Friday, March 7, 2014
Are the directors of Hobby Lobby and Conestoga Wood breaching their fiduciary duties by challenging the contraceptive mandate, seemingly without serious regard to the financial consequences?
Mark Underberg says “perhaps”.
Stephen Bainbridge says “no”.
Professor Bainbridge focuses on the facts that both Hobby Lobby and Conestoga Woods are family-owned, closely-held corporations, and that Conestoga Woods is incorporated under Pennsylvania law, which has a nonshareholder constituency statute. I am not going to jump into their disagreement directly, but, instead, will use a story I saw about Apple to extend the conversation.
Unlike Hobby Lobby and Conestoga Woods, Apple is a publicly-traded, California corporation. California does not have a constituency statute. Recently, Apple CEO and director, Tim Cook, discussed the company’s commitment to the environment, the blind, and making the world a better place. Cook supposedly told investors:
If you want me to do things only for ROI reasons, you should get out of this stock.
More forcefully, Cook said:
When we work on making our devices accessible by the blind, I don’t consider the bloody ROI.
In Cook’s first statement, he seems to be saying that ROI is one of the reasons (just not the only reason) Apple makes decisions. This appears to be a perfectly acceptable statement for a director in the day-to-day decision-making process to make. Could, however, Apple’s board of directors properly completely disregard ROI, as Cook’s second statement suggests?
While Apple is a California corporation, many states take their cues from Delaware on issues of corporate law. Two-former Delaware Chancellors, one of whom is the new Chief Justice of the Delaware Supreme Court, have reiterated the importance of considering shareholder value, at least for directors of Delaware corporations.
In eBay v. Newmark, former-Chancellor William Chandler stated that:
Having chosen a for-profit corporate form, the Craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.
In a similar vein, Chief Justice Leo Strine has written that:
[A]s a matter of corporate law, the object of the corporation is to produce profits for the stockholders…. the social beliefs of the managers, no more than their own financial interests, cannot be their end in managing the corporation.
(I note that a number of academics think the former-Chancellors' focus on shareholders is misplaced).
How much leeway does corporate law provide directors in focusing on non-shareholder interests? One might convincingly argue that even directors of public, Delaware-corporations are likely to avoid liability if they can make an argument that the decision could (possibly) lead to long-term value for the shareholders. Making such an argument would be relatively easy for Apple – likeminded customers, shareholders, and employees may become more committed to Apple following Apple's society-focused decisions. These likeminded shareholders may buy more shares and sue less frequently. Customers may buy more Apple products and goodwill may increase. Employee turnover may be reduced. All of this may increase profitability in the long-term. While a court is unlikely to challenge such an argument from Apple’s directors, is the argument an honest one? Are Apple's directors really making those decisions with a focus on profitability?
Could Apple’s directors argue, without fear of liability, that they made the society-focused decisions simply because it was the right thing to do, and openly admit that they knew that shareholders were going to suffer in both the short and long-term? I am not sure they could, and I believe that it is that uncertainty in traditional corporate law that benefit corporation statutes attempt to address. (Granted, I admit that the current benefit corporation statutes are far from perfect.)
Update: Professor Bainbridge posted a reply. Thanks to him for the detailed response, and I agree with much of what he writes. To clarify, my point was not about the likelihood of a breach, but rather the possibility of a breach. Also, while I appreciate the protection of the business judgment rule and the Shlensky v. Wrigley case, I think my hypthetical is different than Shelensky. In my hypothetical, the directors openly admit that nonshareholders were the focus of the decision and that shareholders would be hurt in the short and long run. While the court in Shlensky generously provided reasons for why not adding stadium lights might help the Cubs in the long run, I don't remember any direct statements by the defendants about shareholders being purposefully ignored.
Granted, my hypothetical might be a bit far-fetched. Any director with good attorneys may be able to just keep silent or mention the possible long-term benefits of their decisions. That said, in both Dodge v. Ford and eBay v. Newmark, the defendants seemed to insist on telling the court that they were not focused on the shareholders. Some egos may have been involved. I know some professors (such as Professor Gordon Smith) think the rules in those two cases are regulated to closely-held corporations, and while I am not convinced that the general rules are so limited, I do note that the chance of a majority of a public company board openly admiting that shareholder interests were ignored is extremely close to zero.
In the end, I agree with Professor Bainbridge that a breach is highly unlikely, but that Cook "would have been wise to be more temperate in his remarks." Where Professor Bainbridge and I may part company is that I maintain that there is a possibility of a breach if the directors (of a corporation incorporated in a state without a constituency statute) openly admit completely disregarding shareholder interests.
Thursday, March 6, 2014
Some law professors may remember when Justices Roberts and Kennedy opined on the value legal scholarship. Justice Roberts indicated in an interview that law professors spend too much time writing long law review articles about “obscure” topics. Justice Kennedy discussed the value he derives from reading blog posts by professors who write about certs granted and opinions issued. I have no doubt that most law students don’t look at law review articles unless they absolutely have to and I know that when I was a practicing lawyer both as outside counsel and as in house counsel, I almost never relied upon them. If I was dealing with a cutting-edge issue, I looked to bar journals, blog posts and case law unless I had to review legislative history.
As a new academic, I enjoy reading law review articles regularly and I read blog posts all the time. I know that outside counsel read blogs too, in part because now they’re also blogging and because sometimes counsel will email me to ask about a blog post. I encourage my students to follow bloggers and to learn the skill because one day they may need to blog for their own firms or for their employers.
Blogging provides a number of benefits for me. First, I can get ideas out in minutes rather than months via the student-edited law review process. This allows me to get feedback on works/ideas in progress. Second, it forces me to read other people’s scholarship or musings on topics that are outside of my research areas. Third, reading blogs often provides me with current and sophisticated material for my business associations and civil procedure courses. At times I assign posts from bloggers that are debating a hot topic (Hobby Lobby for example). When we discuss the Basic v. Levinson case I can look to the many blog posts discussing the Halliburton case to provide current perspective.
But as I quickly learned, not everyone in the academy is a fan of blogging. Most schools do not count it as scholarship, although some consider it service. Anyone who considers blogging should understand her school’s culture. For me the benefits outweigh the detriment. Like Justice Kennedy, I’m a fan of professors who blog. In no particular order, here are the mostly non-law firm blogs I check somewhat regularly (apologies in advance if I left some out):
http://www.theconglomerate.org/ (thanks again for giving me first opportunity to blog a few months into my academic career!)
http://law.wvu.edu/the_business_of_human_rights (currently on a short hiatus)
I would welcome any suggestions of must-reads.
March 6, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, Marcia L. Narine, Merger & Acquisitions, Securities Regulation, Social Enterprise, Teaching, Unincorporated Entities, Weblogs | Permalink | Comments (2)
Sunday, February 23, 2014
My co-blogger Haskell Murray recently posted “Religion, Corporate Social Responsibility, and Hobby Lobby” and asked me to respond, which I am happy to do. I will admit that I am still developing my thoughts on the issues raised by Haskell’s post, so what follows is a bit jumbled but still gives a sense of why I currently oppose for-profit corporations being permitted to evade regulation by pleading religious freedom (if you have not read Haskell’s post, please do so before proceeding):
1. Corporate power threatens democracy. Corporations and other limited liability entities have been controversial since their creation because, among other things, the combination of limited liability, immortality, asset partitioning, etc., makes them incredible wealth and power accumulation devices. Of course, on the one hand, this is precisely why we have them – so that investors are willing to contribute capital they would never contribute if they risked being personally liable as partners, and thus unique economic growth is spurred, a rising tide then lifts all ships, and so on. On the other hand, because of their unique ability to consolidate power, corporations are aptly considered by many to be one of Madison’s feared factions that threaten to undermine the very democracy that supports their creation and growth:
Besides the danger of a direct mixture of religion and civil government, there is an evil which ought to be guarded against in the indefinite accumulation of property from the capacity of holding it in perpetuity by ecclesiastical corporations. The establishment of the chaplainship in Congress is a palpable violation of equal rights as well as of Constitutional principles. The danger of silent accumulations and encroachments by ecclesiastical bodies has not sufficiently engaged attention in the U.S.
[More after the break.]
February 23, 2014 in Business Associations, Constitutional Law, Corporate Governance, Corporations, Current Affairs, Financial Markets, Food and Drink, Haskell Murray, Religion, Social Enterprise, Stefan J. Padfield | Permalink | Comments (3)
Friday, February 21, 2014
Professor Stephen Bainbridge made me aware of Keith Paul Bishop's post entitled:
I was shocked because the [law professor] brief constitutes a frontal assault on corporate social responsibility. For example, the law professors make the following apocalyptic claim: "If this Court were to agree that, as a matter of federal law, shareholders holding a control bloc of shares in a corporation may essentially transfer their [social responsibility] beliefs to the corporation, the results could be overwhelming." Ok, I substituted “social responsibility” for “religious”. However, if the transfer of stockholder religious beliefs to the corporation would be “overwhelming”, why wouldn’t the same be true of beliefs regarding climate change, the environment, or other beliefs animating the corporate social responsibility movement?
Two of my co-bloggers signed the law professor brief in the Hobby Lobby case that Bishop discusses, so they are probably better suited to respond, but I will provide a few thoughts.
One distinction, between the Hobby Lobby case and CSR, that may be quickly raised is addressed in section II.C of the law professor brief. Hobby Lobby is attempting to use religion to avoid legal obligations. There may be situations where companies argue they should be able to avoid legal obligations because of "beliefs regarding climate change, the environment, or other beliefs animating the corporate social responsibility movement" but none spring immediately to mind.
While the parade of horribles in the second section of the law professor brief might prove compelling, the entire first section (over half of the argument) would be seriously damaged if Hobby Lobby's articles of incorporation were amended to express the religious stance of the company. The first section of the brief focuses on treating the corporation as a separate entity, distinct from its owners. It seems, however, that Hobby Lobby's owners could amend the corporation's articles to endow the corporation with its own, separate and distinct, religious views.
As I have previously mentioned, Hobby Lobby could have helped its chances in this case by converting to some form of for-profit benefit corporation and being specific about its religious views in its articles of incorporation. The Delaware Public Benefit Corporation ("PBC") statute makes the ability to maintain a religious purpose in a PBC explicit when it defines "public benefit" as "a positive effect (or reduction of negative effects) on 1 or more categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature." (emphasis added) According to Delaware's PBC law, each PBC must include at least one "specific public benefit" within its statement of purpose.
I am interested in any additional thoughts on this topic, and am eagerly awaiting Professor Bainbridge's promised full response to the law professor brief (and any responses to his response).
On March 3, I plan to start my spring break by speaking at Western Carolina University. I will be speaking on the various social enterprise statutes—Benefit Corporations, Benefit LLCs, Public Benefit Corporations, Flexible Purpose Corporations, Social Purpose Corporations, and L3Cs—with a special focus on my recent research surrounding Delaware's new (as of August 1, 2013) Public Benefit Corporation law.
Western Carolina University has a major in Business Administration and Law and I understand that a number of students from that undergraduate program will be in attendance.
Many thanks to Professor Melissa English for inviting me. I love the mountains of North Carolina and always enjoy sharing my research.
Thursday, February 20, 2014
Our BLPB group has had a number of email discussions recently about the use of social media including blogs, Facebook, LinkedIn and Twitter for professional purposes. My home institution has discussed the same topic and even held a “training” session on technology in and outside of the classroom. Because I am a heavy user, I volunteered to blog about how I use social media as a lawyer and academic in the hopes of spurring discussion or at least encouraging others to take a dip in the vast pool of social media.
Although I have been on Facebook for years, I don’t use that professionally at all. I also don’t allow my students to friend me, although I do know a number of professors who do. I often see lawyer friends discussing their clients or cases in a way that borders on violations of the rules of professional conduct, and I made sure to discuss those pitfalls when I was teaching PR last year.
I have also used LinkedIn for several years, mainly for professional purposes to see what others in my profession (at the time compliance and privacy work) were thinking about. I still belong to a number of LinkedIn groups and have found that academics from other countries tend to use LinkedIn more than US professors. I have received a number of invitations to collaborate on research just from posts on LinkedIn. I also encourage all of my law students to join LinkedIn not only for networking purposes, but also so that they can attract recruiters, who now use LinkedIn almost as often as they use headhunters. When I blog, I link my posts to LinkedIn, which in turn automatically posts to Twitter.
I admit that I did not like Twitter at first. I now have three Twitter accounts- follow me at @mlnarine. I started using Twitter when I was a deputy general counsel and compliance officer and I followed law firms and every government agency that was online that regulated my industry. The government agencies were very early to the Twitter game and I once learned about a delay in the rollout of a regulation via Twitter a full week before my outside counsel who was working on the project informed me.
I also use the hashtag system (#) to see what others are saying on topics that hold my interest such as #csr (corporate social responsibility and unfortunately also customer service rep), #socent for social enterprise, #corpgov for corporate governance, and #Dodd-Frank and #climatechange (self explanatory).
I make an effort to tweet daily and am now an expert in trying to say something useful in 140 characters or less (being on yearbook staff in high school and counting characters for headlines made this a breeze for me). I re-tweet other tweets that I believe may be of interest to my followers or links to articles, and often gain new followers based on what I have chosen to tweet, largely because of my use of hashtags. In fact, after a marathon tweeting session following the Dodd-Frank conflict minerals oral argument before the DC Circuit Court of Appeals, I received four calls from the press for interviews, a nice, unexpected benefit of trying to educate my followers. Often when I attend conferences, such as last week’s ABA meeting or the UN’s Business and Human Rights Forum, the organizers develop a hashtag so that those who cannot attend in person can follow the proceedings through tweets and the attachments to those tweets.
The best part of twitter is that I met fellow blogger, Haskell Murray because of one his tweets and that led to an invitation to speak at a conference. Haskell has published a useful list of business law professors on Twitter so if you’re not on his list, let us know and we will update it.
Next week I will post about the benefits or perils of blogging, especially for someone new to academia.
February 20, 2014 in Business Associations, Anne Tucker, Conferences, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, Ethics, Haskell Murray, Marcia L. Narine, Social Enterprise, Stefan J. Padfield, Teaching, Web/Tech | Permalink | Comments (0)
Wednesday, February 12, 2014
Last week, I had an enjoyable conversation with Joseph Yockey (Iowa) about his new article: "Does Social Enterprise Law Matter?" I am glad to see more people entering the social enterprise law conversation and have included the abstract of his interesting new article below:
Social enterprise laws are sweeping through the nation. Entrepreneurs can now organize under one of several new legal forms, including the “benefit corporation” form. In theory, these options will make it easier for socially minded firms to pursue a double bottom line of profit and public benefit — that is, to do well while doing good.
This Article tests that theory. In asking whether social enterprise laws matter, I find that the answer is yes, but not for the reasons most people think. The traditional rationale for social enterprise laws is that they free managers from the “duty” to put profits ahead of social objectives. But that’s wrong; existing corporate law is already flexible enough to permit most social/economic tradeoffs. However, by drawing on insights from new governance theories of regulation, I argue that social enterprise laws add value in other ways. Specifically, they provide a catalyst for entrepreneurs, investors, and stakeholders to develop the normative framework necessary to sustain an important new business model and asset class. They do so through their signaling power, as well as through their ability to create a focal point that will facilitate self-regulation, capital formation, and the design of standards necessary to govern this complex sector.
The Article thus offers a new way of thinking about social enterprise laws. Rather than simply provide new off-the-rack legal forms, these laws encourage a multi-disciplinary process of norm creation and private engagement. I conclude by offering firms and lawmakers several strategies to reinforce this underlying dynamic.
Tuesday, February 11, 2014
CVS/Caremark announced, on Feb. 5, 2014, that that the company would cease selling tobacco products in its 7,600 U.S. pharmacies. Given that the entity estimated that it would lose about $2 billion in revenues from the decision, the world took notice. CVS has managed the announcement well, and the company has received generally good press about the whole idea.
Personally, I applaud the decision, both because I think it’s a sensible choice and because I think the board properly exercised its authority to set CVS stores up for long-term success. The company tried to maximize the feel-good story of the decision, but I think that message was tempered by the necessity that CVS explain the profit-seeking role of the decision with the announcement. Clearly, CVS’s counsel read eBay v. Newmark.
The CVS announcement had two components. First, the media spin – for the aren’t-they-great? response:
“We have about 26,000 pharmacists and nurse practitioners helping patients manage chronic problems like high cholesterol, high blood pressure and heart disease, all of which are linked to smoking,” said Larry J. Merlo, chief executive of CVS. “We came to the decision that cigarettes and providing health care just don’t go together in the same setting.”
The decision to exit the tobacco category does not affect the company's 2014 segment operating profit guidance, 2014 EPS guidance, or the company's five-year financial projections provided at its December 18th Analyst Day. The company estimates that it will lose approximately $2 billion in revenues on an annual basis from the tobacco shopper, equating to approximately 17 cents per share. Given the anticipated timing for implementation of this change, the impact to 2014 earnings per share is expected to be in the range of 6 to 9 cents per share. The company has identified incremental opportunities that are expected to offset the profitability impact. This decision more closely aligns the company with its patients, clients and health care providers to improve health outcomes while controlling costs and positions the company for continued growth.
Here’s the thing: CVS shouldn’t have to do this second part, in my view, though I would have advised them to because of the recent language used by the Delaware courts. Unlike some, I still believe in the business judgment rule. Absent conflicts of interest, fraud, or illegality, CVS should be able to make this decision without further justification. The court should abstain. But courts want more.
In eBay v. Newmark, Chancellor Chandler was not satisfied that craigslist was profitable or that the company had achieved market-leading status through its chosen course of operations. He wanted more:
craigslist’s unique business strategy continues to be successful, even if it does run counter to the strategies used by the titans of online commerce. Thus far, no competing site has been able to dislodge craigslist from its perch atop the pile of most-used online classifieds sites in the United States. craigslist’s lead position is made more enigmatic by the fact that it maintains its dominant market position with small-scale physical and human capital. Perhaps the most mysterious thing about craigslist’s continued success is the fact that craigslist does not expend any great effort seeking to maximize its profits or to monitor its competition or its market share.
For Chancellor Chandler, and Delaware courts, it was not sufficient that craigslist’s CEO testified “that craigslist’s community service mission ‘is the basis upon which our business success rests. Without that mission, I don’t think this company has the business success it has. It’s an also-ran. I think it’s a footnote.’” Would it have been sufficient if he had said “our profitability” instead of “business success?” I doubt it.
As such, CVS had to go further to show where this decision fit within their profit-making scenario. Chancellor Strine agrees: “I simply indicate that the corporate law requires directors, as a matter of their duty of loyalty, to pursue a good faith strategy to maximize profits for the stockholders.” Chancellor Strine immediately seeks to soften the blow by stating, “The directors, of course, retain substantial discretion, outside the context of a change of control, to decide how best to achieve that goal and the appropriate time frame for delivering those returns.” The problem: that’s not really true if you add this philosophy together with eBay, which appears to require “great effort” to maximize profits, or monitor competition or market share, as opposed to pursuing a corporate philosophy that creates and maintains profitability and market leadership.
To be clear, this is not about CSR. This is about director primacy and keeping the courts out of the boardroom as much as possible. I think CVS should be able to decide to drop tobacco if they wish, just as craigslist should be able to decide that it wants to stay profitable and be a market leader forever. If long-term success, in the board’s judgment, means not selling cigarettes or not monetizing and not taking risks of a boom and bust, they should be able to do that.
Was it essential that Boston Market and Krispy Kreme expand as fast as possible and as seek as much profit at they could in the near term? I hope not. The directors are supposed to be in charge and make such decisions, not the shareholders, and not the courts. The business judgment rule is an abstention doctrine, and courts should stay out of it unless there is a strong indication of a conflict of interest, fraud, or illegality. CVS took the proper steps to minimize the risk of a court intervention. They just shouldn't have had to justify that decision to anyone but their shareholders at election time.
Friday, February 7, 2014
On April 24, 2014, the University of Saint Thomas (Minnesota) will host a conference on social enterprise. The conference will be interdisciplinary, engaging experts in Catholic studies, entrepreneurship, law, management, and public policy.
The first session will address issues surrounding using business as an agent for social change, with a focus on social entrepreneurship and benefit corporations. The first session will run from 3:00 p.m. to 5:00 p.m. in the Atrium at the University of St. Thomas, School of Law and is approved for 2.0 hours of CLE credit (Minnesota). Speakers are listed below:
- Elizabeth K. Babson, Attorney with Drinker, Biddle and Reath LLP and a co-author of the Benefit Corporation White Paper
- Lyman P. Q. Johnson, LeJeune Distinguished Chair in Law, University of St. Thomas, School of Law, and Robert O. Bentley Professor of Law at Washington and Lee University
- John F. McVea, Associate Professor of Entrepreneurship, University of St. Thomas, Opus College of Business
- J. Haskell Murray, Assistant Professor of Management and Business Law, Belmont University
- Michael J. Naughton, Director, John A. Ryan Institute for Catholic Social Thought, University of St. Thomas, Center for Catholic Studies
- Elizabeth R. Schiltz (moderator), Thomas J. Abood Research Scholar, and Co-Director of the Terrence J. Murphy Institute for Catholic Thought, Law and Public Policy, University of St. Thomas, School of Law
The second session will run from 5:00 p.m. until 8:00 p.m. in the Opus Hall of the Opus College of Business, will include dinner, and the discussion will focus on PoveryCure (a video series by Michael M. Miller of the Acton Institute).
The sponsors from the University of St. Thomas include:
- Center for Catholic Studies
- John A. Ryan Institute for Catholic Social Thought
- Joseph and Edith Habiger Institute for Catholic Leadership
- Opus College of Business
- School of Law
- Schulze School of Entrepreneurship
- Terrence J. Murphy Institute for Catholic Thought, Law and Public Policy
- Veritas Institute
Advanced registration is required, but the conference is free of charge and open to the public. Register here.
Friday, January 31, 2014
During my brief academic career, I have focused the majority of my research on social enterprise law. While I have expressed my disagreement with various parts of the current social enterprise statutes, I have tried to make constructive suggestions for improvement, and am largely in favor of businesses that have a society-focused mission.
Lately, I have been thinking about whether my oral and written support of socially responsible businesses significantly impacts my purchasing behavior.
Frankly and regrettably, the social responsibility of a given company is usually merely a “tie-breaker” in my purchasing decisions. In my Social Enterprise Law seminar last spring, the class concluded, after doing case studies on a number of social enterprises, that for-profit social enterprises likely need a business plan that is just as good as a traditional for-profit company to be sustainable and successful. Social enterprises that used their social responsibility as a crutch often failed or performed poorly.
Patagonia is a socially responsible company that I have supported religiously -- long before I started writing in the area. You can see my worn out Patagonia shoes below. While Patagonia’s products may be expensive, their value proposition is strong. Those shoes cost me less per day worn than any other shoes I have ever purchased. (My wife has been trying to get rid of these shoes for years and is probably going to be mortified that I posted a picture of them, if she ever finds this post).
More recently, I have made purchases from Method, Better World Books, Plum Organics, Ben & Jerry's, and other socially responsible businesses (or at least companies that market themselves as socially responsible) with varying levels of satisfaction. In Nashville, we frequent a number of restaurants that attempt to buy fair trade and from local sources.
When we moved into our new home a little over a week ago, we used The Green Truck Moving Company. (They gave us a small discount for tweeting about the service, but had no involvment in or knowledge of this post). The Green Truck Moving Company plants two trees for each move, has trucks that run on biodiesel, recycles your boxes, and had the friendliest movers I have ever encountered. I have moved over a dozen times in my life, and they did a great job, but, frankly, I probably would not have used them if they were not competitive on price with their more profit-focused peers.
One of the reasons that more consumers are not willing to pay significantly more for socially responsible products may be that they do not trust the claims put forward by the companies. For example, Professor Alicia Plerhoples (Georgetown) recently profiled a for-profit college with a seemingly poor track record that took advantage of one of the new social enterprise legal forms.
My students (and many other people around their age), however, seem to have a strong and growing interest in socially responsible products and businesses. The law is evolving quickly in that area and will hopefully address the accountability issues.
For those who are interested in further reading regarding consumer willingness to purchase from socially responsible companies, here is information on a recent Nielsen survey and a link to an article entitled Are People Willing to Pay More for Socially Responsible Products: A Meta - Analysis. (Thanks to Professors Cass Brewer (Georgia State) and Peter Roberts (Emory) for the links).
Saturday, January 25, 2014
Pearce & Hopkins on “Regulation of L3Cs for Social Entrepreneurship: A Prerequisite to Increased Utilization”
John A. Pearce II & Jamie Patrick Hopkins have posted “Regulation of L3Cs for Social Entrepreneurship: A Prerequisite to Increased Utilization” on SSRN. Here is the abstract:
One new business model is the low-profit, limited liability company (L3C). The L3C was first introduced in Vermont in 2008 and has since been adopted by several other states. The L3C is designed to serve the for-profit and nonprofit needs of social enterprise within one organization. As such, it has been referred to as a "[f]or-profit with [a] nonprofit soul."
In an effort to efficiently introduce the L3C business model, states have designed L3C laws under existing LLC regulations. The flexibility provided by LLC laws allows an L3C to claim a primary social mission and avail itself of unique financing tools such as tranche investing. Specifically, the L3C statutes are devised to attract the program related investments (PRIs) of charitable foundations. Despite these successes, adoption of the L3C form has been slower than proponents expected.
A similar business initiative has found great success in the United Kingdom (U.K.), where numerous proponents supported legislation designed to create hybrid business models that would promote social entrepreneurship. As a result, the U.K. created the Community Interest Company (CIC) in 2006, allowing more than 4,500 companies to register as CICs that offer a double bottom line (or dual benefit) to investors.
While CICs and L3Cs were created with the same double bottom line in mind, CICs face strict government regulations that provide investors with additional protections. These regulations have indirectly contributed to the success of many CICs by increasing investor confidence in the success of these businesses. In the United States, the flexibility of LLC statutes may provide L3Cs with unique funding options, but the lack of government regulation leaves investor outcomes uncertain and inhibits L3Cs from being a better-utilized business model for social entrepreneurship.
Thursday, January 16, 2014
Living in a Material World- From Naming and Shaming to Knowing and Showing: Will New Disclosure Regimes Finally Drive Corporate Accountability for Human Rights?
In my posts last Thursday (see here and here) and in others, I have explained why I don’t think that the Dodd-Frank conflicts minerals law is the right way to force business to think more carefully about their human rights impacts. I have also blogged about the non-binding UN Guiding Principles on Business and Human Rights, which have influenced both the Dodd-Frank rule, the EU's similar proposal, and the State Department's required disclosures for businesses investing in Burma (see here).
For the past few months, I have been working on an article outlining one potential solution. But I was dismayed, but not surprised to read last week that the US government’s procurement processes may be contributing to the very problems that it seeks to prevent in Bangladesh and other countries with poor human rights records. This adds a wrinkle to my proposal, but my contribution to the debate is below:
Faced with less than optimal voluntary initiatives and in the absence of binding legislation, what mechanisms can interested stakeholders use as leverage to force corporations to take a more proactive role in safeguarding human rights, particularly due diligence issues in the supply chain? Can new disclosure and procurement requirements provide enough incentives to have a measurable impact on the behavior of transnational corporations based in the United States? This Article argues that federal and state governments should take advantage of the fact firms are adapting to more rigorous transparency and due diligence demands from socially responsible investors, international stock exchange listing requirements, and enterprise risk management processes.
Corporations respond to incentives and penalties. Governments can and should require stronger procurement contractual terms for contractors and subcontractors. The contract could require: (1) executive level, Sarbanes-Oxley like attestations regarding human rights policies and due diligence on impacts within the supply chain; (2) an audit by certified third parties and (3) suspension or debarment from contracts as well as clawbacks of executive bonuses and a portion of board compensation as penalties for false or misleading attestations.
Companies that do not choose to participate in government contracting programs will not have to complete the attestation or due diligence process but the benefits of participating will outweigh the costs. The large number of participating firms will likely lead to the practice becoming an industry standard across sectors, thereby forestalling additional legislation, shareholder resolutions, and name and shame campaigns, and thus eventually leading to benefits for all stakeholders including those most directly affected.
January 16, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation, Social Enterprise | Permalink | Comments (1)
Sunday, January 12, 2014
Dolf Diemont, Aloy Soppe & Kyle Moore have posted “Corporate Social Responsibility and Downside Equity Tail Risk” on SSRN. Here is the abstract:
This paper assesses the relationship between Corporate Social Responsibility and downside equity tail risk – a field of research that has so far been neglected - using world wide data for the period 2003-2011. Tail risk is estimated using Extreme Value Theory. Corporate Social Responsibility is approached using stakeholder theory. The results show that there are significant relationships between CSR and tail risk. These relationships are tested for robustness using a heterogeneous and homogeneous tail index, raw returns and idiosyncratic returns, and various values for the tail threshold. The relationships we found are sequential, which makes a causal relationship between CSR and tail risk plausible.
Saturday, January 11, 2014
Hao Liang & Luc Renneboog have posted “The Foundations of Corporate Social Responsibility” on SSRN. Here is the abstract:
We investigate the roles of legal origins and political institutions – believed to be the fundamental determinants of economic outcomes – in corporate social responsibility (CSR). We argue that CSR is an essential path to economic sustainability, and document strong correlations between country-level sustainability ratings and various extensive firm-level CSR ratings with global coverage. We contrast the different views on how legal origins and political institutions affect corporations’ tradeoff between shareholder and stakeholder rights. Our empirical evidence suggest that: (a) Legal origins are more fundamental sources of CSR adoption and performance than firms’ financial and operational performance; (b) Among different legal origins, the English common law – widely believed to be mostly shareholder-oriented – fosters CSR the least, (c) Within the civil law countries, firms of countries with German legal origin outperform their French counterparts in terms of ecological and environmental policy, but the French legal origin firms outperform German legal origin companies in social issues and labor relations.Companies under the Scandinavian legal origin score highest on CSR (and all its subfields); (d) Political institutions – democratic rules and constraints to political executives – are not preconditions for CSR and sustainability, and sometimes even hinder CSR implementation. Our results are robust after controlling for corporate governance, culture, firm-level financial performance and constraints, and different indices of political institutions.
Friday, January 10, 2014
Alicia Plerhoples is leading an innovative Social Enterprise and Nonprofit Clinic at Georgetown University Law Center. She presented her "Representing Social Enterprise" article at AALS in 2013, and her article was recently published by the Clinical Law Review. I recommend the article to all those interested in social enterprise and/or clinical education. The article will be helpful to the academic, practitioner, and clinician (perhaps because Professor Plerhoples has experience in all three roles). “Representing Social Enterprise” includes a deep discussion of the models of social enterprise, thoughtful analysis of the corporate governance issues that are likely to arise when representing social enterprises, and interesting insights into Georgetown’s clinic.
The abstract is reproduced below and the entire article can be found on SSRN here:
"This article explores the representation of social enterprises — i.e., nonprofit and for-profit organizations whose managers strategically and purposefully work to create social, environmental, and economic value or achieve a social good through business techniques — in the Social Enterprise & Nonprofit Law Clinic at Georgetown University Law Center. The choice to represent social enterprise clients facilitates a curriculum that explicitly focuses on the business models, governance tools, and legal mechanisms that these organizations use to accomplish sustainability and charitable objectives. By serving social enterprise clients, clinic students learn to solve novel and unstructured problems and engage in information sharing and knowledge creation essential to legal advocacy. Legal issues unique to social enterprises compel clinic students to question corporate law and its underlying normative values and employ transactional lawyering for public interest purposes."
Cross-posted at SocEntLaw.
Tuesday, December 24, 2013
Here, Professor Bainbridge kindly asks for my thoughts on Keith Paul Bishop's article Would Hobby Lobby Stores, Inc. Have A Stronger Case As A Flexible Purpose Corporation?
I agree with Bishop's conclusion that the question is still open. Both the Flexible Purpose Corporation ("FPC") and the Benefit Corporation version of social enterprise legal forms are quite new and each became available in California as of January 1, 2012. The FPC is only available in California (though Washington state's social purpose corporation is similar in many respects) and the Benefit Corporation legislation has passed in 20 U.S. jurisdictions (19 states and Washington D.C.), starting with Maryland in 2010. As the name suggests, the FPC allows managers more flexibility in choosing their particular corporate purpose(s), whereas most of the Benefit Corporation statutes require a "general public benefit purpose" to benefit "society and the environment" when "taken as a whole" but also allow additional "specific public benefit purpose(s)." Delaware's version of the benefit corporation law (called a "public benefit corporation") requires the choosing of one or more specific public benefit purposes.
Converting to an FPC or a Benefit Corporation, without more, likely would not be much help to companies fighting the HHS mandate. The statutes are simply too broad, and I think courts would want more evidence regarding the corporation's stance on the issue. Obviously, people would disagree on whether a "socially focused" corporation would oppose certain types of contraceptives. And it seems that the majority (though certainly not all) of those in the social enterprise area lean left of the political center. But, if an FPC or Benefit Corporation made its particular social/religious purpose(s) clear in its articles of incorporation, including enough information to determine a stance against certain types of contraceptives, I think the entity's argument could be strengthened.
In some states, like Oregon and Texas, relatively recent amendments to their state corporation statutes make clear that a social purpose can be included in the articles of incorporation of a traditional corporation. In other states, whether such a social purpose would be acceptable in a traditional corporation is a debatable question, and thus social enterprise legal forms would clear the way toward including a social/religious purpose that would suggest (or clearly state) opposition to the mandate.
In short, the social enterprise forms, without customization, are likely insufficient, but use of a social enterprise form, with language in the articles of incorporation that suggest that the corporation would be opposed to the mandate, could strengthen the argument of those fighting the HHS mandate. In some states, as mentioned above, a social enterprise form would likely be unnecessary, and a traditional corporation with customized language could be used.
I think the question posed by Keith Paul Bishop and Professor Bainbridge is an interesting one and would love to hear additional thoughts from others, especially any Constitutional Law scholars.
Thursday, December 19, 2013
Changing Corporate Law to Make Companies More Sustainable- Perspectives from governments, academics and practitioners
On December 5th and 6th I attended and presented at the third annual Sustainable Companies Project Conference at the University of Oslo. The project, led by Beate Sjafjell began in 2010 and attempts to seek concrete solutions to the following problem:
Taking companies’ substantial contributions to climate change as a given fact, companies have to be addressed more effectively when designing strategies to mitigate climate change. A fundamental assumption is that traditional external regulation of companies, e.g. through environmental law, is not sufficient. Our hypothesis is that environmental sustainability in the operation of companies cannot be effectively achieved unless the objective is properly integrated into company law and thereby into the internal workings of the company.
Members of the Norwegian government, the European Commission, the Organisation for Economic Cooperation and Development (“OECD”), and the United Nations Environmental Programme (UNEP) Finance Initiative also presented with academics and practitioners from the US, Europe, Asia and Africa.
I did not participate in the first two conferences, but was privileged this year to present my paper entitled “Climate Change and Company Law in the United States: Using Procurement, Pay and Policy Changes to Influence Corporate Behavior.” The program and videos of the entire conference (click on the link of the panel discussions) are here. I presented last and my paper, with the others, will appear in a special edition of the Journal of European Company Law in 2014.
Professors David Millon and Celia Taylor rounded out the US delegation. Millon, who I learned first coined the phrase “shareholder primacy,” proposed a constituency statute for Delaware, but acknowledged that his proposal (even if it were passed) might not have much impact because of the twin influence of inventive-based compensation for executives and the role of institutional investors, who also seek short-term profit maximization. Taylor discussed the SEC Guidance on climate change disclosures recommending that they be made mandatory, but cautioned against disclosure overload and potential greenwashing.
Others provided insight on shareholder primacy and board duties from the UK, Norway, and Indonesia, and Tineke Lambooy presented the results of a meta study regarding boards and sustainability. Gail Henderson, from Canada, used the concept of "undue hardship" in human rights law to propose a new burden to reduce environmental impacts. Mark Taylor, who was one of the many attendees who like me came straight from the UN Forum on Business and Human Rights, explained due diligence provisions in EU member state laws and argued that due diligence is emerging as a standard for compliant businesses. Carol Liao discussed "catalytic innovation" and hybrid entities. Her blog about the conference is here.
A number of presenters focused on: auditing; integrated reporting; insurance, bankruptcy, contract, and insolvency law; and the role of sustainable investors (there are 50 sustainable stock indices), particularly large sovereign pension funds. One of the more interesting proposals came from Ivo Mulder of UNEP, who is conducting a study on a sovereign credit risk model. Sovereign bond markets represent 40% of global bond markets but there is no integration of environmental, social or governance factors even though risk mitigation is a key factor in fixed-income investing. He called for a new way of thinking about how bond securities are valued in primary and secondary markets.
Perhaps one of the most innovative proposals came from Endre Stavang, who suggested an “environmental option.” Specifically he and his co-author recommend enacting legislation that will empower certain green companies to transfer a call option to buy a block of its shares to an established company of their choice. He stressed that the option is free and that the exercise price would be the price of the green company’s share at the time of the transfer. The non-green receiving company would have a period of five years to exercise.
The abstracts from all of the presenters are available here. It was an intense two days of creative presentations, but hopefully these kinds of substantive public policy discussions, which include government, intergovernmental organizations, stakeholders and academics will have an impact. It’s the reason I joined academia.
Happy Holidays to all, and to my new Norweigian colleagues, Gledelig høytid.
December 19, 2013 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Science, Securities Regulation, Social Enterprise | Permalink | Comments (0)
Wednesday, December 4, 2013
After meeting Colin Mayer (Oxford) and hearing him present at Vanderbilt’s 2013 Law and Business Conference, I purchased and read his recent book, Firm Commitment: Why the Corporation is Failing Us and How to Restore Trust in it. The book is organized in three parts: (1) how the corporation is failing us; (2) why it is happening; (3) what we should do about it. While the first two parts contain some helpful background and interesting case studies, I found the third part the most useful. In the third part, Professor Mayer suggests:
These three straightforward adaptations of current arrangements – establishing corporate values, permitting the creation of a board of trustees to act as their custodians, and allowing for time dependent shares - together solve the fundamental problems of breaches of trust in relation to current and future generations. (pg. 247)
In discussing corporate values, Professor Mayer writes:
Corporate social responsibility was rightly dismissed as empty rhetoric and jettisoned when recession forced a return to more traditional shareholder value. Why should I trust an organization that is owned and controlled by anonymous, opportunistic, self-interested wealth seekers? Without commitment, there is no reason why there should be any trust in the corporation, however much its fine promotional material suggests otherwise. Values need value. They need to be valuable to those upholding them and costly to those who do not. They need to inflict pain on those who abuse them and gain on those who do not. (pg. 244)
While Professor Mayer was writing about corporations generally, and not benefit corporations specifically, the same commitment concern is present with these new corporate forms (called benefit corporations or public benefit corporations) that claim to be focused on society and the environment.
As one possible solution to the commitment problem, Professor Mayer suggests time dependent shares. Time dependent shares would provide greater voting power to shareholders who commit to hold shares for a longer period of time. This feature, Professor Mayer argues, would focus the managers on long term value, which could benefit all stakeholders. Professor Mayer does not favor requiring time dependent shares for all corporations, but suggests that time dependent shares might be useful for those firms that need or desire long-term investment and commitment. I am still thinking through all the possible implications of time dependent shares, especially in the M&A context, but appreciate the effort to fight short-termism and focus management on longer term goals for the corporation.
Interested readers can find Firm Commitment through Oxford University Press.
Cross-posted at SocEntLaw.
Wednesday, November 20, 2013
Given my interest in social enterprise, many friends and colleagues e-mailed me Professor Steven Davidoff’s recent article in the New York Times DealBook about Make a Stand, a company founded by then eight-year old Vivienne Harr that sells “all-natural, certified organic, U.S. grown/Fair-Trade, GMO-free” lemonade and donates 5% of gross revenue to organizations focused on ending child slavery.
As Professor Davidoff mentions, Make a Stand is organized as a social purpose corporation in Washington state. Social purpose corporations are one of the many “social enterprise” legal forms that have arisen in the U.S. over the past five years, along with benefit corporations, benefit LLCs, flexible purpose corporations, L3Cs, public benefit corporations, and sustainable business corporations.
While these new legal forms have been grouped under the term “social enterprise,” the term “social enterprise” is not well defined in the literature.
The Social Enterprise Alliance (the “SEA”) defines “social enterprise” through a tripartite test:
- Directly addresses social need;
- Commercial activity [not donations] drives revenue; and
- Common good is the primary purpose.
The recent "social enterprise" statutes, however, do not expressly require products or services of social enterprises to directly address social need in the way described by the SEA. Most of the social enterprise statutes are also unclear on whether shareholder or other stakeholder interests take priority. The benefit corporation statutes do require a “general public benefit purpose” but simply list shareholder interests alongside other stakeholder interests that the directors must consider in every decision (and shareholders are the only listed stakeholders that the statutes give standing to sue derivatively ).
Professor Christine Hurt (Illinois Law) describes one of the differences between corporate social responsibility (“CSR”) and social entrepreneurship (often used interchangeably with “social enterprise”) as:
CSR focuses on companies that make widgets, but who do so in an enlightened way; Social entrepreneurship envisions companies that make a completely different kind of widget. . . .most of the companies who are heralded for "good CSR" make products for rich people or at least premium products that are a splurge for the average person: Ben & Jerry's ice cream; Burt's Bees; Toms shoes. In making these products, which are more expensive than their competitors, they brand themselves as "giving back" or being enlightened to employees, communities or the environment. These companies don't seem to be losing money by "doing well and doing good," though their profit margins arguably might be lower than otherwise.
Social entrepreneurs start for-profit companies in a sphere usually inhabited only by not-for-profits and try to do something that can't be done by NGOs because of capital scarcity or knowhow scarcity. Social E's make a different kind of widget that isn't needed by rich people, but by the needy: affordable clean water, light sources, hygiene products, sanitation, etc.
However, most of the companies that have chosen the social enterprise legal forms, including Make a Stand, look more like companies engaging in CSR than social enterprises as defined by Professor Hurt. Make a Stand's lemonade may be made in an "enlightened way" and a percentage of revenue is given away, but the lemonade itself appear to be made for sale to relatively wealthy consumers.
Some legal scholars have given “social enterprise” a much broader definition, a definition that looks much more like Professor Hurt’s description of CSR – essentially, companies that use commercial activity to drive revenue with at least one significant social or "common good" purpose.
Part of the confusion stems from people using the term “social enterprise” to describe at least three different types of enterprises, which I have listed below. Some companies will, of course, fall in more than one category.
Generous Enterprise. What (and how much) the company gives away. Examples include Make a Stand’s 5% of revenue giving pledge, Patagonia’s 1% of revenue for the planet commitment, and TOMs Shoes’ and Warby Parker’s buy one, give one model.
Responsible Enterprise. How (and under what conditions) the product is made. Examples include companies committed to fair trade, organic, recycled materials, LEED certified buildings, good corporate governance practices, fair treatment of employees, and the like. Some companies that spring to mind as attempting to be "responsible" are Ben & Jerry’s, Method, Plum Organics, and Seventh Generation. On the smaller side, someone I went to high school is a co-founder of a company that falls into this category; Recover Brands makes clothing from recycled plastic bottles and recycled cotton.
Justice Enterprise. Who makes and who purchases the product. These companies exist to provide employment to disenfranchised and/or create products for purchase by disenfranchised. Greyston Bakery, Spring Back Recycling (a company that began as a project by the Belmont University Enactus team), Thistle Farms, and others, exist, in large part, to hire, train, and support the disenfranchised (especially those transitioning from homelessness and prison). Companies like Grameen Danone Foods, Cure2Children, and Power Africa develop products or services targeted at underserved communities with the goal of improving their lives; each of these three organizations is providing and developing, as Professor Hurt put it, “a different kind of widget that isn't needed by rich people, but by the needy.” Steven Buhrman at Wannado Local inspired the naming of this category. As mentioned to me by Professor Hurt, this category could be broken into two. I agree. Perhaps, "reintegration enterprises" for the first, and "social innovation enterprises" for the second.
Social enterprises could also be divided by whether they make and distribute profits. Originally, the term social enterprise was used primarily in the non-profit context and primarily in articles originating in business schools. Law professors, however, have generally and increasingly used the term in the for-profit context.
Academics, managers, investors, consumers, customers, and governments are all using the term “social enterprise,” but more precise terminology may be helpful. Clarity is important when governments offer incentives to “social enterprises” and investors decide to invest in “social enterprises” so that both groups identify the type of social return they are seeking. Also, clarity within the three groups is needed. How much giving is sufficient? What are the standards for responsible operation? What types of products and services are appropriate for a justice enterprise? Right now there are more questions than answers in the social enterprise space, but there are an increasing number of people working on answers, including those at B Lab, academics and practitioners (including those who blog at SocEntLaw.com), and the Sustainability Accounting Standards Board (“SASB”).
Cross-posted at SocEntLaw.