Wednesday, November 23, 2016
I have been thinking about the long-short term investment horizon debate, definitions, empirics and governance design consequences for some time now (see prior BLPB post here and also see Joshua Fershee's take on the topic). This has been on mind so much that I am now planning a June, 2017 conference on that very topic in conjunction with the Adolf A. Berle Jr. Center on Corporations, Law & Society (founded by Charles “Chuck” O’Kelley at Seattle University School of Law). In planning this interdisciplinary conference where the goal is to invite corporate governance folks, finance and economics scholars, and psychologists and neuroscientist, I have had the pleasure of reading a lot of out-of-discipline work and talking with the various authors. It has been an unexpected benefit of conference planning. I also want some industry voices represented so I have reached out to Aspen Institute, Conference Board and a new group, Focusing Capital on the Long Term (FCLT), which I learned about through this process.
I share this with BLPB readers for several reasons. The first is that the FCLT, is a nonprofit organization, a nonprofit organization for BUSINESS issues created and funded by BUSINESSES. In July 2016, the Canada Pension Plan Investment Board, McKinsey & Company together with BlackRock, The Dow Chemical Company and Tata Sons founded FCLT. Other asset managers, owners, corporations and professional services firms (approximately 20) have joined FCLT as members. Rather than the typical application of a chamber of commerce style organization or trade industry group, here the stated missing of FCLT is to “actively engage in research and public dialogue regarding the question of how to encourage long-term behaviors in business and investment decisions.”
Second, FCLT has access to otherwise proprietary information—like C-suite executive surveys---and is conducting original research and publishing white papers and research reports on the issues of management pressures, and governance designs that may promote a long-term time horizon.
I know for some folks reading, especially those strongly aligned with a shareholder rights camp, will view this with skepticism as a backdoor campaign to promote executive/management power and bolster the reputation of professional service firms hired by those managers.** For me, though the anecdotal experience is a valuable component to considering all sides to the debate. It also helps articulate why and how the feedback loop of short-term pressures—even if it is only perceived rather than structurally quanitifable—may exist.
Third, I found some of the materials, particularly the Rising to the Challenge of Short-termism, written by Dominic Barton, Jonathan Bailey, and Joshua Zoffer in 2016 to be a useful reading for my corporate governance seminar. It helped to explain the gap between the law and the pressure of short-termism. It also helped provide a window into at least some aspects of decision making and payoffs in the governance setting. It can be quite hard to give students a window in the C-suite and BOD dynamics that they are naturally curious about while in law school. Even if you ideologically or empirically disagree with the claim of short-termism when trying to structure balanced reading materials that provide an introduction to the full scope of measures, these are resources worth considering.
Rising to the Challenge of Short-termism, written by Dominic Barton, Jonathan Bailey, and Joshua Zoffer in 2016, draws upon a McKinsey survey of over 1,000 global C-Suite executives and board members. The report describes increasing pressures on executives to meet short-term financial performance metrics and that the window to meet those metrics was decreasing. The shortening time horizon shapes both operations decisions as well as strategic planning where the average plan has shrunk to 2 years or less. Culture matters. Firms with self-reported long-term cultures reported less willingness to take actions like cut discretionary spending or delay projects when faced with a likely failure to meet quarterly benchmarks compared with firms that didn’t self-report a long-term culture. Sources of the pressure are perceived to come from within the board and executives, but also cite to greater industry-wide competition, vocal activist investors, earning expectations and economic uncertainty. The article concludes with 10 elements of a long-term strategy as a mini action plan.
Straight talk for the long term: How to improve the investor-corporate dialogue published in March 2015.
Investing for the future: How institutional investors can reorient their portfolio strategies and investment management to focus capital on the long term, published in March 2015. The paper identifies 5 core action areas for institutional investors focusing on investment beliefs, risk appetite statement, bench-marking process, evaluations and incentives and investment mandates to evaluate investment horizons.
A roadmap for focusing capital on the long term: A summary of ideas for asset owners, asset managers, boards of directors, and corporate management to focus on long-term value creation, published March 2015.
Long-term value summit in 2015 with a published discussion report made available February 2016. “120 executives, investors, board members, and other leaders from around the world gathered in New York City for the Long-Term Value Summit. Their mandate: to identify the causes and mechanisms of the short-term thinking that has come to pervade our markets and profit-seeking institutions and, more importantly, to brainstorm actionable solutions”
**The initial board of directors, announced on September 28, 2016 at the first board meeting, include some well positioned folks within BlackRock (Mark Wiseman), McKinsey & Co. (Dominic Barton), Dow Chemical (Andrew Liveris), Unilever (Paul Polman) and more. The BOD will be advised by Larry Fink, Chairman and CEO of BlackRock, as well.
Wednesday, November 16, 2016
Last week on the eve of the election, I shared a series of predictions regarding the market's response to a Trump or Clinton presidential election victory. Almost all of the predictions were for a swift and negative reaction to a Trump victory. Immediate market predictions, like polling predictions, were, in a word: WRONG.
From the Wall Street Journal:
Stocks were mixed on Friday, taking a pause to end an eventful week that pushed the Dow industrials to their best week since 2011.
The Dow climbed 0.2% on Friday to 0.2%, pushing the index up 5.4% for the week to 18847.66.
The S&P 500 dipped 0.1% on Friday to 2164.45, while the Nasdaq Composite jumped 0.5% to 5237.11.
I find myself so disorientated in this post-election reality.
Thursday, November 10, 2016
I have been on hiatus for a few weeks, and had planned to post today about the compliance and corporate governance issues related to Wells Fargo. However, I have decided to delay posting on that topic in light of the unexpected election results and how it affects my research and work.
I am serving as a panelist and a moderator at the ABA's annual Labor and Employment meeting tomorrow. Our topic is Advising Clients in Whistleblower Investigations. In our discussions and emails prior to the conference, we never raised the election in part because, based on the polls, no one expected Donald Trump to win. Now, of course, we have to address this unexpected development in light of the President-elect's public statements that he plans to dismantle much of President Obama's legacy, including a number of his executive orders.
President-elect Trump's plan for his first 100 days includes, among other things: a hiring freeze on all federal employees to reduce federal workforce though attrition (exempting military, public safety, and public health); a requirement that for every new federal regulation, two existing regulations must be eliminated; renegotiation or withdrawal from NAFTA; withdrawal from the Trans-Pacific Partnership; canceling "every unconstitutional executive action, memorandum and order issued by President Obama; and a number of rules related to lobbyists and special interests.
Plaintiffs' lawyers I have spoken to at this conference so far are pessimistic that standards will become even more pro-business and thus more difficult to bring cases. That's probably true. However, I have the following broader business-law related questions:
- What will happen to Dodd-Frank? There are already a number of house bills pending to repeal parts of Dodd-Frank, but will President Trump actually try to repeal all of it, particularly the Dodd-Frank whistleblower rule? How would that look optically? Former SEC Commissioner Paul Atkins, a prominent critic of Dodd-Frank and the whistleblower program in particular, is part of Trump's transition team on economic issues, so perhaps a revision, at a minumum, may not be out of the question.
2. What will happen with the two SEC commissioner vacancies? How will this president and Congress fund the agency?
3. Will SEC Chair Mary Jo White stay or go and how might that affect the work of the agency to look at disclosure reform?
4. How will the vow to freeze the federal workforce affect OSHA, which enforces Sarbanes-Oxley?
5. In addition to the issues that Trump has with TPP and NAFTA, how will his administration and the Congress deal with the Export-Import (Ex-IM) bank, which cannot function properly as it is due to resistance from some in Congress. Ex-Im provides financing, export credit insurance, loans, and other products to companies (including many small businesses) that wish to do business in politically-risky countries.
6. How will a more conservative Supreme Court deal with the business cases that will appear before it?
7. Who will be the Attorney General and how might that affect criminal prosecution of companies and individuals? Should we expect a new memo or revision of policies for Assistant US Attorneys that might undo some of the work of the Yates Memo, which focuses on corporate cooperation and culpable individuals?
8. What will happen with the Consumer Financial Protection Bureau, which the DC Circuit recently ruled was unconstitutional in terms of its structure and power?
9. What will happen with the Obama administration's executive orders on Cuba, which have chipped away at much of the embargo? The business community has lobbied hard on ending the embargo and eliminating restrictions, but Trump has pledged to require more from the Cuban government. Would he also cancel the executive orders as well?
10. What happens to the Public Company Accounting Board, which has had an interim director for several months?
11. Jeb Henserling, who has adamantly opposed Ex-Im, the CFPB, and Dodd-Frank is under consideration for Treasury Secretary. What does this say about President-elect Trump's economic vision?
Of course, there are many more questions and I have no answers but I will be interested to see how future announcements affect the world financial markets, which as of the time of this writing appear to have calmed down.
November 10, 2016 in Compliance, Corporate Governance, Corporations, Current Affairs, Financial Markets, International Law, Legislation, Marcia Narine Weldon, Securities Regulation, White Collar Crime | Permalink | Comments (2)
Monday, November 7, 2016
As we gear up for the final show down and hopefully the end of the 2016 election (please, please, please let it end) I write today about the relationship between the markets and politics. It is apparently THE business angle in the news cycle this week. This is an admitted punt on substantive work and am instead providing you with a host of hyperlinks to nervously check and re-check in between nervously checking and re-checking polling estimates and vote counts. Please note, I am passing along a compilation of articles, a list that I have not editted to reflect a certain viewpoint.
Historical Accounts of the Relationship between politics and the markets
Merrill Lynch, How Presidential Elections Affect the Markets
Predictions regarding market reactions to the outcome of the 2016 election
Sunday, October 23, 2016
The Association of American Law Schools (AALS) Annual Meeting will be held Tuesday, January 3 – Saturday, January 7, 2017, in San Francisco. Readers of this blog who may be interested in programs associated with the AALS Section on Socio-Economics & the Society of Socio-Economics should click on the following link for the complete relevant schedule:
Specifically, I'd like to highlight the following programs:
On Wednesday, Jan. 4:
9:50 - 10:50 AM Concurrent Sessions:
- The Future of Corporate Governance:
How Do We Get From Here to Where We Need to Go?
andre cummings (Indiana Tech) Steven Ramirez (Loyola - Chicago)
Lynne Dallas (San Diego) - Co-Moderator Janis Sarra (British Columbia)
Kent Greenfield (Boston College) Faith Stevelman (New York)
Daniel Greenwood (Hofstra) Kellye Testy (Dean, Washington)
Kristin Johnson (Seton Hall) Cheryl Wade (St. John’s ) Co-Moderator
Lyman Johnson (Washington and Lee)
- Socio-Economics and Whistle-Blowers
William Black (Missouri - KC) Benjamin Edwards (Barry)
June Carbone (Minnesota) - Moderator Marcia Narine (St. Thomas)
1:45 - 2:45 PM Concurrent Sessions:
1. What is a Corporation?
Robert Ashford (Syracuse) Moderator Stefan Padfield (Akron)
Tamara Belinfanti (New York) Sabeel Rahman (Brooklyn)
Daniel Greenwood (Hofstra)
On Thursday, Jan. 5:
3:30 - 5:15 pm:
Section Programs for New Law Teachers
Principles of Socio-Economics
in Teaching, Scholarship, and Service
Robert Ashford (Syracuse) Lynne Dallas (San Diego)
William Black (Missouri - Kansas City) Michael Malloy (McGeorge)
June Carbone (Minnesota) Stefan Padfield (Akron)
On Saturday, Jan. 7:
10:30 am - 12:15 pm:
Economics, Poverty, and Inclusive Capitalism
Robert Ashford (Syracuse) Stefan Padfield (Akron)
Paul Davidson (Founding Editor Delos Putz (San Francisco)
Journal of Post-Keynesian Economics) Edward Rubin (Vanderbilt)
Richard Hattwick (Founding Editor,
Journal of Socio-Economics)
October 23, 2016 in Business Associations, Conferences, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Financial Markets, Law and Economics, Law School, Marcia Narine Weldon, Research/Scholarhip, Stefan J. Padfield, Teaching | Permalink | Comments (0)
Wednesday, October 12, 2016
Job posting from an e-mail I recently received:
The UNIVERSITY OF NEBRASKA COLLEGE OF LAW invites applications for
lateral candidates for a tenured faculty position to hold the Clayton K. Yeutter Chair at
the College of Law. This chaired faculty position will be one of four faculty members to
form the core of the newly-formed, interdisciplinary Clayton K. Yeutter Institute for
International Trade and Finance. The Institute also will include the Duane Acklie Chair at
the College of Business Associations, the Michael Yanney Chair at the College of
Agricultural Sciences, and the Haggart/Works Professorship for International Trade at the
College of Law. The Yeutter Chair, along with the other three professors, will be
expected to support the work and objectives and ensure the success of the Yeutter
Institute. The Yeutter Chair will teach courses at the College of Law, including
International Finance. Other courses may include Corporate Finance and/or other related
classes pertaining to issues arising in international business and finance. More on the
Yeutter Institute can be found at http://news.unl.edu/newsrooms/today/article/giftsestablish-
Minimum Required Qualifications: J.D Degree or Equivalent; Superior Academic
Record; Outstanding Record of Scholarship in International Finance and/or other areas
related to international business; and Receipt of Tenure at an Accredited Law School.
General information about the Law College is available at http://law.unl.edu/. Please fill
out the University application, which can be found at
https://employment.unl.edu/postings/51633, and upload a CV, a cover letter, and a list of
references. The University of Nebraska-Lincoln is committed to a pluralistic campus
community through affirmative action, equal opportunity, work-life balance, and dual
careers. See http://www.unl.edu/equity/notice-nondiscrimination. Review of applications
will begin on November 5, 2016 and continue until the position is filled. If you have
questions, please contact Associate Dean Eric Berger, Chair, Faculty Appointments
Committee, University of Nebraska College of Law, Lincoln, NE 68583-0902, or send an
email to email@example.com.
Wednesday, October 5, 2016
The Wells Fargo headlines--fresh from a congressional testimony, a spiraling stock price, and a CEO with $41M less dollars to his name-- raise the question of whether this is a case study of corporate governance effectiveness or inefficiency. That the wrong doing (opening an estimated 2M unauthorized customer accounts to manipulate sales figures) was eventually unearthed, employees fired and bonus pay revoked may give some folks confidence in the oversight and accountability structures set up by corporate governance. Michael Hiltzit at the LA Times writes a scathing review of the CEO and the Board of Directors failed oversight on this issue.
The implicit defense raised by Stumpf’s defenders is that the consumer ripoff at the center of the scandal was, in context, trivial — look at how much Wells Fargo has grown under this management. But that’s a reductionist argument. One reason that the scandal looks trivial is that no major executive has been disciplined; so how big could it be? This only underscores the downside of letting executives off scot-free — it makes major failings look minor. The answer is to start threatening the bosses with losing their jobs, or going to jail, and they’ll start to take things seriously.
Whats your vote? Is the call for resignation an empty symbolism or a necessary consequence of governance?
Wednesday, September 7, 2016
Stock pricing in the securities market responds to supply and demand. This is intuitive with regard to individual securities. We understand that if more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, the price decreases if more want to sell than buy. I wonder to what extent regulators have examined the role of retirement saving plans in flooding the market with demand to buy new securities and which can drive up stock prices overall. Consider this historical graph of the NYSE trading average. Observe the sharp rise beginning in the late 1980's with the introduction of individual retirement savings plan and the beginning of the defined contribution society.
chart source: Forecast Chart
New Department of Labor regulations open the door for state governments to sponsor retirement savings plans for non-government workers. See for example, California's proposed plans. The rules, proposed in 2015, became final on August 30, 2016. You can read a summary of the proposed plans published by The Brookings Institute and a DOL interpretive bulletin. Also being considered are proposed rules authorizing high-population cities to sponsor similar plans in states that don't create the non-government worker retirement savings plans. Collectively, these regulations are intended to facilitate the retirement savings of the estimated 55 million small business workers who do not currently have the option of participating in a retirement savings plan. This policy decision encourages retirement saving and promotes individual financial stability. It also means that more worker/saver/investors (a group I have called Citizen Shareholders in prior works) will be encouraged to invest in the private securities market. The demand cycle continues and can be sustained so long as there are as many or more worker/saver/investors as there are folks liquidating their retirement savings. In other words, a severely aging workforce/population could pose a demand/supply problem for the securities market.
Wednesday, August 31, 2016
House Representative Carolyn B. Maloney, Democrat of New York, sent a formal request to a slew of federal agencies to share trading data collected in connection with the Volcker Rule. The Volcker Rule prohibits U.S. banks from engaging in proprietary trading (effective July 21, 2015), while permitting legitimate market-making and hedging activities. The Volcker Rule restricts commercial banks (and affiliates) from investing investing in certain hedge funds and private equity, and imposes enhanced prudential requirements on systemically identified non-bank institutions engaged in such activities.
Representative Maloney requested the Federal Reserve, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission, Office of the Comptroller of the Currency, and the Securities and Exchange Commission to analyze seven quantitative trading metrics that regulators have been collecting since 2014 including: (1) risk and position limits and usage; (2) risk factor sensitivities; (3) value-at-risk (VaR) and stress VaR; (4) comprehensive profit and loss attribution; (5) inventory turnover; (6) inventory aging; and (7) customer facing trade ratios.
Representative Maloney requested the agencies analyze the data and respond to the following questions:
The extent to which the data showed significant changes in banks’ trading activities leading up to the July 21, 2015 effective date for the prohibition on proprietary trading. To the extent that the data did not show a significant change in the banks’ trading activities leading up to the July 21, 2015 effective date, whether the agencies believe this is attributable to the banks having ceased their proprietary trading activities prior to the start of the metrics reporting in July 2014.
Whether there are any meaningful differences in either overall risk levels or risk tolerances — as indicated by risk and position limits and usage, VaR and stress VaR, and risk factor sensitivities — for trading activities at different banks.
Whether the risk levels or risk tolerances of similar trading desks are comparable across banks reporting quantitative metrics. Similarly, whether the data show any particular types of trading desks (e.g., high-yield corporate bonds, asset-backed securities) that have exhibited unusually high levels of risk.
How examiners at the agencies have used the quantitative metrics to date.
How often the agencies review the quantitative metrics to determine compliance with the Volcker Rule, and what form the agencies’ reviews of the quantitative metrics take.
Whether the quantitative metrics have triggered further reviews by any of the agencies of a bank’s trading activities, and if so, the outcome of those reviews
Any changes to the quantitative metrics that the agencies have made, or are considering making, as a result of the agencies’ review of the data received as of September 30, 2015.
The agencies' response to the request may provide insight into Dodd-Frank/Volcker Rule, the role of big data in the rule-making process (and re-evaluation), and bigger issues such as whether systemic financial risk is definable by regulation and quantifiable in data collection. I will post regulatory responses, requested by October 30th, here on the BLPB.
August 31, 2016 in Anne Tucker, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Investment Banking, Legislation, Private Equity, Securities Regulation, Venture Capital | Permalink | Comments (0)
Monday, August 22, 2016
We are now more than three months into the Title III crowdfunding experiment. I have been wanting to get back to posting on Title III crowdfunding since my "LIVE" post back in May, but so much other fun stuff has been going on! So, to make me feel a bit better on that point, I will share some current crowdfunding data with you all in this post based on publicly available information obtained from a Westlaw search performed yesterday (Sunday, August 21, 2016). [Note to the powers that be at the SEC: EDGAR makes it hard to find the aggregated set of Form C filings unless you are collecting data on an ongoing basis. I hope that changes as EDGAR continues to improve . . . .]
At the outset, I will note that others have offered their own reports on Title III crowdfunding since I last posted (including here, here, and here). These reports offer some nice summaries. This post offers a less comprehensive data dump focusing in on completed offerings and withdrawn offerings. At the end, I offer some limited observations from the information provided here about crowdfunding as a small-business capital-raising alternative, the need for EDGAR adjustments, inferences about the success of Title III crowdfunded offerings, and platform disclosure about withdrawn offerings.
First, however, the top-level Westlaw-based summary:
Total Form C filings: 85 (275 filings show on Westlaw, but only 85 are non-exhibit filings representing distinct offerings)
Total Form C/A filings (amendments, including exhibit filings): 153
Total Form C-U filings (updates): 4
Total Form C-W filings (withdrawals): 2
The remainder of this post takes a shallow dive into the updates and withdrawals. Filings in each case are presented in reverse chronological order by filing date. All referenced dates are in 2016. Issuer names are copied from filings and may not be the actual legal names of the entities.
Wednesday, August 17, 2016
If it is true that “a good thing cannot last forever,” the recent turn of events concerning appraisal arbitrage in Delaware may be a proof point. A line of cases coming out of the Delaware Court of Chancery, namely In re Appraisal of Transkaryotic Therapies, Inc., No. CIV.A. 1554-CC (Del. Ch. May 2, 2007), In re Ancestry.Com, Inc., No. CV 8173-VCG (Del. Ch. Jan. 5, 2015), and Merion Capital LP v. BMC Software, Inc., No. CV 8900-VCG (Del. Ch. Jan. 5, 2015), have made one point clear: courts impose no affirmative evidence that each specific share of stock was not voted in favor of the merger—a “share-tracing” requirement. Despite this “green light” for hedge funds engaging in appraisal arbitrage, the latest case law and legislation identify some new limitations.
What Is Appraisal Arbitrage?
Under § 262 of the Delaware General Corporation Law (DGCL), a shareholder in a corporation (usually privately-held) that disagrees with a proposed plan of merger can seek appraisal from the Court of Chancery for the fair value of their shares after approval of the merger by a majority of shareholders. The appraisal-seeking shareholder, however, must not have voted in favor of the merger. Section 262, nevertheless, has been used mainly by hedge funds in a popular practice called appraisal arbitrage, the purchasing of shares in a corporation after announcement of a merger for the sole purpose of bringing an appraisal suit against the corporation. Investors do this in hopes that the court determines a fair value of the shares that is a higher price than the merger price for shares.
In Using the Absurdity Principle & Other Strategies Against Appraisal Arbitrage by Hedge Funds, I outline how this practice is problematic for merging corporations. Not only can appraisal demands lead to 200–300% premiums for investors, assets in leveraged buyouts already tied up in financing the merger create an even heavier strain on liquidating assets for cash to fund appraisal demands. Additionally, if such restraints are too burdensome due to an unusually high demand of appraisal by arbitrageurs seeking investment returns, the merger can be completely terminated under “appraisal conditions”—a contractual countermeasure giving potential buyers a way out of the merger if a threshold percentage of shares seeking appraisal rights is exceeded. The article also identifies some creative solutions that can be effected by the judiciary or parties to and affected by a merger in absence of judicial and legislative action, and it evaluates the consequences of unobstructed appraisal arbitrage.
The Issue Is the “Fungible Bulk” of Modern Trading Practices
In the leading case, Transkaryotic, counsel for a defending corporation argued that compliance with § 262 required shareholders seeking appraisal prove that each of its specific shares was not voted in favor of the merger. The court pushed back against this share-tracing requirement and held that a plain language interpretation of § 262 requires no showing that specific shares were not voted in favor of the merger, but only requires that the current holder did not vote the shares in favor of the merger. The court noted that even if it imposed such a requirement, neither party could meet it because of the way modern trading practices occur.
August 17, 2016 in Anne Tucker, Business Associations, Case Law, Corporate Finance, Corporate Governance, Corporations, Delaware, Financial Markets, Private Equity, Shareholders | Permalink | Comments (0)
Wednesday, August 3, 2016
The Federal Reserve Board announced its enforcement actions against Goldman Sachs from 2012-2014 events where a Goldman Sachs banker, a former NY Fed employee, received confidential documents from a NY Fed employee. The individuals involved plead guilty to the resulting charges and Goldman Sachs paid fines in New York. The Federal Reserve Board took separate actions this week based upon evidence that the banker "repeatedly obtained, used and disseminated [confidential supervisory information or CSI] ... including CSI concerning financial institutions’ confidential CAMELS ratings, non-public enforcement actions, and confidential documents prepared by banking regulators." Even though Goldman Sachs terminated the banker involved and reported the matter to authorities, apparently the misconduct was sustained over a long-enough period of time and used to "solicit business" in a way that compelled Federal Reserve Board Action.
The Fed's release and copies of the orders are available here. The sanctions against Goldman Sachs include the monetary fine as well a requirement to 'Within 90 days of this Order, ...submit to the Board of Governors an acceptable written plan, and timeline for implementation, to enhance the effectiveness of the internal controls and compliance functions regarding the identification, monitoring, and control of confidential supervisory information."
Financial press coverage of the matter is available in a variety of outlets:
Thursday, July 21, 2016
Jamie Dimon (JP Morgan Chase), Warren Buffet (Berkshire Hathaway), Mary Barra (General Motors), Jeff Immet (GE), Larry Fink (Blackrock) and other executives think so and have published a set of "Commonsense Principles of Corporate Governance" for public companies. There are more specifics in the Principles, but the key points cribbed from the front page of the new website are as follows:
Truly independent corporate boards are vital to effective governance, so no board should be beholden to the CEO or management. Every board should meet regularly without the CEO present, and every board should have active and direct engagement with executives below the CEO level;
■ Diverse boards make better decisions, so every board should have members with complementary and diverse skills, backgrounds and experiences. It’s also important to balance wisdom and judgment that accompany experience and tenure with the need for fresh thinking and perspectives of new board members;
■ Every board needs a strong leader who is independent of management. The board’s independent directors usually are in the best position to evaluate whether the roles of chairman and CEO should be separate or combined; and if the board decides on a combined role, it is essential that the board have a strong lead independent director with clearly defined authorities and responsibilities;
■ Our financial markets have become too obsessed with quarterly earnings forecasts. Companies should not feel obligated to provide earnings guidance — and should do so only if they believe that providing such guidance is beneficial to shareholders;
■ A common accounting standard is critical for corporate transparency, so while companies may use non-Generally Accepted Accounting Principles (“GAAP”) to explain and clarify their results, they never should do so in such a way as to obscure GAAP-reported results; and in particular, since stock- or options-based compensation is plainly a cost of doing business, it always should be reflected in non-GAAP measurements of earnings; and
■ Effective governance requires constructive engagement between a company and its shareholders. So the company’s institutional investors making decisions on proxy issues important to long-term value creation should have access to the company, its management and, in some circumstances, the board; similarly, a company, its management and board should have access to institutional investors’ ultimate decision makers on those issues.
I expect that shareholder activists, proxy advisory firms, and corporate governance nerds like myself will scrutinize the specifics against what the signatories’ companies are actually doing. Nonetheless, I commend these business leaders for at least starting a dialogue (even if a lot of the recommendations are basic common sense) and will be following this closely.
Wednesday, July 20, 2016
Last week on the blog I featured the smart book Empire of the Fund by sharing excerpts from a conversation with author, Professor William Birdthistle. In discussing the book, he shared with me some insights on writing a book: its process, genesis and use in the classroom. I am fascinated by other's people writing process in the continual effort to improve my own.
writing a book...
[W]riting a book was more of a challenge than I expected, even though I told myself it was simply a collection of law review articles. It turns out that the blinking cursor on an empty screen is more taunting when you're obliged to fill hundreds of pages. Brief stints of productivity need to be repeated again and again and, until it all exists, nothing really exists. I developed a convoluted system of drafting notes, then sitting down with a research assistant to record a chat about those notes, then working that recording into an outline. That process still left me with plenty of writing to do, but I found it much easier to expand, polish, and revise those outlines than to fight the demon blank page.
Talking through your ideas forces you to synthesize the materials. It also retains the humanity behind the arguments. This method makes a lot of sense when you read Professor Birdthistle's book because it feels like he is talking to you— just in a way that is smarter, better organized and more pithy than most of us can muster in the average conversation. His book doesn't read like the belabored, bloated, and laborious sections that all too often find their way in law review articles (my own included).
genesis for the book...
The contents, to a large extent, have actually come from the classroom -- as these materials serve as the syllabus for a seminar I've taught for a few years. The seminar, called Investment Funds, is almost always popular: in a go-go market, all the students want to hear about private equity and hedge funds; then in downturns, I get a sober audience of students who want to know more about their 401(k)s.
application to broader classes...
I often work this material in to my BusOrg and SecReg classes too: so, I emphasize the role of funds on topics like corporate purpose (does charitable giving look different if the corporate funds might otherwise go to 401(k) holders), proxy contests (in which mutual funds are major institutional investors but often conspicuously absent from these fights), shorting (where the securities are often borrowed from mutual funds and ETFs), and behavioral versus neoclassical theory (quoting heavily from a wonderful disagreement between Judges Easterbrook and Posner in Jones v. Harris before it went to the Supreme Court).
Since almost all students will soon be figuring out their own 401(k) and mutual fund investments, I've found that it's easy to make business issues far more salient to their lives. Even to the saints who'll soon have a 403(b).
the role of behavioral work...
Finally, I highlight Professor Birdthistle's observations about changes to the corporate law landscape made space for a book like his to contribute, in a serious way, to the academic and popular debate about the efficacy of the mutual fund market.
I've been struck by the change in our intellectual and academic disposition towards investing problems. I've been in the academy for a decade now and, when I began, the rational investor model was so thoroughgoing that it was difficult to discuss problems of individual investing. Many conversations -- and job talks -- required a first-principles exegesis about how this market might possibly be anything other than highly efficient. But a tide of behavioral work in recent years has helped explain why investors might struggle, and a good deal of empirical work has concretely shown how they struggle. So conversations today focus more upon solutions rather than on whether there is even a problem.
To this last point, I wonder what ideas and principles, which seem untouchable today, will give way to the next generation's breakthrough. I think is a particularly heartening message for young scholars--not all of the work has been done! Keep at it! And it is an important message for folks who aren't writing in the mainstream. For folks who are passionate about their work, but feeling like their ideas aren't garnering the right cache with the right audiences. This is where you persevere so long as the work is thorough and well researched. Maybe you and your work are contributing to an important intellectual advancement. You could be changing the tides in ways that in presently imperceptible, but significant nonetheless. So as the August submission deadline looms and the summer hours threaten to languish, press on!
Because this post is a compilation of quotes, I now turn to Garrison Keeler to close:
Be well, do good work, and keep in touch.
*Query: Are the best motivational speeches are the ones you write for yourself?
Wednesday, July 13, 2016
Professor William Birdthistle at Chicago-Kent College of Law is publishing his new book, Empire of the Fund with Oxford University Press. A brief introductory video for the book (available here) demonstrates both Professor Birdthistle’s charming accent and talent for video productions (this is obviously not his first video rodeo). Professor Birdthistle has generously provided our readers with a window into the book’s thesis and highlights some of its lessons. I’ll run a second feature next week focusing on the process of writing a book—an aspiration/current project for many of us.
Empire of the Fund is segmented into four digestible parts: anatomy of a fund describing the history and function of mutual funds, diseases & disorders addressing fees, trading practices and disclosures, alternative remedies introducing readers to ETFs, target date funds and other savings vehicles, and cures where Birdthistle highlights his proposals. For the discussion of the Jones v. Harris case alone, I think I will assign this book to my corporate law seminar class for our “book club”. As other reviewers have noted, the book is funny and highly readable, especially as it sneaks in financial literacy. And now, from Professor Birdthistle:
Things that the audience might learn:
The SEC does practically zero enforcement on fees. [pp. 215-216] Even though every expert understands the importance of fees on mutual fund investing, the SEC has brought just one or only two cases in its entire history against advisors charging excessive fees. Section 36(b) gives the SEC and private plaintiffs a cause of action, but the SEC has basically ignored it; even prompting Justice Scalia to ask why during oral arguments in Jones v. Harris? Private plaintiffs, on the other hand, bring cases against the wrong defendants (big funds with deep pockets but relatively reasonable fees). So I urge the SEC to bring one of these cases to police the outer bounds of stratospheric fund fees.
The only justification for 12b-1 fees has been debunked. [pp. 81-83] Most investors don't know much about 12b-1 fees and are surprised by the notion that they should be paying to advertise funds in which they already invest to future possible investors. The industry's response is that spending 12b-1 fees will bring in more investors and thus lead to greater savings for all investors via economies of scale. The SEC's own financial economist, however, studied these claims and found (surprisingly unequivocally for a government official) that, yes, 12b-1 fees certainly are effective at bringing in new investment but, no, funds do not then pass along any savings to the funds' investors. I sketch this out in a dialogue on page 81 between a pair of imaginary nightclub denizens.
Target-date funds are more dangerous than most people realize. [pp. 172-174] Target-date funds are embraced by many as a panacea to our investing problem and have been extremely successful as such. But I point out some serious drawbacks with them. First, they are in large part an end-of-days solution in which we essentially give up on trying to educate investors and encourage them simply to set and forget their investments; that's a path to lowering financial literacy, not raising it (which may be a particularly acute issue if my second objection materializes). Second, TDFs rely entirely on the assumption that the bond market is the safety to which all investors should move as they age; but if we're heading for a historic bear market on bonds (as several intelligent and serious analysts have posited), we'll be in very large danger with a somnolent investing population
Thursday, July 7, 2016
SEC disclosures are meant to provide material information to investors. As I hope all of my business associations students know, “information is material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision.”
Regulation S-K, the central repository for non-financial disclosure statements, has been in force without substantial revision for over thirty years. The SEC is taking comments until July 21st on on the rule however, it is not revising “other disclosure requirements in Regulation S-K, such as executive compensation and governance, or the required disclosures for foreign private issuers, business development companies, or other categories of registrants.” Specifically, as stated in its 341-page Comment Release, the SEC seeks input on:
- whether, and if so, how specific disclosures are important or useful to making investment and voting decisions and whether more, less or different information might be needed;
- whether, and if so how, we could revise our current requirements to enhance the information provided to investors while considering whether the action will promote efficiency, competition, and capital formation;
- whether, and if so how, we could revise our requirements to enhance the protection of investors;
- whether our current requirements appropriately balance the costs of disclosure with the benefits;
- whether, and if so how, we could lower the cost to registrants of providing information to investors, including considerations such as advancements in technology and communications;
- whether and if so, how we could increase the benefits to investors and facilitate investor access to disclosure by modernizing the methods used to present, aggregate and disseminate disclosure; and
- any challenges of our current disclosure requirements and those that may result from possible regulatory responses explored in this release or suggested by commenters.
As of this evening, thirty comments had been submitted including from Wachtell Lipton, which cautions against “overdisclosure” and urges more flexible means of communicating with investors; the Sustainability Accounting Standards Board, which observes that 40% of 10-K disclosures on sustainability use boilerplate language and recommends a market standard for industry-specific disclosures (which SASB is developing); and the Pension Consulting Alliance, which agrees with SASB’s methodology and states that:
[our] clients increasingly request more ESG information related to their investments. Key PCA advisory services that are affected by ESG issues include:
- Investment beliefs and investment policy development
- Manager selection and monitoring
- Portfolio-wide exposure to material ESG risks
- Education and analysis on macro and micro issues
- Proxy voting and engagement
This is an interesting time for people like me who study disclosures. Last week the SEC released its revised rule on Dodd-Frank §1504 that had to be re-written after court challenges. That rule requires an issuer “to disclose payments made to the U.S. federal government or a foreign government if the issuer engages in the commercial development of oil, natural gas, or minerals and is required to file annual reports with the Commission under the Securities Exchange Act.” Representative Bill Huizenga, the Chairman of the House Financial Services Subcommittee on Monetary Policy and Trade, introduced an amendment to the FY2017 Financial Services and General Government (FSGG) Appropriations bill, H.R. 5485, to prohibit funding for enforcement for another governance disclosure--Dodd-Frank conflict minerals.
SEC Chair White has herself questioned the wisdom of the SEC requiring and monitoring certain disclosures, noting the potential for investor information overload. Nonetheless, she and the agency are committed to enforcement. Her fresh look at disclosures reflects a balanced approach. If you have some spare time this summer and think the SEC’s disclosure system needs improvement, now is the time to let the agency know.
Sunday, July 3, 2016
The University of Akron Law Review recently published its Symposium on Law and SocioEconomics. You can find a full list of the contributions here (Volume 49, Issue 2). As one of the organizers of the symposium, I had the honor of writing a conclusion to the issue, titled Socio-Economics: Challenging Mainstream Economic Models and Policies. I provide the abstract below, and you can read the entire piece here.
At a time when many people are questioning the ability of our current system to provide economic justice, the Socio-Economic perspective is particularly relevant to finding new solutions and ways forward. In this relatively short conclusion to the Akron Law Review’s publication, Law and Socio-Economics: A Symposium, I have separated the Symposium articles into three groups for review: (1) those that can be read as challenging mainstream economic models, (2) those that can be read as challenging mainstream policy conclusions, and (3) those that provide a good example of both. My reviews essentially take the form of providing a short excerpt from the relevant article that will give the reader a sense of what the piece is about and hopefully encourage those who have not yet done so to read the entire article.
Friday, July 1, 2016
This post concerns the rights and responsibilities of whistleblowers. I sit on the Department of Labor Whistleblower Protection Advisory Committee. These views are solely my own.
Within a week of my last day as a Deputy General Counsel and Chief Compliance Officer for a Fortune 500 company and shortly before starting my VAP in academia, I testified before the House Financial Services Committee on the potential unintended consequences of the proposed Dodd-Frank whistleblower law on compliance programs. I blogged here about my testimony and the rule, which allows whistleblowers who provide original information to the SEC related to securities fraud or violations of the Foreign Corrupt Practices Act to receive 10 to 30 percent of the amount of the recovery in any action in which the Commission levies sanctions in excess of $1 million dollars. During my testimony in 2011, I explained to some skeptical members of Congress that:
…the legislation as written has a loophole that could allow legal, compliance, audit, and other fiduciaries to collect the bounty although they are already professionally obligated to address these issues. While the whistleblower community believes that these fiduciaries are in the best position to report to the SEC on wrongdoing, as a former in house counsel and compliance officer, I believe that those with a fiduciary duty should be excluded and have an “up before out” requirement to inform the general counsel, compliance officer or board of the substantive allegation or any inadequacy in the compliance program before reporting externally.
Thankfully, the final rule does have some limitations, in part, I believe because of my testimony and the urgings of the Association of Corporate Counsel, the American Bar Association and others. In a section of the SEC press release on the program discussing unintended consequences released a few weeks after the testimony, the agency stated:
However, in certain circumstances, compliance and internal audit personnel as well as public accountants could become whistleblowers when:
- The whistleblower believes disclosure may prevent substantial injury to the financial interest or property of the entity or investors.
- The whistleblower believes that the entity is engaging in conduct that will impede an investigation.
- At least 120 days have elapsed since the whistleblower reported the information to his or her supervisor or the entity’s audit committee, chief legal officer, chief compliance officer – or at least 120 days have elapsed since the whistleblower received the information, if the whistleblower received it under circumstances indicating that these people are already aware of the information.
At least two compliance officers or internal audit personnel have in fact received awards—one for $300,000 and another for $1,500,000. When I served on a panel a couple of years ago with Sean McKessy, Chief of the Office of the Whistleblower, he made it clear that he expected lawyers, auditors, and compliance officers to step forward and would not hesitate to award them.
Compliance officers have even more incentive to be diligent (or become whistleblowers) because of the DOJ Yates Memo, which requires companies to serve up a high ranking employee in order for the company to get cooperation credit in a criminal investigation. I blogged about my concerns about the Memo’s effect on the attorney-client relationship here, stating:
The Yates memo raises a lot of questions. What does this mean in practice for compliance officers and in house counsel? How will this development change in-house investigations? Will corporate employees ask for their own counsel during investigations or plead the 5th since they now run a real risk of being criminally and civilly prosecuted by DOJ? Will companies have to pay for separate counsel for certain employees and must that payment be disclosed to DOJ? What impact will this memo have on attorney-client privilege? How will the relationship between compliance officers and their in-house clients change? Compliance officers are already entitled to whistleblower awards from the SEC provided they meet certain criteria. Will the Yates memo further complicate that relationship between the compliance officer and the company if the compliance personnel believe that the company is trying to shield a high profile executive during an investigation?
The US Chamber of Commerce shares my concerns and issued a report last month that echoes the thoughts of a number of defense attorneys I know. I will be discussing these themes and the Dodd-Frank Whistleblower aspect at the International Legal Ethics Conference on July 14th at Fordham described below:
Current Trends in Prosecutorial Ethics and Regulation
Ellen Yaroshefsky, Cardozo School of Law (US) (Moderator); Tamara Lave, University of Miami Law School (US); Marcia Narine, St. Thomas University School of Law (US);Lawrence Hellman, Oklahoma City University School of Law (US); Lissa Griffin, Pace University Law School (US); Kellie Toole, Adelaide Law School (Australia); and Eric Fish,Yale Law School (US)
Nationally and internationally, prosecutors' offices face new, as well as ongoing, challenges and their exercise of discretion significantly affects individuals and entities. This panel will explore a wide range of issues confronting the modern prosecutor. This will include certain ethical obligations in handling cases, organizational responsibility for wrongful convictions, the impact of the exercise of prosecutorial discretion in whistleblower cases, and the cultural shifts in prosecutors' offices.
To be clear, I believe that more corporate employees must go to jail to punish if not deter abuses. But I think that these mechanisms are the wrong way to accomplish that goal and may have a chilling effect on the internal investigations that are vital to rooting out wrongdoing. If you have any thoughts about these topics, please leave them below or email me at firstname.lastname@example.org. My talk and eventual paper will also address the relationship between Sarbanes-Oxley, the state ethical rules, and the Catch-22 that in house counsel face because of the conflicting rules and the realities of modern day corporate life.
July 1, 2016 in Compliance, Conferences, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Lawyering, Marcia Narine Weldon, Securities Regulation, White Collar Crime | Permalink | Comments (1)
Tuesday, June 28, 2016
SEC Chair Mary Jo White yesterday presented the keynote address, for the International Corporate Governance Network Annual Conference, "Focusing the Lens of Disclosure to Set the Path Forward on Board Diversity, Non-GAAP, and Sustainability." The full speech is available here.
In reading the speech, I found that I was talking to myself at various spots (I do that from time to time), so I thought I'd turn those thoughts into an annotated version of the speech. In the excerpt below, I have added my comments in brackets and italics. These are my initial thoughts to the speech, and I will continue to think these ideas through to see if my impression evolves. Overall, as is often the case with financial and other regulation, I found myself agreeing with many of the goals, but questioning whether the proposed methods were the right way to achieve the goals. Here's my initial take:
June 28, 2016 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Joshua P. Fershee, Securities Regulation, Shareholders, Social Enterprise | Permalink | Comments (1)
Friday, June 17, 2016
On Wednesday, the EU finally outlined its position on conflict minerals. The proposed rule will affect approximately 900,000 businesses. As I have discussed here, these “name and shame” disclosure rules are premised on the theories that: 1) companies have duty to respect human rights by conducting due diligence in their supply chains; 2) companies that source minerals from conflict zones contribute financially to rebels or others that perpetuate human rights abuses; and 3) if consumers and other stakeholders know that companies source certain minerals from conflict zones they will change their buying habits or pressure companies to source elsewhere.
As stated in earlier blog posts, the US Dodd- Frank rule has been entangled in court battles for years and the legal wranglings are not over yet. Dodd-Frank Form SD filings were due on May 31st and it is too soon to tell whether there has been improvement over last year’s disclosures in which many companies indicated that the due diligence process posed significant difficulties.
I am skeptical about most human rights disclosure rules in general because they are a misguided effort to solve the root problem of business’ complicity with human rights abuses and assume that consumers care more about ethical sourcing than they report in surveys. Further, there are conflicting views on the efficacy of Dodd-Frank in particular. Some, like me, argue that it has little effect on the Congolese people it was designed to help. Others such as the law’s main proponent Enough, assert that the law has had a measurable impact.
The EU's position on conflict minerals is a compromise and many NGOs such as Amnesty International, an organization I greatly respect, are not satisfied. Like its US counterpart, the EU rule requires reporting on tin, tantalum, tungsten, and gold, which are used in everything from laptops, cameras, jewelry, light bulbs and component parts. Unlike Dodd-Frank, the rule only applies to large importers, smelters, and refiners but it does apply to a wider zone than the Democratic Republic of Congo and the adjoining countries. The EU rule applies to all “conflict zones” around the world.
Regular readers of my blog posts know that I teach and research on business and human rights, and I have focused on corporate accountability measures. I have spent time in both Democratic Republic of Congo and Guatemala looking at the effect of extractive industries on local communities through the lens of an academic and as a former supply chain executive for a Fortune 500 company. I continue to oppose these disclosure rules because they take governments off the hook for drafting tough, substantive legislation. Nonetheless, I look forward to seeing what lessons if any that the EU has learned from the US when the member states finally implement and enforce the new rule. In coming weeks I will blog on recent Form SD disclosures and the progress of the drafting of the final EU rule.
June 17, 2016 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, International Law, Legislation, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (0)