Thursday, July 21, 2016
Jamie Dimon (JP Morgan Chase), Warren Buffet (Berkshire Hathaway), Mary Barra (General Motors), Jeff Immet (GE), Larry Fink (Blackrock) and other executives think so and have published a set of "Commonsense Principles of Corporate Governance" for public companies. There are more specifics in the Principles, but the key points cribbed from the front page of the new website are as follows:
Truly independent corporate boards are vital to effective governance, so no board should be beholden to the CEO or management. Every board should meet regularly without the CEO present, and every board should have active and direct engagement with executives below the CEO level;
■ Diverse boards make better decisions, so every board should have members with complementary and diverse skills, backgrounds and experiences. It’s also important to balance wisdom and judgment that accompany experience and tenure with the need for fresh thinking and perspectives of new board members;
■ Every board needs a strong leader who is independent of management. The board’s independent directors usually are in the best position to evaluate whether the roles of chairman and CEO should be separate or combined; and if the board decides on a combined role, it is essential that the board have a strong lead independent director with clearly defined authorities and responsibilities;
■ Our financial markets have become too obsessed with quarterly earnings forecasts. Companies should not feel obligated to provide earnings guidance — and should do so only if they believe that providing such guidance is beneficial to shareholders;
■ A common accounting standard is critical for corporate transparency, so while companies may use non-Generally Accepted Accounting Principles (“GAAP”) to explain and clarify their results, they never should do so in such a way as to obscure GAAP-reported results; and in particular, since stock- or options-based compensation is plainly a cost of doing business, it always should be reflected in non-GAAP measurements of earnings; and
■ Effective governance requires constructive engagement between a company and its shareholders. So the company’s institutional investors making decisions on proxy issues important to long-term value creation should have access to the company, its management and, in some circumstances, the board; similarly, a company, its management and board should have access to institutional investors’ ultimate decision makers on those issues.
I expect that shareholder activists, proxy advisory firms, and corporate governance nerds like myself will scrutinize the specifics against what the signatories’ companies are actually doing. Nonetheless, I commend these business leaders for at least starting a dialogue (even if a lot of the recommendations are basic common sense) and will be following this closely.
Friday, May 20, 2016
As previously mentioned, last week I presented at the Center for Nonprofit Management's Bridge to Excellence Conference.
Below I share a few thoughts. Some of these thoughts I have shared before about other conferences, but I think they bear repeating.
- Value of Practitioner Conferences. As an academic, it is easy for me to stay mostly in the academic world. I do think, however, going to practitioner conferences can be quite useful. Maybe most important, these conferences can help you meet people who are in practice, especially in your local area. People I have met at practitioner conferences have served as guest speakers in my classes, provided individual advice to students, helped students find jobs, and provided ideas for blog posts and scholarship. Practitioner conferences can also be useful as they tend to address very practical problems and remind me that I want my scholarship to speak to not only academics, but also the bar, bench, and business people. Attending one practitioner conference can lead to more opportunities---other speaking engagements, board member openings, and consulting opportunities, and the like.
- Check Technology Before Speaking. I learned this early in my academic career, and I found the IT person well before my talk and made sure the technology worked well. We had no issues. In other sessions, however, there were a number of technology delays and hiccups. Especially, if you plan to use a video file, make sure that the file loads and that the sounds works beforehand. One of the speakers made the mistake of mocking PowerPoint before launching her Storify presentation, which would not load at all because of Internet issues. Thankfully, you did not let that slow her down and provided an engaging presentation. Checking technology beforehand is not always possible, and IT support is not always available, but it is a rare conference that doesn't have a technology issue at some point, so I think more planning is usually appropriate.
- Think-Pair-Share and Q&A. Think-Pair-Share is a well-known teaching technique that I often use in my classes. You pose a question. Allow some time for thought. Break the room into small groups to discuss. Then ask for volunteers to share thoughts. I tried this technique at the conference yesterday and thought it worked well. We did not have an incredible amount of time, so I did not allow much time for individual thought beforehand, but the audience seemed to enjoy the discussion and the thoughts shared were mostly quite useful. One benefit of this technique is that it gets the audience involved. Another benefit is that it allows the audience members to meet and talk with people they may not have had a chance to otherwise. I was able to leave a few minutes at the end of my presentation for Q&A, but not nearly as much as I would have liked. Personally, I often find the Q&A among the most valuable time, depending on the audience and the questions. I generally wish more speakers left more time for Q&A.
- Time Between Sessions. CNM provided significant time between sessions - always at least 20 minutes, I think. But, as always seems to happen at conferences, sessions run long, and that time gets squeezed. The networking time between sessions can be incredibly useful, and so I think it is important to get speakers to honor the time limitations and leave a good bit of time between sessions, knowing that there will be delays. Part of the responsibility of staying on track falls on the speaker. The conference organizers can help by starting on time and providing notice when time is short. CNM did quite a good job keeping things on track, but even so, I wished for a bit more time between sessions.
- Vendor "Passports" and Drawings. CNM included a vendor "passport" in our materials. You got an orange sticker for each vendor you spoke to and if you filled out the passport (which had blank boxes next to vendor names) you could be entered into a drawing for excellent prizes at the end of the day. This seemed to be a good way to get attendees to engage with the vendors (who are also usually conference sponsors), and it seemed to be a good way to keep the attendees at the conference until the end of the day.
- Speed Consulting. CNM had a speed consulting session where you could speak briefly with experts in finance, law, management, grant-writing, etc. I could see a session like this being used at academic conferences, where more senior faculty members would offer bits of advice to prospective professors or more junior professors. I imagine, however, that more in-depth questions would have to be scheduled for another time. It did seem to be a good time to get some very preliminary thoughts and meet experts.
- Mementos. Thoughts may vary on this, but I like conferences that provide attendees and/or speakers with unique takeaway items. Some may think too much money is wasted on these trinkets, and that can be the case if the item is quite generic, but I think mementos can be a nice touch. I keep a few such items from conferences on my office shelves and they are nice reminders of the conferences. At CNM's conference, they provided little elephants, because the theme was "elephants in the room." I especially liked this gift because both of my young children are crazy about elephants and it was nice to bring them something home from work. One of my table-mates gave me her elephant so I had one for each child.
Monday, May 9, 2016
Thought Josephine Sandler Nelson's recent Oxford Business Law Blog post on Volkswagen might be of interest to our readers. It is reposted here with permission.
Fumigating the Criminal Bug: The Insulation of Volkswagen’s Middle Management
New headlines each day reveal wide-spread misconduct and large-scale cheating at top international companies: Volkswagen’s emissions-defeat devices installed on over eleven million cars trace back to a manager’s PowerPoint from as early as 2006. Mitsubishi admits that it has been cheating on emissions standards for the eK and Dayz model cars for the past 25 years—even after a similar scandal almost wiped out the company 15 years ago. Takata’s $70 million fine for covering up its exploding air bags in Honda, Ford, and other car brands could soon jump to $200 million if a current Department of Justice probe discovers additional infractions. The government has ordered Takata’s recall of the air bags to more than double: one out of every five cars on American roads may be affected. Now Daimler is conducting an internal investigation into potential irregularities in its exhaust compliance.
A recent case study of the 2015-16 Volkswagen (‘VW’) scandal pioneers a new way to look at these scandals by focusing on their common element: the growing insulation and entrenchment of middle management to coordinate such large-scale wrongdoing. “The Criminal Bug: Volkswagen’s Middle Management” describes how VW’s top management put pressure on the rest of the company below it to achieve results without inquiring into the methods that the agents would use to achieve those results. The willing blindness of top executives to the methods of the agents below them is conscious and calculated. Despite disclosure-based regulation’s move to strict-liability prosecutions, the record of prosecutorial failure at trial against top executives in both the U.S. and Germany demonstrates that assertions of plausible deniability succeed in protecting top executives from accountability for the pressure that they put on agents to commit wrongdoing.
Agents inside VW receive the message loud and clear that they are to cheat to achieve results. As even the chairman of the VW board has admitted about the company, “[t]here was a tolerance for breaking the rules”. And, contrary to VW’s assertion, no one believes that merely a “small group of engineers” is responsible for the misconduct. Only middle management at the company had the longevity and seniority to shepherd at least three different emissions-control defeat devices through engine re-designs over ten years, to hide those devices despite heavily documented software, and to coordinate even across corporate forms with an outside supplier of VW’s software and on-board computer.
The reason why illegal activity can be coordinated and grow at the level of middle management over all these years is rooted in the failure of the law to impose individual accountability on agents at this level of the corporation. Additional work by the same author on the way in which patterns of illegal behavior in the 2007-08 financial crisis re-occur in the 2015-16 settlements for manipulations of LIBOR, foreign currency exchange rates, and other parts of the financial markets indicates that middle management is further protected from accountability by regulators’ emphasis on disclosure-based enforcement. In addition, U.S. law has lost the ability to tie together the behavior of individuals within a corporation through conspiracy or other types of prosecutions.
Previous research has shown that the more prominent the firm is, and the higher the expectations for performance, the more likely the firm is to engage in illegal behavior. Now we understand more about the link between the calculated pressure that top executives put on their companies and the protection of middle management that supports the patterns of long-term, large-scale wrongdoing that inflict enormous damage on the public. It is not solely VW that needs to fumigate this criminal bug: the VW case study suggests that we need to re-think the insulation from individual liability for middle management in all types of corporations.
This post originally appeared on the Oxford Business Law Blog, May 5, 2016.
Wednesday, May 4, 2016
In follow up to my post yesterday, my trusted and valued co-blogger Joan Heminway asked a good question (as usual) based one of my comments. My response became long enough that I thought it warranted a follow-up post (and it needed formatting). Joan commented:
you say: "there should be no problem if, for example, Delaware corporate law did not allow a for-profit entity to exercise religion for the sole sake of religion. I think that is the case right now: that’s not a proper corporate purpose under my read of existing law." Are you implying that a corporate purpose of that kind for a for-profit corporation organized in Delaware would be unlawful? Can you explain?
My response: I am suggesting exactly that, though I concede one might need a complaining shareholder first. My read of eBay, and Chief Justice Strine’s musing on the subject, suggest that an entity that is run for purposes of religion (not shareholder wealth maximization) first and foremost, is an improper use of the Delaware corporate form. (“I simply indicate that the corporate law requires directors, as a matter of their duty of loyalty, to pursue a good faith strategy to maximize profits for the stockholders.”) Chancellor Chandler explained in eBay:
The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment.
I think this definition of philanthropic easily includes religious ends (or should).
Chancellor Chandler continued:
Jim and Craig opted to form craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.
I don’t see how this should play any differently if it applied to religion. Consider, for example, this possible spin:
Jane and Carrie opted to form Religion, Inc., as a for-profit Delaware corporation and voluntarily accepted millions of dollars from BigCo as part of a transaction whereby BigCo became a stockholder. Having chosen a for-profit corporate form, the Religion directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.
Further to the point, Chancellor Chandler added:
I cannot accept as valid . . . a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders—no matter whether those stockholders are individuals of modest means or a corporate titan of online commerce.
Thus, a for-profit business can be religious in nature—e.g., make religious books or products or sponsor religious seminars—but as a Delaware corporation, the purpose of the entity must be to “promote the value of the corporation for the benefit of its stockholders.”
This is the potential problem with the Hobby Lobby case as to Delaware law. There, the companies had a lot to lose:
If they and their companies refuse to provide contraceptive coverage, they face severe economic consequences: about $475 million per year for Hobby Lobby, $33 million per year for Conestoga, and $15 million per year for Mardel. And if they drop coverage altogether, they could face penalties of roughly $26 million for Hobby Lobby, $1.8 million for Conestoga, and $800,000 for Mardel.
These losses were justified in that case as being necessary to exercise religion, and not to further a corporate purpose. Of course, they had to make that claim, because otherwise they couldn’t get the benefit of RFRA, which requires demonstrating “an honest conviction,” which could be problematic if the reason was couched in business terms, and not religious ones.
Incidentally, I think the business judgment rule should probably protect this decision, anyway, but I don’t know that Delaware law would support that view. In fact, it shouldn't based in recent case law, and I think plainly eBay says no on that one. The Supreme Court says RFRA protects the right to pursue religious ends. It doesn't mean Delaware law does. (Note: Hobby Lobby is not a Delaware entity, so the rules are admittedly different.)
Thus, my fix seek to balance these competing possible outcomes. Tell shareholders your plan, and they can’t question it later, even if that plan costs the company $475 million in losses. Where the law has evolved, I don't think it's fair to suggest it was part of the bargain for all companies, thought maybe investors in Hobby Lobby did know. But it doesn't matter. I thought craigslist’s long-standing business plan was sufficient notice, too. Chancellor Chandler disagreed.
Friday, March 4, 2016
Christopher Bruner recently posted a book chapter entitled The Corporation's Intrinsic Attributes. I try to read everything Christopher writes, including his excellent Cambridge University Press book, Corporate Governance in the Common Law World, and I am looking forward to reading this new book chapter over spring break next week. The book chapter's abstract is reproduced below for interested readers:
Numerous treatises, casebooks, and other resources commonly present concise lists of attributes said to be intrinsic to the modern corporation and/or essential to its economic utility. Such descriptions of the corporate form often constitute introductory matter, conditioning how students, professionals, and public officials alike approach corporate law by presenting a straightforward framework to distinguish the corporate form from other types of business entities. There are two significant problems with such frameworks, however, from a pedagogic perspective. First, these frameworks describe the corporation by reference to purportedly fixed intrinsic attributes, conflicting sharply with the flux and dynamism that have in fact characterized the history of corporate law. Second, these frameworks differ markedly from each other in how they characterize the corporation's attributes, each embodying a contestable perspective on the nature of the corporate form.
The diversity of perspectives that such inquiry reveals calls into question the degree to which we can validly deduce a single correct or optimal division of power between boards and shareholders, degree of regard for shareholder interests, and/or degree of liability exposure for boards and shareholders, based exclusively on premises purportedly intrinsic to corporate law itself - that is, without express appeal to external policy considerations and related regulatory fields. These matters map onto three core issues of corporate law and governance - power, purpose, and risk-taking, respectively - and the inability to resolve them by reference to the corporation's purportedly intrinsic features suggests that re-conceptualizing the corporate form might facilitate more effective assessment of its capabilities.
This chapter undertakes that project. Section I begins with an historical discussion of the corporation's emergence and early deployment for business in the United Kingdom and the United States. Section II turns to various contemporary descriptions of the corporation's intrinsic attributes presented in modern reference materials, exploring their commonalities, differences, and theoretical implications. Section III explores the impossibility of resolving core issues of power, purpose, and risk-taking by reference to such conceptions of the corporate form, providing three US examples that map onto these respective issues - the scope of shareholders' bylaw authority, the degree of board discretion to consider non-shareholder interests in hostile takeovers, and the regulation of financial risk-taking following the recent crisis. Each illustrates the necessity of resort to political discourse - a reality underscored through comparison with the United Kingdom, which reveals substantial divergence on such issues notwithstanding broad similarities between the US and UK corporate governance regimes.
The chapter concludes, in Section IV, by proposing that we refrain from describing the corporate form by reference to purportedly fixed intrinsic attributes. I argue that it would pay to re-conceptualize the modern corporation by reference to the tools it offers, and how those tools can be deployed - a series of governance "levers," I suggest, that can be adjusted and calibrated in various ways to pursue a broad range of governance-related goals.
Monday, February 22, 2016
Free Web Seminar: The Opportunities and Pitfalls of Cybersecurity and Data Privacy in Mergers and Acquisitions
One of my two former firms, King & Spalding, is hosting a free interactive web seminar on cybersecurity and M&A on February 25 at 12:30 p.m. Thought the web seminar might be of interest to some of our readers. The description is reproduced below.
An Interactive Web Seminar
The Opportunities and Pitfalls of Cybersecurity and Data Privacy in Mergers and Acquisitions
February 25, 2016
12:30 PM – 1:30 PM
Over the last several years, company after company has been rocked by cybersecurity incidents. Moreover, obligations relating to cybersecurity and data privacy are rapidly evolving, imposing on corporations a complex and challenging legal and regulatory environment. Cybersecurity and data privacy deficiencies, therefore, might pose potentially significant business, legal, and regulatory risks to an acquiring company. For this reason, cybersecurity and data privacy are becoming integral pre-transaction due diligence items.
This e-Learn will analyze the (1) special cybersecurity and data privacy dangers that come with corporate transactions; (2) strategies to mitigate those dangers; and (3) benefits of incorporating cybersecurity and data privacy into due diligence. The panel will zero in on these issues from the vantage point of practitioners in the deal trenches, and from the perspective of a former computer crime prosecutor and a former FBI agent who have dealt with a broad range of cyber risks to public and private corporations. This e-Learn is for managers and attorneys at all levels who are involved at any stage of the M&A process and at any stage of cyber literacy, from the beginner who is just starting to appreciate the complex nature of cyber risks to the expert who has addressed them for years. The discussion will leave you with a better understanding of this critical topic and concrete, practical suggestions to bring back to your M&A team.
Robert Leclerc, King & Spalding’s Corporate Practice Group and experienced deal counsel; Nick Oldham, King & Spalding, and Former Counsel for Cyber Investigations, DOJ's National Security Division; John Hauser, Ernst & Young, and former FBI Special Agent specializing in cyber investigations.
Wednesday, February 3, 2016
Laurence Fink, CEO of BlackRock, the largest asset manager in the U.S., wrote a letter to the CEO's of S&P 500 Companies urging reforms aimed at fostering long-term valuation creation and curbing a myopic focus on near-term profits. Fink has long been a public advocate of long-term valuation creation for the health of American companies and the wealth of society (for an example see this April 2015 letter on the "gambling nature" of the economy"). His message has been consistent: long term, long term, long term.
Citing to increased dividends and buyback programs as evidence of corrosive short-termism, Fink laid out a modest play for action. He asks every CEO to publish an annual strategic plan signed off on by the board. The CEO strategic plan should communicate the vision for the company and how such long-term growth can be achieved.
[P]erspective on the future, however, is what investors and all stakeholders truly need, including, for example, how the company is navigating the competitive landscape, how it is innovating, how it is adapting to technological disruption or geopolitical events, where it is investing and how it is developing its talent. As part of this effort, companies should work to develop financial metrics, suitable for each company and industry, that support a framework for long-term growth.
Fink wants companies to create these long-term vision statements as a routine part of governance and not just in the context of hedge-fund motivated proxy fights. The idea is that informing the investing public as to the long-term direction of the company and short-term obstacles frames the company message and dampens the "quarterly earnings hysteria". Also interesting to me as I approach a class on corporate social responsibility is Fink's encouragement of companies to pay more attention to social and environmental risks as increasingly difficult obstacles that must be addressed as part of a long term plan. Fink also called upon lawmakers to incentivize a long-term view by thinking beyond the next election cycle as would be needed to enact tax reform (specifically capital gains) and increased resources for infrastructure.
As readers of the blog know, I am in interested in the long-term/short-term debate and have written past posts about it. How controversial would such a CEO statement be? Venture capital/private equity funds investing in companies often require an annual CEO statement. If the language can be crafted to avoid liability for future statements, what are the downsides? Tipping off competitors and losing information advantages or first actor advantages? Letting lesser competitors free ride and adopt market leaders's plans a year or two later? Exposing the board of directors and officers to breached duty claims for failure to meet the objectives? (this last one seems very unlikely given the liability standards and exculpation provisions.)
The financial press and blogs are awash in stories on this. If you are interested in the related commentary, here are a few:
Friday, January 22, 2016
Two weeks ago I posted about whether small businesses, start ups, and entrepreneurs should consider corporate social responsibility as part of their business (outside of the benefit corporation context). Definitions of CSR vary but for the purpose of this post, I will adopt the US government’s description as:
entail[ing] conduct consistent with applicable laws and internationally recognised standards. Based on the idea that you can do well while doing no harm … a broad concept that focuses on two aspects of the business-society relationship: 1) the positive contribution businesses can make to economic, environmental, and social progress with a view to achieving sustainable development, and 2) avoiding adverse impacts and addressing them when they do occur.
During my presentation at USASBE, I admitted my cynical thoughts about some aspects of CSR, discussed the halo effect, and pointed out some statistics from various sources about consumer attitudes. For example:
- Over 66% of people say they will pay more for products from a company with “good values”
- 66% of survey respondents indicated that their perception of company’s CEO affected their perception of the company
- 90% of US consumers would switch brands to one associated with a cause, assuming comparable price and quality
- 26% want more eco-friendly products
- 10% purchased eco-friendly products
- 45% are influenced by commitment to the environment
- 43% are influenced by commitment to social values and community
- Those with incomes of 20k or less are 5% more willing to pay more than those with incomes of $50k or more
- Consumers in developed markets are less willing to pay more for sustainable products than those in Latin America, Asia, the Middle East, and Africa. The study’s author opined that those underdeveloped markets see the effects of poor labor and environmental practices first hand
- 75% of millennial respondents, 72% of generation Z (age 20 and younger) and 51% of Baby Boomers are willing to pay more for sustainable products
- More than one out of every six dollars under professional management in the United States—$6.57 trillion or more—is invested according to socially-responsible investment strategies.
- 64% of large companies increased corporate giving from between 2010 and 2013.
- Among large companies giving at least 10% more since 2010, median revenues increased by 11% while revenues fell 3% for all other companies
From marketing and recruiting perspectives, these are compelling statistics. But from a bottom line perspective, does a company with lean margins have the luxury to implement sustainable business practices? Next week I will post about CSR in larger companies and the role that small suppliers play in global value chains. This leaves some small businesses without a choice but to consider changing their practices. In addition, in some ways, using some CSR concepts factors into enterprise risk management, which companies of all size need to consider.
January 22, 2016 in Business Associations, Corporate Governance, Corporations, CSR, Current Affairs, Entrepreneurship, Ethics, Management, Marcia Narine Weldon, Nonprofits, Research/Scholarhip, Social Enterprise | Permalink | Comments (1)
Friday, December 25, 2015
I was a little rough on BigLaw last week, so I want to sing BigLaw’s praises this week. Granted, this post is scheduled for Christmas, so it may be even more lightly read than my previous post.
Students often ask me about BigLaw, and I tell them that if I had to do it over again, I would still start my career in BigLaw. Under the break, I explain why that is true.
Friday, December 18, 2015
My co-blogger Marcia Narine shared an article on social media this week entitled Lawyers have lowest health and wellbeing of all professionals, study finds. Sadly, this is not new news.
Those results, I am afraid, would be even worse if only members of the nation’s largest law firms (a/k/a “BigLaw”) were surveyed. Deborah Rhode (Stanford) talks about some of the problems in BigLaw, described in her book the Trouble with Lawyers.
Let’s assume, for the sake of this post, that the executive committee of a large law firm wants to improve employee welfare. What could the committee realistically do to improve employee wellbeing? Part of the low score for lawyers, I imagine, is just the nature of BigLaw, but under the break I make a few suggestions for consideration.