August 21, 2014
Outsourcing the Board: A Good Idea?
Posted by Sung Hui Kim

This week’s Economist has a column praising my UCLAW colleague Stephen Bainbridge’s and University of Chicago law professor Todd Henderson’s creative proposal, published in the Stanford Law Review, to replace individual directors with professional-services firms acting as Board Service Providers (BSPs).  (That article can be accessed here.)  The column nicely summarizes the possible impact of such a change:

“Messrs Bainbridge and Henderson argue that this would require only a simple legal change but could revolutionise the stick-in-the-mud world of boards. It would replace today’s nod-and-a-wink arrangements with a market in which rival BSPs compete. It would create a new category of professional director. And it would allow BSPs to exploit economies of scale to recruit the best board members, introduce more rigorous training programmes and develop the best proprietary knowledge. Now, even the most diligent board member can only draw on his or her experience. BSPs would be able to draw on the expertise of hundreds. This would increase the chances that corporate incompetence will be corrected, corporate malfeasance found out and corporate self-dealing, in the form of inflated pay, countermanded.”

The BSP idea is very creative. (Frankly, I am always puzzled by the extent to which academics have trouble appreciating creativity. Perhaps—and I’m speculating here—traits such as creativity are weakly correlated with succeeding in the academic tournament—getting high LSAT scores, writing good law school exams, getting judicial clerkships, and placing law review articles?)  I also agree that introducing market competition by enabling firms to compete on performance will likely benefit consumers and shareholders, as well as increase the leverage of the board vis-à-vis executive officers.

That said, I worry about uncontrolled expenditures as BSPs find yet another reason to bill the corporation another $250,000 for yet another “critical project.” My prior experience as general counsel of a corporation (plus my six years of practicing law in a law firm) make me skeptical of the incentives of partners within firms (“Bill, bill, bill!”). I worry about the ratio of the value of services to cost. While we may see a decrease in executive compensation as a result of increased board leverage, are we going to see an increase in the effective compensation (i.e., including billings) of the board? My guess is yes.

I also worry about the audit/gatekeeping function of the Board.  After all, we have plenty of experience with auditors being firms, rather than individuals. And the record there doesn’t look so hot. Remember Enron and Arthur Andersen? And remember Ted Eisenberg’s and Jonathan Macey’s empirical study suggesting that Andersen was not an outlier but typical?  While gatekeeping theory provides that market gatekeepers, such as investment banks and accounting firms, are incentivized to work hard to prevent malfeasance out of fear that their longstanding reputations will be damaged, the reality is that the reputational informational markets are noisy and manipulable. Moreover, the incentives of the firm’s agent – the functional gatekeeper – may diverge from the incentives of the firm.  In other words, large firms may suffer from principal-agent problems, as has often been alleged with David Duncan, the lead audit partner responsible for the Enron account at Andersen. (In prior work, I wrote about the incentives of firms vs. individuals for the audit/gatekeeping function.)

But I suppose Henderson and Bainbridge would respond that still, those reputation markets would work better with firms competing with one another than the status quo—little to no competition with respect to individual directors (for various reasons).

Perhaps there’s room for compromise. If you’ve been following the accounting profession, you know that the PCAOB (the body that regulates the accounting of public companies) in an effort to improve the transparency of audits has proposed to require the disclosure of the name of the engagement partner for the most recent period’s audit. Also, it has been suggested that the engagement partner individually sign the audit report. It should not be surprising that accounting firms uniformly dislike these suggestions. This indicates that they are probably good ideas. Perhaps, then, as a means of dealing with the principal-agent problem within BSPs themselves and to ensure that the incentives of the firm’s agents (the persons who actually sit in board meetings) are more properly aligned, similar measures should be taken.  

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August 19, 2014
In Praise of Maritza Munich
Posted by Sung Hui Kim

The blogosphere is filled with chatter about the recent decision Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, Del. Supr., No. 614, 2013 (July 23, 2014), in which the Delaware Supreme Court en banc explicitly endorsed the Garner exception to the attorney-client privilege in a Section 220 books-and-records proceeding. But there been less attention showered on Maritza Munich, the general counsel of Walmart International, who resigned. As the court opinion tells us, Munich tried to stop the bribery scandal that was unfolding at the world’s largest retailer. As summed up nicely by Michael Scher of the FCPA Blog (HT to Stephen Bainbridge):

“As head of international compliance, Munich insisted on an investigation of a ‘campaign of bribery’ in Mexico and the top manager who led it. According to ongoing media reports, the top executives of Wal-Mart blocked the investigation. She then ‘resigned,’ while other executives were promoted.

Munich’s career at Wal-Mart was stolen from her. Instead of incentive pay, a bonus, and a stellar career, she lost out on the recognition, respect and financial security she deserved for doing a [compliance officer’s] job when it mattered most.”

I think it is important to circulate stories of lawyers who take ethical stands against those who hold power over them. Although martyrs and whistleblowers are common subjects of films and books, as I’ve argued in prior work and based on a plethora of research in sociology departments and management schools, such acts of courage and integrity are rare. But they do happen and, when we encounter such an instance, we should take a moment and celebrate that person's courage.

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August 09, 2014
Disruptive Legal Technologies: Benefit Corporations and the Crowdfunding of Firms
Posted by Eric Orts

Two recent developments in the law and practice of business include:  (1) the advent of benefit corporations (and kindred organizational forms) and (2) the application of crowdfunding practices to capital-raising for start-ups.  My thesis here is that these two innovations will become disruptive legal technologies.  In other words, benefit corporations and capital crowdfunding will change the landscape of business organization substantially.

A disruptive technology is one that changes the foundational context of business.  Think of the internet and the rise of Amazon, Google, etc.   Or consider the invention of laptops and the rise of Microsoft and the fall of the old IBM.  Automobiles displace horses, and telephones make the telegraph obsolete.  The Harvard economist Joseph Schumpeter coined a phrase for the phenomenon:  “creative destruction.”

Technologies can be further divided into two types:  physical technologies (e.g., new scientific inventions or mechanical innovations) and social technologies (such as law and accounting).   See Business Persons, p. 1 (citing Richard R. Nelson, Technology, Institutions, and Economic Growth (2005), pp. 153–65, 195–209).  The legal innovations of benefit corporations and capital crowdfunding count as major changes in social technologies.  (Perhaps the biggest legal technological invention remains the corporation itself.)

1.  Benefit corporations began as a nonprofit idea, hatched in my hometown of Philadelphia (actually Berwyn, Pennsylvania, but I’ll claim it as close enough).  A nonprofit organization called B Lab began to offer an independent brand to business firms (somewhat confusingly not limited to corporations) that agree to adopt a “social purpose” as well as the usual self-seeking goal of profit-making.  In addition, a “Certified B Corporation” must meet a transparency requirement of regular reporting on its “social” as well as financial progress.  Other similar efforts include the advent of “low-profit” limited liability companies or L3Cs, which attempt to combine nonprofit/social and profit objectives.  In my theory of business, I label these kind of firms “hybrid social enterprises.”  Business Persons, pp. 206-15.

A significant change occurred in the last few years with the passage of legislation that gave teeth to the benefit corporation idea.  Previously, the nonprofit label for a B Corp required a firm to declare adherence to a corporate constituency statute or to adopt a similar constituency by-law or other governing provision which signaled that a firm’s sense of its business objective extended beyond shareholders or other equity-owners alone.  (One of my first academic articles addressed the topic at an earlier stage.  See “Beyond Shareholders:  Interpreting Corporate Constituency Statutes.”  I also gave a recent video interview on the topic here.)  Beginning in 2010, a number of U.S. states passed formal statutes authorizing benefit corporations.  One recent count finds that twenty-seven states have now passed similar statutes.  California has allowed for an option of all corporations to “opt in” to a “flexible purpose corporation” statute which combines features of benefit corporations and constituency statutes.  Most notably, Delaware – the center of gravity of U.S. incorporations – adopted a benefit corporation statute in the summer of 2013. According to Alicia Plerhoples, fifty-five corporations opted in to the Delaware benefit corporation form within six months.  Better known companies that have chosen to operate as benefit corporations include Method Products in Delaware and Patagonia in California.

2. Crowdfunding firms.  Crowdfunding along the lines of Kickstarter and Indiegogo campaigns for the creation of new products have become commonplace.  And the amounts of capital raised have sometimes been eye-popping.  An article in Forbes relates the recent case of a robotics company raising $1.4 million in three weeks for a new project.  Nonprofit funding for the microfinance of small business ventures in developing countries seems also to be successful.  Kiva is probably the best known example.  (Disclosure:  my family has been an investor in various Kiva projects, and I’ve been surprised and encouraged by the fact that no loans have so far defaulted!)

However, a truly disruptive change in the capital funding of enterprises – perhaps including hybrid social enterprises – may be signaled by the Jumpstart Our Business Start-ups (JOBS) Act passed in 2012. Although it is limited at the moment in terms of the range of investors that may be tapped for crowdfunding (including a $1 million capital limit and sophisticated/wealthy investors requirement), a successful initial run may result in amendments that may begin to change the face of capital fundraising for firms.  Judging from some recent books at least, crowdfunding for new ventures seems to have arrived.  See Kevin Lawton and Dan Marom’s The Crowdfunding Revolution (2012) and Gary Spirer’s Crowdfunding:  The Next Big Thing (2013).

What if easier capital crowdfunding combined with benefit corporation structures?  Is it possible to imagine the construction of new securities markets that would raise capital for benefit corporations -- outside of traditional Wall Street markets where the norm of “shareholder value maximization” rules?  There are some reasons for doubt:  securities regulations change slowly (with the financial status quo more than willing to lobby against disruptive changes) and hopes for “do-good” business models may run into trouble if consumer markets don’t support them strongly.  But it’s at least possible to imagine a different world of business emerging with the energy and commitment of a generation of entrepreneurs who might care about more in their lives than making themselves rich.  Benefit corporations fueled by capital crowdfunding might lead a revolution:  or, less provocatively, may at least challenge traditional business models that for too long have assumed a narrow economic model of profit-maximizing self-interest.  James Surowiecki, in his recent column in The New Yorker, captures a more modest possibility:  “The rise of B corps is a reminder that the idea that corporations should be only lean, mean, profit-maximizing machines isn’t dictated by the inherent nature of capitalism, let alone by human nature.  As individuals, we try to make our work not just profitable but also meaningful. It may be time for more companies to do the same.”

So a combination of hybrid social enterprises and capital crowdfunding doesn’t need to displace all of the traditional modes of doing business to change the world.  If a significant number of entrepreneurs, employees, investors, and customers lock-in to these new social technologies, then they will indeed become “disruptive.”

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August 07, 2014
New Directions in Corporate Disclosure: Politics, Environment, and Religion
Posted by Eric Orts

Corporate disclosure, especially in securities regulation, has been a standard regulatory strategy since the New Deal. Brandeisian “sunlight” has been endorsed widely as a cure for nefarious inside dealings. An impressive apparatus of regulatory disclosure has emerged, including annual and quarterly reports enshrined in Forms 10K and 10Q. Other less comprehensive disclosures are also required: for initial public offerings and various debt issuances, as well as for unexpected events that require an update of available information in the market (Form 8K).

For the most part, corporate disclosure has focused on financial information: for the good and sufficient reason that it is designed to protect investors – especially investors who are relatively small players in large public trading markets. Some doubts have been raised about the effectiveness of this kind of disclosure and, indeed, the effectiveness of mandatory disclosure in general. A recent book by Omri Ben-Shahar and Carl Scheider, More Than You Wanted to Know: The Failure of Mandated Disclosure, advances a wide-ranging attack on all mandatory disclosure. (I think that their attack goes too far: I’ll be coming out with a short review of the book for Penn Law’s RegBlog called “Defending Disclosure”).   Assuming, though, that much financial disclosure makes sense, what about expanding it to include other activities of business firms?

Consider three types of nonfinancial information that might usefully be disclosed: information about a business firm’s activities with respect to politics, the natural environment, and religion.

1. Politics. One good candidate for enhanced corporate disclosure concerns business activities in politics. Lobbying laws require various disclosures, and various campaign finance laws do too. It is possible to obscure actual political spending through the complexity of corporate organization. (For a nice graphic of the Koch brothers’ labyrinth assembled by the Center for Responsive Politics, see here.) Good reporters can ferret out this information – but they need to get access to it in the first place. My colleague Bill Laufer has been an academic leader in an effort to encourage public corporations to disclose political spending voluntarily, with Wharton’s Zicklin Center for Business Ethics Research teaming up with the nonpartisan Center for Political Accountability to rank companies with respect to their transparency about corporate political spending. The rankings have been done for three years now, and there are indications of increased business participation.  Recently, even this voluntary effort has been attacked by business groups such as the U.S. Chamber of Commerce for being “anti-business.” See letter from U.S. Chamber of Commerce quoted here.  Jonathan Macey of Yale Law School has also objected to the rankings in an article in the Wall Street Journal, arguing that the purpose of political disclosure is somehow part of “a continuing war against corporate America.” These objections, however, seem overblown and misplaced. What is so wrong about asking for disclosure about the political spending of business firms? One can Google individuals to see their record of supporting Presidential and Congressional candidates via the Federal Election Commission’s website, yet large businesses should be exempt? Political spending by corporations and other business should be disclosed in virtue of democratic ideals of transparency in the political process. Media, non-profit groups, political parties, and other citizens may then use the resulting information in political debates and election campaigns. Also, it seems reasonable for shareholders to expect to have access to this kind of information.

In Business Persons, I’ve gone further to argue (in chapter 7) that both majority and dissenting opinions in Citizens United appear to support mandatory disclosure as a good compromise strategy for regulation. One can still debate the merits of closer control of corporate spending in politics (and I believe that though business corporations indeed have “rights” to political speech these rights do not necessarily extend to unlimited spending directed toward political campaigns). It seems to me hard to dispute that principles of political democracy – and the transparency of the process – support a law of mandatory disclosure of corporate spending in politics.

2. Natural environment. Increasingly, many large companies are also issuing voluntary reports regarding their environmental performance (and often adding in other “social impact” elements). Annual reports issued under the International Standards Organization (the ISO 14000 series), the Global Reporting Initiative, and the Carbon Disclosure Project are examples. The Environmental Protection Agency (EPA) has also established a mandatory program for greenhouse gas emissions reporting, which is tailored to different industrial sectors. One can argue about whether these kinds of disclosures are sufficiently useful to justify their expense, but my own view is that they help to encourage business firms to take environmental concerns seriously. Many firms use this reporting to enhance their internal efficiency (often leading to financial bottom-line gains). As important, however, is the engagement of firms to consider environmental issues – and encouraging them to act as “part of the solution” rather than simply as a generating part of the problem.

One caveat that is relevant to all nonfinancial disclosure regimes:   The scope of firms required to disclose should be considered.  I do not believe that the case is convincing that only public reporting companies under the securities laws should be included.  (For one influential argument to the contrary, see Cynthia A. Williams, “The Securities and Exchange Commission and Corporate Social Transparency,”  112 Harvard Law Review 1197 (1999)).  Instead, it makes to sense for different agencies appropriate to the particular issue at hand to regulate:  the Federal Election Commission for political disclosures and the EPA for environmental disclosures.

3. Religion? In the wake of the Hobby Lobby case, some have called for greater disclosure about a firm’s values on this score both with respect to employment and investors. See, e.g., Joan Heminway’s piece here. Stephen Bainbridge has also called attention to this question here.  Probably it makes sense to consider disclosure as a partial solution, though the idea of mandatory government disclosure of religious characteristics makes me nervous on “separation of church and state” grounds. It might be better to “wait” (as Frank Partnoy advises us often to do in his recent book) and see how the Hobby Lobby line of cases develops. My guess is that some tensions will become apparent that may result in keeping Hobby Lobby limited to the context of close and usually small corporations (though Hobby Lobby itself is an exception, having more than 10,000 employees).
 
But a rule of disclosure might not be the best approach with respect to religion and firms. Better in this context perhaps to bite the bullet and ascertain when for various legal purposes a business firm “crosses the line” from a private organization (with rights of self-organization and self-determination with respect to many internal business practices) to a public-facing organization (with duties to treat public customers, employees, and business partners in a non-discriminatory manner). These issues are not easy. As I suggest in Business Persons (chapter 3), a central problem in business theory concerns “the public/private distinction” which I conceive as involving “two faces of the business enterprise.” Here, the religious preferences of private owners require balancing with the public role undertaken when holding out one’s shingle in public markets. Drawing legal lines isn’t always easy, but often it’s necessary.  And disclosures alone will not always be sufficient.

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August 05, 2014
The Legal and Social Ontology of the Firm
Posted by Eric Orts

Thanks to Gordon Smith and my Wharton colleague David Zaring for inviting me as a guest blogger on The Conglomerate.  I am a new entrant in the blogosphere here, and I appreciate this invitation very much.

What follows is a written version of remarks that I presented at the Society for Business Ethics in Philadelphia on August 3 at a panel on “Corporate Personhood – For or Against or Whether It Even Matters?” organized by Kendy Hess of Holy Cross.  (Thanks, Kendy!)  The panel also included excellent presentations on the topic by two of my Wharton colleagues, Gwen Gordon and Amy Sepinwall, as well as Kendy.  A longer version will be presented in a conference in London in September, and a written version will also be included in a book that I'm co-editing with Craig Smith called The Moral Responsibility of Firms (forthcoming in Oxford University Press).  It will also inform chapter 1 of a book that is underway (and still forthcoming) currently called Rethinking the Firm: An Interdisciplinary Interpretation (also under contract with OUP). 

In these posts, I've been kindly invited to revisit some themes of my new book on Business Persons:  A Legal Theory of the Firm.  So I hope that I'll generate some interest in the book:  or perhaps make some of the ideas there more accessible in "blog-sized" pieces.  The following contribution is a first entry.

***

Let me be provocative first and say affirmatively: Corporations are legal persons and it matters. The thesis is qualified, however, by the fact that to say that corporations are persons is a conclusion that only then begins arguments about what it actually means in practice with respect to particular issues.  The fact that corporations are “persons” means only that we provide them – through law – with certain capacities and powers, and certain rights and obligations.  It remains to be decided what the nature and limits of these capacities and powers, and rights and obligations, may and will be.

Three main arguments support my claim.

1. Firms exist.  Some economists (and lawyers following them) have argued that firms do not really exist.  They are mere fictions, they say, and any serious epistemological analysis must look past the “legal fiction” of the firm – or the “corporation” in the form we are discussing here – to the actual human beings who are involved.  Although this methodological reduction may be useful for some kinds of analysis (economic modeling, etc.), it is wrong from a realistic legal and social perspective.  Firms exist because the law has evolved to say that they exist.  They are constructions of human relationships that are socially sanctioned and legally recognized.  They are “fictions” in the sense that they are created through the artificial mechanisms of law and government.  They are also “real” because people acting under law and in society believe in them and make them real.  Firms are therefore what I’ve called “real fictions”:  both nominalism and realism are right, but only when they are combined together into a nominalist realism.  See Business Persons, ch. 1.  Philosophers such as Margaret Gilbert, John Searle, and Philip Pettit support this view.  People acting in social groups form collective realities, which are reinforced and articulated by organizational law.  Business firms – including for-profit corporations – are in this sense social constructions.  Corporations are like money and nation-states.  Exxon-Mobil and Patagonia are as real as China and the United States.  They exist because we believe in them.  We act as if they exist – and so as social constructions they exist.  They have power and authority.

2. Firms are persons.  The method of legal recognition is to bestow “personality”:  The law recognizes an individual human being as a “person” who has “standing” to bring or defend a claim in court.  A person has rights: personal rights against mistreatment and rights against violations of one’s dignity and physical integrity.  The law matters here.  Consider the situation of a slave (historically not so very long ago in the United States) or an illegal immigrant (such as children from other countries crossing the southern border of the United States today).  The law does not recognize them fully as “persons” – or at least not to the same level of available rights and obligations as “citizens.”  Even children of citizens do not have a complete set of rights:  they cannot drive cars or enter contracts legally until reaching an age allowing legal capacity.  The law makes other distinctions:  “person” is a legally denominated concept.  It is extended (or not) for various reasons of philosophy and social policy.  Is a fetus a “person”?  What rights does a “terrorist” have?  Even: is a dog, such as my dog Butterbean, a legal person for certain purposes?  I cannot, for example, torture him for fun (assuming that I’m that kind of person, which I’m not).  In this sense, then, a dog too is a person:  he has some minimal rights recognized under law (though he'll need someone else to speak for him).

An analogous argument applies to firms.  They are “persons” because the law recognizes them as such and as having certain rights and obligations:  standing in court, holding of property, a party to contracts, an organizational principal, a target for tort liability, and a potential plaintiff to insist on its “rights,” whatever they may be.  The exact nature of these various rights of firms remains to be decided:  The controversial recent cases of Citizens United and Hobby Lobby extend claims of political and religious freedom to include corporations as persons.  Are these cases correctly decided?  The answer does not, I believe, turn on whether they are considered “persons” or not.  Firms are uncontroversially legal persons for many purposes.  The question is whether or not we should extend certain kind of rights to firms as “persons” derivatively – representing the people who act collectively through them.  Note that the answer can be qualified.  We may say: “Yes, corporations hold property and should have standing to object on constitutional grounds if a government attempts to expropriate the property without compensation.”  But we may also say: “No, corporations usually represent diverse groups of people regarding religion, so in these cases it is not correct to say that corporations should have religious rights" (contrary, of course, to the holding of Hobby Lobby).  I make this latter argument in a previous blog for The Conglomerate on Hobby Lobby here.

3. Legal personality matters, but it is not dispositive. Firms exist, firms have legal personality, and it matters.  The fact that a corporation is a person does not settle the argument for or against an assertion of rights or obligations.  This is a mistake in argumentation, in my view, that opinions on both sides of the divided Justices of the Citizens United and Hobby Lobby cases make.  In these kinds of cases, the Court should ask – as legislatures and citizens should as well – what is the purpose of a firm and of a corporation given the question that we're asking?  Arguably, as Justice Alito argues in Hobby Lobby, business firms are not just profit maximizers (as some students are taught in some business school classes).  They are moral creatures because the people who compose them are moral creatures (or, at least they have the potential to be moral -- nobody's perfect!)  But we then have to dig deeper and ask “who” is involved in the firm.  Why are we asking the question: “persons” for what purposes?  Perhaps firms should have political rights, but perhaps also they should be constrained in this respect for good reasons of political theory and modern democracy.  Perhaps some kinds of firms should have religious rights, but the scope of these potential rights should be constrained.  Rights of employees may be equal to those of owners and managers in this context.  There are other limits in principle that need to be drawn here too:  but my main point here is that doing so assumes that “legal personality” matters.  It is then a question of filling in the institutional portrait:  who is this person?  What kind of person?  And how does the nature of this person relate to the considerations in play on a specific issue?

4. Conclusion.  My argument is designed mostly to set up rather than to answer the hard questions, so I hope that my position will not be too controversial.  Here again are my main propositions.

a.  Firms exist. For our purposes here, corporations are a kind of firm.  (The difference between for-profit and profit corporations raises another set of issues.)

b.  Firms, including corporations, have legal personality.  The question is not whether firms are persons, but what the fact that they are persons means with respect to particular further questions regarding the rights or obligations that we should extend to them as persons.

c.  Legal personality matters, but is not dispositive.  To argue about whether firms are persons or not persons does not advance the ball very much.  The popular debate conflates the meanings of "persons" and "people."  Firms are persons; begin there.  And then engage the substantive policy issues as hand.  Move the discussion forward, while recognizing the truth of the “real fictions” of firms as legal persons.

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May 13, 2014
Utah Benefit Corporation Act
Posted by Gordon Smith

Some of my non-lawyer friends assume that, as a law professor, I am well versed on the interstices of every law that might apply to their lives, so I had a good chuckle this morning when I read that 352 new laws took effect in Utah today. Wow. The legislature was busy this last term.

The law that is getting the most publicity: the prohibition on dialing or texting while driving.

The law that will have the most immediate effect on my life: increasing the speed limits on rural highways.

The law that most scares me: allowing people to hunt without first completing a hunter-education course.

The law that I assumed was already in place: the "revenge porn" law, which prohibits distribution of "intimate images" without consent and with intent to cause emotional distress or harm.

A new law that is getting a lot less attention (but see here) is the adoption of the Benefit Corporation Act. I am still a skeptic, but over half of states now have or will soon have a statute in place. Do we teach these in Business Organizations? It's probably time to add them ... as if we don't have enough to do in that course.

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May 07, 2014
Governing the Fragmented Firm: The Challenge of Identifying and Transmitting Incentives in a Global Value Chain
Posted by Kish Vinayagamoorthy

Many thanks to David for inviting me to visit.  As he mentioned, I just completed my first year at Washington and Lee University School of Law, where I taught International Business Transactions and Corporate Social Responsibility. One theme I explored in these courses concerned the challenge of governing the “fragmented firm” that has outsourced and offshored many of its functions to other actors in a global value chain (“GVC”).  My students and I were particularly engaged with the question of how to ensure compliance with human rights standards in a GVC that involves a variety of different firms operating in a variety of different countries.

California addressed this problem with the California Transparency in Supply Chains Act of 2010 that requires that covered firms disclose their efforts to ensure that their supply chains are free from slavery and human trafficking.  However, the Act’s effects are limited because of the problem of misaligned incentives in the GVC.  A GVC involves both buyers and suppliers and the Act's incentives are designed for the buying end.  As I explain in my forthcoming article, effective governance of the GVC requires an incentive structure that is appropriate for the diversity of actors who operate in the "fragmented firm."

Under the California Act,  a covered firm must disclose to what extent it does the following:

  •  “Engages in verification of product supply chains to evaluate and address risks of human trafficking and slavery.”
  • “Conducts audits of suppliers to evaluate supplier compliance with company standards for trafficking and slavery in supply chains.”
  • “Requires direct suppliers to certify that materials incorporated into the product comply with the laws regarding slavery and human trafficking of the country or countries in which they are doing business.”
  • “Maintains internal accountability standards and procedures for employees or contractors failing to meet company standards regarding slavery and trafficking.”
  • “Provides company employees and management, who have direct responsibility for supply chain management, training on human trafficking and slavery, particularly with respect to mitigating risks within the supply chains of products.”

Here are links to examples of disclosures produced in compliance with the Act: Patagonia, Nestle

The problem is that the California Act offers incentives that are more appropriate for the model of a single, integrated firm rather than the present reality of a diversity of actors operating in a global value chain.  It risks privileging the interests of the buying end of this value chain (e.g. brand name firm) to the neglect of the other actors in the chain, such as suppliers.  This is a problem because suppliers often undermine the objectives of the California Act and similar initiatives when supplier incentives are ignored.  For example, one way to improve transparency in the supply chain is to perform audits of the supplier facilities in order to evaluate compliance with human rights standards.  However, suppliers counteract the threat of on-site inspections by orchestrating the process to provide a false image of compliance.  These are among the reasons that increased monitoring and auditing will not lead to the desired results.

Suppliers engage in such audit evasion because of the subordination of their interests in the incentive structures of international, national, and private initiatives aimed at improving human rights in global business.  In these various approaches, there is an underlying assumption of harmony of interests among the variety of actors who operate in the modern global value chain.  However, the different firms that operate in the global value chain have varying – even conflicting – interests and vary in location, size, capacity, and functional specialties.  It is these interests and differences that determine the receptivity or resistance of suppliers to improving human rights standards.  Disproportionate attention to multinational brand name buyers fosters conclusions that media exposure, consumer boycotts and other forms of reputational risks can secure better practices in global value chains.  However, suppliers (such as local factory owners and managers in overseas facilities) are motivated by other sets of factors.  The incentives that would win their cooperation for improving standards vary from those of their multinational customers.  Moreover, they are the parties who are “on the ground” and can determine the degree of implementation of improved practices.  

As explained in my forthcoming article, Outsourcing Corporate Accountability, the real challenge is to formulate an incentive structure that speaks to all actors in the value chain.  This task requires a “decentralized approach” to governance: (a) a decentralized view of the firm that acknowledges the variety of actors in the global value chain, and (b) decentralized form of multi-stakeholder coordination that is capable of transmitting these incentives in a global value chain.   

     Of course, the fragmented firm raises a variety of other challenges for transnational governance, and I will discuss some of these other problems in the next couple of weeks.

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March 18, 2014
When Corruption and Social Enterprise Collide
Posted by Joseph Yockey

In addition to social enterprise, I’m also interested in how foreign corruption affects corporate governance and compliance. One of my current projects involves looking at where these areas intersect.

I was drawn to this topic because the developing world is often where social enterprises can do the most good, but, sadly, the developing world is also where corruption tends to be the most prevalent. Can a social enterprise do business in a country where nearly every public official demands bribes? Most traditional corporations will probably answer that question in the affirmative. A transnational oil and gas firm, for example, ought to have the resources to resist or at least mitigate the compliance challenges presented by corruption. Moreover, some traditional firms will likely approach corruption from a strictly economic perspective. The U.S. Foreign Corrupt Practices Act (FCPA) prohibits firms from paying bribes to foreign officials for the purpose of getting business. Firms that violate the statute face stiff monetary and reputational sanctions. But if the risk of detection is low and the potential gains from a corrupt transaction are high, managers could be tempted to go ahead and make a payoff to improve the financial bottom line. 

The issue arguably becomes more complex in the case of a social enterprise. Social enterprises seek first and foremost to create a public benefit. Their managers must balance the mission and profit goals of socially oriented investors, employees, and other stakeholders. Accordingly, the question of whether to bribe is not simply a matter of weighing detection probabilities and potential gains. Managers will also need to anticipate, assess, and work through the ancillary effects of corruption—including market distortion, erosion of the rule of law, and negative effects on employee morale—when making decisions.

Perhaps some social-enterprise managers will elect to pay bribes on the theory that they will be serving the greater good by getting their products to those in need. They might conclude that the harms and enforcement risks from bribery are worth the benefit of providing people with, say, healthier sanitation options or cheaper energy. Others, though, will surely resist bribery altogether on moral or social welfare grounds. For these managers, the question becomes whether they can remain in markets with endemic corruption. This is a tough situation. If social enterprises decide to withdraw or otherwise limit their activities in certain markets, the obvious downside is their inability to positively affect citizens in distress. Whether other actors will step in and fill the gaps they leave behind is an open question.

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March 16, 2014
It Turns Out Litigators Are Being Hired For Internal Investigations
Posted by David Zaring

This story about how GM is launching an internal investigation by hiring its defense lawyers to do the investigating isn't that new, but it does remind one that if you go through the revolving door, in addition to raising your salary, you're changing your practice from one involving courtrooms and complaints to one involving conference rooms and the occasional negotiation with a regulator.

In my view, one of the biggest changes in law firm practice over the past 25 years has been the growth of this sort of work at the largest of firms, which used to stay the heck away from criminal practice.  That in turn has been facilitated by the emergence of the internal investigation as something that regulators expect to see done, which means that the new work is actually profitable (those investigations involve a lot of billing, defending a criminal case generally does not).  And that in turn has made the revolving door revolve more quickly; it used to involve high-ranking political appointees only, now almost any long-serving, mid-level-at-least lawyer in an enforcement agency can prove useful for a law firm.

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March 12, 2014
Playing Fair
Posted by Joseph Yockey

I’m helplessly drawn to soccer and have been for nearly sixteen years. The sport has shown me countless moments of transcendent genius, like that goal by Arsenal’s Thierry Henry, and it continues to inform my thoughts on issues ranging from globalization to personal fashion.

One of the biggest stories in the footballing world this week comes out of the German Bundesliga, Germany’s top professional league. Sunday’s match between Werder Bremen and Nürnberg saw Bremen’s captain Aaron Hunt deny his team a penalty—and a near-certain goal—by admitting to the referee that he had not been fouled after seeming to “trip” over an opponent’s foot. Werder was leading at the time and eventually won the game 2-0. Afterwards, Hunt told the media that he had tried to provoke the penalty “out of instinct” but then thought that doing so “was wrong.”

Most are treating this as an example of good sportsmanship. My reaction is slightly different. I see Hunt’s conduct as a potential teaching tool for discussing social enterprise.

When I first started looking into social enterprise, it felt like the movement’s supporters saw it principally as a response to concerns about shareholder wealth maximization. Their worry was that an undue corporate emphasis on profit making was to blame for the financial crisis, climate change, and other problems. Social enterprise was seen as the antidote, since it captures firms that seek to go beyond profits in order to do “well” (financially) while doing “good” (socially).

I’m a fan of social enterprise, and I think social enterprise law can add real value. Yet I’d caution against placing it in direct opposition to traditional corporate behavior. Social enterprise is growing at a time when notions of shareholder prioritization continue to evolve. While it is true that courts generally hold that directors must act for the benefit of the “corporation,” what this means as a practical matter is open to debate. Some managers probably do see the singular pursuit of wealth as their obligation, but many others now see a strong relationship between a firm’s social footprint and its impact on shareholder value.

This brings me back to Mr. Hunt. I like to imagine that something similar to his phantom foul situation plays out in corporate decision-making. Even if traditional corporate managers often start with a view toward maximizing profits “out of instinct,” I’m not ready to concede that many won’t still pull back to consider the wider social effects of their decisions. The difference between corporate managers and professional footballers is that not every ethical quandary in the C-suite happens in front of a live worldwide audience. But that’s not to say that every manager needs or wants to check her ethical sensibilities at the door, or that existing corporate law is not already flexible enough to permit most social/economic tradeoffs.

Whatever the justifications are for supporting social enterprise—and I believe there are many—they should not include a wholesale rejection of the traditional corporate model. Generating meaningful social impact is always going to be less about form and more about management’s sense of purpose, virtue, and ideals. So where does that leave the role of social enterprise and social enterprise law? That’ll be the subject of my next few posts.

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August 01, 2013
Hiring Announcements At Business Schools - Kansas, Texas State, Richard Stockton
Posted by David Zaring

If you're interested, they are after the jump:

The Department of Finance and Economics in the McCoy College of Business Administration at Texas State University - San Marcos anticipates one tenure-track opening in Business Law effective Spring 2014 or Fall 2014.  Duties include teaching undergraduate and graduate business law courses, conducting research leading to peer-reviewed publications, and providing service to the students, department, profession and university.

 Initial review of applications will be completed by November 1, 2013, but may continue until filled. 

 Qualifications

Required: Candidates must have a J.D. from an ABA accredited school of law.  Significant experience in the practice of law is also required.

Preferred: Preference will be given to candidates with membership in a state bar association, previous excellence in teaching law at the university level, a history of scholarly research and publications, law review membership, experience as a law clerk at the appellate level, and/or an undergraduate degree in business and/or an MBA degree from an AACSB-accredited college or university.  

Application Procedures

To apply, send a letter of application addressed to Dr. Alexis Stokes, vita, Texas State Employment Application (available at: http://facultyrecords.provost.txstate.edu/faculty-employment/application.html), graduate transcript, three letters of recommendation, student evaluations of instruction, and evidence of research potential.  Application materials should be sent via email to B-LawFacSearch@txstate.edu.  To ensure full consideration, submit the above materials by November 1, 2013.

Members of the Search Committee will be available to meet with prospective applicants at the ALSB Conference in Boston in August.  If you are interested in meeting with the committee in Boston, please contact Alexis Stokes, Associate Professor of Business Law, at as44@txstate.edu no later than Tuesday, August 6th, to schedule an interview.

Texas State University - San Marcos is a doctoral-granting Emerging Research University located in the burgeoning Austin-San Antonio corridor, the largest campus in The Texas State University System, and among the largest in the state.  Texas State’s 34,000 students choose from 97 undergraduate and 87 master’s and 12 doctoral programs offered by ten colleges (Applied Arts, The Emmett and Miriam McCoy College of Business Administration, Education, Fine Arts and Communication, Health Professions, Honors, Liberal Arts, Science and Engineering, the Graduate College, and the University College).  With a diverse campus community including 37% of the student body from ethnic minorities, Texas State is one of the top 15 producers of Hispanic baccalaureate graduates in the nation.  There are approximately 1,100 full-time faculty and nearly 2,000 full-time staff.  Research and creative activities have led to growing success in attracting external support.  For FY 2011, Texas State had an annual operating budget of $436 million and research expenditures of more than $33 million.  The Alkek Library has more than 1.5 million titles in its collection.  Additional information about Texas State and its nationally recognized academic programs is available at http://www.txstate.edu.

Personnel Policies:

Faculty are eligible for life, disability, health, and dental insurance programs.  A variety of retirement plans are available depending on eligibility.  Participation in a retirement plan is mandatory.  The State contributes toward the health insurance programs and all retirement plans.  http://www.humanresources.txstate.edu/benefits.htm

Texas State University-San Marcos is a tobacco-free campus. Smoking and the use of any tobacco product will not be allowed anywhere on Texas State property or in university owned or leased vehicles.

The Community:

San Marcos, a city of about 45,000 residents, is situated in the beautiful Central Texas Hill Country, 30 miles south of Austin and 48 miles north of San Antonio.  Metropolitan attractions plus outdoor recreational opportunities makes the community an attractive place in which to live and work.  Other major metropolitan areas, including Houston and Dallas-Ft. Worth, are within four hours.  Round Rock, a city of 99,887 residents, is located 15 miles north of Austin in the Central Texas Hill Country. 

Some positions may require teaching on the main campus and at the Round Rock Higher Education Center.

Texas State University-San Marcos will not discriminate against any person in employment or exclude any person from participating in or receiving the benefits of any of its activities or programs on any basis prohibited by law, including race, color, age, national origin, religion, sex, disability, veterans’ status, or on the basis of sexual orientation.  Equal employment opportunities shall include: personnel transactions of recruitment, employment, training, upgrading, promotion, demotion, termination, and salary. Texas State is committed to increasing the diversity of its faculty and senior administrative positions. Texas State University-San Marcos is a member of The Texas State University System. Texas State University-San Marcos is an EOE.

 

University of Kansas School of Business seeks an Assistant Professor in Business Ethics and Organizational Behavior. This is a full time, unclassified, tenure-track position beginning mid-August 2014. 

Required: A Ph.D. or D.B.A. degree in business ethics, organizational behavior, or closely related field, demonstrated potential for conducting high quality research in business ethics and organizational behavior, and demonstrated potential for high quality teaching in business ethics and organizational behavior.   

Preferred: Preference will be given to candidates with established research records as demonstrated through publications in top-tier academic journals and presentations at national and international academic conferences.  Preference will also be given to candidates with flexibility in teaching and a desire to engage in interdisciplinary research with colleagues in areas both within and outside of business ethics and organizational behavior.  Finally, the University of Kansas is especially interested in hiring faculty members who can contribute to four key campus-wide strategic initiatives:  (1) Sustaining the Planet, Powering the World; (2) Promoting Well-Being, Finding Cures; (3) Building Communities, Expanding Opportunities; and (4) Harnessing Information, Multiplying Knowledge.  For more information, see:  http://www.provost.ku.edu/planning/themes/

Salary: Competitive.

Application procedures: To be considered, apply online and submit an application letter that addresses both the required and preferred qualifications listed above, curriculum vita, research statement, teaching statement, and three letters of recommendation to http://employment.ku.edu. Select “Search Faculty Jobs”, search with keyword “ethics”. 

Submit evidence of teaching effectiveness, research papers, supplemental materials and questions concerning this position to Management Search (E-Mail: Ethics_OBsearch@ku.edu; Ph: 785-864-5308; Mail: 1300 Sunnyside Avenue, Lawrence, Kansas  66045).

Applications received prior to September 1, 2013 will receive priority consideration.  Review of applications will continue until the position is filled.  EOE M/F/D/V

The University of Kansas prohibits discrimination on the basis of race, color, ethnicity, religion, sex, national origin, age, ancestry, disability, status as a veteran, sexual orientation, marital status, parental status, gender identity, gender expression and genetic information in the University's programs and activities. The following person has been designated to handle inquiries regarding the non-discrimination policies: Director of the Office of Institutional Opportunity and Access, IOA@ku.edu, 1246 W. Campus Road, Room 153A, Lawrence, KS, 66045, (785)864-6414, 711 TTY.

 

Public Law Business Studies --- Assistant/Associate Professor

The School of Business at Richard Stockton College of New Jersey invites applications for one full-time tenure track assistant or associate professor of business to teach public law and business ethics available September 1, 2014.  An earned J.D. or equivalent is required. Evidence of potential for teaching, research and service in the business law field are required.  Related legal or business work experience is a plus, as is exposure to or experience within the liberal arts. 

Stockton, located in the New Jersey Pinelands 12 miles from Atlantic City and one hour from Philadelphia is known for its distinctive academic programs and an interdisciplinary approach to learning. The position primarily involves teaching undergraduate and MBA courses in business law, the legal and ethical environment of business, and related courses. Candidates may also teach courses in other business disciplines, depending on academic credentials and professional experience.  All Stockton faculty members also are required to teach courses in the college’s interdisciplinary general studies program.

Other requirements include scholarship and providing college service.

Along with a track record of excellence in teaching, the Candidate will be expected to maintain a scholarly record that includes appropriate publications in law review or peer-reviewed legal or business journals. The School of Business is currently a candidate for AACSB accreditation.

Please send a letter describing your interest in the position as well as your curriculum vitae, recent teaching evaluations (if available), one paper that represents your research capabilities, and three letters of reference to Dr. Janet Wagner, Dean of Business, The Richard Stockton College of New Jersey, AA206, P.O. Box 195, Pomona, NJ 08240.  Electronic submissions to busn.school@stockton.edu are encouraged.

Screening of applications will continue until the position is filled. Stockton is an equal opportunity institution and is committed to building a culturally diverse faculty and staff.

 

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January 08, 2013
Business Ethics Teaching Conference
Posted by Gordon Smith
Cynthia Williams and I are organizing a a Business Ethics Teaching Conference at Aspen Grove, a BYU center in the mountains by Provo, Utah on February 21-22. As with our last teaching conference in 2010, this one will be participatory, with an interdisciplinary focus on business ethics and how issues of ethics and social responsibilities can be incorporated into the basic business course. While space is limited, we are looking for junior professors (including fellows or visiting assistant professors) who have a strong interest in business ethics and might want to attend. Please contact me as soon as possible.

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November 14, 2012
"Ethics Unwrapped"
Posted by Gordon Smith

If you teach business ethics, check out "Ethics Unwrapped," a series of free ethics teaching videos from the McCombs School of Business at The University of Texas at Austin. Well done!

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October 30, 2012
Sorkin's Right About The Facebook - Ceglia Mystery
Posted by David Zaring
It's hard to believe that DLA Piper, and, briefly, Kasowitz Benson, were willing to take up Paul Ceglia's claim that he owned as much as 84% of Facebook.  Especially now that he has been charged with fraud for it by the USAO for the SDNY.  Moreover, as Andrew Sorkin observed, their participation was crucial in establishing his credibility.  It is why it is a good thing that Sorkin is following up - law firms can be unaccountable for the misdeeds of their clients, and maybe that's often as it should be.  But not necessarily when the client's case basically requires the firm's imprimatur.

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September 25, 2012
Hiring Announcement - Wharton
Posted by David Zaring

My department is hiring at the junior and senior level, and, although we're casting the net broadly, is very interested in the subjects in which the readers of this blog are interested. So if you think you'd be interested, please do apply!  The announcement is below.  We want your application!

FACULTY POSITIONS IN BUSINESS LAW AND BUSINESS ETHICS

The Wharton School at the University of Pennsylvania invites applications for tenured and tenure-track positions in its Department of Legal Studies and Business Ethics.  The Department has seventeen full-time faculty who teach a wide variety of business-oriented courses in law and ethics in the undergraduate, MBA, and Ph.D. programs and whose research is regularly published in leading journals.  The Wharton School has one of the largest and best-published business school faculties in the world. 

Applicants should have either a J.D. or a Ph.D. from an accredited institution (an expected completion date no later than July 1, 2014 is acceptable) and a demonstrated commitment to scholarship in business law, business ethics, or a combination of the two fields.  Specific areas of potential focus for hiring include corporate governance, financial regulation, health law/bioethics, securities regulation, and social impact/sustainability.  In addition, the Wharton School has particular strengths in its global reach and perspective, as well as an interdisciplinary approach to business issues (embracing ten academic departments and over twenty research centers). 

Please submit electronically your letter of introduction, c.v., and one selected article or writing sample in PDF format via the following website by December 15, 2012: http://lgst.wharton.upenn.edu.  Decisions for interviews will be made on a rolling basis, so candidates are encouraged to apply early.

The University of Pennsylvania is an equal opportunity, affirmative action employer.  Women and minority candidates are strongly encouraged to apply.

 

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