Thursday, March 6, 2014
This week in Lawson v. FMR, LLC the Supreme Court extended the reach of Sarbanes-Oxley to potentially millions more employers when it ruled that SOX's whistleblower protection applies to employees of private employers that contract with publicly-traded companies. In 2002, Congress enacted SOX with whistleblower protection provisions containing civil and criminal penalties. The law clearly protects whistleblowers who work for publicly-held companies, and courts have generally ruled against employees who work for privately-held firms. But the Department of Labor’s Administrative Review Board has ruled that contractors at public companies enjoy whistleblower protection as well. The Supreme Court agreed with that assessment, with Justice Ginsburg writing for the majority. The dissent, written by Justice Sotomayor, noted the "stunning reach" based on the majority's interpretation and opined that the extension was not what Congress intended. The plaintiffs in Lawson did not work for Fidelity, but were contracted to provide advice to Fidelity Mutual Fund customers. Plaintiffs voiced concerns to management regarding problems with cost-accounting methodologies and the alleged improper retention of millions of dollars in fees. Because Fidelity has no employees of its own, it was not a party to the suit.
This development will likely be among the many that the Whistleblower Protection Advisory Committee will discuss at our meeting next week. I sit on a 12-person committee comprised of management, labor and the public for a two-year term, and we are reviewing two dozen laws that OSHA enforces to protect employees. SOX is just one of the financial laws covered by OSHA for whistleblower purposes. Although the comment/question period for the committee meeting is officially closed, those who want to submit comments or questions can still do so through http://www.regulations.gov. The meeting is open to the public on March 11th from 9 a.m. - 5 p.m. in Room N-3437 A-C, U.S. Department of Labor, 200 Constitution Ave., NW, Washington, DC 20210
Some law professors may remember when Justices Roberts and Kennedy opined on the value legal scholarship. Justice Roberts indicated in an interview that law professors spend too much time writing long law review articles about “obscure” topics. Justice Kennedy discussed the value he derives from reading blog posts by professors who write about certs granted and opinions issued. I have no doubt that most law students don’t look at law review articles unless they absolutely have to and I know that when I was a practicing lawyer both as outside counsel and as in house counsel, I almost never relied upon them. If I was dealing with a cutting-edge issue, I looked to bar journals, blog posts and case law unless I had to review legislative history.
As a new academic, I enjoy reading law review articles regularly and I read blog posts all the time. I know that outside counsel read blogs too, in part because now they’re also blogging and because sometimes counsel will email me to ask about a blog post. I encourage my students to follow bloggers and to learn the skill because one day they may need to blog for their own firms or for their employers.
Blogging provides a number of benefits for me. First, I can get ideas out in minutes rather than months via the student-edited law review process. This allows me to get feedback on works/ideas in progress. Second, it forces me to read other people’s scholarship or musings on topics that are outside of my research areas. Third, reading blogs often provides me with current and sophisticated material for my business associations and civil procedure courses. At times I assign posts from bloggers that are debating a hot topic (Hobby Lobby for example). When we discuss the Basic v. Levinson case I can look to the many blog posts discussing the Halliburton case to provide current perspective.
But as I quickly learned, not everyone in the academy is a fan of blogging. Most schools do not count it as scholarship, although some consider it service. Anyone who considers blogging should understand her school’s culture. For me the benefits outweigh the detriment. Like Justice Kennedy, I’m a fan of professors who blog. In no particular order, here are the mostly non-law firm blogs I check somewhat regularly (apologies in advance if I left some out):
http://www.theconglomerate.org/ (thanks again for giving me first opportunity to blog a few months into my academic career!)
http://law.wvu.edu/the_business_of_human_rights (currently on a short hiatus)
I would welcome any suggestions of must-reads.
March 6, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, Marcia L. Narine, Merger & Acquisitions, Securities Regulation, Social Enterprise, Teaching, Unincorporated Entities, Weblogs | Permalink | Comments (2)
Thursday, February 20, 2014
Our BLPB group has had a number of email discussions recently about the use of social media including blogs, Facebook, LinkedIn and Twitter for professional purposes. My home institution has discussed the same topic and even held a “training” session on technology in and outside of the classroom. Because I am a heavy user, I volunteered to blog about how I use social media as a lawyer and academic in the hopes of spurring discussion or at least encouraging others to take a dip in the vast pool of social media.
Although I have been on Facebook for years, I don’t use that professionally at all. I also don’t allow my students to friend me, although I do know a number of professors who do. I often see lawyer friends discussing their clients or cases in a way that borders on violations of the rules of professional conduct, and I made sure to discuss those pitfalls when I was teaching PR last year.
I have also used LinkedIn for several years, mainly for professional purposes to see what others in my profession (at the time compliance and privacy work) were thinking about. I still belong to a number of LinkedIn groups and have found that academics from other countries tend to use LinkedIn more than US professors. I have received a number of invitations to collaborate on research just from posts on LinkedIn. I also encourage all of my law students to join LinkedIn not only for networking purposes, but also so that they can attract recruiters, who now use LinkedIn almost as often as they use headhunters. When I blog, I link my posts to LinkedIn, which in turn automatically posts to Twitter.
I admit that I did not like Twitter at first. I now have three Twitter accounts- follow me at @mlnarine. I started using Twitter when I was a deputy general counsel and compliance officer and I followed law firms and every government agency that was online that regulated my industry. The government agencies were very early to the Twitter game and I once learned about a delay in the rollout of a regulation via Twitter a full week before my outside counsel who was working on the project informed me.
I also use the hashtag system (#) to see what others are saying on topics that hold my interest such as #csr (corporate social responsibility and unfortunately also customer service rep), #socent for social enterprise, #corpgov for corporate governance, and #Dodd-Frank and #climatechange (self explanatory).
I make an effort to tweet daily and am now an expert in trying to say something useful in 140 characters or less (being on yearbook staff in high school and counting characters for headlines made this a breeze for me). I re-tweet other tweets that I believe may be of interest to my followers or links to articles, and often gain new followers based on what I have chosen to tweet, largely because of my use of hashtags. In fact, after a marathon tweeting session following the Dodd-Frank conflict minerals oral argument before the DC Circuit Court of Appeals, I received four calls from the press for interviews, a nice, unexpected benefit of trying to educate my followers. Often when I attend conferences, such as last week’s ABA meeting or the UN’s Business and Human Rights Forum, the organizers develop a hashtag so that those who cannot attend in person can follow the proceedings through tweets and the attachments to those tweets.
The best part of twitter is that I met fellow blogger, Haskell Murray because of one his tweets and that led to an invitation to speak at a conference. Haskell has published a useful list of business law professors on Twitter so if you’re not on his list, let us know and we will update it.
Next week I will post about the benefits or perils of blogging, especially for someone new to academia.
February 20, 2014 in Business Associations, Anne Tucker, Conferences, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, Ethics, Haskell Murray, Marcia L. Narine, Social Enterprise, Stefan J. Padfield, Teaching, Web/Tech | Permalink | Comments (0)
Thursday, February 13, 2014
Last night I attended a forum organized by the Ladies Empowerment and Action Program (LEAP). The panel featured female entrepreneurs from the culinary industry. Some were chefs, some owned restarurnts, some sold products, and others blogged and educated the public, but their stories were remarkably similar. They told the audience of business students and budding entrepreneurs that they generally didn’t like partners, were wary of investors because they tended to exert too much control over their vision, and that they wished that they had better financial advisors who cared about them and understood their business.
One panelist, who had received $500,000 in capital from an investor, indicated that she was glad that she had been advised to enter into her contract as though she may end up in litigation. As a former litigator who now teaches both civil procedure and business associations, I both agree and disagree with that advice. As a naïve newbie litigator in a large New York firm, I used to joke with the corporate associates that the only reason I needed to understand how their deals were done was so that I could understand how to defend them went they fell apart and the litigation ensued. Now that I am older and wiser I try to focus my students on considering an exit strategy of course, but also on how to ask the right questions so that the parties never have to consider litigation.
Many of my students will likely advise small and midsized businesses as well as large corporations and that’s part of the reason that I stress the importance of a baseline level of understanding of finance and accounting. But how will we prepare them to counsel entrepreneurs who may not see the value in partners or understand how startup capital works? Perhaps that’s not the job of a lawyer but if the issue comes up, will our graduates know how to provide balanced arguments for their clients? How will we prepare our students to add value so that accountants don’t provide the (potentially wrong) legal advice to these entrepreneurs or so that their clients don’t just turn to LegalZoom, which reportedly sets up 20% of the LLCs in California? In essence, how do we teach our students to think like business people and lawyers?
Although clinics where students advise entrepreneurs or small businesses are expensive, and skills-based transactions courses aren’t as plentiful as they should be in law schools, these are good starts. I currently try to integrate drafting, negotiation and role-play into my classes when appropriate, but would welcome additional ideas that work.
Thursday, February 6, 2014
One of my favorite professors/bloggers, Mike Koehler has an interesting post describing how and why the former DOJ FCPA Enforcement Chief criticized the SEC's handling of the FCPA. I used to read Mike's blog daily during my in-house days, and I share his views on the FCPA enforcement regime.
His post is below and reiterates what I wrote about here about the number of enforcement officers who leave office and question the way in which the FCPA is prosecuted:
This post has a similar theme to this prior post. The theme is – all one has to do is wait for former DOJ and SEC FCPA enforcement officials to blast various aspects of the current FCPA enforcement climate. Touching upon the same issues I first highlighted in this August 2012 post titled “The Dilution of FCPA Enforcement Has Reached a New Level With the SEC’s Enforcement Action Against Oracle,” as well as prior posts here, here and here, a former Assistant Chief of the DOJ’s FCPA Unit (William Stuckwisch - currently a partner at Kirkland & Ellis) blasts certain aspects of SEC FCPA enforcement inthis recent article published in Criminal Justice.
The article begins:
“Imagine the following scenario: You have guided your client, a publicly traded company, through the long and winding process that is a Foreign Corrupt Practices Act (FCPA) internal investigation. Afterward, or increasingly more often simultaneously, you then lead your client through presentation of the results of the investigation to the United States Department of Justice (DOJ) and Securities and Exchange Commission (SEC) (collectively, “government”). Ultimately, neither the internal investigation nor the government’s investigation finds any improper payment (or offers of payments) to any foreign official, or any other knowing misconduct. As a result, the government cannot pursue substantive FCPA antibribery charges against your client, and the DOJ cannot pursue any other FCPA-related criminal charges. Just when you begin to savor this significant success, you are ripped back to reality, as the SEC informs you that, nevertheless, your client faces civil enforcement under the FCPA’s internal controls provision and demands a significant penalty. Unfortunately, this scenario is not a hypothetical for the FCPA Bar to deliberate at conferences and include as footnotes in memoranda addressing real-world client issues. Instead, it mirrors the facts publicly alleged in the SEC’s August 2012 enforcement action against Oracle Corporation, a case considered by many FCPA practitioners to be a stunning result. [...] In Oracle, the SEC faulted the US parent corporation for not auditing local distributors hired by its Indian subsidiary, without alleging that the distributors (or anyone else) had made any improper payment to any foreign government official. Oracle is the latest example of the SEC’s expansive enforcement of the FCPA’s internal controls provision, and it potentially paints a bleak picture—one in which the provision is essentially enforced as a strict liability statute that means whatever the SEC says it means (after the fact).”
Elsewhere, Stuckwisch, the lead author of the article, notes:
“[G]iven the highly subjective nature of the internal controls provisions, companies will continue to feel at the SEC’s mercy once it opens an FCPA investigation, even if no improper payments (or offers of payments) are ever found.” [...] In our view, the true lesson of Oracle is not that this particular type of internal control is required, but rather that the internal controls provision is so broad, and the statutory standard of reasonable assurances so subjective, that the SEC has an almost unfettered ability to insist on a settlement, including a civil penalty, at the conclusion of virtually any FCPA investigation. Companies may be willing to enter into such settlements—particularly because, in the absence of a parallel DOJ action, they need not make any factual admissions (due to the “neither admit nor deny” nature of SEC settlements in such circumstances), and the cost of a settlement is often lower than continuing investigative and representative costs. But such settlements can have severe, unintended consequences. Perhaps most significantly, these settlements can lead other companies to misdirect their scarce compliance resources.”
Stuckwisch’s final observation is of course spot-on and generally restates the thesis from my 2010 article “The Facade of FCPA Enforcement.“
Thursday, January 30, 2014
Professor Caroline Mala Corbin from University of Miami has written an interesting article on the Hobby Lobby and Conestoga Wood Specialites Corp. cases before the Supreme Court. Her abstract is below:
Do for-profit corporations have a right to religious liberty? This question is front and center in two cases before the Supreme Court challenging the Affordable Care Act’s “contraception mandate.” Whether for-profit corporations are entitled to religious exemptions is a question of first impression. Most scholars writing on this issue argue that for-profit corporations do have the right to religious liberty, especially after the Supreme Court recognized that for-profit corporations have the right to free speech in Citizens United.
This essay argues that for-profit corporations should not – and do not – have religious liberty rights. First, there is no principled basis for granting religious liberty exemptions to for-profit corporations. For-profit corporations do not possess the inherently human characteristics that justify religious exemptions for individuals. For-profit corporations also lack the unique qualities that justify exemptions for churches. Citizens United fails to provide a justification as its protection for corporate speech is based on the rights of audiences and not the rights of corporate speakers. Second, as a matter of current law, neither the Free Exercise Clause nor the Religious Freedom Restoration Act recognizes the religious rights of for-profit corporations. Finally, corporate religious liberty risks trampling on the employment rights and religious liberty of individual employees.
Thursday, January 23, 2014
Even before I read the book The Happy Lawyer by my former colleagues Nancy Levit and Doug Linder, I loved every legal job I ever had from judicial law clerk to BigLaw associate (twice), to deputy general counsel. I am still a happy lawyer after twenty-two years in the profession. I am clearly an anomaly among my attorney friends, most of whom looked at me with envy when I said that I was leaving practice to pursue academia. One friend, a partner in a South Florida firm quipped, “litigation has to be one of the only professions where your client hates you, your opposing counsel hates you, and the judge probably thinks you’re an idiot. When the outcome is positive, the client loves you until they see the bill.” No wonder lawyers aren’t happy.
But the situation for lawyers is more serious than a few clients grumbling about high bills. Earlier this week CNN reported that lawyers are the 4th most unhappy professionals behind dentists, pharmacists, and physicians, and are 3.6 times more likely to suffer from depression than non-lawyers. According to the article, 40% of law students report that they have suffered from depression before graduation. That acknowledgement of a diagnosis of depression or indeed seeking any help for mental illness or substance abuse can adversely affect the graduate’s chances for admission to the bar.
Eight states, including my home state of Florida, have added a mental health component to the continuing legal education requirement, in part to address a rise in attorney suicides. No one can pinpoint the cause for the increase in unhappiness. Perhaps it’s the recession, which led to layoffs at every level and which will forever alter the legal landscape. Perhaps, like doctors, pharmacists and dentists, lawyers tend to be type A personalities who thrive on perfection and success and drive themselves harder than others.
I read the CNN article while was on a tour in Switzerland two days ago. I thought I wanted to live the life of the Swiss with their low taxes, 3.1% unemployment rate, high income and great medical and social insurance programs, when the tour guide stunned us by acknowledging that Switzerland has the third highest suicide rate in the world. “It’s the relentless pressure to succeed and the tremendous competition here,” he explained. It seems as though the Swiss have something in common with American lawyers.
I was actually in Switzerland for the 4th annual kickoff of the innovative LawWithoutWalls program founded by University of Miami Professor Michele DeStefano. The program requires law and business students from around the world to work on teams to develop a project of worth addressing a problem facing the legal profession or legal education. I serve as an academic mentor with entrepreneurs, venture capitalists, in house counsel, practitioner mentors and lawyers from sponsor Eversheds. The students learn about the commoditization of legal services from the very firms that are disrupting the profession, Axiom and LegalZoom, who have representatives serving as mentors or thought leaders. They watch actual pitches on legal innovations to venture capitalists. They learn about doing a business plan for their projects of worth from entrepreneurs, and they use that knowledge when they present their project in a Shark Tank-like presentation in April. The next few months of their lives as part of this program will help the students learn skills and make contacts for an ever-evolving global legal market. Hopefully, they will be better equipped to handle what’s out there than the students who take their career cues from the television show Suits.
But what about the practicing lawyers? Not everyone wants to or can make the leap to academia. There are few LawWithoutWalls programs for veteran, burned-out lawyers. Many attorneys will continue to suffer from soul-crushing anxiety, depression or boredom. I don’t have the answer but look out for the follow-up to Levit and Linder’s book entitled The Good Lawyer: Seeking Quality in the Practice of Law due out this summer.
Thursday, January 16, 2014
Living in a Material World- From Naming and Shaming to Knowing and Showing: Will New Disclosure Regimes Finally Drive Corporate Accountability for Human Rights?
In my posts last Thursday (see here and here) and in others, I have explained why I don’t think that the Dodd-Frank conflicts minerals law is the right way to force business to think more carefully about their human rights impacts. I have also blogged about the non-binding UN Guiding Principles on Business and Human Rights, which have influenced both the Dodd-Frank rule, the EU's similar proposal, and the State Department's required disclosures for businesses investing in Burma (see here).
For the past few months, I have been working on an article outlining one potential solution. But I was dismayed, but not surprised to read last week that the US government’s procurement processes may be contributing to the very problems that it seeks to prevent in Bangladesh and other countries with poor human rights records. This adds a wrinkle to my proposal, but my contribution to the debate is below:
Faced with less than optimal voluntary initiatives and in the absence of binding legislation, what mechanisms can interested stakeholders use as leverage to force corporations to take a more proactive role in safeguarding human rights, particularly due diligence issues in the supply chain? Can new disclosure and procurement requirements provide enough incentives to have a measurable impact on the behavior of transnational corporations based in the United States? This Article argues that federal and state governments should take advantage of the fact firms are adapting to more rigorous transparency and due diligence demands from socially responsible investors, international stock exchange listing requirements, and enterprise risk management processes.
Corporations respond to incentives and penalties. Governments can and should require stronger procurement contractual terms for contractors and subcontractors. The contract could require: (1) executive level, Sarbanes-Oxley like attestations regarding human rights policies and due diligence on impacts within the supply chain; (2) an audit by certified third parties and (3) suspension or debarment from contracts as well as clawbacks of executive bonuses and a portion of board compensation as penalties for false or misleading attestations.
Companies that do not choose to participate in government contracting programs will not have to complete the attestation or due diligence process but the benefits of participating will outweigh the costs. The large number of participating firms will likely lead to the practice becoming an industry standard across sectors, thereby forestalling additional legislation, shareholder resolutions, and name and shame campaigns, and thus eventually leading to benefits for all stakeholders including those most directly affected.
January 16, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation, Social Enterprise | Permalink | Comments (1)
Thursday, January 9, 2014
On Tuesday, I attended the oral argument for the National Association of Manufacturers v. SEC—the Dodd-Frank conflict minerals case. Trying to predict what a court will do based on body language and the tone of questioning at oral argument, especially in writing, is foolish and crazy, but I will do so anyway.
I am cautiously optimistic that the appellate court will send the conflict mineral rule back to the SEC to retool based on the three arguments generated the most discussion. First, the judges appeared divided on whether the SEC had abused its discretion by changing the statutory language requiring issuers to report if minerals “did” originate from the DRC or surrounding companies rather than the current SEC language of “may have” originated. This language would sweep in products in which there is a mere possibility rather than a probability of originating in covered countries. One judge grilled the SEC like I grill my law students about the actual statutory language and legislative intent, while another appeared satisfied with SEC’s explanation that issuers did not have to file if the lack of certainty was due to a small number of responses from suppliers or for lack of information. My prediction- if the SEC loses, they will have to rewrite this section to comport with Congressional intent.
The second main issue concerned the SEC’s failure to apply a de minimis exception to the rule. NAM’s lawyer provided a real-life example of a catalyst used in producing automobiles that sometimes washed away during production but at other times could leave just one part per million of tin in the finished product. Judge Srinivasan pointed out that if the mineral could wash away but the product could still function, then perhaps it wasn’t “necessary” as the law required for reporting. Judge Sentelle raised a concern about “breaking new ground” by requiring the SEC to enact a de minimis exception. The SEC bolstered its argument by indicating that no commentator that had proposed such an exception during the rulemaking process had provided a workable threshold. My prediction- this is a toss up. This was the SEC’s most successful argument of the day.
Many commenters believed that the third argument—the First Amendment claim-- was spurious and/or a Hail Mary plea when NAM first raised it last year. Yet this argument provided the most interesting discussion of the day, especially since Judge Randolph specifically reminded NAM’s counsel to discuss it and not save it for rebuttal as NAM had planned. NAM argued that by requiring companies to declare on their websites that their products were not “DRC-Conflict Free,” thereby denouncing their own products, this amounted to a “scarlet letter.” NAM conceded that the government could ask for the information and could post it, but maintained that requiring companies to “shame” themselves was unconstitutional. This argument gained traction with both judges Randolph and Sentelle, who called it “compelled speech.” The judges also questioned the SEC on: whether the SEC had ever or should focus its efforts on communications to consumers; how the SEC would enforce the rule, asking whether a group of scientists would do product inspections; how this rule would achieve Congress’ intent of securing the safety of the Congolese people; whether the government could require companies to indicate whether they had used child labor overseas; and whether the intent of the shaming provision was to cause a boycott- bingo! My prediction- the SEC loses on this provision.
If the SEC does have to go back to the drawing board, it will be interesting to see how current Chair Mary Jo White influences the rule given her public statements about the rule being out of the SEC’s purview. I hope that the European Commission, which has done an impact analysis, will pay close attention as they roll out their own conflict minerals legislation to the EU.
Many have asked what I think the government should have done to help the people of Congo. Put simply, the government could and should fund and enforce the DRC Relief, Security, and Democracy Promotion Act of 2006, which has over a dozen provisions addressing security sector reform, minerals, infrastructure and other matters that could provide a more holistic solution. Next week, I will blog about other ways that the government could incentivize business to address human rights issues around the world.
Thursday, January 2, 2014
Can loyalty-driven securities solve the problem of short-termism? Probably not, according to a study.
The Generation Foundation (the “Foundation”), which focuses on sustainable capitalism, commissioned Mercer and Canadian law firm Stikeman Elliott LLP to study ways to foster more long-term thinking in the capital markets. In a prior report the Foundation proposed five actions to counteract the effects of short-termism including: (1) identifying and incorporating risks from stranded assets; (2) mandating integrated reporting; (3) ending the default practice of issuing quarterly earnings guidance; (4) aligning compensation structures with long-term sustainable performance; and (5) encouraging long-term investing with loyalty-driven securities.
Loyalty-driven securities provide differentiated rights or rewards to shareholders based on their tenure of shareholding. These rewards could include extra dividends, warrants or additional voting rights for owners who held shares for three years (or some other time period), limiting proxy access to shareholders of a specified minimum duration, or inferior voting rights for short-term shareholders. The idea is not far-fetched. Apparently, the European Commission is considering proposals to reward certain shareholders with additional voting rights.
In a report issued in December 2013 the Foundation, Mercer and the law firm outline the results of their legal review of almost a dozen countries and the interviews of over 120 experts. Interviewees included academics, pension funds, investors, and stakeholders such as GMI, Blackrock, UBS Global Asset Management, Ceres, the Conference Board, the Office of NYC Comptroller, Johnson & Johnson, Fidelity, Ira Millstein, CalSTRS, Aviva Investors and academics from Columbia and the London School of Economics.
The report starts with the premise that “heightened interest in ‘short-termism’ also reflects the belief that causes of short-termism… are products of poorly designed organizational incentives and failures of corporate governance systems rather than simply a result of information asymmetry, technological innovation, or the cognitive limits of decision-makers.”
The study revealed that proposals to consider loyalty-driven securities --which are already allowed by law and in use in France -- met with considerable resistance. Those who opposed them mentioned potential discrimination between shareholders; the risk of unintended consequences because it would favor certain types of investors such as passive investors; administrative complexities around share transfers, tracking of tenure and custody; the weakness of the incentive because the nature of the reward would not be enough to forego revenue; and finally a concern that loyalty-driven securities would not address the root causes of short-termism.
Three themes emerged from the interviews for continued study. First, the authors suggest longer time horizons for investment analysis and a review of different forms of capital including financial, physical and human. Second, they recommend realigning frameworks for performance measurement and reward so that individuals will not be penalized for their longer-term decision-making. Third, they believe that investors may need more information and stronger relationships with companies so that they can have faith in long-term value creation and strategies and the executives in charge of implementation.
To effectuate this kind of change they recommend: better-informed fiduciary oversight; board and investment committee education programs; a database of sustainable financial market-certified candidates for board, trustee and investment committees; focus by policymakers and regulators on shaping laws conducive to long-term thinking; a live shadow-monitoring pilot to establish a set of metrics against which to monitor and report fund manager performance to clients; alignment of incentives related to executive compensation; a formal investor-issuer council for systemic risk; and a campaign to educate and encourage analysts and investors to question companies about their long-term strategy during quarterly earnings calls.
Given my focus on corporate governance and sustainability, I read the report with great interest. Whether or not you favor loyalty-driven securities, the full report and appendices are worth a read.
Thursday, December 19, 2013
Changing Corporate Law to Make Companies More Sustainable- Perspectives from governments, academics and practitioners
On December 5th and 6th I attended and presented at the third annual Sustainable Companies Project Conference at the University of Oslo. The project, led by Beate Sjafjell began in 2010 and attempts to seek concrete solutions to the following problem:
Taking companies’ substantial contributions to climate change as a given fact, companies have to be addressed more effectively when designing strategies to mitigate climate change. A fundamental assumption is that traditional external regulation of companies, e.g. through environmental law, is not sufficient. Our hypothesis is that environmental sustainability in the operation of companies cannot be effectively achieved unless the objective is properly integrated into company law and thereby into the internal workings of the company.
Members of the Norwegian government, the European Commission, the Organisation for Economic Cooperation and Development (“OECD”), and the United Nations Environmental Programme (UNEP) Finance Initiative also presented with academics and practitioners from the US, Europe, Asia and Africa.
I did not participate in the first two conferences, but was privileged this year to present my paper entitled “Climate Change and Company Law in the United States: Using Procurement, Pay and Policy Changes to Influence Corporate Behavior.” The program and videos of the entire conference (click on the link of the panel discussions) are here. I presented last and my paper, with the others, will appear in a special edition of the Journal of European Company Law in 2014.
Professors David Millon and Celia Taylor rounded out the US delegation. Millon, who I learned first coined the phrase “shareholder primacy,” proposed a constituency statute for Delaware, but acknowledged that his proposal (even if it were passed) might not have much impact because of the twin influence of inventive-based compensation for executives and the role of institutional investors, who also seek short-term profit maximization. Taylor discussed the SEC Guidance on climate change disclosures recommending that they be made mandatory, but cautioned against disclosure overload and potential greenwashing.
Others provided insight on shareholder primacy and board duties from the UK, Norway, and Indonesia, and Tineke Lambooy presented the results of a meta study regarding boards and sustainability. Gail Henderson, from Canada, used the concept of "undue hardship" in human rights law to propose a new burden to reduce environmental impacts. Mark Taylor, who was one of the many attendees who like me came straight from the UN Forum on Business and Human Rights, explained due diligence provisions in EU member state laws and argued that due diligence is emerging as a standard for compliant businesses. Carol Liao discussed "catalytic innovation" and hybrid entities. Her blog about the conference is here.
A number of presenters focused on: auditing; integrated reporting; insurance, bankruptcy, contract, and insolvency law; and the role of sustainable investors (there are 50 sustainable stock indices), particularly large sovereign pension funds. One of the more interesting proposals came from Ivo Mulder of UNEP, who is conducting a study on a sovereign credit risk model. Sovereign bond markets represent 40% of global bond markets but there is no integration of environmental, social or governance factors even though risk mitigation is a key factor in fixed-income investing. He called for a new way of thinking about how bond securities are valued in primary and secondary markets.
Perhaps one of the most innovative proposals came from Endre Stavang, who suggested an “environmental option.” Specifically he and his co-author recommend enacting legislation that will empower certain green companies to transfer a call option to buy a block of its shares to an established company of their choice. He stressed that the option is free and that the exercise price would be the price of the green company’s share at the time of the transfer. The non-green receiving company would have a period of five years to exercise.
The abstracts from all of the presenters are available here. It was an intense two days of creative presentations, but hopefully these kinds of substantive public policy discussions, which include government, intergovernmental organizations, stakeholders and academics will have an impact. It’s the reason I joined academia.
Happy Holidays to all, and to my new Norweigian colleagues, Gledelig høytid.
December 19, 2013 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Science, Securities Regulation, Social Enterprise | Permalink | Comments (0)
Thursday, December 12, 2013
Last week I attended the UN Forum on Business and Human Rights in Geneva. The Forum was designed to discuss barriers and best practices related to the promotion and implementation of the non-binding UN Guiding Principles on Business and Human Rights, which discuss the state’s duty to protect human rights, the corporation’s duty to respect human rights, and the joint duty to provide access to judicial and non-judicial remedies for human rights abuses. This is the second year that nation states, NGOs, businesses, civil society organizations, academics and others have met to discuss multi-stakeholder initiatives, how businesses can better assess their human rights impact, and how to conduct due diligence in the supply chain.
Released in 2011 after unanimous endorsement by the UN Human Rights Council, the Guiding Principles are considered the first globally-accepted set of standards on the relationship between states and business as it relates to human rights. The US State Department and the Department of Labor have designed policies around the Principles, and a number of companies have adopted them in whole or in part, because they provide a relatively detailed framework as to expectations. Some companies faced shareholder proposals seeking the adoption of the Principles in 2013, and more will likely hear about the Principles in 2014 from socially responsible investors. Several international law firms discussed the advice that they are now providing to multinationals about adopting the Principles without providing a new basis for liability for private litigants.
Although the organizers did not have the level of business representation as they would have liked of one-third of the attendees, it was still a worthwhile event with Rio Tinto, Unilever, Microsoft, Google, Nestle, Barrick Gold, UBS, Petrobras, Total, SA, and other multinationals serving as panelists. Members of the European Union Parliament, the European Union Commission and other state delegates also held leadership roles in shaping the discussion on panels and from the audience.
Some of the more interesting panels concerned protecting human rights in the digital domain; case studies on responsible investment in Myanmar (by the State Department), the palm oil industry in Indonesia and indigenous peoples in the Americas; the dangers faced by human and environmental rights defenders (including torture and murder); how to conduct business in conflict zones; public procurement and human rights; developments in transnational litigation (one lawyer claimed that 6,000 of his plaintiffs have had their cases dismissed since the Supreme Court Kiobel decision about the Alien Tort Statute); mobilizing lawyers to advance business and human rights; the various comply or explain regimes and how countries are mandating or recommending integrated reporting on environmental, social and governance factors; tax avoidance and human rights; human rights in international investment policies and contracts; and corporate governance and the Guiding Principles.
As a former businessperson, many of the implementation challenges outlined by the corporate representatives resonated with me. As an academic, the conference reaffirmed how little law students know about these issues. Our graduates may need to advise clients about risk management, international labor issues, corporate social responsibility, supply chain concerns, investor relations, and new disclosure regimes. Dodd-Frank conflict minerals and the upcoming European counterpart were frequently mentioned and there are executive orders and state laws dealing with human rights as well.
Traditional human rights courses do not typically address most of these issues in depth and business law courses don’t either. Only a few law firms have practice areas specifically devoted to this area- typically in the corporate social responsibility group- but many transactional lawyers and litigators are rapidly getting up to speed out of necessity. Small and medium-sized enterprises must also consider these issues, and we need to remember that “human rights” is not just an international issue. As business law professors, we may want to consider how we can prepare our students for this new frontier so that they can be both more marketable and more capable of advising their clients in this burgeoning area of the law. For those who want to read about human rights and business on a more frequent basis, I recommend Professor Jena Martin’s blog.
December 12, 2013 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation, Teaching | Permalink | Comments (1)
Thursday, December 5, 2013
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.