Saturday, November 3, 2018
Yesterday, I had the pleasure of participating in Case Western Reserve Law Review Conference and Leet Symposium, Fiduciary Duty, Corporate Goals, and Shareholder Activism. It was a fun and lively set of discussions with some interesting themes that hit right in my sweet spot of interests, so I had a wonderful time. I’ll give a brief synopsis of the topics under the cut, but the entire thing will soon be available as a webcast online at the above link, and next year the law review will publish a special symposium issue.
Also, I just apologize in advance if I misdescribe anyone’s remarks – if you see this post and want to correct me, feel free to send an email.
[More under the jump]
Panel I: The Changing Face of the Corporate Board, with Todd Henderson, Ann Lipton, Sean Griffith, moderated by Stephen Wilks
So, two things about this panel: first, there was a last minute switch, so the lineup is a little different from the official schedule, and second, only Todd Henderson really spoke directly to the topic, but that didn’t make things any less interesting.
Todd Henderson: Todd explained the ideas in the book he coauthored with Steve Bainbridge, Outsourcing the Board: How Board Service Providers Can Improve Corporate Governance. In their view, a critical flaw in corporate governance today is no one knows what works. There is an entire industry of purported experts who express their views (Paul Rose, as an example, has written about this in The Corporate Governance Industry) – staggered boards good! Bad! Diversity good! etc – but they pay little price for failure and it’s not even clear we would recognize failure if we saw it. Many studies purport to establish what works in corporate governance via Tobin’s Q, but that metric has been recently challenged (see, e.g., The Misuse of Tobin’s Q by Robert Bartlett and Frank Partnoy). And as corporate law profs are fond of reminding people, Enron was believed to be the gold standard in corporate governance until, you know, it wasn’t. (Or, if it was, we are in trouble.)
Their theory, then, is that directors should be companies, instead of natural persons – namely, companies that specialize in providing corporate governance services. And that way – especially if these companies themselves are publicly traded – the market would show us what works and what doesn’t. (Do they have companies serving as their own directors? Or would that be a conflict? I don’t know; I admit, I haven’t (yet) read the book and I didn’t think to ask during the panel). Todd elaborated on a lot of the advantages this system would bring, including providing better incentives for corporate governance innovations that no one wants to be the first mover about – for example, Sean Griffith’s “no pay” bylaw proposal – and even perhaps making Delaware less reluctant to impose liability for fiduciary failures, thereby putting more teeth in the standards.
Ann Lipton (me!): The title of my presentation was Shareholder Primacy: Maximize What? and I engaged the question whether corporate directors have a fiduciary duty to maximize stock prices over the long term, or whether they have a fiduciary duty to honor the interests of shareholders. These have long been presumed to be the same, but they are not, and the law has only barely confronted that issue. I used the PLX case – which I previously discussed in depth here – as a jumping off point to talk about where the law is, and what the law should be.
Sean Griffith: Sean discussed the preliminary results of an empirical study he’s conducting of “frequent filers” – plaintiffs who frequently bring lawsuits against companies for corporate governance failures, usually settling for some disclosures and attorneys’ fees. Among other of his findings, six plaintiffs – all individuals – filed a total of 232 lawsuits over the past six years. He documented how the claims migrated from state court merger litigation to – post-Trulia – federal court merger litigation over proxy filings to federal court proxy filing litigation generally, focusing on compensation and related disclosures. One of the more intriguing findings is something of a division of labor among law firms and plaintiffs that suggest there might be agreements among plaintiffs’ firms – tacit or explicit – that certain firms will use certain plaintiffs for certain kinds of cases. He also noticed that most of these cases are not filed as class actions, but as individual claims (Here is an example of one such case, where Sean himself objected to the settlement, and won.) Sean suspects that by filing cases for individuals rather than classes, law firms avoid the PSLRA provisions meant to discourage “professional plaintiffs.” I also asked – and I honestly don’t know the answer to this – if filing as an individual makes it easier for the plaintiff to receive compensation for his/her role in the lawsuit.
Ethical Challenges in the Role of In-House Counsel, with Sally Gunz, Paula Schaefer, and Jonathan Leiken, moderated by Cassandra Robertson
Sally Gunz: Sally discussed some empirical findings from studies of in-house counsel. Among other things, there has been a trend of companies hiring very junior people as counsel – the suggestion being that they are selected because they do not have the experience or the authority to act as a serious check on management. For example, a survey of in house counsel using a real life ethical problem concluded that only the more experienced counsel – older, longer time in practice – were able to resolve it correctly. She also found that the more that general counsel are involved in top management decisionmaking, the more they resolve ethical dilemmas as managers rather than as lawyers.
Paula Schaefer: Paula is interested in what she calls behavioral legal ethics; namely, she studies how the psychology of conformity applies to in-house counsel. For example, she described the Milgram experiment – including the finding that most people overestimated how they would act in that situation – and discussed how those principles apply to lawyers. She also described Solomon Asch’s famous experiment as a basis to discuss how in-house counsel may feel pressured to give management the answer they want to hear, instead of the one they need to hear. Piggybacking off of Sally’s earlier discussion of junior attorneys as in-house counsel, she described a case where an attorney just two years out of law school was hired as inhouse counsel for a payday lender, and ended up in prison. To drive the point home, she showed a power point slide of the very prison where he did his time.
Jonathan Leiken: Jonathan is in house counsel at Diebold, and he discussed some of the challenges, including the moment when Diebold faced a dilemma about disclosing the fraud that it had uncovered internally, and the consequences of that decision. In response to a question from Sean Griffith, he explained that when designing compliance systems, the company uses certain benchmarks to assess their quality – like, how many complaints about such and such should a company of this size expect, etc. One of the biggest challenges is designing systems to reward whistleblowing and other ethical behavior. The company wants to make sure ethical employees are promoted and otherwise recognized, but because there’s no simple metric, supervisors are asked to evaluate their subordinates’ ethics when they provide employment reviews. He also mentioned that handling compliance issues internationally is a huge challenge; for example, on the American side, the company is used to simply providing requested information to government authorities, but on the European side, GDPR requires that the company consider employee privacy.
Keynote Speaker: SEC Commissioner Hester Peirce, Undermining Investor Protection through Environmental, Social and Governance Activism
After the standard disclaimers about how her views are her own, Commissioner Peirce focused her discussion on how she believes it is a mistake for the securities laws to be used for disclosure of environmental/social information, and that instead, only information that is material to long-term wealth maximization should be required to be disclosed. She recognized that some investors may have idiosyncratic concerns that extend beyond financially material information, but does not believe that they represent the “reasonable” investor. Even when they do, she expressed concerns that regulators are capable of developing useful, standardized measures for environmental and social information across a broad swath of companies. She also noted that not only are such disclosures costly to companies, but companies may be reluctant to go public in the first place if they fear being subject to unpredictable disclosure requirements, untethered to the financial information that would be of interest to investors.
And hey, apparently a Bloomberg reporter was there or watched the remarks remotely or got an advance copy, because you can read his writeup here.
Panel III: Society and Shareholders: How Companies Weigh Financial and Social Pressures, with Andy Green, Claire Hill, and Minor Myers, moderated by Charles Korsmo
Andy Green: Andy pushed back – somewhat – on Commissioner Peirce’s remarks. He agreed that the securities laws are designed for investors and for capital markets, but also argued that environmental and social information has more relevance to long-term corporate health than she was willing to acknowledge. He pointed out that there is increasing investor demand for this kind of information, and that though regulators may have difficulty developing standards, many private organizations – like SASB – have been working with companies and investors to develop a workable framework. (On this, I also refer the reader to Jill Fisch’s paper, Making Sustainability Disclosure Sustainable, with a proposal for a Sustainability Discussion & Analysis section of SEC filings, similar to current MD&A and CD&A sections).
Claire Hill: Claire discussed repugnant business models – something she has written about before – and offered the basic argument that the line between financially relevant social information, and not financially relevant social information, is fuzzy and contingent. Ie., once people become aware of a bad practice, they may start to protest, or even involve regulators, thus turning what was once immaterial (financially) into something material. She encourages this; her view is that some business practices are unethical but perhaps impossible to regulate effectively given the limits of what the legal system can accomplish, and therefore she wants to develop ways to encourage society to use shaming and social pressure to make it expensive for companies to continue with these practices.
Minor Myers: Minor’s main argument was that sometimes companies do things that humans would not – because humans have a sense of shame. Corporate managers may not respond to that shame if they find financial incentives to maximize stock prices – either because of their own pay packages, or because they hope to maintain their reputations in the corporate job market – too strong. Therefore, it is reasonable to allow shareholders to vote on basic issues of corporate morality, like whether Wal-Mart should sell guns, and so forth, so managers have a sense of when shareholders are willing to sacrifice profit to serve their sense of the greater good. He thinks it’s useful for managers to know where shareholders stand, and that shareholder votes can serve as a useful “release valve” for hot button social issues. He believes these votes should be nonbinding, however, and that the thresholds for social proposals should be higher than 14a-8 currently permits. Right now, the threshold is so low that it allows any social/political activist – who has little stake in the company itself – to force a vote; he would like to limit it to shareholders with a serious stake in the company.
And that’s the wrap! In short, it was a really fun, lively symposium, and I am grateful for having had the chance to participate.