Tuesday, April 12, 2016
Short post today: I spent Business Organizations today whining that Benefit Corporations dilute the business judgment rule for regular corporations. I do this, in part, because I hate it, but I also do it because students can see (I think) how the concept of the business judgment rule works in practice.
I left class to find that Coca-Cola is providing paid leave for new fathers, not just new mothers. I fully support this, and think it is both wise and moral. The report notes:
Coke said one motivation is to help it recruit and retain millennials.
This makes total sense to me. And I think it good business. But I still hope the reason to say this is that it is (in the Board's judgment) good business, and not because the board thinks they otherwise need to justify such a decision.
Sunday, April 10, 2016
"In fact, corporate governance arrangements are not contractual." 104 Geo. L.J. 583, 587 (2016) #corpgov— Stefan Padfield (@ProfPadfield) April 6, 2016
Saturday, April 9, 2016
Institutional investors – often in response to some protest – occasionally choose to divest themselves of investment in industries that they believe are doing some social harm.
And Marcia here at BLPB has argued that investors (like consumers) are rarely sufficiently committed to these causes – she doubts that “name and shame” policies, which are intended in part to encourage such moves, will have much of an effect in light of investors’ greater desire for return.
Well, here’s one new datapoint: Calpers is revisiting its policy of refusing to invest in tobacco stocks. Apparently, its moral commitments can’t quite hold up in the face of the industry’s rising share prices. Calpers’s official position is apparently that it can do more good by “engaging” rather than by walking away, although when it comes to tobacco – a product that many criticize merely for its existence – it’s hard to see exactly how that happens.
Friday, April 8, 2016
Recently, I have been talking to a few of our law students about jobs, and I have also discussed job negotiations in my MBA negotiations course.
Here are a few thoughts for law students negotiating their first job. First, take the time to sit and think about what you want in a job. I know this seems simple, but far too many students simply follow their classmates in chasing the most prestigious firms without fully understanding why; those firms may or may not be a good fit, depending on your goals. Talk to a number of people who have worked in jobs you are considering, and interview them about positives and negatives. Second, you have to understand your BATNA (your best alternative to a negotiated agreement). If you only have one offer, and thus no good alternatives to that job, you will be in a very weak negotiating position. As such, it is best to uncover a good, or at least decent, second option, even if it is a job outside law, before negotiating . Third, try to find out, from faculty members or recent graduates, what items may be negotiable at the organization. At larger firms and many government agencies, it seems that salary and benefits are almost always unmovable for entry level lawyers. That said, there are still some items - like practice group and start date - which might be negotiable. Start date can actually be really important. An early start date, if it is allowed (some organizations start all their first years at once), can give you a head start and more individualized senior associate/partner attention before the rest of the class arrives. At smaller firms, salary and benefits may be negotiable. Fourth, and perhaps more important, in all your discussions be respectful. You don't want to get a reputation of being entitled before you even start with the firm, and again, you need to be realistic about your other options; this is still a buyers' market. If you fortunate enough to have multiple good offers, you can, respectfully, ask for offer improvement, but if it is your only legitimate offer, asking may not be worth the risk of them pulling the offer. Fifth, once you are in the job, I would focus on making yourself valuable, to the senior associates, partners, and eventually the clients, so that you will be in a powerful negotiating position down the road.
For more general thoughts, watch Deepak Malholtra's (Harvard Business School) talk on negotiating your job offer.
Wednesday, April 6, 2016
Five years ago I blogged about Massey Energy, one of most tragic mining disasters in US history. Just a few minutes ago its CEO Donald Blankenship was sentenced to the maximum one year in prison. The prison term is unusual for a corporate executive, but should it be?
The Department of Justice under Eric Holder came under fire for prosecuting thousands of low level mortgage brokers and analysts but no C-Suite individuals after the financial crisis. Perhaps in response to that, the DOJ released the Yates Memo, which I blogged about in September. There are already some interesting takeaways on the Memo, which you can read about here or you can hear about when I present if you attend the International Legal Ethics Conference in New York in July.
I'm not sure whether the Yates memo will prevent corporate crime or get the "right" people to go to jail. Actually, I am pretty sure that it won't. According to news reports, the Massey CEO was unusually involved in daily operations, which made convicting him easier (that along with hours of taped conversations). I do believe that the Yates Memo (if it's even constitutional) will fundamentally change the relationship between attorneys, compliance officers, and their internal clients. I will blog more about that in coming months. In the meantime, I hope that today's sentencing provides some measure of comfort to the families of the fallen miners.
I have heard the hype that April is financial literacy month, but I don't know what that means other than it is a slogan and a headline. It has a hashtag (#FLM2016), but no consensus definition other than merely understanding how money works. PBS, the President, the National Council of Financial Educators, Wikipedi and even someone self-titled "RichDad" all weigh in on the definition. This is unhelpful even by law school standards where we teach vague definitions like reasonable and negligent.
A basic internet search also reveals that there aren't widely adopted standards to demonstrate that a person has achieved financial literacy, and perhaps most strikingly there aren't comprehensive, free resources from a government agency or reputable third parties (i.e., companies not selling credit management services) to assist interested folks in acquiring the requisite financial information. There are resources available for children like this learning module hosted by the Federal Reserve Bank: Ella Saves! These introductory materials serve the goal of educating the next generation of financial consumers against the perils of credit and the need for saving. But what resources are available for the current generation of financial consumers-- those faced with student debt, who had access to large home mortgage loans, who have access to multiple credit cards with large balances and high fees, who are likely tasked with not only saving but investing their savings for retirement through a defined contribution plan? There are a variety of individual tools, articles and books available but if you are a novice and don't yet know what you need to know, this is both an overwhelming and an inefficient approach to acquiring the knowledge you need.
For example, through further research I found the Institute for Financial Literacy, a 2002 501(c)(3) focusing on adult financial education. Thank you Financial Literacy! They publish five standards (note that there is no consensus that these are the right benchmarks for financial literacy) and benchmarks, as well as provide some supporting materials for each one. A main resource they offer though is a listing of other state, federal and nonprofit websites where you can go and research what you don't know. Brilliant if you know where to start and what you need to find, unhelpful if not.
My frustration stems from the belief/observation that this information matters; individual and national financial stability depend upon it. Why is it so hard to know gauge whether or not I have it and what I need to do to gain it?
Tuesday, April 5, 2016
AP reported yesterday:
NEW ORLEANS (AP) — A federal judge in New Orleans granted final approval Monday to an estimated $20 billion settlement over the 2010 BP oil spill in the Gulf of Mexico, resolving years of litigation over the worst offshore spill in the nation's history.
The settlement, first announced in July, includes $5.5 billion in civil Clean Water Act penalties and billions more to cover environmental damage and other claims by the five Gulf states and local governments. The money is to be paid out over roughly 16 years. The U.S. Justice Department has estimated that the settlement will cost the oil giant as much as $20.8 billion, the largest environmental settlement in U.S. history as well as the largest-ever civil settlement with a single entity.
The settlement with the government (private claims remain) reminds me of a post I made almost six years ago, where I argued that it was not the federal government's job to avoid the harm of such an oil spill, and it was neither advisable nor reasonable to expect that the government could handle such an event. I explained my thinking:
Just imagine what would have happened six months [before the oil spill] if the President had suggested a new agency that would be trained and funded to clean up disasters like this, granted the authority to take over an oil well at the first sign of trouble, and this agency would be funded by a large tax on oil companies. You can be sure that the response would have been that the government shouldn’t be in this business because the oil companies are better trained, better prepared, and better able to respond to such problems. I guarantee it.
Yes, perhaps the federal government could have been swifter than it has been, especially with regard to protecting the coast. However, in this situation, President Obama’s primary mistake was likely listening to BP when they said they could, and would, handle the problem. I find it curious that many of the same people who often argue that government should stay out of the way of big businesses now want to lay blame at the feet of a president who did just that.
In this political era where candidates suggest that the government should be in business of building big walls (funded, and perhaps also built, by other governments) and free college tuition, I think it's worth taking another close look at what we really should expect of government. (For the record, of the two ideas proposed above, I hate the first idea, and I am skeptical of the second. I appreciate the sentiment behind the free college tuition idea, but highly question the wisdom or feasibility in practice, even if I would prefer that someone else pay my law school loans.)
The reality is that, where we allow highly specialized industrial activity, we cannot ensure there will be no harm. We can try create protections, and we can enact penalties for failures to follow the rules and remediate harm. This is not to say everything was done correctly leading up to the Deepwater Horizon spill. There were significant regulatory failures to accompany BP's failures. But when we look for solutions, we still need to be realistic about what role the government can and should take. About one thing I am confident: it is still not a good use of government funding to put a fleet of government-funded, oil-well plugging submarines at the ready.
Monday, April 4, 2016
A Constructive Resolution to [What Otherwise Would Have Been] Another Ugly Law Review Experience . . .
Imagine this: You open an email message late in the evening from a law review managing editor. The message includes as an attachment the edited version of an article being published by the law review--or, more precisely--reprinted by the law review. So far, so good.
But also imagine your surprise when you open the attachment and find that the edits are extensive--more extensive than you had expected. So, you dig right in to see what's amiss. The first three modifications are changes to footnote citations. They are incorrect edits. As you review the edited draft, you find that most of the suggested changes are erroneous or unnecessary. Some are even undesirable or undesired (e.g., edits to the text of quoted passages that deviate from the source quoted). In frustration, you wonder whether you should complete your review of the edits or just, based on what you've read to date, throw in the towel and ask the law review to start all over, reminding the law review managing editor that the article already has been published and, in the process, edited by you and the other journal's editors and staff.
I experienced a version of this law scholar nightmare recently. What did I do? I completed my review of the edits (which took six solid hours) and sent the law review managing editor my responses under cover of an email message that explained (1) my likely-to-be-interpreted-as-curt tone and (2) the nature of the changes or reversals of changes I made. I tried to educate through these materials. But I was worried that the managing editor (with whom I had exchanged productive emails on other subjects, including the reprint permission and the publication agreement) might be angered by or otherwise negatively predisposed against my comments.
What happened next was absolutely super, however. Later that day, I received a message from the managing editor reading as follows, in relevant part:
Hello Professor Heminway,
Thank you so much for such a detailed and quick response! I understand your concerns, and we will work through the comments and suggestions that you have made. . . .
Your explanations and feedback throughout this process have been both educational and humbling. I appreciate your attention to detail as well as your willingness to ensure that you thoroughly explain your basis of thought behind certain suggestions and concerns. There's no doubt that your students have a lot to learn from you. Thank you for everything.
I was blown away.
I offer this correspondence and this entire story not to toot my own horn for having made the right decision to "stick it out" and offer explanations for my dissatisfaction with the draft that was returned to me by the law review. Rather, having earlier vented here about the law review editorial process and read similar blog critiques written by others (like this one or this one), I want to offer, as Haskell recently did here, a net positive view of the law review editorial experience with a student-edited publication. Bloggers here and elsewhere have made many suggestions on how the student editorial process may be able to be improved (see, e.g., here, here, and here). In the mean time, however, I continue to believe that a bit of patience and good communication can extend the learning experience for student editors in meaningful ways.
Sunday, April 3, 2016
"European Court recognizes that only non-profit organizations..can assert..rights to religious freedom ...." 34 B.U. Int'l L.J. 1 #corpgov— Stefan Padfield (@ProfPadfield) March 28, 2016
“3 studies … can explain public backlash to judicial expansions of corporate rights.” 40 Law & Hum. Behav. 195 (2016) #corpgov— Stefan Padfield (@ProfPadfield) March 29, 2016
Saturday, April 2, 2016
A while back, I posted about a new split between the Second and Ninth Circuits regarding the ability of plaintiffs to bring a Section 10(b) action based on a failure to disclose required information, even in the absence of allegations that the omitted information rendered the remaining statements misleading. The Second Circuit is for; the Ninth is against.
At the time, the split was not well-developed; the Second Circuit allowed for the possibility of such claims, but also held that the case before it failed to allege scienter. And the last time the Second Circuit had allowed similar claims to go forward was in In re Scholastic Corp. Sec. Litig., 252 F.3d 63 (2d Cir. 2001).
So it wasn’t clear whether the split would have much practical effect.
Well, the Second Circuit now found a case where scienter was properly alleged – and it reversed a district court’s dismissal of the complaint. The opinion is a veritable goldmine of interesting nuggets.
[More under the jump]
Friday, April 1, 2016
Benjamin Means and Joseph Seiner, both of University of South Carolina School of Law, have an interesting article out entitled Navigating the Uber Economy. Work is changing quickly, and the employment/independent contractor line is becoming more difficult to draw. The abstract is reproduced below and the article is available here. Last July, Anne Tucker authored a blog post related to this issue, available here.
In litigation against ride-sharing companies Uber and Lyft, former drivers have alleged that they were misclassified as independent contractors and denied employment benefits. The companies have countered that they do not employ drivers and merely license access to a platform that matches those who need rides with nearby available drivers. At stake are the prospects, not only for Uber and Lyft, but for a nascent, multi-billion dollar "on-demand" economy.
Unfortunately, existing laws fail to provide adequate guidance regarding the distinction between independent contractors and employees, especially when applied to the hybrid working arrangements characteristic of a modern economy. Under the Fair Labor Standards Act and analogous state laws, courts consider several factors to assess the "economic reality" of a worker's alleged employment status; yet, there is no objective basis for prioritizing those factors.
This Essay argues that the classification of workers as independent contractors or employees should be shaped by an overarching inquiry: how much flexibility does the individual have in the working relationship? Those who can choose the time, place and manner of the work they perform are more independent than those who must accommodate themselves to a business owner's schedule. Our approach is novel and would provide an objective basis for adjudicating classification disputes, especially those that arise in the context of the on-demand economy. By reducing legal uncertainty, we would ensure both that workers receive appropriate protections under existing law and that businesses are able to innovate without fear of unknown liabilities.
Thursday, March 31, 2016
Business and Human Rights Scholars Conference
University of Washington School of Law, Seattle, Washington
September 16-17, 2016
The University of Washington School of Law, the NYU Stern Center for Business and Human Rights, the Rutgers Business School, the Rutgers Center for Corporate Law and Governance, and the Business and Human Rights Journal announce the second Business and Human Rights Scholars Conference, to be held September 16-17, 2016 at the University of Washington School of Law in Seattle. Conference participants will present and discuss scholarship at the intersection of business and human rights issues.
Upon request, participants’ papers may be considered for publication in the Business and Human Rights Journal (BHRJ), published by Cambridge University Press. The Conference is interdisciplinary; scholars from all global regions and all disciplines are invited to apply, including law, business, business ethics, human rights, and global affairs.
To apply, please submit an abstract of no more than 250 words to BHRConference@kinoy.rutgers.edu with the subject line Business & Human Rights Conference Proposal. Papers must be unpublished at the time of presentation. Please include your name, affiliation, contact information, and curriculum vitae.
The deadline for submission is May 15, 2016. Scholars whose submissions are selected for the Conference will be notified no later than June 15, 2016. We encourage early submissions, as selections will be made on a rolling basis.
About the BHRJ
The BHRJ provides an authoritative platform for scholarly debate on all issues concerning the intersection of business and human rights in an open, critical and interdisciplinary manner. It seeks to advance the academic discussion on business and human rights as well as promote concern for human rights in business practice.
BHRJ strives for the broadest possible scope, authorship and readership. Its scope encompasses interface of any type of business enterprise with human rights, environmental rights, labor rights and the collective rights of vulnerable groups. The Editors welcome theoretical, empirical and policy/reform-oriented perspectives and encourage submissions from academics and practitioners in all global regions and all relevant disciplines.
A dialogue beyond academia is fostered as peer-reviewed articles are published alongside shorter ‘Developments in the Field’ items that include policy, legal and regulatory developments, as well as case studies and insight pieces.
Wednesday, March 30, 2016
CALL FOR PAPERS
2016 Financial Stability Conference
“Innovation, Market Structure, and Financial Stability”
The Federal Reserve Bank of Cleveland and the Office of Financial Research invite the submission of research and policy-oriented papers for the 2016 Financial Stability Conference to be held December 1-2, 2016, in Washington, D.C. The objectives of this conference are to highlight research and advance the dialogue on financial market dynamics that affect financial stability, and to disseminate recent advances in systemic risk measurement and forecasting tools that assist in macroprudential policy development and implementation.
PAPER SUBMISSION PROCEDURE
The deadline for submissions is July 31, 2016. Please send completed papers to:firstname.lastname@example.org Notification of acceptance will be provided by September 30, 2016. Travel and accommodation expenses will be covered for one presenter for each accepted paper.
A pdf version of this call for papers is available here
Some readers may be interested in the position listed below. Georgia Institute of Technology, Scheller College of Business has a strong faculty and is a recognized leader in the sustainability area.
Managing Director, Ray C. Anderson Center for Sustainable Business
(Professor of the Practice or Academic Professional)
The Scheller College of Business at the Georgia Institute of Technology in Atlanta, Georgia seeks applications or nominations for an academic appointment as the Managing Director, Ray C. Anderson Center for Sustainable Business (ACSB). The Center is part of the Scheller College of Business, which was ranked #1 in the US and #8 globally in the 2015 Corporate Knights Better World MBA Rankings. The College is a dynamic environment with a commitment to sustainability embedded in its strategic plan and faculty members across many disciplines who have sustainable business interests. The Managing Director will have the opportunity to shape and steer the growth of the Center’s activities and impact, as the Center recently received a long-term gift doubling its operational budget from the Ray C. Anderson Foundation. The Managing Director will also have the opportunity to partner with the Georgia Tech Center for Serve-Learn-Sustain (CSLS), an institute-wide undergraduate education initiative that is developing learning and co-curricular opportunities designed to help our students combine their academic and career interests with their desire to create sustainable communities.
More information follows after the break.
Tuesday, March 29, 2016
The Rock Center for Corporate Governance at Stanford University seeks to hire a resident academic fellow to begin in September or October 2016 for a 12-month or one-academic-year term, with the possibility of renewal for a second year. The fellow will pursue his or her own independent research, as well as work closely with Stanford Law School faculty on a range of projects related to corporate governance, securities regulation, vehicles for public and private investment, and financial market reform. The ideal candidate has excellent academic credentials and experience in relevant fields of practice. The position is particularly well suited to a practicing attorney, with either a litigation or transactional background, seeking a transition to academia, or a post-doctoral economics or finance student with interests in corporate governance. More information can be found at https://stanfordcareers.stanford.edu/job-search?jobId=70496.
(c) for purposes of imposing liability on any member or manager of a limited liability company for the debts, obligations or other liabilities of the company, a court shall consider only the following factors no one (1) of which, except fraud, is sufficient to impose liability:(i) Fraud;(ii) Inadequate capitalization;(iii) Failure to observe company formalities as required by law; and(iv) Intermingling of assets, business operations and finances of the company and the members to such an extent that there is no distinction between them.
The veil of a limited liability company may be pierced under exceptional circumstances when: (1) the limited liability company is not only owned, influenced and governed by its members, but the required separateness has ceased to exist due to misuse of the limited liability company; and (2) the facts are such that an adherence to the fiction of its separate existence would, under the particular circumstances, lead to injustice, fundamental unfairness, or inequity.
(d) In any analysis conducted under subsection (c) of this section, a court shall not consider factors intrinsic to the character and operation of a limited liability company, whether a single or multiple member limited liability company. Factors intrinsic to the character and operation of a limited liability company include but are not limited to:(i) The ability to elect treatment as a disregarded or pass-through entity for tax purposes;(ii) Flexible operation or organization including the failure to observe any particular formality relating to the exercise of the company’s powers or management of its activities;(iii) The exercise of ownership, influence and governance by a member or manager;(iv) The protection of members’ and managers’ personal assets from the obligations and acts of the limited liability company.
Monday, March 28, 2016
There's been a lot of bad press lately about contract lawyers. Between legal actions for overtime pay and articles in bar publications and elsewhere, it's easy to conclude that all of these warriors in the legal workforce are overworked and underpaid in this post-financial-crisis world.
Yet, I just had a corporate general counsel in my Advanced Business Associations class last week who regularly uses contract counsel and, based on his description, those he works with seem to be a relatively contented lot. He has gone ahead and hired a few of them (although he notes that some prefer independent contractor status for its flexibility). So, I wonder whether many of us make the same mistake with the press on contract lawyers that we do with the press on law schools: generalizing a description and drawing conclusions from limited, nonscientific data (i.e., one-sided or narrowly drawn press reports). For one thing, most of what I read focuses on contract lawyers performing e-discovery reviews or rote due diligence. I know that there are more varied assignments out there (even if those two areas represent most of the territory).
I do know former students who, for a variety of reasons, have worked as contract lawyers after graduation or during a career interruption. In most cases, this has been intended as and has been in fact a temporary position. But (although I do not stay in touch with everyone after graduation) I am sure that some have ended up staying in contract lawyering longer than they had planned . . . or wanted. Still, I have not heard about any abusive behavior or unusually long hours. I have heard complaints about the routine and unstimulating nature of much of the work.
What information do you have about contract lawyers? Are they a uniformly mistreated lot because employers--especially maybe Big Law and other large firms--take advantage of them and view them only as low-cost, low-quality providers of legal services? How often do those who use contract lawyer services hire the lawyers in as employees? How many contract lawyers continue in that role for more than two years? Let me know what you know.
Sunday, March 27, 2016
"courts have almost universally adopted the corporate veil-piercing doctrine to deal with [LLCs]" 50 WakeForest L. Rev. 1229 (2015) #corpgov— Stefan Padfield (@ProfPadfield) March 21, 2016
2/2: "Piercing the corporate veil of a public corporation is rare and unlikely, but not impossible." 2016-Ohio-1182 #corpgov— Stefan Padfield (@ProfPadfield) March 25, 2016
Saturday, March 26, 2016
Lately I've been thinking about CLE programs. I no longer am required to take them (thank goodness) but they were a regular feature in my life when I was practicing. I'm only familiar with New York's requirement, but I assume other states' programs are not terribly dissimilar. I'm sorry to say that I generally found CLE requirements to be a thundering waste of my time - not to mention the fees for classes that functioned as a waste of my firm's money. I realize there's been a decades-long debate about this issue, but I'll throw my hat in and speculate whether there's anything that could be done to improve them.
My first problem with CLE - and this I gather has always been the complaint - is that the classes were generally of no use to me in my practice. I was a specialist; almost all of my time was spent on securities litigation, with the occasional sprinkling of corporate. That meant I lived the latest case law and proposed legislation/rulemaking on a day to day basis. The majority of CLE programs in the area were simply pitched at a level that was far too introductory for me - if I actually needed, say, an hourlong course on the latest Supreme Court decisions in the field, that would have been a flashing red light that I was committing malpractice on a day to day basis.
Aware of this, I sometimes selected CLE programs that were outside my field: electronic privacy, IP, employment, antitrust. And these were interesting, and new to me - but they were also entirely irrelevant to my work.
My other problem with CLE - and this is perhaps a new complaint - was, frankly, the political bias. I was a plaintiff-side litigator in a highly politicized area of law. I found that, at least in my area, CLE programs tended to consist mostly, if not entirely, of defense-side speakers (sometimes with a smattering of government). As a result, I found most of the discussions to be heavily slanted in the defense's favor, both in terms of their interpretation of existing law, and their recommendations and commentary. This wasn't always true, of course, but it was true enough on a regular basis to be frustrating. The occasional panel with one plaintiff-side attorney was rarely enough to counter what was an overwhelmingly defense-side spin. I used to fear that to the extent some lawyers found these programs novel, they were receiving a very distorted picture of the law - one that they would then carry through to their own practice.
I imagine there are a lot of entrenched interests in maintaining the current system, but I wonder if there might be some ways to make the CLE requirement more meaningful.
First, I'd propose a some option of self-certification, whereby attorneys with a certain number of years of experience, who attest that they specialize in a particular field, are able to fulfill the requirement by certifying that they have read/studied a specified amount recent legal developments in their area of practice - caselaw, new regulations, new publications and updates, etc.
Second, I'd propose a balance requirement. At least for fields where attorneys tend to specialize on one side of the "v," any program featuring more than one speaker would be required to devote 50/50 time, or 60/40 time, or even 70/30 time, to each side.
I imagine that there are a zillion reasons why these proposals are impractical and unlikely to be adopted, and I know these issues have been discussed in various fora before, but it seems to me they can't render the requirement any less useful than it is now.
I'd be curious to know how others experience CLE. Am I too harsh in my assessment? Do others get more out of it than I did?
Friday, March 25, 2016
I feel badly for Chipotle. When I have taught Business Associations, I have used the chain’s Form 10-K to explain some basic governance and securities law principles. The students can relate to Chipotle and Shake Shack (another example I use) and they therefore remain engaged as we go through the filings. Chipotle has recently been embroiled in a public relations nightmare after a spate of food poisonings occurred last fall and winter, a risk it pointed out in its February 2015 10-K filings. The stock price has fluctuated from $750 a share in October to as low as $400 in January and then back to the mid $500 range. After some disappointing earnings news the stock is now trading at around $471.
Clean Yield Group, concerned that the company will focus only on bringing its stock back to “pre-crisis levels,” filed a shareholder proposal March 17th asking the company to link executive compensation with sustainability efforts. The proposal claims that the CEO was overpaid by $40 million in 2014 and states in part:
A number of studies demonstrate a firm link between superior corporate sustainability performance and financial outperformance relative to peers. Firms with superior sustainability performance were more likely to tie top executive incentives to sustainability metrics.
Leading companies are increasingly taking up this practice. A 2013 study conducted by the Investor Responsibility Research Institute and the Sustainable Investments Institute found that 43.4% of the S&P 500 had linked executive pay to environmental, social and/or ethical issues. These companies traverse industry sectors and include Pepsi, Alcoa, Walmart, Unilever, National Grid, Intel and many others…
Investor groups focusing on sustainable governance such as Ceres, the UN Global Compact, and the UN Principles for Responsible Investment (which represents investors with a collective $59 trillion AUM) have endorsed the establishment of linkages between executive compensation and sustainability performance.
Even with the adjustments to executive pay incentives announced this week in reaction to Chipotle’s ongoing food-borne illness crisis, Chipotle shareholders have consistently approved excessively large pay packages to our company’s co-chief executives that dangerously elide accountability for sustainability-related risks. This proposal provides the opportunity to rectify this situation.
If shareholders approve the compensation package on our company’s 2016 proxy ballot, by year-end, Mr. Ells and Mr. Moran will have pocketed nearly $211 million for their services since 2011. Shareholders have not insisted upon direct oversight of sustainability matters as a condition of employment or compensation, and the present crisis illustrates the probable error in that thinking.
This week, the Compensation Committee of the Board announced that it would withhold 2015 bonuses for executive officers. It has also announced that executive officers’ 2016 performance bonuses will be solely tied to bringing CMG stock back, over a three-year period, to its pre-crisis level.
This is a shortsighted approach that skirts the underlying issues that may have contributed to the E. coli and norovirus outbreaks that have left hundreds of people sickened, injured sales, led to ongoing investigations by health authorities and the federal government, damaged our company’s reputation, and will likely lead to expensive litigation. For years, Chipotle has resisted calls by shareholders to implement robust and transparent management and reporting systems to handle a range of environmental, social and governance issues that present both risks to operations as well as opportunities. While no one can know for certain whether a more rigorous management approach to food safety might have averted the current crisis, moving forward, shareholders can insist upon a proactive approach to the management of sustainability issues by altering top executives’ compensation packages to incentivize it.
The last sentence of the paragraph above stuck out to me. The shareholder does not know whether more rigorous sustainability practices would have prevented the food poisonings but believes that compensation changes incentivizing more transparency is vital. I’m not sure that there is a connection between the two, although there is some evidence that requiring more disclosure on environmental, social, and governance factors can lead to companies uncovering operational issues that they may not have noticed before. Corporate people are fond of saying that “what gets measured gets treasured.” Let’s see what Chipotle’s shareholders treasure at the next annual meeting.
March 25, 2016 in Business Associations, Compensation, Compliance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Marcia Narine, Securities Regulation, Shareholders | Permalink | Comments (0)