Wednesday, April 20, 2016
As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the US Commodity Futures Trading Commission (CFTC) promulgated rules to regulate the swaps marketplace, securities trades that were previously unregulated and a contributing factor in the 2008 financial crisis. The CFTC oversees the commodity derivatives markets in the USA and has dramatically increased regulations and enforcement as a result of Dodd-Frank. As of January 2016, the CFTC finalized Dodd-Frank Rules exemptive orders and guidance actions. Commodity derivatives market participants, whether acting as a commercial hedger, speculator, trading venue, intermediary or adviser, face increased regulatory requirements including:
- Swap Dealer Regulation such as De Minimis Exceptions, new capital and margin requirements to lower risk in the system, heightened business conduct standards to lower risk and promote market integrity, and increase record-keeping and reporting requirements so that regulators can police the markets.
- Derivative Transparency and Pricing such as regulating exchanges of standardized derivatives to increase competition, information and arbitrage on price.
- Establishing Derivative Clearinghouses for standardized derivatives to regulate and lower counter party risks
The full list of CFTC Dodd Frank rulemaking areas is available here. In conjunction with the new regulations, the CFTC has stepped up enforcement actions according to a 2015 CFTC enforcement report detailing 69 enforcement actions for the year. Through these enforcement actions, the CFTC collected $2.8 billion in fines (outpacing SEC collections of $2 billion with a much larger agency budget and enforcement docket).
Thursday, April 14, 2016
Today in my Business and Human Rights class I thought about Ann's recent post where she noted that socially responsible investor Calpers was rethinking its decision to divest from tobacco stocks. My class has recently been discussing the human rights impacts of mega sporting events and whether companies such as Rio Tinto (the medal makers), Omega (the time keepers), Coca Cola (sponsor), McDonalds (sponsor), FIFA (a nonprofit that runs worldwide soccer) and the International Olympic Committee (another corporation) are in any way complicit with state actions including the displacement of indigenous peoples in Brazil, the use of slavery in Qatar, human trafficking, and environmental degradation. I asked my students the tough question of whether they would stop eating McDonalds food or wearing Nike shoes because they were sponsors of these events. I required them to consider a number of factors to decide whether corporate sponsors should continue their relationships with FIFA and the IOC. I also asked whether the US should refuse to send athletes to compete in countries with significant human rights violations.
Because we are in Miami, we also discussed the topic du jour, Carnival Cruise line's controversial decision to follow Cuban law, which prohibits certain Cuban-born citizens from traveling back to Cuba on sea vessels, while permitting them to return to the island by air. Here in Miami, this is big news with the Mayor calling it a human rights violation by Carnival, a County contractor. A class action lawsuit has been filed seeking injunctive relief. This afternoon, Secretary of State John Kerry weighed in saying Carnival should not discriminate and calling upon Cuba to change its rules.
So back to Ann's post. In an informal poll in which I told all students to assume they would cruise, only one of my Business and Human Rights students said they would definitely boycott Carnival because of its compliance with Cuban law. Many, who are foreign born, saw it as an issue of sovereignty of a foreign government. About 25% of my Civil Procedure students would boycott (note that more of them are of Cuban descent, but many of the non-Cuban students would also boycott). These numbers didn't surprise me because as I have written before, I think that consumers focus on convenience, price, and quality- or in this case, whether they really like the cruise itinerary rather than the ethics of the product or service.
Tomorrow morning (Friday), I will be speaking on a panel with Jennifer Diaz of Diaz Trade Law, two members of the US government, and Cortney Morgan of Husch Blackwell discussing Cuba at the ABA International Law Section Spring Meeting in New York. If you're at the meeting and you read this before 9 am, pass by our session because I will be polling our audience members too. And stay tuned to the Cuba issue. I'm not sure that the Carnival case will disprove my thesis about the ineffectiveness of consumer pressure because if the Secretary of State has weighed in and the Communist Party of Cuba is already meeting next week, it's possible that change could happen that gets Carnival off the hook and the consumer clamor may have just been background noise. In the meantime, Carnival declared a 17% dividend hike earlier today and its stock was only down 11 cents in the midst of this public relations imbroglio. Notably, after hours, the stock was trading up.
April 14, 2016 in Ann Lipton, Conferences, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Human Rights, International Law, Law School, Marcia Narine, Teaching | Permalink | Comments (0)
Wednesday, March 30, 2016
CALL FOR PAPERS
2016 Financial Stability Conference
“Innovation, Market Structure, and Financial Stability”
The Federal Reserve Bank of Cleveland and the Office of Financial Research invite the submission of research and policy-oriented papers for the 2016 Financial Stability Conference to be held December 1-2, 2016, in Washington, D.C. The objectives of this conference are to highlight research and advance the dialogue on financial market dynamics that affect financial stability, and to disseminate recent advances in systemic risk measurement and forecasting tools that assist in macroprudential policy development and implementation.
PAPER SUBMISSION PROCEDURE
The deadline for submissions is July 31, 2016. Please send completed papers to:email@example.com Notification of acceptance will be provided by September 30, 2016. Travel and accommodation expenses will be covered for one presenter for each accepted paper.
A pdf version of this call for papers is available here
Friday, March 25, 2016
I feel badly for Chipotle. When I have taught Business Associations, I have used the chain’s Form 10-K to explain some basic governance and securities law principles. The students can relate to Chipotle and Shake Shack (another example I use) and they therefore remain engaged as we go through the filings. Chipotle has recently been embroiled in a public relations nightmare after a spate of food poisonings occurred last fall and winter, a risk it pointed out in its February 2015 10-K filings. The stock price has fluctuated from $750 a share in October to as low as $400 in January and then back to the mid $500 range. After some disappointing earnings news the stock is now trading at around $471.
Clean Yield Group, concerned that the company will focus only on bringing its stock back to “pre-crisis levels,” filed a shareholder proposal March 17th asking the company to link executive compensation with sustainability efforts. The proposal claims that the CEO was overpaid by $40 million in 2014 and states in part:
A number of studies demonstrate a firm link between superior corporate sustainability performance and financial outperformance relative to peers. Firms with superior sustainability performance were more likely to tie top executive incentives to sustainability metrics.
Leading companies are increasingly taking up this practice. A 2013 study conducted by the Investor Responsibility Research Institute and the Sustainable Investments Institute found that 43.4% of the S&P 500 had linked executive pay to environmental, social and/or ethical issues. These companies traverse industry sectors and include Pepsi, Alcoa, Walmart, Unilever, National Grid, Intel and many others…
Investor groups focusing on sustainable governance such as Ceres, the UN Global Compact, and the UN Principles for Responsible Investment (which represents investors with a collective $59 trillion AUM) have endorsed the establishment of linkages between executive compensation and sustainability performance.
Even with the adjustments to executive pay incentives announced this week in reaction to Chipotle’s ongoing food-borne illness crisis, Chipotle shareholders have consistently approved excessively large pay packages to our company’s co-chief executives that dangerously elide accountability for sustainability-related risks. This proposal provides the opportunity to rectify this situation.
If shareholders approve the compensation package on our company’s 2016 proxy ballot, by year-end, Mr. Ells and Mr. Moran will have pocketed nearly $211 million for their services since 2011. Shareholders have not insisted upon direct oversight of sustainability matters as a condition of employment or compensation, and the present crisis illustrates the probable error in that thinking.
This week, the Compensation Committee of the Board announced that it would withhold 2015 bonuses for executive officers. It has also announced that executive officers’ 2016 performance bonuses will be solely tied to bringing CMG stock back, over a three-year period, to its pre-crisis level.
This is a shortsighted approach that skirts the underlying issues that may have contributed to the E. coli and norovirus outbreaks that have left hundreds of people sickened, injured sales, led to ongoing investigations by health authorities and the federal government, damaged our company’s reputation, and will likely lead to expensive litigation. For years, Chipotle has resisted calls by shareholders to implement robust and transparent management and reporting systems to handle a range of environmental, social and governance issues that present both risks to operations as well as opportunities. While no one can know for certain whether a more rigorous management approach to food safety might have averted the current crisis, moving forward, shareholders can insist upon a proactive approach to the management of sustainability issues by altering top executives’ compensation packages to incentivize it.
The last sentence of the paragraph above stuck out to me. The shareholder does not know whether more rigorous sustainability practices would have prevented the food poisonings but believes that compensation changes incentivizing more transparency is vital. I’m not sure that there is a connection between the two, although there is some evidence that requiring more disclosure on environmental, social, and governance factors can lead to companies uncovering operational issues that they may not have noticed before. Corporate people are fond of saying that “what gets measured gets treasured.” Let’s see what Chipotle’s shareholders treasure at the next annual meeting.
March 25, 2016 in Business Associations, Compensation, Compliance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Marcia Narine, Securities Regulation, Shareholders | Permalink | Comments (0)
Wednesday, March 16, 2016
Being near to celebrity, even academic celebrity, can be exciting. I feel unjustifiable pride and exhilaration in the nomination of George Washington Law School professor Lisa Fairfax to be a SEC commissioner. The White House announced her nomination last October, and the U.S. Senate Committee on Banking, Housing and Urban Affairs held hearings yesterday for Lisa Fairfax (democratic nominee) and Hester Peirce (republican nominee). Professor Fairfax is being heralded as having "written extensively in favor of shareholder rights, shareholder activism, and gender and racial diversity on corporate boards." Her scholarship is available on her SSRN page. Hester Peirce, another academic of sorts, is a senior fellow at the Mercatus Center at George Mason University researching financial markets and an adjunct professor. The Mercatus Center is a "university-based research center... advanc[ing] knowledge about how markets work to improve people’s lives by training graduate students, conducting research, and applying economics to offer solutions to society’s most pressing problems." Her writing is available here.
The hearing process was reported by the WSJ as "tough" for both nominees. The confirmation process is by no means a given in the current political climate. A video of the hearing is available for viewing. Additionally, each nominee submitted a statement and financial records as a part of the confirmation process. Download FairfaxStatement Download FairfaxFinancialDisclosure Download PeirceStatement Download PeirceFinancialDisclosure
Lisa Fairfax summarized her credentials to be a Commissioner:
As a law professor, over the last fifteen years I have had the privilege of teaching Corporations and Securities Law to the next generation of practitioners, judges, and regulators, so that they can understand the increasingly complex world in which companies must operate, markets must perform, and regulators must monitor. My teaching, along with my research and writing in these areas, have given me a deep understanding of the issues confronting the SEC, as well as a strong desire to help tackle those issues head on.
Fairfax's statement also stated her view of the SEC:
[I] believe deeply in the SEC’s three part mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. ... I believe that the SEC’s three-part mission statement is more than a statement; it is a set of guiding principles that should shape every aspect of the agency’s activities. ...I believe the SEC’s work must be aimed at ensuring that investors are protected at all times, and that investors have confidence in the markets and the financial system.
The SEC also has a responsibility to facilitate access to needed capital for all participants in the market, from the corporation and small business owner in need of cash and credit, to the individual investing to support a family, finance a child’s education, or ensure a comfortable retirement.
Hester Peirce, who previously worked with the SEC’s Division of Investment Management, Commissioner Paul Atkins, and the SEC Investor Advisory Committee wrote:
My desire to serve at the SEC is motivated by the conviction that the capital markets help unlock people’s potential. Investors build their retirement nest eggs, their down payments, and their children’s college funds. Vibrant capital markets find and fund individuals and companies with brilliant ideas that can enhance people’s lives and the nation’s prosperity.
My belief in the capital markets’ ability to enrich our communities is built on lessons I have learned at the Peirce family dinner table, in classrooms at Case Western Reserve and Yale, and from mentors and colleagues throughout my career.
I am academically (and personally) interested in the role of retirement investors in capital markets so I noted with interest that both nominees spoke of the relevance of capital markets and the SEC to individual (retirement) investors.
The Committee is expected to vote on April 7, 2016.
Friday, March 4, 2016
Presidential candidate Donald Trump has repeatedly stated that he never plans to eat Oreo cookies again because the Nabisco plant is closing and moving to Mexico. Trump, who has starred in an Oreo commercial in the past, is actually wrong about the nature of Nabisco’s move, and it’s unlikely that he will affect Nabisco’s sales notwithstanding his tremendous popularity among some in the electorate right now. Mr. Trump has also urged a boycott of Apple over how that company has handled the FBI’s request over the San Bernardino terrorist’s cell phone.
Strangely, I haven’t heard a call for a boycott of Apple products following shareholders’ rejection of a proposal to diversify the board last week. I would think that Reverend and former candidate Al Sharpton, who called for the boycott of the Oscars due to lack of diversity would call for a boycott of all things Apple. But alas, for now Trump seems to be the lone voice calling for such a move (and not because of diversity). In fact, I’ve never walked past an Apple Store without thinking that there must be a 50% off sale on the merchandise. There are times when the lines are literally out the door. Similarly, despite the #Oscarssowhite controversy and claims from many that the boycott worked because the Oscars had historically low ratings, viewership among black film enthusiasts was only down 2% this year.
So why do people constantly call for boycotts? According to a Freakonomics podcast from January, they don’t actually work. Historians and economists made it clear in interviews that they only succeed as part of an established social movement. In some cases they can backfire leading to a "buycott," as it did for Chik Fil A. The podcast also put into context much of what we believe are the boycott “success stories,” including the Montgomery Bus Boycott with Rosa Parks and the sit in movement related to apartheid in the 1980s.
I have spent much of my time looking at disclosure legislation that is based in part on the theory that informed consumers and socially-responsible investors will boycott or divest holdings (see here, here, and here). In particular, I have focused on the Dodd-Frank conflict minerals corporate governance disclosure and why I don’t think that using name and shame laws work—namely because consumers talk a good game in surveys but actually don’t purchase based on social criteria nearly as much as NGOs and legislators believe.
The SEC was supposed to decide whether to file a cert petition to the Supreme Court on the part of the conflict minerals legislation that was struck down on First Amendment grounds by March 9th but they now have an extension until April. Since I wrote an amicus brief in the case at the lower level, I have a particular interest in this filing. I had planned my business and human rights class on disclosures and boycotts around that cert. filing to make it even more relevant to my students, who will do a role play simulation drafted by Professor Erika George representing civil society (NGOs, investors, and other stakeholders), the electronics industry, the US government (state department, Congress, and SEC), Congolese militia, the Congolese government, and the Congolese people. The only group they won’t represent is US consumers, even though that’s the target group of the Dodd-Frank disclosure. I did tweak Professor George’s materials but purposely chose not to add in the US consumer group. After my students step out of their roles, we will have the honest discussions about their own views and buying habits. I’ll try not to burst any boycott bubbles.
March 4, 2016 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, International Business, International Law, Law School, Legislation, Marcia Narine, Securities Regulation, Shareholders, Teaching | Permalink | Comments (1)
Monday, February 22, 2016
I was fortunate to hear Angela Walch (St. Mary's) present on this paper at SEALS last summer. Her article, The Bitcoin Blockchain as Financial Market Infrastructure: A Consideration of Operational Risk, has now been published in the NYU Journal of Legislation and Public Policy and is available on SSRN. The abstract is reproduced below:
“Blockchain” is the word on the street these days, with every significant financial institution, from Goldman Sachs to Nasdaq, experimenting with this new technology. Many say that this remarkable innovation could radically transform our financial system, eliminating the costs and inefficiencies that plague our existing financial infrastructures, such as payment, settlement, and clearing systems. Venture capital investments are pouring into blockchain startups, which are scrambling to disrupt the “quadrillion” dollar markets represented by existing financial market infrastructures. A debate rages over whether public, “permissionless” blockchains (like Bitcoin’s) or private, “permissioned” blockchains (like those being designed at many large banks) are more desirable.
Amidst this flurry of innovation and investment, this paper enquires into the suitability of the Bitcoin blockchain to serve as the backbone of financial market infrastructure, and evaluates whether it is robust enough to serve as the foundation of major payment, settlement, clearing, or trading systems.
Positing a scenario in which the Bitcoin blockchain does serve as the technology enabling significant financial market infrastructures, this paper highlights the vital importance of functioning financial market infrastructure to global financial stability, and describes relevant principles that global financial regulators have adopted to help maintain this stability, focusing particularly on governance, risk management, and operational risk.
The paper then moves to explicate the operational risks generated by the most fundamental features of Bitcoin: its status as decentralized, open-source software. Illuminating the inevitable operational risks of software, such as its vulnerability to bugs and hacking (as well as Bitcoin’s unique 51% Attack vulnerability), uneven adoption of new releases, and its opaque nature to all except coders, the paper argues that these technology risks are exacerbated by the governance risks generated by Bitcoin’s ambiguous governance structure. The paper then teases out the operational risks spawned by decentralized, open-source governance, including that no one is responsible for resolving a crisis with the software; no one can legitimately serve as “the voice” of the software; code maintenance and repair may be delayed or imperfect because not enough time is devoted to the code by volunteer software developers (or, if the coders are paid by private companies, the code development may be influenced by conflicts of interest); consensus on important changes to the code may be difficult or impossible to achieve, leading to splits in the blockchain; and the software developers who “run” the Bitcoin blockchain seem to have backgrounds in software coding rather than in policy-making or risk-management for financial market infrastructure.
The paper concludes that these operational risks, generated by Bitcoin’s most fundamental, presumably inalterable, structures, significantly undermine the Bitcoin blockchain’s suitability to serve as financial market infrastructure.
Thursday, February 4, 2016
For the past four weeks I have been experimenting with a new class called Transnational Business and Human Rights. My students include law students, graduate students, journalists, and accountants. Only half have taken a business class and the other half have never taken a human rights class. This is a challenge, albeit, a fun one. During our first week, we discussed CSR, starting off with Milton Friedman. We then used a business school case study from Copenhagen and the students acted as the public relations executive for a Danish company that learned that its medical product was being used in the death penalty cocktail in the United States. This required students to consider the company’s corporate responsibility profile and commitments and provide advice to the CEO based on a number of factors that many hadn’t considered- the role of investors, consumer reactions, the pressure from NGOs, and the potential effect on the stock price for the Danish company based on its decisions. During the first three weeks the students have focused on the corporate perspective learning the language of the supply chain and enterprise risk management world.
This week they are playing the role of the state and critiquing and developing the National Action Plans that require states to develop incentives and penalties for corporations to minimize human rights impacts. Examining the NAPs, dictated by the UN Guiding Principles on Business and Human Rights, requires students to think through the consultation process that countries, including the United States, undertake with a number of stakeholders such as unions, academics, NGOs and businesses. To many of those in the human rights LLM program and even some of the traditional law students, this is all a foreign language and they are struggling with these different stakeholder perspectives.
Over the rest of the semester they will read and role play on up to the minute issues such as: 1) the recent Tech Terror Summit and the potential adverse effects of the right to privacy; 2) access to justice and forum non conveniens, arguing an appeal from a Canadian court’s decision related to Guatemalan protestors shot by security forces hired by a company incorporated in Canada with US headquarters; 3) the difficulties that even best in class companies such as Nestle have complying with their own commitments and certain disclosure laws when their supply chain uses both child labor and slaves; 4) the Dodd-Frank conflict minerals debate in the Democratic Republic of Congo and the EU, where students will play the role of the State Department, major companies such as Apple and Intel, the NGO community, and socially-responsible investors debating some key corporate governance and human rights issues; 5) corporate codes of conduct and the ethical, governance, and compliance aspects of entering the Cuban market, given the concerns about human rights and confiscated property; 6) corporate culpability for the human rights impacts of mega sporting events such as the Super Bowl, World Cup, and the Olympics; 7) human trafficking (I’m proud to have a speaker from my former company Ryder, a sponsor of Truckers Against Traffickers); 8) development finance, SEC disclosures, bilateral investment treaties, investor rights and the grievance mechanisms for people harmed by financed projects (the World Bank, IMF, and Ex-Im bank will be case studies); 9) the race to the bottom for companies trying to reduce labor expenses in supply chains using the garment industry as an example; and 10) a debate in which each student will represent the actual countries currently arguing for or against a binding treaty on business and human rights.
Of course, on a daily basis, business and human rights stories pop up in the news if you know where to look and that makes teaching this so much fun. We are focusing a critical lens on the United States as well as the rest of the world, and it's great to hear perspectives from those who have lived in Europe, Africa, Asia, and South America. It's a whole new world for many of the LLM and international students, but as I tell them if they want to go after the corporations and effect change, they need to understand the pressure points. Using business school case studies has provided them with insights that most of my students have never considered. Most important, regardless of whether the students embark on a human rights career, they will now have more experience seeing and arguing controversial issues from another vantage point. That’s an invaluable skill set for any advocate.
February 4, 2016 in Business Associations, Comparative Law, Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Human Rights, International Business, International Law, Investment Banking, Law School, Lawyering, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (0)
Wednesday, February 3, 2016
Laurence Fink, CEO of BlackRock, the largest asset manager in the U.S., wrote a letter to the CEO's of S&P 500 Companies urging reforms aimed at fostering long-term valuation creation and curbing a myopic focus on near-term profits. Fink has long been a public advocate of long-term valuation creation for the health of American companies and the wealth of society (for an example see this April 2015 letter on the "gambling nature" of the economy"). His message has been consistent: long term, long term, long term.
Citing to increased dividends and buyback programs as evidence of corrosive short-termism, Fink laid out a modest play for action. He asks every CEO to publish an annual strategic plan signed off on by the board. The CEO strategic plan should communicate the vision for the company and how such long-term growth can be achieved.
[P]erspective on the future, however, is what investors and all stakeholders truly need, including, for example, how the company is navigating the competitive landscape, how it is innovating, how it is adapting to technological disruption or geopolitical events, where it is investing and how it is developing its talent. As part of this effort, companies should work to develop financial metrics, suitable for each company and industry, that support a framework for long-term growth.
Fink wants companies to create these long-term vision statements as a routine part of governance and not just in the context of hedge-fund motivated proxy fights. The idea is that informing the investing public as to the long-term direction of the company and short-term obstacles frames the company message and dampens the "quarterly earnings hysteria". Also interesting to me as I approach a class on corporate social responsibility is Fink's encouragement of companies to pay more attention to social and environmental risks as increasingly difficult obstacles that must be addressed as part of a long term plan. Fink also called upon lawmakers to incentivize a long-term view by thinking beyond the next election cycle as would be needed to enact tax reform (specifically capital gains) and increased resources for infrastructure.
As readers of the blog know, I am in interested in the long-term/short-term debate and have written past posts about it. How controversial would such a CEO statement be? Venture capital/private equity funds investing in companies often require an annual CEO statement. If the language can be crafted to avoid liability for future statements, what are the downsides? Tipping off competitors and losing information advantages or first actor advantages? Letting lesser competitors free ride and adopt market leaders's plans a year or two later? Exposing the board of directors and officers to breached duty claims for failure to meet the objectives? (this last one seems very unlikely given the liability standards and exculpation provisions.)
The financial press and blogs are awash in stories on this. If you are interested in the related commentary, here are a few:
Wednesday, January 27, 2016
In December, 2015, Dow Chemicals Co. and DuPont announced a proposed merger between their two companies. Under the proposed deal, and with the approval of stockholders and regulators, the two agro/chemical giants will merger their companies in 2016 to create DowDuPont, with an estimated $130 billion value. Within 18-24 months of closing, DowDuPont will be split into three independent, publicly traded companies .
The proposed "merger of equals" is structured to share power equally between Dow and DuPont and its leadership in the new company. Dow and DuPont stockholders will each own roughly half of DowDuPont. There will be 16 members on the new DowDuPont board of directors: 8 from each company. The roles of Chairman and CEO will be split with Andrew Liveris (Dow) serving as Chairman and Edward Breen (DuPont) as CEO.
Questions of equality and perceived power imbalance arise when we examine the relationships between (1) corporate boards and activist investors; (2) various shareholders (hedge funds vs. institutional investors vs. retail investors, etc.), and (3) possibly, CEO's.
Let's tackle the first (and tangentially the second) imbalance by talking about hedge funds. Last year, Trian hedge fund targeted DuPont in a very expensive, public and close proxy contest. DuPont defeated Trian, even with ISS recommendations to vote with Trian. The DuPont defense was widely regarded as a model proxy contest defense strategy (see here, e.g.,) and even more enthusiastically as
"a victory not only for DuPont and its chief executive, Ellen Kullman, but for others in corporate America concerned that activist investors’ influence has grown too strong and that companies have capitulated to their demands too readily." WSJ May 13, 2015
By October, Ellen Kullman, the trimphant CEO of DuPont, however stepped down. By December DuPont announced the mega-merger with Dow. DuPont's role in the mega-merger with Dow is being cast as a reaction to and attempt to seek protection from activist investors, which are increasingly garnering ISS and institutional investor support. DuPont's success against Trian rested largely on their ability to convince its three largest shareholders—Vanguard Group, BlackRock Inc. and State Street Corp.—which all manage index funds to vote with it (and against ISS recommendations). The inference here is that DuPont didn't want to roll the dice again and risk losing control in a future contest with Trian or another activist.
Dow Chemicals hasn't been immune to the hedge fund threat. Third Point LLC, Dan Loeb's hedge fund, has a 2% position in Dow and nearly pursued a proxy fight in 2015. Third Point has been making noise about the continued roll of Andrew Liveris in DowDuPont demonstrating that the hall monitor is still on duty.
The gaining strength of hedge fund campaigns in 2015 and the increasingly alignment of hedge funds and indexed funds has many boards running scared. The DealBook Deal Professor, Steven Davidoff Solomon, writes of the mega-merger:
The proposed combination of Dow Chemical and DuPont shows that in today’s markets, financial engineering prevails and that only activist shareholders matter....
This plan is one easily understood by a hedge fund activist or investment banker in a cubicle in Manhattan with an Excel spreadsheet. To them, it makes perfect sense to merge a company and then almost immediately split it in three.
Merger and acquisition volume was at a record high (too soon to say peak) in 2015 as companies sought, in part, to achieve paper returns and cost efficiencies in a slow-growth economy. When large (and voting) shareholders are index and mutual funds with pressures to earn returns for their investors, it can produce corresponding pressure on operating companies for tactics, if not actions to produce those returns. In the DuPont proxy fight, the large block of retail investors in the old-guard public company was a big barrier to Trian, but in companies with less percentage held by retail investors (e.g., newer companies), the hedge fund agenda can drive the company.
Finally, it is interesting to note the rise and fall of DuPont CEO Ellen Kullman in this story. She successfully warded off a proxy contest and seemed to have fended off hedge fund advances, but ultimately her fate and DuPont's were largely driven by Trian's agenda. Reading about this merger reminded me of the spate of stories last year about how hedge funds disproportionately target companies with female CEO's. This is an issue that as a female law professor, I am particularly sensitive to, but that bias not withstanding, the story received quite a bit of play in the financial press last year: DealBook, Bloomberg, and here, and here.
Friday, January 22, 2016
Wednesday, January 20, 2016
Second Circuit Affirms High Misconduct Standard for Caremark Claims in Cent. Laborers’ Pension Fund v. Dimon
In early January, the Second Circuit Court of Appeals ruled in Cent. Laborers’ Pension Fund v. Dimon to affirm the dismissal of purported shareholder derivative claims alleging that directors of JP Morgan Chase--the primary bankers of Bernard L. Madoff Investment Securities LLC (“BMIS”) for over 20 years--failed to institute internal controls sufficient to detect Bernard Madoff’s Ponzi scheme. The suit was dismissed for failures of demand excuse. Plaintiffs contended that the District Court erred in requiring them to plead that defendants “utterly failed to implement any reporting or information system or controls,” and that instead, they should have been required to plead only defendants’ “utter failure to attempt to assure a reasonable information and reporting system exist[ed].” (emphasis added). The Second Circuit declined, citing to In re General Motors Co. Derivative Litig., No. CV 9627-VCG, 2015 WL 3958724, at *14–15 (Del. Ch. June 26, 2015), a Chancery Court opinion from earlier this year that dismissed a Caremark/oversight liability claim. In In re General Motors the Delaware Chancery Court, found that plaintiffs' allegations that:
[T]he Board did not receive specific types of information do not establish that the Board utterly failed to attempt to assure a reasonable information and reporting system exists, particularly in the case at hand where the Complaint not only fails to plead with particularity that [the defendant] lacked procedures to comply with its . . . reporting requirements, but actually concedes the existence of information and reporting systems. . . .
In other words, the Plaintiffs complain that [the defendant] could have, should have, had a better reporting system, but not that it had no such system.
The Second Circuit's opinion in Central Laborers' affirms that Caremark claims require allegations misconduct sufficient to satisfy a failure of good faith, and cannot rest solely on after-the-fact allegations of failed reasonableness of the corporate reporting system.
Tuesday, January 19, 2016
Rob Weber posted on the Columbia Law School Blue Sky Blog an article titled The Comprehensive Capital Analysis and Review and the New Contingency of Bank Dividends, highlighting his recent paper on the topic.
In both the post, and in greater detail in the paper, Rob highlights three aspects of the CCAR program:
[(1)] the significant practical implications of the CCAR for large U.S.-domiciled banks....[(2)] its reliance on discretionary judgments by regulators concerning a hypothetical, uncertain future... [and (3) the CCAR as a] “risk regulation” regime – a designation developed in the environmental, health, and safety (“EHS”) regulatory context that has been underappreciated, underutilized, and undertheorized in the financial regulatory context.
Focusing on this third aspect, Rob states that:
The risk regulation model ... confronts head-on the necessity of basing regulatory intervention into otherwise private activity on a discretionary assessment of an uncertain, hypothetical, and conjectural harm. It is no objection that the harm has not yet occurred. The uncertainty of the harm is a feature, not a bug, of the system.
Thursday, January 14, 2016
On Sunday, the world lost a musical giant in David Bowie, who died of cancer at 69. He was the first artist who that made me a true music fan. Like buy all the records, read the biographies, hang-posters-on-the-wall type fan. I grew up with a love for Motown music, especially Smokey Robinson, the Supremes, and the Four Tops, that I still have, but my appreciation for that music came from listening to my parent's records.
When it came time to choose my own artists, other kids were into Led Zeppelin and Pink Floyd, but Bowie emerged as my guy. He was later followed by bands like R.E.M., the English Beat, and The Cure, among others, as I moved into more of the college radio scene, and I really liked Joan Jett, but Bowie was always The Guy. My fandom started with an album I poached from my aunt, Heroes. I also got ahold of David Live (1974), and then worked my way back before going forward. The Rise and Fall of Ziggy Stardust and the Spiders from Mars, Space Oddity, The Man Who Sold the World, Aladdin Sane, Diamond Dogs, and Hunky Dory were the next to follow. I even own a copy of the Christmas record featuring David Bowie and Bing Crosby.
Let's Dance came out in 1983. It was a hit, and yet criticized for being too mainstream. I was twelve, and thought it was great. I still do, though in a very different way than much of his other work. The connected tour for the album, the Serious Moonlight Tour, featured Bowie in a bow tie. I thought it was the coolest thing. I bought one and learned to tie it myself. I still have the tie, and I wore it to teach my first Business Organizations class of the semester on Tuesday (and my Energy Business Law and Strategy course). Contrary to what some want to believe now that E. Gordon Gee is the president of my institution, bowties originated with Bowie for me, not President Gee. (And yes, it is likely that only a law professor could connect someone as cool as Bowie with bowties, and probably only this law professor.)
I write this as much for me, as anything, I suppose, but a few things about David Bowie strike me as relevant to this blog. First, he was always ahead of his time, looking for what was next. He didn't back down, he said what he thought in a strong, but usually respectful way. He was, unfortunately, well ahead of his time in criticizing MTV for its lack of programing diversity. Not so much for calling them out -- others did that, too -- but in the way he did it, as you can see here.
His eye for talent was remarkable, too. David Sanborn played sax on David Live. Luther Vandross sang backup on Young Americans. Stevie Ray Vaughn played on Let's Dance, and Reeves Gabrels (now with The Cure) with Tin Machine. Adrian Belew played on Lodger. Bowie, in turn, sang back up and played sax on Lou Reed's Transformer. And his work with Iggy Pop, Queen, Tina Turner, Trent Reznor, and others crossed genres and time.
Finally, he tried creative financial vehicles. As one report explains,
In 1997, Bowie, born David Robert Jones, securitized revenue from 25 albums (287 songs) released before 1990. At the same time, he swapped distribution rights on his back catalogue for a $30 million advance on future royalties in a deal with EMI. The 10-year “Bowie Bond” he created with banker David Pullman promised a 7.9% return and raised $55 million, along with a media frenzy. A flurry of other artists followed, but the Bowie Bonds skidded toward junk status by 2004, downgraded by Moody’s from A3 to Baa3.
The trend never really took off, though. Despite never missing a payment, the bonds did not do well, though that did not appear to hurt Bowie. People got worried about online music sharing soon after the deal was struck. Still, the idea of monetizing intangible assets, was rather forward looking, even if some believe that loans, and not bonds, are the better suited to assets like music. For Bowie, in music and otherwise, new things were worth trying, even if they didn't always go as planned. I still wished I'd gotten in on that deal, regardless. I always felt like I missed out.
I know Bowie is something of an acquired taste for some (and an unacquirable one for others), but the outpouring of support following his death shows a tremendous amount of respect and admiration. He may even get his first U.S. number one album with his Blackstar album, which was recently released. Some believe the track Lazarus and the related video were his goodbye to the world. It's hard to argue it's not.
He will be missed, but I'm glad his legacy provides such a tremendous body work. I think the Sirius/XM Bowie channel should be permanent, and not just a limited-run engagement.
As I write this, I got a notice that Alan Rickman, also 69, has died of cancer. Cancer sucks. As David Bowie noted in this short, but poignant, interview from 2002, "Life is a finite thing." It sure is.
Wednesday, January 6, 2016
The AALS Annual meeting starts today in New York. The full program is available here, and listed below are two Section meeting announcements of particular interest to business law scholars:
Thursday, January 7th from 1:30 pm – 3:15 pm the SECTION ON AGENCY, PARTNERSHIP, LLC’S AND UNINCORPORATED ASSOCIATIONS, COSPONSORED BY TRANSACTIONAL LAW AND SKILLS will meet in the Murray Hill East, Second Floor, New York Hilton Midtown for a program titled:
"Contract is King, But Can It Govern Its Realm?"
The program will be moderated by Benjamin Means, University of South Carolina School of Law. Discussants include:
- Joan M. Heminway, University of Tennessee College of Law
- Lyman P.Q. Johnson, Washington and Lee University School of Law
- Mark J. Loewenstein, University of Colorado School of Law
- Mohsen Manesh, University of Oregon School of Law
- Sandra K. Miller, Professor, Widener University School of Business Administration, Chester, PA
BLPB hosted an online micro-symposium in advance of the Contract is King meeting. The wrap up from this robust discussion is available here.
Friday January 8th, from 1:30 pm – 3:15 pm join the SECTION ON BUSINESS ASSOCIATIONS AND LAW
AND ECONOMICS JOINT PROGRAM at the Sutton South, Second Floor, New York Hilton Midtown for a program titled:
"The Corporate Law and Economics Revolution Years Later: The Impact of Economics and Finance Scholarship on Modern Corporate Law".
The program will be moderated by Usha R. Rodrigues, University of Georgia School of Law, and feature the following speakers:
- Frank Easterbrook, Judge, U.S. Court of Appeals for the Seventh Circuit, Chicago, IL
- H. Kent Greenfield, Boston College Law School
- Roberta Romano, Yale Law School
- Tamara C. Belinfanti, New York Law School
- Kathryn Judge, Columbia University School of Law
- K. Sabeel Rahman, Brooklyn Law School
At the conclusion of the program, the officers of the Section on Business Associations would like to honor 13 faculty members
for their mentorship work throughout the year.
I hope to see many of you in New York soon!
January 6, 2016 in Anne Tucker, Conferences, Corporate Governance, Corporations, Delaware, Financial Markets, Joan Heminway, Law and Economics, Law School, Teaching, Unincorporated Entities | Permalink | Comments (0)
Tuesday, January 5, 2016
On Saturday, January 9, 2016, I will be spending the day at the AALS Section on Socio-Economics Annual Meeting at the Sheraton New York Times Square Hotel. Among other things, I will be part of a panel discussion from 9:50 - 10:50 AM, Death of the Firm: Vulnerabilities and the Changing Structure of Employment. My co-panelists will be June Carbone and Katherine Stone (I am very tempted to give up my 15 minutes and just sit back and listen to these two great scholars, but please don't use the comments section to encourage me to do that). As I understand it, the gist of the discussion will be that while firms once supported a significant part of the safety net that provided employee health and retirement benefits, they have recently abdicated more and more of these responsibilities. At the same time, however, what may be described as subsidies granted by the state to firms -- particularly corporations -- as part of a social contract whereby these firms provided the aforementioned benefits, have not been correspondingly reduced. In fact, the rights of corporations have been expanded by, for example, cases like Citizens United and Hobby Lobby -- suggesting a possible windfall for the minority of individuals best positioned to reap the benefits of corporate growth and insulation. Obviously, competing interpretations of the relevant history abound. Regardless, please stop by if you have the opportunity. Continuing to beat a favorite drum of mine (see here, here, and here), I will be applying the lens of corporate personality theory to the foregoing issue and arguing that corporate personality theory has a role to play both in understanding how we got here and how best to move forward. Additional details, including the entire day’s program, can be found here.
On Monday, January 11, 2016, I will also be participating in the Society of Socio-Economists Annual Meeting, also at the Sheraton. Program details are available here. Again, please stop by if you have the opportunity.
January 5, 2016 in Business Associations, Conferences, Constitutional Law, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Employment Law, Financial Markets, Law and Economics, Shareholders, Stefan J. Padfield | Permalink | Comments (0)
Wednesday, December 2, 2015
I am about 10, if not 15 years late to this party. This is not a new question: have investment time horizons shrunk, and if so, in a way that extracts company value at the expense of long-term growth and sustainability?
Since this isn’t a new question, there is a considerable amount of literature available in law and finance (and a definition available on investopedia). This may seem like great news, if like me, you are interested in acquiring a solid understanding of short termism. By solid understanding, I mean internalization of knowledge, not mere familiarity where I can be prompted to recall something when someone else talks/writes about it. I have some basic questions that I want answers to: What is short-termism?, What empirical evidence best proves or disproves short-termism? Which investors, if any, are short-term? What are the consequences (good and bad) of a short-term investment horizon? If there is short-termism, what are the solutions? I’ll briefly discuss each below, and my utter failure to answer these questions with any real certainty thus far.
What is the definition of short-termism and does it change depending upon context or user? There appears to be consensus on the conceptual definition of foregoing long-term investments in favor of corporate policies maximizing present payouts like dividends and stock buy-backs among hedge funds. As for what determines “short-term” with institutional investors- responsiveness to quarterly earnings? Over-reliance on algorithmic trading models? The definition gets less clear when we start looking at different types of investors.
How can one test the presence of short-termism? Stock holding patterns and redemption rates and turnover would be the obvious answers. This information is hard to aggregate, much of it is proprietary. Second, the issue of outliers, like high value high-frequency trades, may distort the view if most shareholders or at least the most influential shareholders like institutions, aren’t operating with a short-term time horizon. But that can mean different things for different investors. Once again which investors we are looking at drives this question in part.
This brings us to the next question, WHO might be short term? Hedge Funds? Institutional Investors like pensions and mutual funds? High Frequency Traders? Retail investors? Retirement Investors (I call these folks Citizen Shareholders)?
Looking to the next question: what are the consequences of a short-term investment horizon? Shareholders like hedge funds whose investment model differs from institutional investors, often employ shareholder activism to change management and corporate policies as a means to increase the share value of the company, after which the fund usually divests significantly, if not completely. The evidence here too is mixed (see e.g., conflicting findings by Bebchuk & Coffee).
For many the anecdotal evidence of short-termism pressures coming from board rooms is powerfully persuasive and hard to ignore even where researchers can’t pin down the source. I don’t use anecdotal in a derogatory sense at all, there is truth in experience and limitations in our ability to quantify naturally occurring phenomenons. Perhaps the question of short-termism is like trying to identify what smells bad in a pantry. You know it is there; finding the cause is much more difficult. Consider the position of Martin Lipton who wrote in response to the Bebchuk article:
"To the contrary, the attacks and the efforts by companies to adopt short-term strategies to avoid becoming a target have had very serious adverse effects on the companies, their long-term shareholders, and the American economy. To avoid becoming a target, companies seek to maximize current earnings at the expense of sound balance sheets, capital investment, research and development and job growth."
Also consider a survey of corporate board members reported that over 60% felt short term pressure from investors. It is a real problem to directors and one that corporate governance cannot ignore. A fair question to ask is whether or not the fear is misstated or if the concern is another way of arguing for greater control. And this brings us to the last question.
If there is short-termism, what are the solutions? Aligning corporate managers/directors incentive payments has been critiqued. Giving corporate boards more power and isolating them from shareholders tips the scales of the corporate power puzzle heavily towards managers which brings threats of agency costs and managerial abuses. But on the other hand, if a short-term investment perspective extracts company value in a way that causes externalities that undercuts the contractarian argument for shareholder primacy. If shareholders’, or at least some shareholders’, primary investment stake isn’t to be residual claimants in the traditional sense then their incentives aren’t aligned with the interests of other stakeholders. Those shareholders aren’t acting in everyone’s best interest. The debate often devolves into one of consequences, or perhaps it is the starting point for many who write in the area. If short-termism doesn’t exist or isn’t bad then there is no push back on shareholder primacy. If short-termism does exit and it does cause externalities then it is a powerful argument in favor of director primacy.
I am weeks into this inquiry and all I have done is further confuse myself about what I thought I knew, expanded my questions list and flooded my dropbox with articles (tedious, dense, often empirical articles).
A few things have come out of this quagmire. First, I have great discussion points for my corporate governance seminar and certainly a supplemental segment for my casebook. Second, I am increasingly thinking the tremendously important insights provided by many law and finance scholars isn’t the complete picture. I can’t get to the bottom of this question, because there might not be one (or one that I understand) yet. So where are the gaps? What do we still need to know to further explore this topic? These big, heavy, interdisciplinary questions are hard to tackle alone at our desks and benefit from engagement, dialogue, and rapid fire thinking that takes places at conferences/symposiums.
In terms of blogging, let’s focus back on you readers. I’ll check back in periodically on this topic by sharing my reading list on the topic and also highlighting some of the articles on my list. If you have a seminal article that you found help explain short-termism to you (or your students) please share. If you are working on any papers in this area, please email me separately (firstname.lastname@example.org) as I am working on putting together a symposium for summer 2017.
Wednesday, November 11, 2015
My recent article: Locked In: The Competitive Disadvantage of Citizen Shareholders, appears in The Yale Law Journal’s Forum. In this article I examine the exit remedy for unhappy indirect investors as articulated by Professors John Morley and Quinn Curtis in their 2010 article, Taking Exit Rights Seriously. Their argument was that the rational apathy of indirect investors combined with a fundamental difference between ownership of stock in an operating company and a share of a mutual fund. A mutual fund redeems an investor’s fund share by cashing that investor out at the current trading price of the fund, the net asset value (NAV). An investor in an operating company (a direct shareholder) exits her investment by selling her share certificate in the company to another buyer at the trading price of that stock, which theoretically takes into account the future value of the company. The difference between redemption with the fund and sale to a third party makes exit in a mutual fund the superior solution over litigation or proxy contests, they argue, in all circumstances. It is a compelling argument for many indirect investors, but not all.
In my short piece, I highlight how exit remedies are weakened for citizen shareholders—investors who enter the securities markets through defined contribution plans. Constrained investment choice within retirement plans and penalties for withdrawals means that “doing nothing” is a more likely option for citizen shareholders. That some shareholders are apathetic and passive is no surprise. The relative lack of mobility for citizen shareholders, however, comes at a cost. Drawing upon recent scholarship by Professors Ian Ayres and Quinn Curtis (Beyond Diversification), I argue that citizen shareholders are more likely to be locked into higher fee funds, which erode investment savings. Citizen shareholders may also be subsidizing the mobility of other investors. These costs add up when one considers that defined contribution plans are the primary vehicle of individual retirement savings in this country aside from social security. If the self-help remedy of exit isn’t a strong protection for citizen shareholders, then it is time to examine alternative remedies for these crucial investors.
Monday, October 19, 2015
My co-blogger Haskell Murray had an interesting post on Friday about the use of crowdfunding as a strategy to attract venture capital. He points out that many companies that had successful crowdfunding campaigns on Kickstarter or Indiegogo subsequently raised venture capital. He argues that a successful crowdfunding campaign might be a signal to venture capitalists.
If you haven’t read Haskell’s post yet, it’s well worth reading. I want to take the discussion in a slightly different direction.
I don’t think venture capitalists should be waiting to see if a company has a successful crowdfunding campaign. I think they should use crowdfunding listings as leads and try to preemptively capture those companies before they complete their crowdfunding campaigns—convince the good companies to forego crowdfunding and go the venture capital route instead.
If I were a wealthy venture capitalist, I would have someone skimming through all of the crowdfunding sites, including the equity crowdfunding sites, looking for potential investments. The venture capital business is extremely competitive. Getting to the good companies before they have a successful raise is one way to one-up the competition. Once a company has shown crowdfunding success, others will want a piece.
Many of the companies doing crowdfunding will not interest venture capitalists. But it only takes a few hidden gems to make the weeding process worthwhile. And most of the weeding out could be done quite easily by inexpensive, low-level staff. Even I could spot most of the obvious losers.
I have suggested this strategy at a couple of conferences where venture capitalists were present. It will be interesting to see if any of them try it. (For some reason, professional venture capitalists don't seem all that interested in my investment advice.)
As for me, I’ll file this in my “What I would do if I had a ton of money” folder. (It’s a very full folder.)
Monday, September 14, 2015
A student of mine studying peer-to-peer lending ran across an interesting provision in the securities filings of Prosper Marketplace, one of the two main peer-to-peer lending sites. (The other is Lending Club.)
Here is one of the risk factors in Prosper’s filings:
In the unlikely event that PFL receives payments on the Borrower Loan corresponding to an investor’s Note after the final maturity date, such investor will not receive payments on that Note after maturity.
Each Note will mature on the initial maturity date, unless any principal or interest payments in respect of the corresponding Borrower Loan remain due and payable to PFL upon the initial maturity date, in which case the maturity of the Note will be automatically extended to the final maturity date. If there are any amounts under the corresponding Borrower Loan still due and owing to PFL on the final maturity date, PFL will have no further obligation to make payments on the related Notes, even if it receives payments on the corresponding Borrower Loan after such date.
To understand how this works, you need to understand a little about how the Prosper site works. When a loan is funded by the peer-to-peer lenders on Prosper's site, the borrower signs a note payable to Prosper. Prosper, in turn, issues notes to the peer-to-peer lenders, but Prosper promises to make payments only to the extent that the underlying borrowers pay their notes to Prosper. In other words, Prosper is essentially just passing through any payments made by the peer-to-peer borrowers, with no additional recourse against Prosper. But, because of the limitation quoted above, Prosper won’t even pass through all loan payments. It’s free to keep any payments made after the final maturity date.
Prosper is, of course, free to structure its contracts in any way it wants, and I can understand why a provision like this would be useful. Prosper does not want to maintain records on these loans and lenders in perpetuity, and the final maturity date is a convenient cut-off point.
However, this limitation produces a potential windfall to Prosper. Payment after the final maturity date may be unlikely, but surely some borrowers will make payments after that point. If a conscientious borrower decides to pay later, Prosper pockets all of the money.
I would think the peer-to-peer lending sites, eager to attract the “crowd” to their sites, would bend over backwards to demonstrate their fairness to potential lenders, even if it does increase their administrative costs. Apparently not.