Friday, October 23, 2020

When Wall Street Talks, Does Washington Listen?

It’s hard to believe that the US will have an election in less than two weeks. Three years ago, a month after President Trump took office, I posted about CEOs commenting on his executive order barring people from certain countries from entering the United States. Some branded the executive order a “Muslim travel ban” and others questioned whether the CEOs should have entered into the political fray at all. Some opined that speaking out on these issues detracted from the CEOs’ mission of maximizing shareholder value. But I saw it as a business decision - - these CEOs, particularly in the tech sector, depended on the skills and expertise of foreign workers.

That was 2017. In 2018, Larry Fink, CEO of BlackRock, told the largest companies in the world that “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society…Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders.” Fink’s annual letter to CEOs carries weight; BlackRock had almost six trillion dollars in assets under management in 2018, and when Fink talks, Wall Street listens. Perhaps emboldened by the BlackRock letter, one year later, 181 CEOs signed on to the Business Roundtable's Statement on the Purpose of a Corporation, which “modernized” its position on the shareholder maximization norm. The BRT CEOs promised to invest in employees, deal ethically and fairly with suppliers, and embrace sustainable business practices. Many observers, however, believed that the Business Roundtable statement was all talk and no action. To see how some of the signatories have done on their commitments as of last week, see here.

Then came 2020, a year like no other. The United States is now facing a global pandemic, mass unemployment, a climate change crisis, social unrest, and of course an election. During the Summer of 2020, several CEOs made public statements on behalf of themselves and their companies about racial unrest, with some going as far as to proclaim, “Black Lives Matter.” I questioned these motives in a post I called “"Wokewashing and the Board." While I admired companies that made a sincere public statement about racial justice and had a real commitment to look inward, I was skeptical about firms that merely made statements for publicity points. I wondered, in that post, about companies rushing to implement diversity training, retain consultants, and appoint board members to either curry favor with the public or avoid the shareholder derivative suits facing Oracle, Facebook, and Qualcomm. How well had they thought it out? Meanwhile, I noted that my colleagues who have conducted diversity training and employee engagement projects for years were so busy that they were farming out work to each other. Now the phones aren’t ringing as much, and when they are ringing, it’s often to cancel or postpone training.

Why? Last month, President Trump issued the Executive Order on Combatting Race and Sex Stereotyping. As the President explained:

today . . .  many people are pushing a different vision of America that is grounded in hierarchies based on collective social and political identities rather than in the inherent and equal dignity of every person as an individual. This ideology is rooted in the pernicious and false belief that America is an irredeemably racist and sexist country; that some people, simply on account of their race or sex, are oppressors; and that racial and sexual identities are more important than our common status as human beings and Americans ... Therefore, it shall be the policy of the United States not to promote race or sex stereotyping or scapegoating in the Federal workforce or in the Uniformed Services, and not to allow grant funds to be used for these purposes. In addition, Federal contractors will not be permitted to inculcate such views in their employees.

The Order then provides a hotline process for employees to raise concerns about their training. Whether you agree with the statements in the Order or not -- and I recommend that you read it -- it had a huge and immediate effect. The federal government is the largest procurer of goods and services in the world. This Order applies to federal contractors and subcontractors. Some of those same companies have mandates from state law to actually conduct training on sexual harassment. Often companies need to show proof of policies and training to mount an affirmative defense to discrimination claims. More important, while reasonable people can disagree about the types and content of diversity training, there is no doubt that employees often need training on how to deal with each other respectfully in the workplace. (For a thought-provoking take on a board’s duty to monitor diversity  training by co-blogger Stefan Padfield, click here.)

Perhaps because of the federal government’s buying power, the U.S. Chamber of Commerce felt compelled to act. On October 15th, the Chamber and 150 organizations wrote a letter to the President stating:

As currently written, we believe the E.O. will create confusion and uncertainty, lead to non-meritorious investigations, and hinder the ability of employers to implement critical programs to promote diversity and combat discrimination in the workplace. We urge you to withdraw the Executive Order and work with the business and nonprofit communities on an approach that would support appropriate workplace training programs ...  there is a great deal of subjectivity around how certain content would be perceived by different individuals. For example, the definition of “divisive concepts” creates many gray areas and will likely result in multiple different interpretations. Because the ultimate threat of debarment is a possible consequence, we have heard from some companies that they are suspending all D&I training.  This outcome is contrary to the E.O.’s stated purpose, but an understandable reaction given companies’ lack of clear guidance. Thus, the E.O. is already having a broadly chilling effect on legitimate and valuable D&I training companies use to foster inclusive workplaces, help with talent recruitment, and remain competitive in a country with a wide range of different cultures. … Such an approach effectively creates two sets of rules, one for those companies that do business with the government and another for those that do not. Federal contractors should be left to manage their workforces and workplaces with a minimum amount of interference so long as they are compliant with the law.

It’s rare for the Chamber to make such a statement, but it was bold and appropriate. Many of the Business Roundtable signatories are also members of the U.S. Chamber, and on the same day, the BRT issued its own statement committing to programs to advance racial equity and justice. BRT Chair and WalMart CEO Doug McMillon observed,  “the racial inequities that exist for many Black Americans and people of color are real and deeply rooted . .  These longstanding systemic challenges have too often prevented access to the benefits of economic growth and mobility for too many, and a broad and diverse group of Americans is demanding change. It is our employees, customers and communities who are calling for change, and we are listening – and most importantly – we are taking action.” Now that's a stakeholder maximization statement if I ever heard one.

Those who thought that some CEOs went too far in protesting the Muslim ban, may be even more shocked by the BRT’s statements about the police. The BRT also has a subcommittee to address racial justice issues and noted that “For Business Roundtable CEOs, this agenda is an important step in addressing barriers to equity and justice . . . This summer we took on the urgent need for policing reform. We called on Congress to adopt higher federal standards for policing, to track whether police departments and officers have histories of misconduct, and to adopt measures to hold abusive officers accountable. Now, with announcement of this broader agenda, CEOs are supporting policies and undertaking initiatives to address several other systems that contribute to large and growing disparities.”

Now that stakeholders have seen so many of these social statements, they have asked for more. Last week, a group of executives from the Leadership Now Project issued a statement supporting free and fair elections. However, as Bennett Freeman, former Calvert executive and Clinton cabinet member noted, no Fortune 500 CEOs have signed on to that statement. Yesterday, the Interfaith Center on Corporate Responsibility (ICCR) sent a letter to 200 CEOs, including some members of the BRT asking for their support. ICCR asked that they endorse:

  1. Active support for free and fair elections
  2. A call for a thorough and complete counting of all ballots
  3. A call for all states to ensure a fair election
  4. A condemnation of any tactics that could be construed as voter intimidation
  5. Assurance that, should the incumbent Administration lose the election, there will be a peaceful transfer of power
  6. Ensure that lobbying activities and political donations support the above

Is this a pipe dream? Do CEOs really want to stick their necks out in a tacit criticism of the current president’s equivocal statements about his post-election plans? Now that JPMorgan Chase CEO Jamie Dimon has spoken about the importance of respect for the democratic process and the peaceful transfer of power, perhaps more executives will make public statements. But should they? On the one hand, the markets need stability. Perhaps Dimon was actually really focused on shareholder maximization after all. Nonetheless, Freeman and others have called for a Twitter campaign to urge more CEOs to speak out. My next post will be up on the Friday after the election and I’ll report back about the success of the hashtag activism effort. In the meantime, stay tuned and stay safe.

October 23, 2020 in Contracts, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Employment Law, Ethics, Financial Markets, Human Rights, Legislation, Management, Marcia Narine Weldon, Nonprofits, Stefan J. Padfield | Permalink | Comments (1)

Friday, October 2, 2020

Sex, Lies, and M&A- Part II

No. You didn't miss Part 1. I wrote about Weinstein clauses last July. Last Wednesday, I spoke with a reporter who had read that blog post.  Acquirors use these #MeToo/Weinstein clauses to require target companies to represent that there have been no allegations of, or settlement related to, sexual misconduct or harassment. I look at these clauses through the lens of a management-side employment lawyer/compliance officer/transactional drafting professor. It’s almost impossible to write these in a way that’s precise enough to provide the assurances that the acquiror wants or needs.

Specifically, the reporter wanted to know whether it was unusual that Chevron had added this clause into its merger documents with Noble Energy. As per the Prospectus:

Since January 1, 2018, to the knowledge of the Company, (i), no allegations of sexual harassment or other sexual misconduct have been made against any employee of the Company with the title of director, vice president or above through the Company’s anonymous employee hotline or any formal human resources communication channels at the Company, and (ii) there are no actions, suits, investigations or proceedings pending or, to the Company’s knowledge, threatened related to any allegations of sexual harassment or other sexual misconduct by any employee of the Company with the title of director, vice president or above. Since January 1, 2018, to the knowledge of the Company, neither the Company nor any of its Subsidiaries have entered into any settlement agreements related to allegations of sexual harassment or other sexual misconduct by any employee of the Company with the title of director, vice president or above.

Whether I agree with these clauses or not, I can see why Chevron wanted one. After all, Noble’s former general counsel left the company in 2017 to “pursue personal interests” after accusations that he had secretly recorded a female employee with a video camera under his desk. To its credit, Noble took swift action, although it did give the GC nine million dollars, which to be fair included $8.3 million in deferred compensation. Noble did not, however, exercise its clawback rights. Under these circumstances, if I represented Chevron, I would have asked for the same thing. Noble’s anonymous complaint mechanisms went to the GC’s office. I’m sure Chevron did its own social due diligence but you can never be too careful. Why would Noble agree? I have to assume that the company’s outside lawyers interviewed as many Noble employees as possible and provided a clean bill of health. Compared with others I’ve seen, the Chevron Weinstein clause is better than most.

Interestingly, although several hundred executives have left their positions due to allegations of sexual misconduct or harassment since 2017, only a small minority of companies use these Weinstein clauses. Here are a few:

  1. Merger between Cotiviti and Verscend Technologies:

Except in each case, as has not had and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect, to the Knowledge of the Company, (i) no allegations of sexual harassment have been made against (A) any officer or director of the Acquired Companies or (B) any employee of the Acquired Companies who, directly or indirectly, supervises at least eight (8) other employees of the Acquired Companies, and (ii) the Acquired Companies have not entered into any settlement agreement related to allegations of sexual harassment or sexual misconduct by an employee, contractor, director, officer or other Representative.

  1. Merger between Genuine Parts Company, Rhino SpinCo, Inc., Essendant Inc., and Elephant Merger Sub Corp.:

To the knowledge of GPC, in the last five (5) years, no allegations of sexual harassment have been made against any current SpinCo Business Employee who is (i) an executive officer or (ii) at the level of Senior Vice President or above.

  1. AGREEMENT AND PLAN OF MERGER BY AND AMONG WORDSTREAM, INC., GANNETT CO., INC., ORCA MERGER SUB, INC. AND SHAREHOLDER REPRESENTATIVE SERVICES LLC:

(i) The Company is not party to a settlement agreement with a current or former officer, employee or independent contractor of the Company or its Affiliates that involves allegations relating to sexual harassment or misconduct. To the Knowledge of the Company, in the last eight (8) years, no allegations of sexual harassment or misconduct have been made against any current or former officer or employee of the Company or its Affiliates.

  1. AGREEMENT AND PLAN OF MERGER By and Among RLJ ENTERTAINMENT, INC., AMC NETWORKS INC., DIGITAL ENTERTAINMENT HOLDINGS LLC and RIVER MERGER SUB INC.:

(c) To the Company’s Knowledge, in the last ten (10) years, (i) no allegations of sexual harassment have been made against any officer of the Company or any of its Subsidiaries, and (ii) the Company and its Subsidiaries have not entered into any settlement agreements related to allegations of sexual harassment or misconduct by an officer of the Company or any of its Subsidiaries.

Here are just a few questions:

  1. What's the definition of "sexual misconduct"? Are the companies using a legal definition? Under which law? None of the samples define the term.
  2. What happens of the company handbook or policies do not define "sexual misconduct"?
  3. How do the parties define "sexual harassment"? Are they using Title VII, state law, case law, their diversity training decks,  the employee handbook? None of the samples define the term.
  4. What about the definition of "allegation"? Is this an allegation through formal or informal channels (as employment lawyers would consider it)? Chevron gets high marks here.
  5. Have the target companies used the best knowledge qualifiers to protect themselves?
  6. How will the target company investigate whether the executives and officers have had “allegations”? Should the company lawyers do an investigation of every executive covered by the representation to make sure the company has the requisite “knowledge”? If the deal documents don't define "knowledge," should we impute knowledge?
  7. What about those in the succession plan who may not be in the officer or executives ranks?

Will we see more of these in the future? I don’t know. But I sure hope that General Motors has some protection in place after the most recent allegations against Nikola’s founder and former chairman, who faces sexual assault allegations from his teenage years. Despite allegations of fraud and sexual misconduct, GM appears to be moving forward with the deal, taking advantage of Nikola’s decreased valuation after the revelation of the scandals.

I’ll watch out for these #MeToo clauses in the future. In the meantime, I’ll ask my transactional drafting students to take a crack at reworking them. If you assign these clauses to your students, feel free to send me the work product at mweldon@law.miami.edu.

Take care and stay safe.

October 2, 2020 in Compliance, Contracts, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Employment Law, Ethics, Lawyering, M&A, Management, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (1)

Friday, September 18, 2020

Where Were The Gatekeepers Pt 2- Social Media's Social Dilemma

Two weeks ago, I wrote about the role of compliance officers and general counsel working for Big Pharma in Where Were the Gatekeepers- Part 1. As a former compliance officer and deputy general counsel, I wondered how and if those in-house sentinels were raising alarm bells about safety concerns related to rushing a COVID-19 vaccine to the public. Now that I’ve watched the Netflix documentary “The Social Dilemma,” I’m wondering the same thing about the lawyers and compliance professionals working for the social media companies.

The documentary features some of the engineers and executives behind the massive success of Google, Facebook, Pinterest, Twitter, YouTube and other platforms. Tristan Harris, a former Google design ethicist, is the star of the documentary and the main whistleblower. He raised concerns to 60 Minutes in 2017 and millions have watched his TED Talk.  He also testified before Congress in 2019 about how social media companies use algorithms and artificial intelligence to manipulate behavior. Human rights organizations have accused social media platforms of facilitating human rights abuses. Facebook and others have paid billions in fines for privacy violations.  Advertisers boycotted over Facebook and hate speech. But nothing has slowed their growth.

The documentary explicitly links the rising rate of youth depression, suicide, and risk taking behavior to social media’s disproportionate influence. Most of my friends who have watched it have already decreased their screen time or at least have become more conscious of it. Maybe they are taking a cue from those who work for these companies but don’t allow their young children to have any screen time. Hmmm … 

I’ve watched the documentary twice. Here are some of the more memorable quotes:

If you’re not paying for the product, then you’re the product.”

“They sell certainty that someone will see your advertisement.” 

“It’s not our data that’s being sold. They are building models to predict our actions based on the click, what emotions trigger you, what videos you will watch.” 

“Algorithms are opinions embedded in code.”

”It’s the gradual, slight, imperceptible change in our own behavior and perception that is the product.”

“Social media is a drug.”

”There are only two industries that call their customers ‘users’: illegal drugs and software.”

”Social media is a marketplace that trades exclusively in human futures.”

”The very meaning of culture is manipulation.”

“Social media isn’t a tool waiting to be used. It has its own goals, and it has its own means of pursuing them.”

“These services are killing people and causing people to kill themselves.”

“When you go to Google and type in “climate change is,” you will get a different result based on where you live … that’s a function of … the particular things Google knows about your interests.”

“It’s 2.7 billion Truman Show. Each person has their own reality, their own facts.” 

“It worries me that an algorithm I worked on is increasing polarization in society.”

“Fake news on Twitter spreads six times faster than real news.”

“People have no idea what is true and now it’s a matter of life and death.”

“Social media amplifies exponential gossip and exponential hearsay to the point that we don’t know what’s true no matter what issue we care about.”

“If you want to control the operation of a country, there’s never been a better tool than Facebook.”

"The Russians didn't hack Facebook. What they did was use the tools Facebook created for legitimate advertisers and legitimate users, and they applied it to a nefarious purpose." 

“What [am I] most worried about? In the short term horizon? Civil War.”

“How do you wake up from the matrix when you don’t know you’re in the matrix”?

“You could shut down the service and destroy . . . $20 billion in shareholder value and get sued, but you can’t in practice put the genie back in the model.”

“We need to accept that it’s ok for companies to be focused on making money but  it’s not ok when there’s no regulation, no rules, and no competition and companies are acting as de facto governments and then saying ‘we can regulate ourselves.’ “

“There’s no fiscal reason for these companies to change.”

This brings me back to the beginning of my post. We’ve heard from former investors, engineers, and algorithm magicians from these companies, but where were and are the gatekeepers? What were they doing to sound the alarm?  But maybe I’m asking the wrong question. As Ann Lipton’s provocative post on Doyle, Watson, and the Purpose of the Corporation notes, “Are you looking at things from outside the corporation, in terms of structuring our overall legal and societal institutions?  Or are you looking at things from inside the corporation, in terms of how corporate managers should understand their jobs and their own roles?”

If you’re a board member or C-Suite executive of a social media company, you have to ask yourself, what if hate speech, fake news, polarization, and addiction to your product are actually profitable? What if perpetuating rumors that maximize shareholder value is the right decision? Why would you change a business model that works for the shareholders even if it doesn’t work for the rest of society? If social media is like a drug, it’s up to parents to instill the right values in their children. I get it. But what about the lawyers and the people in charge of establishing, promoting, and maintaining an ethical culture? To be clear, I don’t mean in any way to impugn the integrity of lawyers and compliance professionals who work for social media companies. I have met several at business and human rights events and privacy conferences who take the power of the tech industry very seriously and advocate for change.

The social media companies have a dilemma. Compliance officers talk about “tone at the top,” “mood in the middle,” and the “buzz at the bottom.” Everyone in the organization has to believe in the ethical mandate as laid out and modeled by leadership. Indeed, CEOs typically sign off on warm, fuzzy statements about ethical behavior in the beginning of the Code of Conduct. I’ve drafted quite a few and looked at hundreds more.  Notably, Facebook’s Code of Conduct, updated just a few weeks ago, has no statement of principle from CEO Mark Zuckerberg and seems very lawyerlike. Perhaps there’s a more robust version that employees can access where Zuckerberg extols company values. Twitter’s code is slightly better and touches more on ethical culture. Google’s Code states, “Our products, features, and services should make Google more useful for all our users. We have many different types of users, from individuals to large businesses, but one guiding principle: “Is what we are offering useful?”’ My question is “useful” to whom? I use Google several times a day, but now I have to worry about what Google chooses to show me. What's my personal algorithm? I’ve been off of Facebook and Instagram since January 2020 and I have no plans to go back.

Fifty years ago, Milton Friedman uttered the famous statement, “There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” The social media companies have written the rules of the game. There is no competition. Now that the “Social Dilemma” is out, there really isn’t any more deception or fraud.

Do the social media companies actually have a social responsibility to do better? In 2012,  Facebook’s S-1 proclaimed that the company’s mission was to “make the world more open and connected.” Facebook’s current Sustainability Page claims that, “At Facebook, our mission is to give people the power to build community and bring the world closer together.” Why is it, then that in 2020, people seem more disconnected than ever even though they are tethered to their devices while awake and have them in reach while asleep? Facebook’s sustainability strategy appears to be centered around climate change and supply chain issues, important to be sure. But is it doing all that it can for the sustainability of society? Does it have to? I have no answer for that. All I can say is that you should watch the documentary and judge for yourself.

September 18, 2020 in Ann Lipton, Compliance, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Family, Film, Human Rights, Lawyering, Management, Marcia Narine Weldon, Psychology, Shareholders, Television | Permalink | Comments (0)

Saturday, September 5, 2020

Where Were The Gatekeepers Pt 1- Big Pharma and Operation Warp Speed

I think that the GCs at Big Pharma have hacked into my Zoom account. First, some background. Earlier this week, I asked my students in UM’s Lawyering in a Pandemic course to imagine that they were the compliance officers or GCs at the drug companies involved in Operation Warp Speed, the public-private partnership formed to find a vaccine for COVID-19 in months, rather than years. I asked the students what they would do if they thought that the scientists were cutting corners to meet the government’s deadlines. Some indicated that they would report it internally and then externally, if necessary.

I hated to burst their bubbles, but I explained that the current administration hasn’t been too welcoming to whistleblowers. I had served on a non-partisan, multi-stakeholder Department of Labor Whistleblower Protection Advisory Committee when President Trump came into office, which was disbanded shortly thereafter. For over a year after that, I received calls from concerned scientists asking where they could lodge complaints. With that background, I wanted my students to think about how company executives could reasonably would report on cutting corners to the government that was requiring the “warp speed” results in the first place. We didn’t even get into the potential ethical issues related to lawyers as whistleblowers.

Well the good news is that Pfizer, Moderna, Johnson & Johnson, GlaxoSmithKline, and Sanofi  announced on Friday that they have signed a pledge to make sure that they won’t jeopardize public safety by ignoring protocols. Apparently, the FDA may be planning its own statement to reassure the public. I look forward to seeing the statements when they’re released, but these companies have been working on these drugs for months. Better late than never, but why issue this statement now? Perhaps the lawyers and compliance officers – the gatekeepers – were doing their jobs and protecting the shareholders and the stakeholders. Maybe the scientists stood their ground. We will never know how or why the companies made this decision, but I’m glad they did. The companies hadn’t announced this safety pledge yet when I had my class and at the time, almost none of the students said they would get the vaccine. Maybe the pledge will change their minds.

Although the drug companies seem to be doing the right thing, I have other questions about Kodak. During the same class, I had asked my students to imagine that they were the GC, compliance officer, or board member at Kodak. Of course, some of my students probably didn’t even know what Kodak is because they take pictures with their phones. They don’t remember Kodak for film and cameras and absolutely no one knows Kodak as a pharmaceutical company. Perhaps that’s why everyone was stunned when Kodak announced a $765 million federal loan to start producing drug ingredients, especially because it’s so far outside the scope of its business. After all, the company makes chemicals for film development and manufacturing but not for life saving drugs. Kodak has struggled over the past few years because it missed the boat on digital cameras and has significant debt, filing for bankruptcy in 2012. It even dabbled in cryptocurrency for a few months in 2018. Not the first choice to help develop a vaccine.

To be charitable, Kodak did own a pharmaceutical company for a few years in the 80’s. But its most recent 10-K states that “Kodak is a global technology company focused on print and advanced materials and chemicals. Kodak provides industry-leading hardware, software, consumables and services primarily to customers in commercial print, packaging, publishing, manufacturing and entertainment.” 

The Kodak deal became even more newsworthy because the company issued 1.75 million in stock and options to the CEO and other grants to company insiders and board members before the public announcement of the federal loan. The CEO had only had the job for a year. I haven’t seen any news reports of insiders complaining or refusing the grants. In fact, the day after the announcement of the loan, a Kodak board member made a $116 million dollar donation to charity he founded. Understandably, the news of the deal caused Kodak’s shares to soar. Insiders profited, and the SEC started asking questions after looking at records of the stock trades.

Alas, the deal is on hold as the SEC investigates. The White House’s own trade advisor has said that this may be “one of the dumbest decisions by executives in corporate history.” I’m not sure about that, but there actually may be nothing to see here. Some believe that there was a snafu with the timing of the announcement and that the nuances of Reg FD may get Kodak off the hook .I wonder though, what the gatekeepers were doing? Did the GC, compliance officer, or any board member ask the obvious questions? “Why are we doing something so far outside of our core competency?” They didn’t even get the digital camera thing right and that is Kodak’s core competency. Did anyone ask “should we really be issuing options and grants right before the announcement? Isn’t this loan material, nonpublic information and shouldn’t we wait to trade?”

I’ll keep watching the Kodak saga and will report back. In coming posts, I’ll write about other compliance and corporate governance mishaps. In the meantime, stay safe and please wear your masks.


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September 5, 2020 in Compensation, Compliance, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Ethics, Financial Markets, Lawyering, Management, Marcia Narine Weldon, Securities Regulation, Shareholders, Technology | Permalink | Comments (0)

Friday, August 14, 2020

Wokewashing and the Board

As an academic and consultant on environmental, social, and governance (ESG) matters, I’ve used a lot of loaded terms -- greenwashing, where companies tout an environmentally friendly record but act otherwise; pinkwashing, where companies commoditize breast cancer awareness or LGBTQ issues; and bluewashing, where companies rally around UN corporate social responsibility initiatives such as the UN Global Compact.

In light of recent events, I’ve added a new term to my arsenal—wokewashing. Wokewashing occurs when a company attempts to show solidarity with certain causes in order to gain public favor. Wokewashing isn’t a new term. It’s been around for years, but it gained more mainstream traction last year when Unilever’s CEO warned that companies were eroding public trust and industry credibility, stating:

 Woke-washing is beginning to infect our industry. It’s polluting purpose. It’s putting in peril the very thing which offers us the opportunity to help tackle many of the world’s issues. What’s more, it threatens to further destroy trust in our industry, when it’s already in short supply… There are too many examples of brands undermining purposeful marketing by launching campaigns which aren’t backing up what their brand says with what their brand does. Purpose-led brand communications is not just a matter of ‘make them cry, make them buy’. It’s about action in the world.

The Black Lives Matter and anti-racism movements have brought wokewashing front and center again. My colleague Stefan Padfield has written about the need for heightened scrutiny of politicized decisions and corporate responses to the BLM movement here, here, and here, and Ann Lipton has added to the discussion here. How does a board decide what to do when faced with pressure from stakeholders? How much is too much and how little is too little?

The students in my summer Regulatory Compliance, Corporate Governance, and Sustainability course were torn when they acted as board members deciding whether to make a public statement on Black Lives Matter and the murder of George Floyd. As fiduciaries of a consumer goods company, the “board members” felt that they had to say “something,” but in the days before class they had seen the explosion of current and former employees exposing  companies with strong social justice messaging by pointing to hypocrisy in their treatment of employees and stakeholders. They had witnessed the controversy over changing the name of the Redskins based on pressure from FedEx and other sponsors (and not the Native Americans and others who had asked for the change for years). They had heard about the name change of popular syrup, Aunt Jemima. I intentionally didn’t force my students to draft a statement. They merely had to decide whether to speak at all, and this was difficult when looking at the external realities. Most of the students voted to make some sort of statement even as every day on social media, another “woke” company had to defend itself in the court of public opinion. Others, like Nike, have received praise for taking a strong stand in the face of public pressure long before it was cool and profitable to be “woke.”

Now it’s time for companies to defend themselves in actual court (assuming plaintiffs can get past various procedural hurdles). Notwithstanding Facebook and Oracle’s Delaware forum selection bylaws, the same lawyers who filed the shareholder derivative action against Google after its extraordinary sexual harassment settlement have filed shareholder derivative suits in California against Facebook, Oracle, and Qualcomm. Among other things, these suits generally  allege breach of the Caremark duty, false statements in proxy materials purporting to have a commitment to diversity, breach of fiduciary duty relating to a diverse slate of candidates for board positions, and unjust enrichment. Plaintiffs have labeled these cases civil rights suits, targeting Facebook for allowing hate speech and discriminatory advertising, Qualcomm for underpaying women and minorities by $400 million, and Oracle for having no Black board members or executives. Oracle also faces a separate class action lawsuit based on unequal pay and gender.

Why these companies? According to the complaints, “[i]f Oracle simply disclosed that it does not want any Black individuals on its Board, it would be racist but honest…” and  “[a]t Facebook, apparently Zuckerberg wants Blacks to be seen but not heard.” Counsel Bottini explained, “when you actually go back and look at these proxy statements and what they’ve filed with the SEC, they’re actually lying to shareholders.”

I’m not going to discuss the merits of these cases. Instead, for great analysis, please see here written by attorneys at my old law firm Cleary Gottlieb. I’ll do some actual legal analysis during my CLE presentation at the University of Tennessee Transactions conference on October 16th.

Instead, I’m going to make this a little more personal. I’m used to being the only Black person and definitely the only Black woman in the room. It’s happened in school, at work, on academic panels, and in organizations. When I testified before Congress on a provision of Dodd-Frank, a Black Congressman who grilled me mercilessly during my testimony came up to me afterwards to tell me how rare it was to see a Black woman testify about anything, much less corporate issues. He expressed his pride. For these reasons, as a Black woman in the corporate world, I’m conflicted about these lawsuits. Do corporations need to do more? Absolutely. Is litigation the right mechanism? I don’t know.

What will actually change? Whether or not these cases ever get past motions to dismiss, the defendant companies are likely to take some action. They will add the obligatory Black board members and executives. They will donate to various “woke” causes. They will hire diversity consultants. Indeed, many of my colleagues who have done diversity, equity, and inclusion work for years are busier than they have ever been with speaking gigs and training engagements. But what will actually change in the long term for Black employees, consumers, suppliers, and communities?

When a person is hired or appointed as the “token,” especially after a lawsuit, colleagues often believe that the person is under or unqualified. The new hire or appointee starts under a cloud of suspicion and sometimes resentment. Many eventually resign or get pushed out. Ironically, I personally know several diversity officers who have left their positions with prestigious companies because they were hired as window dressing. Although I don’t know Morgan Stanley’s first Chief Diversity Officer, Marilyn Booker, her story is familiar to me, and she has now filed suit against her own company alleging racial bias.

So I’ll keep an eye on what these defendants and other companies do. Actions speak louder than words. I don’t think that shareholder derivative suits are necessarily the answer, but at least they may prompt more companies to have meaningful conversations that go beyond hashtag activism.

August 14, 2020 in Ann Lipton, Compliance, Consulting, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Financial Markets, Management, Marcia Narine Weldon, Shareholders, Stefan J. Padfield | Permalink | Comments (0)

Tuesday, July 28, 2020

M&A In The Business Law News!

As I have been working on a few projects involving law firms and legal education in the pandemic, I have come across a number of fun business law items involving mergers and acquisitions.  The news reports I have noted cover regulatory changes, case law, and planning/drafting.  Both small and large transactions are receiving attention.  I shared these with Business Law Section colleagues in the Tennessee Bar Association about a week ago.  I got some positive response.  So, I am sharing them here, too.  Feel free to post what you are seeing in this regard in the comments.

In the small business arena, a recent American Bar Association (ABA) Business Law Today article focuses in on clawback provisions in equity sale agreements.  These provisions, the article avers, “enable the former owner to participate in the consideration received in a subsequent sale of the business by the remaining owner or owners.” The article lists a number of key things to consider in drafting these kinds of provisions.

Another ABA Business Law Today piece notes the trend toward glorifying deal price in valuation determinations, as evidenced in recent Delaware court opinions on appraisal rights.  The article cites to three leading cases, two in 2017 and one in 2019, that address fair value determinations under Delaware law.  As to the most recent case, Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., No. 368, 2018 (Apr. 16, 2019) (per curiam), the article importantly notes that “the Delaware Supreme Court sides with the Chancery Court’s position—and reinforces recent Delaware jurisprudence—by holding that the deal price should act as a ceiling for a valuation, a result that will likely reinforce the trend in place since 2016 toward decreasing numbers of appraisal petitions.”

Another noteworthy M&A news item is the recent release by the Federal Trade Commission (FTC) and Department of Justice (DoJ) of final Vertical Merger Guidelines.  As multiple sources report (see, e.g., here and here), formal guidelines for non-horizontal mergers were last issued in 1984.  The most recent articulation of the FTC and DoJ Horizontal Merger Guidelines occurred in 2010.

Finally, an article in the National Law Review reminds us that it may be a good time to review client charters and bylaws to ensure that anti-takeover protections are up-to-date and adequate.  A helpful list of possible anti-takeover devices is included in the article.  The article also covers general corporate governance upgrades that may be warranted at this time.  Specifically, the article recommends “that boards evaluate potential revisions to their bylaws to allow for greater flexibility and clarity relating to shareholder meetings and board actions.”  Suggestions for shareholder meeting enhancements include ideas relating to virtual meetings and meeting procedures.  Advice on board action provisions relates to remote meetings and emergency bylaws.

Why should we care about these developments, observations, and recommendations?  Changes in the economy and in specific client circumstances relating to the COVID-19 pandemic may make M&A a more significant part of corporate governance and transactional activity for the next year or two.  As a result, it will be important for business lawyers to remain up-to-date on current M&A activity as well as related regulatory pronouncements and practice points.  As academics, we, too, may be engaged in related activities for the same reason.  Food for thought . . . .

July 28, 2020 in Corporate Governance, Joan Heminway, M&A | Permalink | Comments (2)

Wednesday, June 24, 2020

Stakeholder v. Shareholder Capitalism: Bebchuk and Mayer Debate

Tomorrow (6/25/20) at 9am EST, Colin Mayer (Oxford) will debate Lucian Bebchuk (Harvard) on the topic of stakeholder v. shareholder capitalism. 

Oxford is streaming the debate for free here.  

June 24, 2020 in Business Associations, Corporate Governance, Corporations, CSR, Haskell Murray, International Business, Management, Research/Scholarhip, Shareholders | Permalink | Comments (0)

Friday, June 12, 2020

Padfield on "the Omnipresent Specter of Political Bias" in Corporate Decision-Making (and 3 other papers)

Wednesday, June 10, 2020

Sharfman on Martin Lipton’s "Purpose of the Corporation"

Friend of the blog Bernard Sharfman has a new post up on the Oxford Business Law Blog, responding to Martin Lipton’s recent "On the Purpose of the Corporation" posts.  Bernie's full post can be found here, and I've excerpted some portions (slightly out of  order) below.  I appreciate that the post highlights that a big part of the shareholder v. stakeholder debate is about whose rights are determined by contract v. fiduciary duties.

[T]he Lipton, Savitt, and Cain definition of corporate purpose is missing both an objective and a strategy on how it will create social value....

I am disappointed with this definition, a definition that ignores the social value created by for-profit businesses, namely the goods and services they produce; ignores that this social value is being produced for the financial benefit of its shareholders; and uses the pretense that uninformed institutional investors are partners in the management of a company....

[T]hey make no mention of the social value created by the corporation through the successful management of its stakeholder relationships, the goods and services it provides. How can a definition of corporate purpose not mention this? It’s as if a corporation should be ashamed of why it exists....

Pfizer, as a for-profit corporation, ... has the legal obligation of looking out for the interests of its shareholders. This is the only stakeholder group that the board owes fiduciary duties to, who can sue the board for a breach of those duties, who can approve major corporate decisions, and who can initiate and implement a proxy contest to remove board members. Thus, shareholder wealth maximization is the objective of Pfizer’s social value creation....

[A] collective action problem in shareholder voting leads to uninformed institutional investors, resource-constrained investor stewardship teams and proxy advisors that cannot solve this problem, and the current lack of enforcement of an investment adviser’s fiduciary duties does not solve the additional problem of institutional investor bias in shareholder voting.

June 10, 2020 in Business Associations, Corporate Governance, CSR, Shareholders, Stefan J. Padfield | Permalink | Comments (0)

Monday, May 11, 2020

Corporate Governance in the COVID-19 Era

Maybe I am just sensitized to these media reports because of my research and teaching, but it seems that the COVID-19 pandemic has sparked new media interest in and engagement with corporate governance issues.  I have received four media calls in the past few weeks--two on background and two for source quotations.  That is an unusual rate of contact for me. Is anyone else noticing this?

Of course, there has been a lot to talk about.  Annual meetings already called and noticed to shareholders needed to move online.  As managers and employees moved out of workplaces to shelter at home, well-worn systems of decision-making and information dissemination--as well as the expectations of others in connection with them--changed or were challenged.  Filing and other deadlines became guidelines . . . .

The two media calls in which I was asked to provide background information related to

  • increased or altered director and legal counsel attentiveness to drafting force majeure clauses and material adverse change/effect definitions in light of what we now know about COVID-19 and its effects and
  • prospects for various kinds of shareholder derivative, direct, and class action litigation in light of COVID-19 and related board decision making.  

I was glad to be able to help the two journalists who called on these issues.  They had great questions; made me think.

The two articles in which I was quoted are both (regrettably) secured behind firewalls.  But if any of you are subscribers to Agenda, you will have access to them both.  I have linked to each below.  Both were written by Jennifer Williams-Alvarez.

The first piece, an April 22nd article entitled "Boards Adopt Emergency Bylaws for Critical Flexibility," put a spotlight on the potential utility of emergency bylaws in light of the pandemic.  I admitted that I now am more sensitive and sympathetic to emergency bylaws than I used to be.

Decades ago, Heminway says she would not have necessarily recommended that companies include an emergency bylaw provision when drafting corporate governance documents. But with the financial crisis, the attacks on the United States on Sept. 11, 2001, and the current Covid-19 crisis, she says she would now make the suggestion.

I wonder how many of you who have been in practice for "more than a minute" feel the same way.

The second article, "DPA Forces New Unknowns for Boards to ‘Triage’," posted on April 27, offered insights on the Defense Production Act, the subject of multiple executive memoranda and orders relying to product manufacturing and distribution over the past month.  This article picked up on a topic I wrote about here early last month.  Since Agenda focuses on issues of importance to corporate directors and those who work with them, the article explored various angles of interest in the Defense Production Act relating to corporate boards.  For example, we got into an extended conversation about public company reporting obligations and related information gathering and management.

Board members should think about disclosure responsibilities, says Heminway. For certain companies, such as manufacturers, an assessment must be made about whether it represents a material risk to repurpose operations or reprioritize contracts so that the government is at the front of the line, she says.

Between the two of us, we were able to find a few examples of COVID-19 Defense Production Act disclosures made in public filings with the U.S. Securities and Exchange Commission.  Our coverage of applicable mandatory disclosure obligations led to a brief conversation about how boards of directors gather information.

“What I worry about is the board exercising its fiduciary duties in this context,” Heminway says, referring to reporting responsibilities. “The main issues here are going to be duty of care issues,” a requirement that directors fully inform themselves of all material information, she notes.

“The amount of information available now is overwhelming, and it’s changing every day. The Defense Production Act is a piece of that,” says Heminway. “It’s part of what they need to be informed about.

The article covers a lot of ground overall and quotes from a number of sources, including former and current government employees.

I admit that I have been impressed by the level of interest and engagement of the journalists with whom I have been speaking.  What they and others like them are producing and publishing fueled my teaching during March and April (I assigned a number of articles to my students relating to COVID-19 and corporate governance) and is likely to continue to catalyze blog posts and, potentially, research projects as time goes on.  It is good to know that corporate governance questions are motivating useful media inquiries and publications during the COVID-19 crisis.  It also is nice to know that we law professors may be able to use our knowledge to help inform important constituencies during the pendency of the pandemic while, at the same time, expanding our own horizons.  A true win-win. 

May 11, 2020 in Corporate Governance, Current Affairs, Joan Heminway | Permalink | Comments (0)

Wednesday, April 15, 2020

Excerpts from "OPEN LETTER TO BLACKROCK CEO LARRY FINK"

The National Center for Public Policy Research has posted an open letter to Blackrock CEO Larry Fink that should be of interest to readers of this blog.  I provide some excerpts below.  The full letter can be found here.

Dear Mr. Fink,

….

This economic crisis makes it more important than ever that companies like BlackRock focus on helping our nation’s economy recover. BlackRock and others must not add additional hurdles to recovery by supporting unnecessary and harmful environmental, social, and governance (ESG) shareholder proposals.

…. we are especially concerned that your support for some ESG shareholder proposals and investor initiatives brings political interests into decisions that should be guided by shareholder interests…. when a company’s values become politicized, the interests of the diverse group of shareholders and customers are overshadowed by the narrow interests of activist groups pushing a political agenda.

…. ESG proposals will add an extra-regulatory cost .... This may harm everyday Americans who are invested in these companies through pension funds and retirement plans. While this won’t affect folks in your income bracket, this may be the difference between affording medication, being able to retire, or supporting a family member’s education for many Americans.

There is a financial risk to this tack as well. The Wall Street Journal recently reported that “[p]erformance of BlackRock’s own iShares range of ESG funds shows that ESG is no guarantee of gold-plated returns. Its two oldest in the U.S., set up in 2005 and 2006 and now tracking the MSCI USA ESG Select index and the MSCI KLD 400 Social index, have both lagged behind iShares’ S&P 500 fund.”

And while publicly traded companies operate under a legal fiduciary duty to their investors, this is also a moral imperative. Free market capitalism has lifted more people out of poverty than any economic system in world history. That’s because, at its simplest level, capitalism operates under the basic rule that all exchanges are voluntary. Therefore, to achieve wealth and create growth in a capitalist system, one must appeal to the self-interest of others….

April 15, 2020 in Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Shareholders, Stefan J. Padfield | Permalink | Comments (0)

Friday, March 20, 2020

Businesses Respond to COVID-19

CNN recently ran a story entitled - the pandemic risks bringing out the worst in humanity.

Rather than focus on the negative, I decided to collect some of the positive business responses to COVID-19. This is probably just a small sampling of the positive responses. I may update this list from time to time; please feel free to add more in the comments or email me. [Updated with some suggestions from my business ethics students and to include some of the highlights from this excellent, more extensive list that a reader e-mailed.]

Also related to COVID-19, I just came across this article about David Lat (founder of "Above the Law"). David is an acquaintance of mine and many of our readers. According to the article, David has COVID-19 and has been dealt a particularly harsh case. David is an incredibly kind person, with a beautiful family, and his case has made me take the virus even more seriously.  

 

March 20, 2020 in Business Associations, Corporate Governance, Ethics, Haskell Murray | Permalink | Comments (0)

Monday, February 10, 2020

Me, Too and #MeToo: Women in Congress and the Boardroom

My short essay, "Me, Too and #MeToo: Women in Congress and the Boardroom," was recently published in the George Washington Law Review.  The abstract follows.

The “Year of the Woman” (1992) and the year of #MeToo (2018) were landmark years for women in federal congressional elections. Both years also represent significant milestones for women’s roles as U.S. public company directors. In each of these two years, social context was interconnected with these political and corporate gender changes. The relevant social context in 2018 is most clearly defined by public revelations of sexual misconduct involving a significant number of men in positions of political and business power. The relevant social context in 1992 similarly involved specific, highly public disclosures and allegations of sexual misconduct.

These parallels beg many questions. In particular, one may ponder whether the correlation between social context and congressional or public company board elections is coincidence or something more. Apropos of the current era, those of us who focus on corporate board diversity may wonder whether looking at the election of women to Congress and corporate boards in the #MeToo era provides any insights or lessons about female corporate board representation.

This brief Essay examines and comments on possible gender effects of the #MeToo movement on public company board composition in relation to the possible gender effects of the #MeToo movement on the composition of legislative bodies. Although #MeToo has clarified, and perhaps expanded, the salient connections between business issues and women’s issues, those who have the power to elect corporate directors may not fully recognize this connection or other factors as unique values of female corporate board participation. Until additional female membership on corporate boards is substantively valued, swift sustainable changes in the gender makeup of corporate boards may not be realizable without specific, enforceable legal mandates. Although California’s state legislature has taken a bold step in this direction in the #MeToo era, it seems unlikely that additional state legislatures will follow its lead. As a result, the pace of change in corporate board gender composition is likely to continue to be more evolutionary than revolutionary.

I appreciate the opportunity to publish these thoughts generated in connection with a conference held at GWU Law back in 2018.  The conference, "Women and Corporate Governance: A Conference Exploring the Role and Impact of Women in the Governance of Public Corporations," featured a number of super panels.  I had the opportunity to moderate one ("Women as Counsel and Gatekeepers") and publish this piece.

February 10, 2020 in Corporate Governance, Corporations, Current Affairs, Joan Heminway, Management | Permalink | Comments (0)

Wednesday, January 15, 2020

Sharfman on Exemptions from the Proxy Rules for Proxy Voting Advice

The following comes to us from Bernard S. Sharfman. It is a copy of the comment letter (without footnotes) that he recently sent to the SEC in support of the Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice.  (The comment letter with footnotes can be found here.)  An introductory excerpt is followed, after the break, by the full letter. Please excuse any formatting errors generated by my poor copy-and-paste skills.

Part I of this letter will describe the collective action problem that is at the heart of shareholder voting. Part II will discuss the problems that this collective action causes for the voting recommendations of proxy advisors, including the creation of a resource constrained business environment. Part III discusses how proxy advisors deal with such a business environment. Part IV will discuss how the market for voting recommendations is an example of a market failure, requiring the SEC to pursue regulatory action to mitigate the harm caused by two significant negative externalities. Part V will discuss how the collective action problem of shareholder voting and the market failure impacts corporate governance. Part VI will discuss the value of the proposed amendments.

Continue reading

January 15, 2020 in Corporate Governance, Current Affairs, Securities Regulation, Stefan J. Padfield | Permalink | Comments (2)

Monday, January 13, 2020

Question of the Day: SWM - Doctrine, Theory, Policy?

Each time I teach Advanced Business Associations, I try to engage students on the first day in an exercise that leverages their existing knowledge of business associations law but also introduces new angles and nomenclature.  I assign a reading (this year, on shareholder wealth maximization) and ask each student to write up a brief definition of the concepts of “policy” and “theory” as they may apply to and operate in business associations law. I then ask them to relate their definitions to the reading.

So, the core question before the house in that course on the first day of classes last week effectively was the following: is shareholder wealth maximization legal doctrine, policy, theory, or something else?  We had a wide-ranging discussion on the question, working off three propositions I put on the board.  The class session enabled me to review some concepts from the foundational Business Associations course while also discussing the role of theory and policy in law and lawyering, getting some creative mental juices flowing, and teaching a bit of the new vocabulary they will need for the course.

I decided that it could be beneficial to share with my students the views of others on our effective core question from class last week.  So, today, I ask you:

Shareholder wealth maximization: doctrine, theory, policy, or something else?

Offer your answers in the comments or send me a private message.  You can pick more than one category, of course, in classifying shareholder wealth maximization.  In other words, the categories are not intended to be mutually exclusive. A brief explanation for your response would be helpful.  I will not attribute the answers I pass on, unless you want me to.  I hope this post will stimulate some interesting responses, but I also know that law professors are busy with the start of the new semester.  It may go without saying, but (especially in these circumstances) a short response is appreciated as much as a long one.

January 13, 2020 in Business Associations, Corporate Governance, Joan Heminway, Teaching | Permalink | Comments (0)

Monday, December 16, 2019

Repost: CLS Blue Sky Blog on Blockchain and Corporate Governance

Earlier today, the CLS Blue Sky Blog published a post written by Adam Sulkowski and me (thanks to Adam for taking the laboring oar on this piece at the outset!) on corporate governance lawyering in the blockchain era--the topic of our recent article published in the Wayne Law Review.  A bit over a month ago, I posted the abstract for that article, together with some related commentary, here on the BLPB.

The CLS Blue Sky Blog includes some observations from our article about law practice in a corporate governance context if and as data storage and usage moves to blockchains.  I want to highlight them by repeating them here.

Our specific recommendations relating to lawyering cover several areas. First, we advise attorneys not only to stay updated about applicable law and relevant interpretations, but also to expand their awareness. Serving clients responsibly will require more familiarity and astuteness with technology and operations. Second, we urge our colleagues in the practice of law – including those involved in the making and administration of laws – to be uncharacteristically forward-looking. It is prudent to be proactive in the contexts of advising firm management and public policymaking. Overall, we highlight that counsel has a critical role in thinking through all the implications and contingencies resulting from a move of any governance function or process to a blockchain-based platform.

Why might that critical role look like?  I mentioned in my original post that Adam and I engaged in some visioning.  Among other things,

[i]t may well fall to attorneys to help clients see and appreciate irrevocable consequences and the potential risks and opportunities. We suggest that anyone engaged in the practice and study of law has a role to play in provoking conversations and new ideas for policy solutions in the context of ambiguities. Eliminating doubts about the adoption and consequences of blockchain-enabled corporate governance will create more certainty for market participants and society.

Perhaps more strikingly, in the article,

 . . . we discuss a conceptual reframing that several authors have suggested will be useful as a way of understanding our new role as attorneys. We proffer that that the lawyer’s role will evolve into that of a sort of translator – helping to transform human norms and values into software code. This is a key function in assuring that the deployment of technology serves its intended ends.

There are implications of these possible evolutions in the lawyer's role as corporate governance moves to blockchains.  Those implications extend to the legal education setting.

This reconceptualization of business lawyering is relevant to the functions of legal educators and law schools. Based on our observations, there undoubtedly will be a growing need for lawyers who are familiar with both how blockchain technology can be deployed and laws relevant to corporate governance. Law schools should consider evolving their courses and business law curricula accordingly.

Overall, in the CLS Blue Sky Blog post, Adam and I offer a longer playing summary of our work.  The additional information we provide there may help you to decide whether and when to read our entire article.  To the extent you are not inclined to read the article, however, I hope that this post or that post may at least provoke some thought.

December 16, 2019 in Corporate Governance, Joan Heminway, Lawyering, Web/Tech | Permalink | Comments (0)

Monday, December 9, 2019

Delaware's Duty of Care: Mrs. Pritchard Redux

This post is dedicated to the students in my Business Associations class, who took their final exam this morning.

Two weeks ago, reflecting on Francis v. United Jersey Bank, 432 A. 2d 814 (N.J. 1981), I asked for commentary on the following question: "How would the Francis case be pleaded, proven, and decided as a breach of duty action under Delaware law?"  That post generated some commentary--both online and in private messages to me.  In this post, I forward an analysis and a related request for commentary.

A number of commentators (including BLPB co-blogger Doug Moll in the online comments to my post) posited that a Caremark oversight claim may be the appropriate claim, and that the cause of action would be for a breach of the duty of care.  I find the latter part of that answer contestable.  Here is my analysis.

I begin by agreeing that Mrs. Pritchard's abdication of responsibility constitutes a failure to exercise oversight. Under the Delaware Supreme Court's decision in Stone v. Ritter, I understand that claim to be Caremark claim. ("Caremark articulates the necessary conditions for assessing director oversight liability.")  I think many, if not most, are also in agreement on this.

Here is where there may be some divergence.  Also relying on Stone, I understand that Caremark claim as a breach of the duty of loyalty, founded on a failure to act in good faith.  ("[B]ecause a showing of bad faith conduct . . . is essential to establish director oversight liability, the fiduciary duty violated by that conduct is the duty of loyalty.")  This makes sense to me because of the Delaware Supreme Court's opinion in Brehm v. Eisner, in which it circumscribes the duty of care.  ("Due care in the decisionmaking context is process due care only.")

However, Brehm (as evidenced in the immediately preceding parenthetical quote) addressed the duty of care under Delaware law in a decision-making context.  Francis was largely a case about the absence of decision making.  Moreover, the Brehm court's view on a substantive duty of care are rooted in the contradiction of that doctrine with the business judgment rule.  ("As for the plaintiffs' contention that the directors failed to exercise 'substantive due care,' we should note that such a concept is foreign to the business judgment rule. Courts do not measure, weigh or quantify directors' judgments.")  So, Brehm's wisdom on the duty of care under Delaware law may be inapplicable to facts like those in Francis, since the business judgment rule is inapplicable because the board did not engage in decision making.

Nevertheless, Stone seems to erect barriers to a duty of care claim for oversight like that presented in the Francis case.  BLPB co-blogger Anne Tucker voiced this concern in a 2010 article in the Delaware Journal of Corporate Law

Exculpatory provisions that eliminate liability for negligence and gross negligence (i.e., the duty of care), combined with the assumption of the duty of good faith under the liability standard for the duty of loyalty, narrow the standard of liability for director oversight. The result is while directors have three fiduciary duties-the duties of care, good faith, and loyalty-the three standards of conduct are essentially collapsed into one actionable standard: the duty of loyalty.

Anne Tucker Nees, Who's the Boss? Unmasking Oversight Liability Within the Corporate Power Puzzle, 35 Del. J. Corp. L. 199, 224–25 (2010).  Lyman Johnson similarly had commented, seven years earlier (and before the Stone case was decided)  that

care has been rendered a “small” notion in corporate law. It largely refers to the manner in which directors are to act. It is a process-oriented duty to act “with care.” Having confined care to that narrow chamber, the other meanings of care as found in the phrases “take care of” (the corporation) and “care for” (the corporation) remain fully available for infusion into corporate law through an expansive duty of loyalty.

Lyman Johnson, After Enron: Remembering Loyalty Discourse in Corporate Law, 28 Del. J. Corp. L. 27, 72 (2003).  Others also have written about this.

Based on the foregoing, I conclude that a duty of care cause of action is not available in Delaware for an oversight claim like that raised in Francis.  Delaware's duty of care comprises the duty to fully inform oneself of material information reasonably available under Smith v. Van Gorkom.  As a result, an oversight claim based on facts like those in Francis is a claim for a breach of the duty of loyalty as described in Stone.

Agree?  Disagree?  Provide analyses and, if possible, relevant decisional law.

December 9, 2019 in Anne Tucker, Corporate Governance, Delaware, Joan Heminway | Permalink | Comments (0)

Monday, December 2, 2019

Nike and Winning at All Costs

Win

In running circles, Nike has been in the news quite a lot this year.

In May, Nike was criticized for its maternity policy (of lack thereof) for sponsored runners (SeeNike Told Me to Dream Big, Until I Wanted a Baby”).

In September, Nike’s running coach, Alberto Salazar, was suspended for 4 years for facilitating doping. (SeeNike’s Elite Running Group Folded After Suspension of Coach Alberto Salazar”)

In October, Nike's sponsored runner, Eliud Kipchoge, ran the first sub-2 hour marathon, wearing the much-hyped Nike Vaporfly shoes. (SeeEliud Kipchoge runs first ever sub-two hour marathon in INEOS 1:59 challenge”) (See also, “Achieving the Seemingly Impossible: A Tribute to Eliud Kipchoge” by our own Colleen Baker)

In November, former Nike-sponsored runner Mary Cain’s allegations of verbal abuse and weight shaming went viral. (See “I Was the Fastest Girl in America, Until I Joined Nike: Mary Cain’s male coaches were convinced she had to get “thinner, and thinner, and thinner.” Then her body started breaking down.”) (See also, “Mary Cain Speaks Out Against Nike and Coach Alberto Salazar Over Emotional, Physical Abuse”)

I think Robert Johnson of Let’s Run gets it right - Don’t Believe The Spin, Nike’s Treatment Of Mary Cain Is Very Much In Line With Its #1 Core Value: Win At All Costs. And, at least based on what I see among my serious running friends, the negative press is not hurting Nike’s sales. The Nike Vaporfly shoes are the best running shoes on the market, and the negative press appears to be rationalized or ignored by consumers. Even the author of the Mary Cain story for Sports Illustrated (which was extremely critical of Nike) donned a Nike kit and the Nike Vaporflies in his recent marathon.

So here is the perennial business law question: is Nike's "ruthless winning" strategy proper, or even required? As we all know, the business judgment rule allows Nike’s board of directors a great deal of flexibility in their decision-making. But the pull of the shareholder maximization norm---and the fact that shareholders hold many more accountability tools than other stakeholders---makes the results above pretty unsurprising.

Former Chief Justice of the Delaware Supreme Court has posted a paper with some ideas for encouraging more prosocial behavior by U.S. corporations, but there are no easy solutions and still much academic work to be done in this area.

December 2, 2019 in Business Associations, Corporate Governance, CSR, Haskell Murray | Permalink | Comments (2)

Monday, November 4, 2019

Micromanagement through Shareholder Proposals

I approached with some curiosity the Securities and Exchange Commission's recent shareholder proposal guidance in Staff Legal Bulletin No. 14J ("SLB 14J").  My interest in this topic stems from my past life as a full-time lawyer in private practice.  During that time, I both wrote shareholder proposals and wrote no-action letters to the Securities and Exchange Commission ("SEC") to keep shareholder proposals out of corporate proxy statements.

In SLB 14J, the SEC clarifies its application of the "ordinary business" exception to the inclusion of a shareholder proposal under Rule 14a-8.  Specifically, "[t]he Commission has stated that the policy underlying the 'ordinary business' exception rests on two central considerations. The first relates to the proposal’s subject matter; the second relates to the degree to which the proposal 'micromanages' the company."  I want to share the SEC's guidance with you on the latter.

The idea of shareholders micromanaging most public firms is almost laughable.  Yet, certain shareholder proposals do get somewhat specific in their direction of the firm and its resources.

In considering arguments for exclusion based on micromanagement, . . . we look to whether the proposal seeks intricate detail or imposes a specific strategy, method, action, outcome or timeline for addressing an issue, thereby supplanting the judgment of management and the board. [A] proposal, regardless of its precatory nature, that prescribes specific timeframes or methods for implementing complex policies, consistent with the Commission’s guidance, may run afoul of micromanagement. In our view, the precatory nature of a proposal does not bear on the degree to which a proposal micromanages. . . .

This makes some sense to me, yet this guidance may not be as easy to apply as the SEC may think.  Here is the SEC's example of an excludable proposal:

For example, this past season we agreed that a proposal seeking annual reporting on “short-, medium- and long-term greenhouse gas targets aligned with the greenhouse gas reduction goals established by the Paris Climate Agreement to keep the increase in global average temperature to well below 2 degrees Celsius and to pursue efforts to limit the increase to 1.5 degrees Celsius” was excludable on the basis of micromanagement. In our view, the proposal micromanaged the company by prescribing the method for addressing reduction of greenhouse gas emissions. We viewed the proposal as effectively requiring the adoption of time-bound targets (short, medium and long) that the company would measure itself against and changes in operations to meet those goals, thereby imposing a specific method for implementing a complex policy.

I am note sure how I feel about the characterization of this proposal as excludable.  Is the described proposal about reporting or about "prescribing the method for addressing the reduction of addressing reduction of greenhouse gas emissions"?  Well, maybe a little of each . . . .  What do you think?

During my time in active, full-time law practice, the format and content of Rule 14a-8 changed a number of times.  It appears that the SEC may be poised to make another change--one more fundamental than enhanced guidance.  According to one recent report, the SEC may announce as early as tomorrow "changes . . . to make it harder for shareholders to file proposals, and harder for proposals to be eligible for re-filing in subsequent years."  Stay tuned for that possible announcement.

[Note: All footnote references in the quotations used in this post have been omitted.]

November 4, 2019 in Corporate Governance, Corporations, Joan Heminway, Securities Regulation, Shareholders | Permalink | Comments (2)

Monday, October 21, 2019

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.

October 21, 2019 in Business Associations, Corporate Governance, Joan Heminway, Lawyering | Permalink | Comments (0)