Tuesday, April 15, 2014
They really don't.
To be clear, this is not a post bashing corporations (or government). It's not really extolling the virtues of corporations, either. Instead, it's just to make the point that, notwithstanding Citizens United or Hobby Lobby and other cases of their ilk, the idea that corporations are people is still a legal fiction. A useful and important one, but a fiction nonetheless.
On April 11, Corey Booker posted the following on Facebook:
In awful years past, corporations polluted the Passaic river to the point that it ended the days where people could eat from it, swim in it, and use it as a thriving recreation source. Today we announced a massive initiative to clean the Passaic river and bring it back to life again. The tremendous clean up effort will create hundreds of jobs and slowly over time restore one of New Jersey's great rivers to its past strength and glory.
The river needs the clean-up, and I applaud the effort. Still, the reality is corporations did not pollute the Passaic River, at least not literally. People working for the corporation did. It is agency law that allows a corporation to act in the first place, because the fictional corporate person needs a natural person to act. (For a simple explanation, see here.) The corporation is liable for the harm caused by its agents. (And, in certain cases, the individuals would also be liable directly if their actions were, for example, illegal.)
Government doesn't really do anything, either. The clean-up proposal that Booker was referencing is a $1.7 billion Superfund river remediation project that was proposed by the EPA. Of course, government works through agents, too, and there are real people behind the proposal. Real people, through concerted action between corporations and government will actually do the clean up, too.
This is a point I have made before, but I think it's an important one. We need to remember that people are at the root of all corporate and government actions. This is important in two directions. First, for those criticizing a corporate or government action, it is critical for them to remember that there are people carrying out the action. A corporation or a government may act in an inappropriate manner, but it is also likely that the person carrying out the action is doing so with the intent to do well in the capacity in which they were fired.
Second, for people working for corporations or governments it is equally critical that they recognize that the their employer doesn't carry out actions without their help. That is, people who work for corporations or governments must recognize that they are carrying out the will of the entity they represent (and they should hold themselves responsible for doing do). Perhaps it is their boss who gave them the order (also a natural person), or even the board of directors (a group of natural people), but the charge is in fact, if not legally, being given by natural people.
Why does this matter? When we vilify or exalt the action of entities (like corporations or governments) we disconnect ourselves from the realities of the world, or at least our responsibilities within it. We become more susceptible to Groupthink in either direction. We are able to shirk our responsibilities -- as employees, as agents, as lawyers, as voters, as shareholders, as people -- to make decisions the are conscious of the world around us. In our daily lives and in our representative capacities, we all must make difficult decisions from time to time.
Sometimes, tough decisions require a cost-benefit analysis that means someone else will be worse off because of our decision. It's hard, but it's what people do. Often, it's what we must do. In doing so, though, it is essential that we hold ourselves and other people accountable as people for what we've done. Regardless of the rhetoric we often hear, the amalgamations of people who make up both governments and corporations have done some amazing and impressive things. Both have also done some horrendous and outrageous things. The people in charge, and the people who follow, are accountable in both circumstances.
In this instance, I am making a conceptual argument, not a legal one. There are legal regimes, sometimes effective, sometimes not, for holding both entities and their agents accountable for their actions (and rewarding them, where appropriate). How we think about corporations and governments and each other, though, has a broader impact. Without us -- all of us -- there are no corporations and there is no government. If we remember that, our responses to challenges are more likely to be more targeted, more effective, and more reasonable. Just because we don't always agree, doesn't mean we aren't all in this together. Whether we like it or not, we are, and it's time we acted like it.
Friday, March 28, 2014
This short post caught my eye for two reasons.
Second, since my move to a business school last fall, I have heard the term “networking” with increasing frequency. Sure, “networking” is discussed in law schools and there are some networking events, but in business schools the term “networking” is ubiquitous and the events focused on “networking” are constant.
"Networking" has some negative connotations, but I think Blumenthal’s attack is misplaced. Instead of attacking “networking,” Blumenthal would have done better to attack “selfishness.”
There is nothing wrong, and much good, in the dictionary definition of “networking”:
the exchange of information or services among individuals, groups, or institutions; specifically: the cultivation of productive relationships for employment or business.
Networking can be a wonderful thing, for everyone involved, if you can keep the selfishness at a minimum. Unfortunately, many people network in a selfish manner.
Blumenthal also writes about breaking down the walls between our work and personal lives, but sometimes those walls are healthy. He writes about the joys of involving friends in business, but sometimes involving friends in business is unwise.
Those of us in the corporate law world have seen and read about countless businesses that turned friend against friend, mentor against mentee, and family member against family member.
I am thankful that my professional and personal contacts overlap significantly. Just yesterday, I had two long phone conversations with people I consider both professional contacts and valued personal friends. That said, I am also thankful that I have friends who have nothing to do with work and some professional contacts who never venture outside of my work circles.
In short, while I understand Blumenthal’s negative reaction to “networking,” I think "selfishness" is the real problem. Further, I understand the great happiness he may be experiencing by involving friends in his business, but I also hope he recognizes that business may put great strain on those personal relationships.
Wednesday, March 26, 2014
A little more than six weeks ago The Lego Movie hit theaters. Without getting into too much detail for those of you who have not yet seen the movie or who will never get around to seeing the movie, in essence it’s about an ordinary guy who’s mistakenly identified as an extraordinary “MasterBuilder”. He is recruited to fight against a Lego villain (President Business-we can call him P.B.) who is intent on gluing everything together. The anti-PB crusaders like having the freedom to dismantle, break, and re-make their Lego creations and shudder at the thought of having everything permanently fixed in place. PB, on the other hand, is intent on perma-gluing the Lego bricks together because he likes the certainty and control of knowing where everything is, and he is wary of innovation or change. Hence, his admonition- “EVERYTHING MUST STAY IN PLACE.”
Now as I watched this battle unfold between President Business’ pro-gluing supporters on one hand, and the pro-change supporters on the other, I could not help but see some similarities between the Lego people’s contested views on the purpose of Legos and our society’s contested views on the purpose of corporations. In The Lego Movie it is a contest between staying in place and the freedom to innovate and create, while in the corporate purpose debate it is a contest between profit maximization/shareholder primacy and ANYTHING ELSE THAT DARES TO SAY ANYTHING OTHER THAN SHAREHOLDER PRIMACY (e.g., creating shared value; stakeholder theory; team production).
While shareholder primacy has both normative and pragmatic appeal, one cannot help but wonder whether this traditional conceptualization of corporations is open to being re-made, or must it be immovable and “stay in place”. In other words, if we accept that our world today is markedly different from the one that existed when shareholder primacy came into vogue, are we selling ourselves short by clinging to a mantra that may no longer be ideal or that may need to be revamped?
Consider a new report by McKinsey [Dr. Maximilian Martin of Impact Economy], titled “Impact Economy, Driving Innovation through Corporate Impact Venturing – A Primer on Business Transformation”. In essence, the report finds that pursuing a profit-as-usual model with “CSR” as a tangential activity is “fast coming to an end.” According to the report, this is because “[a] new paradigm is emerging in its place that is responding to structural changes in the operating environments of business.” The McKinsey [Impact Economy] report points to four “megatrends” that are nudging corporations towards a more transformative and holistic view of their role and purpose – what McKinsey [Impact Economy] terms “sustainable value creation.” These four trends are: (i) significant opportunities at the Base of the Pyramid (BoP); (ii) a $540 billion market for “Lifestyles of Health and Sustainability Consumption”; (iii) the growth in markets “resulting from green growth and the circular economy”; and (iv) the “modernization of the welfare state.” The conclusion reached by the report is that “companies are well advised to grasp the changing tectonics of value creation and tackle markets accordingly if they want to remain competitive in the long run.”
This new McKinsey [Impact Economy] report is of course not alone in making the case for a more expansive view of corporate purpose (for example, the Aspen Business & Society Program’s report on long-term value creation, or Michael Porter’s work on creating shared value). But what does it take to move the needle? In the Lego Movie, it took President Business and the head of the pro-change supporters realizing that their views were really not that far apart. Maybe that too is the winning answer for the corporate purpose debate – those corporations who are successful in responding to the aforementioned mega trends and other societal needs stand to be the ones who provide the most value creation for society and their shareholders.
UPDATE 4/15/14: The original version of this post improperly identified McKinsey as the source of the “Impact Economy, Driving Innovation through Corporate Impact Venturing – A Primer on Business Transformation” report. The post has been corrected to reflect the fact that the report was written by Dr. Maximilian Martin of Impact Economy.
Friday, March 21, 2014
Statutory provisions allowing for the formation of Delaware Public Benefit Corporations ("PBCs") went effective August 1, 2013. According to the latest data I have, 87 PBCs have been formed in Delaware .
While 87 is an extremely small number when compared to the more than 1 million entities formed in Delaware, Delaware has already bested all states that have passed a benefit corporation statute, except for California. California, which has a 20 month head-start on Delaware, has 139 benefit corporations.
Some states, like New Jersey and South Carolina have been stuck at fewer than 5 benefit corporations for well over a year.
The group of researchers I am working with now estimates that there are about 350 benefit corporations in the U.S. (including PBCs), though the data is relatively difficult to obtain from the secretary of state's offices and obtaining reliable, complete data is even more difficult.
Currently, there are no significant tax benefits (at the state or federal level) for social enterprises (like PBCs and benefit corporations) in the U.S., but the U.K. recently announced 30% tax relief for their social enterprises. (The U.K. social enterprises are a good bit different than those in the U.S.).
It will be interesting to see if the benefit corporation form increases in popularity or languishes.
Obviously, if tax breaks were given to benefit corporations in the U.S., popularity would likely rise. That said, tax breaks would also likely lead to misuse of the form and the need for additional oversight. (Additional oversight is already in place in the U.K.)
Wednesday, March 19, 2014
A hearing in the Delaware Court of Chancery highlights the question raised in my earlier post of institutional shareholder activism and provides a timely example of one brand of shareholder activism: issue activism.
Yesterday, Vice Chancellor J. Travis Laster denied Hershey's motion to dismiss a books-and-records suit brought by shareholder Louisiana Municipal Police Employees' Retirement System. The suit seeks inspection of corporate books to investigate claims that the chocolate company knowingly used suppliers violating international child labor laws. A full description of the hearing is available here.
UPDATE, Kent Greenfield who has been involved in the case, provided me with a copy of the Hershey hearing & ruling ( Download Hershey Ruling) as well as some context for the case. Yesterday's hearing did two things. First, it clarified the standard of review for motions to dismiss section 220 books and records demands. Citing to Seinfeld v. Verizon Commc'ns, Inc., 909 A.2d 117, 118 (Del. Supr. 2006), the proper standard is whether a shareholder has provided "some evidence to suggest a 'credible basis' from which a court can infer that mismanagement, waste or wrongdoing may have occurred." Second, the books and record request was brought on the novel theory that corporate violations of law (domestic and international) are ultra vires and within the scope of shareholder enforcement. The ultra vires corporate enforcement theory is discussed in more detail in this 2005 article by Professors Greenfield and Sulkowski.
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.