Wednesday, March 24, 2021
I always learn a ton in reading Professor Julie Andersen Hill's banking articles. A TON! Hence, I'm excited to see that she recently posted her new piece, Cannabis Banking: What Marijuana Can Learn from Hemp (forthcoming 2021, Boston University Law Review). This is her second article on cannabis banking, the first being an excellent symposium piece, Banks, Marijuana, and Federalism. As both houses of Congress have recently reintroduced the SAFE Banking Act, these articles couldn't be more timely. Here's the abstract for Cannabis Banking:
Marijuana-related businesses have banking problems. Many banks explain that because marijuana is illegal under federal law, they will not serve the industry. Even when marijuana-related businesses can open bank accounts, they still have trouble accepting credit cards and getting loans. Some hope to fix marijuana’s banking problems with changes to federal law. Proposals range from broad reforms removing marijuana from the list of controlled substances to narrower legislation prohibiting banking regulators from punishing banks that serve the marijuana industry. But would these proposals solve marijuana’s banking problems?
In 2018, Congress legalized another variant of the Cannabis plant species—hemp. Prior to legalization, hemp-related businesses, like marijuana-related businesses, struggled with banking. Some hoped legalization would solve hemp’s banking problems. It did not. By analyzing the hemp banking experience, this Article provides three insights. First, legalization does not necessarily lead to inexpensive, widespread banking services. Second, regulatory uncertainty hampers access to banking services. When banks were unsure what state and federal law required of hemp businesses and were unclear about bank regulators’ compliance expectations for hemp-related accounts, they were less likely to serve the hemp industry. Regulatory structures that allow banks to easily identify who can operate cannabis businesses and verify whether the business is compliant with the law are more conducive to banking. Finally, even with clear law and favorable regulatory structures, the emerging cannabis industry still presents credit, market, and other risks that make some banks hesitant to lend.
Wednesday, March 3, 2021
I recently had the good fortune to hear Professor Jonathan R. Macey speak about his insightful and timely new article, Fair Credit Markets: Using Household Balance Sheets to Promote Consumer Welfare (forthcoming, Texas Law Review). I wanted to highlight it to readers and share the Abstract:
Access to credit can provide a path out of poverty. Improvidently granted, however, credit also can lead to financial ruin for the borrower. Strangely, the various regulatory approaches to consumer lending do not effectively distinguish between these two effects of the lending process. This Article develops a framework, based on the household balance sheet, that distinguishes between lending that is welfare enhancing for the borrower and lending that is potentially (indeed likely) ruinous, and argues that the two types of lending should be regulated in vastly different ways.
From a balance sheet perspective, various kinds of personal loans impact borrowers in vastly different ways. Specifically, there is a difference among loans based on whether the loan proceeds are being used: (a) to make an investment (where the borrower hopes to earn a spread between the cost of the borrowing and the returns on the investment); (b) to fund capital expenditures (homes, cars, etc.); or (c) to fund current consumption (medical care, food, etc.). From a balance sheet perspective, this third type of lending is distinct. Such loans reduce wealth and are correlated with significant physical and mental health problems. In contrast, loans used to acquire capital assets (i.e. houses) are positively correlated with such socioeconomic indicators.
Payday loans are the paradigmatic example of the use of credit to fund current consumption. Loans to fund current consumption reduce the wealth of the borrower because they create a liability on the “personal balance sheet” of the borrower, without creating any corresponding asset. The general category of loans to fund current consumption includes both loans used to fund unforeseen contingencies like emergency medical care or emergency car repairs, and those used to make routine purchases. Consistent with the stated justification for creating these lending facilities, which is to serve households and communities, the emergency lending facilities of the U.S. Federal Reserve should be made accessible to individuals facing emergency liquidity needs.
Loans that are taken out for current consumption but are not used for emergencies also should be afforded special regulatory treatment. Lenders who make non-emergency loans for current consumption should owe fiduciary duties to their borrowers. Compliance with such duties would require not only much greater disclosure than is currently required. It also would impose a duty of suitability on lenders, which would require lenders to provide borrowers with the loan most appropriate for their needs, among other protections discussed here. These heightened duties also should be extended to borrowers when they take out a loan that increases the debt on a borrower’s balance sheet by more than 25 percent.
Wednesday, February 24, 2021
Truth be told, I don't know a whole lot about SPACs. HOWEVER, I've been encountering this topic frequently these days, whether I'm following clearing and settlement news such as Ex-Cosmo editor teams up with ice hockey owner in Spac deal or doing my daily glance at the FT and reading about Why London should resist the Spac craze. Wanting to be more in the know, I've just added Michael Klausner, Michael Ohlrogge & Emily Ruan's "A Sober Look at SPACs" to my reading list. Here's the abstract:
A Special Purpose Acquisition Company (“SPAC”) is a publicly listed firm with a two-year lifespan during which it is expected to find a private company with which to merge and thereby bring public. SPACs have been touted as a cheaper way to go public than an IPO. This paper analyzes the structure of SPACs and the costs built into their structure. We find that costs built into the SPAC structure are subtle, opaque, and far higher than has been previously recognized. Although SPACs raise $10 per share from investors in their IPOs, by the time the median SPAC merges with a target, it holds just $6.67 in cash for each outstanding share. We find, first, that for a large majority of SPACs, post-merger share prices fall, and second, that these price drops are highly correlated with the extent of dilution, or cash shortfall, in a SPAC. This implies that SPAC investors are bearing the cost of the dilution built into the SPAC structure, and in effect subsidizing the companies they bring public. We question whether this is a sustainable situation. We nonetheless propose regulatory measures that would eliminate preferences SPACs enjoy and make them more transparent, and we suggest alternative means by which companies can go public that retain the benefits of SPACs without the costs.
Wednesday, February 17, 2021
In August 2020, Citibank, as administrative agent for a syndicated loan to Revlon, Inc., accidently wired nearly $900 million to lenders. It had intended to send a $7.8 million interest payment. Some of the lenders refused to return the money. Not surprisingly, Citibank was not happy about this. Yesterday, U.S. District Judge Jesse M. Furman issued a ruling denying Citibank's attempt to recoup the funds. As it turns out, under NY law, keeping money wired by mistake generally amounts to conversion or unjust enrichment. However, under the discharge-for-value defense, “The recipient is allowed to keep the funds if they discharge a valid debt, the recipient made no misrepresentations to induce the payment, and the recipient did not have notice of the mistake.”
Wednesday, February 10, 2021
Co-blogger Joan Heminway predicted that GameStop Will Be 2021's Great Gift To Business Law Professors. Totally agree. I think it’s also a great gift to those of us who research financial market infrastructure, particularly clearing and settlement. This episode has highlighted the importance of clearinghouses. In the past, I’ve written several posts on clearinghouses (for example, here, here, here). In preparing to speak on this topic during the UT Law roundtable last week, I came across several great articles about the role of clearinghouses and margin calls in the Robinhood/GameStop story. I share a few of these below with readers.
Keep in mind that the DTCC’s clearinghouse, the National Securities Clearing Corporation (NSCC), was designated in 2012 by the Financial Oversight Stability Council (FSOC) as one of eight designated financial market utilities under Dodd-Frank's Title VIII. These designated FMUs are single points of failure in financial markets. I've written extensively about Title VIII, beginning with The Federal Reserve as Last Resort.
Jeff John Robert’s Fortune article: The real story behind Robinhood’s decision to restrict GameStop trading – and that 4 a.m. call to put up $3 billion.
Telis Demos’ WSJ article: Why Did Robinhood Ground GameStop? Look at Clearing
Stephen G. Cecchetti & Kim Schoenholtz’s blog post, GameStop: Some Preliminary Lessons
Robinhood’s post on “What Happened this Week”
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!
Wednesday, December 30, 2020
BLPB readers, I hope that everyone is enjoying the holiday season and the semester break! I also want to get an early start on wishing everyone a HAPPY NEW YEAR!!!
Before we leave 2020, I wanted to share that if you missed Bank Supervision: Past, Present, and Future, a stellar virtual conference hosted by the Federal Reserve Board of Governors, Harvard Law School, and the Wharton School on December 11, you can still access the conference materials here. There's lots of great stuff, including four literature reviews (below) that banking law profs researching in this area are certain to find helpful. Enjoy! And a big shout-out to the hosts for such a successful event!
Literature Review on Economics: Beverly Hirtle, Banking Supervision: The Perspective from Economics
Literature Review on Law: Julie Andersen Hill, Bank Supervision: A Legal Scholarship Review
Literature Review on History: Sean H. Vanatta, Histories of Bank Supervision
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 firstname.lastname@example.org.
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.
Wednesday, December 9, 2020
In doing my weekly SSRN search, I was absolutely delighted to see Professor Ron Berndsen’s Five Fundamental Questions on Central Counterparties (here) (note: these institutions are sometimes also referred to as CCPs or clearinghouses). Berndsen has produced an extensive and invaluable review of the “booming literature on CCPs, of which about 60% is published in the last five years.” As he notes, this area “can be considered as the most important niche of financial economics.”
Berndsen organizes the review through “asking five fundamental questions about CCPs.” Table 6 on p.30 (copied below) provides these questions and shortened answers.
I am grateful to Berndsen for writing this article, proposing future research topics based on his extensive review of the literature, and providing a comprehensive bibliography (even if it has increased my "to read" list!). An abstract of the article is below:
Central counterparties (CCPs) are designed to reduce aggregate counterparty credit risk and function as market infrastructures for capital markets in securities and derivatives. Although CCPs, also known as clearing houses, exist for well over a century, they have gained prominence since they became the main international public policy response to the Lehman crisis of making over-the-counter derivative transactions safer. This G20's response to the Lehman crisis of making central clearing mandatory for standardized over-the-counter derivative transactions has been translated into law, Dodd-Frank for the US and EMIR for the EU. However, CCPs remain to some extent controversial with adversaries claiming that they potentially increase systemic risk and proponents viewing them as systemic risk reducing when properly designed and maintained. In this article I review the booming literature on CCPs, of which about 60% is published in the last five years, by asking five fundamental questions about CCPs. The aim is to construct a broad, academically substantiated, synthesis about CCPs and to propose directions for future research in what can be considered as the most important niche of financial economics.
Wednesday, November 18, 2020
Yesterday, the Financial Stability Board (FSB) released a report: Holistic Review of the March Market Turmoil (Report). It contains lots of really interesting information and is well worth a read (for a quick overview, there’s an Executive Summary and a two minute YouTube video of Randal K. Quarles, FSB Chair and a Governor of the Federal Reserve System, discussing the Report).
I thought its emphasis on the increasingly central role of market liquidity to financial market resilience particularly important. Today, both the traditional, highly regulated banking system and the market-based credit system provide credit to the economy. These systems are interconnected and roughly equivalent in size. Although the market-based credit system – non-bank financial intermediation (NBFI) – looks, smells, and acts like banking, it is not similarly regulated nor does it have access to deposit insurance or the Federal Reserve’s lender of last resort liquidity facility. Nevertheless, in the financial crisis of 2007-09 and this past March, the Federal Reserve provided extraordinary liquidity and other support to the NBFI to promote financial stability and address bank-like runs.
On p.2, the Report notes that “The need to intervene in such a substantial way has meant that central banks had to take on material financial risk. This could lead to moral hazard issues in the future, to the extent that markets do not fully internalise their own liquidity risk in anticipation of future central bank interventions in times of stress.” The Report explains on p.33 just how extensive this recent central bank support was: “Overall, these measures lead to a US$7 trillion increase in G7 central bank assets in just eight months (Graph 5.1). In contrast, G7 central bank assets only rose by about US$3 trillion in the year following the collapse of Lehman Brothers in 2008.”
The market-based credit system underprices liquidity risk. Measures must be taken to address this significant issue. As I wrote in The Federal Reserve As Last Resort (footnotes removed from quote):
Liquidity is not free. Liquidity risk is one of the fundamental risks in financial markets. All else being equal, liquid financial assets are less risky than illiquid ones and, therefore, worth more. Financial investors generally expect to receive a "liquidity premium" for illiquid financial assets. In the past, however, both economic and financial theories have sometimes treated liquidity as costless. And international financial institutions have long mismanaged and mispriced liquidity risk. Not surprisingly, liquidity assistance emerged as one of the most sought-after remedies provided by the Federal Reserve and central banks around the world during the financial crisis.
On p.50, the Report states that “Taken together, the measures introduced [by central banks] essentially removed risk from investors and transferred it to the balance sheet of central banks and hence of the public sector as a whole.” I’m excited for the FSB’s upcoming “work programme” on NBFI (see p.3 of the Report for details), and hope that in the future, investors will be required to retain more of their contracted for risk and that the resilience of this sector greatly improves.
Friday, October 23, 2020
It’s hard to believe that the US will have an election in less than two weeks. Three years ago, a month after President Trump took office, I posted about CEOs commenting on his executive order barring people from certain countries from entering the United States. Some branded the executive order a “Muslim travel ban” and others questioned whether the CEOs should have entered into the political fray at all. Some opined that speaking out on these issues detracted from the CEOs’ mission of maximizing shareholder value. But I saw it as a business decision - - these CEOs, particularly in the tech sector, depended on the skills and expertise of foreign workers.
That was 2017. In 2018, Larry Fink, CEO of BlackRock, told the largest companies in the world that “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society…Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders.” Fink’s annual letter to CEOs carries weight; BlackRock had almost six trillion dollars in assets under management in 2018, and when Fink talks, Wall Street listens. Perhaps emboldened by the BlackRock letter, one year later, 181 CEOs signed on to the Business Roundtable's Statement on the Purpose of a Corporation, which “modernized” its position on the shareholder maximization norm. The BRT CEOs promised to invest in employees, deal ethically and fairly with suppliers, and embrace sustainable business practices. Many observers, however, believed that the Business Roundtable statement was all talk and no action. To see how some of the signatories have done on their commitments as of last week, see here.
Then came 2020, a year like no other. The United States is now facing a global pandemic, mass unemployment, a climate change crisis, social unrest, and of course an election. During the Summer of 2020, several CEOs made public statements on behalf of themselves and their companies about racial unrest, with some going as far as to proclaim, “Black Lives Matter.” I questioned these motives in a post I called “"Wokewashing and the Board." While I admired companies that made a sincere public statement about racial justice and had a real commitment to look inward, I was skeptical about firms that merely made statements for publicity points. I wondered, in that post, about companies rushing to implement diversity training, retain consultants, and appoint board members to either curry favor with the public or avoid the shareholder derivative suits facing Oracle, Facebook, and Qualcomm. How well had they thought it out? Meanwhile, I noted that my colleagues who have conducted diversity training and employee engagement projects for years were so busy that they were farming out work to each other. Now the phones aren’t ringing as much, and when they are ringing, it’s often to cancel or postpone training.
Why? Last month, President Trump issued the Executive Order on Combatting Race and Sex Stereotyping. As the President explained:
today . . . many people are pushing a different vision of America that is grounded in hierarchies based on collective social and political identities rather than in the inherent and equal dignity of every person as an individual. This ideology is rooted in the pernicious and false belief that America is an irredeemably racist and sexist country; that some people, simply on account of their race or sex, are oppressors; and that racial and sexual identities are more important than our common status as human beings and Americans ... Therefore, it shall be the policy of the United States not to promote race or sex stereotyping or scapegoating in the Federal workforce or in the Uniformed Services, and not to allow grant funds to be used for these purposes. In addition, Federal contractors will not be permitted to inculcate such views in their employees.
The Order then provides a hotline process for employees to raise concerns about their training. Whether you agree with the statements in the Order or not -- and I recommend that you read it -- it had a huge and immediate effect. The federal government is the largest procurer of goods and services in the world. This Order applies to federal contractors and subcontractors. Some of those same companies have mandates from state law to actually conduct training on sexual harassment. Often companies need to show proof of policies and training to mount an affirmative defense to discrimination claims. More important, while reasonable people can disagree about the types and content of diversity training, there is no doubt that employees often need training on how to deal with each other respectfully in the workplace. (For a thought-provoking take on a board’s duty to monitor diversity training by co-blogger Stefan Padfield, click here.)
Perhaps because of the federal government’s buying power, the U.S. Chamber of Commerce felt compelled to act. On October 15th, the Chamber and 150 organizations wrote a letter to the President stating:
As currently written, we believe the E.O. will create confusion and uncertainty, lead to non-meritorious investigations, and hinder the ability of employers to implement critical programs to promote diversity and combat discrimination in the workplace. We urge you to withdraw the Executive Order and work with the business and nonprofit communities on an approach that would support appropriate workplace training programs ... there is a great deal of subjectivity around how certain content would be perceived by different individuals. For example, the definition of “divisive concepts” creates many gray areas and will likely result in multiple different interpretations. Because the ultimate threat of debarment is a possible consequence, we have heard from some companies that they are suspending all D&I training. This outcome is contrary to the E.O.’s stated purpose, but an understandable reaction given companies’ lack of clear guidance. Thus, the E.O. is already having a broadly chilling effect on legitimate and valuable D&I training companies use to foster inclusive workplaces, help with talent recruitment, and remain competitive in a country with a wide range of different cultures. … Such an approach effectively creates two sets of rules, one for those companies that do business with the government and another for those that do not. Federal contractors should be left to manage their workforces and workplaces with a minimum amount of interference so long as they are compliant with the law.
It’s rare for the Chamber to make such a statement, but it was bold and appropriate. Many of the Business Roundtable signatories are also members of the U.S. Chamber, and on the same day, the BRT issued its own statement committing to programs to advance racial equity and justice. BRT Chair and WalMart CEO Doug McMillon observed, “the racial inequities that exist for many Black Americans and people of color are real and deeply rooted . . These longstanding systemic challenges have too often prevented access to the benefits of economic growth and mobility for too many, and a broad and diverse group of Americans is demanding change. It is our employees, customers and communities who are calling for change, and we are listening – and most importantly – we are taking action.” Now that's a stakeholder maximization statement if I ever heard one.
Those who thought that some CEOs went too far in protesting the Muslim ban, may be even more shocked by the BRT’s statements about the police. The BRT also has a subcommittee to address racial justice issues and noted that “For Business Roundtable CEOs, this agenda is an important step in addressing barriers to equity and justice . . . This summer we took on the urgent need for policing reform. We called on Congress to adopt higher federal standards for policing, to track whether police departments and officers have histories of misconduct, and to adopt measures to hold abusive officers accountable. Now, with announcement of this broader agenda, CEOs are supporting policies and undertaking initiatives to address several other systems that contribute to large and growing disparities.”
Now that stakeholders have seen so many of these social statements, they have asked for more. Last week, a group of executives from the Leadership Now Project issued a statement supporting free and fair elections. However, as Bennett Freeman, former Calvert executive and Clinton cabinet member noted, no Fortune 500 CEOs have signed on to that statement. Yesterday, the Interfaith Center on Corporate Responsibility (ICCR) sent a letter to 200 CEOs, including some members of the BRT asking for their support. ICCR asked that they endorse:
- Active support for free and fair elections
- A call for a thorough and complete counting of all ballots
- A call for all states to ensure a fair election
- A condemnation of any tactics that could be construed as voter intimidation
- Assurance that, should the incumbent Administration lose the election, there will be a peaceful transfer of power
- Ensure that lobbying activities and political donations support the above
Is this a pipe dream? Do CEOs really want to stick their necks out in a tacit criticism of the current president’s equivocal statements about his post-election plans? Now that JPMorgan Chase CEO Jamie Dimon has spoken about the importance of respect for the democratic process and the peaceful transfer of power, perhaps more executives will make public statements. But should they? On the one hand, the markets need stability. Perhaps Dimon was actually really focused on shareholder maximization after all. Nonetheless, Freeman and others have called for a Twitter campaign to urge more CEOs to speak out. My next post will be up on the Friday after the election and I’ll report back about the success of the hashtag activism effort. In the meantime, stay tuned and stay safe.
October 23, 2020 in Contracts, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Employment Law, Ethics, Financial Markets, Human Rights, Legislation, Management, Marcia Narine Weldon, Nonprofits, Stefan J. Padfield | Permalink | Comments (1)
Wednesday, October 7, 2020
Securities Financing and Derivatives Markets Interconnections and Potentials for Greater Transactional Efficiencies
I just did a quick read through ISDA’s new whitepaper, Collaboration and Standardization Opportunities in Derivatives and SFT Markets. “SFT” stands for securities financing transactions. I encourage anyone studying these markets to at least review its Executive Summary. As it states “This paper explains and illustrates how and why two large, important and interconnected markets – derivatives and securities financing transactions (SFTs) – could collaborate to achieve greater standardization and improved efficiency.” (p. 3)
It's divided into two parts: 1) an overview of the relevant markets (repo, stock loan, and derivatives), their interconnectedness, and possibilities for and benefits of greater transactional efficiencies, and 2) a proposal for implementing these objectives.
Much of the paper focuses on market interconnections, which strongly argue for the possibility of improved transactional efficiencies. I kept thinking about interconnections from a systemic risk/financial stability perspective, and how (if at all) promoting greater transactional efficiencies (which, at least at first glance, seems like a good idea) might impact such considerations.
I encourage more of us in the banking and financial institutions area to give additional thought to systemic risk and financial stability issues related to securities lending, including due to its interconnections with derivatives markets. For example, while there has been much written about AIG’s CDS problems in the 2007-08 financial crisis, comparatively little work has addressed the securities lending issues it had (for example, see Securities Lending and the Untold Story in the Collapse of AIG). Nevertheless, “Participants in the SFT and derivatives markets have traditionally overlapped. Banks (including investment banks, commercial banks and central banks), prime brokers, funds (including hedge funds, pension funds and sovereign wealth funds) and market infrastructures (such as clearing houses) are among the biggest players in both the derivatives and SFT markets.” (p. 12)
Well, once I finish my article on NCWOL claims for clearinghouse shareholders for the upcoming BLPB Virtual Symposium, maybe I’ll turn my attention to clearinghouses and securities lending. I’d also love to see more work in this area by BLPB readers, and if you’ve an article related to these topics, please do send it my way!
Wednesday, September 9, 2020
Just today, Professor Christopher Odinet posted Predatory Fintech and the Politics of Banking (forthcoming, Iowa Law Review) to SSRN (here). It's already been downloaded over 100 times, and I can't wait to read it! Here's the Abstract:
With American families living on the financial edge and seeking out high cost loans even before COVID-19, the term financial technology or “fintech” has been used like an incantation aimed at remedying everything that’s wrong with America’s financial system. Scholars and supporters from both the public and private sector proclaim that innovations in financial technology will “bank the unbanked” and open new channels to affordable credit. This exuberance for all things tech in finance has led to a quiet yet aggressive deregulatory agenda, including, as of late, a federal assault via rulemaking on the ability of states to police the cost and privilege of extending credit within their borders. This deregulation and the ethos behind it have made space for growth in high cost, predatory lending that reaches across state lines via websites and smart phones and that is aggressively targeting cash-strapped families. These loans are made using a business model whereby funds are funneled through a group of lightly regulated banks in a way designed to take advantage of federal preemption. Fintech companies rent out and profit from the special legal status of these bank partners, which in turn keeps the bank’s involvement in the shadows. Stripping down fintech’s predatory practices and showing them for what they really are, this Article situates fintech in the context of this country’s longstanding dual banking wars, both between states and the federal government and between consumer advocates and banking regulators. And it points the way forward for scholars and regulators willing to shake off fintech’s hypnotic effect. This means, in the short term, using existing regulatory tools to curtail the dangerous lending identified here, including by taking a more expansive view of what it means for a bank to operate safely and soundly under the law. In the long term, it means having a more comprehensive and national discussion about how we regulate household credit in the digital age, specifically through the convening of a Twenty-First Century Commission on Consumer Finance. The Article explains how and why the time is ripe to do both. As the current pandemic wipes out wages and decimates savings, leaving desperate families turning to predatory fintech finance ever more, the need for reform has never been greater.
Saturday, September 5, 2020
I think that the GCs at Big Pharma have hacked into my Zoom account. First, some background. Earlier this week, I asked my students in UM’s Lawyering in a Pandemic course to imagine that they were the compliance officers or GCs at the drug companies involved in Operation Warp Speed, the public-private partnership formed to find a vaccine for COVID-19 in months, rather than years. I asked the students what they would do if they thought that the scientists were cutting corners to meet the government’s deadlines. Some indicated that they would report it internally and then externally, if necessary.
I hated to burst their bubbles, but I explained that the current administration hasn’t been too welcoming to whistleblowers. I had served on a non-partisan, multi-stakeholder Department of Labor Whistleblower Protection Advisory Committee when President Trump came into office, which was disbanded shortly thereafter. For over a year after that, I received calls from concerned scientists asking where they could lodge complaints. With that background, I wanted my students to think about how company executives could reasonably would report on cutting corners to the government that was requiring the “warp speed” results in the first place. We didn’t even get into the potential ethical issues related to lawyers as whistleblowers.
Well the good news is that Pfizer, Moderna, Johnson & Johnson, GlaxoSmithKline, and Sanofi announced on Friday that they have signed a pledge to make sure that they won’t jeopardize public safety by ignoring protocols. Apparently, the FDA may be planning its own statement to reassure the public. I look forward to seeing the statements when they’re released, but these companies have been working on these drugs for months. Better late than never, but why issue this statement now? Perhaps the lawyers and compliance officers – the gatekeepers – were doing their jobs and protecting the shareholders and the stakeholders. Maybe the scientists stood their ground. We will never know how or why the companies made this decision, but I’m glad they did. The companies hadn’t announced this safety pledge yet when I had my class and at the time, almost none of the students said they would get the vaccine. Maybe the pledge will change their minds.
Although the drug companies seem to be doing the right thing, I have other questions about Kodak. During the same class, I had asked my students to imagine that they were the GC, compliance officer, or board member at Kodak. Of course, some of my students probably didn’t even know what Kodak is because they take pictures with their phones. They don’t remember Kodak for film and cameras and absolutely no one knows Kodak as a pharmaceutical company. Perhaps that’s why everyone was stunned when Kodak announced a $765 million federal loan to start producing drug ingredients, especially because it’s so far outside the scope of its business. After all, the company makes chemicals for film development and manufacturing but not for life saving drugs. Kodak has struggled over the past few years because it missed the boat on digital cameras and has significant debt, filing for bankruptcy in 2012. It even dabbled in cryptocurrency for a few months in 2018. Not the first choice to help develop a vaccine.
To be charitable, Kodak did own a pharmaceutical company for a few years in the 80’s. But its most recent 10-K states that “Kodak is a global technology company focused on print and advanced materials and chemicals. Kodak provides industry-leading hardware, software, consumables and services primarily to customers in commercial print, packaging, publishing, manufacturing and entertainment.”
The Kodak deal became even more newsworthy because the company issued 1.75 million in stock and options to the CEO and other grants to company insiders and board members before the public announcement of the federal loan. The CEO had only had the job for a year. I haven’t seen any news reports of insiders complaining or refusing the grants. In fact, the day after the announcement of the loan, a Kodak board member made a $116 million dollar donation to charity he founded. Understandably, the news of the deal caused Kodak’s shares to soar. Insiders profited, and the SEC started asking questions after looking at records of the stock trades.
Alas, the deal is on hold as the SEC investigates. The White House’s own trade advisor has said that this may be “one of the dumbest decisions by executives in corporate history.” I’m not sure about that, but there actually may be nothing to see here. Some believe that there was a snafu with the timing of the announcement and that the nuances of Reg FD may get Kodak off the hook .I wonder though, what the gatekeepers were doing? Did the GC, compliance officer, or any board member ask the obvious questions? “Why are we doing something so far outside of our core competency?” They didn’t even get the digital camera thing right and that is Kodak’s core competency. Did anyone ask “should we really be issuing options and grants right before the announcement? Isn’t this loan material, nonpublic information and shouldn’t we wait to trade?”
I’ll keep watching the Kodak saga and will report back. In coming posts, I’ll write about other compliance and corporate governance mishaps. In the meantime, stay safe and please wear your masks.
September 5, 2020 in Compensation, Compliance, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Ethics, Financial Markets, Lawyering, Management, Marcia Narine Weldon, Securities Regulation, Shareholders, Technology | Permalink | Comments (0)
Wednesday, August 19, 2020
As I shared last week (here), many of us who study banking law and regulation are watching the path of Lacewell v. Office of the Comptroller of the Currency (OCC), a case about the OCC’s power to grant federal fintech charters to nondepository institutions, that is in the Second Circuit Court of Appeals. We've been treated to dueling banking law prof amicus curiae briefs (additional amicus briefs were also filed). In this week’s post, I’ll highlight the brief written by Professor David Zaring at the Wharton School. Download Zaring_Brief
Zaring has previously written about OCC chartering practices (here). He argues that “the OCC has the authority to issue special purpose national bank charters for financial technology (fintech) companies pursuant to the National Bank Act and 12 C.F.R. §5.20(e)(1).” Hence, the District Court’s judgement should be reversed.
First, as Zaring notes, the core issue here really is: “what is banking?” He argues that the “the business of banking” is “susceptible to more than one meaning,” and that receipt of deposits is not an essential aspect of what it is to be a bank. The plain text of 12 C.F.R. §5.20(e)(1) “allow[s] national banks to obtain an SPNB [special purpose national bank] charter so long as they conduct at least one of three enumerated functions-(1) receive deposits, (2) pay checks, or (3) lend money.” Second, the OCC has a history of taking a cautious, “reasoned approach to charters,” and it “is not trying to hide an elephant in a mousehole or expand the definition of the ‘business of banking’ out of all recognition…” Indeed, Zaring asserts, “the agency’s past practice with special charters illustrates its caution.” Third, it’s costly and unwise to require online fintech firms “to tailor their businesses by state borders,” because of the U.S.’s dual banking system. “Few industries benefit more from regulation at the national level than industries that exist on the internet.” Fourth, the lack of a federal fintech charter is costly to the U.S. in terms of “investment in financial technology,” and international competitiveness in this arena. Finally, the OCC’s “chartering decisions are reviewable,” and, “if appropriate,” the “Court should clarify” this.
Zaring does an excellent job of explaining why the OCC has the authority to grant federal fintech charters to nondepository institutions, and I encourage BLPB readers to review his brief. As I previously noted, the answer to what might seem to be a technical banking law question of interest to few (and perhaps uninteresting to most) will have tremendous practical ramifications.
Stay tuned for Part III! I’ll plan to update BLPB readers when the Second Circuit Court of Appeals issues its decision.
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)
Thursday, August 13, 2020
Those of us who study banking law and regulation know it’s an absolutely exciting area! That’s particularly true at the moment. Not only are we watching the path of Lacewell v. Office of the Comptroller of the Currency (OCC), a case about the OCC’s power to grant federal fintech charters to nondepository institutions, currently in the Second Circuit Court of Appeals, but we’ve also been treated to dueling banking law prof amicus curiae briefs (additional amicus briefs were also filed). In this week’s post, I’ll highlight the brief led by Lev Menand, Saule Omarova, Morgan Ricks, Joe Sommer, and Art Wilmarth, and signed by thirty-three banking law scholars (here).
The professors begin by stating their interest: “ensuring that banking agencies stay within their statutory mandates and work in the public interest.” They term the OCC’s proposal to charter nondepository fintech firms “a dangerous power grab premised on the novel claim that banking is just another word for lending.” In a nutshell, the scholars argue that “the OCC does not have the power to charter entities that are not in the deposit – that is, money creation – business.” It’s actually illegal – as the brief notes – for “unregulated entities to receive deposits.” “Bank deposits constitute the bulk of our nation’s money supply, and it is for this reason that banks are subject to strict federal oversight…Creating deposit dollars is a delegated sovereign privilege – an extremely sensitive activity that justifies federal chartering, regulation, and supervision.” The OCC’s very name is linked to the nation’s currency system!
As the brief explains, if the OCC were to be able to grant federal fintech charters to nondepository institutions, this would result in a significant expansion of its regulatory authority. It would also impact the governance of the Federal Reserve, and expand access to Fed master accounts and discount window lending. Additionally, as banks are exempt from the coverage of the federal securities laws and investment company laws, it would impact the coverage of these laws, and it would even create “an alternative, OCC-controlled system of business organization available to a huge range of companies.”
Indeed, the answer to what might seem to be a technical banking law question of interest to few (and perhaps boring to most) will have tremendous ramifications. The professors do an excellent job of explaining the implications of the OCC having the authority to grant federal fintech charters, and I encourage BLPB readers to review their brief.
Stay tuned for Part II, next Wednesday!! I’ll be highlighting Professor David Zaring’s Amicus Curiae Brief supporting the OCC’s position.