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 (0)
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)
Friday, August 28, 2020
Two weeks ago, I wrote about wokewashing and the board of directors. I discussed companies that tout their social justice credentials to curry favor with consumers but in fact treat their employees differently. I touched on the difference between companies jumping on the “anti-racism” bandwagon and those like Nike, which took an unpopular stand in 2018 by supporting Colin Kapernick, who at the time was considered a pariah for taking a knee during the national anthem. Some commentators predicted boycotts but in fact, Nike had a 31% increase in sales following the ad campaign. One sporting good store owner who publicly called for a boycott actually went out of business.
Four years after Kapernick took a knee, professional basketball, hockey, soccer, and tennis players took a walk protesting a police-involved shooting of a Black man. Although the Milwaukee Bucks spurred the walkout by refusing to play against the Orlando Magic in the playoffs on Wednesday, LeBron James reportedly led what could have been a season-ending strike of the West Coast teams. One hundred league staffers also temporarily walked off the job today in support. Michael Jordan, basketball legend and team owner, helped broker a deal for the NBA teams to resume play tomorrow (Saturday).
What does all of this have to do with business? According to Forbes, “since 2010, the average NBA team value is up nearly sixfold and growing at a much faster rate than the other three major U.S. sports leagues, thanks to strong international growth prospects and blockbuster media deals.” The NBA’s 30 teams generated over $8 billion in revenues and several teams are worth $4billion each. NBA players aren’t doing too badly either. LeBron James earns almost $40 million a year from the NBA but is worth almost $500 million from endorsements and other deals. Athletes and entertainers are big business -- as rapper/producer Jay-Z once sang, “I’m not a businessman, I’m a business, man.”
Remember that store owner who went out of business after boycotting Nike products? He apparently realized that "being a sports store and not having Nike jerseys is kind of like being a milk store without milk or a gas station without gas." Being a sports league without marquee players is the same thing. Although the players received threats and vitriol, they chose to follow the example of the Bates 7 of NYU, Muhammad Ali refusing to go to VietNam, Tommie Smith and John Carlos in the Summer Olympics in 1968, the Boston Celtics in 1961, and countless others.
While some have argued that ball players should “shut up and dribble,” tennis legend Billie Jean King has stated that athletes must lead. No one complained when football player Aaron Rodgers took a stand on conflict minerals at the height of his playing career. But arguing for a law that prevents rape, murder, and child slavery isn’t really controversial. The Milwaukee Bucks did more than walk out. They apparently called the Wisconsin Attorney General from the locker room. The NBA players led and the NBA followed. League Commissioner Adam Silver stated that he supported the players, even though they initially took action without notifying the league or the union.
Is the NBA wokewashing? Not likely, even though NBA fans tend to be younger and more diverse than other sports fans. Today, the NBA and NBPA issued a statement promising to establish a social justice coalition to advocate for “meaningful police and criminal justice reform,” promote voting in ads, and work with cities to convert arenas into polling locations. Time will tell. I’m the mother of a Black 24-year old artist. He wouldn’t hurt a soul. But I worry every single day that he could be the next George Floyd or Jacob Blake. I thank the athletes who risked being “Kapernicked” or blacklisted. The NBA and other leagues know that if they don’t live up their commitments, they may not just lose fans, they’ll lose the game.
Friday, August 14, 2020
As an academic and consultant on environmental, social, and governance (ESG) matters, I’ve used a lot of loaded terms -- greenwashing, where companies tout an environmentally friendly record but act otherwise; pinkwashing, where companies commoditize breast cancer awareness or LGBTQ issues; and bluewashing, where companies rally around UN corporate social responsibility initiatives such as the UN Global Compact.
In light of recent events, I’ve added a new term to my arsenal—wokewashing. Wokewashing occurs when a company attempts to show solidarity with certain causes in order to gain public favor. Wokewashing isn’t a new term. It’s been around for years, but it gained more mainstream traction last year when Unilever’s CEO warned that companies were eroding public trust and industry credibility, stating:
Woke-washing is beginning to infect our industry. It’s polluting purpose. It’s putting in peril the very thing which offers us the opportunity to help tackle many of the world’s issues. What’s more, it threatens to further destroy trust in our industry, when it’s already in short supply… There are too many examples of brands undermining purposeful marketing by launching campaigns which aren’t backing up what their brand says with what their brand does. Purpose-led brand communications is not just a matter of ‘make them cry, make them buy’. It’s about action in the world.
The Black Lives Matter and anti-racism movements have brought wokewashing front and center again. My colleague Stefan Padfield has written about the need for heightened scrutiny of politicized decisions and corporate responses to the BLM movement here, here, and here, and Ann Lipton has added to the discussion here. How does a board decide what to do when faced with pressure from stakeholders? How much is too much and how little is too little?
The students in my summer Regulatory Compliance, Corporate Governance, and Sustainability course were torn when they acted as board members deciding whether to make a public statement on Black Lives Matter and the murder of George Floyd. As fiduciaries of a consumer goods company, the “board members” felt that they had to say “something,” but in the days before class they had seen the explosion of current and former employees exposing companies with strong social justice messaging by pointing to hypocrisy in their treatment of employees and stakeholders. They had witnessed the controversy over changing the name of the Redskins based on pressure from FedEx and other sponsors (and not the Native Americans and others who had asked for the change for years). They had heard about the name change of popular syrup, Aunt Jemima. I intentionally didn’t force my students to draft a statement. They merely had to decide whether to speak at all, and this was difficult when looking at the external realities. Most of the students voted to make some sort of statement even as every day on social media, another “woke” company had to defend itself in the court of public opinion. Others, like Nike, have received praise for taking a strong stand in the face of public pressure long before it was cool and profitable to be “woke.”
Now it’s time for companies to defend themselves in actual court (assuming plaintiffs can get past various procedural hurdles). Notwithstanding Facebook and Oracle’s Delaware forum selection bylaws, the same lawyers who filed the shareholder derivative action against Google after its extraordinary sexual harassment settlement have filed shareholder derivative suits in California against Facebook, Oracle, and Qualcomm. Among other things, these suits generally allege breach of the Caremark duty, false statements in proxy materials purporting to have a commitment to diversity, breach of fiduciary duty relating to a diverse slate of candidates for board positions, and unjust enrichment. Plaintiffs have labeled these cases civil rights suits, targeting Facebook for allowing hate speech and discriminatory advertising, Qualcomm for underpaying women and minorities by $400 million, and Oracle for having no Black board members or executives. Oracle also faces a separate class action lawsuit based on unequal pay and gender.
Why these companies? According to the complaints, “[i]f Oracle simply disclosed that it does not want any Black individuals on its Board, it would be racist but honest…” and “[a]t Facebook, apparently Zuckerberg wants Blacks to be seen but not heard.” Counsel Bottini explained, “when you actually go back and look at these proxy statements and what they’ve filed with the SEC, they’re actually lying to shareholders.”
I’m not going to discuss the merits of these cases. Instead, for great analysis, please see here written by attorneys at my old law firm Cleary Gottlieb. I’ll do some actual legal analysis during my CLE presentation at the University of Tennessee Transactions conference on October 16th.
Instead, I’m going to make this a little more personal. I’m used to being the only Black person and definitely the only Black woman in the room. It’s happened in school, at work, on academic panels, and in organizations. When I testified before Congress on a provision of Dodd-Frank, a Black Congressman who grilled me mercilessly during my testimony came up to me afterwards to tell me how rare it was to see a Black woman testify about anything, much less corporate issues. He expressed his pride. For these reasons, as a Black woman in the corporate world, I’m conflicted about these lawsuits. Do corporations need to do more? Absolutely. Is litigation the right mechanism? I don’t know.
What will actually change? Whether or not these cases ever get past motions to dismiss, the defendant companies are likely to take some action. They will add the obligatory Black board members and executives. They will donate to various “woke” causes. They will hire diversity consultants. Indeed, many of my colleagues who have done diversity, equity, and inclusion work for years are busier than they have ever been with speaking gigs and training engagements. But what will actually change in the long term for Black employees, consumers, suppliers, and communities?
When a person is hired or appointed as the “token,” especially after a lawsuit, colleagues often believe that the person is under or unqualified. The new hire or appointee starts under a cloud of suspicion and sometimes resentment. Many eventually resign or get pushed out. Ironically, I personally know several diversity officers who have left their positions with prestigious companies because they were hired as window dressing. Although I don’t know Morgan Stanley’s first Chief Diversity Officer, Marilyn Booker, her story is familiar to me, and she has now filed suit against her own company alleging racial bias.
So I’ll keep an eye on what these defendants and other companies do. Actions speak louder than words. I don’t think that shareholder derivative suits are necessarily the answer, but at least they may prompt more companies to have meaningful conversations that go beyond hashtag activism.
August 14, 2020 in Ann Lipton, Compliance, Consulting, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Financial Markets, Management, Marcia Narine Weldon, Shareholders, Stefan J. Padfield | Permalink | Comments (0)
Friday, July 24, 2020
Yesterday, I had the pleasure of moderating a panel of Black entrepreneurs sponsored by the Miami Finance Forum, a group of finance, investment management, banking, capital markets, private equity, venture capital, legal, accounting and related professionals. When every company and law firm was posting about Black Lives Matter and donating to various causes, my colleague Richard Montes de Oca, an MFF board member, decided that he wanted to do more than post a generic message. He and the MFF board decided to launch a series of webinars on Black entrepreneurship. The first panel featured Jamarlin Martin, who runs a digital media company and has a podcast; Brian Brackeen, GP of Lightship Capital and founder of Kairos, a facial recognition tech company; and Raoul Thomas, CEO of CGI Merchant Group, a real estate private equity group.
These panelists aren't the typical Black entrepreneurs. Here are some sobering statistics:
- Black-owned business get their initial financing through 44% cash; 15% family and friends; 9% line of credit; 7% unsecured loans; and 3% SBA loans;
- Between February and April 2020, 41% of Black-owned businesses, 33% of Latinx businesses, and 26% of Asian-owned businesses closed while 17% of White-owned business closed;
- As of 2019, the overwhelming majority of businesses in majority Black and Hispanic neighborhoods did not have enough cash on hand to pay for two weeks worth of bills;
- The Center for Responsible Lending noted that in April, 95% of Black-owned businesses were tiny companies with slim change of achieving loans in the initial rounds of the Paycheck Protection Program;
- Only 12% of Black and Hispanic business owners polled between April 30-May 12 had received the funding they requested from the stimulus program. In contrast half of all small business had received PPP funds in the same poll.
Because we only had an hour for the panel, we didn't cover as much as I would have liked on those statistics. Here's what we did discuss:
- the failure of boards of directors and companies to do meaningful work around diversity and inclusion- note next week, I will post about the spate of shareholder derivative actions filed against companies for false statements about diversity commitments;
- the perceptions of tokenism and "shallow, ambiguous" diversity initiatives;
- how to get business allies of all backgrounds;
- the need for more than trickle down initiatives where the people at the bottom of the corporation/society don't reap benefits;
- the fact that investing in Black venture capitalists does not mean that those Black VCs will invest in Black entrepreneurs and the need for more transparency and accountability;
- whether the Black middle class still exists and the responsibility of wealthier Black professionals to provide mentorship and resources;
- why it's easier for entrepreneurs to get investments for products vs. services, and a hack to convince VCs to invest in the service;
- whether a great team can make up for a so-so product when a VC hears a pitch;
- why there are so many obstacles to being a Black LGBTQ entrepreneur and how to turn it to an advantage when pitching; and
- whether reparations will actually help Black entrepreneurs and communities.
If you want to hear the answers to these questions, click here for access to the webinar. Stay safe and wear your masks!
July 24, 2020 in Corporations, CSR, Current Affairs, Entrepreneurship, Family Business, Management, Marcia Narine Weldon, Private Equity, Service, Shareholders, Technology, Venture Capital | Permalink | Comments (0)
Wednesday, June 24, 2020
Tomorrow (6/25/20) at 9am EST, Colin Mayer (Oxford) will debate Lucian Bebchuk (Harvard) on the topic of stakeholder v. shareholder capitalism.
Oxford is streaming the debate for free here.
Friday, June 12, 2020
Padfield on "the Omnipresent Specter of Political Bias" in Corporate Decision-Making (and 3 other papers)
I've finally gotten around to updating my SSRN page. I would love to hear any comments you might have.
June 12, 2020 in Behavioral Economics, Books, Constitutional Law, Corporate Governance, Corporate Personality, Corporations, CSR, Human Rights, Law and Economics, Stefan J. Padfield | Permalink | Comments (0)
Wednesday, June 10, 2020
Friend of the blog Bernard Sharfman has a new post up on the Oxford Business Law Blog, responding to Martin Lipton’s recent "On the Purpose of the Corporation" posts. Bernie's full post can be found here, and I've excerpted some portions (slightly out of order) below. I appreciate that the post highlights that a big part of the shareholder v. stakeholder debate is about whose rights are determined by contract v. fiduciary duties.
[T]he Lipton, Savitt, and Cain definition of corporate purpose is missing both an objective and a strategy on how it will create social value....
I am disappointed with this definition, a definition that ignores the social value created by for-profit businesses, namely the goods and services they produce; ignores that this social value is being produced for the financial benefit of its shareholders; and uses the pretense that uninformed institutional investors are partners in the management of a company....
[T]hey make no mention of the social value created by the corporation through the successful management of its stakeholder relationships, the goods and services it provides. How can a definition of corporate purpose not mention this? It’s as if a corporation should be ashamed of why it exists....
Pfizer, as a for-profit corporation, ... has the legal obligation of looking out for the interests of its shareholders. This is the only stakeholder group that the board owes fiduciary duties to, who can sue the board for a breach of those duties, who can approve major corporate decisions, and who can initiate and implement a proxy contest to remove board members. Thus, shareholder wealth maximization is the objective of Pfizer’s social value creation....
[A] collective action problem in shareholder voting leads to uninformed institutional investors, resource-constrained investor stewardship teams and proxy advisors that cannot solve this problem, and the current lack of enforcement of an investment adviser’s fiduciary duties does not solve the additional problem of institutional investor bias in shareholder voting.
Sunday, April 19, 2020
In a reflection on the meaning of career success, a majority of my business ethics students mentioned happiness as a barometer.
“Happiness,” however, is an incredibly imprecise term. For example, here is over seventy-five minutes of Jennifer Frey (University of South Carolina, Philosophy) and Jonathan Masur (University of Chicago, Law) discussing happiness under two different definitions.
Frey, in the tradition of Aristotle and Aquinas, considers happiness not as a private good, but rather as the highest common good. Happiness is enjoyed in community. True happiness according to Frey, is bound up in the cultivation of virtue and human excellence. Under Frey’s definition, happiness makes room for sacrifice and suffering as beautiful and awe-inspiring.
Masur, a self-described hedonist, seems to have a more psychological, subjective view of happiness. Masur defines happiness as positive feelings, and unhappiness as negative feelings. Masur acknowledges that happiness--maybe even the deepest happiness--can arise from relationships and altruistic behavior. Unlike Frey, however, Masur includes positive feelings that are artificially produced or arising from unvirtuous behavior as part of “happiness.” Masur sees happiness and living a good, moral life as often overlapping, but as not necessarily intertwined.
These are two different conceptions of happiness. I think we need seperate words for the different conceptions--perhaps joy and pleasure--though I do not think any two English words fully capture the differences.
Somewhat relatedly, this month, my neighborhood book club is reading Aldous Huxley’s Brave New World. Throughout the book, Huxley explores a future devoted to pleasure. In this world, a drug called soma, a sport called obstacle golf, and touch-engaging films called the "feelies" combine to drown out negative emotions. While the elimination of virtually all infectious diseases seems enviable in this moment, there is very little I admire in the brave new world---it seems incredibly shallow. Some of Aristotle’s virtues are largely missing. Courage, temperance, and liberality are only seen in the outcasts of this world. Self-denial and committed relationships are strongly discouraged.
Ross Douthat, in The New York Times, hits some similar notes below:
- In effect, both Huxley and [C. S.] Lewis looked at the utilitarian's paradise--a world where all material needs are met, pleasure is maximized, and pain is eliminated--and pointed out what we might be giving up to get there: the entire vertical dimension in human life, the quest for the sublime and the transcendent, for romance and honor, beauty and truth.
But even John Stuart Mill, the utilitarian, seemed to realize that there can be a depth to happiness that extends beyond pure pleasure. Mill wrote:
- It is better to be a human dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied. And if the fool, or the pig, are of a different opinion, it is because they only know their own side of the question. The other party to the comparison knows both sides.
Near the conclusion of Brave New World, the Savage (John) has an illuminating verbal spat with the Controller Mustapha Mond:
- Savage: "But I like the inconveniences [of life.]"
- "We don't," said the Controller. "We prefer to do things comfortably."
- "But I don't want comfort. I want God, I want poetry, I want want freedom, I want goodness. I want sin."
- "In fact," said Mustapha Mond, "you're claiming the right to be unhappy."
- "All right then," said the Savage defiantly, "I am claiming the right to be unhappy."
The Savage meets a tragic end (in part because he gets cut off from supportive community and has not grasped the concept of forgiveness), but I am still more drawn to his life--of pain and love, desire and disappointment, art and decay, principle and struggle--than to a life plugged into the pleasure producing experience machine.
Even though Frey and Masur disagree on the breadth of the term “happiness,” both seem to agree that devoted relationships, selflessness, and self-transcendence often lead to durable, deep happiness. While many of my business ethics students did not define “happiness” in their reflections, I hope they increasingly realize the fulfillment that can come from cultivating virtue in the midst of difficulty.
Wednesday, April 15, 2020
The National Center for Public Policy Research has posted an open letter to Blackrock CEO Larry Fink that should be of interest to readers of this blog. I provide some excerpts below. The full letter can be found here.
Dear Mr. Fink,
This economic crisis makes it more important than ever that companies like BlackRock focus on helping our nation’s economy recover. BlackRock and others must not add additional hurdles to recovery by supporting unnecessary and harmful environmental, social, and governance (ESG) shareholder proposals.
…. we are especially concerned that your support for some ESG shareholder proposals and investor initiatives brings political interests into decisions that should be guided by shareholder interests…. when a company’s values become politicized, the interests of the diverse group of shareholders and customers are overshadowed by the narrow interests of activist groups pushing a political agenda.
…. ESG proposals will add an extra-regulatory cost .... This may harm everyday Americans who are invested in these companies through pension funds and retirement plans. While this won’t affect folks in your income bracket, this may be the difference between affording medication, being able to retire, or supporting a family member’s education for many Americans.
There is a financial risk to this tack as well. The Wall Street Journal recently reported that “[p]erformance of BlackRock’s own iShares range of ESG funds shows that ESG is no guarantee of gold-plated returns. Its two oldest in the U.S., set up in 2005 and 2006 and now tracking the MSCI USA ESG Select index and the MSCI KLD 400 Social index, have both lagged behind iShares’ S&P 500 fund.”
And while publicly traded companies operate under a legal fiduciary duty to their investors, this is also a moral imperative. Free market capitalism has lifted more people out of poverty than any economic system in world history. That’s because, at its simplest level, capitalism operates under the basic rule that all exchanges are voluntary. Therefore, to achieve wealth and create growth in a capitalist system, one must appeal to the self-interest of others….
Tuesday, December 24, 2019
Happy holidays! Billions of people around the world are celebrating Christmas or Hanukah right now. Perhaps you’re even reading this post on a brand new Apple Ipad, a Microsoft Surface, or a Dell Computer. Maybe you found this post via a Google search. If you use a product manufactured by any of those companies or drive a Tesla, then this post is for you. Last week, a nonprofit organization filed the first lawsuit against the world’s biggest tech companies alleging that they are complicit in child trafficking and deaths in the cobalt mines of the Democratic Republic of Congo. Dodd-Frank §1502 and the upcoming EU Conflict Minerals Regulation, which goes into effect in 2021, both require companies to disclose the efforts they have made to track and trace "conflict minerals" -- tin, tungsten, tantalum, and gold from the DRC and surrounding countries. DRC is one of the poorest nations in the world per capita but has an estimated $25 trillion in mineral reserves (including 65% of the world's cobalt). Armed militia use rape and violence as a weapon of war in part so that they control the mineral wealth. The EU and US regulators believe that consumers might make different purchasing decisions if they knew whether companies source their minerals ethically. The EU legislation, notably, does not limit the geography to the DRC, but instead focuses on conflict zones around the world.
If you’ve read my posts before, then you know that I have written repeatedly about the DRC and conflict minerals. After visiting DRC for a research trip in 2011, I wrote a law review article and co-filed an amicus brief during the §1502 litigation arguing that the law would not help people on the ground. I have also blogged here about legislation to end the rule, here about the EU's version of the rule, and here about the differences between the EU and US rule. Because of the law and pressure from activists and socially-responsible investors, companies, including the defendants, have filed disclosures, joined voluntary task forces to clean up supply chains, and responded to shareholder proposals regarding conflict minerals for years. I will have more on those initiatives in my next post. Interestingly, cobalt, the subject of the new litigation, is not a “conflict mineral” under either the U.S. or E.U. regulation, although, based on the rationale behind enacting Dodd-Frank §1502, perhaps it should have been. Nonetheless, in all of my research, I never came across any legislative history or materials discussing why cobalt was excluded.
The litigation makes some startling claims, but having been to the DRC, I’m not surprised. I’ve seen children who should have been in school, but could not afford to attend, digging for minerals with shovels and panning for gold in rivers. Although I was not allowed in the mines during my visit because of a massacre in the village the night before, I could still see child laborers on the side of the road mining. If you think mining is dangerous here in the U.S., imagine what it’s like in a poor country with a corrupt government dependent on income from multinationals.
The seventy-nine page class action Complaint was filed filed in federal court in the District of Columbia on behalf of thirteen children claiming: (1) a violation of the Trafficking Victims Protection Reauthorization Act of 2008; (2) unjust enrichment; (3) negligent supervision; and (4) intentional infliction of emotional distress. I’ve listed some excerpts from the Complaint below (hyperlinks added):
Defendants Apple, Alphabet, Dell, Microsoft, and Tesla are knowingly benefiting from and providing substantial support to this “artisanal” mining system in the DRC. Defendants know and have known for a significant period of time the reality that DRC’s cobalt mining sector is dependent upon children, with males performing the most hazardous work in the primitive cobalt mines, including tunnel digging. These boys are working under stone age conditions for paltry wages and at immense personal risk to provide cobalt that is essential to the so-called “high tech” sector, dominated by Defendants and other companies. For the avoidance of doubt, every smartphone, tablet, laptop, electric vehicle, or other device containing a lithium-ion rechargeable battery requires cobalt in order to recharge. Put simply, the hundreds of billions of dollars generated by the Defendants each year would not be possible without cobalt mined in the DRC….
Plaintiffs herein are representative of the child cobalt miners, some as young as six years of age, who work in exceedingly harsh, hazardous, and toxic conditions that are on the extreme end of “the worst forms of child labor” prohibited by ILO Convention No. 182. Some of the child miners are also trafficked. Plaintiffs and the other child miners producing cobalt for Defendants Apple, Alphabet, Dell, Microsoft, and Tesla typically earn 2-3 U.S. dollars per day and, remarkably, in many cases even less than that, as they perform backbreaking and hazardous work that will likely kill or maim them. Based on indisputable research, cobalt mined in the DRC is listed on the U.S. Department of Labor’s International Labor Affairs Bureau’s List of Goods Produced with Forced and Child Labor.
When I mentioned above that I wasn’t surprised about the allegations, I mean that I wasn’t surprised that the injuries and deaths occur based on what I saw during my visit to DRC. I am surprised that companies that must perform due diligence in their supply chains for conflict minerals don’t perform the same kind of due diligence in the cobalt mines. But maybe I shouldn't be surprised at all, given how many companies have stated that they cannot be sure of the origins of their minerals. In my next post, I will discuss what the companies say they are doing, what they are actually doing, and how the market has reacted to the litigation. What I do know for sure is that the Apple store at the mall nearest to me was so crowded that people could not get in. The mall also has a Tesla showroom and people were gearing up for test drives. Does that mean that consumers are not aware of the allegations? Or does that mean that they don’t care? I’ll discuss that in the next post as well.
Wishing you all a happy and healthy holiday season.
December 24, 2019 in Compliance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Human Rights, Litigation, Marcia Narine Weldon, Securities Regulation, Shareholders | Permalink | Comments (0)
Monday, December 2, 2019
In running circles, Nike has been in the news quite a lot this year.
In May, Nike was criticized for its maternity policy (of lack thereof) for sponsored runners (See “Nike Told Me to Dream Big, Until I Wanted a Baby”).
In September, Nike’s running coach, Alberto Salazar, was suspended for 4 years for facilitating doping. (See “Nike’s Elite Running Group Folded After Suspension of Coach Alberto Salazar”)
In October, Nike's sponsored runner, Eliud Kipchoge, ran the first sub-2 hour marathon, wearing the much-hyped Nike Vaporfly shoes. (See “Eliud Kipchoge runs first ever sub-two hour marathon in INEOS 1:59 challenge”) (See also, “Achieving the Seemingly Impossible: A Tribute to Eliud Kipchoge” by our own Colleen Baker)
In November, former Nike-sponsored runner Mary Cain’s allegations of verbal abuse and weight shaming went viral. (See “I Was the Fastest Girl in America, Until I Joined Nike: Mary Cain’s male coaches were convinced she had to get “thinner, and thinner, and thinner.” Then her body started breaking down.”) (See also, “Mary Cain Speaks Out Against Nike and Coach Alberto Salazar Over Emotional, Physical Abuse”)
I think Robert Johnson of Let’s Run gets it right - Don’t Believe The Spin, Nike’s Treatment Of Mary Cain Is Very Much In Line With Its #1 Core Value: Win At All Costs. And, at least based on what I see among my serious running friends, the negative press is not hurting Nike’s sales. The Nike Vaporfly shoes are the best running shoes on the market, and the negative press appears to be rationalized or ignored by consumers. Even the author of the Mary Cain story for Sports Illustrated (which was extremely critical of Nike) donned a Nike kit and the Nike Vaporflies in his recent marathon.
So here is the perennial business law question: is Nike's "ruthless winning" strategy proper, or even required? As we all know, the business judgment rule allows Nike’s board of directors a great deal of flexibility in their decision-making. But the pull of the shareholder maximization norm---and the fact that shareholders hold many more accountability tools than other stakeholders---makes the results above pretty unsurprising.
Former Chief Justice of the Delaware Supreme Court has posted a paper with some ideas for encouraging more prosocial behavior by U.S. corporations, but there are no easy solutions and still much academic work to be done in this area.
Saturday, September 7, 2019
Have you ever wanted to learn the basics about blockchain? Do you think it's all hype and a passing fad? Whatever your view, take a look at my new article, Beyond Bitcoin: Leveraging Blockchain to Benefit Business and Society, co-authored with Rachel Epstein, counsel at Hedera Hashgraph. I became interested in blockchain a year ago because I immediately saw potential use cases in supply chain, compliance, and corporate governance. I met Rachel at a Humanitarian Blockchain Summit and although I had already started the article, her practical experience in the field added balance, perspective, and nuance.
The abstract is below:
Although many people equate blockchain with bitcoin, cryptocurrency, and smart contracts, the technology also has the potential to transform the way companies look at governance and enterprise risk management, and to assist governments and businesses in mitigating human rights impacts. This Article will discuss how state and non-state actors use the technology outside of the realm of cryptocurrency. Part I will provide an overview of blockchain technology. Part II will briefly describe how public and private actors use blockchain today to track food, address land grabs, protect refugee identity rights, combat bribery and corruption, eliminate voter fraud, and facilitate financial transactions for those without access to banks. Part III will discuss key corporate governance, compliance, and social responsibility initiatives that currently utilize blockchain or are exploring the possibilities for shareholder communications, internal audit, and cyber security. Part IV will delve into the business and human rights landscape and examine how blockchain can facilitate compliance. Specifically, we will focus on one of the more promising uses of distributed ledger technology -- eliminating barriers to transparency in the human rights arena thereby satisfying various mandatory disclosure regimes and shareholder requests. Part V will pose questions that board members should ask when considering adopting the technology and will recommend that governments, rating agencies, sustainable stock exchanges, and institutional investors provide incentives for companies to invest in the technology, when appropriate. Given the increasing widespread use of the technology by both state and non-state actors and the potential disruptive capabilities, we conclude that firms that do not explore blockchain’s impact risk obsolescence or increased regulation.
Things change so quickly in this space. Some of the information in the article is already outdated and some of the initiatives have expanded. To keep up, you may want to subscribe to newsletters such as Hunton, Andrews, Kurth's Blockchain Legal Resource. For more general information on blockchain, see my post from last year, where I list some of the videos that I watched to become literate on the topic. For additional resources, see here and here.
If you are interested specifically in government use cases, consider joining the Government Blockchain Association. On September 14th and 15th, the GBA is holding its Fall 2019 Symposium, “The Future of Money, Governance and the Law,” in Arlington, Virginia. Speakers will include a chief economist from the World Bank and banking, political, legal, regulatory, defense, intelligence, and law enforcement professionals from around the world. This event is sponsored by the George Mason University Schar School of Policy and Government, Criminal Investigations and Network Analysis (CINA) Center, and the Government Blockchain Association (GBA). Organizers expect over 300 government, industry and academic leaders on the Arlington Campus of George Mason University, either in person or virtually. To find out more about the event go to: http://bit.ly/FoMGL-914.
Blockchain is complex and it's easy to get overwhelmed. It's not the answer to everything, but I will continue my focus on the compliance, governance, and human rights implications, particularly for Dodd-Frank and EU conflict minerals due diligence and disclosure. As lawyers, judges, and law students, we need to educate ourselves so that we can provide solid advice to legislators and business people who can easily make things worse by, for example, drafting laws that do not make sense and developing smart contracts with so many loopholes that they cause jurisdictional and enforcement nightmares.
Notwithstanding the controversy surrounding blockchain, I'm particularly proud of this article and would not have been able to do it without my co-author, Rachel, my fantastic research assistants Jordan Suarez, Natalia Jaramillo, and Lauren Miller from the University of Miami School of Law, and the student editors at the Tennessee Journal of Business Law. If you have questions or please post them below or reach out to me at email@example.com.
September 7, 2019 in Compliance, Conferences, Contracts, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, Law Reviews, Lawyering, Legislation, Marcia Narine Weldon, Securities Regulation, Shareholders, Technology | Permalink | Comments (0)
Friday, August 23, 2019
I had planned to write about the Statement on the Purpose of a Corporation signed by 200 top CEOs. If you read this blog, you've likely read the coverage and the varying opinions. I'm still reading the various blog posts, statements by NGOs, and 10-Ks of some of the largest companies so that I can gather my thoughts. In the meantime, many of these same companies will be at the UN Forum on Business and Human Rights touting their records. I've been to the Forum several times, and it's worth the trip. If you're interested in joining over 2,000 people, including representatives from many of the signatories of the Statement, see below. You can register here:
The UN annual Forum on Business and Human Rights is the global platform for stock-taking and lesson-sharing on efforts to move the UN Guiding Principles on Business and Human Rights from paper to practice. As the world’s foremost gathering in this area, it provides a unique space for dialogue between governments, business, civil society, affected groups and international organizations on trends, challenges and good practices in preventing and addressing business-related human rights impacts. The first Forum was held in 2012. It attracts more than 2,000 experts, practitioners and leaders for three days of an action- and solution-oriented dialogue.The Forum was established by the UN Human Rights Council in 2011 “to discuss trends and challenges in the implementation of the Guiding Principles and promote dialogue and cooperation on issues linked to business and human rights, including challenges faced in particular sectors, operational environments or in relation to specific rights or groups, as well as identifying good practices” (resolution 17/4, paragraph 12).
The Forum addresses all three pillars of the Guiding Principles:
- The State duty to protect against human rights abuses by third parties, including business, through appropriate policies, regulation and adjudication;
- The corporate responsibility to respect human rights, which means to avoid infringing on the rights of others and to address adverse impacts with which a business is involved; and
- The need for access to effective remedy for rights-holders when abuse has occurred, through both judicial and non-judicial grievance mechanisms
The Forum is guided and chaired by the UN Working Group on Business and Human Rights and organized by its Secretariat at the Office of the UN High Commissioner for Human Rights (OHCHR).
If you have any questions about the value of attending the Forum, feel free to reach out to me at firstname.lastname@example.org.
August 23, 2019 in Conferences, Corporate Personality, Corporations, CSR, Current Affairs, Human Rights, International Business, International Law, Marcia Narine Weldon, Shareholders, Social Enterprise | Permalink | Comments (0)
Friday, August 16, 2019
Last week, I led a “legal hack” for some of the first year students during orientation. Each participating professor spoke for ten minutes on a topic of our choice and then answered questions for ten minutes. I picked business and human rights, my passion. I titled my brief lecture, “Are you using a product made by slaves, and if you are, can you do anything about it”?
In my ten minutes, I introduced the problem of global slavery; touched on the false and deceptive trade practices litigation levied against companies; described the role of shareholder activists and socially responsible investors in pressuring companies to clean up supply chains; raised doubts about the effectiveness of some of the disclosure regimes in the US, EU, and Australia; questioned the efficacy of conscious consumerism; and mentioned blockchain as a potential tool for provenance of goods. Yes. In ten minutes.
During the actual hack later in the afternoon, I had a bit more time to flesh out the problem. I developed a case study around the Rana Plaza disaster in which a building collapse in Bangladesh killed over 1,000 garment workers six years ago. Students brainstormed solutions to the problems I posed with the help of upperclassmen as student facilitators and community stakeholders with subject matter expertise. At the end of the two-hour brainstorming session, the students presented their solutions to me.
We delved deeper into my subject matter as I asked my student hackers to play one of four roles: a US CEO of a company with a well-publicized CSR policy deciding whether to stay in Bangladesh or source from a country with a better human rights record; a US Presidential candidate commenting on both a potential binding treaty on business and human rights and a proposed federal mandatory due diligence regime in supply chains; a trade union representative in Bangladesh prioritizing recommendations and demands to EU and US companies; and a social media influencer with over 100 million followers who intended to use his platform to help an NGO raise awareness.
This exercise was identical to an exercise I did in March in Pakistan with 100 business leaders, students, lawyers, government officials, and members of civil society as part of an ABA Rule of Law Initiative. The only difference was that I asked Pakistanis to represent the Bangladesh government and I asked the US students to represent a political candidate.
In both Pakistan and Miami, the participants had to view the labor issues in the supply chain from a multistakeholder perspective. Interestingly, in both Pakistan and Miami, the participants playing the social media influencer rejected the idea of a boycott. Even though multiple groups played this role in both places, each group believed that seeking a boycott of companies that used unsafe Bangladeshi factories would cause more harm than good.
Of note, the Miami Law students did their hack during the call for a boycott of Soul Cycle due to Steve Ross’ decision to hold a fundraiser for President Trump. In my unscientific poll, three out of three students who patronized Soul Cycle refused to boycott. When it came to the fictionalized case study, all groups raised concerns that a boycott could hurt garment workers in Bangladesh and retail workers in the US and EU. Some considered a “buycott” to support brands with stronger human rights records.
I’ve written before about my skepticism about long term boycotts, especially those led by millennials. Some of these same students echoed my concerns about their own lack of sustained commitment on proposed boycotts in the past. The “winning” hack- #DoBetterBangladesh was a multipronged strategy to educate consumers, adopt best practices of successful campaigns such as the Imokalee
farm workers, and form acoalition with other influencers to encourage consumer donations to reputable NGOs in Bangladesh. After seeing what these student groups could do in just two hours, I can’t wait to see what they can accomplish after three years of law school.
Friday, May 24, 2019
Currently, I am working on a project that looks at how social value is measured and reported. As I dig deeper, I am becoming even more convinced that measuring social value may be too difficult for us to do well.
Let’s take scooters as an example. How would you measure (and report) the social value of these scooter companies? How many points should a “third-party standard” assign for the jobs created, for the gasoline saved, for the affordable transportation provided, for the fun produced? How many points should you subtract for a death, for injuries, for obstructing sidewalks? In the language of the Model Benefit Corporation Legislation, how do you know if a scooter company is producing “[a] material positive impact on society and the environment, taken as a whole”?
Over the past few weeks, I’ve been diving into the B Impact Assessment, (which is the top third-party standard used by benefit corporations) and, frankly, the points assigned seem somewhat arbitrary and easy for companies to manipulate. In my opinion, almost any company, including a scooter company, could get the 80+ points needed to qualify as a certified B corp. if they learned and worked the system a bit (and, as most readers know, you don’t even have to be certified to become a benefit corporation under the state statutes.)
I know bright people who would emphatically argue that scooter companies create a “material positive impact,” and I know bright people who think scooter companies are socially destructive. Social reporting does not have to be totally useless; it would be interesting to have the data on scooter usage (how many people are using them for their commute, what is the injury rate relative to cars, etc?). But the total amount of social value is not easily reduced to numbers and social reports. Given the nuance of each decision, the various externalities, and the difficulty in quantifying the social impact, I have previously suggested giving stakeholder representatives certain governance rights (such as the ability to elect and sue the board of directors). This way, directors will be more likely to consider each stakeholder group when making decisions.
Friday, May 10, 2019
Join me in Miami, June 26-28.
June 26-28, 2019
Managing Compliance Across Borders is a program for world-wide compliance, risk and audit professionals to discuss current developments and hot topics (e.g. cybersecurity, data protection, privacy, data analytics, regulation, FCPA and more) affecting compliance practice in the U.S., Canada, Europe, and Latin America. Learn more
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Learn More: Visit the website for updated speaker information, schedule and topic details.
This program is designed and presented in collaboration with our partner in Switzerland
May 10, 2019 in Compliance, Conferences, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, International Business, Law Firms, Law School, Marcia Narine Weldon, White Collar Crime | Permalink | Comments (0)
Tuesday, April 23, 2019
Prof. Justin Pace, Haworth College of Business, Western Michigan University recently sent me his paper, Rogue Corporations: Unlawful Corporate Conduct and Fiduciary Duty. In it, he discusses Delaware's "per se doctrine where the board directs the corporation to violate the law. A knowing violation of positive law is bad faith, which falls under the duty of loyalty. The business judgment rule will not apply and exculpation will not be available under Section 102(b)(7). The shareholders may not even need to show harm."
In the paper, he considers this concept from a moral and ethical perspective, which are interesting in their own right, though I remain more interested in the doctrine itself. The paper is worth a look. A few comments of my own, after the abstract:
On February 28, 2018, Dick’s Sporting Goods announced that it would no longer sell long guns to 18- to 20-year-olds. On March 8, 2018, Dick’s was sued for violating the Michigan Elliott-Larsen Civil Rights Act, which prohibits discrimination on the basis of age in public accommodations. Dick’s and Walmart were also sued for violating Oregon’s ban on age discrimination. In addition to corporate liability under various state civil rights acts, directors of Dick’s and Walmart face the threat of suit for breaching their fiduciary duties—suits that may be much harder to defend than the more usual breach of fiduciary duty suit.
Delaware corporation law appears to have an underappreciated per se doctrine where the board directs the corporation to violate the law. A knowing violation of positive law is bad faith, which falls under the duty of loyalty. The business judgment rule will not apply and exculpation will not be available under Section 102(b)(7). The shareholders may not even need to show harm.
This paper examines the relevant legal doctrine but also takes a step back to consider what the rule should be from an ethical and a moral standpoint. To do so, rather than apply traditional corporate governance arguments, this paper considers broader moral theories. In addition to the utilitarian calculus that is so ubiquitous in corporate governance scholarship via the law and economics movement, this paper considers the liberalism of both John Rawls and Robert Nozick. But liberalism may seem less persuasive given the rise of illiberalism politically on both the American right and left. Given that, this paper also considers two non-liberal models: one a populist modification of Charles Taylor’s democratic communitarianism and the other Catholic Social Thought.
Unsurprisingly, the proper rule depends on which moral theory is applied. If that theory is liberalism (of either form covered), then a per se approach is troubling. Harm to the corporation must be shown, and either the Delaware legislature or the corporate players, depending on the form of liberalism, must acquiesce to a per se rule. Counterintuitively, it is the per se rule that runs counter to basic democratic norms. It gives the power to litigate in response to harm not to the party harmed but to a third party. Given the divergent results from applying different moral theories, and given the democratic difficulty, the Delaware legislature should clarify the standard. It will likely find that a harsh, per se standard is unjustified.
First, I have always thought that some people read DGCL § 102(b)(7) too literally (or at least broadly). The statute reads:
(b) In addition to the matters required to be set forth in the certificate of incorporation by subsection (a) of this section, the certificate of incorporation may also contain any or all of the following matters:
. . . .
(7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective. All references in this paragraph to a director shall also be deemed to refer to such other person or persons, if any, who, pursuant to a provision of the certificate of incorporation in accordance with § 141(a)of this title, exercise or perform any of the powers or duties otherwise conferred or imposed upon the board of directors by this title.
I have never been one to believe that directors face potential liability for any type of "knowing violation of law." Anyone who has seen a UPS or FedEx truck in New York City knows that the drivers knowingly park illegally and risk tickets (which they often get) for doing the job. It is a cost of doing business, and I find it hard to believe any court would hold directors liable for such a thing, though directors certainly know (or should) of the practice. That would make for one of the most absurd Caremark-like cases ever, in my view.
Prof. Pace argues in his paper:
A per se standard might prove lucrative. It opens up liability for losses normally insulated by business judgment rule. If Nike loses market share because it made Colin Kaepernick the face of a large marketing campaign, shareholders cannot successfully sue because that decision is protected by the business judgment rule. But if Dick’s Sporting Goods loses market share because it stops selling long guns to 18- to 20-year-olds, shareholders presumably can sue and recover based on that market share, even though civil liability for violating state bars on age discrimination may be negligible.
Perhaps, but I would still think that most courts would likely work around this. First, I think a court could easily calculate damages as the modest civil liability incurred, not the lost market share. Second, in Dick's Sporting Goods situation, as I observed elsewhere, "it is worth noting that Dick's sales dropped, but profits rose after the decision because the company cut costs by replacing some guns with higher-margin items." If there is no harm, is there a foul? Or maybe better said, it is possible that there is no director liability unless one can show actual harm.
I will concede that DGCL § 102(b)(7) likely eliminates business judgment rule protection for directors where one can show a knowing violation of the law. However, getting past the business judgment rule does not automatically lead to liability. It simply allows the court to review the board's decision, but the plaintiff still must show harm. And I am not at all sure one can show harm in the Dick's gun sales circumstance. It is, in my view, entirely fair. I also gather that I am may be in the minority on this one. But a good conversation, either way.
Friday, April 12, 2019
As a former compliance officer who is now an academic, I've been obsessed with the $25 million Varsity Blues college admissions scandal. Compliance officers are always looking for titillating stories for training and illustration purposes, and this one has it all-- bribery, Hollywood stars, a BigLaw partner, Instagram influencers, and big name schools. Over fifty people face charges or have already pled guilty, and the fallout will continue for some time. We've seen bribery in the university setting before but those cases concerned recruitment of actual athletes.
Although Operation Varsity Blues concerns elite colleges, it provides a wake up call for all universities and an even better cautionary tale for businesses of all types that think of bribery as something that happens overseas. As former Justice Department compliance counsel, Hui Chen, wrote, "bribery. . . is not an act confined by geographies. Like most frauds, it is a product of motive, opportunity, and rationalization. Where there are power and benefits to be traded, there would be bribes."
My former colleague and a rising star in the compliance world, AP Capaldo, has some great insights on the scandal in this podcast. I recommend that you listen to it, but if you don't have time, here are some questions that she would ask if doing a post mortem at the named universities. With some tweaks, compliance officers, legal counsel, and auditors for all businesses should consider:
1) What kind of training does our staff receive? How often?
2) Does it address the issues that are likely to occur in our industry?
3) When was the last time we spot checked these areas for compliance ? In the context of the universities, were these scholarships or set asides within the scope of routine audits or any other internal controls or reviews?
4) What factors or aspects of the culture could contribute to a scandal like this? What are our red flags and blind spots? Do we have a cultural permissiveness that could lead to this? In the context of the implicated universities, who knew or had reason to know?
5) How can we do a values-based analysis? Do we need to rethink our values or put some teeth behind them?
6) How are our resources deployed?
7) Do we have fundamental gaps in our compliance program implementation? Are we too focused on one area or another?
8) Are integrity and hallmarks of compliant behavior part of our selection/hiring process?
Capaldo recommends that universities tap into their internal resources of law and ethics professors who can staff multidisciplinary task forces to craft programs and curate cultures to ensure measurable improvements in compliance and a decrease in misconduct. I agree. I would add that as members of the law and business community and as alums of universities, we should ask our alma maters or employers whether they have considered these and other hard questions. Finally, as law and business professors, we should use this scandal in both the classroom and the faculty lounge to reinforce the importance of ethics, internal controls, compliance with law, and shared values.
April 12, 2019 in Business School, Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Law Firms, Law School, Lawyering, Management, Marcia Narine Weldon, Sports, Teaching | Permalink | Comments (0)
Wednesday, April 3, 2019
I recently received a copy of Citizen Capitalism: How a Universal Fund Can Provide Influence and Income to All from Sergio Gramitto. While I have not yet read the book, I didn’t want to let another blog post go by without passing along at least some of its highlights, as well as why I am particularly interested in its proposals.
In addition to Sergio, the authors of Citizen Capitalism include Tamara Belinfanti and the late Lynn Stout. Suffice it to say that Lynn was one of our true superstars, and I would hate to miss any presentation by either Sergio or Tamara. I’ve had the pleasure of engaging professionally with all of them in some capacity, and I hold them each in the highest regard.
Sergio and Lynn first discussed the idea of a Universal Fund in their article Corporate Governance as Privately-Ordered Public Policy: A Proposal, and then expanded on that idea with Tamara in Citizen Capitalism. The book has been reviewed in numerous places (see, for example, here and here). What follows is a descriptive excerpt from Cornell’s Clarke Program on Corporations & Society.
We offer a utopian-but feasible-proposal to better align the operations of business corporations with the interests of a broader range of humanity. The heart of the proposal is the creation of a Universal Fund into which individuals, corporations, and state entities could donate shares of public and private corporations. The Universal Fund would then distribute a proportionate interest in the Fund-a Universal Share-to all members of a class of eligible individuals (for example, all citizens over the age of 18), who would then become Universal Shareholders. Like a typical mutual fund, the Universal Fund would "pass through" to its Shareholders all income on its equity portfolio, including dividends and payments for involuntary share repurchases. Unlike a typical mutual fund, however, the Universal Fund would follow an "acquire and hold" strategy and could not sell or otherwise voluntarily dispose of its portfolio interests. Similarly, Universal Shareholders could not sell, bequeath, or hypothecate their Shares. Upon the death of a Universal Shareholder, that individual's Share would revert to the Fund.
Robert Ashford has been advocating for a similar proposal for years (see his SSRN page here) under the heading of binary economics (also known as “inclusive capitalism”). I’ve had the pleasure of working with Robert on a few related projects, and pass along the following excerpt from my article The Inclusive Capitalism Shareholder Proposal for whatever it may be worth.
When it comes to the long-term well being of our society, it is difficult to overstate the importance of addressing poverty and economic inequality. In Capital in the Twenty-First Century, Thomas Piketty famously argued that growing economic inequality is inherent in capitalist systems because the return to capital inevitably exceeds the national growth rate. Proponents of “Inclusive Capitalism” can be understood to respond to this issue by advocating for broadening the distribution of the acquisition of capital with the earnings of capital. Obviously, distributing capital more widely should, all else being equal, help alleviate at least some poverty and close at least some of the economic inequality gap by providing poor-to-middle-class consumers capital (paid for by the earnings of that capital) that they did not have before. But why should corporations distribute the ownership of their capital more broadly? The answer is because broadening the distribution of capital should promote greater growth because low-to-middle-income consumers are understood by many to spend more than wealthy consumers. This increased demand may then be expected to produce gains sufficient to offset the costs incurred in the process of instituting the Inclusive Capitalism proposal presented herein.
Based on my initial overview, I believe one meaningful difference between the Citizen Capitalism proposal and Ashford’s binary economics / inclusive capitalism proposal is the source of funding. The Citizen Capitalism proposal relies on donations while the binary economics proposal relies on the self-interest of corporations in increasing consumer demand.
Regardless, there are good arguments to be made for capitalism being the least worst system for advancing the well-being of individuals, and proposals like the foregoing provide important pro-market alternatives for addressing inequality.