Thursday, July 24, 2014
As many have celebrated or decried, Dodd-Frank turned four-years old this week. This is the law that Professor Stephen Bainbridge labeled "quack federal corporate governance round II" (round I was Sarbanes-Oxley, as labeled by Professor Roberta Romano). Some, like Professor Bainbridge, think the law has gone too far and has not only failed to meet its objectives but has actually caused more harm than good (see here, for example). Some think that the law has not gone far enough, or that the law as drafted will not prevent the next financial crisis (see here, for example). The Council on Foreign Relations discusses the law in an accessible manner with some good links here.
SEC Chair Mary Jo White has divided Dodd-Frank’s ninety-five mandates into eight categories. She released a statement last week touting the Volcker Rule, the new regulatory framework for municipal advisors, additional controls on broker-dealers that hold customer assets, reduced reliance on credit ratings, new rules for unregulated derivatives, additional executive compensation disclosures, and mechanisms to bar bad actors from securities offerings.
Notwithstanding all of these accomplishments, only a little over half of the law is actually in place. In fact, according to the monthly David Polk Dodd-Frank Progress Report:
As of July 18, 2014, a total of 280 Dodd-Frank rulemaking requirement deadlines have passed. Of these 280 passed deadlines, 127 (45.4%) have been missed and 153 (54.6%) have been met with finalized rules. In addition, 208 (52.3%) of the 398 total required rulemakings have been finalized, while 96 (24.1%) rulemaking requirements have not yet been proposed.
Many who were involved with the law’s passage or addressing the financial crisis bemoan the slow progress. The House Financial Services Committee wrote a 97-page report to call it a failure. So I have a few questions.
1) When Dodd-Frank turns five next year, how far behind will we still be, and will we have suffered another financial blip/setback/recession/crisis that supporters say could have been prevented by Dodd-Frank?
2) How will the results of the mid-term elections affect the funding of the agencies charged with implementing the law?
3) What will the SEC do to address the Dodd-Frank rules that have already been invalidated or rendered otherwise less effective after litigation from business groups such as §1502, Conflict Minerals Rule (see here for SEC response) or §1504, the Resource Extraction Rule (see here for court decision)?
4) Given the SEC's failure to appeal after the proxy access litigation and the success of the lawsuits mentioned above, will other Dodd-Frank mandates be vulnerable to legal challenge?
5) Will the whistleblower provision that provides 10-30% of any recovery over $1 million to qualified persons prevent the next Bernie Madoff scandal? I met with the SEC, members of Congress and testified about some of my concerns about that provision before entering academia, and I hope to be proved wrong.
Let's wait and see. I look forward to seeing how much Dodd-Frank has grown up this time next year.
Thursday, July 10, 2014
In last week’s post about the business of the World Cup, I indicated that I would review Christine Bader’s book, The Evolution of a Corporate Idealist: When Girl Meets Oil. I have changed my mind, largely because I don’t have much to add to the great reviews the book has already received. Instead I would like to talk about how lawyers, professors and students can use the advice, even if they have no desire to do corporate social responsibility work as Bader did, or worse, they think CSR and signing on to voluntary UN initiatives is really a form of "bluewashing."
Bader earned an MBA and worked around the world on BP’s behalf on human rights initiatives. This role required her to work with indigenous peoples, government officials and her peers within BP convincing them of the merits of considering the human rights, social, and environmental impacts. She then worked with the UN and John Ruggie helping to develop the UN Guiding Principles on Business and Human Rights, a set of guidelines which outline the state duty to protect human rights, the corporate duty to respect human rights, and both the state and corporations' duty to provide judicial and non-judicial remedies to aggrieved parties. She now works as a lecturer at Columbia University, where she teaches human rights and business and she also advises BSR, which focuses on making businesses more sustainable. Her book tells her story but also quotes a number of other CSR professionals and how they have navigated through some of the world’s largest multinationals.
Bader’s book has some important takeaways for all of us.
1) In order to have influence, we have to learn to speak the language that our audience understands and appreciates- I tell my students that when they write exams for me, it’s all about me. Other professors want their exams written with certain catchphrases using the IRAC method, and I may want something different. One size does not fit all. Attorneys learn (or get replaced) that some clients want long memos, others want executive summaries and bullet points and all want plain English. Talking to a venture capitalist is different than talking to a circuit court judge. Similarly, many law professors are behind the curve. If we only talk to each other in the jargon of the academy and insulate ourselves, the rest of the world won’t have the benefit of our research because they won’t understand or want to read it. Academics have a lot to contribute, but we need to adapt to our audience whether it’s policymakers, judges, our peers or law students.
2) Sometimes we have to be less passionate in making our arguments and appeal to what’s important to our audience- This point relates to Point 1. Bader regularly met with a number of constituencies and was understandably zealous in trying to convince others, internally and externally, about her positions. She and other “corporate idealists” from other firms often learned the importance of language- making a business case to certain internal stakeholders meant talking in terms of the bottom line rather than using the maxim “it’s the right thing to do” or “doing well by doing good.” Good attorneys know how to represent their clients without taking things personally because sometimes the passion can actually dilute effectiveness. As law professors, we need to teach our students to be more effective so that they know how and when to modulate their tone, and how to pivot and change the way they frame their arguments when they can’t convince the recipient of their message.
3) Almost everything comes down to risk management- Bader often had to focus on risk management and mitigation when her moral arguments fell on deaf ears. Those who teach business should make sure that students have a basic understanding of the pressure points that business people face. For some it may be tax liability. For others it may be the appropriate exit strategy. In essence, it all comes down to understanding the client’s risk profile and being able to advise accordingly. Litigators should also understand risk profiles so that they can develop an appropriate settlement strategy and help their client’s work their way through some of the unexpected pitfalls that may arise over the course of the case.
4) Building relationships is a critical skill- Bader learned that social interactions with her peers at BP and the external stakeholders after hours greatly increased her effectiveness in dealing with thorny issues that arose during business hours. Lawyers often believe that if they have the substantive knowledge, they are the smartest people in the room. Law firms don’t teach young associates about the importance of emotional intelligence and building relationships with peers, opposing counsel, and clients. In fact, many law students and lawyers believe that having the reputation as a “shark” is the best way to represent clients. We need to teach our students that it’s better to be respected than feared or hated, and that they can disagree without being disagreeable. Those of us in the academy should model that behavior more often.
5) We must learn to compromise and recognize that incremental changes are important too- Bader and other corporate idealists often want to change the world but quickly learn that internal and external stakeholders aren’t ready to move that fast. She discussed “nudging” her client toward the right direction. Law school and law-related television shows lead students to believe that the end game is to win and to win big. In the business world, sometimes there are no big wins. Lawyers and business advisors often take two steps forward and one step back, and that’s ok. Students and attorneys who take classes in alternative dispute resolution learn this valuable skill. Bader and other corporate idealists also realized that you have to work with people on the opposite side who feel just as strongly that their position is on the side of the angels. Lawyers who know how to build relationships and refocus their messaging can influence those on the other side if they are willing to listen, and when necessary compromise and accept small victories.
6) We can compromise but shouldn’t compromise our values- When Bader felt that her work was no longer fulfilling, she looked for other positions that aligned with her world view. With rising student debt and many lawyers living beyond their means, it’s difficult for lawyers to walk away from a job or client that they don’t like. That’s understandable. It’s more problematic to stay in a situation where there is criminal or ethical misconduct without speaking up or leaving because of the financial handcuffs. It’s also unacceptable to remain in a culture that stifles a lawyer’s ability to raise issues. In some cases, as alleged with some of the GM lawyers, failure to speak up could literally be a matter of life and death.
I enjoyed this quick read because it reminded me so much of my years in corporate life. Bader’s story can teach all of us, even the non corporate-idealists, valuable lessons about coping and thriving in the business world.
Friday, July 4, 2014
The title of this post refers to the thought-provoking book by former BP executive, Christine Bader, The Evolution of a Corporate Idealist: When Girl Meets Oil. I will save a review for next week in Part 2 of this post. Briefly, Bader discusses the internal and external struggles that she and other “corporate idealists” face when trying to provide practical, culturally appropriate, innovative ways to implement corporate social responsibility and human rights programs around the world. Much of what she said resonated with me based upon my years as a compliance and ethics officer for a multinational corporation and as a current consultant on these issues.
Like comedian/TV commentator John Oliver, I am torn about the World Cup and the significant power that soccer/futbol’s international governing body FIFA has over both Brazil and its residents. His hilarious but educational rant is worth a close watch, and I experienced the conflict he describes firsthand during my two recent trips to Salvador, Brazil. I went to watch what the rest of the world calls “the beautiful game” in a country where soccer is a religion. That's not an exaggeration by the way-- I bought a statuette of a monk holding a soccer ball in a local cathedral. The monk had a place of honor in the display case right next to the rosaries. The Cup has political consequences as well -- if Brazil doesn’t win the Cup at home, politicians will feel it in Fall’s election.
Trip one to Brazil was purely for pleasure with sixteen aficionados to experience one of the world's most diverse and beautiful cultures while catching two matches. Because I have spent the last couple of year’s researching and writing on business and human rights, when the US team advanced to the quarter finals, I took advantage of my frequent flyer miles, hastily organized some meetings with human rights activists that I had never met, snagged a ticket to the US v. Belgium match, and spent three days mixing business with pleasure.
I had done my homework of course (see e.g. this on the money aspect, this petition to vote for the worst sponsor, this on police response to protestors, and this from David Zirin on Brazil's actions with the World Cup and Olympics). I also knew that FIFA, the nonprofit with a one billion dollar reserve, pays no taxes to the host country. Indeed, while FIFA will earn several billions in profit from the 2014 Cup, Brazil will have spent over ten billion to host. Luckily Brazil loves soccer, but as you may have seen on the news, protests have erupted in the major cities about the perceived broken promises from the government to the people. The infrastructure, schools, hospitals and other projects have not materialized as promised. And while FIFA only requires eight stadiums for a World Cup, Brazil inexplicably built twelve. The Manaus Stadium in the middle of the Amazon cost $250 million and there is no soccer team there. At least the Salvador stadium, which cost $350 million to tear down and rebuild, can host its two teams as well as some of the soccer for the 2016 Olympics. The favelas where the poorest residents live are in clear view of the luxurious new facility in Salvador because they are within walking distance.
For the privilege of hosting the Cup, Brazil agreed to suspend its 2003 law banning alcohol in stadiums so that Budweiser could sell beer; institute World Cup courts to fast track convictions; exempt sponsor companies from some taxes; and establish exclusion zones 2 kilometers around FIFA-designated areas so that no local vendors can sell their wares—this in a country that is at the bottom 10% on the world for income inequality.
A few hours after I landed, I met with an organizer of the some of the protests in Salvador, Brazil’s third largest city. The next day I met with an activist for the homeless in the office of the Public Defender for Human Rights. Despite government funding, the Public Defender and activist communities in Salvador work closely together to address human rights abuses. I learned the following, among other things. Over 250,000 people throughout Brazil were displaced for the games, many with no compensation. Salvador, a city with over 4,000 homeless, only developed housing for 200 families despite knowing about the games for seven years. Homeless people who did not move when told were harassed by the police. If the harassment didn’t work, police confiscated their documentation and/or clothing and destroyed them. If that didn’t work, street cleaning trucks bombarded them with soap and water as though they were trash. Through the joint efforts of the Public Defender and activists, this activity, which started last September, largely stopped.
I also learned that religious groups can protest against abortion and drug use in exclusion zones but those protesting against FIFA must secretly hand out pamphlets in groups smaller than three people to avoid detection, arrest and jail time (sometimes charged as “terrorists.”). FIFA established almost a dozen agencies to ensure that the Cup went smoothly but most locals have experienced nothing but serious disruption. Hundreds of vendors who had eagerly staked out spaces to sell to tourists were banned and the government gave them no place else to go. People have died and suffered serious injury as FIFA has pressured the Brazilian government to complete projects on time. Although protestors have not focused on them, others have raised questions about the environmental impact of the Cup.
Sony, Johnson & Johnson, Budweiser, Coca-Cola, and McDonald's -- all key sponsors paying upwards of a minimum of $10 million-- tout their corporate social responsibility programs so I have the following ten questions about the business of the World Cup.
1) Is FIFA, the nonprofit corporation, really acting as a quasi-government and if so, what are its responsibilities to protect and respect local communities?
2) Does FIFA have more power than the host country and will it use that power when it requires voters to consider a bidding country’s human rights record when awarding the 2026 Cup as it has suggested?
3) If Qatar remains the site of the 2022 Cup after the various bribery and human rights abuse investigations, will FIFA force that country to make concessions about alcohol and gender roles to appease corporate sponsors?
4) Will/should corporate sponsors feel comfortable supporting the Cup in Russia in 2018 and Qatar in 2022 given those countries’ records and the sponsors’ own CSR priorities?
5) Does FIFA’s antidiscrimination campaign extend beyond racism to human rights or are its own actions antithetical to these rights?
6) Are the sponsors commenting publicly on the protests and human right violations? Should they and what could they say that has an impact? Should they have asked for or conducted a social impact analysis or is their involvement as sponsors too attenuated for that?
7) Should socially responsible investors ask questions about whether companies could have done more for local communities by donating to relevant causes as part of their CSR programs?
8) Are corporations acting as "bystanders", a term coined by Professor Jena Martin?
9) Is the International Olympic Committee, a nonprofit, nongovernmental organization, taking notes?
10) Do consumers, the beneficiaries of creative corporate commercials and viral YouTube videos, care about any of this?
I have thoughts but no answers to my questions and will spend my summer on these corporate responsibility issues. I definitely don’t envy the corporate idealists working for any of these sponsors.
Thursday, June 26, 2014
I always enjoy reading Bryan Cave partner Scott Killingsworth's comments in various LinkedIn groups. In addition to practicing law, he’s a contributing editor to a treatise on the duties of board members. He’s just published a short but thorough essay on "The Privatization of Compliance." It reminds me of some of the comments that Dean Colin Scott made at Law and Society about tools of private transnational regulation, which include self-regulation, contracts, consumers, industry initiatives, corporate social responsibility programs and meta-regulators. Killingsworth’s abstract is below.
Corporate Compliance is becoming privatized, and privatization is going viral. Achieving consistent legal compliance in today’s regulatory environment is a challenge severe enough to keep compliance officers awake at night and one at which even well-managed companies regularly fail. But besides coping with governmental oversight and legal enforcement, companies now face a growing array of both substantive and process-oriented compliance obligations imposed by trading partners and other private organizations, sometimes but not always instigated by the government. Embodied in contract clauses and codes of conduct for business partners, these obligations often go beyond mere compliance with law and address the methods by which compliance is assured. They create new compliance obligations and enforcement mechanisms and touch upon the structure, design, priorities, functions and administration of corporate ethics and compliance programs. And these obligations are contagious: increasingly accountable not only for their own compliance but also that of their supply chains, companies must seek corresponding contractual assurances upstream, causing a chain reaction of proliferating and sometimes inconsistent mandates.
This essay examines the origins and the accelerating growth of the privatization of compliance requirements and oversight; highlights critical differences between compliance obligations imposed between private parties and those imposed by governmental actors; and evaluates the trend's benefits, drawbacks and likely direction. Particular attention is given to the use of supplier codes of conduct and contractual compliance mandates, often in combination; to the issue of contractual remedies for social, process-oriented, or vague obligations that may have little direct bearing on the object of the associated business transaction; to the proliferating trend of requiring business partners to "flow down" required conduct and compliance mechanisms to additional tiers within the supply chain; and to this trend's challenging implications for the corporate compliance function's role and its interaction with operations, procurement, and sales groups. Recommendations are made for achieving efficiencies and reducing system dysfunction by seeking a broad consensus on generally accepted principles for business-partner codes of conduct, compliance-related contract clauses, and remedies appropriate to each.
Thursday, June 19, 2014
Regular readers of this blog have seen several posts discussing the materiality of various SEC disclosures. See here and here for recent examples. I have been vocal about my objection to the Dodd-Frank conflict minerals rule, which requires US issuers to disclose their use of tin, tungsten, tantalum and gold deriving from the Democratic Republic of Congo and surrounding nations, and describe the measures taken to conduct audits and due diligence of their supply chains. See this post and this law review article.
Last year SEC Chair Mary Jo White indicated that she has concerns about the amount and types of disclosures that companies put forth and whether or not they truly assist investors in making informed decisions. In fact, the agency is undergoing a review of corporate disclosures and has recently announced that rather than focusing on disclosure “overload” the agency wants to look at “effectiveness,” duplication, and “holes in the regulatory regime where additional disclosure may be good for investors.”
I’m glad that the SEC is looking at these issues and I urge lawmakers to consider this SEC focus when drafting additional disclosure regulation. One possible test case is the Business Supply Chain Transparency on Trafficking and Slavery Act of 2014 (H.R. 4842) by Representative Carolyn Maloney, which would require companies with over $100 million in gross revenues to publicly disclose the measures they take to prevent human trafficking, slavery and child labor in their supply chains as part of their annual reports.
The sentiment behind Representative Maloney’s bill is similar to what drove the Dodd-Frank conflict minerals rule (without the extensive audit requirements) and the California Transparency in Supply Chains Act (CTSA). In her announcement she stated,
“Every day, Americans purchase products tainted by forced labor and this bill is a first step to end these inhumane practices. By requiring companies with more than $100 million in worldwide receipts to be transparent about their supply chain policies, American consumers can learn what is being done to stop horrific and illegal labor practices. This bill doesn’t tell companies what to do, it simply asks them to tell us what steps they are already taking. This transparency will empower consumers with more information that could impact their purchasing decisions.”
While the Conflict Minerals and CTSA are “name and shame” laws, which aim to change corporate behavior through disclosure, the proposed federal bill has a twist. It requires the Secretary of Labor, the Secretary of State and other appropriate Federal and international agencies, independent labor evaluators, and human rights groups, to develop an annual list of the top 100 companies complying with supply chain labor standards.
I don’t have an issue with the basic premise of the proposed federal law because human trafficking is such a serious problem that the American Bar Association, the Department of Labor, and others have developed resources for corporations to tackle the problem within their supply chains. A number of states have also enacted laws, and in fact Republican Florida Governor Rick Scott, hardly the poster child for liberals, announced his own legislation this week (although it focuses on relief for victims).
Further, to the extent that companies are using the 2011 UN Guiding Principles on Business and Human Rights to develop due diligence processes for their supply chains, this disclosure should not be difficult. In fact, the proposed bill specifically mentions the Guiding Principles. I don’t know how expensive the law will be to comply with, and I’m sure that there will be lobbying and tweaks if the bill gets out of the House. But If Congress wants to add this to the list of required corporate disclosures, legislators should monitor the SEC disclosure review carefully so that if the human trafficking bill passes, the agency’s implementing regulations appropriately convey legislative intent.
I know that corporations are interested in this issue because I spoke to a reporter yesterday who was prompted by recent articles and news reports to write about what boards should know about human trafficking in supply chains. As I told the reporter, although I applaud the initiatives I remain skeptical about whether these kinds of environmental, social and governance disclosures really affect consumer behavior and whether these are the best ways to protect the intended constituencies. That’s what I will be writing about this summer.
Thursday, June 12, 2014
Thursday, June 5, 2014
Last week I posted about proxy advisory firm ISS and its recommendations regarding Wal-Mart and Target.
This week the US Chamber of Commerce weighed in on the two main proxy advisory firms, what the organization sees as their potential conflict of interests and the lack of transparency, and the SEC’s imminent release of guidance on the firms. It’s worth a read and has some great links.
Next week I will be blogging from Salvador, Brazil where I will be enjoying the World Cup. I will post a brief recap of some of the business-related Law and Society sessions I attended in Minneapolis last weekend. With all of the controversy that invariably surrounds a large sporting event in a country that scores high on the corruption perception index, I may even be inspired to write a law review article on the FCPA.
Thursday, May 29, 2014
Institutional Shareholder Services (ISS) has always had a lot of influence - some think too much- and it's also received quite a bit of press this week. First, the Wall Street Journal reported that the proxy advisory firm slammed Wal-Mart's board for lack of independence regarding its executive pay practices in particular how compensation is (un)affected by declining company performance. ISS also raised concerns about the company's ongoing FCPA troubles and how or whether executives will be held accountable. ISS called for more board independence. Given the fact that the Walton family owns 50% of the company stock, it’s not likely that ISS’ recommendations will have much weight, but it’s still noteworthy nonetheless.
This morning, the press reported that ISS took aim at another troubled company, Target. In addition to its revenue declines, Target also reported a massive data breach last year, which led to numerous shareholder derivative suits. ISS recommended that seven of the ten board members lose their seats for failing to adequately monitor the risk. Target has already made a number of significant management changes. This recommendation from ISS may be an even bigger wake up call to board members (including those outside of Target) about their Caremark duties, even if Target shareholders do not follow the ISS recommendation.
I will stay tuned and will be sure to save these articles for next semester's business associations class.
Greetings from the Law and Society conference. Tomorrow I serve as the discussant on a panel entitled Theorizing the Corporation at Legal Intersections with Professors Charlotte Garden of Seattle, Sarah Haan of Idaho and Elizabeth Pollman of Loyola, Los Angeles. We will debate/discuss corporate personhood and how Citizens United has affected elections in ways that people might not expect. I'll explain more about that and other panel discussions in next week's blog.
If you're at the conference or Minneapolis, swing by the University of St. Thomas, Room MSL 458 at 12:45 on Friday.
Wednesday, May 28, 2014
Tomorrow kicks off the 2014 Law & Society Annual meeting in Minneapolis, MN. Law & Society is a big tent conference that includes legal scholars of all areas, anthropologists, sociologists, economists, and the list goes on and on. A group of female corporate law scholars, of which I am a part, organizes several corporate-law panels. The result is that we have a mini- business law conference of our own each year. Below is a preview of the schedule...please join us for any and all panels listed below.
0575 Corp Governance & Locus of Power
U. St. Thomas MSL 458
Participants: Tamara Belinfanti, Jayne Barnard, Megan Shaner, Elizabeth Noweiki, and Christina Sautter
1412 Empirical Examinations of Corporate Law
U. St. Thomas MSL 458
Participants: Elisabeth De Fontenay, Connie Wagner, Lynne Dallas, Diane Dick & Cathy Hwang
1468 Theorizing Corp. Law
U. St. Thomas MSL 458
Participants: Elizabeth Pollman, Sarah Haan, Marcia Narine, Charlotte Garden, and Christyne Vachon
1:00 Business Meeting Board Rm 3
Roundtable on SEC Authority
Participants: Christyne Vachon, Elizabeth Pollman, Joan Heminway, Donna Nagy, Hilary Allen
1473 Emerging International Questions in Corp. Law
U. St. Thomas MSL 458
Participants: Sarah Dadush, Melissa Durkee, Marleen O'Conner, Hilary Allen, and Kish Vinayagamoorthy
1479 Examining Market Actors
U. St. Thomas MSL 321
Participants: Summer Kim, Anita Krug, Christina Sautter, Dana Brackman, and Anne Tucker
1474 Market Info. & Mandatory Disclosures
U. St. Thomas MSL 321
Participants: Donna Nagy, Joan Heminway, Wendy Couture, and Anne Tucker
Thursday, May 22, 2014
Earlier this week, Stanford University's Rock Center for Corporate Governance released a study entitled “How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making.” Not surprisingly, the 138 North American investor relations professionals surveyed prefer long-term investors so that management can focus on strategic decisionmaking without the distraction of “short-term performance pressures that come from active traders,” according to Professor David F. Larcker. Companies believed that attracting the "ideal" shareholder base could lead to an increase in stock price and a decrease in volatility.
The average “long-term investor” held shares for 2.8 years while short-term investors had an investment horizon of 7 months or less. Pension funds, top management and corporate directors held investments the longest, and companies indicated that they were least enamored of hedge funds and private equity investors. Those surveyed had an average of 8% of their shares held by hedge funds and believed that 3% would be an ideal percentage due to the short-termism of these investors. Every investor relations professional surveyed who had private equity investment wanted to see the ownership level down to zero.
I wonder what AstraZeneca’s investor relations team would have said if they could have participated in the survey given the various reactions by its shareholders to Pfizer’s proposed takeover. (See here and here to read about the divisions within the shareholder ranks). What would AstraZeneca’s “ideal” shareholder base look like? BlackRock, which owns 8%, is the company’s largest shareholder. Will it sway AstraZeneca’s board to reconsider its rejection of Pfizer's bid and should it? Pfizer’s purported behind the scenes attempts to get shareholders to express their anger at AstraZeneca’s board may not be working, but this may be a prime example of why companies wish they could pick their shareholders.
As one of the study’s authors Professor Anne Beyer aptly concluded, “companies see very large, tangible benefits to managing their shareholder base, so there seems to be a real opportunity for some companies to improve corporate decisions and increase their value by paying close attention to who holds their shares.”
Thursday, May 15, 2014
1) I was not the only person who went to law school because I was terrified of math and accounting. Many of my students did too, which made teaching this required course much harder even after I explained to them how much accounting I actually had to understand as a litigator and in-house counsel.
2) I will always make class participation count toward the grade. Apparently paying tens of thousands of dollars a year for an education is not enough to make some students read their extremely expensive textbooks. A 20% class participation grade is a great incentive. Similarly, I will never allow laptops in the classroom. The subject matter is tough enough without the distraction of Instagram, Facebook and buying shoes on Zappos.
3) Students come to a required course with a wide range of backgrounds- some have never written a check and others have traded in stocks since they were teenagers and use Bitcoin. Teaching to the middle is essential.
4) As I suspected, when students are allowed to use an outline for an exam, they won't study as hard or as thoroughly, and I will grade harder.
5) Never underestimate how little many students know about the basics of how businesses operate. No matter how smart they are, many students have simply had no exposure to any kind of business. For some of them it's almost like taking civil procedure all over again in terms of difficulty. (I taught that for the first time too).
6) Balanced public policy discussions can get even the quietest students to participate. On the last day of class we debated the purpose of the corporation using benefit corporations, Citizens United and Hobby Lobby as vehicles for discussion. They did all of the readings and watched the assigned videos for class, leading to some of the richest discussion of the year.
7) Law students say they hate to work in groups, but many of them thrive and take leadership roles they wouldn't normally assume, especially when they know that this work also counts toward their class participation grade. They also learn to take risks in small group discussion that they might not normally take in front of the whole class.
8) Using a game for a review works really well. I used a modified Jeopardy format and allowed groups to work in teams. The competitive nature of the students came out and it also provided a more interesting and lively review than the standard lecture.
9) It's really important to match your textbook to teaching style, learning objectives and type of student.
10) Even the most "terrified" law student can learn to like business associations. I have had several students email me to say they miss the course because they have no one with whom to discuss current business issues. That warms my heart.
There are a number of things I will change next semester. I'm looking forward to learning from more seasoned business law professors at the Emory Conference on Teaching Transactional Law in 2 weeks.
Thursday, May 8, 2014
Last week I blogged about enterprise risk management, lawyers, and their "obligations" to counsel clients about human rights risks based in part on statements by the American Bar Association and Marty Lipton of Wachtell, who have cited the UN Guiding Principles on Business and Human Rights. I posted the blog on a few LinkedIn groups and received some interesting responses from academics, in house counsel, consultants, and outside counsel, which leads me to believe that this is fertile ground for discussion. I have excerpted some of the comments below:
“Corporations do have risk with respect to human rights violations, and this risk needs to be managed in a thoughtful manner that respects human dignity. I did wonder, though, whether you see any possible unintended consequences of asking attorneys to start advising on moral as well as legal rights?”
“I agree. Great post. Lawyers should always be ready to advise on both legal risks and what I call "propriety". If a lawyer cannot scan for both risks, then he or she is either incompetent or has integrity issues. Companies that choose to take advice from a lawyer who is incompetent or has integrity issues probably have integrity issues too. I'm not sure I would leave leadership on ERM as a whole in the hands of a lawyer, unless that person has very good risk credentials.”
“As a lawyer, and a casinos and banks counselor, recently, due to a Constitution reform in Mexico, I have been more involved in the Universal Declaration of Human Rights and the "Pacto de San Jose Costa Rica" (American Convention of HR) where you find out that the law in the best benefit of the citizen will be applicable, even over the Constitution. Of course that has an important impact over secondary laws and over many industries as well. So, you are absolutely right: "are we lawyers ready to be good counselors to our clients?". My personal thought is that we have to get involved in all those Human Rights laws and with the impact that they have with our country’s laws. That is where the world is going in the benefit of our species.”
“Exciting idea. I'm going to give a typical lawyer answer; it depends on the lawyer. This reflects what …. said above about competence. I would give a trifle more leeway for those that realize they need more research/education on the topic before advising on it.”
“I have a very strong opinion that the role of an in-house counsel or GC sitting on a Board or Exec. committee cannot be, and should not be, limited to pure legal matters, legal compliance and company legal risk, but rather need to play a key role on corporate business sustainability. Likewise, outside counselors should have this in the top of their agendas. Certainly this has never been the trend in Spain or in some EU countries, and involvement of senior executive legal counsel in corporate decisions relating CSR, Human Rights or similar issues that do have a clear impact on corporate ethics credentials and corporate integrity is now being slowly accepted and perceived as a great added value by the Boards. I am personally convinced that in the next years we will see an interesting evolution on this.”
I agree with the all of the comments, but particularly the last one. Here's ABA Rule 2.1 in it's entirety-
Counselor Rule 2.1 Advisor
"In representing a client, a lawyer shall exercise independent professional judgment and render candid advice. In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client's situation."
When I taught professional responsibility, Rule 2.1 typically led to heated discussions. During my stint as a compliance officer, though I often engaged in "moral" and ethical discussions. As for unintended consequences, as the first commenter points out, there could be many. People's "morals" may differ, just as companies have different "cultures." Companies with different cultures operating in countries with different cultures- now that's a whole other layer of complexity. Lawyers and/or compliance officers may not want to "rock the boat" with “moral” discussions and may be more comfortable sticking to black letter law. When it comes to human rights where some multinationals may be dealing with non-binding "soft law" or operate in countries where the binding law is not enforced, what "moral" yet practical advice should lawyers give to their clients on the ground?
These are topics that I plan to write about and that I enjoyed discussing with students in courses I have taught in the past on corporate governance, compliance and corporate social responsibility. Next week I will attend a conference at Columbia University on teaching business and human rights, and I am sure these issues will be front and center. Clearly, based on discussions on LinkedIn, they already are for many practicing lawyers.
Thursday, May 1, 2014
Last week I had the pleasure of speaking on a panel on global human rights compliance and enterprise risk management with Mark Nordstrom of General Electric and John Sherman of Shift. The panel was part of a conference entitled New Challenges in Risk Management and Compliance at the UConn School of Law Insurance Law Center.
I spoke about the lack of direct human rights obligations under international law for multinationals, the various voluntary initiatives such as the Universal Declaration of Human Rights, the ILO Tripartite Declaration, the UN Global Compact, ISO 26000, the OECD Guidelines for Multinational Enterprises, the Global Reporting Initiative, and accusations of bluewashing. I also discussed Dodd-Frank 1502 (conflict minerals), sustainable stock exchange indices, ESG reporting, SEC proxy disclosure on risk management oversight, socially responsible investors, and the roles of the Sustainability Accounting Standards Board and the International Integrated Reporting Council in spurring transparency and integrated reporting.
Sherman focused on the UN Guiding Principles on Business and Human Rights, which were unanimously endorsed by the UN Human Rights Council in 2011 and which contain three pillars, namely the state duty to protect people from human rights abuses by third parties, including business; business’ responsibility to respect human rights, which means avoid infringing on the rights of others and addressing negative impacts with which a business is involved; and the need for greater access to effective remedy for victims of corporate-related abuse, both judicial and non-judicial.
He pointed out that American Bar Association endorsed the Guiding Principles in 2011 concluding that under Model Rule 2.1 of the ABA Rules of Professional Conduct, a lawyer’s obligation to provide independent and candid legal advice includes the responsibility to go beyond the black letter of the law, and to advise the client on moral, economic, and social and political standards that can affect the lawyer’s advice. This includes the impact of the Guiding Principles when relevant. An advisory group to the Law Society for England and Wales has made even stronger recommendations. Sherman is chairing a working group of the International Bar Association that is developing guidance for bar associations around the world on the Guiding Principles. He observed that Marty Lipton of Wachtel Lipton, has strongly endorsed the Guiding Principles as a “balanced and prudent process for corporations to manage their human rights risks.” Firms such GE, Total, and Coca Cola have met to discuss how their in house counsel can implement the Guiding Principles. Interestingly, Nordtsrom from GE relayed a troubling example of a human rights dilemma in which one of their medical devices was used in China for sex selection purposes rather than for the life saving purposes for which it was intended.
A number of businesses around the world have adopted these voluntary Guiding Principles, but in 2013 Halliburton, McDonalds and Caterpillar faced shareholder proposals based on them. The Guiding Principles have influenced the Dodd-Frank conflict minerals legislation; the US regulations requiring companies investing more than $500,000 of new money in Myanmar to report on their human rights policies and due diligence; the European Commission's 2011 recommendation that all EU countries develop their own National Action Plans to implement the Guiding Principles; the European Union’s Parliament recent directive in April 2014 requiring close to 6,000 companies in the EU to disclose their environmental, social and human rights policies including their due diligence processes, outcomes, and principles risks; the proposed Canadian conflicts minerals legislation; ISO 26000; and the OECD Guidelines for Multinational Enterprises.
Although I now teach business associations and civil procedure, I used to teach a seminar in corporate governance, compliance and corporate social responsibility and found that my students really enjoyed the discussions on human rights and enterprise risk management. Some of the sessions I attended in Geneva on Business and Human Rights at the UN in Decemeber were led by lawyers from around the world who were already advising large and small businesses about the Guiding Principles and how to respond to the numerous comply or explain regimes around the world that are asking about environmental, social and governance factors.
Earlier this week, I sat in on a webinar on the role of the board in overseeing sustainability issues, including human rights, which I will write about next week. There isn’t enough time to address these kinds of issues in a traditional business associations course, but as the ABA and Marty Lipton pointed out, the time is coming for attorneys to counsel their clients on these risks. This means that we as business professors need to prepare our students for this new world.
May 1, 2014 in Business Associations, Conferences, Corporate Governance, Corporations, Current Affairs, Ethics, Law School, Marcia L. Narine, Securities Regulation, Teaching | Permalink | Comments (0)
Thursday, April 24, 2014
Last week the DC Circuit Court of Appeals generally upheld the Dodd-Frank conflict minerals rule but found that the law violated the First Amendment to the extent that it requires companies to report to the SEC and state on their websites that their products are not “DRC Conflict Free.” The case was remanded back to the district court on this issue.
As regular readers of the blog know I signed on to an amicus brief opposing the law as written because of the potential for a boycott on the ground and the impact on the people of Congo, and not necessarily because it’s expensive for business (although I appreciate that argument as a former supply chain professional). I also don’t think it is having a measurable impact on the violence. In fact, because I work with an NGO that works with rape survivors and trains midwives and medical personnel in the eastern Democratic Republic of Congo, I get travel advisories from the State Department. Coinicidentally, I received one today as I was typing this post warning that “armed groups, bandits, and elements of the Congolese military [emphasis mine] remain security concerns in the eastern DRC….[they] are known to pillage, steal vehicles, kidnap, rape, kill and carry out military or paramilitary operations in which civilians are indiscriminately targeted… Travelers are frequently detained and questioned by poorly disciplined security forces [I was detained by the UN] at numerous official and unofficial roadblocks and border crossings…Requests for bribes [which I experienced] is extremely common and security forces have occasionally injured or killed people who refused to pay.”
None of this surprises me. I commend the efforts of companies to clean up their supply chains and to cut off income sources to rebel groups who control some of the mines or brutally insert themselves into the mineral trade. But what the State Department advisory makes clear (and what many people already know) is that the problem that the Dodd-Frank law is trying to solve is not something that can be cured through a “name and shame” corporate governance disclosure, especially one that may no longer have the “shame” factor of having companies brand themselves “not DRC Conflict Free.”
Earlier this week, Senator Ed Markey and eleven other members of Congress sent a letter urging SEC Chair Mary Jo White to avoid any delay in implementing the rule. The letter states in part “…the law we passed was simple. Congress said that any company registered in the United States which uses any of a small list of key minerals from the DRC or its neighbors has to disclose in its SEC filing the use of those minerals and what is being done, if anything, to mitigate sourcing from those perpetuating DRC's violence. Such transparency allows consumers and investors to know which companies source materials more responsibly in DRC and serves as a catalyst for industry to finally create clean supply chains out of Congo.”
The "law" may have been “simple,” but the implementation is not for a large number of companies. That’s probably why the EU has proposed a voluntary self-certification scheme focused on importers rather than manufacturers and sellers like Dodd-Frank. That’s probably why a large number of companies are not ready to comply, according to a recent PwC survey of 700 companies.
Chair White, who has made no secret of what she thinks of the SEC’s role in solving human rights crises, still has to reissue Dodd-Frank 1504, the resource extraction rule that was struck down after a court challenge. According to a Davis Polk report, as of April 1, 2014, a total of 280 Dodd-Frank rulemaking requirement deadlines have passed. Of these 280 passed deadlines, 45.7% have been missed and 54.3% have been met with finalized rules. The SEC has a lot of financial rule making to complete and should consider how to prioritize and retool the conflicts minerals rule using the agency's discretion and going beyond the fixes that may be required by future rulings on the First Amendment issue.
I will continue to monitor the future of this law. I am now on my way to a conference for businesspeople, lawyers, academics and students at UConn entitled New Challenges in Risk Management and Compliance. I will discuss regulatory issues related to global human rights and enterprise risk management on a panel with the human rights initiative leader for General Electric and the General Counsel for the Shift Project, who worked with John Ruggie on the UN Guiding Principles on Business and Human Rights. I am excited to meet and learn from them both. The Guiding Principles and earlier iterations of Ruggie’s work greatly influenced both the US and EU conflict mwinerals laws.
Next week I will report back on some of the outcomes from the conference.
April 24, 2014 in Business Associations, Conferences, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation | Permalink | Comments (0)
Thursday, April 10, 2014
[I]t is counterproductive for investors to turn the corporate governance process into a constant Model U.N. where managers are repeatedly distracted by referenda on a variety of topics proposed by investors with trifling stakes. Giving managers some breathing space to do their primary job of developing and implementing profitable business plans would seem to be of great value to most ordinary investors. -Hon. Leo E. Strine Jr., Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, 114 COLUMBIA L. REV. 449, 475 (2014).
When was the last time you remember the U.S. Chamber of Commerce, the National Association of Corporate Directors, the National Black Chamber of Commerce, American Petroleum Institute, the Latino Coalition, Financial Services Roundtable, Center On Executive Compensation, and the Financial Services Forum joining forces on an issue? Well yesterday they signed on to a petition for rulemaking that was submitted to the SEC regarding the resubmission of shareholder proposals that “fail to elicit meaningful shareholder support.”
Shareholders who own at least $2,000 worth of a company’s stock for at least one year may require a company to include one shareholder proposal in the company’s proxy statement to all shareholders under Rule 14a-8(b) of the ’34 Act. Under Rule 14a-8(i)(12), companies may exclude shareholder proposals from proxy materials under thirteen circumstances, including but not limited to proposals that deal with substantially the same subject matter as another proposal that has been previously included in the company’s proxy materials within the preceding 5 calendar years and did not receive a specified percentage of the vote on its last submission. Specifically a company can exclude a proposal (or one with substantially the same subject matter) if it failed to receive 3% support the last time it was voted on if voted on once in the last five years, 6% if it was voted on twice in the last five years, and 10% if it was voted on three or more times in the past five years for resubmission. Note that the SEC itself proposed and then withdrew the idea of raising the threshold to 6%, 15% and 30% in 1997. The Resubmission Rule is supposed to protect the interests of the majority of shareholders so that a small minority cannot burden the rest of the shareholders with proposals that the majority have repeatedly expressed that they have no interest in and to ensure that management can focus on issues that are important to the company.
Why is this important? The petition includes the following enlightening statistics:
1) The two largest proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis command 97% of the market for proxy advisory firms meaning that they can, in the petitioners view, “dictate” what should be included in proxy solicitations. Proposals favored by ISS may receive up to 24.7% greater support than those do not have their support and proposals favored by Glass Lewis may receive up to 12.9% greater support, all independent of other factors.
2) According to the Manhattan Institute, since 2011, 437 shareholder proposals relating to questions of social policy have been submitted just to the Fortune 250. These proposals have been opposed by an average of 83.7% of votes cast.
3) Between 2005-2013, 420 shareholder proposals focusing on environmental issues were proposed to US companies but only one passed (I would note that many environmental issues never make it to the proxy because shareholders are now engaging with management earlier).
4) Between 2005-2013, 237 labor-related proposals were submitted to US companies. Only three proposals received majority support and the other 234 labor-related proposals received less than 20% support.
5) A Navigant study estimates that companies incur direct costs of $87,000 per proposal or $90 million annually in the aggregate.
6) The website shareholderactivist.com calls shareholder activism a "participatory sport" where investor activists submit similar proposals to multiple companies so that they can "advance a larger agenda.”
The petitioners argue that the current Resubmission Rule fails to protect shareholders and forces the majority of shareholders to “wade through and evaluate” numerous proposals that have already been “viewed unfavorably” by 90% or more of shareholders year after year and have no realistic likelihood of winning the support of a substantial number of shareholders. The petitioners recommend that the SEC reconsider the Resubmission Rule because the existing rule was adopted without cost-benefit analysis. To better serve shareholders, the petitioners contend that SEC should significantly increase the voting percentage of favorable votes a proposal must receive before the company is obligated to include a repeat proposal in subsequent years in its proxy. To read the Petition for Rulemaking click here. The comment period for the SEC will be open soon.
As a side note, my business associations class studied Rule 14a-8 and drafted their own shareholder proposals last week. I saw one of my students today and excitedly told her I was working on this blog post and that we were going to discuss this proposal on Monday. Her response- oh no- will we have to know this for the final? Must be the end of the semester.
April 10, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Financial Markets, Law School, Marcia L. Narine, Securities Regulation, Teaching | Permalink | Comments (0)
Thursday, April 3, 2014
As regular readers of this blog may know, I sit on the Department of Labor's Whistleblower Protection Advisory Committee. The Occupational Health and Safety Administration, a division of the Department of Labor, may not be the first agency that many people think of when it comes to protecting whistleblowers, but in fact the agency enforces almost two dozen laws, including Sarbanes-Oxley and the Consumer Financial Protection Bureau's law on whistleblowers. The Consumer Financial Protection Act was promulgated on July 21, 2010 to protect employees against retaliation by entities that offer or provide consumer financial products.
Today OSHA released its interim regulations for protecting CFPB whistleblowers. The regulation defines a “covered person” as “any person that engages in offering or providing a consumer financial product or service.” A “covered employee” is “any individual performing tasks related to the offering or provision of a consumer financial product or service.” A “consumer financial product or service” includes, but is not limited to, a product or service offered to consumers for personal, family, or household purposes, such as residential mortgage lending and servicing, private student lending and servicing, payday lending, prepaid debit cards, consumer credit reporting, credit cards and related activities. The Consumer Financial Protection Act protects “covered employees” of “covered persons” from retaliation who report violations of the law to their employer, the CFPB, or any other federal, state, or local government authority or law enforcement agency. Employees are also protected from retaliation for testifying about violations, filing reports or refusing to violate the law.
Retaliation is broadly defined as firing or laying off, reducing pay or hours, reassigning, demoting, denying overtime or promotion, disciplining, denying benefits, failing to hire or rehire, blacklisting, intimidating, and making threats. An employee or representative who believes that s/he has suffered retaliation must bring a claim within 180 days after the alleged retaliatory action. If OSHA finds that the complaint has merit, the agency will issue an order requiring the employer to put the employee back to work, pay lost wages, restore benefits, and provide other relief. Either party can request a full hearing before an ALJ of the Department of Labor. A final decision from an ALJ may be appealed to the Department’s Administrative Review Board and an employee may also file a complaint in federal court if the Department of Labor does not issue a final decision within certain time limits.
Although the statute is part of Dodd-Frank, the CFPB whistleblowers don’t get the same monetary benefits as Dodd-Frank whistleblowers who go to the SEC. The SEC Dodd-Frank whistleblower rule allows the recovery of between 10-30% of any monetary award of more then $1million of any SEC enforcement action to those individuals who provide original information to the agency. The SEC announced that in 2013 it awarded $14,831,965.64 during its fiscal year to 4 whistleblowers based on 3,238 tips. The vast majority—more than $14 million went to a single individual. The top three allegations involved corporate disclosures and financials (17.2%), offering fraud (17.1%) and manipulation (16.2%).
Should there be such a disparity between those whistleblowers who protect consumers and those who protect investors? Maybe not, but studies consistently show that whistleblowers don’t report to government agencies for the money so perhaps the absence of a large financial reward won’t be a deterrence. Time will tell as to whether any of these whistleblower laws will prevent the next financial crisis. But at least those who work in the financial sector will have some protection.
Thursday, March 27, 2014
I wonder how many people are boycotting Hobby Lobby because of the company’s stance on the Affordable Health Care Act and contraception. Perhaps more people than ever are shopping there in support. Co-blogger Anne Tucker recounted the Supreme Court’s oral argument here in the latest of her detailed posts on the case. The newspapers and blogosphere have followed the issue for months, often engaging in heated debate. But what does the person walking into a Hobby Lobby know and how much do they care?
I spoke to reporter Noam Cohen from the New York Times earlier today about an app called Buycott, which allows consumers to research certain products by scanning a barcode. If they oppose the Koch Brothers or companies that lobbied against labels for genetically modified food or if they support companies with certain environmental or human rights practices, the app will provide the information to them in seconds based on their predetermined settings and the kinds of “campaigns” they have joined. Neither Hobby Lobby nor Conestoga Woods is listed in the app yet.
Cohen wanted to know whether apps like Buycott and GoodGuide (which rates products and companies on a scale of 1-10 for their health, environmental and social impact) are part of a trend in which consumers “vote” on political issues with their purchasing power. In essence, he asked, has the marketplace, aided by social media, become a proxy for politics? I explained that while I love the fact that the apps can raise consumer awareness, there are a number of limitations. The person who downloads these apps is the person who already feels strongly enough about an issue to change their buying habits. These are the people who won’t eat chocolate or drink coffee unless it’s certified fair trade, who won’t shop in Wal-Mart because of the anti-union stance, and who sign the numerous change.org petitions that seek action on a variety of social and political topics.
I had a number of comments for Cohen that delved deeper than the efficacy of the apps. The educated consumer can make informed choices and feel good about them but how does this affect corporate behavior? Although the research is inconsistent in some areas, most research shows that companies care about their reputations but the extent to which a boycott is effective depends on the amount of national media attention it gets; how good the company’s reputation was before the boycott (many firms with excellent reputations feel that they can be buffered by previous pro-social behavior and messaging); whether the issue is one-sided (child labor) or polarizing (gay marriage, Obamacare, climate change); how passionate the boycotters are; how easy it is to participate (is the product or service unique); and how the message is communicated.
Many activists have done an excellent job of messaging. The SEC Dodd-Frank conflict minerals regulation made it through Congress through the efforts of NGOs that had been trying for years to end a complex, geopolitical crisis that has killed over 5 million people. They got consumers, social media and Hollywood actors talking about “blood on the mobile” or companies being complicit in rape and child slavery in Congo because when they changed the messaging they elicited the appropriate level of moral outrage. The conflict minerals “name and shame” law depends on consumers learning about which products are sourced from the Congo and surrounding countries and making purchasing decisions based on that information. Congress believes that this will solve an intractable human rights crisis. The European Union, which has a much stronger corporate social responsibility mandate for its member states has taken a different view. Although it will also rely on consumers to make informed choices, its draft recommendations on dealing with conflict minerals makes reporting voluntary, which has exposed the EU to criticism. As I have written here, here, here here and here, relying on consumers to address a human rights crisis will only work if it leads to significant boycotts by corporations, investors or governments or if it leads to legislation, and that legislation cannot harm the people it is intended to help.
So what do I think of apps like GoodGuide, BuyCott and 2ndVote (for more conservative causes)? I own some of them. But I also send letters to companies, vote regularly, call people in Congress and write on issues that inspire me. How many of the apps’ users go farther than the click or the scan? Some researchers have used the word “slacktivists” to describe those who participate in political discussions through social media, online petitions and apps. The act of pressing the button makes the user feel good but has no larger societal impact.
What about the vast majority of consumers? The single mother shopping for her children in a big-box retailer or in the fast food restaurant that has been targeted for its labor practices may not have the time, luxury or inclination to buy more “ethically sourced” products. Moreover, studies show that consumers often overreport on their ethical purchasing and that price, convenience and costs typically win out. The apps’ developers may have more modest intentions than what I ascribe to them. If they can raise consumer awareness- admittedly for the self-selected people who buy the app in the first place- then that’s a good thing. If the petitions or media attention lead to well-crafted legislation, that’s even better.
Thursday, March 20, 2014
It’s proxy season and the Conference Board has released a series of reports on investor engagement and corporate governance. In “The Conference Board Governance Center White Paper: What is the Optimal Balance in the Relative Roles of Management, Directors, and Investors in the Governance of Public Corporations?” the authors provide a 76-page overview of the evolution of US corporate governance, describing key trends and issues.
The report begins by discussing the history of the allocation of roles and responsibilities for governance of public companies. If I thought my law students would read it, I would assign this section to them. The second part of the paper addresses the legal, social and market trends that have influenced the historical allocation of rights. Specifically, it reviews:
a) the increasing influence of institutional investors resulting from the concentration of ownership in institutional investment, changes in voting rules and practices and more assertive shareholder activism;
b) shifting conceptions about the purpose of the corporation and the duty to maximize corporate value, with a strong emphasis on shareholder wealth maximization;
c) decreased public trust of business leaders following the corporate scandals of 2001-2002 and 2007-2008;
d) federal regulation intended to enhance the influence of shareholders and increase board and management accountability;
e) continuing related to executive compensation and incentives; and
f) the growth of proxy advisory firms in the shareholder voting process.
Some interesting statistics:
a) in 2013, 25% of all shareholder proposals were sponsored by two individuals and their family members and family trusts;
b) from 2006-2013, 33% of shareholder proposals submitted to Fortune 250 companies were sponsored by investors affiliated with labor; 26% by corporate gadflies; 25% by religious, social impact and public policy organizations; and 15% by other individual investors;
c) 241 activist campaigns were launched in 2012 up from 187 in 2009;
d) 69% of proxy contests against the management of Russell 3000 companies during the 2013 proxy season were launched by activist hedge funds; and
e) one third of the activist hedge fund contests sought full control of the board.
The third part of the report briefly summarizes but does not provide any conclusions about the work of Professors Bainbridge, Stout, Anabtawi, Bebchuk, Laverty, and others. It considers the following questions (but does not answer them):
a) Do federal mandates undermine the benefits of a historically state-driven corporate law?
b) Are further changes to board processes and composition desirable?
c) Should shareholders assume a more active role in corporate governance?
d) Do proxy advisory firms replace, rather than augment, the shareholder voice, and should the proxy advisory industry be subject to greater regulation and oversight?
e) Can changes to voting mechanisms improve the effectiveness of corporate governance?
f) Is short-termism a cause of concern, and is so, what are its causes and remedies?
g) What new challenges are presented by vote decoupling, high-speed trading, and hyper portfolio diversification?
In next week’s post I will discuss the “Guidelines for Engagement” and the “Recommendations of the Task Force on Corporate/Investor Engagement.” In the meantime, I highly recommend downloading these complimentary reports.
Thursday, March 13, 2014