wrong by denying the victim in order to neutralize the “moral indignation of self and others.” Denying the victim takes two forms. One is when the offender argues that the victim’s actions were inappropriate and therefore he deserved the harm. The second is when the victim is “absent, unknown, or abstract,” which is often the case with property and economic crimes. In this instance, the offender may be able to minimize her internal culpability because there are no visible victims “stimulat[ing] the offender’s conscience.” White collar offenders may use this rationalization in frauds against the government, such as false claims or tax evasion cases, and other crimes in which the true victim is abstract.
Condemning the Condemners. White collar offenders may also rationalize their behavior by shifting attention away from their conduct on to the motives of other persons or groups, such as regulators, prosecutors, and government agencies. By doing so, the offender “has changed the subject of the conversation”; by attacking others, “the wrongfulness of [her] own behavior is more easily repressed.” This rationalization takes many forms in white collar cases: the offender calls her critics hypocrites, argues they are compelled by personal spite, or asserts they are motivated by political gain. The claim of selective enforcement or prosecution is particularly prominent in this rationalization. In addition, white collar offenders may point to a biased regulatory system or an anticapitalist government.
Appeal to Higher Loyalties. The appeal to higher loyalties rationalization occurs when an individual sacrifices the normative demands of society for that of a smaller group to which the offender belongs. The offender does not necessarily reject the norms she is violating; rather, she sees other norms that are aligned with her group as more compelling. In the white collar context, the group could be familial, professional, or organizational. Offenders rationalizing their behavior as necessary to provide for their families, protect a boss or employee, shore up a failing business, or maximize shareholder value are employing this technique. Notably, female white collar offenders have been found to appeal to higher family loyalties more than their male counterparts.
Metaphor of the Ledger. White collar offenders may accept responsibility for their conduct and acknowledge the harm it caused, yet still rationalize their behavior by comparing it to all previous good behaviors. By creating a “behavior balance sheet,” the offender sees her current negative actions as heavily outweighed by a lifetime of good deeds, both personal and professional, which minimizes moral guilt. It seems likely that white collar offenders employ this technique, or at least have it available to them, as evidenced by current sentencing practices—almost every white collar sentencing is preceded by a flood of letters to the court supportive of the defendant and attesting to her good deeds.
Claim of Entitlement. Under the claim of entitlement rationalization, offenders justify their conduct on the grounds they deserve the fruits of their illegal behavior. This rationalization is particularly common in employee theft and embezzlement cases, but is also seen in public corruption cases.
Claim of Relative Acceptability/Normality. The final white collar rationalization entails an offender justifying her conduct by comparing it to the conduct of others. If “others are worse” or “everybody else is doing it,” the offender, although acknowledging her conduct, is able to minimize the attached moral stigma and view her behavior as aligned with acceptable norms. In white collar cases, this rationalization is often used by tax violators and in real estate and accounting frauds.
I’ve identified the use of these rationalizations by white collar offenders such as Rajat Gupta, Peter Madoff, Allen Stanford, and others. But I’d be interested to hear from readers where they’ve seen “vocabularies of motive” in the white collar world. (If you’re not sure, try starting with Bloomberg's oral history of Drexel Burnham Lambert, in what has to be the largest collection of rationalizations ever assembled.)
Thursday, May 14, 2015
Last week, I looked lovingly at a picture of a Starbucks old-fashioned grilled cheese sandwich. It had 580 calories. I thought about getting the sandwich and then reconsidered and made another more “virtuous” choice. These calorie disclosures, while annoying, are effective for people like me. I see the disclosure, make a choice (sometimes the “wrong” one), and move on.
Regular readers of this blog know that I spend a lot of time thinking about human rights from a corporate governance perspective. I thought about that uneaten sandwich as I consulted with a client last week about the California Transparency in Supply Chains Act. The law went into effect in 2012 and requires retailers, sellers, and manufacturers that exceed $100 million in global revenue that do business in California to publicly disclose the degree to which they verify, audit, and certify their direct suppliers as it relates to human trafficking and slavery. Companies must also disclose whether or not they maintain internal accountability standards, and provide training on the issue in their direct supply chains. The disclosure must appear prominently on a company’s website, but apparently many companies, undeterred by the threat of injunctive action by the state Attorney General, have failed to comply. In April, the California Department of Justice sent letters to a number of companies stating in part:
If your company has posted the required disclosures on its Internet website or, alternatively, takes the position that it is not required to comply with the Act, we request that – within 30 days of this letter’s date – you complete the form accessible at http://oag.ca.gov/sb657 and provide this office with (1) the web links (URLs) to both your company’s Transparency in Supply Chains Act disclosures and its homepage containing a link to the disclosures; and/or (2) information demonstrating your company is not covered by the Act.
There are no financial penalties for noncompliance. Rather, companies can face reputational damage and/or an order from the Attorney General to post something on their websites. A company complies even if that disclosure states that the company does no training, auditing, certification, monitoring or anything else related to human trafficking or slavery. The client I spoke to last week is very specialized and all of its customers are other businesses. Based on their business profiles, those “consumers” are not likely to make purchasing decisions based on human rights due diligence. I will be talking to another client in a few weeks on the California law. That client is business to consumer but its consumers specifically focus on low cost—that’s the competitive advantage for that client. Neither company-- the B2B nor the B2 (cost conscious)C-- is likely to lose significant, if any business merely because they don’t do extensive due diligence on their supply chains. Similarly, Apple, which has done a great job on due diligence for the conflict minerals law will not set records with the sale of the Apple Watch because of its human rights record. I bet that if I walked into an Apple Store and asked how many had seen or heard of Apple’s state of the art conflict minerals disclosure, the answer would be less than 1% (and that would be high).
People buy products because they want them. The majority of people won’t bother to look for what’s in or behind the product, although that information is readily available through apps or websites. If that information stares the consumer in the face (thanks Starbucks), then the consumer may make a different choice. But that assumes that (1) the consumer cares and (2) there is an equally viable choice.
To be clear, I believe that companies must know what happens with their suppliers, and that there is no excuse for using trafficked or forced labor. But I don’t know that the use of disclosures is the way to go. Some boards will engage in the cost benefit analysis of reputational damage and likelihood of enforcement vs cost of compliance rather than having a conversation about what kind of company they want to be. Many board members will logically ask themselves, “should we care if our customers don’t care?”
My most recent law review article covers this topic in detail. I’ll post it in the next couple of weeks because I need to revise it to cover the April development on the California law, and the EU’s vote on May 19 on their own version of the conflict minerals law. In the meantime, ignorance is bliss. I’m staying out of Starbucks and any other restaurant that posts calories- at least during the stressful time of grading exams.
May 14, 2015 in Corporate Finance, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, International Business, Law Reviews, Marcia Narine, Securities Regulation | Permalink | Comments (3)
My post from last week posed the question of why corporate executives do what they do. Why do they commit unethical and illegal acts? If you ask almost anyone this, the answer comes back the same: corporate executives are greedy. That’s why they lie, cheat, and steal. Follow that up with the question of what should be done about it, and most people say that more law and more prison time is the solution.
I’ve never bought into that thinking (as to the cause or the fix). Sure, some of us are greedy. And some small percentage of us are looking to break the law to advance our own interests at every opportunity. But I’ve seen too many good people do bad things, and vice versa, to think that the cause of illegal corporate behavior (or almost any behavior) is somehow an inherently binary condition—good or bad, right or wrong, greedy or selfless. The reality is that many of us are both good and bad at the same time. But how does that actually work? How can someone like Rajat Gupta, the former managing director of Goldman Sachs, spend his time chairing three international humanitarian organizations and positively impacting “humanity writ large” (can you say that?), while also passing boardroom secrets to his billionaire hedge fund pal, Raj Rajaratnam?
Criminological and behavioral ethics theories help explain this duality. In the 1960’s, a criminologist named Donald Cressey conducted a study of hundreds of convicted embezzlers. Cressey determined that three key elements are necessary for violations of trust—the essence of almost all white-collar crime—to occur: (1) an individual possesses a “nonshareable problem,” i.e., a problem the individual feels cannot be solved by revealing it to others; (2) the individual believes the problem can be solved in secret by violating a trust, which is usually tied to their employment; and (3) the individual “verbalizes” the relationship between the nonshareable problem and the illegal solution in “language that lets him look on trust violation as something other than trust violation.” Put another way, the individual uses words and phrases during an internal dialogue that makes the behavior acceptable in his mind, such as by telling himself he is “borrowing” the embezzled money and will pay it back. Cressey believed that these verbalizations—what we commonly call rationalizations—were “the crux of the problem” of white collar crime, because they allowed an offender to keep his perception of himself as an honest citizen intact while acting in a criminal manner. This, in essence, is the psychological mechanism that allows good people to do bad things.
Importantly, Cressey (and others after him) found that rationalizations were not simply after-the-fact excuses offenders used to lessen their culpability upon being caught. Instead, rationalizations were “vocabularies of motive,” words and phrases that existed as group definitions labeling deviant behavior as appropriate, rather than excuses invented by the offender “on the spur of the moment.” In other words, offender rationalizations are drawn from larger society and put into use prior to the commission of criminal acts. This insight—that offenders rationalize their unethical or criminal conduct before they act, which then allows their conduct to proceed—is considered a key insight into white collar criminal behavior and has greatly influenced criminologists and behavioral ethicists alike.
In the next post, I will set out some of the most common rationalizations used by white collar offenders. And we’ll see that these rationalizations are present in many, if not most, of today’s headline-grabbing cases of corporate wrongdoing.
Friday, May 8, 2015
Thanks to faithful BLPB reader Scott Killingsworth for the tip about this new article appearing in the New Yorker detailing the scholarship and advocacy of renowned Harvard constitutional law professor Laurence Tribe. The article raises questions about conflicts of interest between scholarship and advocacy.
[I]t would also be foolish to ignore the inherent tension in searching for truth while also working for paying clients. The scholar-warrior may lapse into a far more contemptible figure: the scholar for hire, who sells his name and his title for cash. A subtler danger comes from the well-known and nearly unavoidable tendency lawyers have of identifying with their clients.
The article also highlights his role in the current debate on corporate constitutional rights.
Tribe has taken a strong view of individual rights; his view of corporate rights is similar, and in this capacity he has at times advanced constitutional arguments that might invalidate great parts of the administrative state, in a manner recalling the Supreme Court’s jurisprudence of the nineteen-twenties and thirties. In that sense, the current condemnation of Tribe can be seen as part of a larger progressive backlash against the use of the Bill of Rights to serve corporate interests.
This short article is absolutely worth making your Friday procrastination list or your weekend "catch-up" reading list.
Thursday, May 7, 2015
As I begin my guest spot here at Business Law Profs Blog, I’ve really enjoyed reading the recent posts by Ann Lipton (here) and Marcia Narine (here) on corporate whistleblowers. What has always fascinated me about whistleblowers is the “why” question: why do they do it knowing all the negatives—to their career, their family, their psyche—in store for them?
While I don’t have any great insights as to the answer (although others do), trying to figure out why corporate executives do what they do—particularly in the realm of business ethics and white collar crime—is something I’ve been focused on for a while, first as a white collar criminal defense attorney and now as an academic. One way I’ve tried to look at the issue is by pulling together disciplines that provide some understanding of why business people commit bad acts and what our collective response to that should be. This has led me primarily into the areas of criminology, behavioral ethics, and federal sentencing. And what emerges from that soup, at least for me, is the concept of rationalization—that very powerful, and very human, way of viewing oneself positively (say, as an upstanding citizen, family man, etc.), while taking actions inconsistent with that view according to society’s standards (say, by passing a stock tip to a friend, misrepresenting your company’s financials, etc.). I see rationalization as the critical step in the commission of white collar crime, and thus what should be the focus of our corporate compliance and white collar crime enforcement efforts.
Over the next few posts, I’ll try and flesh out these ideas, explaining how rationalizations operate, their most common iterations in the white collar world, and how our current regulatory and corporate compliance efforts, by failing to consider the role of rationalizations, might actually be leading to more corporate wrongdoing.
Friday, May 1, 2015
Professor Todd Haugh (Indiana University - Kelley School of Business) will be joining us as a guest blogger for the month of May. Todd is an assistant professor of business law & ethics and has focused his research on white collar crime and sentencing. His most recent work deals with "the financial crisis and how white collar offenders rationalize their conduct." We welcome Todd to the Business Law Prof Blog and look forward to his posts.
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.
Friday, April 17, 2015
At the end of next week, I will be at the University of Connecticut School of Business and the Thomas J. Dodd Research Center for their Social Enterprise and Entrepreneurship Conference.
Further information about the conference is available here, a portion of which is reproduced below:
In October 2014, Connecticut joined a growing number of states that empower for-profit corporations to expand their core missions to expressly include human rights, environmental sustainability, and other social objectives. As a new legal class of businesses, these benefit corporations join a growing range of social entrepreneurship and enterprise models that have the potential to have positive social impacts on communities in Connecticut and around the world. Designed to evaluate and enhance this potential, SE2 will feature a critical examination of the various aspects of social entrepreneurship, as well as practical guidance on the challenges and opportunities presented by the newly adopted Connecticut Benefit Corporation Act and other forms of social enterprise.
Presenters at the academic symposium on April 23 are:
- Mystica Alexander, Bentley University
- Norman Bishara, University of Michigan
- Kate Cooney, Yale University
- Lucien Dhooge, Georgia Institute of Technology
- Gwendolyn Gordon, University of Pennsylvania
- Gil Lan, Ryerson University
- Diana Leyden, University of Connecticut
- Haskell Murray, Belmont University
- Inara Scott, Oregon State University
Presenters at the practitioner conference on April 24 are:
- Gregg Haddad, State Representative, Connecticut General Assembly (D-Mansfield)
- Spencer Curry & Kieran Foran, FRESH Farm Aquaponics
- Sophie Faris, Community Development, B-Lab
- James W. McLaughlin, Associate, Murtha Cullina LLP
- Michelle Cote, Managing Director, Connecticut Center for Entrepreneurship and Innovation
- Mike Brady, CEO, Greyston Bakery
- Jeff Brown, Executive Vice President, Newman’s Own Foundation
- Justin Nash, President, Veterans Construction Services, and Founder, Til Duty is Done
- Vishal Patel, CEO & Founder, Happy Life Coffee
- Anselm Doering, President & CEO, EcoLogic Solutions
- Dafna Alsheh, Production Operations Director, Ice Stone
- Tamara Brown, Director of Sustainable Development and Community Engagement, Praxair
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)
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)
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)
Friday, March 13, 2015
If you keep up with higher education news, you have already read about the decision to close Sweet Briar College. This story hit close to home, in part because I am a professor and in part because I graduated from a small liberal arts college.
My biggest question is why the administration took so long to tell the students and faculty. By making the announcement in the spring semester, the administration seems to have harmed students who will be looking to transfer and faculty members who will be looking for new jobs. More reading on the faculty members' situation is available in The Atlantic.
Given the general demand for students, I assume the students will be able to find new college homes, though their options might be be somewhat more limited than if the announcement were made in the fall. Most of the Sweet Briar College faculty members, however, will be in an incredibly tough bind. Most academic hiring happens during the fall semester.
With a nearly $100 million endowment (some of which is supposedly restricted), one wonders whether the administration could have kept the school open for one more school year, for the benefit of the faculty and students looking for a place to land. Alternatively, what prevented an announcement this past fall? Perhaps administration worried about students and faculty leaving en masse if given longer lead time, but if the school is closing anyway, I do not see why that would be a problem. Perhaps creditors played a role?
Also, I wonder why the school did not make a more desperate and direct plea to their alums. Instead of abruptly announcing that the school would close, why didn't the administration say that the school would close unless they raise X dollars in Y time period?
As outsiders, we obviously do not know all the facts, but, in any event, it appears to be a sad situation.
At Belmont, we have been basking in the glow of a dramatic win in the men’s basketball OVC championship game.
While I could not be prouder of all the members of our team, many of whom are majoring in business, I am most proud of the way they played and conducted themselves – with heart, effort, intelligence, humility, confidence, and class. Murray State, holder of a 25-game win-streak and ranked #25 in the country coming into the game, played just as hard and conducted themselves with class as well.
The OVC championship game was the best basketball game I have ever seen and it was a shame that either team had to lose. In the unlikely event that any selection committee members are reading this, I think Murray State deserves a spot in the NCAA tournament as well; how do you justify dropping a team from #25 to outside the top-68 teams after a well-played 1-point loss to another strong team?
Since that basketball game, I have been thinking a lot about “winning” as compared to “how you play the game.” Growing up, I was insanely competitive and was obsessed with winning. I loved the quote attributed to Vince Lombardi: “winning isn’t everything, it is the only thing” and I despised the claim that “it isn’t whether you win or lose, it is how you play the game.” (Interestingly, some argue that Lombardi never said those words, claiming instead that he said “[w]inning is not everything, but making the effort to win is,” which is much closer to the statement I despised.)
Perhaps, I am getting softer as I age or maybe it is being a father that is changing me, but I now believe that how you play the game is much more important than whether you win or lose. Results of games, like Belmont’s recent one, could turn on a fraction of an inch, but conduct during the entire game (and before and after the game) tells you a great deal more about the character of the competitors.
I am still not in the “everyone gets a trophy” camp and I still think winning and losing are important parts of competition, but I do think that “winning” should be subordinated to certain overriding principles. When the overriding principles govern, you get things like Bobby Bowden sharing his playbook with the Marshall University team that lost most of its members in a plane crash OR the carrying of an injured opponent around the bases OR the helping of a fallen runner. When winning is seen as “the only thing,” teams and individuals skirt rules to gain an advantage (doping in baseball, cycling, and track; recruiting violations; spygate; deflategate; etc.)
Next week I will apply some of these concepts to business.
Thursday, March 12, 2015
This Sunday, the NCAA will announce the 68 basketball teams that are scheduled to participate in this year's men's basketball tournament. Then, the true "madness" begins.
At many schools, one or more professors will likely organize an NCAA Tournament pool. The pool will likely include entry fees and prize money. The pool's rules and standings will often appear on a public website.
All of this may sound like innocuous fun -- especially during the anxiety-ridden days of waiting for ExpressO and Scholastica acceptances to arrive. However, law professors playing in online, pay-to-enter NCAA Tournament pools technically are acting in violation of several federal laws -- albeit, laws that are rarely enforced,
One federal law that seems to prohibit online, pay-to-enter NCAA Tournament pools is the Interstate Wire Act of 1961. This act disallows individuals from “engaging in the business of betting or wagering [through the knowing use of] a wire communication for the transmission in interstate or foreign commerce.” According to various recent court decisions, the Wire Act applies to contests hosted via the Internet, as well as those hosted over the phone. And even though the act was originally passed to crack down on organized crime, even "upstanding" individuals such as law professors, at least in theory, are not immune from prosecution.
A second federal law that seems to prohibit online, pay-to-enter NCAA Tournament pools is the Professional and Amateur Sports Protection Act ("PASPA"). Passed in 1992 at the behest of America’s five premier professional sports leagues (including the NCAA), PAPSA makes it illegal for any private person to operate a wagering scheme based on a competitive game in which “professional or amateur athletes participate." Of course, PASPA includes a grandfather clause that exempts previously authorized government sponsored sports gambling in four states -- Nevada, Delaware, Oregon, and Montana. But it doesn't include any exception whatsoever for private March Madness pools.
Finally, a third federal law that may disallow online, pay-to-enter NCAA Tournament pools is the Uniform Internet Gambling Enforcement Act. This act, which was passed most recently in 2006, makes it illegal for those "engaged in the business of betting or wagering" to “knowingly accept” funds in connection with the participation of another person in unlawful Internet gambling. Although the UIGEA offers a special carve-out provision for “fantasy sports,” this carve-out does not apply to March Madness pools because winning outcomes are based on the final score of actual game results, and not individual player performances.
Of course, the likelihood of anyone going to jail for simply participating in an online NCAA Tournament pool may seem next to nil. But if you are going to play in one of these contests, I have two simple recommendations: (1) let someone else other than you collect the money; and (2) encourage the host to 'grade' the brackets by hand, rather than posting contestant names and picks on an Internet website.
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.
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.