Thursday, September 11, 2014
As I predicted in 2011 here and here, in 2012 here, in 2013 in amicus brief, and countless times on this blog, the SEC Dodd-Frank conflicts minerals law has had significant unintended consequences on the Congolese people and has been difficult to comply with. Apparently the Commerce Department, which has a role to play in determining which mines are controlled by rebels so that US issuers can stay away from them, can't actually figure it out either. In the past few days, the Washington Post, the Guardian, and other experts including seventy individuals and NGOS (some Congolese) who signed a memo, have called this misguided law into question. In my view, without the "name and shame" aspect of the law, it is basically an extremely expensive, onerous due diligence requirement that only a few large companies can or have the incentive to do well or thoroughly. More important, and I as I expected, it has had little impact on the violence on the ground and has hurt the people it purported to help.
I had hoped to be wrong. The foundation that I work with helps medical practitioners, midwives, and traditional birth attendants in eastern Congo and many of their patients and neighbors are members of the artisanal mining community. I won’t go as far as Steve Bainbridge has in calling for the law’s repeal because I think that companies should do better due diligence of their supply chains, especially in conflict zones. This law, however, is not the right one for Congo and the SEC is not the right agency to address this human rights crisis. Frankly, I don’t know that the EU's voluntary certification is the right answer either. I hope that Canada, which is looking at a similar rule, pays close heed and doesn’t perpetuate the same mistake that the US Congress made and that the SEC exacerbated. In the meantime, I will stay tuned to see how and if the courts, Congress, and the SEC revisit the rule.
Thursday, September 4, 2014
Behemoth proxy advisory firm Institutional Shareholder Services has released its 2015 Policy Survey. I have listed some of the questions below:
Which of the following statements best reflects your organization's view about the relationship between goalsetting and award values?
Is there a threshold at which you consider that the magnitude of a CEO’scompensation should warrant concern even if the company’s absolute and relative performance have been positive, for example, outperforming the peer group?
With respect to evaluating the say on pay advisory vote, how does your organization view disclosed positive changes to the pay program that will be implemented in the succeeding year(s) when a company demonstrates pay for performance misalignment or other concerns based on the year in review?
If you chose either the first or second answer in the question above, should shareholders expect disclosure of specific details of such future positive changes (e.g., metrics, performance goals, award values, effective dates) in order for the changes to be considered as a potential mitigator for pay for performance or other concerns for the year in review?
Where a board adopts without shareholder approval a material bylaw amendment that diminishes shareholders' rights, what approach should be used when evaluating board accountability?
Should directors be held accountable if shareholder unfriendly provisions were adopted prior to the company’s IPO?
In general, how does your organization consider gender diversity when evaluating boards?
As a general matter, what weight (relative out of 100%) would you view as appropriate for each of the categories indicated below (notwithstanding that some factors, such as repricing without shareholder approval, may be 100% unacceptable)?
How significant are the following factors when evaluating the board's role in risk oversight in your voting decision on directors (very significant, somewhat significant, not significant)?
In making informed voting decisions on the ratification of the outside auditor and the reelection of members of audit committees, how important (very important/somewhat important/not important) would the following disclosures be to you?
In your view, when is it appropriate for a company to utilize quantitative E&S (environmental and social) performance goals?
As someone who studies and consults on corporate governance issues, I look forward to seeing the results of this survey. However, the US Chamber of Commerce’s Center for Capital Market Competitiveness, which has argued that ISS and other proxy advisory firms have conflicts of interest and lack transparency, has issued a response to ISS because:
The CCMC is concerned that the development of the Survey lacks a foundation based on empirical facts and creates a one-size-fits-all system that failure to take into account the different unique needs of companies and their investors. We believe that these flaws with the Survey can adversely affect advisory recommendations negatively impacting the decision making process for the clients of proxy advisory firms. The CCMC is also troubled that certain issues presented in the Survey, such as Pay for Performance, will be the subject of Securities and Exchange Commission (“SEC”) rulemakings in the near future. While we have provided commentary to those portions of the Survey, we believe that their inclusion in the survey is premature pending the completion of those rulemakings….It is both surprising and very troublesome that the Survey does not contain a single reference to the paramount concern of investors and portfolio managers—public company efforts to maintain and enhance shareholder value—and seeks to elicit only abstract philosophies and opinions, completely eschewing any pretense of an interest in obtaining hard facts and empirically-significant data. This confirmation—that ISS’ policies and recommendations are based solely on a miniscule sampling of philosophical preferences, rather than empirical data—is itself a matter that requires, but does not yet receive, appropriate disclosure and disclaimers on ISS research reports.
The CCMC’s letter details concerns with each of ISS’ questions. Both the complete survey and the CCMC response are worth a read.
Wednesday, August 27, 2014
Thanks for your informative post, Anne. I started drafting this post as a comment to yours, and then I realized it was its own post. [sigh]
It seems to me that the U.S. Department of HHS and any commentators must grapple with what has been a difficult, fact-based question in determining how to define “closely held” to effectuate the Supreme Court’s intent in as expressed in the Hobby Lobby opinion. That question? What "control" means in this context.
The Court said in the Hobby Lobby opinion: “The companies in the cases before us are closely held corporations, each owned and controlled by members of a single family, and no one has disputed the sincerity of their religious beliefs.” More specifically, the Court notes that the Hahns (owners of shares in Conestoga) “control its board of directors and hold all of its voting shares” and notes that Hobby Lobby and Mardel “remain closely held, and David, Barbara, and their children retain exclusive control of both companies.” [Emphasis has been added by me in each quote.]
The definition of “control” primarily has been a question of fact in business law, making the task of defining it here somewhat difficult. Some questions and considerations to grapple with are set forth below the fold. I am sure that others can come up with more. I am posting these as a way of getting the collective juices flowing.
Monday, August 25, 2014
This follows on Ann's post yesterday on Gender and Crowdfunding. Ann, so glad you've joined me and Steve Bradford as securities crowdfunding watchers! Delighted to have you in that informal, somewhat disgruntled "club."
I have been interested in whether securities crowdfunding will democratize business finance. (I note here that Steve Bradford's comment to Ann's post raises the broader question of crowdfunding's ability to better engage underrepresented populations in general.) My interest has, however, been more on the investor (backer) side of the crowdfunding equation than on the business (entrepreneur) side.
As Ann notes, given the delay in the Securities and Exchange Commission (SEC) rulemaking under Title III of the Jumpstart Our Business Startups (JOBS) Act, the information on gender and crowdfunding that we have so far comes from other types of crowdfunding. This information may or may not map well to markets in securities crowdfunding. But it's still worth reviewing the information that we do have.
Thursday, August 21, 2014
Two news articles about the Dodd-Frank whistleblower law caught my eye this week. The first was an Op-Ed in the New York Times, in which Joe Nocera profiled a Mass Mutual whistleblower, who received a $400,000 reward—the upper level of the 10-30% of financial recoveries to which Dodd-Frank whistleblowers are entitled.
Regular readers of this blog may know that I met with the SEC, regulators and testified before Congress before the law went into effect about what I thought might be unintended effects on compliance programs. I have blogged about my thoughts on the law here and here.
The Mass Mutual whistleblower, Bill Lloyd, complained internally and repeatedly to no avail. Like most whistleblowers, he went external because he felt that no one at his company took his reports seriously. He didn’t go to the SEC for the money. As I testified, people like him who try to do the right thing and try resolve issues within the company (if possible) deserve a reward if their claims have merit.
The second story had a different ending. The Wall Street Journal reported on the Second Circuit opinion supporting Siemens’ claim that Dodd-Frank’s anti-retaliation protection did not extend to its foreign whistleblowing employees. In that case, everything-- the alleged wrongful conduct, the internal reporting, and the termination--happened abroad. The employee did disclose to the SEC, but only after he was terminated, and therefore his retaliation claim relates to his internal reports. The court's reasoning about the lack of extraterritorial jurisdiction was sound, but this ruling may be a victory for multinationals that may unintentionally undermine the efforts to bring certain claims to internal compliance officers.
I proudly serve as a “management representative” on the Department of Labor’s Whistleblower Protection Advisory Committee with union members, outside counsel, corporate representatives, and academics. Although Dodd-Frank is not in our purview, two dozen other laws, including Sarbanes-Oxley are, and we regularly hear from other agencies including the SEC. I will be thinking of these two news articles at our next meeting in September.
I will also explore these issues and others as the moderator of the ABA 8th Annual Section of Labor and Employment Law Conference, which will be held in Los Angeles, November 5-8, 2014. Panelists include Sean McKessey, Chief of the SEC’s Office of the Whistleblower, Mike Delikat of Orrick, Herrington & Sutcliffe LLP, and Jordan A. Thomas of Labaton Sucharow LLP.
The program is as follows:
Program Title: Whistleblower Rewards: Trends and Emerging Issues in Qui Tam Actions and IRS, SEC & CFTC Whistleblower Rewards Claims
Description: This session will explore the types of claims that qualify for rewards under the False Claims Act and the rewards programs administered by the Securities & Exchange Commission, Commodity Futures Trading Commission, and Internal Revenue Service, the quantity and quality of evidence needed by the DOJ, IRS, SEC, and CFTC to investigate a case successfully, and current trends in the investigation and prosecution of whistleblower disclosures. The panel also will address, from the viewpoint of in-house counsel, the interplay between these reward claims and corporate compliance and reporting obligations.
If you can think of questions or issues I should raise at either the DOL meeting in DC next month or with our panelists in November, please email me at email@example.com or leave your comments below.
Monday, August 18, 2014
OK. So, I am stretching a bit here. But yoga may be considered a sport, athletic clothing is a kind of fashion, and securities fraud prohibitions and corporate director fiduciary duty involve law. So, I stand by my blog title in the face of any criticism that may follow this post.
I do yoga four times a week when I am not traveling. I also work out, sometimes on days when I am not doing yoga. So, I have a fair number of pieces of yoga wear and other athletic clothing. This means that I get regular mail and email solicitations from the firms that purvey these clothing items.
I recently received a catalog from one of my favorite athletic clothing brands, Sweaty Betty, which I discovered originally when I was teaching in Cambridge, England in one of our study abroad programs a few years ago. I noticed, with some amusement, that the new catalog harps on the opacity of the firm's yoga bottoms or trousers (as the British like to call them). The website does the same--"100% opaque" labels abound. As an astute consumer and securities lawyer, I immediately jumped to the conclusion, whether right or wrong, that this yoga-bottoms advertising campaign is a reaction to the see-through yoga pants debacle of one of Sweaty Betty's competitors, Lululemon (another of my favorite brands).
What does business law have to do with this (apart from the many standard legal angles on the recall of products generally)? As my securities regulation students from last spring well know (since it was the subject of part of their final exam), stockholders of Lululemon brought a securities fraud class action suit against Lululemon, after the recall of the see-through pants, based on alleged misrepresentations of material fact in public disclosures touting the high quality of its yoga pants. Predictably (at least imho), the District Court dismissed the action back in April. The court's opinion and order resulted in a few interesting online law firm commentaries with colorful titles (including posts from, e.g., Orrick and Weil). The public fallout also includes (as most would guess) allegations of breaches of fiduciary duty and observations about insider trading and Rule 10b5-1 plans because of some well-timed trades by Lululemon's founder and then-CEO.
As we think about the new semester (ours starts on Wednesday), the Sweaty Betty catalog reminded me to bring the Lululemon matter to the attention of our law faculty readers. The facts and public reactions make for a nice case study of risk management in the context of securities regulation and fiduciary duty law. A Stanford "Closer Look" piece, as well as many news reports, make the use of the case reasonably easy. And for those of you who want to take a peak at my exam question, just ask . . . .
Thursday, August 14, 2014
A brief ten-question survey is one of the most effective tools I have used in my three years as an academic. I first used one when teaching professional responsibility and then used it for my employment law, corporate governance seminar, and business associations courses. I’m using it for the first time with my civil procedure students. I count class participation in all of my classes for a portion of their grade, and responding to the survey link by the first day of class is their first “A” or first “F” of the semester.
I use survey monkey but other services would work as well. The survey serves a number of uses. First, I will get an idea of how many students actually read my emails before next Tuesday’s first day of class—interestingly as of Thursday morning, 62% of my incoming 1Ls have completed their survey, while 42% of the BA students have done theirs. Second, my BA students work in mini law firms for a number of drafting exercises and simulations. The students can pick their own firms, but I designate a “financial expert” to each firm based upon the survey responses. I remind them that they should never leave the classroom thinking they are “experts” in the real world-- they are just experts compared to the "terrified." I use this tactic to avoid having all of the MBAs and bitcoin owners (yes, I had some last year) sit together and unintentionally intimidate the other firms with their perceived advantage.
Third, I get an idea of how students have learned about business prior to BA and what news sources they use. Fourth, I tailor my remarks and hypotheticals (when appropriate) to reach the litigators or those who plan to specialize in nontransactional work. I want them to know how BA will relate to the practice areas they think they will enter. I tell them on the first day that I went to Columbia for college because it didn’t have a math requirement and I planned to do public interest work, went to law school because the LSAT was the only graduate school entrance exam that had no math on it (ok- my professor Jack Greenberg at Columbia also said I should go). I tell them that I became a litigator to avoid business and spent my first years as a non-corporate person having to learn about FASB and the definition of a "security" because I was a big-firm commercial litigator. I tell them that when I went in-house I had to take accounting for lawyers and although I don’t love the accounting, we will discuss some basics because they never know where they will end up. Many of them mat even represent entrepreneurs. My first day speech is meant to reach the 79% of my students (as of this morning) who say they want to be litigators.
Finally, I feel as though I’m not walking in on the first day completely ignorant of my students. I often use the names or storylines from popular shows or movies in class when I can. The show Suits, by the way, is the runaway favorite for my 1Ls and I know my BA students watch it as well. My BA survey questions are below. If you are interested in seeing my Civ Pro questions, email me at firstname.lastname@example.org.
1. Please enter your first and last name. If your name is hard to pronounce, please provide a phonetic spelling as well (rhymes with ___ or NUH-RHINE for Narine).
2. Have you had any experience working in a legal setting (firm, court, agency, clinic, other) BEFORE coming to law school or DURING law school? Please answer yes or no and then describe the experience if you answered "yes".
a) Yes- please complete comment box
Other (please specify)
3. Which type of practice appeals to you more?
a) Planning (e.g. transactional)
b) Dispute resolution (e.g. litigation)
c) I do not plan to practice law after graduation
Other (please specify)
4. Have you or a close family member ever owned a business?
Yes, and I have been completely involved in management and/or business discussions
Yes, and I have been somewhat or occasionally involved in management and/or business discussions
Yes, but I have had no involvement in management and/or business discussions
5. Do you own any stocks, bonds, other types of securities (individually or through a mutual fund or trust) or bitcoin?
6. Choose up to THREE fields of law in which you would most prefer to practice
b) civil rights/constitutional law
c) corporate and securities law (including business planning)
d) criminal law (prosecution)
e) criminal law (defense)
f) labor and employment law
g) trusts and estates
h) family law
i) health law
k) intellectual property
l) real estate/land use
m) litigation (plaintiff side)
n) litigation (defense side)
o) sports and entertainment
q) other, please describe
Other (please specify)
7. Do you have an MBA, business, finance, accounting, or economics degree?
8. Do you read any business related newspapers, magazines or blogs? Do you watch any business-related television shows or listen to podcasts or radio shows? If so, please name them.
9. Other than to pass the class, what are your learning goals for this course? Are there particular topics that interest or frighten you?
10. Please describe your level of familiarity with business, finance and/or accounting.
I am an expert and could teach this class
I have some experience, but could use a refresher
I have no experience, but am willing to learn
I am completely terrified
My goals this year: help my students think like business people so that they can add value, help them pass the bar, and most important, help them realize that business isn't so terrifying. Now I just have to get my Civ Pro students to realize that the show Franklin and Bash is probably not the best way to learn about legal practice.
August 14, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, Law School, Marcia Narine, Securities Regulation, Teaching, Television | Permalink | Comments (3)
Wednesday, August 13, 2014
Alternative mutual funds, with assets under management reported from $300-500 billion, mimic riskier investment strategies employed by hedge funds such as investing in commodities, private debt, shorting assets and complex derivatives. The trading strategies, as you can guess, are funded through higher fees charged to investors. The funds are touted as a new way for mainstream investors to diversify their assets. Forbes ran a great, short piece back in February describing the investment advantages and disadvantages of alternative mutual funds.
These alternative mutual funds are now in the cross hairs of the SEC and FINRA, the self-regulatory branch of the securities industries. FINRA issued an Investor Alert on "alt" funds in June, available here. The Wall Street Journal reported yesterday that the SEC will conduct a limited scope (15-20 funds) national sweep to identify fund oversight, ready assets, and disclosure of investment strategies. Included in the funds sweep are large investment firms such as BlackRock and AQR Capital Management, as well smaller firms that are new market entrants.
Monday, August 11, 2014
Ah, yes . . . . The public/private divide . . . . My co-blogger Ann Lipton fairly begged me to write about this topic today, given that she had to miss the discussion session on the subject (entitled "Does The Public/Private Divide In Federal Securities Regulation Make Sense?") convened by me and Michael Guttentag at last week's Southeastern Association of Law Schools (SEALS) annual conference. Arm-twisting aside, however, this is a topic of current interest (and actively engaged scholarship) for me.
The discussion session allowed a bunch of our corporate and securities law colleagues to explore historical, present, and projected future distinctions between public and private offerings and public and private companies/firms. The discussion ranged widely, as did the short papers submitted by the participants. Some topics of conversation were oriented in part toward corporate governance concerns--comments from Lisa Fairfax on linkages to shareholder empowerment and from Jill Fisch on executive compensation in the post-Dodd-Frank public environment come to mind in this regard. Other discussion topics engaged securities regulation more centrally, including by, e.g., questioning the coherence of the rationale underlying the Section 12(g) and 15(d) reporting thresholds (with interesting commentary from Amanda Rose and Usha Rodrigues); offering historical observations about the difference between public offerings and private placements and how that history does, should, and may play out in offering markets (Dale Oesterle and Wulf Kaal); expressing concern about accredited investor status in the wake of the new Rule 506(c) under the Securities Act of 1933, as amended (Jonathan Glater); and analyzing the CROWDFUND Act at the public/private offering and company divides (me).
Different notions of "publicness" and "privateness" were offered up, dissected, and used in the discussion. Many pointed to the formative work of Hillary Sale (The New 'Public' Corporation, Public Governance, and J.P. Morgan: An Anatomy of Corporate Publicness) and Don Langevoort and Bob Thompson (Redrawing the Public-Private Boundaries in Entrepreneurial Capital-Raising and 'Publicness' in Contemporary Securities Regulation after the JOBS Act) as important touchstones. Both sets of papers address issues involving the publicness of firms. The Langevoort and Thompson Redrawing article also addresses public and private offerings of securities on a detailed level.
Yet, not everyone anchored their ideas to these existing works. One participant (Ben Means) provocatively suggested, for example, analyzing public disclosure rules using the bumpy-versus-smooth taxonomy for legal rules described in Adam Kolber's recent California Law Review article. I was not familiar with this piece. I now plan to read it.
Many discussants denied the continued existence or salience of a public/private divide in securities regulation, believing instead that there is a sliding scale or continuum between public and private. Although this argument has more traction after the JOBS Act and the Dodd-Frank Act, evidence of an indistinct line both in finance and entity law predates those legislative initiatives. Some of us were uncomfortable in declaring the death of the public/private divide--or in letting go of the analytical distinction between publicness and privateness because of the role that it serves in scholarship and teaching. The public/private divide has been a heuristic in securities regulation that people find hard to abandon . . . .
My paper, which is founded on the works of Professors Langevoort, Sale, and Thompson, is forthcoming in the University of Cincinnati Law Review. Although the draft is not "ready for Prime Time" yet, I am happy to share it with anyone who may be interested in it. Other papers submitted for the discussion group may or may not be precursors to works in process. But you can contact any discussion group participant (or ask me to contact one or more participants on your behalf) if you want to explore their ideas further.
Although I am not yet fully ready to step back into the classroom to teach next week, I am better prepared for the experience (and for the research and writing I am doing) thanks to the SEALS conference. And now, to finish that syllabus . . . .
Thursday, August 7, 2014
On June 5, 2014, SEC Commissioner Dan Gallagher commemorated the agency’s 80th anniversary by, among other things, repeating the criticisms of the various nonfinancial disclosures that companies are compelled to make by law or asked to make through shareholder proposals. In his view, “companies’ disclosure documents are being cluttered with non-material information that can drown out or obscure the information that is at the core of a reasonable investor’s investment decision. The Commission is not spending nearly enough time making sure that our rules elicit focused, meaningful disclosures of material information.” I assume that he is referring to the various environmental, social and governance proposals (“ESG”) brought by socially responsible investors and others. I’m writing this blog post while taking a break from reviewing dozens of these proposals for an article that I am writing on how consumers and investors evaluate ESG disclosures and those required in other countries in the human rights context.
Citing Chair White’s quote about “information overload,” last week the US Chamber of Commerce’s Center for Capital Markets Competitiveness released a list of relatively non-controversial recommendations on how the SEC can modernize the current disclosure regime so that it can better serve the investing public. For a great discussion of what led to this latest round of disclosure reform see here. Some of the recommendations concern items that technology can handle. Others concern repetition and relate to factors that the SEC does not require but are there to avoid litigation. The report, entitled “Corporate Disclosure Effectiveness: Ensuring a Balanced System that Informs and Protects Investors and Facilitates Capital Formation,” focuses on near-term improvements to Regulation S-K that the Chamber believes would likely garner widespread support. The report also discusses longer-term proposals, but does not discuss in any detail the kinds of issues that Chair Gallagher and others raise. You can also watch an entire webcast of the panel discussion releasing the report featuring, among others, two former SEC Commissioners, current SEC Director of the Division of Corporate Finance Keith Higgins, and issuers counsel, including my former colleague from Ryder, Flora Perez, here (start at minute 19:45).
Full disclosure-- I was part of the working group that reviewed some of the recommendations and gave comments before the report’s release, and while I also oppose the conflict minerals disclosure because I don’t think it should be within the SEC’s purview and didn’t take into account some of the realities of the modern supply chain, I don’t have a complete aversion to corporate disclosure of ESG or other risk factors to investors and the public. The who, what, why, how, where and when are the key questions.
Below is a list of all of the recommendations for reform taken directly from the Chamber’s one-pager:
Near Term Improvements:
The requirement to disclose in a company’s Form 10-K the “general development” of a business, including the nature and results of any bankruptcy, acquisition, or other significant development in the lifecycle of a business (Item 101(a)(1) of Regulation S-K)
The requirement to disclose financial information for different geographic areas in which a company operates (Item 101(d) of Regulation S-K)
The requirement to disclose whether investors can obtain a hard copy of a company’s filings free of charge or view them in the SEC’s Public Reference Room (Items 101(e)(2) and (e)(4) of Regulation S-K)
The requirement to describe principal plants, mines, and other materially important physical properties (Item 102 of Regulation S-K)
The requirement that companies discuss material legal proceedings (Item 103 of Regulation S-K)
The requirement to disclose which public market a company’s shares are traded on and the high and low share prices for the preceding two years (Items 201(a)(1)(i), (ii), (iii), and (iv) of Regulation S-K)
The requirement to disclose the frequency and amount of dividends for a company’s stock during the preceding two years (Item 201(c) of Regulation S-K)
The requirement to display a graph showing the company’s stock performance over a period of time (Item 201(e) of Regulation S-K)
The requirement to disclose any changes in and disagreements with accountants (Item 304 of Regulation S-K)
The requirement to disclose certain transactions with related parties (Item 404(a) of Regulation S-K)
The requirement to disclose the ratio between earnings and fixed charges (Item 503(d) of Regulation S-K)
The requirement to file certain exhibits (Item 601 of Regulation S-K)
The requirement to disclose recent sales of unregistered securities and a description of the use of proceeds from registered sales (Item 701 of Regulation S-K)
Longer Term Improvements:
Compensation Discussion & Analysis (CD&A)
Management’s Discussion and Analysis (MD&A)
A Revised Delivery System
Take a look at the list, read the report which describes the Chamber's rationale, and if you have time watch the webcast, which provides some real-world context. What’s missing from the list? What shouldn’t be on the list? Have you seen anything in your practice or teaching that could inform the debate? I look forward to seeing your feedback on this site or via email at email@example.com
Thursday, July 31, 2014
Warning- do not click on the first link if you do not want to see nudity.
Dov Charney founded retailer American Apparel in 1998 and it became an instant sensation with its 20-something year old consumer base. He mixed a "made in America- sweatshop free" CSR focus with a very sexy/sexual set of ads (hence the warning- - when I first created the link, the slideshow went from a topless “Eugenia in disco pants in menthe” (seriously) to a shot of adorable children’s clothing in about 10 seconds). No wonder my 18-year old son, who leaves for art school in two weeks, appreciates the ad campaigns. Most of his friends do too- both the males and females. In fact, he indicated that although they all know about the “sweatshop free” ethos, because “it’s in your face when you walk in the stores,” that’s not what draws them to the clothes. As a person who blogs and writes about human rights and supply chains, I almost wish he had lied to me. But he’s no different than many consumers who over-report their interest in ethical sourcing, but then tend to buy based on quality, price and convenience. I am still researching this issue for my upcoming article on CSR, disclosure regimes and human rights but see here, here, here and here for some sources I have used in the past. My son’s friends--the retailer’s target demographic-- appreciate that the clothes are “sweatshop free” but don’t make their buying decisions because of it. They buy because of the clothes and to a lesser extent, the ads.
The first time I ever really thought about the store was after a 2005 20/20 expose about Charney, who was accused of, among other things, sexually harassing and intimidating numerous employees. At the time I was a management-side employment lawyer and corporate compliance officer and thought to myself “what a nightmare for whomever has to defend him.” It’s pretty hard to shock an employment lawyer, but the allegations, which continued until his ouster last month, were pretty egregious. After over 10 years of lawsuits, the company terminated him for breaching his fiduciary duty, violating company policy, and misusing corporate assets.
Recently, American Apparel’s employment practices liability insurance rose from $350,000 to $1 million, I can only assume, because of his actions and not due to the other 10,000 company employees. The company has been sued repeatedly by the EEOC and not just for sexual allegations. Purportedly, the company, which has never traded above $7.00 a share and today is a steal at $.97, could not get financing from some sources as long as Charney was at the helm.
My son and his friends did not know about the termination or the harassment allegations over the years, but he says that the nature of the allegations could have caused some of his friends to stop and think about whether they wanted to patronize the stores. I have some 30-something friends who refuse to shop there. Could this be why the store chose to add a female director? As I explained to a reporter last week, the company shouldn’t need a female perspective to realize that the founder is, to put it mildly, a risk. And in fact, as studies cited by my co-blogger Josh Fershee noted earlier this week, being the “woman’s voice” may minimize her perceived effectiveness. Yes, it’s true that American Apparel took more decisive action than the NFL last week, as Joan Heminway observed, but what took them so long? Is it too little too late? Where was the general counsel when Charney allegedly refused to take his sexual harassment training, which is required by law in California every two years? Where were the other board members who allowed the settlement of case after case involving Charney? I have often found that some of the most vigilant supporters of women in the workplace, especially in harassment matters, are older males who have daughters and wives and who know what it’s like for them. When did the board worry about whether the CEO's well-publicized alleged attacks on employees contradicted the heavy corporate responsibility branding? Did the board meet its Caremark duties?
Ironically, the company’s 10-K filed two months before his termination indicated that, “In particular, we believe we have benefited substantially from the leadership and strategic guidance of Dov Charney. The loss of Dov Charney would be particularly harmful as he is considered intimately connected to our brand identity and is the principal driving force behind our core concepts, designs and growth strategy.”
So at what point between April and June did Charney’s actions go off the scale on the enterprise risk management heat map? COSO, the standard bearer for ERM, encourages boards to focus on: what the firm is willing to accept as it pursues shareholder value; a knowledge of management’s risk management processes that have identified and assessed the most significant enterprise-wide risks; a review of the risk portfolio compared to the risk appetite; and whether management is properly responding to the most significant risks and apprising the board of those risks. Could such an objective risk assessment have even occurred with Charney (the risk) in the room? How could the company have the right tone at the top when the founder/CEO failed to comply with Code of Ethics Rule #2 --“service to the Company never should be subordinated to personal gain and advantage”? The stock price has been falling for years and the company has been struggling. Did the high rates to insure Charney’s conduct finally become too hot to handle? On the other hand, would the directors have made the same decision if the shares were trading at $97 instead of .97? Some shareholders are raising concerns too about why any of the original board members remain given the appalling financial performance.
The board now has a “suitability committee,” which will review the results of an independent investigation into Charney’s actions. Even if the report clears Charney and he’s brought back, the new independent directors will have a lot of questions to answer. The question of whether there is a woman on the board seems to be almost irrelevant given the history. For the record, even though the literature is mixed on the financial benefits of gender and racial diversity, I am a strong proponent of the diversity of viewpoints, particularly those that the underrepresented can bring to the table.
But this board needs to re-establish trust among its investors and funders and then focus on what any retailer should- potential supply chain disruptions, the impact of any immigration reform, currency fluctuations, and keeping their customer base happy and out of competitors H & M and Forever 21. The last thing they need to worry about is how to pay off the victims of their founder’s latest escapades.
Monday, July 28, 2014
The new crowdfunding exemption in section 4(a)(6) of the Securities Act will, once the SEC adopts the rules required to implement it, allow ordinary investors to invest in unregistered securities offerings. Will those unsophisticated investors go down in flames or will they be able to make rational investment choices?
Some proponents of crowdfunding argue that crowdfunding benefits from the so-called “wisdom of the crowd": that the collective, consensus choice that results from crowdfunding is better than what any individual could do alone, and often as good as expert choices. A recent study seems to support that view.
Two business professors—Ethan R. Mollick at the Wharton School and Ramana Nanda at Harvard—looked at crowdfunding campaigns for theater projects. They submitted those projects to people with expertise in evaluating theater funding applications and compared the expert evaluations to the actual crowdfunding results.
Mollick and Nanda found a strong positive correlation between the projects funded by the crowd and those rated highly by the experts. In other words, crowds were more likely to fund the campaigns the experts preferred. In addition, projects funded by the crowd that were not rated highly by the experts did just as well as the projects chosen by the experts.
Of course, theater projects aren’t the same as securities, but this study should certainly be of interest to those following the securities crowdfunding debate. The full study (44 pages) is available here. If you don’t have time to read the full study, a summary is available here.
Thursday, July 24, 2014
As many have celebrated or decried, Dodd-Frank turned four-years old this week. This is the law that Professor Stephen Bainbridge labeled "quack federal corporate governance round II" (round I was Sarbanes-Oxley, as labeled by Professor Roberta Romano). Some, like Professor Bainbridge, think the law has gone too far and has not only failed to meet its objectives but has actually caused more harm than good (see here, for example). Some think that the law has not gone far enough, or that the law as drafted will not prevent the next financial crisis (see here, for example). The Council on Foreign Relations discusses the law in an accessible manner with some good links here.
SEC Chair Mary Jo White has divided Dodd-Frank’s ninety-five mandates into eight categories. She released a statement last week touting the Volcker Rule, the new regulatory framework for municipal advisors, additional controls on broker-dealers that hold customer assets, reduced reliance on credit ratings, new rules for unregulated derivatives, additional executive compensation disclosures, and mechanisms to bar bad actors from securities offerings.
Notwithstanding all of these accomplishments, only a little over half of the law is actually in place. In fact, according to the monthly David Polk Dodd-Frank Progress Report:
As of July 18, 2014, a total of 280 Dodd-Frank rulemaking requirement deadlines have passed. Of these 280 passed deadlines, 127 (45.4%) have been missed and 153 (54.6%) have been met with finalized rules. In addition, 208 (52.3%) of the 398 total required rulemakings have been finalized, while 96 (24.1%) rulemaking requirements have not yet been proposed.
Many who were involved with the law’s passage or addressing the financial crisis bemoan the slow progress. The House Financial Services Committee wrote a 97-page report to call it a failure. So I have a few questions.
1) When Dodd-Frank turns five next year, how far behind will we still be, and will we have suffered another financial blip/setback/recession/crisis that supporters say could have been prevented by Dodd-Frank?
2) How will the results of the mid-term elections affect the funding of the agencies charged with implementing the law?
3) What will the SEC do to address the Dodd-Frank rules that have already been invalidated or rendered otherwise less effective after litigation from business groups such as §1502, Conflict Minerals Rule (see here for SEC response) or §1504, the Resource Extraction Rule (see here for court decision)?
4) Given the SEC's failure to appeal after the proxy access litigation and the success of the lawsuits mentioned above, will other Dodd-Frank mandates be vulnerable to legal challenge?
5) Will the whistleblower provision that provides 10-30% of any recovery over $1 million to qualified persons prevent the next Bernie Madoff scandal? I met with the SEC, members of Congress and testified about some of my concerns about that provision before entering academia, and I hope to be proved wrong.
Let's wait and see. I look forward to seeing how much Dodd-Frank has grown up this time next year.
Friday, July 18, 2014
At the risk of overdoing what may have been a good thing, I contributed a disclosure-oriented post to the Hobby Lobby symposium on The Conglomerate earlier today. It includes new information about a U.S. Department of Labor Q&A posted yesterday, among other things. Enjoy or not, as you so please . . . .
Monday, July 14, 2014
My post last week spawned more commentary than usual--on the BLPB site and off. So, I am regrouping on the same issue for my post today and plan to push forward a bit on some of the areas of commentary. Also, since The Conglomerate is running a Hobby Lobby symposium this week, I thought it might be nice to offer some thoughts on disclosure up here and (maybe) later chime in at The Conglomerate on this or other issues relating to the Hobby Lobby case later in the week . . . .
Tuesday, July 8, 2014
A recent article discussing the American Society of Civil Engineers' Report Card on U.S. infrastructure explains:
Without adequate investment on infrastructure the US could face a $2.4 trillion drop in consumer spending by 2020, a $1.1 trillion loss in total trade and experience the loss of 3.5 million jobs in 2020 alone.
This is just a sliver of the doom and gloom the American Society of Civil Engineers predicted this week with the release of their final report in the “Failure to Act” series that focuses on the impacts associated with continued infrastructure deterioration. The latest installment of the ASCE reports focuses on specifically on economic impacts.
Under current investment trends, only 60% of the investment funding required by 2020 will be secured and this underinvestment in infrastructure will have a “cascading impact on the nation’s economy” and culminate in a “gradual worsening of reliability over time,” Gregory E. DiLoreto, ASCE President told the participants on a conference call.
Back in 2007, I published an article titled, Misguided Energy: Why Recent Legislative, Regulatory, and Market Initiatives are Insufficient to Improve the U.S. Energy Infrastructure (here). In that article, I argued:
Soaring energy prices, natural gas supply shortages, and blackouts in major areas of the United States have led to a flurry of legislative and regulatory activity. Through this activity, lawmakers and regulators purport to resolve problems regarding natural gas and electricity supplies and service reliability. A major goal of these actions has been to address the overall energy crisis by increasing investment in the U.S. energy infrastructure. However, as is often the case with political remedies for difficult problems, what is being done and what legislators and policymakers claim is being done are two entirely different things. Recent legislative and regulatory policies are simply ill-equipped to have any substantial impact on the nation’s energy infrastructure in the foreseeable future. Although some of the policies provide long-term hope for increasing the amount and sources of capital available for investment, they are not adequate solutions to a current, and progressing, energy crisis.
Little has changed, but Congress's lack of focus remains. So here's the suggestion, for both energy infrastructure and business regulation: If we're going to add new rules or policies, let's make them clear, transparent, and focused. No 700-page laws or convoluted regulations. If we want to reduce fossil fuel consumption, add a carbon tax. If we want to get transmission infrastructure sited, give federal eminent domain authority for siting.
For now, from the SEC to FERC, let's just give it a try. Otherwise, we don't tend to facilitate markets, we tend to create carve outs that entrench existing powers. And we know how well that works.
Monday, July 7, 2014
The Court's Hobby Lobby decision, as noted in post-decision commentary (see, e.g., Sarah Hahn's guest post earlier this week), apparently relies in part on the fact that shareholders (and, potentially, employees and other relevant constituents of the firm) know that the firm has sincerely held religious beliefs and what those beliefs mean for business operations and legal compliance. The Court does not directly address this in its opinion. Rather, the opinion includes various references to owner engagement that imply buisness owner awareness. The Court states:
- For-profit corporations, with ownership approval, support a wide variety of charitable causes . . . . (Op. 23, emphasis added)
"So long as its owners agree, a for-profit corporation may take costly pollution-control and energy conservation measures that go beyond what the law requires." (Op. 23, emphasis added)
In making these statements and reasoning through this part of the opinion, the Court relies on state corporate law principles and allusions.
Importantly, the Court also indicates its views on how the policy underlying the RFRA favors an interpretation that includes corporations as persons:
An established body of law specifies the rights and obligations of the people (including shareholders, officers, and employees) who are associated with a corporation in one way or another. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people. For example, extending Fourth Amendment protection to corporations protects the privacy interests of employees and others associated with the company. Protecting corporations from government seizure of their property without just compensation protects all those who have a stake in the corporations’ financial well-being. And protecting the free-exercise rights of corporations like Hobby Lobby, Conestoga, and Mardel protects the religious liberty of the humans who own and control those companies.
(Op. 18, emphasis in original) Note how the last sentence reduces the protected category of persons under the RFRA to those who "own and control" the firm at issue. This represents an interesting narrowing of constituency groups from the more inclusive treatment in the first sentence of the paragraph. The reason for this narrowing may be (likely is) a practical one, evidencing judicial restraint. The plaintiffs in the Hobby Lobby actions were those who owned or controlled the corporation, and the decision likely will be limited in its application accordingly.
Given these breadcrumbs from the Court's opinion, should disclosure to shareholders or other constituencies be required, and if so, where would those disclosure rules reside as a matter of positive law? A blog post may be the wrong place to begin to address this issue (which is admittedly complex and involves, potentially, areas of law somewhat unfamiliar to me). But indulge me in a thought experiment here for a minute.
Saturday, July 5, 2014
The blogosphere has been a-twitter with commentary on Jamie Dimon's revelation earlier this week that he has throat cancer and will be undergoing treatments in the hope of eradicating it. From the public news, his prognosis sounds good. For that, I am sure all are grateful.
As some of you may know, my interest in issues relating to disclosures of facts from executives' private lives stems from my fascination, starting about 12 years ago, with the Martha Stewart disclosure cases (about which I wrote in law journals and in several chapters of a book that I edited). After co-writing the book about the basic concerns in Stewart's insider trading, misstatements/omissions securities fraud, and derivative fiduciary duty actions, I focused in additional articles on some finer points relating to her case. Two of these works covered the disclosure of private facts. Among the types of private facts covered are those relating to executive health concerns.
Monday, June 30, 2014
Rather than try to rehash what is now done, I will pose a different question: How does one reconcile this religious exercise with the profit-seeking mandate that the Delaware court imposes from time to time. As Chancellor Chandler noted in eBay v. Newmark (more here):
The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment.
Note that “purely” is not an entirely accurate modifier here. Craigslist made a profit and had some ventures that raised money. They just did not monetize the majority of the endeavors
So what about an entity that operates for purely religious ends? Hobby Lobby and those similarly situated seem to be saying that religion trumps profit (see, e.g., Chik_Fil-A closing on Sundays). This is not the argument that our business model is stronger because of our choices, which I have argued before should be protected, but this is saying we choose religion over profit.
As Chancellor Chandler noted in eBay, if there are no shareholders to complain, then perhaps it is not an issue. Still, as soon as a shareholder disagrees, will decisions such as limiting healthcare options (thus limiting the talent pool for employees) or closing on Sunday? It seems to me the Hobby Lobby decision has opened the door for several fiduciary duty fights down the road.
Can a corporation now choose to give a majority of its funds to a church, even if it harms the entity? I think no, but I hope, for the sake of businesses everywhere, the Court did not just create a First Amendment out to such fiduciary duties.
I have been catching up on my long backlist of reading and recently read an excellent article on litigation challenging the fees of mutual fund advisers: Quinn Curtis and John Morley, The Flawed Mechanics of Mutual Fund Fee Litigation.
As you may know, section 36(b) of the Investment Company Act of 1940 gives mutual fund investors and the SEC a cause of action to challenge excessive investment adviser fees.
Section 36(b) has generated quite a bit of academic commentary; Curtis and Morley’s footnote listing those articles (fn. 4, if you’re interested) takes up more than a page of single-spaced text. The Supreme Court has also recently chimed in on section 36(b). Jones v. Harris Assocs. L.P., 559 U.S. 335 (2010) discussed the standard for reviewing advisors’ fees under section 36(b).
Don’t worry; Curtis and Morley don’t rehash all of the earlier commentary. Instead, they take the existence of a section 36(b) cause of action as a given and ask how it can be improved to better achieve its purposes. Here’s the abstract:
We identify a number of serious mechanical flaws in the statutes and judicial doctrines that organize fee liability for mutual fund managers. Originating in section 36(b) of the Investment Company Act, this form of liability allows investors to sue managers for charging fees above a judicially created standard. Commentators have extensively debated whether this form of liability should exist, but in this paper we focus instead on improving the mechanics of how it actually works. We identify a number of problems. Among other things, statutes and case law give recoveries to investors who did not actually pay the relevant fees. Statutes and case law also impose no penalties to provide deterrence; they treat similar categories of fees differently; they create an unusual settlement process that prevents litigants from settling their full claims; they expose low-cost advisers to serious litigation risk; they exhibit deep confusion about what makes fees excessive; and they provide unduly small incentives for plaintiffs’ lawyers that are only adequate in cases of low merit. Most of these problems appear to be the unintended results of accidents and confusion, rather than deliberate policy choices. We conclude by offering specific ideas for reform.
The article, to be published in the Yale Journal of Regulation, was posted on SSRN in March, but it’s been sitting in my computer reading file since then. Better late than never. If you’re interested in the regulation of mutual funds and investment advisers, it’s definitely worth reading.