Business Law Prof Blog

Financial Literacy and Workplace-Only Investors

A new report from the Global Financial Literacy Excellence Center sheds some light on how workplace-only investors differ from others.  The report identifies workplace-only investors as persons "who only have retirement accounts through their employers."  These are people who do not invest outside of these workplace-affiliated accounts.  They account for about 15% of the total population studied in the report.  As a group, about 53% of workplace-only investors are women.  In contrast, the report identifies active investors as persons who have investment accounts in addition to any workplace accounts.  This accounts for 43% of the population studied.  Another 42% simply don't have any investments--employment or otherwise.

The report finds that financial literacy levels differ by type of investor and that a financial literacy gap exists between active investors and workplace-only investors.  While most people get basic asset-pricing questions wrong, "workplace-only investors exhibited an even lower understanding of asset pricing." They also exhibited lower understanding on diversification questions.

More and more people now find themselves automatically enrolled in retirement accounts.  They begin to regularly invest this way with each pay period.  It doesn't surprise that many people who have invested this way do not develop the same level of financial literacy as others who invest more actively.

The findings make me consider whether the basic account opening forms used by brokerage firms accurately capture the true experience of investors.  Someone who accumulated securities in a 401k for 20 years might be classified as having 20 years of investing experience.  Yet a workplace-only investor probably should not be treated as an experienced investor simply because an employers automatic retirement savings plan accumulated securities for 20 years.  It may make sense to break these workplace-only investors out from active investors on account opening forms.

Tulane Symposium: The Implications of Artificial Intelligence for a Just Society

On November 8, Professor Kristin Johnson of Tulane will host Tulane Law School’s 2019 Gamm Comparative Law and Justice Symposium, focusing on The Implications of Artificial Intelligence for a Just Society. The rise of artificial intelligence introduces efficiencies and new opportunities in finance, employment, education, criminal law enforcement risk assessments, national security and the automation of the various professions, including the development of smart contracts and the automation of various skills associated with the practice of law. Recursive learning and neural networks enable machine learning algorithms to adapt beyond simple instructions and independently assess data in decision-making processes. Early evidence indicates, however, that learning algorithms may operate in a manner that leads to unfair, biased or unethical and in some cases, discriminatory outcomes.

The Gamm Symposium will explore these normative concerns and proposed solutions including proposals demanding algorithmic accountability or, more specifically, proposals encouraging explainability and transparency. Advancing the discussion beyond traditional proposals, the Symposium concludes with a panel exploring the lack of gender balance in the technology industry and capital investment in women-lead technology firms.

The event is free and open to the public, though registration is required.  More information is available here.

ICYMI: #corpgov Midweek Roundup (Oct. 30, 2019)

"Basically, ... Lipton and Savitt are accusing Strine and other 'accomplished jurists such as Chancellor Chandler, Chancellor Allen, and Justice Moore' [of] not understanding what they wrote," #corpgov https://t.co/vf6EJ1upQa

— Stefan Padfield (@ProfPadfield) October 28, 2019

"This Article studies the first systemic implementation of proxy access and finds that while proxy access was rarely used to nominate directors, it was used indirectly — as a bargaining tool — to improve board diversity." https://t.co/G1FRR81XgE #corpgov

— Stefan Padfield (@ProfPadfield) October 24, 2019

"the court limited PNB’s definition of the majority of the minority to cases in which the statute requires approval by a majority of the outstanding shares" #corpgov https://t.co/6BrCNaueAN

— Stefan Padfield (@ProfPadfield) October 30, 2019

"Traditionally, the SEC has studied information leaks prior to merger announcements and identified numerous instances of insider trading. Our paper suggests that regulators should also assess the trading history of a stock surrounding the announcement of a breach." #corpgov https://t.co/hzdV9ayS2I

— Stefan Padfield (@ProfPadfield) October 24, 2019

"Reuniting ownership and control ... the leveraged buyout ... helped reform management practices in ... U.S. companies. Due to mounting competitive pressures, however, private equity is finding relatively fewer underperforming companies to fix." https://t.co/XZNIUZtM2D #corpgov

— Stefan Padfield (@ProfPadfield) October 24, 2019

Major Banks and Asset Managers Want More Regulation for Clearinghouses

“Big banks do not usually gang up to demand more financial regulation, least of all with asset managers in tow.”  That’s the first sentence of Gillian Tett’s recent piece, Banks are right to say that clearing houses are ripe for reform, in the Financial Times (here – subscription required).  Her title and lead sentence are spot on.  That should be worrisome to all.  Tett’s piece centers on a white paper, A Path Forward for CCP Resilience, Recovery, and Resolution (here), released on October 24, 2019, by nine financial institutions (Allianz Global Investors, BlackRock, Citi, Goldman Sachs, Societe Generale, JPMorgan Chase & Co., State Street, T.RowePrice, and Vanguard).  Tett states: “the current status quo around clearing houses is worrying.”  As BLPB readers know, I agree. 

The white paper calls for “enhanced risk management standards and aligning incentives through requirements for meaningful CCP [clearinghouse] own capital for covering both default and non-default losses and recapitalization resources.” (p.1)  It highlights the incentive misalignment present in many clearinghouses given their publicly-traded, shareholder ownership status: “Although CCP shareholders take 100% of the returns a CCP earns from clearing revenues, they bear only a small portion of the losses the CCP incurs as a result of a default.” (p.10)  Many of its recommendations are not new, but some are.  These include: a clearing member voting mechanism in recovery; ex-ante provision of financial resources for resolution; and, the possibility of “long-term debt that could be bailed in for recapitalization.” (p.1)        

While I generally agree with the white paper’s recommendations, I don’t think they go far enough.  As I’ve posted before on clearinghouses (here, here, here, here) and will do so in the future, I’ll just highlight a few things.  First, while increasing clearinghouse capital is a step in the right direction towards better incentive alignment, it’s only a start.  The ownership structure itself of these institutions needs to be addressed.  If clearinghouses were owned by their members – as they were historically – the incentive misalignment between members and owners would largely diminish.  However, as I’ve noted in Incomplete Clearinghouse Mandates (here), even if clearinghouses are all member-owned, this doesn’t solve the problem of who ultimately holds the extreme tail risk of these institutions.  In a previous post (here), I pointed out parallels between clearinghouses and the residential mortgage giants, Fannie Mae and Freddie Mac, whose exit from government ownership is still pending more than a decade after the financial crisis.  Let’s not go down the same route in the clearinghouse space.  

Second, the white paper argues that clearinghouses should generally be responsible for non-default losses.  I agree.  However, as I’ve noted before, both types of losses could occur in close proximity.  Hence, it could be very difficult in practice to separate them out to allocate any losses in the case of investor-owned clearinghouses.  Finally, as I write about in forthcoming research, clearinghouses are self-regulatory organizations (SROs).  Presumably, they would be acting in a regulatory capacity in a recovery scenario as it is arguably the analog to government action in a resolution scenario.  Exchanges, as SROs, are generally entitled to regulatory immunity for actions taken in a regulatory capacity (for more on exchange immunity, see here).  At the same time, the recovery of an investor-owned, distressed clearinghouse is also inherently a commercial endeavor.  It is fundamentally about the survival of the clearinghouse, and potentially the exchange group structure itself.  So, it could be very difficult in practice to separate regulatory from commercial action for purposes of regulatory immunity.  Given this consideration, investor-owned clearinghouses could have less incentive to be circumspect about recovery decisions that might adversely impact members.      

Tett refers to a “trenchant letter” from the Systemic Risk Council to the Financial Stability Board “demanding action” on clearinghouses.  Paul Tucker, who chairs the Council, is the former Deputy Governor of the Bank of England.  In closing, I recommend that readers interested in understanding more about the centrality of clearinghouses in financial markets read a 2014 speech by Tucker: Are Clearing Houses the New Central Banks?  If the answer to Tucker's question is yes, that says it all!          

[Not] Usurping an LLC Opportunity: A Tale of Two Brothers

The recent Tennessee Court of Appeals decision in Mulloy v. Mulloy has me thinking.  Here is the case synopsis:

Two brothers formed a limited liability company to own and lease a commercial property. When the tenant sought to expand, both brothers sought to find a suitable space for the tenant to lease. The younger of the two brothers found a property that would ideally suit the tenant’s needs, a fact that was communicated to his brother. The older brother purchased the property through a newly created limited liability company without his younger sibling’s involvement. The older brother’s new limited liability company then leased the new property to the tenant. The younger brother brought a derivative suit against his brother and the newly formed limited liability company, claiming usurpation of a corporate opportunity belonging to the limited liability company that the brothers had formed together and tortious interference with business relationships. The younger brother also claimed unjust enrichment. Following a trial, the chancery court found in favor of the older brother and his newly formed limited liability company and dismissed the complaint. After our review of the record, we affirm.

The facts are quite a bit more complex than that.  But you get the idea.

First, let me make Josh Fershee's point for him: limited liability company (LLC) members cannot usurp "corporate" opportunities, since they are not corporations.  Indeed, the court in Mulloy repeatedly refers to the doctrine in that way and cites to corporate law precedent we all know and love.  This despite an accurate citation to Tennessee's statutory standard for the usurpation of LLC opportunities: requiring members to hold in trust for the LLC "any property, profit or benefit derived by the member in the conduct . . . of the LLC’s business, or derived from a use by the member of the LLC’s property, including the appropriation of any opportunity of the LLC.”  Tenn. Code Ann. § 48-249-403(b)(1).

But the big surprise for me was "we affirm."  Why?  I just kept thinking of Meinhard v. Salmon.  Apart from he fact that this case involves a Tennessee LLC and two brothers, the material facts are substantially similar.  Yet, the result is different.  The Mulloy court reasons that the property acquisition opportunity at issue was not the LLC's, but rather the older brother's (even though the brothers' jointly owned LLC existed to lease property to a specific tenant--the same tenant to which the older brother rents the new property--property that the younger brother originally identified).  The court references facts that do help the older brother here.  But something just smells wrong about this.  The lack of candor in this situation is particularly disturbing.

So, that set me to wondering if there was a way to get that "punctilio of an honor, the most sensitive" back into the judicial sightline.  Immediately, I thought of Anderson v. Wilder--a 2003 Tennessee Court of Appeals case in which the court applies the close corporation shareholder fiduciary duties under Massachusetts corporate law to members in a Tennessee LLC.  However, it then occurred to me that Anderson was decided under Tennessee's "old" LLC Act; but the LLC in Mulloy opted into Tennessee's modernized, "new" LLC Act, which became effective on January 1, 2006.  The new LLC Act is modeled in part on the Revised Uniform Limited Liability Company Act and provides as follows, in pertinent part (in Tenn. Code Ann. § 48-249-403(a) and (b) (emphasis in italics added)):

• "The only fiduciary duties a member owes to a member-managed LLC and the LLC's other members and holders are the duty of loyalty and the duty of care . . . ."
• "A member's duty of loyalty to a member-managed LLC and the LLC's other members and holders of financial rights is limited to the following: (1) To account to the LLC and to hold as trustee for it any . . . benefit derived by the member in the conduct . . . of the LLC's business, or derived from a use by the member of the LLC's property, including the appropriation of any opportunity of the LLC . . . ."

These statutory provisions would appear to foreclose an argument that members of an LLC organized under the new LLC Act have a fiduciary duty of utmost good faith and loyalty to each other under Anderson (or otherwise at common law).  Much as I hate to admit it, that's the way a court should, and likely would, see this.

What do you think?  Is my concern about the holding in the appellate court opinion in Mulloy warranted?  Or do we treat the Mulloy brothers like "big boys" and agree with the appellate and trial courts?  Your views are welcomed.  I am looking for some creative arguments here . . . .

Parenting and Grading

After spending the entire day grading undergraduate business law exams, I drove to my son’s elementary school for our first parent-teacher conference. On my wife’s advice, I mostly just listened. My legal and academic training have given me “a very particular set of skills” that I can use to construct and deconstruct arguments in a way some people find combative, so my wife's advice was probably wise.

The parent-teacher conference for our kindergarten-aged son went well. Most important to me, it was clear that our son’s teacher already appeared to love him and seemed committed to helping him develop. But I worry about what our education system may do to my son. Only two months into formal school, my sweet son, who has been in speech therapy since age two, is already receiving grades. Granted, the grades are pretty soft at this point – 3 for mastery, 2 for on track to complete this year, 1 for behind schedule. I hope he will not get overly discouraged. I also know he will not receive nearly as much affirmation in school for his impressive, budding artistic skills as he would for a photographic memory. 

This parent-teacher conference, coupled with a handful of especially weak student exams, prompted a lot of thoughts about grading over the past few days.

As a parent, and increasingly as a professor, I am becoming convinced that we (as a society) over-focus on grades and our grades largely miss what is truly important. As a parent, I feel a good deal of responsibility for the development of my children, and as a professor, I obviously think education is an important part of human development. But before my oldest son started kindergarten this August, I wrote down some of the traits I hope my children will develop before they leave our home. In alphabetic order, they include:

• Compassion
• Courage
• Gratefulness
• Integrity
• Kindness
• Patience
• Perseverance
• Selflessness

While it is tempting to fixate on quantifiable things, like grades, I am attempting to model, praise, and teach the character traits above. And sometimes “failure” will develop these character traits better than “success.” I am seeing this in my son. He has already struggled more academically than I did in my entire educational experience, but, perhaps because of this, he is already significantly ahead of me in compassion and kindness.

As educators, if we are wed to giving grades, why do we only grade such a narrow set of skills? (For a debate in The Chronicle of Higher Education on the usefulness of grades, see here: useful and not useful.) For example, why do we often regulate athletic, artistic, and communication-based courses to pass/fail or effort-based grades, but mark academic work with such relative precision? (One theory is that teachers and administrators are generally naturally gifted in academic pursuits, but are generally not as gifted in athletic, artistic and communication-based areas.) In middle school, for physical education class, we were graded, in part, on our 1-mile time. If I remember correctly, under 6:00 was a 100% and you failed if you ran over 12:00. While it was only maybe 10% of our overall PE grade, I can’t imagine that many schools do that these days. And I understand the arguments against doing so – namely, some students have a significant genetic advantage over other students in endurance running. That said, the same can be said for test-taking. For most students, both endurance running and test-taking can be improved, but some students face much higher hurdles than others.

All of this thinking about grading has not led me to any definite conclusions yet, but I welcome thoughts in the comments. And, in coming semesters, I may try to diversify my grading even more, to capture more skills and to challenge a wider range of students. (The students who are most harmed by our current system may actually be the straight-A students who find tests easy, but who never or rarely face assessment in their naturally weaker areas). I already include a group project and participation as parts of the grade in most of my classes, but I could probably expand this to a higher percentage of the overall grade. That said, I also think that grades should reflect the level of proficiency obtained, so I think substantive knowledge will and should remain important.

Saturday Movie Blogging: The Laundromat

The Laundromat is Steven Soderbergh’s (and Netflix’s) loose adaptation of James Bernstein’s nonfiction book, Secrecy World: Inside the Panama Papers, illustrating the conduct facilitated  by shell companies and the lawyers who supply the paperwork.  Both in style and substance, it echoes Adam McKay’s The Big Short – which is why every. single. review. draws that comparison, and so will I – but sadly, I found it neither as entertaining nor as coherent.

The Laundromat takes the form of multiple vignettes regarding people whose lives are touched by the shell entities facilitated by the lawyers at Mossack Fonseca, with Gary Oldman and Antonio Banderas narrating as Mossack and Fonseca, respectively.  They break the fourth wall as they offer tuxedo-clad, cynical descriptions of the services the firm provides.

 

Despite shoutouts to 1209 North Orange and its 285,000 companies – as well as the confession, I assume truthful, that Soderbergh has companies at that location – the film never really offers an explanation of precisely what shell companies do for their owners.  That was one of the things I thought The Big Short attempted reasonably well: It took the complexity of the financial crisis and made a decent stab of explaining it in an entertaining way (my prior review here).  The Laundromat tells us that these companies are stuffed with (illict) assets and that they offer privacy, but never goes further than that.

In fact, what explanations the film does offer are somewhat contradictory.  We’re told that shell companies facilitate legal tax evasion, but the vignettes have nothing to do with tax evasion; they have to do with fraud, bribery, and other crimes.  Moreover, multiple characters – including Mossack and Fonseca – end up in jail, so it’s clear that somebody did something illegal and the shell companies couldn’t protect them.

The truth, of course, is that shell entities have a variety of purposes, and can be used for both legal and illegal purposes, but that’s far too complex a story to portray on film, leaving The Laundromat’s explanations muddled and – from a pedagogical point of view – deeply disappointing.

At the same time, the movie doesn’t really stand on its own simply as a movie, divorced from the intricacies of the scandal that inspired it.  The vignettes are half-finished, because they exist only as vehicles to illustrate the broader point about how wealthy people shield themselves from liability to the masses, which means that the failure to effectively so illustrate dooms the entire project.

ICYMI: #corpgov Midweek Roundup (Oct. 23, 2019)

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"Yesterday, the Staff of the SEC ... provided additional guidance ... on two key considerations for excluding Rule 14a-8 SH proposals under the 'ordinary business' exception ...: the significance of the proposal’s subject matter and whether it seeks to 'micromanage' the company." https://t.co/1TOOOaaoIy

— Stefan Padfield (@ProfPadfield) October 19, 2019

"we find that proxy advisory firms ... exercise significant influence over executive pay practices.... We also find that PAs are susceptible to conflicts of interest and generally use a 'one‐size‐fits‐all' approach to voting recommendations." https://t.co/4wIymTa313 #corpgov

— Stefan Padfield (@ProfPadfield) October 17, 2019

"how CEOs can exploit their discretion over contracts to undertake entrenchment-increasing M&A deals" #corpgov https://t.co/jGAF9NzyLM

— Stefan Padfield (@ProfPadfield) October 18, 2019

"four central concepts that are widely discussed ... but loosely defined and poorly understood":
1: Good Governance
2: Board Oversight
3: Pay for Performance
4: Sustainability https://t.co/9tmzNzJM0g

— Stefan Padfield (@ProfPadfield) October 16, 2019

"The five-year growth rate in CEO pay for the S&P 500 companies is 23 percent compared with the five-year TSR [total shareholder return] for the S&P 500 companies of 50 percent." https://t.co/3wjVyRuQ2w

— Stefan Padfield (@ProfPadfield) October 12, 2019

Is Creditor Sabotage a Myth?

Yesterday, my weekly SSRN search on the keyword “derivatives” returned a fascinating article: Vincent S.J. Buccola, Jameson K. Mah, and Tai Zhang’s The Myth of Creditor Sabotage (forthcoming in the U. of Chi. L. Rev. 2020). For years now, as researchers in this area know, much speculation has existed about the role of net-short creditors – those creditors for whom “a derivative payoff [as a result of a debtor’s failure would be] more than sufficient to offset a loss on the underlying investment” – potentially play in a debtor’s demise.  Indeed, I’ve posted about Confining Lenders with CDS Positions.  Largely missing from such debates, however, has been discussion of other market participants’ incentives.  Indeed, as the authors state in their Introduction: “The problem with the sabotage story is not that it misapprehends net-short creditors’ incentives, but that it ignores everyone else’s.”  So basic, yet so right.  Thus far, legal scholarship has insufficiently focused on this critical consideration.  In hopes of helping to reverse this shortfall, I highly encourage readers to review this article.  It is posted on SSRN here and an abstract is below:

Since credit derivatives began to substantially influence financial markets a decade ago, rumors have circulated about so-called “net-short” creditors who seek to damage promising albeit financially distressed companies. A recent episode pitting the hedge fund Aurelius against broadband provider Windstream is widely supposed to be a case in point and has at once fueled calls for law reform and yielded an ostensible effigy of Wall Street predation.

This article argues that creditor sabotage is a myth. Net-short strategies work, if at all, by in effect burning money. When therefore an activist creditor shows its cards, as all activists must eventually do, it also reveals an opportunity for others to profit by thwarting the activist’s plans and saving threatened surplus from the ashes. We discuss three sources of liquidity that targeted firms could tap to block a saboteur — “net-long” derivatives speculators, the targets’ own investors, and bankruptcy. We conclude that it is exceedingly difficult for creditors to make money hobbling debtors and that there is little reason to believe anyone tries. We then examine the Windstream case and find, consistent with our theory, that the strongest reason for thinking Aurelius aimed at sabotage, namely that everyone says so, is weak indeed. Our analysis suggests that calls for law reform are addressed to a non-existent or at worst self-correcting problem. Precisely for this reason, however, the persistent appeal of the sabotage myth is a lesson in political rhetoric. A story needn’t be true for some to find it useful.

Blockchains, Corporate Governance, and the Lawyer's Role

Given the number of corporate governance functions that can be conducted using blockchains, it seems appropriate to consider how business lawyers should respond to related challenges.  Babson College's Adam Sulkowski and I undertook to begin to address this concern in an article we wrote for the Wayne Law Review's recent symposium, "The Emerging Blockchain and the Law."  That article, Blockchains, Corporate Governance, and the Lawyer's Role, was recently released.  An abstract follows.

Significant aspects of firm governance can (and, in coming years, likely will) be conducted on blockchains. This transition has already begun in some respects. The actions of early adopters illustrate that moving governance to blockchains will require legal adaptations. These adaptations are likely to be legislative, regulatory, and judicial. Firm management, policy-makers, and judges will turn to legal counsel for education and guidance.

This article describes blockchains and their potentially expansive use in several aspects of the governance of publicly traded corporations and outlines ways in which blockchain technology affects what business lawyers should know and do—now and in the future. Specifically, this article describes the nature of blockchain technology and ways in which the adoption of that technology may impact shareholder record keeping and voting, insider trading, and disclosure-related considerations. The article then reflects on implications for business lawyers and the practice of law in the context of corporate governance.

In the article, Adam and I do a fair amount of visioning.  Based on the development of blockchain corporate governance we imagine, we conclude that business lawyers must both focus on understanding technology in the context of their clients' business operations and be proactive in providing legal advice relating to potential uses of the technology.  We conclude that,

[i]n representing business clients, counsel have a critical role in thinking through all the implications of moving any governance function or process to a blockchain-based platform. It is especially important to help clients see, consider, and appreciate certain irrevocable consequences and legal risks, as well as potential opportunities. . . .

There is much for us all to learn in this area.  A number of legal scholars are engaging in work that may be useful in better informing us.  I, for one, try to attend as many of their presentations as possible as a means of better informing myself of what I need to know to teach corporate governance in the blockchain era.  (We note in the article that blockchain corporate governance "impacts the job of legal educators and law schools.")  I will continue to be on the lookout for additional work on blockchain corporate governance (and lawyering in an increasingly blockchain-driven world) and endeavor to highlight key things I find by posting about them here.

Friday Movie Blogging - American Factory

I watched the Netflix documentary American Factory, about the labor relationships at a Chinese-owned auto glass factory in Dayton, Ohio.  (For anyone unaware, the movie was produced by the Obamas).  It’s a fascinating film for anyone interested either in business or labor issues.

The movie begins when the old GM plant is closed in the midst of the financial crisis, throwing thousands of people out of work.  The plant is later purchased by Fuyao, a Chinese company.  They’re hiring, but at much lower wages than the old factory, and they openly state they do not want any unionization.  They are also sending over Chinese workers to work alongside the Americans.  Despite the pay cut, American workers in this economically-depressed area are happy for the job; we can see the transformation made in people’s lives.

At first, the American workers and the Chinese workers bond; the Americans invite the Chinese over to parties, enjoy introducing them to American culture, and so forth.  But the film then depicts something of a culture clash between the Americans and the Chinese. 

The Chinese expect far more obedience from their workforce, longer working hours, and they seem baffled by American regulations – everything from environmental/safety to labor regulation.  They openly state they want to hire younger workers (age discrimination!) and plan to fire labor organizers (labor violation!).  Americans complain about unsafe working conditions and pollution, and obviously feel as that the Chinese supervisors – unfamiliar with American standards – are unsympathetic to their concerns.  At one amusing/painful moment, the Chinese receive instructions from their supervisors about how American workers have unusually delicate sensibilities and need to be flattered into performing.

Later, in a jarring sequence, the American factory supervisors visit China.  Among other things, workers regularly perform dangerous tasks without any safety equipment, and put on demonstrations of obedience and satisfaction, in sharp contrast to the increasing dissatisfaction of the American workers.  Which isn’t to say the Chinese are necessarily any happier than the Americans – some Chinese workers talk about how they almost never get to see their families because of their long hours – but they are expected to put on a display of unity. 

So there certainly are these cultural differences, which the film illustrates.

But. 

It does not actually strike me that in substance the Chinese-owned American factory is, in fact, run very differently than an American factory.  Which is to say, the Chinese clearly are not sensitive to American laws, which is why they admit to extraordinarily illegal actions on camera; an American factory owner would be more savvy.  But American bosses fire labor organizers, and violate safety laws, and demand unpaid overtime, and offer non-union laborers low wages, and replace workers with automation, all the time.  In fact, to fight the labor agitation, the Chinese bring in an American consultant.  Someone snuck a microphone into the meeting that the consultant held with the workers, and we hear all the standard lines from the anti-union playbook; none of this is unique to Chinese factory owners.

So while the framing device here is one of culture clash – and certainly the Americans and the Chinese experience it that way – it’s not clear that the substantive sources of disagreement would be any different no matter who owned the factory.

And that’s ultimately quite sad.  Because we know from the start that the unionization effort is doomed, and the overall picture is one of an economic and legal system that simply is not designed to encourage that every single person be valued, and every single person be given a chance to flourish.   Instead, the assumption underlying the system – in both countries – is that many human beings, perhaps most human beings, will be cogs in a larger machine, mere instruments to allow other people to thrive.  On the American side, though, the rhetoric is at odds with that tragic reality. 

FINRA's Broken BrokerCheck System

The PIABA Foundation just released a study examining the results of FINRA's expungment processes.   FINRA's expungement rules and dispute resolution process allow brokers to obtain arbitration awards recommending the removal of customer complaints and other information from their regulatory records.  The brokers can then take the awards to court and have them confirmed.  A state court order confirming the award results in the removal of unflattering information from the CRD database. 

As this happens more and more, you should trust FINRA's BrokerCheck system less and less. In theory, BrokerCheck should allow the public to do meaningful due diligence on brokers by looking them up to see if customers have complained. Sadly, many of the complaints customers and state regulators need to evaluate brokers have been washed away through the expungement process. The PIABA Foundation study found that expungment rates have increased dramatically in recent years.  Brokers sought to expurgate 102 complaints in 2015.  The number rose to 300 in 2016 and rose again to 756 in 2017.  Last year, brokers sought to suppress 1,036 complaints. These requests are generally successful and brokers succeed in these efforts over 80% of the time.

I've written about how to see if complaints have been suppressed before.  Growing evidence indicates that the expungement process is so fundamentally broken that brokers with expunged complaints may actually be more dangerous than others.  You simply cannot rely on FINRA's BrokerCheck alone for due diligence any longer because a clean BrokerCheck may only be meaningful if the broker has not also had complaint expunged.

 

ICYMI: #corpgov Midweek Roundup (Oct. 16, 2019)

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I am planning to present a 7-minute, PechaKucha-like, overview of my current WIP, "The Omnipresent Specter of Political Bias in Corporate Decision-Making" on Friday Jan. 3 (2:00pm-3:15pm), at the @FedSoc Annual Faculty Conference held in conjunction with #AALS2020. #curmudgeon https://t.co/IwD6xf2VD9

— Stefan Padfield (@ProfPadfield) October 14, 2019

"it appears that managers are frequently using materiality discretion to correct material misstatements using revisions rather than restatements" #corpgov https://t.co/mP4W1KUS51

— Stefan Padfield (@ProfPadfield) October 16, 2019

"The rise and fall of The We Company IPO bubble ... [and] the subprime mortgage bubble ... share ... structural features that favor the expression of positive sentiments and make it difficult to express negative sentiments." #corpgov https://t.co/WHZ34xxXEp

— Stefan Padfield (@ProfPadfield) October 11, 2019

"It is now the conventional wisdom that, when managers are given great discretion over corporate investment policies, they tend to serve disproportionately their own interests, however well-intentioned managers may be" End of History for Corporate Law 89Geo.L.J.439(2001) #corpgov

— Stefan Padfield (@ProfPadfield) October 14, 2019

"recent trend where employers have sought to circumvent California’s public policy by invoking Delaware law in restrictive covenant agreements with their employees. However, in a number of recent opinions, the Delaware Court of Chancery has resisted those efforts" https://t.co/GRHcegE7sI

— Stefan Padfield (@ProfPadfield) October 13, 2019

Tenure track position in business law at Morgan State University

Morgan State University has an open tenure-track position in the business law area.  A short blurb from the posting is below and a link to the posting here:

The Department of Business Administration in the Earl G. Graves School of Business and Management at Morgan State University invites applications for a full-time, tenure-track Assistant Professor appointment in
Business Law. The position will commence Spring/Fall 2020.

The School of Business and Management is AACSB accredited and housed in a beautiful new building with state of the art technology and a Capital Markets and Marketing Lab, as well as have growing programs that engage students and the local/business community. The School of Business and Management faculty are research-active. Therefore, the successful candidate must actively engage in research, as well as teach Business Law courses along with Life and Health Insurance, Real Estate, and Risk Management (as secondary interests).

Opportunities for Business Law Profs - Deadlines Approaching!

Two opportunities for business law profs crossed my desk over the past few days.  One comes from Beate Sjåfjell, and the other from Caprice Roberts.  The topics?  Sustainability and SEALS.

Beate advises that there are a few places left at an upcoming conference on Corporate Sustainability Reforms: Securing Market Actors' Contribution to Global Sustainability.  The conference will be held in Oslo, Norway on October 24, 2019 and features contributions from around the world and across disciplines. She promotes the conference as follows:

We know that we need the contribution of all market actors: business, citizens, investors, and the public sector to achieve sustainability. However, a number of barriers, gaps and incoherencies that prevents market actors from contributing has been identified by the SMART Project. At this conference we will discuss how to facilitate the transition to sustainability, with the aim of identifying concrete proposals.

The conference is open to students, scholars, policy-makers, practitioners, and journalists. The deadline to register is October 17. There is no registration fee, and a lunch and reception are included for all participants.

Caprice wrote to remind me that the submissions portal, https://www.sealslawschools.org/index.php/conference-submissions/, is open for the Southeastern Association of Law Schools (SEALS) 2020 annual meeting and conference at the Marriott Fort Lauderdale July 30 - August 5.  Guidelines are accessible from the same link. SEALS hopes to have a preliminary draft of the program up in early November.

 

I have focused on generating or promoting business law offerings at SEALS for many years.  John Anderson and I are looking to organize a discussion session for the 2020 conference on what motivates insider trading, and a few people have been asking around about some other business law topics.  The more, the merrier.  Let me know if I can help you in generating ideas for discussion sessions or other SEALS programs.

Nobel Prize and The Challenges of Global Poverty

Congrats to MIT professors Abhijit Banerjee, Esther Duflo and Michael Kremer on their recent Nobel Prize in Economics. 

A few years ago, I completed Professors Banerjee and Duflo's free online EdX course on "The Challenges of Global Poverty."

Evidently, they are doing a rerun of that course, starting February 4, 2020. You can sign up here. 

Achieving the Seemingly Impossible: A Tribute to Eliud Kipchoge

Yesterday, two highly important events occurred in the sports world.  First, OU prevailed in the Red River Showdown.  Boomer Sooner!  But, that’s not what this post is about (so, stay w/me Texas Longhorns fans!).  Second, famed Kenyan marathoner Eliud Kipchoge broke the 2-hour marathon barrier.  Today’s post is my heartfelt way of paying tribute to Kipchoge’s historic moment. 

In June, co-blogger and fellow runner Haskell Murray wrote about inspirational runners exemplifying toughness, self-discipline, humility, and perseverance (here).  In July, I followed suit (here).  In reflecting upon the little I know of Kipchoge’s journey that led to smashing a barrier many thought impossible, it’s clear to me that he has these character traits in abundance.

In November 2016, Nike announced its Breaking2 project.  In a nutshell, it involved years of planning, the assembly of world-class scientists, trainers, runners, and even a new shoe, in the quest for a sub-two hour marathon.  In May 2017, after months of intense preparation, Kipchoge almost achieved this objective.  His time: 2:00:25 (a Nike/National Geographic documentary of the Breaking2 project is: here).  He’d given 100%, but ultimately failed to reach the goal.  Nevertheless, Kipchoge did not quit.  Indeed, in the 2018 Berlin Marathon, he set the current official world marathon record of 2:01:39.

Yesterday, Kipchoge made history.  This required tremendous perseverance, extreme self-discipline, mental toughness, and the humility to risk once again falling short of the goal in the international spotlight.  As I’ve learned more about Kipchoge’s running career through reading and short films like the one released ahead of the 2019 London Marathon of his training camp and philosophies (here), several takeaways and life-lessons for all seem to be:

“[N]o-one is limited”

Never give up.

“If you want to be successful, you need to choose. But to choose well, you must know who you are and what you stand for.  Where you want to go and why you want to get there.”

The importance of sacrifice in achieving success.

Keep it simple and focused.

The importance of taking risks

“In training, it’s teamwork” – “1 percent of the whole team is really more important than 100 percent of yourself.”

“[T]he positivity of sport”

Believe in the impossible!

 [10/15/19 Postscript: Kipchoge won two Olympic medals: bronze (2004) and silver (2008) in the 5000m.  He pivoted to distance running after failing to make the 2012 Kenyan Olympic team (here).  In 2016, he won the Olympic marathon.  Yet one more example of his not letting failure stop him, but instead persevering and turning it into triumph!]        

           

ABA LLC Institute - Time to Register!

Some of you may remember my post from last year on the American Bar Association's LLC Institute, an annual program at which I have presented and from which I have benefitted.  This year's institute is scheduled for November 7 & 8 at the Stetson Tampa Law Center.  The registration deadline is October 25.  The registration site can be found here.

The program agenda is, as usual, amazing.  Baylor Law's Beth Miller will lead off (with others) in presenting updates on relevant decisional law.  Additional highlights include panels on "LLC Agreements That Went Wrong, and How to Fix Them: Case Studies and War Stories" and "Re-Imagining the Business Trust as a Sustainable Business Form" (the latter featuring friend and Florida Law prof Lee-Ford Tritt) and an ethics program featuring (among others) Bob Keatinge, who is always illuminating and entertaining.  Presentations by other LLC Institute favorites (including Tom Rutledge, whose message to me prompted this post) pepper the program.

On Thursday night, at the annual dinner, Mitchell Hamline School of Law Emeritus Professor Dan Kleinberger will receive the 2019 Martin I. Lubaroff Award.  Most business law profs know Dan, who has (among other things) been a tremendous servant of the academy and the bar on unincorporated business entity issues.  I have benefitted from that service.  I am sad to miss being at the institute this year to see him get that award and congratulate him in person.

The LLC Institute is where the LLC elite meet.  If you have not attended this program and research/write in the unincorporated business associations area, I recommend you check it out.  Heck, I recommend that you attend anyway.  It's a super two days of learning and networking in a lovely part of the country.  Continuing legal education credit is available.

Delaware and its Courts

When I begin teaching my Business students about corporations, I always start with a little information about Delaware.  I tell them that Delaware has less than 0.3% of the U.S. population, it's physically the second smallest state in the country, and it has more registered businesses than people, among other facts.

Which is why I very much enjoyed reading Omari Simmons's paper, Chancery’s Greatest Decision: Historical Insights on Civil Rights and the Future of Shareholder Activism, which gave me a new appreciation for Delaware and its history.  I was entirely unaware that one of the cases involved in the Supreme Court's famous Brown v. Board of Education decision was a ruling from Delaware Chancery.  The paper gives a fascinating background of racial relations in the state and the events that led to Chancellor Seitz's ruling that Delaware's racially-segregated school system impermissibly discriminated against African-Americans.  I'd had no idea of Delaware's involvement in the civil rights movement and I was delighted to learn of it.  Here is the abstract:

This essay offers a historical account of the Delaware Court of Chancery’s greatest case, Belton v. Gebhart, a seminal civil rights decision. The circumstances surrounding the Belton case illuminate the limits and potential of shareholder activism to bolster civil rights in the modern context. They vividly illustrate how advancing civil rights requires a range of tactics that leverage public, private, and philanthropic resources. Shareholder activism works best as part of a multipronged activist strategy, not as a substitute for other types of activism. Examining a historical civil rights example is instructive for thinking about how shareholder activism might advance the modern civil rights agenda. Recognizing the complex challenges associated with advancing civil rights, this essay raises key questions about the nascent environmental, social, and governance (ESG) framework with which scholars, practitioners, and other observers must contend.

I guess the only thing I'll add is that, due to Chief Justice Strine's retirement, Governor Carney will be called upon to pick a successor, and many legal groups are urging that he consider a woman or person of color, given Delaware's heavily male, heavily white bench.  I have no idea who the candidates are or the various considerations that will go into Governor Carney's decision; all I can say is that Delaware's judiciary is of unique national importance, and it would be gratifying to see it better reflect our country as a whole.

A Heavyweight Division in Corporate Governance?

Texas Senator Phil Gramm and his former aide-de-camp recently took to the Wall Street Journal’s opinion page to attack Senator Warren’s plan for accountable capitalism.  At base, her plan offers governance reforms that only the federal government may be able to deliver.  The reforms may increase the odds that corporations will behave responsibly in our society and limit the risk that they will use their enormous capital and clout to manipulate our political system for their own ends.

Senator Warren’s plan sounds similar to rhetoric coming from business leaders.  The Business Roundtable recently released its view on the purpose of a corporation.  These leading executives declared a shared, fundamental commitment to balancing important stakeholder interests.  Page after page of CEO signatories agree that corporations should deliver value to customers, invest in employees by providing fair compensation and benefits, deal fairly and ethically with suppliers, support communities, respect the environment, and generate long-term value for shareholders. 

Warren’s legislation offers a plan for putting the Business Roundtable's vision into practice.  The Accountable Capitalism Act calls for federal charters for America’s largest corporations. It would allow employees to vote for a minority of corporate directors and require a supermajority of directors to authorize corporate political spending.  Shareholders need not fear they will lose all influence over corporate decisions.  Shareholders will still elect the majority of corporate directors.

The Gramm and Solon op-ed gets some things wrong about corporate law.  Many state corporation laws already allow directors to consider other stakeholder interests.  Nevada, for example, authorizes a significant number of corporations.  Nevada corporate law includes a constituency statute, expressly allowing corporate directors to balance stakeholder interests, including the interests of employees, suppliers, creditors, the community, and the state or national economy.   Under Nevada law, corporate directors do not need to limit themselves simply to the narrow, short-term interests of some shareholders.  Gramm and Solon are simply wrong when they say that corporations now have a “duty to serve investors exclusively.”  That just is not true in many states.  Of course, directors who ignore shareholders will likely lose their seats.

In fact, many corporations without an exclusive duty to serve investors thrive.  Consider noted conservative billionaire Sheldon Adelson. He runs Las Vegas Sands Corp., a Nevada corporation.  Nevada’s corporate law grants the Las Vegas Sands’ board of directors the freedom to balance stakeholder interests.  They have still delivered enormous profits to shareholders. If Gramm and Solon were right that the law requires exclusive fidelity to shareholders, which they are not, investors could not have done so well over the years by buying and holding Las Vegas Sands’ stock.

Chief Justice Strine has also called for reforms to corporate law.  Although his plan differs from Warren's, they both recognize the need for significant changes. Warren’s legislation would create a heavyweight division in American corporate law—putting in place rules for the largest and most powerful corporate entities. Something like this would likely need to be a federal reform because states probably cannot do this on their own. If just one state created a heavyweight division, corporations could simply dodge rules by jumping to a different jurisdiction. 

Ultimately, as corporations grow ever-larger, we must keep working to ensure that our corporate entities operate responsibly within our economy.  Corporations only exist because our laws authorize their formation.  We give corporate entities powers and privileges.  They offer their owners a way to do business without accepting any personal liability should things go wrong.  This is generally a very good thing because it spurs economic growth and investment.  Yet our Supreme Court has also begun to imbue state-chartered corporations with constitutional rights to political speech and religious freedom.

These powers must come with responsibilities, checks, and balances. Corporations do good by creating ways for people to work together to invest and operate businesses.  This creates enormous value for society. Purely profit-maximizing corporate actors may make sense in economic theory when they simply operate within the rules society sets up for fair and equitable business practices. Yet as corporations grow ever larger, they gain political power and the ability to shape the law in their favor. The Warren and Strine proposals should help frame a debate around how to deliver reforms.