Tuesday, April 15, 2014

Corporations and Governments Don't Actually Do Anything

They really don't. 

To be clear, this is not a post bashing corporations (or government). It's not really extolling the virtues of corporations, either. Instead, it's just to make the point that, notwithstanding Citizens United or Hobby Lobby and other cases of their ilk, the idea that corporations are people is still a legal fiction.  A useful and important one, but a fiction nonetheless.  

On April 11, Corey Booker posted the following on Facebook:

In awful years past, corporations polluted the Passaic river to the point that it ended the days where people could eat from it, swim in it, and use it as a thriving recreation source. Today we announced a massive initiative to clean the Passaic river and bring it back to life again. The tremendous clean up effort will create hundreds of jobs and slowly over time restore one of New Jersey's great rivers to its past strength and glory.

The river needs the clean-up, and I applaud the effort. Still, the reality is corporations did not pollute the Passaic River, at least not literally.  People working for the corporation did. It is agency law that allows a corporation to act in the first place, because the fictional corporate person needs a natural person to act.  (For a simple explanation, see here.) The corporation is liable for the harm caused by its agents. (And, in certain cases, the individuals would also be liable directly if their actions were, for example, illegal.)

Government doesn't really do anything, either.  The clean-up proposal that Booker was referencing is a $1.7 billion Superfund river remediation project that was proposed by the EPA.  Of course, government works through agents, too, and there are real people behind the proposal.  Real people, through concerted action between corporations and government will actually do the clean up, too.  

This is a point I have made before, but I think it's an important one.  We need to remember that people are at the root of all corporate and government actions.  This is important in two directions. First, for those criticizing a corporate or government action, it is critical for them to remember that there are people carrying out the action.  A corporation or a government may act in an inappropriate manner, but it is also likely that the person carrying out the action is doing so with the intent to do well in the capacity in which they were fired.

Second, for people working for corporations or governments it is equally critical that they recognize that the their employer doesn't carry out actions without their help.  That is, people who work for corporations or governments must recognize that they are carrying out the will of the entity they represent (and they should hold themselves responsible for doing do).  Perhaps it is their boss who gave them the order (also a natural person), or even the board of directors (a group of natural people), but the charge is in fact, if not legally, being given by natural people.   

Why does this matter?  When we vilify or exalt the action of entities (like corporations or governments) we disconnect ourselves from the realities of the world, or at least our responsibilities within it.  We become more susceptible to Groupthink in either direction.  We are able to shirk our responsibilities -- as employees, as agents, as lawyers, as voters, as shareholders, as people -- to make decisions the are conscious of the world around us.  In our daily lives and in our representative capacities, we all must make difficult decisions from time to time.

Sometimes, tough decisions require a cost-benefit analysis that means someone else will be worse off because of our decision.  It's hard, but it's what people do. Often, it's what we must do.  In doing so, though, it is essential that we hold ourselves and other people accountable as people for what we've done. Regardless of the rhetoric we often hear, the amalgamations of people who make up both governments and corporations have done some amazing and impressive things.  Both have also done some horrendous and outrageous things.  The people in charge, and the people who follow, are accountable in both circumstances. 

In this instance, I am making a conceptual argument, not a legal one.  There are legal regimes, sometimes effective, sometimes not, for holding both entities and their agents accountable for their actions (and rewarding them, where appropriate).  How we think about corporations and governments and each other, though, has a broader impact.  Without us -- all of us -- there are no corporations and there is no government.  If we remember that, our responses to challenges are more likely to be more targeted, more effective, and more reasonable.  Just because we don't always agree, doesn't mean we aren't all in this together.  Whether we like it or not, we are, and it's time we acted like it. 

April 15, 2014 in Corporations, Current Affairs, Ethics, Joshua P. Fershee, Social Enterprise | Permalink | Comments (1) | TrackBack (0)

Thursday, April 3, 2014

Whistle While You Work

As regular readers of this blog may know, I sit on the Department of Labor's Whistleblower Protection Advisory Committee. The Occupational Health and Safety Administration, a division of the Department of Labor, may not be the first agency that many people think of when it comes to protecting whistleblowers, but in fact the agency enforces almost two dozen laws, including Sarbanes-Oxley and the Consumer Financial Protection Bureau's law on whistleblowers.  The Consumer Financial Protection Act was promulgated on July 21, 2010 to protect employees against retaliation by entities that offer or provide consumer financial products.

Today OSHA released its interim regulations for protecting CFPB whistleblowers.  The regulation defines a “covered person” as “any person that engages in offering or providing a consumer financial product or service.” A “covered employee” is “any individual performing tasks related to the offering or provision of a consumer financial product or service.” A “consumer financial product or service” includes, but is not limited to, a product or service offered to consumers for personal, family, or household purposes, such as residential mortgage lending and servicing, private student lending and servicing, payday lending, prepaid debit cards, consumer credit reporting, credit cards and related activities. The Consumer Financial Protection Act protects “covered employees” of “covered persons” from retaliation who report violations of the law to their employer, the CFPB, or any other federal, state, or local government authority or law enforcement agency. Employees are also protected from retaliation for testifying about violations, filing reports or refusing to violate the law.

Retaliation is broadly defined as firing or laying off, reducing pay or hours, reassigning, demoting, denying overtime or promotion, disciplining, denying benefits, failing to hire or rehire, blacklisting, intimidating, and making threats. An employee or representative who believes that s/he has suffered retaliation must bring a claim within 180 days after the alleged retaliatory action. If OSHA finds that the complaint has merit, the agency will issue an order requiring the employer to put the employee back to work, pay lost wages, restore benefits, and provide other relief. Either party can request a full hearing before an ALJ of the Department of Labor. A final decision from an  ALJ may be appealed to the Department’s Administrative Review Board and an employee may also file a complaint in federal court if the Department of Labor does not issue a final decision within certain time limits.

Although the statute is part of Dodd-Frank, the CFPB whistleblowers don’t get the same monetary benefits as Dodd-Frank whistleblowers who go to the SEC. The SEC Dodd-Frank whistleblower rule allows the recovery of between 10-30% of any monetary award of more then $1million of any SEC enforcement action to those individuals who provide original information to the agency. The SEC announced that in 2013 it awarded $14,831,965.64 during its fiscal year to 4 whistleblowers based on 3,238 tips. The vast majority—more than $14 million went to a single individual.  The top three allegations involved corporate disclosures and financials (17.2%), offering fraud (17.1%) and manipulation (16.2%). 

Should there be such a disparity between those whistleblowers who protect consumers and those who protect investors? Maybe not, but studies consistently show that whistleblowers don’t report to government agencies for the money so perhaps the absence of a large financial reward won’t be a deterrence. Time will tell as to whether any of these whistleblower laws will prevent the next financial crisis. But at least those who work in the financial sector will have some protection.




April 3, 2014 in Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation | Permalink | Comments (0)

Thursday, March 27, 2014

Do consumer boycotts matter to companies?

I wonder how many people are boycotting Hobby Lobby because of the company’s stance on the Affordable Health Care Act and contraception. Perhaps more people than ever are shopping there in support. Co-blogger Anne Tucker recounted the Supreme Court’s oral argument here in the latest of her detailed posts on the case. The newspapers and blogosphere have followed the issue for months, often engaging in heated debate. But what does the person walking into a Hobby Lobby know and how much do they care?

I spoke to reporter Noam Cohen from the New York Times earlier today about an app called Buycott, which allows consumers to research certain products by scanning a barcode. If they oppose the Koch Brothers or companies that lobbied against labels for genetically modified food or if they support companies with certain environmental or human rights practices, the app will provide the information to them in seconds based on their predetermined settings and the kinds of “campaigns” they have joined. Neither Hobby Lobby nor Conestoga Woods is listed in the app yet. 

Cohen wanted to know whether apps like Buycott and GoodGuide (which rates products and companies on a scale of 1-10 for their health, environmental and social impact) are part of a trend in which consumers “vote” on political issues with their purchasing power. In essence, he asked, has the marketplace, aided by social media, become a proxy for politics? I explained that while I love the fact that the apps can raise consumer awareness, there are a number of limitations. The person who downloads these apps is the person who already feels strongly enough about an issue to change their buying habits. These are the people who won’t eat chocolate or drink coffee unless it’s certified fair trade, who won’t shop in Wal-Mart because of the anti-union stance, and who sign the numerous change.org petitions that seek action on a variety of social and political topics. 

I had a number of comments for Cohen that delved deeper than the efficacy of the apps. The educated consumer can make informed choices and feel good about them but how does this affect corporate behavior? Although the research is inconsistent in some areas, most research shows that companies care about their reputations but the extent to which a boycott is effective depends on the amount of national media attention it gets; how good the company’s reputation was before the boycott (many firms with excellent reputations feel that they can be buffered by previous pro-social behavior and messaging); whether the issue is one-sided (child labor) or polarizing (gay marriage, Obamacare, climate change); how passionate the boycotters are; how easy it is to participate (is the product or service unique); and how the message is communicated. 

Many activists have done an excellent job of messaging. The SEC Dodd-Frank conflict minerals regulation made it through Congress through the efforts of NGOs that had been trying for years to end a complex, geopolitical crisis that has killed over 5 million people. They got consumers, social media and Hollywood actors talking about “blood on the mobile” or companies being complicit in rape and child slavery in Congo because when they changed the messaging they elicited the appropriate level of moral outrage. The conflict minerals “name and shame” law depends on consumers learning about which products are sourced from the Congo and surrounding countries and making purchasing decisions based on that information. Congress believes that this will solve an intractable human rights crisis. The European Union, which has a much stronger corporate social responsibility mandate for its member states has taken a different view. Although it will also rely on consumers to make informed choices, its draft recommendations on dealing with conflict minerals makes reporting voluntary, which has exposed the EU to criticism. As I have written here, here, here here and here, relying on consumers to address a human rights crisis will only work if it leads to significant boycotts by corporations, investors or governments or if it leads to legislation, and that legislation cannot harm the people it is intended to help.

So what do I think of apps like GoodGuide, BuyCott and 2ndVote (for more conservative causes)? I own some of them. But I also send letters to companies, vote regularly, call people in Congress and write on issues that inspire me. How many of the apps’ users go farther than the click or the scan?  Some researchers have used the word “slacktivists” to describe those who participate in political discussions through social media, online petitions and apps. The act of pressing the button makes the user feel good but has no larger societal impact. 

What about the vast majority of consumers? The single mother shopping for her children in a big-box retailer or in the fast food restaurant that has been targeted for its labor practices may not have the time, luxury or inclination to buy more “ethically sourced” products.  Moreover, studies show that consumers often overreport on their ethical purchasing and that price, convenience and costs typically win out. The apps’ developers may have more modest intentions than what I ascribe to them. If they can raise consumer awareness- admittedly for the self-selected people who buy the app in the first place- then that’s a good thing.  If the petitions or media attention lead to well-crafted legislation, that’s even better.




March 27, 2014 in Corporate Governance, Corporations, Current Affairs, Ethics, Marcia L. Narine, Religion, Securities Regulation | Permalink | Comments (6)

Friday, March 14, 2014

Dirty Money? Universities and Their Donors

Last week The Atlantic ran an article entitled Dirty Money: From Rockefeller to Koch that detailed the controversy surrounding a $1 million dollar gift from the Charles Koch Foundation to Catholic University.  The article quoted a letter of protest that stated:

We are concerned that by accepting such a donation you send a confusing message to Catholic students and other faithful Catholics that the Koch brothers’ anti-government, Tea Party ideology has the blessing of a university sanctioned by Catholic bishops.

Despite the controversy, it appears Catholic University will keep the gift. A few weeks ago, the Catholic University president and the business school dean collaborated in an article entitled Why We're Keeping a $1 Million Koch Gift in The Wall Street Journal.  The authors conclude:

We're grateful for the $1 million, and we're keeping it, because it would be an unhealthy precedent for a university to refuse support for valuable research because the money, somewhere back up the line, once belonged to a donor whose views on other subjects were unpopular within the academic community.

I have not seen anything further from the school on this issue since the cited WSJ article.

Many universities are facing financial challenges and are desperately looking for funds.  Last April, Catholic University announced a 20% budget cut due to falling revenue.  Schools could argue that they will put donated funds to good use, regardless of the source.  But are their limits on whose money universities should accept?  And if there are limits, how do we determine those limits?

To start, I think we should recognize that there are no perfect people, and schools looking for flawless donors should give up hope of finding any.  Further, I agree with the Catholic University president and business school dean that excluding donors merely because of their unpopular views sends the wrong message to our students and our community.  We should respect and expose our students to a variety of views, even views with which we disagree. 

Personally, I think schools should focus on two questions:

  1. Will the gift lead to improper influence?
  2. Does acceptance of the gift endorse unethical behavior?

Improper Influence.  We all have biases, but academics have the potential to be among the least biased voices in their communities.  Universities should be most focused on whether the gift will actually lead to improper influence, but university might also be wise to consider if the gift will lead to even an appearance of improper influence.  Individual scholars have been accused of “shilling for Wall Street”.  Similarly, claims of improper influence levied against entire universities could be harmful as well.

Tying this to business law, In re Oracle Corp. Derivative Litigation, 824 A.2d 917 (Del.Ch.2003) Vice Chancellor Strine (now Chief Justice of the Delaware Supreme Court) recognized the judgment clouding potential of large donations.  Regarding two Stanford University professors who sat on an Oracle special litigation committee (“SLC”) VC Strine wrote:

And, for both Grundfest and Garcia-Molina, service on the SLC demanded that they consider whether an extremely generous and influential Stanford alumnus should be sued by Oracle for insider trading. Although they were not responsible for fundraising, as sophisticated professors they undoubtedly are aware of how important large contributors are to Stanford, and they share in the benefits that come from serving at a university with a rich endowment. A reasonable professor giving any thought to the matter would obviously consider the effect his decision might have on the University's relationship with Lucas.

Of course, anyone can levy a claim of improper influence, and schools (and individual professors) should be most concerned about reasonable and supported claims.  Schools can attempt to reduce reliance on any single donor by expanding their donor base.  Each school should also make donors and the public aware that the school's professors do not plan to push donors' agendas, but plan to stay intellectually honest, write about their areas with as little bias as possible, and expose their students to a range of views.   

Improper Endorsement. Universities should be places where students are inspired and encouraged to act ethically.  Taking funds from notorious, unethical figures could be taken, by students and the public, as endorsement of unethical behavior.  Improper endorsement of unethical behavior is less likely, in my opinion, if the donor publicly admits to his/her mistakes and is taking steps to make amends.  Improper endorsement is also less likely, or at least weaker, if naming rights are withheld.  For an earlier debate on the endorsement issue, see the controversy at UCLA Law School over the $10 million gift from Lowell Milken in 2011.  Professor Bainbridge added his thoughts here.  (I note, as Professor Bainbridge does, that only Lowell’s brother Michael was charged with a crime).   

In short, I do think there are some limits on the universe of acceptable university donors, but based on what I know about the Koch Brothers, I would not label them as "off-limits donors" (assuming they do and will respect academic freedom).   According to the cited WSJ article, 270 universities evidently agree and have accepted gifts from the Charles Koch Foundation. 

If others have thoughts to add, I would love to hear them in the comments or via e-email. 

March 14, 2014 in Current Affairs, Ethics, Haskell Murray | Permalink | Comments (1)

Thursday, March 6, 2014

More protection for SOX whistleblowers- are private contractors ready?

This week in Lawson v. FMR, LLC the Supreme Court extended the reach of Sarbanes-Oxley to potentially millions more employers when it ruled that SOX's whistleblower protection applies to employees of private employers that contract with publicly-traded companies. In 2002, Congress enacted SOX with whistleblower protection provisions containing civil and criminal penalties. The law clearly protects whistleblowers who work for publicly-held companies, and courts have generally ruled against employees who work for privately-held firms. But the Department of Labor’s Administrative Review Board has ruled that contractors at public companies enjoy whistleblower protection as well. The Supreme Court agreed with that assessment, with Justice Ginsburg writing for the majority. The dissent, written by Justice Sotomayor, noted the "stunning reach" based on the majority's interpretation and opined that the extension was not what Congress intended.  The plaintiffs in Lawson did not work for Fidelity, but were contracted to provide advice to Fidelity Mutual Fund customers. Plaintiffs voiced concerns to management regarding problems with cost-accounting methodologies and the alleged improper retention of millions of dollars in fees. Because Fidelity has no employees of its own, it was not a party to the suit.

This development will likely be among the many that the Whistleblower Protection Advisory Committee will discuss at our meeting next week. I sit on a 12-person committee comprised of management, labor and the public for a two-year term, and we are reviewing two dozen laws that OSHA enforces to protect employees. SOX is just one of the financial laws covered by OSHA for whistleblower purposes. Although the comment/question period for the committee meeting is officially closed, those who want to submit comments or questions can still do so through http://www.regulations.gov. The meeting is open to the public on March 11th from 9 a.m. - 5 p.m. in Room N-3437 A-C, U.S. Department of Labor, 200 Constitution Ave., NW, Washington, DC 20210






March 6, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation | Permalink | Comments (1)

Sunday, March 2, 2014

Work-Life Balance: Don't Be a Jerk

A while back @FrankPasquale tweeted a link to a blog post by Eric Schwitzgebel that begins with the lines, "A central question of moral epistemology is, or should be: Am I a jerk? Until you figure that one out, you probably ought to be cautious in morally assessing others."

This post has kept popping into my mind since then, and so I thought I'd pass it on to BLPB readers.  Personally, I believe part of living a healthy, balanced life includes trying to minimize the extent to which I am a jerk, and I have found the remainder of Schwitzgebel's post to be helpful in advancing that goal.  Here's a bit more (but you should really go read the whole thing):

But how to know if you're a jerk? It's not obvious. Some jerks seem aware of their jerkitude, but most seem to lack self-knowledge. So can you rule out the possibility that you're one of those self-ignorant jerks? Maybe a general theory of jerks will help!

I'm inclined to think of the jerk as someone who fails to appropriately respect the individual perspectives of the people around him, treating them as tools or objects to be manipulated, or idiots to be dealt with, rather than as moral and epistemic peers with a variety of potentially valuable perspectives. The characteristic phenomenology of the jerk is "I'm important, and I'm surrounded by idiots!" However, the jerk needn't explicitly think that way, as long as his behavior and reactions fit the mold. Also, the jerk might regard other high-status people as important and regard people with manifestly superior knowledge as non-idiots.

To the jerk, the line of people in the post office is a mass of unimportant fools; it's a felt injustice that he must wait while they bumble around with their requests. To the jerk, the flight attendant is not an individual doing her best in a difficult job, but the most available face of the corporation he berates for trying to force him to hang up his phone. To the jerk, the people waiting to board the train are not a latticework of equals with interesting lives and valuable projects but rather stupid schmoes to be nudged and edged out and cut off. Students and employees are lazy complainers. Low-level staff are people who failed to achieve meaningful careers through their own incompetence who ought to take the scut work and clean up the messes. (If he is in a low-level position, it's a just a rung on the way up or a result of crimes against him.)

Inconveniencing others tends not to register in the jerk's mind....


March 2, 2014 in Ethics, Stefan J. Padfield | Permalink | Comments (0)

Thursday, February 27, 2014

Harvard Law School's Petrie-Flom Center: Research Positon for New Project with NFL Players Association

From Michelle Meyer over at the Faculty Lounge.  Sounds like an interesting position:

In connection with our work on a sponsored research project with the National Football League Players Association, the Petrie-Flom Center seeks to hire a Senior Law and Ethics Associate immediately. (Please note that this is a distinct position from the one we recently advertised working with Harvard Catalyst on clinical and translational research.)


We are seeking a full-time doctoral-level hire (J.D., M.D., Ph.D., etc. in law, ethics, public health, social science, or other relevant discipline) with extensive knowledge of and interest in legal and ethical issues related to the health and welfare of professional athletes.  The position will be funded for at least two years, with renewal likely for an additional year or more.


View the full job description and apply here


For questions, contact petrie-flom@law.harvard.edu or 617-496-4662.

February 27, 2014 in Ethics, Haskell Murray, Jobs, Sports | Permalink | Comments (0)

Thursday, February 20, 2014

Facebook, LinkedIn, and Twitter- Who needs them?

Our BLPB group has had a number of email discussions recently about the use of social media including blogs, Facebook, LinkedIn and Twitter for professional purposes. My home institution has discussed the same topic and even held a “training” session on technology in and outside of the classroom.  Because I am a heavy user, I volunteered to blog about how I use social media as a lawyer and academic in the hopes of spurring discussion or at least encouraging others to take a dip in the vast pool of social media.

Although I have been on Facebook for years, I don’t use that professionally at all. I also don’t allow my students to friend me, although I do know a number of professors who do. I often see lawyer friends discussing their clients or cases in a way that borders on violations of the rules of professional conduct, and I made sure to discuss those pitfalls when I was teaching PR last year.

I have also used LinkedIn for several years, mainly for professional purposes to see what others in my profession (at the time compliance and privacy work) were thinking about.  I still belong to a number of LinkedIn groups and have found that academics from other countries tend to use LinkedIn more than US professors. I have received a number of invitations to collaborate on research just from posts on LinkedIn. I also encourage all of my law students to join LinkedIn not only for networking purposes, but also so that they can attract recruiters, who now use LinkedIn almost as often as they use headhunters.  When I blog, I link my posts to LinkedIn, which in turn automatically posts to Twitter.

I admit that I did not like Twitter at first. I now have three Twitter accounts- follow me at @mlnarine.  I started using Twitter when I was a deputy general counsel and compliance officer and I followed law firms and every government agency that was online that regulated my industry. The government agencies were very early to the Twitter game and I once learned about a delay in the rollout of a regulation via Twitter a full week before my outside counsel who was working on the project informed me.

I also use the hashtag system (#) to see what others are saying on topics that hold my interest such as #csr (corporate social responsibility and unfortunately also customer service rep), #socent for social enterprise, #corpgov for corporate governance, and #Dodd-Frank  and #climatechange (self explanatory). 

I make an effort to tweet daily and am now an expert in trying to say something useful in 140 characters or less (being on yearbook staff in high school and counting characters for headlines made this a breeze for me). I re-tweet other tweets that I believe may be of interest to my followers or links to articles, and often gain new followers based on what I have chosen to tweet, largely because of my use of hashtags. In fact, after a marathon tweeting session following the Dodd-Frank conflict minerals oral argument before the DC Circuit Court of Appeals, I received four calls from the press for interviews, a nice, unexpected benefit of trying to educate my followers.  Often when I attend conferences, such as last week’s ABA meeting or the UN’s Business and Human Rights Forum, the organizers develop a hashtag so that those who cannot attend in person can follow the proceedings through tweets and the attachments to those tweets.

The best part of twitter is that I met fellow blogger, Haskell Murray because of one his tweets and that led to an invitation to speak at a conference.  Haskell has published a useful  list of business law professors on Twitter so if you’re not on his list, let us know and we will update it.

Next week I will post about the benefits or perils of blogging, especially for someone new to academia.    

February 20, 2014 in Business Associations, Anne Tucker, Conferences, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, Ethics, Haskell Murray, Marcia L. Narine, Social Enterprise, Stefan J. Padfield, Teaching, Web/Tech | Permalink | Comments (0)

Thursday, January 30, 2014

What does a for-profit corporation believe and should it receive a religious exemption?

Professor Caroline Mala Corbin from University of Miami has written an interesting article on the Hobby Lobby and Conestoga Wood Specialites Corp. cases before the Supreme Court. Her abstract is below:

Do for-profit corporations have a right to religious liberty? This question is front and center in two cases before the Supreme Court challenging the Affordable Care Act’s “contraception mandate.” Whether for-profit corporations are entitled to religious exemptions is a question of first impression. Most scholars writing on this issue argue that for-profit corporations do have the right to religious liberty, especially after the Supreme Court recognized that for-profit corporations have the right to free speech in Citizens United. 

This essay argues that for-profit corporations should not – and do not – have religious liberty rights. First, there is no principled basis for granting religious liberty exemptions to for-profit corporations. For-profit corporations do not possess the inherently human characteristics that justify religious exemptions for individuals. For-profit corporations also lack the unique qualities that justify exemptions for churches. Citizens United fails to provide a justification as its protection for corporate speech is based on the rights of audiences and not the rights of corporate speakers. Second, as a matter of current law, neither the Free Exercise Clause nor the Religious Freedom Restoration Act recognizes the religious rights of for-profit corporations. Finally, corporate religious liberty risks trampling on the employment rights and religious liberty of individual employees.



January 30, 2014 in Business Associations, Constitutional Law, Corporations, Current Affairs, Ethics, Marcia L. Narine, Religion | Permalink | Comments (0)

Tuesday, January 21, 2014

WV Chemical Spill: Can you over do entity formation? (Hint: Yes.)

Freedom Industries -- the company apparently responsible for contaminating the Elk River (and, along with it, 300,000 West Virginia residents’ drinking water) – has filed for Chapter 11 bankruptcy.  The company wasted little time filing for reorganization, and the process already has some people on edge. 

From a public relations perspective, this kind of cases does not serve the concepts of Business Organizations especially well.  The use of limited liability vehicles is sanctioned by law, and such use has been credited with creating all kinds of opportunities for growth through pooled resources that would not otherwise occur without the grant of limited liability.  I happen to think that’s true.  (See, e.g., Corporate Moral Agency and the Role of the Corporation in Society, p. 176, By David Ronnegard) 

Still, one of the issues is that figuring out who owned Freedom Industries took some sleuthing (reporter's findings here).  It appears the structure is as follows: 

Freedom Industries’ Chapter 11 documents list its sole owner as Chemstream Holdings, which is owned by J. Clifford Forrest.  Forrest also owned the Pennsylvania company, Rosebud Mining, which is located at the same address Chemstream Holdings lists for its headquarters.  The

Reports note that the chapter 11 filing also states that two entities have offered to lend up to $5 million to fund Freedom Industries’ reorganization.  The two entities are VF Funding and Mountaineer Funding, the latter of which is a West Virginia LLC formed by its sole owner: J. Clifford Forrest.

The idea that the owner of the company that owns the company that owned the chemicals that harmed the water in West Virginia is now seeking to create a new company to loan money to the company that owned the chemicals is note sitting very well with many of those harmed by the chemical leak. 

Some of those harmed by the chemical spill are objecting to the proposed reorganization structure. As reported here, West Virginia American Water (WVAW), the utility providing the tainted water (and the subject of it own lawsuits because of it), claims the water company will be “the largest creditor by far in this bankruptcy case.” As such, WVAW has asked (PDF here) the bankruptcy judge to slow down the reorganization so that the utility and other creditors an opportunity get a better sense of the ownership structure and how the creditors (and possible creditors) will be treated. 

This case probably looks even worse because it keeps coming back to a single person, and not a group of investors. Again, one company – Chemstream Holdings, Inc. is owned by one person -- J. Clifford Forrest, who then is the sole owner of a company seeking to loan money to the embattled company. 

Keeping with that theme, after a little sleuthing of my own, I found that although the initial reports were of VF Funding and Mounatineer Funding LLC offering to loan $5 million to Freedom Industries, it seems to have gotten even more convoluted.  There is yet another company in the mix – WV Funding LLC (pdf), which was formed on January 17, 2014, and on the same date the entity filed to be the Debtor in Possession of Freedom Industries (pdf). WV Funding LLC was organized by same Wheeling attorney who formed Mountaineer Funding LLC for Forrest.  The sole listed member of WV Funding LLC? Mountaineer Funding LLC (pdf). Related documents here.

All of this, at least at this point, seems permissible. Still, at some point, it really does start to look like someone is trying to pull a fast one.  And even a staunch defender of the corporation and uncorporation has a hard time arguing otherwise.  At a minimum, and even though there are good counterarguments (like Steve Bainbridge makes here in a different context), such behavior starts to make an expansive view of enterprise liability a lot more attractive. 

January 21, 2014 in Business Associations, Corporations, Entrepreneurship, Ethics, Joshua P. Fershee, LLCs, Unincorporated Entities | Permalink | Comments (2)

Thursday, January 16, 2014

Living in a Material World- From Naming and Shaming to Knowing and Showing: Will New Disclosure Regimes Finally Drive Corporate Accountability for Human Rights?

In my posts last Thursday (see here and here) and in others, I have explained why I don’t think that the Dodd-Frank conflicts minerals law is the right way to force business to think more carefully about their human rights impacts.  I have also blogged about the non-binding UN Guiding Principles on Business and Human Rights, which have influenced both the Dodd-Frank rule, the EU's similar proposal, and the State Department's required disclosures for businesses investing in Burma (see here). 

For the past few months, I have been working on an article outlining one potential solution.  But I was dismayed, but not surprised to read last week that the US government’s procurement processes may be contributing to the very problems that it seeks to prevent in Bangladesh and other countries with poor human rights records. This adds a wrinkle to my proposal, but my contribution to the debate is below:

Faced with less than optimal voluntary initiatives and in the absence of binding legislation, what mechanisms can interested stakeholders use as leverage to force corporations to take a more proactive role in safeguarding human rights, particularly due diligence issues in the supply chain?  Can new disclosure and procurement requirements provide enough incentives to have a measurable impact on the behavior of transnational corporations based in the United States? This Article argues that federal and state governments should take advantage of the fact firms are adapting to more rigorous transparency and due diligence demands from socially responsible investors, international stock exchange listing requirements, and enterprise risk management processes.

Corporations respond to incentives and penalties. Governments can and should  require stronger procurement contractual terms for contractors and subcontractors. The contract could require: (1) executive level, Sarbanes-Oxley like attestations regarding human rights policies and due diligence on impacts within the supply chain; (2) an audit by certified third parties and (3) suspension or debarment from contracts as well as clawbacks of executive bonuses and a portion of board compensation as penalties for false or misleading attestations.

Companies that do not choose to participate in government contracting programs will not have to complete the attestation or due diligence process but the benefits of participating will outweigh the costs.  The large number of participating firms will likely lead to the practice becoming an industry standard across sectors, thereby forestalling additional legislation, shareholder resolutions, and name and shame campaigns, and thus eventually leading to benefits for all stakeholders including those most directly affected.



January 16, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation, Social Enterprise | Permalink | Comments (1)

Thursday, January 9, 2014

Aaron Rodgers, Intel and the “Scarlet Letter” of Dodd-Frank- Part 2

On Tuesday, I attended the oral argument for the National Association of Manufacturers v. SEC—the Dodd-Frank conflict minerals case. Trying to predict what a court will do based on body language and the tone of questioning at oral argument, especially in writing, is foolish and crazy, but I will do so anyway.

I am cautiously optimistic that the appellate court will send the conflict mineral rule back to the SEC to retool based on the three arguments generated the most discussion. First, the judges appeared divided on whether the SEC  had abused its discretion by changing the statutory language requiring issuers to report if minerals “did” originate from the DRC or surrounding companies rather than the current SEC language of “may have” originated. This language would sweep in products in which there is a mere possibility rather than a probability of originating in covered countries. One judge grilled the SEC like I grill my law students about the actual statutory language and legislative intent, while another appeared satisfied with SEC’s explanation that issuers did not have to file if the lack of certainty was due to a small number of responses from suppliers or for lack of information. My prediction- if the SEC loses, they will have to rewrite this section to comport with Congressional intent.

The second main issue concerned the SEC’s failure to apply a de minimis exception to the rule. NAM’s lawyer provided a real-life example of a catalyst used in producing automobiles that sometimes washed away during production but at other times could leave just one part per million of tin in the finished product. Judge Srinivasan pointed out that if the mineral could wash away but the product could still function, then perhaps it wasn’t “necessary” as the law required for reporting. Judge Sentelle raised a concern about “breaking new ground” by requiring the SEC to enact a de minimis exception. The SEC bolstered its argument by indicating that no commentator that had proposed such an exception during the rulemaking process  had provided a workable threshold. My prediction- this is a toss up. This was the SEC’s most successful argument of the day.

Many commenters believed that the third argument—the First Amendment claim-- was spurious and/or a Hail Mary plea when NAM first raised it last year. Yet this argument provided the most interesting discussion of the day, especially since Judge Randolph specifically reminded NAM’s counsel to discuss it and not save it for rebuttal as NAM had planned. NAM argued that by requiring companies to declare on their websites that their products were not “DRC-Conflict Free,” thereby denouncing their own products, this amounted to a “scarlet letter.” NAM conceded that the government could ask for the information and could post it, but maintained that requiring companies to “shame” themselves was unconstitutional. This argument gained traction with both judges Randolph and Sentelle, who called it “compelled speech.” The judges also questioned the SEC on: whether the SEC had ever or should focus its efforts on communications to consumers; how the SEC would enforce the rule, asking whether a group of scientists would do product inspections; how this rule would achieve Congress’ intent of securing the safety of the Congolese people; whether the government could require companies to indicate whether they had used child labor overseas; and whether the intent of the shaming provision was to cause a boycott- bingo! My prediction- the SEC loses on this provision.

If the SEC does have to go back to the drawing board, it will be interesting to see how current Chair Mary Jo White influences the rule given her public statements about the rule being out of the SEC’s purview. I hope that the European Commission, which has done an impact analysis, will pay close attention as they roll out their own conflict minerals legislation to the EU.

Many have asked what I think the government should have done to help the people of Congo. Put simply, the government could and should fund and enforce the DRC Relief, Security, and Democracy Promotion Act of 2006, which has over a dozen provisions addressing security sector reform, minerals, infrastructure and other matters that could provide a more holistic solution. Next week, I will blog about other ways that the government could incentivize business to address human rights issues around the world.

January 9, 2014 in Constitutional Law, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation | Permalink | Comments (1)

Tuesday, December 31, 2013

A More Positive 2014: Starting with Gender Equality in Business

Happy New Year!  2014 holds much promise and many challenges.  One such item: a recent World Bank report (key findings pdf) finds some things we all probably suspected: 

The report finds that economies with greater numbers of restrictions on women’s work have, on average, lower female participation in the formal labor force and have fewer firms with female participation in ownership. Conversely, economies which provide a greater measure of incentives for women to work, have greater income equality.

Here's hoping 2014 brings you all you seek.  More equality in the workplace, starting by removing legal barriers to gender equity, is high on my list.

December 31, 2013 in Current Affairs, Ethics, Financial Markets, Joshua P. Fershee | Permalink | Comments (0)

Thursday, December 19, 2013

Changing Corporate Law to Make Companies More Sustainable- Perspectives from governments, academics and practitioners

On December 5th and 6th I attended and presented at the third annual Sustainable Companies Project Conference at the University of Oslo.  The project, led by Beate Sjafjell began in 2010 and attempts to seek concrete solutions to the following problem:

Taking companies’ substantial contributions to climate change as a given fact, companies have to be addressed more effectively when designing strategies to mitigate climate change. A fundamental assumption is that traditional external regulation of companies, e.g. through environmental law, is not sufficient. Our hypothesis is that environmental sustainability in the operation of companies cannot be effectively achieved unless the objective is properly integrated into company law and thereby into the internal workings of the company.  

Members of the Norwegian government, the European Commission, the Organisation for Economic Cooperation and Development (“OECD”), and the United Nations Environmental Programme  (UNEP) Finance Initiative also presented with academics and practitioners from the US, Europe, Asia and Africa.

I did not participate in the first two conferences, but was privileged this year to present my paper entitled “Climate Change and Company Law in the United States: Using Procurement, Pay and Policy Changes to Influence Corporate Behavior.” The program and videos of the entire conference (click on the link of the panel discussions) are here. I presented last and my paper, with the others, will appear in a special edition of the Journal of European Company Law in 2014.

Professors David Millon and Celia Taylor rounded out the US delegation. Millon, who I learned first coined the phrase “shareholder primacy,” proposed a constituency statute for Delaware, but acknowledged that his proposal (even if it were passed) might not have much impact because of the twin influence of inventive-based compensation for executives and the role of institutional investors, who also seek short-term profit maximization. Taylor discussed the SEC Guidance on climate change disclosures recommending that they be made mandatory, but cautioned against disclosure overload and potential greenwashing.

Others provided insight on shareholder primacy and board duties from the UK, Norway, and Indonesia, and Tineke Lambooy presented the results of a meta study regarding boards and sustainability.  Gail Henderson, from Canada, used the concept of "undue hardship" in human rights law to propose a new burden to reduce environmental impacts. Mark Taylor, who was one of the many attendees who like me came straight from the UN Forum on Business and Human Rights, explained due diligence provisions in EU member state laws and argued that due diligence is emerging as a standard for compliant businesses.  Carol Liao discussed "catalytic innovation" and hybrid entities. Her blog about the conference is here.

A number of presenters focused on: auditing; integrated reporting; insurance, bankruptcy, contract, and insolvency law; and the role of sustainable investors (there are 50 sustainable stock indices), particularly large sovereign pension funds.  One of the more interesting proposals came from Ivo Mulder of UNEP, who is conducting a study on a sovereign credit risk model.  Sovereign bond markets represent 40% of global bond markets but there is no integration of environmental, social or governance factors even though risk mitigation is a key factor in fixed-income investing. He called for a new way of thinking about how bond securities are valued in primary and secondary markets.

Perhaps one of the most innovative proposals came from Endre Stavang, who suggested an “environmental option.” Specifically he and his co-author recommend enacting legislation that will empower certain green companies to transfer a call option to buy a block of its shares to an established company of their choice. He stressed that the option is free and that the exercise price would be the price of the green company’s share at the time of the transfer. The non-green receiving company would have a period of five years to exercise.

The abstracts from all of the presenters are available here. It was an intense two days of creative presentations, but hopefully these kinds of substantive public policy discussions, which include government, intergovernmental organizations, stakeholders and academics will have an impact. It’s the reason I joined academia.

Happy Holidays to all, and to my new Norweigian colleagues, Gledelig høytid.





December 19, 2013 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Science, Securities Regulation, Social Enterprise | Permalink | Comments (0)

Thursday, December 12, 2013

Human Rights- What is the Proper Role for Business?

Last week I attended the UN Forum on Business and Human Rights in Geneva.  The Forum was designed to discuss barriers and best practices related to the promotion and implementation of the non-binding UN Guiding Principles on Business and Human Rights, which discuss the state’s duty to protect human rights, the corporation’s duty to respect human rights, and the joint duty to provide access to judicial and non-judicial remedies for human rights abuses. This is the second year that nation states, NGOs, businesses, civil society organizations, academics and others have met to discuss multi-stakeholder initiatives, how businesses can better assess their human rights impact, and how to conduct due diligence in the supply chain.

Released in 2011 after unanimous endorsement by the UN Human Rights Council, the Guiding Principles are considered the first globally-accepted set of standards on the relationship between states and business as it relates to human rights. The US State Department and the Department of Labor have designed policies around the Principles, and a number of companies have adopted them in whole or in part, because they provide a relatively detailed framework as to expectations.  Some companies faced shareholder proposals seeking the adoption of the Principles in 2013, and more will likely hear about the Principles in 2014 from socially responsible investors.  Several international law firms discussed the advice that they are now providing to multinationals about adopting the Principles without providing a new basis for liability for private litigants.

Although the organizers did not have the level of business representation as they would have liked of one-third of the attendees, it was still a worthwhile event with Rio Tinto, Unilever, Microsoft, Google, Nestle, Barrick Gold, UBS, Petrobras, Total, SA, and other multinationals serving as panelists. Members of the European Union Parliament, the European Union Commission and other state delegates also held leadership roles in shaping the discussion on panels and from the audience.

Some of the more interesting panels concerned protecting human rights in the digital domain; case studies on responsible investment in Myanmar (by the State Department), the palm oil industry in Indonesia and indigenous peoples in the Americas; the dangers faced by human and environmental rights defenders (including torture and murder); how to conduct business in conflict zones; public procurement and human rights; developments in transnational litigation (one lawyer claimed that 6,000 of his plaintiffs have had their cases dismissed since the Supreme Court Kiobel decision about the Alien Tort Statute); mobilizing lawyers to advance business and human rights; the various comply or explain regimes and how countries are mandating or recommending integrated reporting on environmental, social and governance factors; tax avoidance and human rights; human rights in international investment policies and contracts; and corporate governance and the Guiding Principles.

As a former businessperson, many of the implementation challenges outlined by the corporate representatives resonated with me. As an academic, the conference reaffirmed how little law students know about these issues.  Our graduates may need to advise clients about risk management, international labor issues, corporate social responsibility, supply chain concerns, investor relations, and new disclosure regimes. Dodd-Frank conflict minerals and the upcoming European counterpart were frequently mentioned and there are executive orders and state laws dealing with human rights as well.

Traditional human rights courses do not typically address most of these issues in depth and business law courses don’t either. Only a few law firms have practice areas specifically devoted to this area- typically in the corporate social responsibility group- but many transactional lawyers and litigators are rapidly getting up to speed out of necessity. Small and medium-sized enterprises must also consider these issues, and we need to remember that “human rights” is not just an international issue. As business law professors, we may want to consider how we can prepare our students for this new frontier so that they can be both more marketable and more capable of advising their clients in this burgeoning area of the law.  For those who want to read about human rights and business on a more frequent basis, I recommend Professor Jena Martin’s blog.  

December 12, 2013 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation, Teaching | Permalink | Comments (1)

Thursday, December 5, 2013

Business and Bitcoin

Yesterday was the last day of a fantastic three-day conference at the UN in Geneva on business and human rights, and I will blog about it next week after I fully absorb all that I have heard. As I type this (Wednesday), I am sitting in a session on corporate governance and the UN Guiding Principles on Business and Human Rights moderated by a representative from Rio Tinto. The multi-stakeholder panel consists of representatives from Caux Roundtable Japan  (focused on moral capitalism), the Norwegian National Contact Point (the governmental entity responsible for responding to claims between aggrieved parties and companies), Aviva Public Limited (insurance, pensions UK), Cividep (a civil society organization in India), and Petrobas (energy company in Brazil).

If you want to learn more about the conference, I have been tweeting for the past two days at @mlnarine, and you can follow the others who have been posting at #UNForumWatch #unforumwatch or #businessforum. 1700 businesspeople, lawyers, academics, NGOs, state delegates and members of civil society are here.  Economist Joseph Stiglitz presented a fiery keynote address. Some of the biggest names in business such as Microsoft, Unilever, Total, Vale and others have represented corporate interests.  

Depending on where you are, by the time you read this, I will be in Oslo attending a conference on climate change and global company law and will be speaking on the US perspective on Friday. I will blog on that conference on my Thursday spot in two weeks.  

On a completely unrelated note, with Bitcoin appreciating over 5000% in the past year (see here) and reaching $1000 last week, I thought readers would be interested in this article,  “Whack-A-Mole: Why Prosecuting Digital Currency Exchanges Won’t Stop Online Money Laundering”by Catherine Martin Christopher.  Au revoir from Geneva. Hallo from Norway. 

The abstract is below. 

Law enforcement efforts to combat money laundering are increasingly misplaced. As money laundering and other underlying crimes shift into cyberspace, U.S. law enforcement focuses on prosecuting financial institutions’ regulatory violations to prevent crime, rather than going after criminals themselves. This article will describe current U.S. anti-money laundering laws, with particular criticism of how attenuated prosecution has become from crime. The article will then describe the use of Bitcoin as a money-laundering vehicle, and analyze the difficulties for law enforcement officials who attempt to choke off Bitcoin transactions in lieu of prosecuting underlying criminal activity. The article concludes with recommendations that law enforcement should look to digital currency exchangers not as criminals, but instead as partners in the effort to eradicate money laundering and — more importantly — the crimes underlying the laundering.



December 5, 2013 in Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine | Permalink | Comments (0)

Thursday, November 28, 2013

The Superrich and the SEC

On Saturday evening I leave for Geneva to attend the United Nations Forum on Business and Human Rights with 1,000 of my closest friends including NGOs, Fortune 250 Companies, government entities, academics and other stakeholders.  I plan to blog from the conference next week.  I am excited about the substance but have been dreading the expense because the last time I was in Switzerland everything from the cab fare to the fondue was obscenely expensive, and I remember thinking that everyone in the country must make a very good living. Apparently, according to the New York Times, the Swiss, whom I thought were superrich, "scorn the Superrich," and last March a two-thirds majority voted to ban bonuses, golden handshakes and to require firms to consult with their shareholders on executive compensation. Nonetheless, last week, 65% of voters rejected a measure to limit executive pay to 12 times the lowest paid employee at their company. According to press reports many Swiss supported the measure in principle but did not agree with the government imposing caps on pay.

Meanwhile stateside, next week the SEC closes its comment period on its own pay ratio proposal under Section 953(b) of the Dodd-Frank Act. Among other things, the SEC rule requires companies to disclose: the median of the annual total compensation of all its employees except the CEO; the annual total compensation of its CEO; and the ratio of the two amounts. It does not specify a methodology for calculation but does require the calculation to include all employees (including full-time, part-time, temporary, seasonal and non-U.S. employees), those employed by the company or any of its subsidiaries, and those employed as of the last day of the company’s prior fiscal year.  A number of bloggers have criticized the rule (see here for example), business groups generally oppose it, and the agency has been flooded with tens of thousands of comment letters already.

The SEC must take some action because Congress has dictated a mandate through Dodd-Frank.  It can’t just listen to the will of the people (many of whom support the rule) like the Swiss government did.  It will be interesting to see what the agency does. After all two of the commissioners voted against the rule, and one has publicly spoken out against it.  But the SEC does have some discretion. The question is how will it exercise that discretion and will the agency once again face litigation as it has with other Dodd-Frank measures where business groups have challenged its actions (proxy access, resource extraction and conflict minerals, for example). More important, will it achieve the right results? Will investors armed with more information change their nonbinding say-on-pay votes or switch out directors who overpay underperforming or unscrupulous executives? If not, then will this be another well-intentioned rule that does nothing to stop the next financial crisis?


November 28, 2013 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation | Permalink | Comments (1)

Thursday, November 14, 2013

Crime and Punishment: Prosecuting Executives and Forcing Companies to Admit Guilt


“Man grows used to everything, the scoundrel!” 
― Fyodor DostoyevskyCrime and Punishment

This week two articles caught my eye.  The New York Times’ Room for Debate feature presented conflicting views on the need to “prosecute executives for Wall Street crime.” My former colleague at UMKC Law School, Bill Black, has been a vocal critic of the Obama administration’s failure to prosecute executives for their actions during the most recent financial crisis, and recommended bolstering regulators to build cases that they can win. Professor Ellen Podgor argued that the laws have overcriminalized behavior in a business context, and that the “line between criminal activities and acceptable business judgments can be fuzzy.” She cited the thousands of criminal statutes and regulations and compared them to what she deems to be overbroad statutes such as RICO, mail and wire fraud, and penalties for making false statements. She worried about the potential for prosecutors to abuse their powers when individuals may not understand when they are breaking the law.

Charles Ferguson, director of the film “Inside Job,” likened the activity of some major financial executives to that of mobsters and argued that they have actually done more damage to the economy. He questioned why the government hadn’t used RICO to pursue more criminal cases.  Former prosecutor and now private lawyer Allen Goelman pointed out rather bluntly that prosecutors aren’t cozy with Wall Street—they just won’t bring a case when the evidence won’t allow them to win. He also reminded us that greed and stupidity, which he claimed was the cause of the “overwhelming majority of the risky and irresponsible behavior by Wall Street,” are not crimes.  Professor Lawrence Friedman wrote that  the law “announces the community’s conceptions of right and wrong,” and if we now treat corporations like people under Citizens United then we should likewise make the executives who run them the objects of the community’s condemnation of wrongdoing.

Finally, Senator Elizabeth Warren concluded that if corporations know that they can break the law, pay a large settlement, and not admit any guilt or have any individual prosecuted, they won’t have any incentive to follow the law. She also argued for public disclosure of these settlements including whether there were tax deductions or releases of liability.

This brings me to the second interesting article. Former SEC enforcement chief and now Kirkland & Ellis partner Robert Khuzami recently said, “I didn’t think there was much doubt in most cases that a defendant engaged in wrongdoing when you had a 20-page complaint, you had them writing a big check, you may well have prosecuted an individual in the wrongdoing.” While not endorsing or rejecting current SEC Chair Mary Jo White’s position to require certain companies to admit wrongdoing in settlements, he raised a concern about whether this change in policy would place undue strain on the agency’s limited resources by forcing more cases to go to trial.  He also raised a valid point about the legitimate fear that firms should have in that admitting guilt could expose them to lawsuits, criminal prosecution, and potential business losses.  Chair White did not set out specific guidelines for the new protocol, but so far this year 22 companies have benefitted from the no admit/no deny policy and have paid $14 million in sanctions. But we don’t know how many executives from these companies lost their jobs. On the other hand, would these same companies have settled if they had to admit liability or would they have demanded their day in court?

Should the desire to preserve agency resources trump the need to protect the investing public—the stated purpose of the SEC? If neither the company nor the executive faces true accountability, what will be the incentive to change? In a post-Citizens United world, will Congressmen strengthen the laws or bolster the power and resources of the regulators to go after the corporations that help fund their campaigns? Have we, as Dostoyevsky asserted, become “used” to the current state of affairs where drug dealers and murderers go to jail, but there aren’t enough resources to pursue financial miscreants?

What will make companies and executives “do the right thing”? Dostoyevksy also wrote “intelligence alone is not nearly enough when it comes to acting wisely,” and he was right. Perhaps the fear of the punishment for clearly enumerated and understood crimes, and the fear of the admission of wrongdoing with the attendant collateral damage that causes will lead to a change in individual and corporate behavior.  I agree with Professor Podgor that there is clearly room for prosecutorial abuse of power and that the myriad of laws can lead to a no-mans land for the unwary executive forced to increase margins and earnings per share (while possibly getting a healthy bonus).  While I have argued in the past for an affirmative defense for certain kinds of corporate crimial liability, I also agree with Professor Black and Senator Warren.  At some point, people and the corporations (made up of people) need more than “intelligence” to act “wisely.” They need the punishment to fit the crime.






November 14, 2013 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Film, Financial Markets, Marcia L. Narine, Securities Regulation | Permalink | Comments (0)

Thursday, November 7, 2013

When the Compliance Officer Blows the Whistle

In 2011, I met with members of the SEC and Congressional staffers as part of a coalition of business people and lawyers raising concerns about the proposed Dodd-Frank whistleblower provision. Ten days after leaving my compliance officer position and prior to joining academia, I testified before a Congressional committee about the potential unintended consequences of the law. The so-called “bounty-hunter” law establishes that whistleblowers who provide original information to the SEC related to securities fraud or violations of the Foreign Corrupt Practices Act are eligible for ten to thirty percent of the amount of the recovery in any action in which the SEC levies sanctions in excess of $1 million dollars. The legislation also contains an anti-retaliation clause that expands the reach of Sarbanes-Oxley. Congress enacted the legislation to respond to the Bernard Madoff scandal. The SEC recently awarded $14 million dollars to one whistleblower. To learn more about the program, click here.

I argued, among other things, that the legislation assumed that all companies operate at the lowest levels of ethical behavior and instead provided incentives to bypass existing compliance programs when there are effective incentive structures within the existing Federal Sentencing Guidelines for Organizations.  Although they are no longer binding, judges use the Guidelines to sentence corporations that plead guilty or are so adjudicated after trial. Prosecutors use them as guideposts when making deals with companies that enter into nonprosecution and deferred prosecution agreements. I recommended: (1) that there be a presumption that whistleblowers report internally first unless there is no viable, credible internal option; (2) that the SEC inform the company that an anonymous report has been made unless there is legitimate reason not to do so and (3) that those with a fiduciary duty to report be excluded from the bounty provisions of the bill and be required to report upward internally before reporting externally.

Fortunately, the final legislation does make it more difficult for certain people to report externally without first trying to use the compliance program, if one exists.  Nonetheless, the Wall Street Journal reported yesterday that a growing number of compliance personnel are blowing the whistle on their own companies, notwithstanding the fact that they must wait 120 days under the rules after reporting internally to go to the SEC.  One of the attorneys interviewed in the WSJ article, Gregory Keating, is a shareholder Littler Mendelsohn, a firm that exclusively represents management in labor matters. His firm and others are seeing more claims brought by compliance officers.

This development leads to a number of questions. What about compliance officers who are also lawyers, as I was? NY state has answered the question by excluding lawyers from the awards, and I am sure that many other states are considering it or will now start after reading yesterday’s article. What does this mean for those forward thinking law schools that are training law students to consider careers in compliance? I believe that this is a viable career choice in an oversaturated legal market because the compliance field is exploding, while the world of BigLaw is contracting. Do we advise students considering the compliance field to forego their bar licenses after graduation because one day they could be a whistleblower and face a conflict of interest? I think that’s unwise.  What about compliance personnel in foreign countries? Courts have already provided conflicting rulings about their eligibility for whistleblower status under the law.

Most significantly, in many companies compliance officers make at least an annual report to the board on the activities of the compliance program in part to ensure that the board fulfills its Caremark responsibilities.  These reports generally do and should involve detailed, frank discussions about current and future risks. Will and should board members become less candid if they worry that their compliance officer may blow the whistle?

Could the Sentencing Commission have avoided the need for compliance officers to blow the whistle externally by recommending that compliance officers report directly to the board as the heads of internal audit typically do? This option was considered and rejected during the last round of revisions to the Sentencing Guidelines in 2010. Compliance officers who do not report to general counsels or others in the C-Suite but have direct access to board members might feel less of a need to report to external agencies. This is why, perhaps, in almost every corporate integrity agreement or deferred prosecution agreement, the government requires the chief compliance officer to report to the board or at least to someone outside of the legal department.

To be clear, I am not opposed to the legislation in principle. And for a compliance officer to report on his or her own organization, the situation internally was probably pretty dire. Gregory Keating and I sit on the Department of Labor’s Whistleblower Protection Advisory Committee, which will examine almost two dozen anti-retaliation laws in  the airline, commercial motor carrier, consumer product, environmental, financial reform, food safety, health care reform, nuclear, pipeline, public transportation agency, railroad, maritime and securities fields.  During our two-year term we will work with academics, lawyers, government officials, organized labor and members of the public to make the whistleblower laws more effective for both labor and management.

State bars, government agencies, boards, general counsels, plaintiffs’ lawyers and defense lawyers need to watch these developments  of the compliance officer as whistleblower closely. I will be watching as well, both as a former compliance officer and for material for a future article.



November 7, 2013 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation | Permalink | Comments (0)

Thursday, October 24, 2013

Now that juries and the DOJ have spoken, will boards be more active in shaping ethical culture in the C-Suite?

CEOs and executives just can’t get a break in the news lately.  A jury found both former Countrywide executive Rebecca Mairone and Bank of America liable for fraud for Countrywide’s “Hustle” loans in 2007 and 2008 (see here). Martha Stewart has had to renegotiate her merchandising agreement with JC Penney to avoid hearing what a judge will say about that side deal in the lawsuit brought against her by Macy’s, with whom she purportedly had an exclusive merchandising deal (see here).  JP Morgan Chase is in talks to pay $13 billion to settle with the Department of Justice over various compliance-related failures, but the company still faces billions in claims from angry shareholders. The company isn’t out of the woods yet in terms of potential criminal liability (see here). CEO Jamie Dimon isn’t personally accused of any wrongdoing, and in fact has been instrumental in achieving the proposed settlements. But in the past he has faced questions from institutional shareholders about his dual roles as chair of the board and CEO. Those questions may come up again in the 2014 proxy season.

The Bank of America verdict and the recent JP Morgan Chase settlement may herald a new age of prosecutions and settlements both for institutions and executives for compliance failures and criminal activity. With the recent announcement of a $14 million dollar award for an SEC whistleblower coupled with the SEC's pronouncements about getting its "swagger" back, we can expect more legal actions to come as employees feel incentivized to come forward to report wrongdoing. 

So what is the role of the board in directing, managing, and shaping corporate culture? In my former life as a compliance officer this issue occupied much of my time.  My peers and I scoured the newspapers looking for cautionary tales like the ones I recounted above so that we could remind our internal clients and board members of what could happen if they didn’t follow the laws and our policies.

Bryan Cave partner Scott Killingsworth has written a white paper on the importance of the board in monitoring the C-Suite.  He examines the latest research in behavioral ethics citing Lynne Dallas, Lynn Stout, Krista Llewellyn, Maureen Muller-Kahle, Max Bazerman and Francesca Gino, among others.  It’s definitely worth a read by board members in light of recent headlines. The abstract is below:

The C-suite is a unique environment peopled with extraordinary individuals and endowed with the potential to achieve enormous good – or, as recent history has vividly shown, to inflict devastating harm. Given that senior executives operate largely beyond the reach of traditional compliance program controls, a board that aspires to true stewardship must embrace a special responsibility to support and monitor ethics and compliance in the C-suite. 

By themselves, the forces at large in the C-suite would challenge the ability of even the most conscientious and rational executives to make consistently irreproachable decisions. The C-suite environment is characterized by the presence of power, strong incentives and huge temptations (financial and other), high ambition, extreme pressure, a fast pace, complex problems and few effective external controls. The problem of C-suite ethics has a deeper dimension, though, than the mere impact of strong pressures upon rational decision-makers. Recent behavioral research brings the unwelcome news that the subversive effects of these pressures are magnified by systematic, predictable human failings that can prompt us to slip our moral moorings and overlook when others do so. We are just beginning to understand the insidious power that such factors as motivated blindness, attentional blindness, conflicts of interest, focused "business-only" framing, time pressure, irrational avoidance of loss, escalating commitment, overconfidence and in-group dynamics can exert below the plane of conscious thought, even over people who have good reason to consider themselves ethically strong. and behaviorally upright. 

But we also know that organizational culture can dramatically affect both ethical conduct and reporting of misconduct, by establishing workplace norms, harnessing social identity and group loyalty and increasing the salience of ethical values. How can these learnings inform the board’s interaction with, and monitoring of, the C-suite? And how can the board help forge a stronger connection between the C-Suite and the organization’s compliance and ethics program? This paper suggests several key strategies for dealing with different aspects of this complex problem. 


October 24, 2013 in Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation | Permalink | Comments (0)