Monday, June 3, 2019

Delaware's Standards of Review in Fiduciary Duty Actions - A Philosophical Moment?

At the 2019 Law and Society Association Annual Meeting last week, Geeyoung Min presented her paper Governance by Dividends.  In the paper, she focuses attention on stock dividends.  Near the end of her presentation, Geeyoung trod over ground on which so many of us also have trod--relating to judicial standards of review in fiduciary duty actions.  As familiar as the story was, she helped me to see something I had not seen before.  Perhaps many of you already have identified this.  If so, I am sorry to bore you with my new insight.

Essentially, what I came to realize during her talk--and develop with her and members of the audience in the ensuing discussion--was that Delaware's judiciary may have (and I may be quoting Geeyoung or someone else who was there, since I wrote this down long-form in my contemporaneous notes) muddied the waters by seeking clarity.  What do I mean by that?  Well, by addressing relatively clearly the circumstances in which the business judgment rule, on the one hand, or entire fairness, on the other, govern the judicial review of corporate fiduciary duty allegations, the Delaware judiciary has effectively made the interstitial space between the two--intermediate tier scrutiny--less clear.

As I reflected a bit more, I realized that an analogy could be made to the development of the substantive law of corporate fiduciary duties in Delaware.  The overall story?  Judicial refinement of the fiduciary duties of care and loyalty has left the duty of good faith somewhat more indeterminate.  

I am not sure where all this goes from here, but there may be lessons in these musings for both judicial and legislative rule-makers, among others. As always, your thoughts are welcomed.

June 3, 2019 in Conferences, Corporate Finance, Corporate Governance, Joan Heminway | Permalink | Comments (0)

Friday, May 10, 2019

Managing Compliance Across Borders Conference at the University of Miami- June 26-28

 

 

 

Join me in Miami, June 26-28.

 

http://media.law.miami.edu/communications/email-blast/2015/img/miami-law-logo.png

 
 
 

http://media.law.miami.edu/communications/emails/2015/gen/facebook.png

http://media.law.miami.edu/communications/emails/2015/gen/twitter.png

http://media.law.miami.edu/communications/emails/2015/gen/instagram.png

http://www.law.miami.edu/communications/emails/2015/gen/linkedin.png

http://media.law.miami.edu/communications/emails/2015/gen/youtube.png

 

 

Managing Compliance Across Borders

June 26-28, 2019

Managing Compliance Across Borders is a program for world-wide compliance, risk and audit professionals to discuss current developments and hot topics (e.g. cybersecurity, data protection, privacy, data analytics, regulation, FCPA and more) affecting compliance practice in the U.S., Canada, Europe, and Latin America. Learn more

See a Snapshot: Who Will Be There?
You will have extensive networking opportunities with high-level compliance professionals and access to panel discussions with major firms, banks, government offices and corporations, including:

  • BRF Brazil
  • Carnival Corporation
  • Central Bank of Brazil
  • Endeavor
  • Equal Employment Opportunity Commission
  • Eversheds Sutherland
  • Fidelity Investments
  • Hilton Grand Vacations
  • Ingram Micro
  • Jones Day
  • Kaufman Rossin
  • LATAM Airlines
  • Laureate Education, Inc.

 

  • MasterCard Worldwide
  • MDO Partners
  • Olin Corporation
  • PwC
  • Royal Caribbean Cruises
  • Tech Data
  • The SEC
  • TracFone Wireless
  • U.S. Department of Justice
  • Univision
  • UPS
  • XO Logistics
  • Zenith Source

 

Location
Donna E. Shalala Student Center
1330 Miller Drive
Miami, FL 33146

 

CLE Credit
Upwards of 10 general CLE credits in ethics and technology applied for with The Florida Bar

 

Program Fee: $2,500 $1,750 until June 1 
Use promo code “MCAB2019” for discount 

Non-profit and Miami Law Alumni discounts are available, please contact:
Hakim A. Lakhdar, Director of Professional Legal Programs, for details

Learn More: Visit the website for updated speaker information, schedule and topic details.

This program is designed and presented in collaboration with our partner in Switzerland

University of St. Gallen

 

 

 

 

 

 

 

May 10, 2019 in Compliance, Conferences, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, International Business, Law Firms, Law School, Marcia Narine Weldon, White Collar Crime | Permalink | Comments (0)

Friday, April 12, 2019

Why Businesses Should Not Ignore the Operation Varsity Blues Scandal

As a former compliance officer who is now an academic, I've been obsessed with the $25 million Varsity Blues college admissions scandal. Compliance officers are always looking for titillating stories for training and illustration purposes, and this one has it all-- bribery, Hollywood stars, a BigLaw partner, Instagram influencers, and big name schools. Over fifty people face charges or have already pled guilty, and the fallout will continue for some time. We've seen bribery in the university setting before but those cases concerned recruitment of actual athletes. 

Although Operation Varsity Blues concerns elite colleges, it provides a wake up call for all universities and an even better cautionary tale for businesses of all types that think of  bribery as something that happens overseas. As former Justice Department compliance counsel, Hui Chen, wrote, "bribery. . .  is not an act confined by geographies. Like most frauds, it is a product of motive, opportunity, and rationalization. Where there are power and benefits to be traded, there would be bribes." 

My former colleague and a rising star in the compliance world, AP Capaldo, has some great insights on the scandal in this podcast. I recommend that you listen to it, but if you don't have time, here are some questions that she would ask if doing a post mortem at the named universities. With some tweaks, compliance officers, legal counsel, and auditors for all businesses should consider: 

1) What kind of training does our staff receive? How often?

2) Does it address the issues that are likely to occur in our industry?

3) When was the last time we spot checked these areas for compliance ? In the context of the universities, were these scholarships or set asides within the scope of routine audits or any other internal controls or reviews?

4) What factors or aspects of the culture could contribute to a scandal like this? What are our red flags and blind spots? Do we have a cultural permissiveness that could lead to this? In the context of the implicated universities, who knew or had reason to know?

5) How can we do a values-based analysis? Do we need to rethink our values or put some teeth behind them?

6) How are our resources deployed?

7) Do we have fundamental gaps in our compliance program implementation? Are we too focused on one area or another?

8) Are integrity and hallmarks of compliant behavior part of our selection/hiring process?

Capaldo recommends that universities tap into their internal resources of law and ethics professors who can staff  multidisciplinary task forces to craft programs and curate cultures to ensure measurable improvements in compliance and a decrease in misconduct. I agree. I would add that as members of the law and business community and as alums of universities, we should ask our alma maters or employers whether they have considered these and other hard questions. Finally, as law and business professors, we should use this scandal in both the classroom and the faculty lounge to reinforce the importance of ethics, internal controls, compliance with law, and shared values.

 

April 12, 2019 in Business School, Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Law Firms, Law School, Lawyering, Management, Marcia Narine Weldon, Sports, Teaching | Permalink | Comments (0)

Wednesday, April 3, 2019

Leveraging Capitalism to Address Inequality

I recently received a copy of Citizen Capitalism: How a Universal Fund Can Provide Influence and Income to All from Sergio Gramitto. While I have not yet read the book, I didn’t want to let another blog post go by without passing along at least some of its highlights, as well as why I am particularly interested in its proposals.

In addition to Sergio, the authors of Citizen Capitalism include Tamara Belinfanti and the late Lynn Stout. Suffice it to say that Lynn was one of our true superstars, and I would hate to miss any presentation by either Sergio or Tamara. I’ve had the pleasure of engaging professionally with all of them in some capacity, and I hold them each in the highest regard.

Sergio and Lynn first discussed the idea of a Universal Fund in their article Corporate Governance as Privately-Ordered Public Policy: A Proposal, and then expanded on that idea with Tamara in Citizen Capitalism. The book has been reviewed in numerous places (see, for example, here and here). What follows is a descriptive excerpt from Cornell’s Clarke Program on Corporations & Society.

We offer a utopian-but feasible-proposal to better align the operations of business corporations with the interests of a broader range of humanity. The heart of the proposal is the creation of a Universal Fund into which individuals, corporations, and state entities could donate shares of public and private corporations. The Universal Fund would then distribute a proportionate interest in the Fund-a Universal Share-to all members of a class of eligible individuals (for example, all citizens over the age of 18), who would then become Universal Shareholders. Like a typical mutual fund, the Universal Fund would "pass through" to its Shareholders all income on its equity portfolio, including dividends and payments for involuntary share repurchases. Unlike a typical mutual fund, however, the Universal Fund would follow an "acquire and hold" strategy and could not sell or otherwise voluntarily dispose of its portfolio interests. Similarly, Universal Shareholders could not sell, bequeath, or hypothecate their Shares. Upon the death of a Universal Shareholder, that individual's Share would revert to the Fund.

Robert Ashford has been advocating for a similar proposal for years (see his SSRN page here) under the heading of binary economics (also known as “inclusive capitalism”). I’ve had the pleasure of working with Robert on a few related projects, and pass along the following excerpt from my article The Inclusive Capitalism Shareholder Proposal for whatever it may be worth.

When it comes to the long-term well being of our society, it is difficult to overstate the importance of addressing poverty and economic inequality. In Capital in the Twenty-First Century, Thomas Piketty famously argued that growing economic inequality is inherent in capitalist systems because the return to capital inevitably exceeds the national growth rate. Proponents of “Inclusive Capitalism” can be understood to respond to this issue by advocating for broadening the distribution of the acquisition of capital with the earnings of capital. Obviously, distributing capital more widely should, all else being equal, help alleviate at least some poverty and close at least some of the economic inequality gap by providing poor-to-middle-class consumers capital (paid for by the earnings of that capital) that they did not have before. But why should corporations distribute the ownership of their capital more broadly? The answer is because broadening the distribution of capital should promote greater growth because low-to-middle-income consumers are understood by many to spend more than wealthy consumers. This increased demand may then be expected to produce gains sufficient to offset the costs incurred in the process of instituting the Inclusive Capitalism proposal presented herein.

Based on my initial overview, I believe one meaningful difference between the Citizen Capitalism proposal and Ashford’s binary economics / inclusive capitalism proposal is the source of funding. The Citizen Capitalism proposal relies on donations while the binary economics proposal relies on the self-interest of corporations in increasing consumer demand.

Regardless, there are good arguments to be made for capitalism being the least worst system for advancing the well-being of individuals, and proposals like the foregoing provide important pro-market alternatives for addressing inequality.

April 3, 2019 in Books, Corporate Finance, Corporate Governance, CSR, Stefan J. Padfield | Permalink | Comments (0)

Friday, March 15, 2019

What Happens When the CEO or the Face of the Business Is a Risk? #MeToo and Corporate Governance

Hundreds of men have resigned or been terminated after allegations of sexual misconduct or assault.  Just last week, celebrity chef/former TV star Mario Batali and the  founder of British retailer Ted Baker were forced to sell their interests or step down from their own companies. Plaintiffs lawyers have now found a new cause of action. Although there a hurdles to success, shareholders file derivative suits when these kinds of allegations become public claiming breach of fiduciary duty, unjust enrichment, or corporate waste among other things. Examples of alleged corporate governance missteps in the filings include: failure to establish and implement appropriate controls to prevent the misconduct; failure to appropriately monitor the business; allowing known or suspected wrongdoing to persist; settling lawsuits but not changing the corporate culture or terminating wrongdoers; and paying large severance packages to the accused. Google, for example, announced earlier this year that it had terminated 48 people with no severance for sexual misconduct, but until it became public, the company did not disclose a $90 million payment to a former executive, who had allegedly coerced sex from an employee. Earlier this week, Google acknowledged another $35 million payment to a search executive who had been accused of sexual assault. This second payment was revealed after lawyers filed a shareholder derivative suit in January. CBS, on the other hand, denied a $120 million severance package to its former head, Les Moonvies, who has demanded arbitration.

So what happens when a company knows that a prominent executive has engaged in misconduct? How does a company prevent the conduct and then react to it? Board members and rank and file employees are undergoing more training even as people talk of a #MeToo backlash. But is that enough? Should companies now discuss potential or alleged sexual harassment by executives as a material risk factor in SEC filings? One panelist speaking at the 37th Annual Federal Securities Institute last month suggested that board counsel needed to consider this as an option.

#MeToo has also affected M&A deals with over a dozen companies now inserting a "Weinstein clause" representing, for example that “To the knowledge of the company, no allegations of sexual harassment have been made against any current or former executive officer of the company or any of its subsidiaries” Other "#MeToo reps" require a target company to confirm that it “has not entered into any settlement agreements” with perpetrators of sexual misconduct. Clawbacks are also increasingly common both in M & A deals and executive compensation agreements. Some companies have even asked newly-hired executives to represent that they have not been accused of or engaged in sexual misconduct.

I expect these #MeToo reps, clawbacks, and other disclosures to become more mainstream for a few reasons. First, there's a steady stream of news keeping these issues in the headlines, and many states have banned or are considering banning nondisclosure agreements in sexual harassment cases. Second, women leaders may now play a larger role in changing corporate culture. California requires that publicly held corporations whose “principal executive office” is located in California include at least one female board member by 2019 and even more depending on the size of the board. See here for some perspective on whether more female board members would lead to fewer sexual harassment scandals.  Third, proxy advisory firms sounded the alarm on #MeToo in early 2018 and both ISS and Glass Lewis have issued statements about what they plan to recommend when there are no women on boards. Finally, BlackRock, the world's largest asset manager has made it clear that it expects to see women on boards.  Some people do not agree that these guidelines/laws will work or are even necessary. Indeed, it will take a few years for empirical evidence to reveal whether having more women on boards and in the C suite will make a meaningful difference.

Personally, I believe it will take a combination of new leadership, successful shareholder derivative suits, and a continuation of the social due diligence in the hiring and M & A context. Sexual misconduct is wrong but it's also expensive. Companies are spending hundreds of thousands of dollars and sometimes more to investigate claims and prepare reports that they know will likely be made public at some time. Conduct won't change unless there are real financial and social penalties for wrongdoers.  

March 15, 2019 in Compliance, Corporate Governance, Current Affairs, Ethics, M&A, Marcia Narine Weldon | Permalink | Comments (1)

Tuesday, March 5, 2019

Quick Take on Polsky's Explaining Choice-of-Entity Decisions by Silicon Valley Start-Ups

Gregg D. Polsky, University of  Georgia Law, recently posted his paper, Explaining Choice-of-Entity Decisions by Silicon Valley Start-Ups. It is an interesting read and worth a look. H/T Tax Prof Blog.  Following the abstract, I have a few initial thoughts:

Perhaps the most fundamental role of a business lawyer is to recommend the optimal entity choice for nascent business enterprises. Nevertheless, even in 2018, the choice-of-entity analysis remains highly muddled. Most business lawyers across the United States consistently recommend flow-through entities, such as limited liability companies and S corporations, to their clients. In contrast, a discrete group of highly sophisticated business lawyers, those who advise start-ups in Silicon Valley and other hotbeds of start-up activity, prefer C corporations.

Prior commentary has described and tried to explain this paradox without finding an adequate explanation. These commentators have noted a host of superficially plausible explanations, all of which they ultimately conclude are not wholly persuasive. The puzzle therefore remains.

This Article attempts to finally solve the puzzle by examining two factors that have been either vastly underappreciated or completely ignored in the existing literature. First, while previous commentators have briefly noted that flow-through structures are more complex and administratively burdensome, they did not fully appreciate the source, nature, and extent of these problems. In the unique start-up context, the complications of flow-through structures are exponentially more problematic, to the point where widespread adoption of flow-through entities is completely impractical. Second, the literature has not appreciated the effect of perplexing, yet pervasive, tax asset valuation problems in the public company context. The conventional wisdom is that tax assets are ignored or severely undervalued in public company stock valuations. In theory, the most significant benefit of flow-through status for start-ups is that it can result in the creation of valuable tax assets upon exit. However, the conventional wisdom makes this moot when the exit is through an initial public offering or sale to a public company, which are the desired types of exits for start-ups. The result is that the most significant benefit of using a flow- through is eliminated because of the tax asset pricing problem. Accordingly, while the costs of flow-through structures are far higher than have been appreciated, the benefits of these structures are much smaller than they appear.

Before commenting, let me be clear: I am not an expert in tax or in start-up entities, so my take on this falls much more from the perspective of what Polsky calls "main street businesses." I am merely an interested reader, and this is my first take on his interesting paper. 

To start, Polsky distinguishes "tax partnerships" from "C Corporations."  I know this is the conventional wisdom, but I still dislike the entity dissonance this creates.  Polsky explains: 

Tax partnerships generally include all state law entities other than corporations. Thus, general and limited partnerships, LLCs, LLPs, and LLLPs are all partnerships for tax purposes. C corporations include state law corporations and other business entities that affirmatively elect corporate status. Typically, a new business will often need to choose between being a state-law LLC taxed as a partnership or a state-law corporation taxed as a C corporation. The state law consequences of each are nearly identical, but the tax distinctions are vast.

 As I have written previously, I'd much rather see the state-level entity decoupled from the tax code, such that we would 

have (1) entity taxation, called C Tax, where an entity chooses to pay tax at the entity level, which would be typical C Corp taxation; (2) pass-through taxation, called K Tax, which is what we usually think of as partnership tax; and (3) we get rid of S corps, which can now be LLCs, anyway, which would allow an entity to choose S Tax

As Dinky Bosetti once said, "It's good to want things." 

Anyway, as one who focuses on entity choice from (mostly) the non-tax side, I dispute the idea that "[t]he state law consequences of each [entity] are nearly identical, but the tax distinctions are vast."  From governance to fiduciary duties to creditor relationships to basic operations, I think there are significant differences (and potential consequences) to entity choice beyond tax implications. 

 I will also quibble with Polsky's statement that "public companies are taxed as C corporations."  He is right, of course, that the default rule is that "a publicly traded partnership shall be treated as a corporation." I.R.C. § 7704(a). But, in addition to Business Organizations, I teach Energy Law, where we encounter Master Limited Partnerships (MLPs), which are publicly traded pass-through entities. See id. § 7704(c)-(d).

Polsky notes that "while an initial choice of entity decision can in theory be changed, it is generally too costly from a tax perspective to convert from a corporation to a partnership after a start-up begins to show promise."  This is why those of us not advising VC start-ups generally would choose the LLC, if it's a close call. If the entity needs to be taxed a C corp, we can convert.  If it is better served as an LLC, and the entity has appreciated in value, converting from a C corp to an LLC is costly.  Nonetheless, Polsky explains for companies planning to go public or be sold to a public entity, the LLC will convert before sale so that the LLC and  C Corp end up in roughly the same place:  

The differences are (1) the LLC’s pre-IPO losses flowed through to its owners while the corporation’s losses were trapped, but as discussed above this benefit is much smaller than it appears due to the presence of tax-indifferent ownership and the passive activity rules, (2) the LLC resulted in additional administrative, transactional, and compliance complexity (including the utilization of a blocker corporation in the ownership structure), and (3) the LLC required a restructuring on the eve of the IPO. All things considered, it is not surprising that corporate classification was the preferred approach for start-ups.

This is an interesting insight. My understanding is that the ability pass-through pre-IPO losses were significant to at least a notable portion of investors. Polsky's paper suggests this is not as significant as it seems, as many of the benefits are eroded for a variety of reasons in these start ups.  In addition, he notes a variety of LLC complexities for the start-up world that are not as prevalent for main street businesses. As a general matter, for traditional businesses, the corporate form comes with more mandatory obligations and rules that make the LLC the less-intensive choice.  Not so, it appears, for VC start-ups.  

 I need to spend some more time with it, and maybe I'll have some more thoughts after I do.  If you're interested in this sort of thing, I recommend taking a look.

March 5, 2019 in Corporate Finance, Corporate Governance, Corporations, Joshua P. Fershee, LLCs, Partnership, Unincorporated Entities, Venture Capital | Permalink | Comments (0)

Monday, December 24, 2018

Voting Recommendations, Fiduciary Duties, and the Proxy Process

A few weeks ago, I posted on the SEC Roundtable on the Proxy Process (here).  I noted in a postscript to that post that friend-of-the-BLPB Bernie Sharfman had an additional comment letter (his fourth) relating to this regulatory project up his sleeve (so to speak).  That comment letter, dated December 17, 2018, was recently filed (see here) and focuses on voting recommendations.  The nub?

Investment advisers should not be in fear of breaching their fiduciary duties if they use board voting recommendations. . . . The SEC needs to go further than just approving the use of board voting recommendations as long as the investment adviser has an agreement with the client to use them. . . . [T]he SEC needs to explicitly state in some way that an investment adviser will not be in breach of its fiduciary duties under the Advisers Act if it uses board voting recommendations when voting its proxies.

To implement such a policy, this comment letter requests the SEC to provide investment advisers with a liability safe harbor under the Advisers Act when using board voting recommendations in voting their proxies as long as their clients do not prohibit their use and no significant business relationship exists between the investment adviser and the company whose shares are being voted. This will help ensure that the value inherent in board voting recommendations is reflected in the voting of proxies by investment advisers.

The entire letter is well worth a good read--and only 11 pages, at that.

But that's not all.

Bernie has taken thoughts from two of his four comment letters and combined and enhanced them in a recently posted article, Enhancing the Value of Shareholder Voting Recommendations.  The abstract of the article is set forth below.

This writing addresses a fundamental issue in corporate governance. If institutional investors such as investment advisers to mutual funds have a fiduciary duty to vote the shares of stock that they owned on behalf of their investors, then how do we practically achieve informing them on how to vote their proxies without requiring each institutional investor to read massive amounts of information on the hundreds or thousands of companies they have invested in for the thousands, tens of thousands, or even hundreds of thousands of votes they are confronted with each year?

A critical step in resolving this issue is maximizing the ability of institutional investors to avail themselves of voting recommendations that are made on an informed basis and with the expectation that they will lead to shareholder wealth maximization. One way to achieve this maximization is to make sure that the voting recommendations provided by proxy advisors are truly informed ones. This leads to the recommendation that the proxy advisor should be held to the standard of an information trader. Another way is for the SEC to recognize the value of board recommendations and explicitly state that their use will allow investment advisers to meet their fiduciary duties when voting their proxies.

As Bernie noted on LinkedIn when he posted a link to the article a few days ago, it is a present "[f]or those of you who are looking forward to reading articles on corporate governance during the Christmas break."  I, for one, am still focused on grading (we ended late this semester, and my exam was given on the last possible day--with one student taking it late because of illness) and on my daughter's birthday (today) and Christmas (tomorrow).  But I did take a peek at the article anyway.  It makes many nice points on relevant embedded legal issues and does draw together well Bernie's ideas on the interaction of the duties of proxy advisors and investment advisers.

Bernie is inviting comments.  I am sure he would appreciate yours.

December 24, 2018 in Corporate Governance, Joan Heminway, Securities Regulation | Permalink | Comments (0)

Friday, December 14, 2018

Getting Back to B Corporations and Benefit Corporations . . . .

Haskell Murray, this one's for you (and many others who work with B corporations and benefit corporations)!

Friend of the BLPB Tamara Belinfanti recently sent me a link to an article in which she was quoted.  The premise of the article is clear from its title: To B or not to B? That’s the question for companies who seek to "balance profit and purpose."  Familiar proposition; great article title.  It's certainly worth a quick read, even if it says nothing new.  (Although it does seem to imply that Justice Strine is no longer the Chief Justice of the Delaware Supreme Court . . . .)

In the article, various folks (including Justice Strine) comment about whether B corporation certification and/or benefit corporations are "needed" for social enterprise firms.  This is a question that I love to think about (especially if it can keep me from grading papers for a bit . . . ).  Some of you may remember my post on this topic from a few years ago.  It also is an issue that I have approached at times in pieces of my academic writing, including in the article featured in this post.

Next summer, at the Southeastern Association of Law Schools annual meeting/conference, I am moderating a discussion group on the subject to continue and enrich the conversation.  The title and brief abstract are set forth below.

Discussion Group: Benefit Corporation (or Not)? Establishing and Maintaining Social Impact Business Firms

As the benefit corporation form nears the end of its first decade of "life" as a legally recognized form of business association, it seems important to reflect on whether it has fulfilled its promise as a matter of legislative intent and public responsibility and service. This discussion group is designed to take on the challenge of engaging in that reflective process. The participating scholars include doctrinal and clinical faculty members who both favor and tend to recommend the benefit corporation form for social enterprises and those who disfavor or hesitate to recommend it.

To date, the participants include domestic and international law professors (clinical and doctrinal) and a practitioner, too!  Let me know if you would like to join this group.  The conference runs from July 28 - August 3 and will be held this year at the Boca Resort and Beach Club.

I will be interested in the discussion.  In the mean time, as someone who does not recommend the benefit corporation form, I am opening the BLPB "floor" for discussion here.  I am interested in your views.

December 14, 2018 in Conferences, Corporate Governance, Haskell Murray, Joan Heminway, Social Enterprise | Permalink | Comments (0)

Tuesday, December 11, 2018

Not Every CEO Opinion is a Breach of Fiduciary Duty (Most Aren't)

Jack Welch, former GE CEO (1981 to 2001) was revered for his ability to maximize shareholder value.  Yet in 2009, he explained that shareholder value was

“the dumbest idea in the world. Shareholder value is a result, not a strategy... your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal… Short-term profits should be allied with an increase in the long-term value of a company.”

This runs contrary to how many people think about the role of the CEO and the board of directors.  I think it's spot on, and it is a key reason the business judgment rule, and its role in preserving director primacy, is so critical.   

Last week, a Wall Street Journal article about Dick's Sporting Goods made the rounds. The article reported: 

Ed Stack, the chairman and chief executive of Dick’s Sporting Goods Inc., arrived at work the Monday after a gunman killed 17 people at a school in Parkland, Fla., nearly certain the outdoor retailer should limit sales of some guns.

. . . .

Dick’s Financial Chief Lee Belitsky asked, “So what’s the financial implication here?” according to Mr. Stack. “I basically said, I don’t really care what the financial implication is, but you’re right, we should look.”

Company executives convened the board via teleconference to explain the proposed plan, took some time to reflect, then gathered again a few days later to vote. “It was unanimous that we should do this and stand up and take a stand,” said Mr. Stack, whose family holds a controlling stake in the retailer.

This revelation led many folks to question whether Stack's statement that he did not "really care" about the financial implications was a breach of fiduciary duty.  The concern was buoyed by the reality that store sales had dropped about 3% to  4% for the year, and the drop was linked to the decision to limit certain gun sales. 

That said, a drop in sales does not mean there was a breach of any duty any more than an increase in sales means no breach occurred. Results may be evidence, but that's all they are. Part of the story. Incidentally, though it is not proof, either way, it is worth noting that Dick's sales dropped, but profits rose after the decision because the company cut costs by replacing some guns with higher-margin items. 

It seems like every time a CEO or board issues a decision that is controversial or chooses to say that he or she supports a certain course of action because they think it is the "right thing to do," the questions begin about whether either the duty of care or loyalty has been breached.  I maintain that a statement (or series of statements) like that is not sufficient to overcome the business judgment rule to allow a review of the decision.  

This is especially true where, like in the Dick's situation, there is evidence that the company deliberated appropriately. The WSJ article noted that company executives called together the board to explain the proposed plan, "took some time to reflect, then gathered again a few days later to vote." The vote was unanimous to end all assault-style weapons sales and to and stop selling guns or ammunition to those under 21 years of age. Interestingly, Walmart Inc. and other retailers followed Dick's lead later that day. If the deliberative process is a concern, it would seem those following Dick's should be more vulnerable to a fiduciary duty/business judgment rule challenge than Dick's. 

For what it's worth, I think Dick's or any store deciding NOT to change their sales practice would also be protected by the business judgment rule, just as I think Chick-Fil-A's decision not to open on Sundays should be protected by the business judgment rule (though if it were a Delaware corporation, I am not sure it would be). 

This is not to say I don't believe in fiduciary duties. I very much do. I just also believe in a strong business judgment rule, ideally enforced as an abstention doctrine. (I believe in lots of things.)  

I need more than a few public statements before I think anyone should be looking behind an entity's decision making. Recent examples raising entity fiduciary duty questions, like Dick's and Nike's Colin Kaepernick ads, have had positive financial outcomes of the entities, but it shouldn't matter.  The business judgment rule is there to protect all the decisions of the board that are not the product of fraud, illegality, or self-dealing, not just correct decisions. 

December 11, 2018 in Corporate Governance, Corporations, Current Affairs, Joshua P. Fershee | Permalink | Comments (6)

Friday, December 7, 2018

Do Investors Really Care About Environmental, Social, and Governance Factors?

In January 2018, Larry Fink of Blackrock, the world’s largest asset manager, shocked skeptics like me when he told CEOs:

In the current environment, these stakeholders are demanding that companies exercise leadership on a broader range of issues. And they are right to: a company’s ability to manage environmental, social, and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process. Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world? Are we using behavioral finance and other tools to prepare workers for retirement, so that they invest in a way that will help them achieve their goals?

In October 2018, Blackrock declared, “sustainable investing is becoming mainstream investing.” The firm bundled six existing ESG EFT funds and launched six similar funds in Europe and looked like the model corporate citisen.

So does Blackrock actually divest from companies with human rights violations or that do not provide meaningful disclosures on human trafficking, child slavery, forced labor, or conflict minerals? The company did not publicly divest from gun manufacturers although it did “speak with” them in February after the Parkland school shooting; the company has stated that due to fiduciary concerns, it cannot divest from single companies in a portfolio. 

In theory, a behemoth like Blackrock could have a significant impact on a firm’s ESG practices, if it so chose. It could set an example for companies and for other institutional investors by seeking (1) additional information after reviewing disclosures and/or (2) demanding changes in management if companies did not in fact, show a true commitment to ESG.

But I shouldn’t pick on Blackrock. Based on what I heard last week in Geneva at the UN Forum on Business and Human Rights, other investors outside of the SRI arena aren’t pressuring companies either.  I attended the Forum for the fourth time with over 2,000 members from the business, NGO, civil society, academic, and governmental communities. There was a heavy focus this year on supply chain issues because 80% of the world’s goods travel through large, international companies.The Responsible Business Alliance and others stressed the importance of eradiating forced labor. Apple, Google, Microsoft, Intel, and Amnesty International focused on tech companies, artificial intelligence, and human rights implications. Rio Tinto and Nestle allowed an NGO to publicly criticize their disclosure reports in painstaking detail. An activist told the entire plenary that states needed to stop killing human rights defenders. In other words, business as usual at the Forum. Here are some of the takeaways from some of the sessions:

  1. NGO PODER warned that investors should not divest when companies are not living up to their responsibilities  but instead should engage companies on ESG factors and demand board seats.
  2. The UN Working Group on Business and Human Rights observed that rating agencies can and should be a fast track to the board on ESG issues. 
  3. A representative from the Sustainable Stock Exchanges Initiative, a joint initiative of UNCTAD, PRI, the UN Global Compact, and UNEP-FI, indicated that investors want to know if ESG information is material. It may be salient, but not material to some. 79 stock exchanges around the world have partnered with the SSEI. 39 have voluntary ESG disclosures and 16 have mandatory disclosures.
  4. The Business and Human Rights Resources Center noted that of 7,200 corporate statements mandated by the UK Modern Slavery Act, only 25% met the minimum requirements required by law. As they shocked the audience with this statistic, news alerts went out the Australia had finally passed its own anti slavery law.
  5. 40% of companies in apparel, agricultural, and extractive industries have a 0 (zero) score for human rights due diligence, indicating weak implementation of the UN Guiding Principles on Business and Human Rights. The average score in the benchmark was only 27%.
  6. French companies must respond to the French Duty of Vigilance Law and the EU Nonfinancial Disclosure regulations, which have different approached to identifying risks. It could take six months to do an audit to do the disclosure, but investors rarely question the companies directly or the data. 
  7. SAP Ariba found that 66% of consumers believe they have a duty to buy goods that are good for society and the environment and that sustainability is mostly driven by millennials and generation Z consumers. 
  8. Nestle, the biggest food and beverage company in the world, requires its 165,000 suppliers to follow responsible sourcing standard especially for child and forced labor. The conglomerate partners with NGOs to conduct human rights impact assessments for their upstream suppliers. 
  9. Apple has returned 30 million USD in recruitment fees to workers since 2008 to address forced labor and illegal practices. HP has also returned fees. The hotel industry has banded together to fight forced labor. Most responsible businesses have banned the use of recruitment fees but many workers still pay them to personnel agencies in the hopes of getting jobs with large companies. 
  10. Many companies are now looking at human rights and ESG issues throughout their own supply chains but also with their joint venture, merger, and other key business partners.
  11. Rae Lindsay of Clifford Chance noted that avoiding legal risk is not the main role of human rights due diligence but lawyers working across disciplines can make sure that clients don’t inadvertently add to legal risk in deals. She encourages deal lawyers to become familiar with the risks and law and business students to learn about these issues. 

So do investors care about ESG? Are these disclosure rules working? You wouldn’t think so by hearing the speakers at the Forum. On the other hand, proxy advisory firm ISS recently launched an Environmental and Social Quality Score to better evaluate the ESG risks in its portfolio companies. I’ll keep an eye out for any divestments or shareholder proposals. 

I’m not holding my breath for too much progress next year at the Forum. While I was encouraged by the good work of many of the companies that attended, I remain convinced that the disclosure regime is ineffective in effectuating meaningful change in the world’s most vulnerable communities. Unless governments, rating agencies, investors, or consumers act, too many companies will continue to pay lip service to their human rights commitments.  

 

 

 

December 7, 2018 in Compliance, Conferences, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, International Business, International Law, Marcia Narine Weldon, Shareholders | Permalink | Comments (1)

Monday, December 3, 2018

More on the SEC Roundtable on the Proxy Process

On November 15, the Securities and Exchange Commission (SEC) convened a Roundtable on the Proxy Process.  (See also here.)  I have not been following this as closely as co-blogger Ann Lipton has (see recent posts here and here), but friend-of-the-BLPB, Bernie Sharfman (Chairman of the Main Street Investors Coalition Advisory Council) has been active as a comment source.  Both contribute valuable ideas that I want to highlight here as the SEC continues to chew on the information it amassed in the roundtable process. 

Ann, as you may recall, has been focusing attention on the uncertain status of proxy advisors when it comes to liability for securities fraud.  In her most recent post, she observes that

There’s a real ambiguity about where, if it all, proxy advisors fit within the existing regulatory framework, and while I am not convinced there is a specific problem with how they operate or even necessarily a need for regulation, I think it can only be for the good if the SEC were to at least clarify the law, if for no other reason than that these entities play an important role in the securities ecosystem, and if we expect market pressure to discipline them, potential new entrants should have an idea of the regime to which they will be subject.

I remember having similar questions as to the possible fiduciary duties and securities fraud liability of funding portals under the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012 (a/k/a the CROWDFUND Act)--Title III of the Jumpstart Our Business Startups Act (a/k/a/, the JOBS Act).  I wrote about these ambiguities (and other concerns) in this paper, published before the SEC adopted Regulation CF.  I know Ann's right that we have clean-up to do when it comes to the status of securities intermediaries in various liability contexts (a topic co-blogger Ben Edwards also is passionate about--see, e.g., here and here).

Bernie has honed in on voting process issues relating to both proxy advisors (the standard for making voting recommendations and the use/rejection of the same) and mutual fund investment advisers (the disclosure of mutual fund adviser voting procedures and SEC's enforcement of the Proxy Voting Rule).  Specifically, in an October 12 letter to the SEC, Bernie sets forth three proposals on proxy advisor voting recommendations.  His bottom line?

Institutional investors have a fiduciary duty to vote. However, the use of uninformed and imprecise voting recommendations as provided by proxy advisors should not be their only option. They should always be in a position of making an informed vote, whether or not a proxy advisor can help in making them informed.

Earlier, in an October 8 letter to the SEC (Revised as of October 23, 2018), Bernie recommends mutual adviser disclosure of "the procedures they will use to deal with the temptation to use their voting power to retain or acquire more assets under management and to appease activists in their own shareholder base" and "the procedures they will use to identify the link between support for a shareholder proposal at a particular company and the enhancement of that company’s shareholder value."  He also recommends that the SEC "should clarify that voting inconsistent with these new policies and procedures or omission of such policies and procedures will be considered a breach of the Proxy Voting Rule" and engage in "diligent" enforcement of the Proxy Voting Rule.  I commend both letters to you.

Ann's and Bernie's proxy disclosure and voting commentary also reminds me of the importance of co-blogger Anne Tucker's work on the citizen shareholder (e.g., here).  It will be interesting to see what the SEC does with the information obtained through the proxy process roundtable and the related comment letters.  There certainly is much here to be explored and digested.

[Postscript, 12/4/2018: Bernie Sharfman notified me this morning of a third comment letter he has filed--on proxy advisor fiduciary duties.  It seems he may have a fourth letter in the works, too.  Look out for that. - JMH]

December 3, 2018 in Agency, Ann Lipton, Anne Tucker, Corporate Governance, Corporations, Joan Heminway, Securities Regulation | Permalink | Comments (0)

Monday, November 26, 2018

Entrepreneurship in the Sharing Economy: P2P Strategies, Models, and Innovation Paradigms - Call for Papers

From our friend and colleague, Djamchid Assadi at the Burgundy School of Business in Dijon, France:

 

Lisbon2019_EURAM-banner_1100

SIG 03 - ENT - Entrepreneurship

With our theme Exploring the Future of Management: Facts, Fashion and Fado, we invite you to participate in the debate about how to explore the future of management.

We look forward to receiving your submissions.

T03_08 - Entrepreneurship in the sharing economy: P2P strategies, models, and innovation paradigms

Proponents:

Djamchid Assadi, Burgundy School of Business BSB; Asmae DIANI, Sidi Mohamed Ben Abdellah University, Fez, Morocco; Urvashi Makkar, G.L. Bajaj Institute of Management and Research (GLBIMR), Greater Noida; Julienne Brabet, Université Paris-Est Créteil (UPEC); Arvind ASHTA, Arvind, CEREN, EA 7477, Burgundy School of Business - Université Bourgogne Franche-Comté, France

Short description:

Sharing of funds, files, accommodations, and other utilities and properties has become a vital part of the emerging social life and economy.

The traditional dyadic firm-to-customer transactions has given place to the depositional triadic of P2P platforms game changers which facilitate exchange between peer providers and peer recipients. As these P2P platforms disrupt conventional transactions, for example, P2P home exchange platforms like Airbnb thoroughly disorder the hotel industry, it is crucial that researchers consider conceptual refinement and empirical grounding for providing insights.

This track aims to bring together researchers with an interest in the sharing economy and, specifically, in P2P platforms.

Long description:

While direct interactions among individuals have always existed, P2P sharing platforms have considerably facilitated and lowered transaction costs for P2P exchanges. The P2P platforms do not supply nor demand. They do not divide a fortune to distribute its portions among peers. The P2P platforms simplify, accelerate and facilitate interactions among peers on the two-sided markets without the intermediation of central hubs. They enable individuals to unlock their unused and underused assets and skills for non or for-profit exchanges among peers.

They have transformed the way individuals consume and generate income and make use of their disposable resources and time. Numerous P2P platforms have sprung up for enterprising (Kickstarter, Indiegogo), working (Carpooling, Airbnb), dating (eHarmony, Match), innovating (Mindmixer), funding (Kiva, Zopa, Prosper), searching (CrowdSearching), etc. Airbnb and Uber are currently valued at $30 and $72 billion respectively.

This track aims to bring together researchers to provide insights and actionable visions to the emerging social and economic paradigms of spontaneous interactions and transaction among peers. It welcomes contributions that examine how P2P platforms transform market, entrepreneurship, competition, strategy, government-industry relations, supply chains, innovation, and other processes.

The following is a non-comprehensive list of leading issues in the sharing economy area.

How does entrepreneurship change in the sphere of sharing resources and utilities?
How do paradigms change in the case of open innovation?
Are the strategies and business models of sharing and collaborative online platforms peculiar?
Why do peers collaborate, share and circulate?
How does the sharing economy impact customer behavior?
What are the relations between social ties and ecosystem on the two-sided markets of the sharing economy?
How do conventional businesses react and develop business models to compete and/or coexist with the increasing trend of sharing economy?
How is value created (income steams) and distributed (value appropriation) among stakeholders in the sharing economy? Who are winners and losers? 
What is the role of institutions in the sharing economy?
How do technologies such as artificial intelligence, machine learning, augmented and virtual reality, and blockchains affect the functioning of sharing economy?
What are the effects of collaborative consumption on sustainability?
Is the possibility of evading ante-P2P regulations the dark side of the sharing economy?

Keywords:

Sharing and collaborative economy
Peer-to-peer and Two-sided market
Spontaneous order of P2P interactions and exchanges
Crowdfunding
Carpooling and Home-exchange
Online dating

Publication Outlet:

Optimization: Journal of Research in Management (Urvashi Makkar, proponent 2, is founding Editor-in-Chief of this journal. Djamchid Assadi, proponent 1, is member of the Editorial Board).

Innovative Marketing (Djamchid Assadi, proponent 1, is member of the Academic Advisory Board. He has exchanged for specific issues with Tatyana Kozmenko, Editorial Assistant).

The corresponding proponent, Djamchid Assadi, has exchanged with the individuals in charge within the books publishing companies. They have shown interest in considering proposals for collective books on the topic of sharing economy.

For more information contact:

Djamchid Assadi - djamchid.assadi@bsb-education.com

AUTHORS GUIDELINES

http://www.euramonline.org/submissions-guidelines-2019/author-s-guidelines.html

  • Conference: 26-28 June 2019
  • Authors registration deadline: 25 April 2019 // Early birds registration deadline: 18 April 2019
  • Notification of acceptance: 20 March 2019
  • Deadline for paper submission: 15 January 2019 (2 pm Belgian time)

November 26, 2018 in Call for Papers, Conferences, Corporate Finance, Corporate Governance, Securities Regulation | Permalink | Comments (0)

Monday, November 19, 2018

Teaching Corporate Fiduciary Duties, Again . . . .

Even after 19 years or so of teaching Business Associations courses, I still marvel at how hard it is to teach corporate fiduciary duty doctrine to my students.  A lot of my frustration comes from the amount of (perhaps not-so-useful) judicially instigated labeling involved under Delaware law, as the leading state in the area.  In particular, there is the narrowing of the duty of care to exclude both substantive duty of care claims and Caremark claims.  And then there is the matter of how to best describe the nature of the business judgment rule and how to describe the interaction of disclosure (candor) with the fiduciary duties of care and loyalty. And finally there is a lingering doctrinal question as to whether, in other jurisdictions, good faith, classified as a subsidiary component of the duty of loyalty in Delaware, may be a free-standing fiduciary duty or, in the alternative, foundational, penumbral, etc. to the fiduciary duties of loyalty and care  . . . .  Tough stuff.

Is anyone else out there suffering in the same way I do in teaching fiduciary duties in a Business Associations or Corporations class?  How do you handle the legal complexity/labeling questions?  I continue to want to improve in teaching this material.  I am all ears.

[Postscript:  I failed to note in the original post the helpful comments that I received on a longer-form, less specific post on this issue two years ago.  Feel free to look there for more and for some ideas folks shared about their teaching then.]

November 19, 2018 in Corporate Governance, Corporations, Joan Heminway, Teaching | Permalink | Comments (7)

Friday, November 9, 2018

The Cambridge Handbook of Social Enterprise Law

The Cambridge Handbook of Social Enterprise Law, edited by Ben Means (South Carolina) and Joe Yockey (Iowa) is at the printers and should be ready for orders in early 2019. 

My fellow BLPB editor Joan Heminway and I both have chapters in the book, along with many others. 

The introduction is posted on SSRN, for those who are interested. Also, editor Ben Means has many talents, as he did the cover artwork below as well.

The Cambridge Handbook of Social Enterprise Law_Cover

November 9, 2018 in Business Associations, Corporate Governance, Haskell Murray, Joan Heminway, Research/Scholarhip, Social Enterprise | Permalink | Comments (0)

Monday, November 5, 2018

Elections of the Political and Corporate Kind

By the time many of you read this, Election Day 2018 will be upon us (or even over).  I have had elections on my mind for some time now--elections of the political and corporate kind.  As a result of an invitation to participate in last week's symposium on women and corporate governance hosted by the George Washington Law Review ("Women and Corporate Governance: A Conference Exploring the Role and Impact of Women in the Governance of Public Corporations"), my election-oriented thoughts somehow became infused with gender reflections . . . .

1992 was dubbed the political “Year of the Woman.” The appointment of Clarence Thomas to the U.S. Supreme Court in 1991 after hearings focused on sexual harassment allegations and revelations of Bill Clinton’s extramarital sexual conduct during his first campaign for election as U.S. President were and are credited with the record number of women elected to federal legislative positions in 1992. “When the ballots were counted, America had elected a record-breaking four women as senators and 24 women as representatives to Congress.” Li Zhou, The striking parallels between 1992’s “Year of the Woman” and 2018, explained by a historian, VOX, Nov 2, 2018, https://www.vox.com/2018/11/2/17983746/year-of-the-woman-1992 (interview with Georgetown University professor Michele Swers).

2018 has again been a hallmark year for women in politics—and in the public company boardroom. The #MeToo movement (and along with it yet another U.S. Supreme Court appointment tinged with allegations of sexual misconduct and a U.S President with a history of philandering and lechery) undoubtedly has been a factor in both the record-breaking number of women seeking political office in 2018 and a simultaneous renewed interest in gender diversity on corporate boards of directors. Perhaps this is not surprising. #MeToo largely emanates from the abuse of gendered power in government and business firms (which together are responsible for the fundamental regulation of our economic and social lives).

Given these parallels, there may be some value to looking at both the political and business management reactions to #MeToo.  Specifically, I am interested in comparing, contrasting, and reflecting on the gender effects of the #MeToo movement on public company board composition in relation to the gender effects of the #MeToo movement on the composition of legislative bodies. I have determined to write a symposium essay along those lines for the George Washington Law Review.  Your reflections and ideas on content are welcomed.

November 5, 2018 in Corporate Governance, Joan Heminway | Permalink | Comments (0)

Sunday, October 21, 2018

5th Conference of the French Academy of Legal Studies in Business - June 20-21 - Paris

5th Conference of the French Academy of Legal Studies in Business (Association Française Droit et Management)

June 20 and 21, 2019 – emlyon - Paris Campus

CALL FOR PAPERS 2019 Social Issues in Firms

Social issues and fundamental rights occupy an increasingly important space in the governance of today’s companies. Private enterprises assume an increasingly active role not only in a given economy but also in society as a whole. Firms become themselves citizens. They recognize and support civic engagement by the men and women who work for them. Historically, the role of the modern firm that resulted from the Industrial Revolution has been torn between two opposing viewpoints.

[More information under the break.]

Continue reading

October 21, 2018 in Business Associations, Business School, Call for Papers, Conferences, Corporate Governance, Corporations, Ethics, Haskell Murray, International Business, International Law, Management, Research/Scholarhip | Permalink | Comments (0)

Quotes from a Draft: The Search for an Egalitarian First Amendment

Jeremy Kessler and David Pozen have posted a draft of their paper The Search for an Egalitarian First Amendment on SSRN (available here).  In skimming the paper, I came across a number of quotes, including a couple of citations, I thought readers of this blog might find of interest. So, here they are, in no particular order:

-- One does not need to read Piketty ... to guess that equating corporations’ rights to spend money, sell data, and trim benefits with citizens’ First Amendment rights might prove controversial in a world of bank bailouts and mortgage foreclosures.

-- the question whether the Free Speech Clause permits a legislature to limit the election-related spending of corporations, unions, or wealthy individuals in the service of antiplutocratic goals. To help answer this question in the face of mixed precedent and negligible Founding-era evidence, the Justices have adverted to each of the three major normative theories of the First Amendment [pursuit of truth, the promotion of individual autonomy, and the facilitation of democratic self-government].

-- Both the majority and the dissent in Citizens United thus plausibly invoked each and every one of the three major First Amendment theories, as well as the value of equality itself, in support of their dueling positions. 

-- For a decade now, the “anxiety that the ‘Great Recession’ . . . defines a new economic normal,” in which the wealthiest
individuals take an ever larger piece of an ever shrinking pie, has shaped American public culture.

-- “Pikettymania” revolved around the stark neo-Marxist claim that “capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.”

-- it is not just the current composition of the Supreme Court or its most controversial free speech decisions that account for the rise of First Amendment Lochnerism—a First Amendment jurisprudence that disables redistributive regulation and exacerbates socioeconomic inequality

-- The move from speaker to system is the most powerful move in the contemporary grammar of egalitarian First Amendment argument; its underlying account of free speech does not merely complicate or chisel away at the deregulatory Lochnerian paradigm but supplies a comprehensive alternative.

-- a First Amendment-industrial complex. Mapping the contours of this complex is well beyond the scope of this Essay. The basic point, for present purposes, is that arguments for a deregulatory First Amendment are now promoted not only
(or even primarily) by for-profit companies seeking to minimize their own labor costs or regulatory burdens, but also by a growing set of nominally depoliticized nonprofits with varying degrees of connection to the business community

-- An additional feature of informational capitalism extends the potential reach of First Amendment Lochnerism: the dominant role played by private owners of the platforms through which information circulates online and within which ever more data is commodified and mined for economic value. Even though they control the infrastructure of digital communication and function as the “new governors” of the digital public sphere, companies like Facebook and Google are generally assumed to not be bound by the First Amendment because they are not state actors. Instead of empowering users to challenge their policies, the First Amendment empowers the companies themselves to challenge statutes and regulations intended to promote antidiscrimination norms or users’ speech and privacy, among other values. First Amendment law not only fails to check the internet’s new governors and the inequalities that pervade their platforms, but also stands in the way of legislative and administrative correctives.

-- The neoliberal preference is not necessarily for “free markets” as such, but for a regulatory environment that prioritizes “familiar protections of property and contract” along with “a favorable return on investment and managerial authority.” In our digital age, the facilitation of these preferences has fallen to the “information state,” the set of national (or international) bureaucracies that oversee the operations of informational capitalism. Within these bureaucracies, “mandates or bans on conduct”—such as traditional labor laws, wage and price controls, or licensing regimes—are apt to be rejected as overly market-disruptive and replaced whenever possible with “‘lighter-touch’ forms of governance . . . such as disclosure requirements” and other regulatory techniques that further the production and circulation of commercially salient information.

-- Cases decided by the Roberts Court, the Rehnquist Court, the Burger Court, and even the Stone Court have been singled out as the inflection point when First Amendment doctrine took its inegalitarian turn.

-- For an ideologically diverse range of scholars, policymakers, and activists, growing inequality names both the deep cause and the dangerous effect of a set of overlapping conflicts—economic, racial, cultural, constitutional—that threaten the stability of contemporary U.S. society.

-- Citizens United v. FEC, 558 U.S. 310, 424–25 (2010) (Stevens, J., concurring in part and dissenting in part) (“Under the majority’s view, I suppose it may be a First Amendment problem that corporations are not permitted to vote, given that voting is, among other things, a form of speech.”).

-- Citizens United v. FEC, 558 U.S. 310, 441 (2010) (Stevens, J., concurring in part and dissenting in part) (arguing that “the Constitution does, in fact, permit numerous ‘restrictions on the speech of some in order to prevent a few from drowning out the many’” (quoting Nixon v. Shrink Mo. Gov’t PAC, 528 U.S. 377, 402 (2000) (Breyer, J., concurring)))

October 21, 2018 in Constitutional Law, Corporate Governance, Stefan J. Padfield | Permalink | Comments (1)

Saturday, October 13, 2018

Has the Dodd-Frank Conflict Minerals Rule Really Made a Difference and is Blockchain The Answer?

Last week Dr. Denis Mukwege won the Nobel Peace Prize for his work on gender-based violence in the Democratic Republic of Congo (DRC). This short video interview describes what I saw when I went to DRC in 2011 to research the newly-enacted Dodd-Frank disclosure rule and to do the legwork for a non-profit that teaches midwives ways to deliver babies safely. For those unfamiliar with the legislation, U.S. issuers must disclose the efforts they have made to track and trace tin, tungsten, tantalum, and gold from the DRC and nine surrounding countries. Rebels and warlords control many of the mines by controlling the villages. DRC is one of the poorest nations in the world per capita but has an estimated $25 trillion in mineral reserves (including 65% of the world's cobalt). Armed militia use rape and violence as a weapon of war in part so that they control the mineral wealth. 

The stated purpose of the Dodd-Frank rule was to help end the violence in DRC and to name and shame companies that do not disclose or that cannot certify that their goods are DRC-conflict free (although that labeling portion of the law was struck down on First Amendment grounds). I  wrote a law review article in 2013 and co-filed an amicus brief during the litigation arguing that the law would not help people on the ground. I have also blogged here about legislation to end the rulehere about the EU's version of the rulehere about the differences between the EU and US rule, and half a dozen times since 2013.

I had the honor of meeting Dr. Mukwege in 2011, who at the time did not support the conflict minerals legislation. He has since endorsed such legislation for the EU. During our trip, we met dozens of women who had been raped, often by gangs. On our way to meet midwives and survivors of a massacre, I saw five corpses of villagers lying in the street. They were slain by rebels the night before. I saw children mining gold from a river with armed soldiers only a few feet away.  That trip is the reason that I study, write, and teach about business and human rights. I had only been in academia for three weeks when I went to DRC, and I decided that my understanding of supply chains and corporate governance from my past in-house life could help others develop more practical solutions to intractable problems. I believed then and I believe now that using a corporate governance disclosure to solve a human rights crisis is a flawed and incomplete solution. It depends on the belief that large numbers of consumers will boycott companies that do not do enough for human rights. 

What does the data say about compliance with the rule? The General Accounting Office puts out a mandatory report annually on the legislation and the state of disclosures. According to the 2018 report:

Similar to the prior 2 years, almost all companies required to conduct due diligence, as a result of their country-of-origin inquiries, reported doing so. After conducting due diligence to determine the source and chain of custody of any conflict minerals used, an estimated 37 percent of these companies reported in 2017 that they were able to determine that their conflict minerals came from covered countries or from scrap or recycled sources, compared with 39 and 23 percent in 2016 and 2015, respectively. Four companies in GAO’s sample declared their products “DRC conflict-free,” and of those, three included the required Independent Private Sector Audit report (IPSA), and one did not. In 2017, 16 companies filed an IPSA; 19 did so in 2016. (emphasis added).

But what about the effect on forced labor and rape? The 2017 GAO Report indicated that in 2016, a study in DRC estimated that 32 percent of women and 33 percent of men in these areas had been exposed to some form of sexual and gender-based violence in their lifetime. Notably, just last month, a coalition of Congolese civil society organizations wrote the following to the United Nations seeking a country-wide monitoring system:

... Armed groups and security forces have attacked civilians in many parts of the country...Today, some 4.5 million Congolese are displaced from their homes. More than 100,000 Congolese have fled abroad since January 2018, raising the risk of increased regional instability... Since early this year, violence intensified in various parts of northeastern Congo’s Ituri province, with terrifying incidents of massacres, rapes, and decapitation. Armed groups launched deadly attacks on villages, killing scores of civilians, torching hundreds of homes, and displacing an estimated 350,000 people. Armed groups and security forces in the Kivu provinces also continue to attack civilians. According to the Kivu Security Tracker, assailants, including state security forces, killed more than 580 civilians and abducted at least 940 others in North and South Kivu since January 2018. (emphasis added)

The U.S. government provides $500 million in aid to the DRC and runs an app called Sweat and Toil for people who are interested in avoiding goods produced by exploited labor. As of today, DRC has seven goods produced with exploitative labor: cobalt (used in electric cars and cell phones), copper, diamonds, and, not surprisingly, tin, tungsten, tantalum, and gold- the four minerals regulated by Dodd-Frank. The app notes that "for the second year in a row, labor inspectors have failed to conduct any worksite inspections... and [the] government also separated as many as 2,360 children from armed groups...[t]here were numerous reports of ongoing collaboration between members of the [DRC] Armed Forces and non-state armed groups known for recruiting children... The Armed Forces carried out extrajudicial killings of civilians including children, due to their perceived support or affiliation with non-state armed groups. .."

For these reasons, I continue to ask whether the conflict minerals legislation has made a difference in the lives of the people on the ground. The EU, learning from Dodd-Frank's flaws, has passed its own legislation, which goes into effect in 2021.  The EU law applies beyond the Democratic Republic of Congo and defines conflict areas as those in a state of armed conflict, or fragile post-conflict area, areas with weak or nonexistent governance and security such as failed states, and any state with a widespread or systematic violation of international law including human rights abuses. Certain European Union importers will have to identify and address the actual potential risks linked to conflict-affected areas or high-risk areas during the due diligence of their supply chains. 

Notwithstanding the statistics above, many investors, NGOs, and other advocates believe the Dodd-Frank rule makes sense. A coalition of investors with 50 trillion worth of assets under management has pushed to keep the law in place. It's no surprise then that many issuers have said that they would continue the due diligence even if the law were repealed. I doubt that will help people in these countries, but the due diligence does help drive out inefficiencies and optimize supply chains.

Stay tuned for my upcoming article in UT's business law journal, Transactions, where I will discuss how companies and state actors are using blockchain technology for due diligence related to human rights. Blockchain will minimize expenses and time for these disclosure requirements, but it probably won't stop the forced labor, exploitation, rapes, and massacres that continue in the Democratic Republic of Congo. (See here for a Fortune magazine article with a great video discussing how and why companies are exploring blockchain's uses in DRC). The blockchain technology won't be the problem-- it's already being used for tracing conflict diamonds. The problem is using the technology in a state with such lawlessness. This means that blockchain will probably help companies, but not the people the laws are meant to protect. 

 

 

 

 

 

 

 

 

 

October 13, 2018 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, International Business, International Law, Legislation, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (1)

Monday, October 8, 2018

Poking the SEC Bear

BLPB reader Tom N. sent me a link to this article last week by email.  The article covers Elon Musk's taunting of the U.S Securities and Exchange Commission (SEC) in a post on Twitter.  The post followed on the SEC's settlement with Musk and Tesla, Inc. of a legal action relating to a prior Twitter post. The title of Tom N.'s message?  "Musk Pokes the Bear in the Eye."  Exactly what I was thinking (and I told him so) when I had read the same article earlier that day!  This post is dedicated to Tom N. (and the rest of you who have been following the Musk affair).

Last week, I wrote about scienter issues in the securities fraud allegations against Elon Musk, following on Ann Lipton's earlier post on materiality in the same context.  This week, I want to focus on state corporate law--specifically, fiduciary duty law.  The idea for this post arises from a quotation in the article Tom N. and I read last week.  The quotation relates to an order from the judge in the SEC's action against Musk and Tesla, Alison Nathan, that the parties jointly explain and justify the fairness and reasonableness of their settlement and why the settlement would not hurt the public interest.  Friend and Michigan Law colleague Adam Pritchard offered (as quoted in the article): “She may want to know why Tesla is paying a fine because the CEO doesn’t know when to shut up.”  Yes, Adam.  I agree.

What about that?  According to the article, the SEC settlement with Musk and Tesla "prevents Musk from denying wrongdoing or suggesting that the regulator’s allegations were untrue."  The taunting tweet does not exactly deny wrongdoing or suggest that the SEC's allegations against him were untrue.  Yet, it comes close by mocking the SEC's enforcement activities against Musk and Tesla.  Musk's action in tweeting negatively about the SEC is seemingly--in the eyes of a reasonable observer--an intentional action that may have the propensity to damage Tesla.  

At the very least, the tweet appears to be contrary to the best interests of the firm.  But is it a manifestation of bad faith that constitutes a breach of the duty of loyalty under Delaware law?  As most of us well know, 

[b]ad faith has been defined as authorizing a transaction "for some purpose other than a genuine attempt to advance corporate welfare or [when the transaction] is known to constitute a violation of applicable positive law." In other words, an action taken with the intent to harm the corporation is a disloyal act in bad faith. . . . [B]ad faith (or lack of good faith) is when a director acts in a manner "unrelated to a pursuit of the corporation's best interests." It makes no difference the reason why the director intentionally fails to pursue the best interests of the corporation.

Bad faith can be the result of "any emotion [that] may cause a director to [intentionally] place his own interests, preferences or appetites before the welfare of the corporation," including greed, "hatred, lust, envy, revenge, . . . shame or pride."

In Re Walt Disney Co. Derivative Litigation, 907 A.2d 693, 753-54 (Del. Ch. 2005).  Of course, Musk was not authorizing a transaction--or even clearly acting for or on behalf of Tesla--in making his taunting tweet.  But he is identified strongly with Tesla, and his tweet was intentional and inconsistent with the best interests of the firm.  Did he intend to harm Tesla in posting his tweet?  Perhaps not.  Did he act in a manner "unrelated to a pursuit of the corporation's best interests?"  Perhaps.  The tweet is certainly an imprudent (and likely grossly negligent or reckless) action that appears to result from Musk intentionally placing his own hatred or revenge ahead of the interests of Tesla.  

"To act in good faith, a director must act at all times with an honesty of purpose and in the best interests and welfare of the corporation."  Id. at 755.  Yet, it is unclear how far that goes in a Twitter-happy world in which the personal blends into the professional.  Musk was (in all likelihood) not taking action as a director or officer of Tesla when he tweeted his taunt.  Yet, he was undoubtedly cognizant that he occupied those roles and that his actions likely had an effect on the firm.  Should his fiduciary duties extend to this type of conduct?

And what about the Tesla board's duty to monitor? Does it extend to monitoring Musk's personal tweeting?  E.g., the argument made in the Chancery Court's opinion in Beam Ex Rel. Martha Stewart Living Omnimedia, Inc. v. Stewart.  Even of not mandated by fiduciary duty law, the SEC clearly wants the board to have that monitoring responsibility.  The settlement with the SEC reportedly provides for "Tesla’s board to implement procedures for reviewing Musk’s communications with investors, which include tweets."  More for us all to think about when we think about Elon Musk and Tesla . . . .  It's always best not to poke the bear.

October 8, 2018 in Ann Lipton, Business Associations, Corporate Governance, Current Affairs, Joan Heminway, Securities Regulation | Permalink | Comments (1)

Tuesday, September 25, 2018

No Need to Be Judgmental: Last Thoughts on the Business Judgmenty Nike Ad

I was going to move on to other topics after two recent posts about Nike's Kaepernick Ad, but I decided I had a little more to say on the topic.  My prior posts, Nike's Kaepernick Ad Is the Most Business Judgmenty Thing Ever and Delegation of Board Authority: Nike's Kaepernick Ad Remains the Most Business Judgmenty Thing Ever explain my view that Nike's decision to run a controversial ad is the essence of the exercise of business judgment.  Some people seem to believe that by merely making a controversial decision, the board should subject to review and required to justify its actions.  I don't agree. I need more.   

First, I came across a case (an unreported Delaware case) that had language that was simply too good for me to pass up in this context:

The plaintiffs have pleaded no facts to undermine the presumption that the outside directors of the board . . . failed to fully inform itself in deciding how best to proceed . . . . Instead, the complaint essentially states that the plaintiffs would have run things differently. The business judgment rule, however, is not rebutted by Monday morning quarterbacking. In the absence of well pleaded allegations of director interest or self-dealing, failure to inform themselves, or lack of good faith, the business decisions of the board are not subject to challenge because in hindsight other choices might have been made instead.

In re Affliated Computer Servs., Inc. Shareholders Litig., No. CIV.A. 2821-VCL, 2009 WL 296078, at *10 (Del. Ch. Feb. 6, 2009) (unreported). 
 
Absolutely, positively, spot on.  (I'll note, again, that Nike's stock is up, not down since the ad. That shouldn't matter as to the inquiry, but it further supports why we have the business judgment rule in the first place.) 
 
Next, the good Professor Bainbridge posted yesterday, I hate to break it to Josh Fershee but "Judgmenty" is not a word. He is, of course, correct. But, I couldn't leave it there. I decided to double down on my use of the admittedly ridiculous "judgmenty."  My claim:
Ever the good sport, the good professor replied: 

So it appears. 

September 25, 2018 in Corporate Governance, Corporate Personality, Corporations, Delaware, Joshua P. Fershee, Management, Sports | Permalink | Comments (2)