Friday, April 9, 2021
As regular readers of the blog know, my passion is business and human rights, particularly related to supply chain due diligence and disclosure. The ABA has just released thirty-three model clauses based on the United Nations Guiding Principles on Business and Human Rights, and the OECD Due Diligence Guidance for Responsible Business Conduct. The ABA committee's reasoning for the model clauses is here:
The human rights performance of global supply chains is quickly becoming a hot button issue for anyone concerned with corporate governance and corporate accountability. Mandatory human rights due diligence legislation is on the near-term horizon in the E.U. Consumers and investors worldwide are increasingly concerned about buying from and investing in companies whose supply chains are tainted by forced or child labor or other human rights abuses. Government bodies such as U.S. Customs and Border Protection are increasingly taking measures to stop tainted goods from entering the U.S. market. And supply chain litigation, whether led by human rights victims or Western consumers, is on the rise. There can therefore be little doubt that the face of global corporate accountability for human rights abuses within supply chains is changing. The issue is “coming home,” in other words. ... Some of the key MCCs 2.0 obligations include: (1) Human Rights Due Diligence: buyer and supplier must each conduct human rights due diligence before and during the term of the contract. This requires both parties to take appropriate steps to identify and mitigate human rights risks and to address adverse human rights impacts in their supply chains. (2) Buyer Responsibilities: buyer and supplier must each engage in responsible sourcing and purchasing practices (including practices with respect to order changes and responsible exits). A fuller description of responsible purchasing practices is contained in the Responsible Buyer Code of Conduct (Buyer Code), also developed and published by the Working Group. (3) Remediation: buyer and supplier must each prioritize stakeholder-centered remediation for human rights harms before or in conjunction with conventional contract remedies and damage assessments. Buyer must also participate in remediation if it caused or contributed to the adverse impact.
Even if you're not obsessed with business and human rights like I am, you may find the work product provides an interesting context in which to discuss contract clauses such as representations, warranties, and damages either in a first-year contract course or a transactional drafting course.
Monday, March 1, 2021
Friend of the BLPB Greg Shill's recent article, The Independent Board as Shield, is an engaging, provocative piece on board independence and the business judgment rule. The abstract provides a taste of his argument and principal related proposal.
The fiduciary duty of loyalty bars CEOs and other executives from managing companies for personal gain. In the modern public corporation, this restriction is reinforced by a pair of institutions: the independent board of directors and the business judgment rule. In isolation, each structure arguably promotes manager fidelity to shareholder interests—but together, they enable manager prioritization. This marks a particularly striking turn for the independent board. Its origin story and raison d’être lie in protecting shareholders from opportunism by managers, but it functions as a shield for managers instead.
Numerous defects in the design and practice of the independent board inhibit its ability to curb managerial excess. Nowhere is this more evident than in the context of transactions that enrich the CEO. When executive compensation and similar matters are approved by independent directors, they take on a new quality: they become insulated by the business judgment rule. This rule is commonly justified as giving legal effect to the comparative advantage of businesspeople in their domain—in determining the price of a product, for example—and it immunizes such decisions from court challenge. But independent directors can opt to extend the rule’s protection beyond this narrow class of duty of care cases to domains that squarely implicate the duty of loyalty. The result is a shield for conflicts of interest that defeats the major objective of the independent board and important goals of corporate law more generally.
This Article proposes to eliminate the independent board’s paradoxical shield quality by ending business judgment protection for claims implicating the duty of loyalty. Judges would apply the familiar entire fairness standard instead. The clearest rationale for this reform comes from the logic of the rule itself: comparative advantage. Judges, not businesspeople, are best situated to adjudicate conflicts of interest. More broadly, the Article’s analysis suggests that the pro-shareholder reputation of the independent board is overstated and may have inadvertently fostered a sense of complacency around board power.
Greg makes some thoughtful points about existing business judgment rule doctrine in this piece and formulates a novel approach to addressing contextual difficulties with board independence doctrine. A number of us had the privilege of hearing about and commenting on this project early on. Nice work (as I told him)!
Saturday, February 6, 2021
Commenters have likened the recent retail “meme” trading in stocks such as GameStop Corp. to buying a ticket on a roller coaster—“You don’t go on a roller coaster because you end up in a different place, you go on it for the ride and it’s exciting because you’re part of it.” See, Bailey Lipschultz and Divya Balji, Historic Week for Gamestop Ends with 400% Rally as Shorts Yield, Bloomberg (January 29, 2021).
The comparison is apt in a number of respects. These retail traders, led by some members of the “WallStreetBets” group on the Reddit social media platform, “got on” GameStop a couple weeks ago at just under $20 a share, and, despite its rapid rise to a high of just under $500 a share, I think most people expect (including the meme traders) that the price at which this turbulent ride will end is somewhere around where it began. After all, GameStop’s fundamentals have not changed. It remains a brick-and-mortar business that was devastated by the pandemic, and it is expected to steadily lose market share to online vendors.
For anyone interested in the mechanics of the “short squeeze” and how these traders managed to move price of GameStop so far out of whack with its presumed value, see some helpful articles here, here, and here. For some thoughts on the controversial limitations on trading by retail brokerage firms such as Robinhood, see my Co-bloggers Ben Edwards’ and Anne Lipton’s recent posts here and here. And see some other interesting takes from my Co-blogger Joan Macleod Heminway here. My purpose in this post is to highlight one aspect of the meme-trading phenomenon that has, I think, been underappreciated.
Given that we all have a pretty good idea of how this roller-coaster ride is going to end, why did many retail traders (along with others) continue to pile on? One answer is that these traders were just blinded by greed and FOMO. Indeed, concern that amateur traders are being led astray in this way by social media influencers and "game-like" trading interfaces has led some to call for paternalistic trading restrictions by brokerage firms and/or regulatory intervention. But it seems to me that something quite different may be going on here as well. There is evidence to suggest that at least some of the meme traders who have taken the markets by storm over the last couple weeks are not (and never were) buying these heavily-shorted stocks simply to make money, but rather to make a point.
The “points” being made by these traders are not necessarily coordinated or consistent. They range from the oft-expressed goal of “taking it to” Wall-Street hedge funds to "hurt the big guys" in the same vein as the Occupy Wall Street movement of 2008, to protesting the demise of bricks-and-mortar businesses by Big-Tech and mega online vendors, to the populist rejection of perceived top-down elitism (private and public) that elevated Donald Trump to the Presidency in 2016. Indeed, former SEC Commissioner, Laura Unger, recently compared the recent social-media-driven short squeezes to the Capitol Hill riots on January 6. Some have even gone so far as to suggest that some meme traders are buying stocks on aesthetic grounds, to bring back retro companies like Blackberry and Blockbuster as “nostalgia plays.”
If retail traders are trading as a form of political, social, or aesthetic expression, then what are the implications? What does this mean for the Efficient Market Hypothesis? What (if anything) should (or can) regulators and/or legislators do about it? These are some questions my co-authors Jeremy Kidd, George Mocsary, and I plan to explore in a forthcoming article. I plan to post some more thoughts on the possibility of retail securities trading as a form of speech (and its social, market, and regulatory implications) in the coming weeks.
Friday, January 29, 2021
Please join me for this ABA Conference on February 10-11. I'm excited to serve as a mock board member on the 11th as well as on the plenary panel on “Leading Voices in ESG Initiatives” with representatives from United Airlines, Microsoft Asia, and others focusing on the many and sometimes conflicting imperatives of implementing ESG goals. I'll be particularly interested in the session by the General Motors GC, who will speak about the plan to go away from gasoline-powered vehicles, which GM just announced.
You can register by clicking here.
About the Virtual Conference:
The state of New York, on December 9, 2020, announced that its pension fund with over $226 billion in assets would divest its oil and gas stocks in companies that, in its view, contribute to global warming. The announcement emphatically highlights how ESG factors (Environmental, Social and Governance) across borders represent business risks but also opportunities for companies, their stockholders, and their other stakeholders. In-house legal departments are the first line of defense to re-orient business operations to address global ESG issues and to identify risks. These challenges, risks and opportunities are creating additional demands on legal departments with constrained resources as they navigate this “New Normal” in addition to their traditional responsibilities to stockholders. This two-day conference will provide in-depth critical analysis through three tracks that efficiently canvas each of the ‘E’, ‘S’ and ‘G’ elements. Through these three tracks, the conference will identify, explore, and evaluate key areas of relevance to in-house counsel wanting to navigate the numerous complex legal and operational issues raised by ESG in jurisdictions around the globe.
- Craig Glidden, Executive Vice President and General Counsel, General Motors
- Tim O’Connor, Senior Director, Environmental Defense Fund
- Olga V. Mack, CEO, Parley Pro
- Ashley Scott, Senior Counsel, Lime
- In-House Executives: Several current and former General Counsel, along with numerous senior in-house counsel across various industries, including Google, Nestle, Microsoft, General Motors, Accenture, LexisNexis, Chubb, United Airlines, Liberty Mutual, OPEC, Lazard, Iron Mountain, Willis Towers Watson, Norsk Hydro, and Equinor.
- ESG leaders: Leading ESG voices from law firms, non-profit organizations, and universities
What to Expect
This two-day cutting-edge conference will provide opportunities for-in-depth analysis of these issues through three tracks of interactive panel discussions that canvas each of the ‘E’, ‘S’ and ‘G’ elements, including how COVID-19 is accelerating ESG trends. Key areas of relevance to in-house counsel wanting to navigate the numerous complex legal and operational issues raised by ESG in jurisdictions around the globe, including NGO and government stakeholder perspectives, will also be examined.
CLEs will be available. I hope to see you there!
Friday, January 22, 2021
New Corporate and Financial Law Scholars at the Southeastern Association of Law Schools (SEALS) Annual Conference
The Southeastern Association of Law Schools (SEALS) is scheduled to hold its annual conference in person, July 26-August 1, at The Omni Amelia Island Resort, Amelia Island, Florida. SEALS has always been one of my favorite law conferences. It combines the opportunity to attend fascinating panels and discussion groups (showcasing our colleagues’ latest research) with plenty of networking opportunities and some fun in the sun! And one of the highlights of the conference is always the New Scholars Workshop, which provides opportunities for new legal scholars to interact with their peers and experts in their respective fields. Here’s an excerpt from the SEALS New Scholars Committee website:
For over a decade, the New Scholars Workshop has provided new scholars with the opportunity to present their work in a supportive and welcoming environment. The New Scholars Committee accepts and reviews nominations to the program, organizes new scholars into colloquia based on subject matter, and coordinates with the Mentors Committee to match each new scholar with a mentor in his or her field. We also hold a New Scholars Luncheon at the Annual Meeting at which New Scholars and their mentors can get to know one another and the members of the New Scholars Committee. To ensure that the annual program runs smoothly, members of the New Scholars Committee attend the colloquia and, following the conference, survey the New Scholars to solicit their feedback and comments on the program’s success. Additionally, the Committee traditionally has organized at least one substantive panel or discussion group on a topic of particular relevance to new law teachers, including navigating the tenure track; balancing the demands of service, scholarship, and teaching; and effective self-promotion. In recent years, the Committee has organized a social function at which New Scholars could meet and interact with one another at the Annual Meeting. We also draft an annual report on our activities.
On Wednesday, July 28, there will be a New Scholars Workshop focusing on Labor, Tax, Corporate, and Financial Law. This program will feature the scholarship of Nicole Iannarone (Drexel University School of Law), Young Ran (Christine) Kim (The University of Utah College of Law), Jennifer B. Levine (Quinnipiac University School of Law), and Daniel Schaffa (University of Richmond School of Law). I look forward to attending this event, and I encourage all new business-law scholars (as well as new scholars in other disciplines) to participate in future New Scholars Workshops at SEALS. See you there!
Sunday, December 27, 2020
In my previous post on the "Study on Directors' Duties and Sustainable Corporate Governance" ("Study on Directors' Duties") that Ernst & Young prepared for the European Commission (Commission), I focused on the transformative power of corporate governance. I said that stakeholder capitalism would have a practical value if supported by corporate governance rules based on appropriate standards such as the ones provided by the Sustainable Development Goals (SDGs).
Some of my pointers for the Commission were the creation of a regulatory framework that enables the representation and protection of stakeholders, the representation of “stakewatchers,” that is, non-governmental organizations and other pressure groups through the attribution of voting and veto rights and their members’ nomination to the management board (similar to German co-determination). I also suggested expanding directors' fiduciary duties to include the protection of stakeholders’ interests, accountability of corporate managers, consultation rights, and additional disclosure requirements.
In my last guest post in this series dedicated to the Study on Directors’ Duties, I ask the following questions. Do investors have a moral duty to internalize externalities such as climate change and income inequality, for example? Do firm ownership and investor commitment matter? Should investors’ money be “moral” money?
In their study Corporate Purpose in Public and Private Firms, Claudine Gartenberg and George Serafeim utilize Rebecca Henderson’s and Eric Van den Steen’s definition of corporate purpose, that is, “a concrete goal or objective for the firm that reaches beyond profit maximization.” In their paper, Gartenberg and Serafeim analyzed data from approximately 1.5 million employees across 1,108 established public and private companies in the US. In their words:
[W]e find that employee beliefs about their firm’s purpose is weaker in public companies. This difference is most pronounced within the salaried middle and hourly ranks, rather than senior executives. Among private firms, purpose is lower in private equity owned firms. Among public companies, purpose is lower for firms with high hedge fund ownership and higher for firms with long-term investors. We interpret our findings as evidence that higher owner commitment is associated with a stronger sense of purpose among employees within the firm.
With institutional investors on the rise, these findings are important because they redirect our attention from the board of directors’ short-termism discussion to shareholders' nature, composition, ownership, and long-term commitment. When it comes to owner commitment, Gartenberg and Serafeim say:
Owner commitment could lead to a stronger sense of purpose for multiple reasons. First, to the extent that commitment translates to an ability to think about the long-term and avoid short-term pressures, this would enable a firm to focus on its purpose rather than on solely short-term performance metrics. Second, committed owners may invest to gain and evaluate more soft information about firms, which in turn may allow managers to invest in productive but hard to verify projects that otherwise would not be approved by less committed owners (e.g., Grossman and Hart, 1986). Third, committed owners might mitigate free rider problems inside the firm, allowing employees to make firm-specific investments with greater confidence that they will not be subject to holdup by firm principals (Alchian and Demsetz 1972; Williamson 1985), which in turn could enhance the sense of purpose inside the organization. A similar argument could hold for customers, suppliers, and other stakeholders, who could see a strong sense of corporate purpose from owner commitment as a credible signal that enables the development of trust or ‘relational contracts’ (Gibbons and Henderson 2012; Gartenberg et al. 2019).
Gertenberg’s and Serafeim’s paper also discloses other findings. They found that firms are more likely to hire outside CEOs when less committed investors control the firms. Additionally, those firms are more likely to pay higher executive compensation levels, particularly relative to what they pay employees. Those firms also engage more frequently in mergers and acquisitions and other corporate restructuring processes. A simple explanation for this would be that such firms have higher agency costs since their ownership is more dispersed.
If we understand the company’s ownership structure, we know the purpose of the company. Therefore, there must be an underlying mechanism to better understand the company’s ownership structure because it will help us understand the company's purpose better.
Besides, Gertenberg’s and Serafeim’s findings spell out that financial performance and corporate ownership positively impact corporate culture, employees' satisfaction, and employee work meaningfulness. Putting it differently, the corporate culture, employees' satisfaction, and employee work meaningfulness can be standards for evaluating the impact of corporate ownership, governance, and leadership.
Now that the focus is on investors, what can they do to change corporate behavior and consequently impact stakeholders like employees? They can be actively engaged through proxy voting. In their paper Shareholder Value(s): Index Fund ESG Activism and the New Millennial Corporate Governance, Barzuza, Curtis, and Webber explain that index funds often are considered ineffective stewards. The authors also explain how index funds have claimed an active role by challenging management and voting against directors to promote board diversity and sustainability.
Still, institutional investors manage their companies’ portfolios depending on the market, which is heavily impacted by systemic shocks we know will eventually occur. The Covid-19 pandemic has shown us how volatile markets are and our current economic model is.
Corporate laws of most European Union (EU) countries determine that the board of directors must act in the company's interest (e.g., Unternehmensinteresse in Germany, l'intérêt social in France, interesse sociale in Italy, etc.). Defining what the interest of the company is has shown to be a rather tricky endeavor. Gelter explains that, in all cases, one side of the debate claims that the company's interest is different from the interest of shareholders. In the US, the purpose of the company is commingled with the idea of shareholder wealth maximization.
To overcome the tension between prioritizing shareholders' wealth maximization and corporate purpose that considers shareholders' and stakeholders' interests, the Commission should take into account the following dimensions in developing policies in corporate law and corporate governance.
- Investors’ ownership and their impact on intangibles like employees’ satisfaction and employee work meaningfulness.
- Governance structure and how it relates to the company’s ownership structure.
- Governance structure and how it integrates stakeholders’ interests in the decision-making process.
- Board diversity and recruitment.
- Institutional investors’ financial resilience.
Finally, investors should demand CEOs and boards of directors show how they are changing the game and moving the needle toward a more sustainable and resilient conception of the corporation. Why? Because ownership matters and commitment too.
December 27, 2020 in Agency, Business Associations, Comparative Law, Corporate Governance, Corporations, CSR, Financial Markets, Law and Economics, M&A, Private Equity, Shareholders | Permalink | Comments (0)
Sunday, December 20, 2020
In my first post on the "Study on Directors' Duties and Sustainable Corporate Governance" ("Study on Directors' Duties") prepared by Ernst & Young for the European Commission, I said that corporate boards are free to apply a purposive approach to profit generation. I added that:
[a]pplying such a purposive approach will depend on moral leadership, CEOs' and corporate boards' long-term vision, clear measurement of the companies' interests and communication of those interests to shareholders, and rethinking executive compensation to encourage board members to take on other priorities than shareholder value maximization. Corporate governance has a significant transformative role to play in this context.
This week, I focus on corporate governance’s enabling power. Therefore, “T” is for transformative corporate governance. Market-led developments can and do precede and inspire legal rules. Corporate governance rules are not an exception in this regard. To illustrate these rules’ transformative potential, I dwell on the ongoing debate around stakeholder capitalism.
First question. What is stakeholder capitalism? In a recent debate with Lucian Bebchuk about the topic, Alex Edmans explained that “stakeholder capitalism seeks to create shareholder welfare only through creating stakeholder welfare.” The definition suggests that the way to create value for both shareholders and stakeholders alike is by increasing the size of the pie.
In his book, Strategic Management: A Stakeholder Approach, R. Edward Freeman defines “stakeholder” as “any group or individual who can affect or is affected by the achievement of the organisation’s objectives.” (1984: p. 46). The Study on Directors’ Duties is concerned with the negative impact of corporate short-termism on stakeholders such as the environment, the society, the economy, and the extent to which corporate short-termism may impair the protection of human rights and the attainment of the sustainable development goals (SDGs). I am not going to discuss whether there is a causal link between short-termism and sustainability. In my previous post, I say that we need to take a step back to determine short-termism and whether it is as harmful as it sounds. Instead, I am interested in finding an answer to the following question. Has stakeholder capitalism practical value?
Edmans points out that “in a world of uncertainty, stakeholder capitalism is practically more useful.” It is more challenging to put a tag on various things in a world of uncertainty, and the market misvalues intangibles. Therefore, in this context, stakeholder capitalism would be a better decisional tool that improves shareholder value and profitability and shareholders' welfare.
Still, how do we measure CEO’s and directors’ accountability toward shareholders and the corporation for the choices they make? Can CEOs and directors be blamed for not caring about social causes? Is stakeholder capitalism, or as Lucian Bebchuk calls it “stakeholderism,” the right way to force managers to make the right decisions for the shareholders and the corporation?
While Edmans stays firmly behind stakeholder capitalism because he considers it has practical value in increasing shareholder wealth while increasing shareholders’ welfare, Bebchuk maintains that “stakeholderism” is “illusory” and costly both for shareholders and stakeholders. Clearly, they disagree.
However, both Edmans and Bebchuk agree on this – we need a normative framework that goes beyond private ordering and prevents companies from subjecting stakeholders to externalities such as climate change, inequality, poverty, and other adverse economic effects.
Corporate managers respond to incentives such as executive compensation, financial reporting, and shareholders' ownership. The challenge is to understand what type of corporate governance rules are more likely to nudge CEOs and managers to value other interests than shareholder wealth maximization. Would a set of principles suffice, or do we need a regulatory framework?
Freeman's definition of a stakeholder is telling because it allows us to think of corporations and governments as stakeholders for sustainable development. I am also inspired by the distinction that Yves Fassin makes in his article The Stakeholder Model Refined, between stakeholders (e.g., consumers), stakewatchers (e.g., non-governmental organizations) and stakekeepers (e.g., regulators). I suggest that the way to ensure stakeholder capitalism’s practical value is to create corporate governance rules based on appropriate standards. The SDGs afford the propriety of those standards.
Within this regulatory setting, corporate governance will fulfill its transformative potential by enabling, for example, the representation and protection of stakeholders, the representation of “stakewatchers” through the attribution of voting and veto rights and nomination to the management board (similar to German co-determination by which stakeholders like employees are appointed to the supervisory board). Corporate governance will show its transformative potential by enabling the expansion of directors' fiduciary duties to include the protection of stakeholders’ interests, accountability of corporate managers, consultation rights, and additional disclosure requirements.
The authors Onyeka K. Osuji and Ugochi C. Amajuoyi contributed an interesting piece, titled Sustainable Consumption, Consumer Protection and Sustainable Development: Unbundling Institutional Septet for Developing Economies to the book Corporate Social Responsibility in Developing and Emerging Markets: Institutions, Actors and Sustainable Development. The book was edited by Onyeka K. Osuji, Franklin N. Ngwu, and Dima Jamali. The piece addresses the stakeholder model from the emerging economies perspective. It goes to show how interconnected we are.
Friday, December 18, 2020
If you read the title, you’ll see that I’m only going to ask questions. I have no answers, insights, or predictions until the President-elect announces more cabinet picks. After President Trump won the election in 2016, I posed eleven questions and then gave some preliminary commentary based on his cabinet picks two months later. Here are my initial questions based on what I’m interested in -- compliance, corporate governance, human rights, and ESG. I recognize that everyone will have their own list:
- How will the Administration view disclosures? Will Dodd-Frank conflict minerals disclosures stay in place, regardless of the effectiveness on reducing violence in the Democratic Republic of Congo? Will the US add mandatory human rights due diligence and disclosures like the EU??
- Building on Question 1, will we see more stringent requirements for ESG disclosures? Will the US follow the EU model for financial services firms, which goes into effect in March 2021? With ESG accounting for 1 in 3 dollars of assets under management, will the Biden Administration look at ESG investing more favorably than the Trump DOL? How robust will climate and ESG disclosure get? We already know that disclosure of climate risks and greenhouse gases will be a priority. For more on some of the SEC commissioners’ views, see here.
- President-elect Biden has named what is shaping up to be the most diverse cabinet in history. What will this mean for the Trump administration’s Executive Order on diversity training and federal contractors? How will a Biden EEOC function and what will the priorities be?
- Building on Question 3, now that California and the NASDAQ have implemented rules and proposals on board diversity, will there be diversity mandates in other sectors of the federal government, perhaps for federal contractors? Is this the year that the Improving Corporate Governance Through Diversity Act passes? Will this embolden more states to put forth similar requirements?
- What will a Biden SEC look like? Will the SEC human capital disclosure requirements become more precise? Will we see more aggressive enforcement of large institutions and insider trading? Will there be more controls placed on proxy advisory firms? Is SEC Chair too small of a job for Preet Bharara?
- We had some of the highest Foreign Corrupt Practices Act fines on record under Trump’s Department of Justice. Will that ramp up under a new DOJ, especially as there may have been compliance failures and more bribery because of a world-wide recession and COVID? It’s more likely that sophisticated companies will be prepared because of the revamp of compliance programs based on the June 2020 DOJ Guidance on Evaluation of Corporate Compliance Programs and the second edition of the joint SEC/DOJ Resource Guide to the US Foreign Corrupt Practices Act. (ok- that was an insight).
- How will the Biden Administration promote human rights, particularly as it relates to business? Congress has already taken some action related to exports tied to the use of Uighur forced labor in China. Will the incoming government be even more aggressive? I discussed some potential opportunities for legislation related to human rights abuses abroad in my last post about the Nestle v Doe case in front of the Supreme Court. One area that could use some help is the pretty anemic Obama-era US National Action Plan on Responsible Business Conduct.
- What will a Biden Department of Labor prioritize? Will consumer protection advocates convince Biden to delay or dismantle the ERISA fiduciary rule? Will the 2020 joint employer rule stay in place? Will OSHA get the funding it needs to go after employers who aren’t safeguarding employees with COVID? Will unions have more power? Will we enter a more worker-friendly era?
- What will happen to whistleblowers? I served as a member of the Department of Labor’s Whistleblower Protection Advisory Committee for a few years under the Obama administration. Our committee had management, labor, academic, and other ad hoc members and we were tasked at looking at 22 laws enforced by OSHA, including Sarbanes-Oxley retaliation rules. We received notice that our services were no longer needed after the President’s inauguration in 2017. Hopefully, the Biden Administration will reconstitute it. In the meantime, the SEC awarded record amounts under the Dodd-Frank whistleblower program in 2020 and has just reformed the program to streamline it and get money to whistleblowers more quickly.
- What will President-elect Biden accomplish if the Democrats do not control the Congress?
There you have it. What questions would you have added? Comment below or email me at email@example.com.
December 18, 2020 in Compliance, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, International Business, Legislation, Marcia Narine Weldon, Securities Regulation, Shareholders, White Collar Crime | Permalink | Comments (2)
Sunday, December 13, 2020
This is my second post in a series of blog posts on the "Study on Directors' Duties and Sustainable Corporate Governance ("Study on Directors' Duties") prepared by Ernst & Young for the European Commission.
In 2015, the world gathered at the United Nations Sustainable Development Summit for the adoption of the Post-2015 development agenda. That Summit was convened as a high-level plenary meeting of the United Nations General Assembly. At this meeting, Resolution A/70/L.1, Transforming our World: The 2030 Agenda for Sustainable Development, was adopted by the General Assembly. In 2016, the Paris Agreement was signed. In my last post, I called both the United Nations 2030 Agenda and the Paris Agreement trendsetters because they kicked-off a global discussion on sustainable development at so many levels, including at the financial level.
During the 2015 United Nations Sustainable Development Summit, I recall that the Civil Society representatives called for a UN resolution on sustainable capital markets to tackle the absence of concrete actions regarding global financial sustainability following the 2008 Great Recession.
At the end of 2016, the European Commission (Commission) created the High-Level Expert Group on Sustainable Finance (HLEG). In early 2018, the HLEG published its report. Shortly after, in 2018, the European Union (EU) published the Action Plan: Financing Sustainable Growth (EU's Action Plan) based on the HLEG’s report. I want to focus for a bit on Action 10 of the EU's Action Plan: Fostering Sustainable Corporate Governance and Attenuating Short-Termism in Capital Markets. Action 10 sets forth the following:
1.To promote corporate governance that is more conducive to sustainable investments, by Q2 2019, the Commission will carry out analytical and consultative work with relevant stakeholders to assess: (i) the possible need to require corporate boards to develop and disclose a sustainability strategy, including appropriate due diligence throughout the supply chain, and measurable sustainability targets; and (ii) the possible need to clarify the rules according to which directors are expected to act in the company's long-term interest.
2.The Commission invites the ESAs to collect evidence of undue short-term pressure from capital markets on corporations and consider, if necessary, further steps based on such evidence by Q1 2019. More specifically, the Commission invites ESMA to collect information on undue short-termism in capital markets, including: (i) portfolio turnover and equity holding periods by asset managers; (ii) whether there are any practices in capital markets that generate undue short-term pressure in the real economy.
Under the EU's Action Plan, in 2019, the Commission called the three European Supervisory Authorities (ESAs) to collect evidence of undue short-term pressure from the financial sector on corporations. These supervisory authorities include the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), and the European Insurance and Occupational Pension Authority (EIOPA). The reports from EBA, ESMA, and EIOPA reviewed the relevant financial literature and identified potential short-term pressures on corporations.
In 2019, the European Commission Directorate-General Justice and Consumers organized a conference on "Sustainable Corporate Governance" that reunited policy-makers to discuss policy developments on corporate governance within Action 10 of the EU's Action Plan.
The Study on Directors' Duties builds on Action 10. As it reads in the Study:
[T]he need for urgent action to attenuate short-termism and promote sustainable corporate governance is clearly identified in the Action Plan on Financing Sustainable Growth, 137 put forward by the European Commission in 2018. The Action Plan recognises that, despite the efforts made by several European companies, pressures from capital markets lead company directors and executives to fail to consider long-term sustainability risks and opportunities and be overly focused on short-term financial performance. Action 10 of the Action Plan is therefore aimed at "fostering sustainable corporate governance and attenuating short-termism in capital markets." The present study implements Action 10, together with other studies aimed at investigating complementary aspects of short-termism,138 which shows European Commission's commitment to explore this complex problem from different angles and find an integrated response.
Before moving forward, it is pressing to define short-termism. In this context, obtaining empirical evidence to infer causation is important for policy advice. When it comes to defining short-termism, in a recent Policy Workshop on Directors' Duties and Sustainable Corporate Governance, Zach Sautner defined short-termism as a reflection of actions (e.g., investment, payouts) that focus on short-term gains at the expense of the long-term value of the corporation. The concept of short-termism encompasses a certain form of value destruction, an undue focus on short-term earnings or stock price, and a notion of market inefficiency. Suppose a CEO favors short-term earnings or makes decisions (e.g., buybacks) to the detriment of the corporation's long-term value. Then, if the market is efficient, it should signal that something is not right.
Still, I cannot avoid asking: is short-termism the right problem that needs fixing? The discussion around short-termism is puzzling because there is a vehement academic debate whether there even exists short-termism or whether it is as harmful as it sounds. For example, in their paper, Long-Term Bias, Michal Barzuza & Eric Talley explain how corporate managers can become hostages of long-term bias, which can be as damaging for investors as short-termism.
If short-termism and its effects are as negative as they sound, what kind of incentives do managers have to overcome it? Corporate managers act based on incentives such as executive compensation, financial reporting, and shareholders' ownership. Is this bad news for those who firmly stand behind stakeholders who can be undoubtedly impacted by the corporation's performance?
The bottom line is this. We need a clearer perspective on short-termism. Suppose one says that excessive payouts are not the problem. They are the symptom. However, even this bold statement needs to be taken with a grain of salt. It is difficult to assess if payouts (e.g., dividends, buybacks) are excessive if we do not know if there is a short-termism problem.
Friday, December 11, 2020
Many of us have been looking for new opportunities to raise and discuss issues of diversity and inclusion (including, but not limited to, race, gender, and LGBTQ issues) in our Business Associations and Securities Regulations classes. Along these lines, I’ve been inspired by a number of my BLPB co-editors’ recent posts. (See, e.g., here, here, and here—just in the last week!) With these thoughts in mind, and as we start preparing our course syllabi for the spring semester, I recommend you read Professor Ellen Podgor’s forthcoming article, Carpenter v. United States, Did Being Gay Matter?, 15 Tenn. J. L. Pol’y 115 (2020). Here’s the abstract:
Carpenter v. United States (1987) is a case commonly referenced in corporations, securities, and white collar crime classes. But the story behind the trading of pre-publication information from the "Heard on the Street" columns of the Wall Street Journal may be a story that has not been previously told. This Essay looks at the Carpenter case from a different perspective - gay men being prosecuted at a time when gay relationships were often closeted because of discriminatory policies and practices. This Essay asks the question of whether being gay mattered to this prosecution.
Oh, and while I’m touting the excellent work of Professor Podgor, I should note another of her forthcoming articles recently posted to SSRN: The Dichotomy Between Overcriminalization and Underregulation, 70 Am. U. L. Rev. __ (forthcoming 2021). Here’s an edited version of the abstract:
The U.S. Securities and Exchange Commission (SEC) failed to properly investigate Bernard Madoff’s multi-billion-dollar Ponzi scheme for over ten years. Many individuals and charities suffered devastating financial consequences from this criminal conduct, and when eventually charged and convicted, Madoff received a sentence of 150 years in prison. Improper regulatory oversight was also faulted in the investigation following the Deepwater Horizon tragedy. Employees of the company lost their lives, and individuals were charged with criminal offenses. These are just two of the many examples of agency failures to properly enforce and provide regulatory oversight, with eventual criminal prosecutions resulting from the conduct. The question is whether the harms accruing from misconduct and later criminal prosecutions could have been prevented if agency oversight had been stronger. Even if criminal punishment were still necessitated, would prompt agency action have diminished the public harm and likewise decreased the perpetrator’s criminal culpability? …
This Article examines the polarized approach to overcriminalization and underregulation from both a substantive and procedural perspective, presenting the need to look holistically at government authority to achieve the maximum societal benefit. Focusing only on the costs and benefits of regulation fails to consider the ramifications to criminal conduct and prosecutions in an overcriminalized world. This Article posits a moderated approach, premised on political economy, that offers a paradigm that could lead to a reduction in our carceral environment, and a reduction in criminal conduct.
Tuesday, December 8, 2020
A recent federal court order gets the basics of entity law representation right, but it's pretty murky on exactly what entity is involved. The case involves a claim of trademark infringement in which the plaintiff, International Watchman, Inc., sued OnceWill, LLC. The order explains:
In OnceWill's Motion, OnceWill indicated that it “is a sole proprietorship consisting of proprietor Ryan Sood.” (Id.) OnceWill's Motion also showed that it was filed by Ryan Sood, acting pro se. (Id.) The Court granted OnceWill's Motion that same day.
Subsequently, also on November 12, 2020, Plaintiff filed its Motion, requesting that the Court strike OnceWill's Motion and reconsider its order granting the requested extension of time for OnceWill to respond to Plaintiff's Complaint. (Doc. No. 13.) Plaintiff asserts that OnceWill is a limited liability company (“LLC”), not a sole proprietorship as OnceWill represented. (Id. at 2.) In support of this assertion, Plaintiff provided a printout from the Washington Secretary of State's website showing that OnceWill is listed as an LLC. (Id.; Doc. No. 13-1.) As a result of OnceWill's status as an LLC, Plaintiff argues that OnceWill only can maintain litigation or appear in court through an attorney and cannot file pleadings or motions in Court on its own behalf pro se as it has attempted to do here.
“The law is well-settled that a corporation may appear in federal courts only through licensed counsel and not through the pro se representation of an officer, agent, or shareholder.” Nat'l Labor Relations Bd. v. Consol. Food Servs., Inc., 81 F. App'x 13, 14 n.1 (6th Cir. 2003). “This rule also applies to limited liability corporations.” Barrette Outdoor Living, Inc. v. Michigan Resin Representatives, LLC, No. 11-13335, 2013 WL 1799858, at *7 (E.D. Mich. Apr. 5, 2013), report and recommendation adopted, 2013 WL 1800356 (E.D. Mich. Apr. 29, 2013); accord Perry v. Krieger Beard Servs., LLC, No. 3:17-cv-161, 2019 U.S. Dist. LEXIS 27311, at *2 (S.D. Ohio Feb. 21, 2019) (“[L]imited liability companies may not appear in this Court pro se and, thus, may only appear through a licensed attorney admitted to practice in this Court.”); Hilton I. Hale & Associates, LLC v. Gaebler, No. 2:10–CV–920, 2011 WL 308275, at *1 (S.D. Ohio Jan. 28, 2011) (“[A] limited liability corporation is another example of an artificial entity that should retain legal counsel before appearing in federal court.”).
Sunday, December 6, 2020
The post below is the first in Lécia Vicente's December series that I heralded in my post on Friday. Due to a Typepad login issue, I am posting for her today. We hope to get the issue corrected for her post for next week.
* * *
My series of blog posts cover the recent "Study on Directors' Duties and Sustainable Corporate Governance" ("Study on Directors' Duties") prepared by Ernst & Young for the European Commission. This study promises to set the tone of the EU's policymaking in the fields of corporate law and corporate governance. The study explains that the "evidence collected over 1992-2018 period shows there is a trend for publicly listed companies within the EU to focus on short-term benefits of shareholders rather than on the long-term interests of the company." The main objective of the study is to identify the causes of this short-termism in corporate governance and determine European Union (EU) level solutions that permit the achievement of the United Nations (UN) Sustainable Development Goals (SDGs) and the objectives of the Paris Agreement.
Both the United Nations 2030 Agenda and the Paris Agreement are trendsetters, for they have elevated the discussion on sustainable development and climate change mitigation to the global level. That discussion has been captured not only by governments and international environmental institutions but also by corporations. Several questions come to mind.
What is sustainability? This one is critical considering that the global level discussion is often monotone, with the blatant disregard of countries' idiosyncrasies, the different historical contexts, regulatory frameworks, and political will to implement reforms. The UN defined sustainability as the ability of humanity "to meet the needs of the present without compromising the ability of future generations to meet their own needs."
The other question that comes to mind is: what is development? Is GDP the right benchmark, or should we be focusing on other factors? There is disagreement among economists on the merit of using GDP as a development measure. Some economists like Abhijit Banerjee & Esther Duflo say, "it makes no sense to get too emotionally involved with individual GDP numbers." Those numbers do not give us the whole picture of a country's development.
The Study on Directors' Duties maintains as a general objective the development of more sustainable corporate governance and corporate directors' accountability for the company's sustainable value creation. This general objective would be specifically implemented either through soft law (non-legislative measures) or hard law (legislative measures) that redesign the role of directors (this includes the creation of a new board position, the Chief Value Officer) and directors' fiduciary duties. This takes me to a third question.
What is the purpose of the company? In other words, what is it that directors should be prioritizing? In a recent blog post, Steve Bainbridge says
I don't "disagree with the assertion that the law does not mandate that a corporation have as its purpose shareholder wealth maximization" but only because I don't think it's useful to ask the question of "what purpose does the law mandate the corporation pursue?
[…] Purpose is always associated with the intellect. In order to have a purpose or aim, it is necessary to come to a decision; and that is the function of the intellect. But just as the corporation has neither a soul to damn nor a body to kick, the corporation has no intellect.
Bainbridge prefers "to operationalize this discussion as a question of the fiduciary duties of corporate officers and directors rather than as a corporate purpose."
Friday, December 4, 2020
Did A Child Slave Help Make Your Chocolate Bar and If So, Who Should Be Responsible? The Supreme Court and Nestle v. Doe
If you’re sipping some hot chocolate while reading this post or buying your Hanukah or Christmas candy, chances are you’re consuming a product made with cocoa beans harvested by child slaves in Africa. Almost twenty years ago, the eight largest chocolate companies, a US Senator, a Congressman, the Ambassador to the Ivory Coast, NGOs, and the ILO pledged through the Harkin Engel Protocol to eliminate “the worst forms of” child slavery and forced labor in supply chains. In 2010, after seeing almost no progress, government representatives fom the US, Ghana, and the Ivory Coast released a Framework of Action to support the implementation and to reduce the use of child and forced labor by 70% by 2020. But, the number of child slaves has actually increased.
2020 has come and almost gone and one of the Harkin Engel signatories, Nestle, and another food conglomerate, Cargill, had to defend themselves in front of the Supreme Court this week in a case filed in 2005 by former child slaves. The John Does were allegedly kidnapped in Mali and forced to work on cocoa farms in the Ivory Coast, where they worked 12-14 hours a day in 100-degree weather, spoke a different language from the farmers, lived off dirty water and bowls of rice, and were never paid. According to counsel for the Respondents who gave a debrief earlier this week, the children were locked up at night, told to work or starve, whipped, and when one tried to escape, his feet were slashed and then hot chilis were rubbed into his soles. Respondents sued under the Alien Tort Statute, which Congress passed in 1789 to allow foreign citizens to sue in US federal courts for violations of “the law of nations” to avoid international tensions. In two recent cases, the Court has limited the use of the ATS against foreign corporations sued for acts against foreign plaintiffs because of jurisdictional grounds and ruled that foreign corporations were not subject to the ATS. But the Nestle and Cargill case is different. Respondents sued a US company and the US arm of a Swiss company. (Click here for access to the briefs and here to listen to the oral argument.) For an excellent symposium on the issues see here.
Respondents claim that the companies provided money and resources to the farmers in Africa and knew that child slaves harvested their cocoa. The two questions before the Court were:
- May an aiding and abetting claim against a domestic corporation brought under the Alien Tort Statute overcome the extraterritoriality bar where the claim is based on allegations of general corporate activity in the United States and where the Respondents cannot trace the alleged harms, which occurred abroad at the hands of unidentified foreign actors, to that activity?
- Does the judiciary have the authority under the Alien Tort Statute to impose liability on domestic corporations?
To those who obsess about business and human rights and ESG issues like I do, this case has huge potential implications. Regular readers of this blog know that I’ve written more than half a dozen posts, law review articles, and an amicus brief on the Dodd-Frank conflict minerals disclosures, which purport to inform consumers about the use of forced labor and child slaves in the harvesting of tin, tungsten, tantalum, and gold. I’ve been skeptical of those disclosure rules that don’t have real penalties. The Nestle case could change all of that by crafting a cognizable cause of action.
To my surprise, the Justices weren’t completely hostile to the thought of corporate liability under the ATS. Here are some of the more telling questions to the counsel for the companies:
Justice Alito: Mr. Katyal, many of your arguments lead to results that are pretty hard to take. So suppose a U.S. corporation makes a big show of supporting every cause de jure but then surreptitiously hires agents in Africa to kidnap children and keep them in bondage on a plantation so that the corporation can buy cocoa or coffee or some other agricultural product at bargain prices. You would say that the victims who couldn't possibly get any recovery in the courts of the country where they had been held should be thrown out of court in the United States, where this corporation is headquartered and does business?
Justice Breyer: …I don't see why exempt all corporations, including domestic corporations, from this -- the scope of the statute.
Justice Kagan: If you could bring a suit against 10 slaveholders, when those 10 slaveholders form a corporation, why can’t you bring a suit against the corporation?
Justice Kavanaugh: The Alien Tort Statute was once an engine of international human rights protection. Your position, however, would allow suits by aliens only against individuals, as you've said, and only for torts international law recognized that occurred in the United States. And Professor Koh's amicus brief on behalf of former government officials, for example, says that your position would "gut the statute." So why should we do that?
Here are some of the more interesting questions to the government, which supports the companies’ positions against application of the ATS to corporations:
Chief Justice Roberts: We don't have objections from foreign countries in this case. As far as we can tell, they're perfectly comfortable having U.S. citizens, U.S. corporations hailed into their U -- in U.S. courts. What should we make of that, and doesn't that suggest we ought to be a little more -- a little less cautious about finding a cause of action here?
Justice Breyer: …what’s new about suing corporations? When I looked it up once, there were 180 ATS lawsuits against corporations. Most of them lost but on other grounds. So why not sue a domestic corporation? You can't sue the individual because, in my hypothetical, the individuals have all moved to Lithuania. All you have is the corporate assets in the bank and minutes that prove it was a corporate decision. What's new about it? Why is it creating a form of action?
Justice Alito: Won't your arguments about aiding and abetting and extraterritoriality all lead to essentially the same result as holding that a domestic corporation cannot be sued under the ATS? Corporations always act through natural persons, so if a corporation can't aid and abet, there -- there will be only a sliver of activity where they could be responsible under respondeat superior, isn't that true?
Justice Amy Coney Barrett: You say that the focus of the tort should be the primary conduct, so, here, what was happening in Cote d'Ivoire, rather than the aiding and abetting, which you characterize as secondary. But why should that be so? I mean, let's imagine you have a U.S. corporation or even a U.S. individual that is making plans to facilitate the use of child slaves, you know, making phone calls, sending money specifically for that purpose, writing e-mails to that effect.Why isn't that conduct that occurs in the United States something that touches and concerns, you know, or should be the focus of conduct, however you want to state the test?
Finally, here are some of the tough questions posed to counsel for the Respondents:
Justice Thomas: The TVPA [Trafficking Victims Protection Act] seems to suggest that Congress does not see the ATS the way you do. Obviously, there, you don't have corporate liability and you don't have aiding and abetting liability. So why shouldn't we take that as an indication that Congress sought limitations on -- on the ATS jurisdiction?
Justice Breyer: Assume that there is corporate liability for domestic corporations. Assume that there is aiding and abetting liability. Now what counts as aiding and abetting for purposes of this statute? When I read through your complaint, it seemed to me that all or virtually all of your complaint amount to doing business with these people.They help pay for the farm. And that's about it.And they knowingly do it. Well, unfortunately, child labor, it's terrible, but it exists throughout the world in many, many places. And if we take this as the norm, particularly when Congress is now working in the area, that will mean throughout the world this is the norm. And I don't know, but I have concern that treating this allegation, the six that you make here, as aiding and abetting falling within that term for purposes of this statute, if other nations do the same, and we do the same, could have very, very significant effects. I'm just saying I'm worried about that.
Justice Alito: So, after 15 years, is it too much to ask that you allege specifically that the -- the defendants involved -- the defendants who are before us here specifically knew that forced child labor was being used on the farms or farm cooperatives with which they did business? Is that too much to ask?
To be fair, Nestle and Cargill have worked to remedy these issues. Nestle’s 2019 Shared Values Report tracks its commitments to individuals and families, communities, and the planet to the UN Sustainable Development Goals. Among other things, the report highlights Nestle's work to reduce human rights abuses and links to its December 2019 report on child labor and cocoa farms. The company touts its progress but admits it has a long way to go. Cargill has a separate Cocoa Sustainability Progress Report, which describes its 2012 Cargill Cocoa Promise for capacity building and a more transparent supply chain. But is it enough?
In any event, we won’t know what the Court decides until Spring. In the meantime, despite the best efforts of the companies, almost two million children still work in the cocoa harvesting business and most aren’t kidnapped anymore. They need the work. The local governments have taken notice in part due to the terrible publicity from the media. Allegedly, however, Hershey and Mars are trying to avoid the $400 a ton premium that the West African governments are levying to provide more funding for the farmers. The companies deny these allegations. But there’s now a chocolate war. This means your chocolate may get more expensive, and that’s not necessarily a bad thing.
How will this all shake out? There’s a chance that the Court could find for the Respondents. More likely, though advocates will focus on convincing Congress to expand the Trafficking Victims Protection Act to include corporations. Some NGOs are already talking about increasing consumer awareness and spurring boycotts. Perhaps, advocates will put pressure on the Biden administration to ban the import on chocolate harvested with child labor, similar to the ban on some products produced by Uighurs in China.I expect that there will be a lot of lobbying at the state and federal level to deal with the larger issue of whether corporations that have some of the rights of natural persons should also have the responsibilities. Boards and companies should get prepared. In the meantime, do you plan to give up chocolate?
Tuesday, December 1, 2020
In September of 2015, I did a Westlaw search, which returned 4575 cases referring to a "limited liability corporation," rather than the proper "limited liability company" or LLC. That search followed one that I had done on May 2011, and the 2015 search showed a jump of 1802 new cases. Today's search returned 5,211 such cases, an increase of 636 cases in five and a half years. That's still more than 100 cases per year, but it's a reduction of about half the rate we were seeing between 2011 and 2015. (I concede this is not especially scientific, but it's still instructive.)
It appears, then, that we're making progress, but two steps forward, one step back. Even Jeopardy -- Jeopardy! -- recently got this wrong. I thank Professor Samantha Prince at Penn State Dickinson Law for bringing this to my attention, upsetting as it is.
In addition, a recent tax court opinion followed suit: "All limited liability corporations, or LLCs, mentioned in this opinion are entities treated as partnerships for federal tax purposes." Padda v. Comm'r of Internal Revenue, T.C.M. (RIA) 2020-154, at n.3 (T.C. 2020) (emphasis added).
So, there's clearly a lot of work left to do, but I remain hopeful that we're trending in the right direction. LLCs are still not corporations, and we need to keep reminding folks. Stay vigilant, good people!
Tuesday, October 27, 2020
If one is going to ignore entity distinctions, I supposed one may as well go all in. Following is from an opinion issued last week that involves Christeyns Laundry Technology, LLC (“Christeyns”), which is a limited liability company. The opinion, though, asserts:
Selective is a New Jersey corporation with its principal place of business in New Jersey. [Docket No. 1-1, ¶ 2.] Christeyns is a Limited Liability Corporation with two partners: Christeyns Holding, Inc., and Rudi Moors. [Docket No. 25, at 14, ¶ 7.] Christeyns Holding, Inc., is a Delaware corporation with its principal place of business in East Bridgewater, Massachusetts. [Id. at 14, ¶ 8.] Rudi Moors is a resident of South-Easton, Massachusetts. [Id. at 14, ¶ 9.] The remaining parties’ claims arise out of a common nucleus of operative fact.
SELECTIVE INSURANCE COMPANY OF AMERICA, Plaintiff, v. CHRISTEYNS LAUNDRY TECHNOLOGY, LLC, et al., Defendants. Additional Party Names: Clean Green Textile Servs., LLC, Lavatec Laundry Tech., Inc., Single Source Laundry Sol., No. CV1911723RMBAMD, 2020 WL 6194015, at *3 n.2 (D.N.J. Oct. 22, 2020) (emphasis added).
We have already established that an LLC is a limited liability company, and not a corporation. And while the opinion seems to track the diversity requirements of corporation and an LLC correctly, LLCs are not partnerships, and thus do not have partners, either. LLCs are made up of members. Referring to them as members clearly connotes limited liability protections that are generally provide to members of an LLC, while the generic "partner" could imply that each "partner" faces unlimited liability for the debts and obligations of a "partnership."
Similarly, another case from last week made the following observation about a witness:
"Ernest Thompson is listed as "GEN. PART" of M Nadlan LLC per DHPD records. The court takes this to mean General Partner of the Limited Liability Corporation."
Yolanda Martinez, Petitioner, M Nadlan LLC, Respondent., No. 41219/2019, 2020 WL 6166864, at *3 n.3 (N.Y. Civ. Ct. Oct. 21, 2020) (emphasis added).
Again with the mixing of entities. In fairness, the court did not label Mr. Thompson as "GEN. PART." Someone else did. But the court did refer to the LLC as a corporation. Once again, although I know LLCs sometimes adopt partnership terms, they should not. And yet again, here, "general partner" could imply personal liability for entity debts on the part of Mr. Thompson, evening though it is more likely he is a managing member of the LLC. If you are listed as a general partner, that holding out could be deemed to be a form or personal guarantee, at least where one could plausibly claim reliance. Moreover, it's just bad form.
Anyway, it's possible, and maybe even likely, that courts would uphold limited liability protections for these LLC members who are listed as partners. But why take the risk of having to find out?
Friday, October 23, 2020
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:
- Active support for free and fair elections
- A call for a thorough and complete counting of all ballots
- A call for all states to ensure a fair election
- A condemnation of any tactics that could be construed as voter intimidation
- Assurance that, should the incumbent Administration lose the election, there will be a peaceful transfer of power
- 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)
Tuesday, October 20, 2020
I was today years old when I learned that the California courts have a group of cases captioned the "Franchise Tax Board Limited Liability Corporation Tax Refund Cases." This is distressing.
In that case, the court explains: "This coordinated litigation involves the remedies available to certain limited liability companies (LLCs) that paid a levy pursuant to section 17942 of the Revenue and Taxation Code which was later determined by this District to be unconstitutional." Fran. Tax Bd. Ltd. Liab. Corp. Tax Refund Cases, 235 Cal. Rptr. 3d 692, 697 (Cal. App. 1st Dist. 2018), reh'g denied (Aug. 6, 2018), review denied (Oct. 31, 2018) (emphasis added). We can see clearly that rhe courts knows these are limited liability companies, and not limited liability corporations. Nonetheless, for eternity, when citied, these cases will refer to limited liability corporations. See, e..g, Union Band Wage & Hour Case v. Union Bank, B295835, 2020 WL 6018545, at *18 (Cal. App. 2d Dist. Oct. 9, 2020) ("Their reliance on Franchise Tax Board Limited Liability Corp. Tax Refund Cases (2018) 25 Cal.App.5th 369, 395-396 does not support their position.").
Another recent case makes a similar mistake, thought it seems to have gotten a lot of other things right. A Louisiana court explained:
Robinson argues that, pursuant to La. R.S. 12:1320(B), as the manager of HLN, a limited liability corporation, Robinson is not liable, in solido, with HLN. Moreover, Robinson argues that Appellant mischaracterized the claim in an attempt to “resurrect” a prescribed tort claim. This Court, in Streiffer v. Deltatech Constr., LLC, explained that “[a] limited liability company is a business entity separate from its members and its members’ liability is governed solely and exclusively by the law of limited liability companies. ‘The fact that a person is the managing member of a limited liability company and/or has a significant ownership interest therein does not in itself make that person liable for its debts.’ ” 2018-0155, pp. 7-8 (La. App. 4 Cir. 10/10/18), ––– So.3d ––––, 2018 WL 4923559, writ denied, 2018-2107 (La. 2/18/19), 263 So.3d 1154 (internal citations omitted). Pursuant to La. C.C. Art. 24, limited liability companies, such as HLN, and its members, such as Robinson, are considered wholly separate entities. Ogea v. Merritt, 2013-1085, p. 6 (La. 12/10/13), 130 So.3d 888, 894-95. Further, pursuant to La. R.S. 12:1320(B), “no **11 member, manager, employee, or agent of a limited liability company is liable in such capacity for a debt, obligation, or liability of the limited liability company.” Further, pursuant to La. R.S. 12:1320(C), “[a] member, manager, employee, or agent of a limited liability company is not a proper party to a proceeding by or against a limited liability company, except when the object is to enforce such a person's rights against or liability to the limited liability company.” Based on the record before us, Robinson, as a manager of the limited liability company, cannot be liable, in solido; Appellant offered no evidence to rebut the general rule of limited liability.
Thomas v. Hous. Louisiana Now, L.L.C., 2020-0183 (La. App. 4 Cir. 9/30/20) (emphasis added). Other than the limited liability corporation thing, this is about right. An individual who is a member of an LLC may have some independent liability (respondent inferior) by his or her actions in tort or through veil piercing, but they are not liable for the torts of the entity merely by being a member or manager. Here the court notes that no evidence was offered to suggest otherwise. Thus, the rest of the assessment is spot on.
Friday, October 2, 2020
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:
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.
- 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.
- 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.
- 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:
- What's the definition of "sexual misconduct"? Are the companies using a legal definition? Under which law? None of the samples define the term.
- What happens of the company handbook or policies do not define "sexual misconduct"?
- 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.
- 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.
- Have the target companies used the best knowledge qualifiers to protect themselves?
- 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?
- 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 firstname.lastname@example.org.
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
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
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.
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)