Friday, September 24, 2021
I'm so excited to present later this morning at the University of Tennessee College of Law Connecting the Threads Conference today at 10:45 EST. Here's the abstract from my presentation. In future posts, I will dive more deeply into some of these issues. These aren't the only ethical traps, of course, but there's only so many things you can talk about in a 45-minute slot.
All lawyers strive to be ethical, but they don’t always know what they don’t know, and this ignorance can lead to ethical lapses or violations. This presentation will discuss ethical pitfalls related to conflicts of interest with individual and organizational clients; investing with clients; dealing with unsophisticated clients and opposing counsel; competence and new technologies; the ever-changing social media landscape; confidentiality; privilege issues for in-house counsel; and cross-border issues. Although any of the topics listed above could constitute an entire CLE session, this program will provide a high-level overview and review of the ethical issues that business lawyers face.
Specifically, this interactive session will discuss issues related to ABA Model Rules 1.5 (fees), 1.6 (confidentiality), 1.7 (conflicts of interest), 1.8 (prohibited transactions with a client), 1.10 (imputed conflicts of interest), 1.13 (organizational clients), 4.3 (dealing with an unrepresented person), 7.1 (communications about a lawyer’s services), 8.3 (reporting professional misconduct); and 8.4 (dishonesty, fraud, deceit).
Discussion topics will include:
- Do lawyers have an ethical duty to take care of their wellbeing? Can a person with a substance use disorder or major mental health issue ethically represent their client? When can and should an impaired lawyer withdraw? When should a lawyer report a colleague?
- What ethical obligations arise when serving on a nonprofit board of directors? Can a board member draft organizational documents or advise the organization? What potential conflicts of interest can occur?
- What level of technology competence does an attorney need? What level of competence do attorneys need to advise on technology or emerging legal issues such as SPACs and cryptocurrencies? Is attending a CLE or law school course enough?
- What duties do lawyers have to educate themselves and advise clients on controversial issues such as business and human rights or ESG? Is every business lawyer now an ESG lawyer?
- What ethical rules apply when an in-house lawyer plays both a legal role and a business role in the same matter or organization? When can a lawyer representing a company provide legal advice to an employee?
- With remote investigations, due diligence, hearings, and mediations here to stay, how have professional duties changed in the virtual world? What guidance can we get from ABA Formal Opinion 498 issued in March 2021? How do you protect confidential information and also supervise others remotely?
- What social media practices run afoul of ethical rules and why? How have things changed with the explosion of lawyers on Instagram and TikTok?
- What can and should a lawyer do when dealing with a businessperson on the other side of the deal who is not represented by counsel or who is represented by unsophisticated counsel?
- When should lawyers barter with or take an equity stake in a client? How does a lawyer properly disclose potential conflicts?
- What are potential gaps in attorney-client privilege protection when dealing with cross-border issues?
If you need some ethics CLE, please join in me and my co-bloggers, who will be discussing their scholarship. In case Joan Heminway's post from yesterday wasn't enough to entice you...
Professor Anderson’s topic is “Insider Trading in Response to Expressive Trading”, based upon his upcoming article for Transactions. He will also address the need for business lawyers to understand the rise in social-media-driven trading (SMD trading) and options available to issuers and their insiders when their stock is targeted by expressive traders.
Professor Baker’s topic is “Paying for Energy Peaks: Learning from Texas' February 2021 Power Crisis.” Professor Baker will provide an overview of the regulation of Texas’ electric power system and the severe outages in February 2021, explaining why Texas is on the forefront of challenges that will grow more prominent as the world transitions to cleaner energy. Next, it explains competing electric power business models and their regulation, including why many had long viewed Texas’ approach as commendable, and why the revealed problems will only grow more pressing. It concludes by suggesting benefits and challenges of these competing approaches and their accompanying regulation.
Professor Heminway’s topic is “Choice of Entity: The Fiscal Sponsorship Alternative to Nonprofit Incorporation.” Professor Heminway will discuss how for many small business projects that qualify for federal income tax treatment under Section 501(a) of the U.S. Internal Revenue Code of 1986, as amended, the time and expense of organizing, qualifying, and maintaining a tax-exempt nonprofit corporation may be daunting (or even prohibitive). Yet there would be advantages to entity formation and federal tax qualification that are not available (or not easily available) to unincorporated business projects. Professor Heminway addresses this conundrum by positing a third option—fiscal sponsorship—and articulating its contextual advantages.
Professor Moll’s topic is “An Empirical Analysis of Shareholder Oppression Disputes.” This panel will discuss how the doctrine of shareholder oppression protects minority shareholders in closely held corporations from the improper exercise of majority control, what factors motivate a court to find oppression liability, and what factors motivate a court to reject an oppression claim. Professor Moll will also examine how “oppression” has evolved from a statutory ground for involuntary dissolution to a statutory ground for a wide variety of relief.
Professor Murray’s topic is “Enforcing Benefit Corporation Reporting.” Professor Murray will begin his discussion by focusing on the increasing number of states that have included express punishments in their benefit corporation statutes for reporting failures. Part I summarizes and compares the statutory provisions adopted by various states regarding benefit reporting enforcement. Part II shares original compliance data for states with enforcement provisions and compares their rates to the states in the previous benefit reporting studies. Finally, Part III discusses the substance of the benefit reports and provides law and governance suggestions for improving social benefit.
All of this and more from the comfort of your own home. Hope to see you on Zoom today and next year in person at the beautiful UT campus.
September 24, 2021 in Colleen Baker, Compliance, Conferences, Contracts, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Ethics, Financial Markets, Haskell Murray, Human Rights, International Business, Joan Heminway, John Anderson, Law Reviews, Law School, Lawyering, Legislation, Litigation, M&A, Management, Marcia Narine Weldon, Nonprofits, Research/Scholarhip, Securities Regulation, Shareholders, Social Enterprise, Teaching, Unincorporated Entities, White Collar Crime | Permalink | Comments (0)
Friday, September 3, 2021
I suggested in my last two posts (here and here) that as Congress and the SEC contemplate reforms to our current insider trading regime, it is important for us all to explore our intuitions about what we think insider trading is, why it is wrong, who is harmed by it, and the nature and extent of the harm. If we are going to rethink how we impose criminal and civil penalties for insider trading, we should have some confidence that the proscribed conduct is wrongful and why. One way to do this is to place ourselves in the shoes of traders and ask, “What would I do?” or “What do I think about that?” With this in mind, I developed some scenarios designed to test our attitudes regarding trading scenarios that distinguish the four historical insider trading regimes (laissez faire, fiduciary-fraud, equal access, and parity of information).
In the previous post, I offered a scenario that would result in liability under equal-access and parity-of-information regimes, but not under the fiduciary-fraud and laissez-faire models. Those of you who were not convinced that the trading in that scenario was wrongful may favor one of the less restrictive models.
In today’s post, I offer two scenarios to test our attitudes regarding trading under the fiduciary-fraud model. This model recognizes a duty to disclose material nonpublic information or abstain from trading on it, but only for those who share a recognized fiduciary or similar duty of trust and confidence to either the counterparty to the trade (under the “classical” theory) or the source of the information (under the “misappropriation” theory). The trading in the following scenario would incur liability under the classical theory of the fiduciary-fraud model (as well as under the more restrictive parity-of-information and equal-access models), but not under the misappropriation theory:
A senior VP at BIG Corp., a publicly traded company, took the lead in closing a big deal to merge BIG Corp. with XYZ Corp. The shares of BIG Corp will skyrocket when the deal is announced in seven days. The senior VP asks the CEO and board of Big Corp if he can purchase shares of BIG Corp for his personal account in advance of the announcement. The CEO and board approve the senior VPs trading. The senior VP buys Big Corp. shares in advance of the announcement and he makes huge profits when the deal is announced.
Note the difference between this scenario and the scenario in last week’s post. Here the counterparties to the trade are existing Big Corp shareholders who (if they had the same information as the senior VP) presumably would not have proceeded with the trade at the pre-announcement price. The theory assumes that such trading on the firm’s information (even with board approval) breaches a fiduciary duty of loyalty to the firm’s shareholders (fair assumption?). In last week’s post, the counterparties to the trade were XYZ Corp.’s shareholders, so the board-approved trade did not breach any fiduciary duty. Do you agree that the senior VP’s trading in the scenario above is deceptive, disloyal, or harmful to shareholders? If so, do you think such trading should be subject to civil or criminal sanction (or both)?
The trading in the next scenario would incur liability under the misappropriation theory of the fiduciary-fraud model (as well as under the more restrictive parity-of-information and equal access models), but not under the classical theory:
A senior VP at BIG Corp., a publicly traded company, took the lead in closing a big deal to merge BIG Corp and XYZ Corp. The shares of BIG Corp and XYZ Corp will both skyrocket when the deal is announced in seven days. At the closing party, the CEO and Board of BIG Corp explain to everyone on the deal team that they would like to keep the deal confidential until it is announced to the public the following week. Immediately after the party, the senior VP goes back to his office and buys shares of XYZ Corp for his personal online brokerage account. The senior VP makes huge profits from his purchase of XYZ Corp shares when the deal is announced a week later.
Here the senior VP at BIG Corp. trades in XYZ Corp. shares, so he does not breach any fiduciary duty to his shareholders. Assuming a reasonable person would conclude that a request of confidentiality includes a request not to trade (fair assumption?), the VP’s trading does, however, breach a duty of loyalty to BIG Corp. Is this trading wrongful? If so, is it more/less/equally wrongful by comparison to the trading in the classical scenario above? Finally, if you do think this trading is wrongful, should it be subject to civil or criminal sanction?
Again, the hope is that walking through these scenarios will help bring some clarity to our shared understanding of when trading on material nonpublic information is wrong and harmful—and (given our answers to these questions) the nature and extent to which it should be regulated.
Monday, July 26, 2021
The following comes to us from friend-of-the-BLPB Alicia Plerhoples.
How to Be An Antiracist author Ibram X. Kendi urges individuals to undertake the difficult work to become anti-racist. In Kendi’s view, racism is not a spectator sport. One can either recognize their participation in racist concepts and institutions that benefit some and work to dismantle racism, or one participates in racist concepts and institutions to perpetuate them. As he explains in Stamped from the Beginning, the 582-page academic version of his popular press book, a person can hold both racist and anti-racist views at the same time, under an assimilationist race theory.
As a business law professor, I am concerned with whether a corporation can be anti-racist. If so, what corporate policies, processes, programs, and culture does an anti-racist corporation have? These questions are imperative given America’s reckoning with racism and in my view, the disproportionate power and excessive protections that corporations have consolidated in American law and the economy.
One might quickly jump to my second question without considering the first. Can a corporation be anti-racist? Slavery’s Capitalism authors Sven Beckert and Seth Rockman identify slavery as the key driving force in the development of the American economy, including American corporations, before the Civil War. “Slavery, as the foundational American institution, organiz[ed] the nation’s politics, legal structures, and cultural practices with remarkable power to determine the life chances of those moving through society.” Corporations, like individuals, benefit from a racially inequitable sociopolitical and legal framework, including, for example, the racial wealth gap, which affects everything from who the corporation’s founders and investors are to who its employees, customers, and suppliers are. According to Majority Action, “business-as-usual can never be neutral in an economy founded on systemic racism.”
Applying Dr. Kendi’s anti-racist theory, corporations can work to be anti-racist similarly to individuals who have been impacted by sociopolitical notions of human value originating from rationalizations of slavery.
What does an anti-racist corporation look like? Racial equity is “the condition that would be achieved if one’s racial identify no longer predicted, in a statistical sense, how one fares.” How does a corporation embody racial equity?
A year ago, partners at Wachtell wrote that “ESG metrics…provide valuable tools and models to help both public and private companies and their investors and other stakeholders (including employees, customers, business partners and communities) understand their progress on [systemic racism and injustice] issues.” While many engaged in ESG work focus solely on the environment (particularly given the climate crisis), we should focus ESG on anti-racism too.
The same Wachtell partners recently reflected on the various racial equity tools that they have seen corporations use during the past year. These tools include:
• Hiring for Diversity, Equity, and Inclusion (DEI) roles;
• Expanding DEI roles;
• Anti-bias training;
• Inclusive hiring practices;
• Audits of DEI progress and effectiveness;
• Public disclosure of DEI goals and targets, including workforce data such as EEO-1 data;
• Executive compensation tied to DEI performance;
• Supporting and increasing supplier diversity; and
• Board and management diversity.
Some racial equity tools go further, calling for corporations to undertake and publicly disclose results of racial equity audits. A racial equity audit analyzes the corporation’s “adverse impacts on non-white stakeholders and communities of color.” Indeed, the 2021 proxy season saw several shareholder proposals calling for racial equity audits. Majority Action, a nonprofit organization that supports investors in holding corporations accountable for ESG and long-term value creation, supports such shareholder proposals and maintains a list of 2021 proposals here.
If a corporation’s leadership were to adopt all of these racial equity tools, would it be an anti-racist corporation? I suspect not given external forces at play. What else would a corporation’s leadership need to do to consider itself an anti-racist corporation? As I explore these issues in a law review article and other project-based work, I would love to hear thoughts from my business law professor colleagues.
Alicia's thoughts and work in this area overlap with my own on sexism and boards of directors. I cannot help but wonder, given that, what makes an anti-sexist board of directors . . . . Hmm. Something to contemplate.
Look for more from Alicia on this as her work in this area continues. We appreciate her publishing this post with us!
Friday, July 23, 2021
Professor Martin Edwards (Belmont University College of Law) and I are excited to moderate a discussion group titled, “A Very Online Economy: Meme Trading, Bitcoin, and the Crisis of Trust and Value(s)—How Should the Law Respond,” at the 2022 American Association of Law Schools Annual Meeting. The discussion group is scheduled to take place (virtually) on Friday, January 7, 2022. We welcome responses to the call for participation (here). Here’s the description:
Emergent forces emanating from social and financial technologies are challenging many underlying assumptions about the workings of markets, the nature of firms, and our social relationship with our economic institutions. The 21st century economy and financial architecture are built on faith and trust in centralized institutions. Perhaps it is not surprising that in 2008, a time where that faith and trust waned, a different architecture called “blockchain” emerged. It promised “trustless” exchange, verifiable intermediation, and “decentralization” of value transfer.
In 2021, the financial architecture and its institutions suffered a broadside from socialmedia-fueled “meme” and “expressive” traders. It may not be a coincidence that many of these traders reached adulthood around 2008, when the crisis called into question whether that real money, those real securities, or that real, fundamental value were really real at all. People are engaging with questions about social values in an increasingly uneasy way. There is a flux not only in the substantive values, but also with what set of institutions people should trust to produce, disseminate, and enforce values.
One question is what role business corporations might play in this moment, which is being worked out most prominently through discussions about environmental and social governance (ESG). Social and financial technologies may be rewriting longstanding assumptions about social and economic institutions. Blockchains challenge our assumptions about the need for centralization, trust, and institutions, while meme or expressive trading and ESG challenge our assumptions about economic value, market processes, and social values.
It promises to be a great discussion!
Tuesday, June 1, 2021
I recently received the final version of my short article, "The Benefits and Burdens of Limited Liability," in Transactions: The Tennessee Journal of Business Law. The article is based on some of my prior blog posts, as well as my presentation as part of the fourth annual Business Law Prof Blog symposium, Connecting the Threads. It was great event, as always, thanks to Joan and the whole crew at Tennessee Law, and it was my pleasure to be part of it.
Here's the abstract:
Law students in business associations and people starting businesses often think the only choice for forming a business entity is a limited liability entity like a corporation or a limited liability company (LLC). Although seeking a limited liability entity is usually justifiable, and usually wise, this Article addresses some of the burdens that come from making that decision. We often focus only on the benefits. This Article ponders limited liability as a default rule for contracts with a named business and considers circumstances when choosing a limited liability entity might not communicate what a business owner intends. The Article notes also that when choosing an entity, you get benefits, like limited liability, but burdens (such as need for counsel or tax consequences) also attach. It's not a one-way street. The Article closes by urging courts to consider both the benefits and burdens of an entity choice, especially in considering whether to uphold or disregard an entity, to help parties achieve some measure of certainty and equity.
Tuesday, April 27, 2021
In a Bloomberg article about the tax perks of trillions of dollars in Environmental, Social, and Governance investing by Wall Street banks, tax specialist Bryen Alperin is quoted as saying: “ESG investing isn’t some kind of hippie-dippy movement. It’s good for business.”
This utilitarian approach to ESG, and social enterprise in general, has made me uncomfortable for a while. The whole “Doing Well by Doing Good” saying always struck me as problematic.
ESG and social enterprise are only needed when the decisions made are not likely to lead to the most financially profitable outcomes. Otherwise, it is just self-interested business.
Over my spring sabbatical, I have been reading a fair bit about spiritual disciplines and the one that is most relevant here is “Secrecy.” The discipline of secrecy is defined as “Consciously refraining from having our good deeds and qualities generally known, which, in turn, rightly disciplines our longing for recognition.” In The Spirit of the Disciplines, Dallas Willard (USC Philosophy) writes, “Secrecy at its best teaches love and humility…. and that love and humility encourages us to see our associates in the best possible light, even to the point of our hoping they will do better and appear better than us.”
As a professor with active social media accounts, the discipline of secrecy is not an easy one for me. But I do think it is a good aspiration for all of us. Not every good deed has to be kept in secret. There can be good reasons for broadcasting good deeds (for example, to encourage others.) However, regularly performing good deeds in secret can help us build selfless character.
Similarly, socially conscious businesses and investors should be focused on the broader good being done, not on the personal benefits. Granted, I don’t think investors can blindly trust the ESG funds or benefit corporations --- the screens are simply unreliable. Also, it may be difficult to determine which companies are really doing social good if they are practicing much of it in secret. But the truth has a tendency of leaking out over time and investors can focus on companies they see doing the right thing without excessive marketing.
As for the companies themselves, I remain optimistic that there are at least a few businesspeople who truly want to benefit society for mostly selfless reasons. Combatting selfishness is not easy, but the discipline of secrecy is one way to fight it.
Saturday, April 24, 2021
My friend and colleague Prof. Victoria Haneman has shared her paper, Menstrual Capitalism, Period Poverty, and the Role of the B Corporation. Here is the abstract:
A menstruation industrial complex has arisen to profit from the monthly clean-up of uterine waste, and it is interesting to consider the way in which period poverty and menstrual capitalism are opposite sides of the same coin. Given that the average woman will dispose of 200 to 300 pounds of “pads, plugs and applicators” in her lifetime and menstruate for an average of thirty-eight years, this is a marketplace with substantial profit to be reaped even from the marginalized poor. As consciousness of issues such as period poverty and structural gender inequality increases, menstrual marketing has evolved and gradually started to “go woke” through messaging that may or may not be genuine. Companies are profit-seeking and the woke-washing of advertising, or messaging designed to appeal to progressively-oriented sentimentality, is a legitimate concern. Authenticity matters to those consumers who would like to distinguish genuine brand activism from appropriating marketing, but few objective approaches are available to assess authentic commitment.
This Essay considers the profit to be made in virtue signaling solely for the purpose of attracting customers and driving sales: pro-female, woke menstruation messaging that may merely be an exploitative and empty co-optation. Feminists should be expecting more of menstrual capitalists, including a commitment that firms operating within this space address the diapositive issue of period poverty, one of the most easily solved but rarely discussed public health crisis of our time, and meaningfully assist those unable to meet basic hygiene needs who may never be direct consumers. This Essay serves as a thought piece to explore the idea of B Corporation certification as an implicit sorting device to distinguish hollow virtue signaling from those menstrual capitalists committed to socially responsible pro-womxn business practices.
It is well-known that I am not fond of benefit corporation statutes, but given that they are a thing (along with B Corp certification), we have to deal with them. I still feel strongly that they benefit entity type, as it currently exists, is not helpful and potentially counterproductive. And I really don't like that B Corp certification has moved to include mandating entity type. But that's just facts, for now, anyway.
My opposition to benefit entities, though, is not anti-signaling by an entity of their values, and there's little doubt in my mind that a benefit entity (if it must exist) certainly makes sense for nonprofits (thought I still think the nonprofit thing told us all we needed to know). We're stuck with benefit entities, so Professor Haneman is probably correct that choosing the entity type could have value in marketing and signaling to consumers shared values. I still think companies should signal through acts, not entity choice, and that all entity types should have the latitude to do such signaling. But in the world we live in, this just may be how it is. Regardless, I recommend taking a look -- even when I disagree, Professor Haneman is always thoughtful, smart, and entertaining.
Friday, April 23, 2021
Cancel culture has been a hot topic for years, so when the University of Miami Law Explainer podcast asked me to talk about it, I had some reservations. I'm not shy, but I'm also not looking to be a headline in our campus newspaper, a meme, or a topic on Fox News. But I have strong feelings about this, and I agreed to speak.
I'm providing the link to the 20-minute interview here. I talked about my history as a radical protestor in college and law school (and my run in with Rush Limbaugh), the effect of boycotts and buycotts, whether Teen Vogue missed a teachable moment after firing an editor for tweets she made as a teenager, whether corporations are doing the right thing when they bow to pressure from vocal consumers, the uproar over the 1619 project, and more. If you want a break from drafting contracts or writing exams, take a listen and let me know what you think.
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.
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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."