Thursday, December 5, 2013
Yesterday was the last day of a fantastic three-day conference at the UN in Geneva on business and human rights, and I will blog about it next week after I fully absorb all that I have heard. As I type this (Wednesday), I am sitting in a session on corporate governance and the UN Guiding Principles on Business and Human Rights moderated by a representative from Rio Tinto. The multi-stakeholder panel consists of representatives from Caux Roundtable Japan (focused on moral capitalism), the Norwegian National Contact Point (the governmental entity responsible for responding to claims between aggrieved parties and companies), Aviva Public Limited (insurance, pensions UK), Cividep (a civil society organization in India), and Petrobas (energy company in Brazil).
If you want to learn more about the conference, I have been tweeting for the past two days at @mlnarine, and you can follow the others who have been posting at #UNForumWatch #unforumwatch or #businessforum. 1700 businesspeople, lawyers, academics, NGOs, state delegates and members of civil society are here. Economist Joseph Stiglitz presented a fiery keynote address. Some of the biggest names in business such as Microsoft, Unilever, Total, Vale and others have represented corporate interests.
Depending on where you are, by the time you read this, I will be in Oslo attending a conference on climate change and global company law and will be speaking on the US perspective on Friday. I will blog on that conference on my Thursday spot in two weeks.
On a completely unrelated note, with Bitcoin appreciating over 5000% in the past year (see here) and reaching $1000 last week, I thought readers would be interested in this article, “Whack-A-Mole: Why Prosecuting Digital Currency Exchanges Won’t Stop Online Money Laundering”by Catherine Martin Christopher. Au revoir from Geneva. Hallo from Norway.
The abstract is below.
Law enforcement efforts to combat money laundering are increasingly misplaced. As money laundering and other underlying crimes shift into cyberspace, U.S. law enforcement focuses on prosecuting financial institutions’ regulatory violations to prevent crime, rather than going after criminals themselves. This article will describe current U.S. anti-money laundering laws, with particular criticism of how attenuated prosecution has become from crime. The article will then describe the use of Bitcoin as a money-laundering vehicle, and analyze the difficulties for law enforcement officials who attempt to choke off Bitcoin transactions in lieu of prosecuting underlying criminal activity. The article concludes with recommendations that law enforcement should look to digital currency exchangers not as criminals, but instead as partners in the effort to eradicate money laundering and — more importantly — the crimes underlying the laundering.
Thursday, November 28, 2013
On Saturday evening I leave for Geneva to attend the United Nations Forum on Business and Human Rights with 1,000 of my closest friends including NGOs, Fortune 250 Companies, government entities, academics and other stakeholders. I plan to blog from the conference next week. I am excited about the substance but have been dreading the expense because the last time I was in Switzerland everything from the cab fare to the fondue was obscenely expensive, and I remember thinking that everyone in the country must make a very good living. Apparently, according to the New York Times, the Swiss, whom I thought were superrich, "scorn the Superrich," and last March a two-thirds majority voted to ban bonuses, golden handshakes and to require firms to consult with their shareholders on executive compensation. Nonetheless, last week, 65% of voters rejected a measure to limit executive pay to 12 times the lowest paid employee at their company. According to press reports many Swiss supported the measure in principle but did not agree with the government imposing caps on pay.
Meanwhile stateside, next week the SEC closes its comment period on its own pay ratio proposal under Section 953(b) of the Dodd-Frank Act. Among other things, the SEC rule requires companies to disclose: the median of the annual total compensation of all its employees except the CEO; the annual total compensation of its CEO; and the ratio of the two amounts. It does not specify a methodology for calculation but does require the calculation to include all employees (including full-time, part-time, temporary, seasonal and non-U.S. employees), those employed by the company or any of its subsidiaries, and those employed as of the last day of the company’s prior fiscal year. A number of bloggers have criticized the rule (see here for example), business groups generally oppose it, and the agency has been flooded with tens of thousands of comment letters already.
The SEC must take some action because Congress has dictated a mandate through Dodd-Frank. It can’t just listen to the will of the people (many of whom support the rule) like the Swiss government did. It will be interesting to see what the agency does. After all two of the commissioners voted against the rule, and one has publicly spoken out against it. But the SEC does have some discretion. The question is how will it exercise that discretion and will the agency once again face litigation as it has with other Dodd-Frank measures where business groups have challenged its actions (proxy access, resource extraction and conflict minerals, for example). More important, will it achieve the right results? Will investors armed with more information change their nonbinding say-on-pay votes or switch out directors who overpay underperforming or unscrupulous executives? If not, then will this be another well-intentioned rule that does nothing to stop the next financial crisis?
Thursday, November 14, 2013
This week two articles caught my eye. The New York Times’ Room for Debate feature presented conflicting views on the need to “prosecute executives for Wall Street crime.” My former colleague at UMKC Law School, Bill Black, has been a vocal critic of the Obama administration’s failure to prosecute executives for their actions during the most recent financial crisis, and recommended bolstering regulators to build cases that they can win. Professor Ellen Podgor argued that the laws have overcriminalized behavior in a business context, and that the “line between criminal activities and acceptable business judgments can be fuzzy.” She cited the thousands of criminal statutes and regulations and compared them to what she deems to be overbroad statutes such as RICO, mail and wire fraud, and penalties for making false statements. She worried about the potential for prosecutors to abuse their powers when individuals may not understand when they are breaking the law.
Charles Ferguson, director of the film “Inside Job,” likened the activity of some major financial executives to that of mobsters and argued that they have actually done more damage to the economy. He questioned why the government hadn’t used RICO to pursue more criminal cases. Former prosecutor and now private lawyer Allen Goelman pointed out rather bluntly that prosecutors aren’t cozy with Wall Street—they just won’t bring a case when the evidence won’t allow them to win. He also reminded us that greed and stupidity, which he claimed was the cause of the “overwhelming majority of the risky and irresponsible behavior by Wall Street,” are not crimes. Professor Lawrence Friedman wrote that the law “announces the community’s conceptions of right and wrong,” and if we now treat corporations like people under Citizens United then we should likewise make the executives who run them the objects of the community’s condemnation of wrongdoing.
Finally, Senator Elizabeth Warren concluded that if corporations know that they can break the law, pay a large settlement, and not admit any guilt or have any individual prosecuted, they won’t have any incentive to follow the law. She also argued for public disclosure of these settlements including whether there were tax deductions or releases of liability.
This brings me to the second interesting article. Former SEC enforcement chief and now Kirkland & Ellis partner Robert Khuzami recently said, “I didn’t think there was much doubt in most cases that a defendant engaged in wrongdoing when you had a 20-page complaint, you had them writing a big check, you may well have prosecuted an individual in the wrongdoing.” While not endorsing or rejecting current SEC Chair Mary Jo White’s position to require certain companies to admit wrongdoing in settlements, he raised a concern about whether this change in policy would place undue strain on the agency’s limited resources by forcing more cases to go to trial. He also raised a valid point about the legitimate fear that firms should have in that admitting guilt could expose them to lawsuits, criminal prosecution, and potential business losses. Chair White did not set out specific guidelines for the new protocol, but so far this year 22 companies have benefitted from the no admit/no deny policy and have paid $14 million in sanctions. But we don’t know how many executives from these companies lost their jobs. On the other hand, would these same companies have settled if they had to admit liability or would they have demanded their day in court?
Should the desire to preserve agency resources trump the need to protect the investing public—the stated purpose of the SEC? If neither the company nor the executive faces true accountability, what will be the incentive to change? In a post-Citizens United world, will Congressmen strengthen the laws or bolster the power and resources of the regulators to go after the corporations that help fund their campaigns? Have we, as Dostoyevsky asserted, become “used” to the current state of affairs where drug dealers and murderers go to jail, but there aren’t enough resources to pursue financial miscreants?
What will make companies and executives “do the right thing”? Dostoyevksy also wrote “intelligence alone is not nearly enough when it comes to acting wisely,” and he was right. Perhaps the fear of the punishment for clearly enumerated and understood crimes, and the fear of the admission of wrongdoing with the attendant collateral damage that causes will lead to a change in individual and corporate behavior. I agree with Professor Podgor that there is clearly room for prosecutorial abuse of power and that the myriad of laws can lead to a no-mans land for the unwary executive forced to increase margins and earnings per share (while possibly getting a healthy bonus). While I have argued in the past for an affirmative defense for certain kinds of corporate crimial liability, I also agree with Professor Black and Senator Warren. At some point, people and the corporations (made up of people) need more than “intelligence” to act “wisely.” They need the punishment to fit the crime.
Thursday, November 7, 2013
In 2011, I met with members of the SEC and Congressional staffers as part of a coalition of business people and lawyers raising concerns about the proposed Dodd-Frank whistleblower provision. Ten days after leaving my compliance officer position and prior to joining academia, I testified before a Congressional committee about the potential unintended consequences of the law. The so-called “bounty-hunter” law establishes that whistleblowers who provide original information to the SEC related to securities fraud or violations of the Foreign Corrupt Practices Act are eligible for ten to thirty percent of the amount of the recovery in any action in which the SEC levies sanctions in excess of $1 million dollars. The legislation also contains an anti-retaliation clause that expands the reach of Sarbanes-Oxley. Congress enacted the legislation to respond to the Bernard Madoff scandal. The SEC recently awarded $14 million dollars to one whistleblower. To learn more about the program, click here.
I argued, among other things, that the legislation assumed that all companies operate at the lowest levels of ethical behavior and instead provided incentives to bypass existing compliance programs when there are effective incentive structures within the existing Federal Sentencing Guidelines for Organizations. Although they are no longer binding, judges use the Guidelines to sentence corporations that plead guilty or are so adjudicated after trial. Prosecutors use them as guideposts when making deals with companies that enter into nonprosecution and deferred prosecution agreements. I recommended: (1) that there be a presumption that whistleblowers report internally first unless there is no viable, credible internal option; (2) that the SEC inform the company that an anonymous report has been made unless there is legitimate reason not to do so and (3) that those with a fiduciary duty to report be excluded from the bounty provisions of the bill and be required to report upward internally before reporting externally.
Fortunately, the final legislation does make it more difficult for certain people to report externally without first trying to use the compliance program, if one exists. Nonetheless, the Wall Street Journal reported yesterday that a growing number of compliance personnel are blowing the whistle on their own companies, notwithstanding the fact that they must wait 120 days under the rules after reporting internally to go to the SEC. One of the attorneys interviewed in the WSJ article, Gregory Keating, is a shareholder Littler Mendelsohn, a firm that exclusively represents management in labor matters. His firm and others are seeing more claims brought by compliance officers.
This development leads to a number of questions. What about compliance officers who are also lawyers, as I was? NY state has answered the question by excluding lawyers from the awards, and I am sure that many other states are considering it or will now start after reading yesterday’s article. What does this mean for those forward thinking law schools that are training law students to consider careers in compliance? I believe that this is a viable career choice in an oversaturated legal market because the compliance field is exploding, while the world of BigLaw is contracting. Do we advise students considering the compliance field to forego their bar licenses after graduation because one day they could be a whistleblower and face a conflict of interest? I think that’s unwise. What about compliance personnel in foreign countries? Courts have already provided conflicting rulings about their eligibility for whistleblower status under the law.
Most significantly, in many companies compliance officers make at least an annual report to the board on the activities of the compliance program in part to ensure that the board fulfills its Caremark responsibilities. These reports generally do and should involve detailed, frank discussions about current and future risks. Will and should board members become less candid if they worry that their compliance officer may blow the whistle?
Could the Sentencing Commission have avoided the need for compliance officers to blow the whistle externally by recommending that compliance officers report directly to the board as the heads of internal audit typically do? This option was considered and rejected during the last round of revisions to the Sentencing Guidelines in 2010. Compliance officers who do not report to general counsels or others in the C-Suite but have direct access to board members might feel less of a need to report to external agencies. This is why, perhaps, in almost every corporate integrity agreement or deferred prosecution agreement, the government requires the chief compliance officer to report to the board or at least to someone outside of the legal department.
To be clear, I am not opposed to the legislation in principle. And for a compliance officer to report on his or her own organization, the situation internally was probably pretty dire. Gregory Keating and I sit on the Department of Labor’s Whistleblower Protection Advisory Committee, which will examine almost two dozen anti-retaliation laws in the airline, commercial motor carrier, consumer product, environmental, financial reform, food safety, health care reform, nuclear, pipeline, public transportation agency, railroad, maritime and securities fields. During our two-year term we will work with academics, lawyers, government officials, organized labor and members of the public to make the whistleblower laws more effective for both labor and management.
State bars, government agencies, boards, general counsels, plaintiffs’ lawyers and defense lawyers need to watch these developments of the compliance officer as whistleblower closely. I will be watching as well, both as a former compliance officer and for material for a future article.
Thursday, October 31, 2013
Although I blog on business issues, I spent most of my professional life as a litigator and this semester I teach civil procedure. A few weeks ago I asked my students to draft a forum selection clause and then discussed the Boilermakers v. Chevron forum selection bylaw case, which at the time was up on appeal to the Delaware Supreme Court. The bylaws at issue required Delaware to be the exclusive venue for matters related to derivative actions brought on behalf of the corporation; actions alleging a breach of fiduciary duties by directors or officers of the corporation; actions asserting claims pursuant to the Delaware General Corporation Law; and actions implicating the internal affairs of the corporation.
While I was not surprised that some institutional investors I had spoken to objected to Chevron’s actions, I was stunned by the vitriolic reactions I received from my students. I explained that Chevron and FedEx, who was also sued, were trying to avoid various types of multijurisdictional litigation, which could be expensive, and I even used it as a teachable moment to review what we had learned about the domiciles of corporations, but the students weren’t buying it.
Perhaps in anticipation of the likelihood of an affirmance from Delaware’s high court, the plaintiffs voluntarily dismissed their appeal, which may have been a smart tactical move. Now let’s see how many Delaware corporations move from the wait and see mode and join the 250 companies that already have these kinds of bylaws. Interestingly, prior to the dismissal, only 1% of those surveyed by Broc Romanek indicated that they would never institute a forum selection bylaw. Given how broad some of these bylaws are, it may stem the tide of some of the litigation that I blogged about here as plaintiffs’ lawyers are forced to face Delaware jurists. Yesterday, as we were discussing venue, I broke the news about the dismissal of the appeal to my students. Needless to say, many were disappointed. Perhaps they will feel differently after they have taken business associations next year.
Thursday, October 24, 2013
Now that juries and the DOJ have spoken, will boards be more active in shaping ethical culture in the C-Suite?
CEOs and executives just can’t get a break in the news lately. A jury found both former Countrywide executive Rebecca Mairone and Bank of America liable for fraud for Countrywide’s “Hustle” loans in 2007 and 2008 (see here). Martha Stewart has had to renegotiate her merchandising agreement with JC Penney to avoid hearing what a judge will say about that side deal in the lawsuit brought against her by Macy’s, with whom she purportedly had an exclusive merchandising deal (see here). JP Morgan Chase is in talks to pay $13 billion to settle with the Department of Justice over various compliance-related failures, but the company still faces billions in claims from angry shareholders. The company isn’t out of the woods yet in terms of potential criminal liability (see here). CEO Jamie Dimon isn’t personally accused of any wrongdoing, and in fact has been instrumental in achieving the proposed settlements. But in the past he has faced questions from institutional shareholders about his dual roles as chair of the board and CEO. Those questions may come up again in the 2014 proxy season.
The Bank of America verdict and the recent JP Morgan Chase settlement may herald a new age of prosecutions and settlements both for institutions and executives for compliance failures and criminal activity. With the recent announcement of a $14 million dollar award for an SEC whistleblower coupled with the SEC's pronouncements about getting its "swagger" back, we can expect more legal actions to come as employees feel incentivized to come forward to report wrongdoing.
So what is the role of the board in directing, managing, and shaping corporate culture? In my former life as a compliance officer this issue occupied much of my time. My peers and I scoured the newspapers looking for cautionary tales like the ones I recounted above so that we could remind our internal clients and board members of what could happen if they didn’t follow the laws and our policies.
Bryan Cave partner Scott Killingsworth has written a white paper on the importance of the board in monitoring the C-Suite. He examines the latest research in behavioral ethics citing Lynne Dallas, Lynn Stout, Krista Llewellyn, Maureen Muller-Kahle, Max Bazerman and Francesca Gino, among others. It’s definitely worth a read by board members in light of recent headlines. The abstract is below:
The C-suite is a unique environment peopled with extraordinary individuals and endowed with the potential to achieve enormous good – or, as recent history has vividly shown, to inflict devastating harm. Given that senior executives operate largely beyond the reach of traditional compliance program controls, a board that aspires to true stewardship must embrace a special responsibility to support and monitor ethics and compliance in the C-suite.
By themselves, the forces at large in the C-suite would challenge the ability of even the most conscientious and rational executives to make consistently irreproachable decisions. The C-suite environment is characterized by the presence of power, strong incentives and huge temptations (financial and other), high ambition, extreme pressure, a fast pace, complex problems and few effective external controls. The problem of C-suite ethics has a deeper dimension, though, than the mere impact of strong pressures upon rational decision-makers. Recent behavioral research brings the unwelcome news that the subversive effects of these pressures are magnified by systematic, predictable human failings that can prompt us to slip our moral moorings and overlook when others do so. We are just beginning to understand the insidious power that such factors as motivated blindness, attentional blindness, conflicts of interest, focused "business-only" framing, time pressure, irrational avoidance of loss, escalating commitment, overconfidence and in-group dynamics can exert below the plane of conscious thought, even over people who have good reason to consider themselves ethically strong. and behaviorally upright.
But we also know that organizational culture can
dramatically affect both ethical conduct and reporting of misconduct, by
establishing workplace norms, harnessing social identity and group loyalty and
increasing the salience of ethical values. How can these learnings inform the
board’s interaction with, and monitoring of, the C-suite? And how can the board
help forge a stronger connection between the C-Suite and the organization’s
compliance and ethics program? This paper suggests several key strategies for
dealing with different aspects of this complex problem.
Thursday, October 10, 2013
US Chamber of Commerce Event on the State of Corporate Governance and the 2014 Proxy Season-October 16
On October 16th, the US Chamber of Commerce’s Center for Capital Markets Competitiveness will host a half-day event to examine trends from the 2013 proxy season and look ahead to 2014. The day will start with a presentation from the Manhattan Institute about the 2013 season and then I will be on a panel with Tony Horan, the Corporate Secretary of JP Morgan Chase, Vineeta Anand from the Office of Investment of the AFL-CIO, and Darla Stuckey of the Society of Corporate Secretaries and Governance Professionals. Our panel will look back at the 2013 proxy season and discuss hot topics in corporate governance in general. Later in the day, Harvey Pitt and other panelists will talk about future trends and reform proposals, and depending on the state of the government shutdown, we expect a member of Congress to be the keynote speaker. The event will be webcast for those who cannot make it to DC. Click here to register.
Dodd-Frank requires the SEC to issue rules barring national exchanges from listing any company that has not implemented a clawback policy that does not include recoupment of incentive-based compensation for current and former executives for a three-year period. Unlike the Sarbanes-Oxley clawback rule, Dodd-Frank requires companies to recover compensation, including options, based on materially inaccurate financial information, regardless of misconduct or fault.
Although the SEC has not yet issued rules on this provision, a number of companies have already disclosed their clawback policies, likely because proxy advisory firms Glass Lewis and Institutional Shareholder Services have taken clawback policies into consideration when making Say on Pay voting recommendations. Equilar has reviewed the proxy statements for Fortune 100 companies filed in calendar year 2013 for compensation events for fiscal year 2012. The organization released a report summarizing its findings, which are instructive.
Of the 94 publicly-traded companies analyzed by Equilar, 89.4% publicly disclosed their policies; 71.8% included provisions that contained both financial restatement and ethical misconduct triggers; 29.1% included non-compete violations as triggers and 27.2% had other forms of triggers. 68% of the policies applied to key executives and employees including named executive officers, while only 14.6% applied to all employees. 7.8% of clawback policies applied only to CEOs and/or CFOs. 35.9% of policies covered a range of compensation types including deferred compensation, sales commissions, flexible perquisite accounts and/or supplemental retirement plans.
The Equilar report provides language and links to the filings for Wal-Mart, Ignite Restaurant Group, CVS Caremark, Johnson & Johnson, AIG, Supervalu, Apple, IBM, Johnson Controls and ConocoPhilips. The report also notes that despite the early disclosures, they tend to fall short of the Dodd-Frank standard in that only 37.9% mention outstanding options. This will surely change once the SEC finalizes the rule.
Friday, October 4, 2013
Too bad I didn't have this information from today's Wall Street Journal to add to my arsenal of reasons of why I think the Dodd-Frank conflict minerals SEC disclosure is a well-intentioned but bad law to address rape, forced labor, plundering of villages, murder, and exploitation of children in the Democratic Republic of Congo. I won’t reiterate the reasons I outlined in my two-part blog post a couple of weeks ago. According to press reports, while acknowledging her responsibility to uphold the law, SEC Chair Mary Jo White mirrored some of the arguments about discretion that business groups and our amicus brief raised on appeal to the DC Circuit, and further explained, “seeking to improve safety in mines for workers or to end horrible human rights atrocities in the Democratic Republic of the Congo are compelling objectives, which, as a citizen, I wholeheartedly share … [b]ut, as the Chair of the SEC, I must question, as a policy matter, using the federal securities laws and the SEC’s powers of mandatory disclosure to accomplish these goals.” I couldn’t agree more. While I have no problems with appropriate and relevant disclosure, corporate responsibility, and due diligence related to human rights, Congress should let the SEC focus on its mission of protecting investors, maintaining efficient markets, and facilitating capital formation.
The text of her speech at Fordham Law School where she made these remarks and others about the need for agency independence and discretion is available here.
Thursday, October 3, 2013
Professor Haskell Murray is presenting on Delaware's new Public Benefit Corporation Act on October 5th at the Southeastern Law Scholars Conference. Delaware is the 19th state to pass such legislation and given the influence that the state has on others in the area of corporate law, it may prompt the many states that are considering it to pass their own pending legislation. Many question the need for benefit corporations in general given the constituency statutes that are already in place in many states and the debate about the shareholder wealth maximization norm. Others worry about unintended consequences (see here for example).
Haskell has probably written more extensively on these entities than almost anyone else (see here). Although his latest article is not yet on SSRN, the abstract is below. I look forward to reading his article and to seeing how many Delaware corporations jump on the benefit corporation bandwagon.
“Systems should exist to serve society. Right now our capitalist system is not serving society; it’s serving shareholders. And we can’t run around expecting different outcomes until we change the rules of the game.” -Jay Coen Gilbert (Co-founder, B-Lab)
“Delaware, the leading incorporation state, engages in significant, and continual, legal innovation. . . . Delaware is not the only state to be continually revising its corporation code: other states invariably follow suit, revising their codes to follow Delaware’s innovations.” -Roberta Romano (Professor, Yale Law School)
B Lab co-founder Jay Coen Gilbert provided the introductory quote in his 2010 TEDx Talk in Philadelphia on certified B corporations. Since 2010, B Lab has been quite active. Not only has the non-profit organization privately certified over 800 companies, but B Lab has also taken the lead in successfully convincing 19 states and Washington, D.C. to pass benefit corporation statutes: in their words, “changing the rules of the game.” After eighteen months of lobbying and negotiation, B Lab even convinced Delaware, the recognized pacesetter in U.S. corporate law, to amend its corporate statute. Delaware, however, cut its own path in regard to the benefit corporation form. Delaware is quite sensitive to issues involving corporate law and often acts quickly to protect its strong market position. While most of the other states appear to have worked from the Model Benefit Corporation Legislation (the “Model”) and stayed relatively close it, Delaware seems to have merely consulted the Model and created a largely new social enterprise form that Delaware calls a public benefit corporation (“PBC”). This article builds on the author’s previous work on benefit corporations, compares the Model and the PBC amendments, and offers suggestions for improving the law.
This article proceeds in five primary parts. Part I of this article provides a brief overview of benefit corporations, the PBC amendments, and the legal side of the social enterprise movement more generally. Part II claims that the PBC amendments allow more private ordering than does the Model, and argues that most of the PBC provisions providing additional flexibility are positive developments. Part III posits that the PBC provides superior guidance to directors, but also makes suggestions for providing additional clarity. Part IV dissects the branding aspect of both the Model and the PBC, decides that the Model provides for slightly better branding, but opines that the social enterprise branding efforts are best left to the private market. Part V briefly examines remaining governance and ethical challenges facing those associated with PBCs and sets the stage for future research. The article concludes with a summary of the article’s main points and projections related to the future of social enterprise legislation in wake of Delaware’s innovations.”
Thursday, September 26, 2013
Do Corporations Have a Duty to Respect Human Rights? The View from Government, Investors and Academia
I have spent the past two days at West Virginia University attending a conference entitled “Business and Human Rights: Moving Forward and Looking Back.” This was not a bunch of academic do-gooders fantasizing about imposing new corporate social responsibilities on multinationals. The conference was supported by the UN Working Group on Business and Human Rights, and attendees and speakers included the State Department (which has a dedicated office for business and human rights), the Department of Labor, nongovernmental organizations, economists, ethicists, academics, members of the extractive industry (defined as oil, gas and mining), representatives from small and medium sized enterprises (“SMEs”), Proctor and Gamble, and Monsanto.
Professor Jena Martin organized the conference after the UN Working Group visited West Virginia earlier this year to learn more about SMEs and human rights issues. She invited participants to help determine how to ground the 2011 UN Guiding Principles on Business and Human Rights into business practices and move away from theory to the operational level. The nonbinding Guiding Principles 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. Transnational corporations applauded the Principles when they were released perhaps because they are completely voluntary, but also perhaps because those specific Principles that focused on due diligence on human rights impacts in the supply chain were drafted after years of consultation with businesses around the world.
The UN Working Group has the daunting task of rolling out the Guiding Principles to over 80,000 companies and their suppliers in 192 countries. Dr. Michael Addo of the Working Group confirmed that the conference was the first of its kind in the US where such a broad coalition of those affected by and thinking about these issues had convened to talk about how the Principles can work in the real world. Participants discussed the risk management issues associated with human rights due diligence including avoiding reputational harm; addressing investor and regulatory pressure; facing internal pressures (recruiting and employee morale); and improved efficiency for project planning, forecasting and value preservation. Other topics included strategies for transnational human rights litigation after the Supreme Court’s Kiobel decision, which significantly limited access to foreign litigants on jurisdictional grounds; the use of supplier codes of conduct as contractual vehicles; using contracts to implement the Principles; antitrust implications of consortiums working together to address human rights issues with suppliers; the benefits of hard law versus “soft law” (voluntary initiatives) in the human rights arena; how the US Government is using its laws, trading leverage, procurement and investing power to support the Principles both domestically and internationally; and recent steps in the European Union to implement the Principles.
The issue of addressing regulatory and investor pressure was particularly interesting to me, and I addressed it in my remarks (which I will blog about separately when my paper is complete). But here are some facts I shared with the audience. US investors, international stock exchanges and governments increasingly value information on environmental, social and governmental (“ESG”) factors. As of 2012, the governments or stock exchanges of 33 countries require or encourage some form of ESG reporting. Earlier this year, the European Union proposed a directive on nonfinancial disclosure, which would require large companies to report annually on their major environmental, social and economic impacts.
The US government is farther behind than the Europeans but is catching up. The Federal Acquisition Regulations now require prospective contractors and subcontractors to certify that they are not engaging in a variety of human trafficking activities in supplying end products, and require changes in contractual clauses and compliance programs as well as cooperation with audits and investigations. Since 2012, certain companies in California have had to publicly disclose their efforts to eliminate human trafficking and slavery from their supply chains.
Investors also seek nonfinancial information. Bloomberg publishes corporate ESG data for over 5,000 companies utilizing 120 ESG factors. Currently, 95% of the Global 250 issues sustainability reports, which generally include impacts on the environment, society and the general economy. But these reports may be of limited utility to investors because industries may view materiality differently. To address this gap, the Sustainability Accounting Standards Board ("SASB") is a 501(c)(3) organization developing standards for publicly-traded companies in the United States in ten sectors from 89 industries so that they can disclose material sustainability information (including human rights) in 10-K and 20-F filings by 2015. Once completed, the SASB framework, which adopts the SEC definition for materiality, may have significant impact because its advisory council consists of the former chair of FASB, who was also an IASB board member, institutional investors, academics, several large corporations, representatives from most of the major investment banks as well Institutional Shareholder Services (“ISS”), the influential proxy advisory firm. According to today's SASB newsletter, thus far over 850 people representing five trillion in market capital and 12 trillion in assets under management have participated in working groups. The materiality standards for the health care industry have been downloaded over 730 times since they were released at the end of July.
As more companies begin to incorporate the Guiding Principles and consider human rights in their enterprise risk management programs and not just as line items in a sustainability report, business practices will start to change because investors and members of the public will demand it. This year a pension fund filed shareholder proposals with three companies related to the Guiding Principles. All of them failed, including one in which a company indicated that they were already conducting the kind of diligence that the Principles recommend. ISS has issued guidance specifically on human rights impacts. It’s time for directors and executives to start considering their human rights footprint in anticipation of future requests for disclosures from investors, the government, regulators and the general public.