If you know me, you probably know I've been working on a piece on nonprofits for a while. As in, since the first Law & Entrepreneurship Retreat, back in (can it be?) May 2007. Since then I went back to the drawing board, had a baby, wrote another article, and had another baby. I'm proud to say that Entity and Identity was accepted by Emory Law Journal, and today it's finally up on SSRN! Here's the abstract:
The function, indeed the very existence, of nonprofit corporations is under-theorized. Recent literature suggests that only preferential tax treatment adequately explains the persistence of the nonprofit form. This answer is incomplete. Drawing on psychology’s social identity theory, this Article posits that the nonprofit form can create a special “warm-glow” identity that cannot be replicated by the for-profit form. For example, a local nonprofit food cooperative is selling more than the free-range eggs or organic strawberries that Whole Foods and other for-profits market so effectively. The co-op offers community participation and an investment in local farms, a distinctive ethos that is incompatible with the profit motive. Ascribing a special meaning to the nonprofit form allows us to view afresh a variety of issues regarding the appropriate legal treatment of nonprofits.
It's been a long time coming. Comments are, of course, welcome. (They may not make it into the draft for another 2 years, but they're welcome.)
I've been working on a piece on nonprofits for quite some time now, but I keep postponing posting it on SSRN. The explanation for the delay is probably worthy of a post in and of itself, but for now, here's a teaser in Texas' See Also. It's my response to Brian Galle's recent article, Keeping Charity Charitable, now out in the Texas Law Review.
Viewed through the lens of editorial pages, Wednesday’s rule change was a watershed event. Shareholder activists have been calling for beefed up proxy access rules since at least the early 1990s. Critics have spent at least as much time (and probably more money) resisting the reform. It is therefore unremarkable that the SEC’s action was also highly politicized. Indeed, if it were itself a publicly traded company, the SEC’s stock price would not have changed much on the partisan, 3-2 party-line vote by the Commission. While such ideologically charged votes are historically rare, they have now become so commonplace at the SEC to border on the banal.
But beyond political remonstration, what does this actually mean for investors? That’s the exciting $60-trillion dollar question. My candid answer is a little less titillating: Given the stock of empirical knowledge we have today, I submit that the only responsible answer to this question is a cautious combination of “it depends,” or “we don’t fully know.” And that’s why I think – a bit ironically – that proxy access may have been the right move for the SEC to take.
The polar endpoints of the debate are well trodden terrain. One can very credibly argue (and many have) that proxy access portends a significant and unprecedented sea change in corporate governance -- for better or worse. After all, under the new rule dissident shareholders are no longer required to underwrite the administrative costs of proxy challenges personally, with only the speculative hope of being compensated should they win. Advocates contend that this enhanced credible threat of rival slates will effectuate greater accountability among board members, who have historically been able to use the governance process as a protective bunker, insulating them from any significant shareholder oversight and criticism. Critics contend that the new rule’s ownership thresholds are sufficiently low to invite commandeering opportunism by self-important shareholders whose interests diverge from the (putatively) most responsible goal of corporations: maximizing long term shareholder value. Moreover, some critics contend, the rule change may cause ordinary shareholders to be confused by a dizzying array of candidate choices, unable to discern sensible candidates from agenda-driven, tinfoil-hat-wearing zealots.
An equally plausible (though admittedly less scintillating) prediction is that the sound and fury attending Wednesday’s reform will ultimately prove to be mere fingerling potatoes in a stew combining the myriad forces at play in corporate governance. Shareholders tend, by and large, to defer to incumbent management unless they have good reason to jump ship (their confidence in management is what caused many of them to buy in the first place, after all). It is unlikely that such loyalists will become snowed or confused simply by having additional (but unproven) choices. In fact, public shareholders have long had to screen and evaluate qualifying proposals (including bylaw amendments) made by other shareholders, which under federal law must be included in proxy materials at company expense. Moreover, even prior to this rule change, dissident shareholders could wage a self-financed proxy contest, utilizing their inspection rights to locate other shareholders and disseminate to them a rival proxy solicitation for alternative candidates. While the new rule certainly makes some elements of a proxy challenge less expensive for such dissident shareholders (in the form of reduced postage and some administrative costs), it won’t save them many of the significant costs that attend a proxy challenge – they will still, for example, frequently want to influence other shareholders about their competing slate, and may still find it most effective to make their case(s) personally. In addition, many states (including Delaware, the incorporation home of most public corporations) had already authorized companies to implement a version of the rule in their own bylaws, and numerous companies were already on their way to a similar governance structure.
Finally, one must realize that the proxy access reform debate has not occurred in a complete statutory, regulatory and jurisprudential vacuum. Other concurrent developments in corporate and securities law may have effects that may tend to counteract (or at least inject considerable noise to) the proxy access debate. For example, Delaware’s Chancery Court has recently approved the maintenance of a dilutive shareholder rights plan triggered at an ownership threshold of 4.99% (see Selecteca v. Versata, a threshold far lower than conventional poison pills have historically prescribed (usually in the 15-20% range). If the Delaware Supreme Court affirms this holding – and many believe it will – the effect will be to remove a proverbial arrow from the quiver of dissident shareholders, just as Rule 14a-11 inserts another one. Similarly, Delaware courts have recently manifested a renewed willingness to whittle away at governance-related fiduciary duties (sometimes known as Blasius duties) that are a favorite and oft-utilized weapon of hedge funds and pension funds alike (see, e.g., the recent Barnes and Noble decision from Vice Chancellor Strine – Yucaipa v. Riggio). In short, proxy access is but a single eddy in a swirling endogenous sea of other corporate governance developments, many of which may tend to complicate or neutralize its effects.
Ultimately, of course, this debate will likely boil down to an empirical question. And even as I write this, I conjecture, hundreds of financial economists and legal scholars are designing empirical studies of this rule change, looking for good control and treatment groups, identifying “clean” events, and cooking up game-theoretic corporate governance models (all the while remaining monastically quiet at the faculty lunch table, convinced – optimistically – that they are the only ones hot on the empirical trail). The better of these studies will likely be read by SEC staff economists and discussed (hopefully in an adult fashion) by the Commission. Perhaps some of them will even induce the Commission to adjust the rule, create extensions and/or carve outs, or maybe even rescind it in years hence.
But no matter how the ongoing policy skirmish shakes down, the legions of social scientists who will soon sweep into the debate are likely to bestow a subtle benefit on our future selves – one that is worth our deliberative consideration now: the benefit of empirical knowledge. Republican SEC appointee Kathleen Casey strongly criticized the new rule change, arguing that "the policy objectives underlying the rule are unsupported by serious analytical rigor." Casey, along with many critics of proxy access, appears to believe that the burden of proof about proxy access must rest squarely on the shoulders of advocates before any regulatory change is implemented. This claim is in many ways right – but perhaps only half right, or only some of the time. In at least some regulatory areas, the stock of empirical data for or against a proposed intervention is so impoverished or underdeveloped that it would be difficult to reject virtually any empirical hypothesis about outcomes; and here the burden of proof becomes insurmountable. Proxy access may well be one of those areas. Yet in such arenas, regulators are still charged with the unenviable task of making policy in an environment of sparse data, underdeveloped models, immense public scrutiny, and a resulting miasma of perfervid (and even quasi-religious) advocacy. Some rule changes – and particularly non-voluntary rule changes such as the new Rule 14a-11 – have the potential merit of creating natural experiments that add to the stock of information for future researchers, policy makers, regulators and investors. That dynamic value may justify their adoption in close cases, even if one’s knee-jerk judgment – based exclusively on currently available static information – would tilt ambivalently towards preserving the status quo. At the very least, if we’re genuinely interested in maximizing “long term shareholder value” (a topic that may be ripe for another debate, another time), the benefit of modest regulatory experimentation deserves a seat at the prescriptive table.
We talk sometimes here at the Glom about the promise and illusion of outside directors (this is really Lisa's area). Outside directors may be independent and therefore more willing to not "go with the flow," but they may also be less knowledgeable of the firm, the industry, or the business world generally. And the next question is then who is "outside"? Other industry players? Other executive friends of the inside management? Social friends?
The NYT on Sunday probed another set of outside directors: Presidents and other senior administrative officers of public and private universities. Around half of all university presidents sit on at least one corporate board. Many issues are discussed: time, expertise, money, and conflicts about money.
Time. In this post-SOX (and post-Enron and WorldCom individual director settlements) world, outside directors should plan on working hard for their money. This isn't a cushy gig anymore. Personal liability and reputational hits are lurking around every corner. To add value, outside directors have to invest a lot of time: prep time, travel time, meeting time. The example that makes me hyperventilate is Dr. Shirley Jackson, the president of Renssalaer Polytechnic Institute and a theoretical physicist, who at one time served on the boards of six mega-companies (FedEx, Marathon Oil, IBM, etc.). According to Nell Minow of the Corporate Library, outside directors should figure on working 240 hours a year for that company, or 20 hours a month. Six times 20 hours is a lot of hours a month -- almost a full-time job -- in addition to what I already thought was a 24/7 job. The article mentions that the Board of Regents of the U. of California system just voted to limit board membership for its chancellors to three.
Expertise. What are these academic officers bringing to the table? Well, they are the C.E.O.s of huge enterprises. They know something about managing people (including difficult personalities, like law professors). Depending on the firm, they may add some inside scoop on that all-important 18-25 demographic. Also, the research expertise might be a help: a particular science specialty might meld well with a particular firm; a legal academic can serve as a fount of information about the board's legal responsibilities. But in most cases, the expertise the academic officer has may not match up that well. But, they can think "out of the box"? The article suggests that academics in particular tend to stay quiet when outside their experience (these aren't legal academics, obviously), letting the board operate as usual. But, academic officers can bring diversity (academia is a lot more diverse than Wall Street), prestige and other intangible benefits, particularly signalling benefits. Of course, every company interviewed showered the outside director with glowing praise, but what else can you expect?
Money and Conflicts about Money. These academics make a lot of outside money, and there's nothing that we hate more than academics making money! But, this might bring us back to the time element. If I am bringing home more money being a director than I am from my day job, am I going to allocate my time wisely? The cautionary tale used here is Ruth J. Simmons, the president of Brown, who was a Goldman director who stepped down this year with stock worth around $4.3 million (probably at the low point). I don't know what Dr. Simmons' academic specialty is, but Minow does not seem to think it was financial derivatives.
And finally, conflicts. As university presidents make contacts at these firms, resulting in contracts with their universities or lucrative partnerships and branding opportunities, when does the director stop being outside? In law, we have several legal tests that require votes of the independent directors. I'm not sure that you are independent if your university has just entered into a $100 million partnership with the firm. Just sayin'.
All that being said, I would be an excellent outside director.
Now that I’ve taught my last class for the semester, I thought I’d jot a few posts with reflections on teaching from the semester before I turn attention to grading and then writing.
Watching the SEC’s Goldman suit, the Senate hearings, and the financial reform legislation unfold has left me convinced that we business association teachers should consider teaching agency and partnership in the basic course (if we don’t already do so). Why? It is not just that many actual business entities are the “uncorporations” that Larry Ribstein writes about and not the “inc.s” in many law school class rooms. Consider the following two problems identified in the Goldman hearings or with respect to the financial crisis:
• Conflicts of interest (by Wall Street firms, rating agencies, mortgage brokers, mortgage originators etc.); and
• Lack of disclosure (to mortgage borrowers, investors in asset-backed securities etc.).
Of course there are lots of other potential areas of concern – like financial institution “safety and soundness,” but the two problems above are essentially about agency costs. As are two of the proposed remedies being discussed:
• Greater disclosure.
We can have a discussion about whether these are the most important problems and the most pressing reforms in the wake of the crisis, but they are front–and-center in the current debate. To frame the basic tradeoffs involved, there are two analytical approaches and two approaches to teaching students. The first is to start deep in the weeds of specialized areas of securities and financial regulation. The second is to start with basic building blocks.
The place to go for those building blocks is agency and partnership law. It is funny how much of the public debate on the Goldman suit resembles debates in those chestnut fiduciary duty cases from a Business Associations case book. Could “sophisticated investors” protect themselves against conflicts of interest with greater diligence or harder negotiations on price? Or do they need (or would it be more efficient to give them) the protection afforded by fiduciary duties? And when we talk about fiduciary duties, even the basic Business Associations course should help students see that those duties could vary quite a bit from one context or form of business entity or state to another.
Perhaps it is just my own learning style, but if I had to take a Business Association class again, I’d prefer to start learning the basic concepts that Corporations borrows from Agency and Partnership rather than being parachuted into the world of staggered boards and poison pills. Don’t kids learn basketball by practicing lay-ups before moving to dunks?
We’ll see how I feel in the fall when I teach my first purely Corporations class.
Much of the outcry about Citizens United has focused on its anticipated impact on elections, see here and here, as well it might since the decision was, after all, one about the proper interpretation of the Bipartisan Campaign Reform Act, aka McCain-Feingold. However, for my money (no pun intended), its most pernicious impact is likely to be not on elections (there was already a lot of corporate money in elections), but rather its influence on the future interpretation of the commercial speech doctrine. The commercial speech doctrine permits the regulation of commercial speech for its truth.
What has this got to do with political speech you might say? Nothing, unless one considers why for-profit corporations get into campaign finance or lobbying in the first place. They do so for the same reasons they engage in commercial speech; to further the economic interests of the corporation (and/or the shareholders if you prefer). Even though the Supreme Court did not hold in Citizens United that a corporation enjoys the same First Amendment rights as a human being, the rhetoric in the opinion, what I call the "anti-discrimination rhetoric," is likely to be used as if the Court had said just that and in support of an argument that the Court should not "discriminate" against commercial speech and relegate it to the category of an intermediate scrutiny test but rather should apply to it a strict scrutiny test, a New York Times v. Sullivan test. Suffice it to say that this permits regulation in theory, but little in practice.
There is evidence that Citizens United will be used this way if you look at how at how Bellotti was used. Bellotti was another corporate election law case. It was decided in 1978, only two years after Virginia Pharmacy, the case in which the commercial speech doctrine was first announced. It has been repeatedly used to argue for expanded protection for commercial speech. Most recently in the Supreme court in 2003 in the Nike v. Kaksy case. See here, here and here.
Theoretically Bellotti was a case that had nothing to do with commercial speech. Nevertheless, it has regularly showed up, as it did in Nike, in arguments in favor of more protection for commercial speech, supposedly for the proposition that speech is not less valuable because a corporation utters it. May be. But consider this, if we (or the Court) gets this argument tangled up with some notion that First Amendment protection is offered on the basis of some anti-discrimination principle we may be in very deep waters indeed, because for a business corporation its political expression is surely tangential to its main organizing purpose. It's core expressive activity is commercial speech. If we are protecting the speaker then it would seem that its core expressive activity ought to be protected. However, going that way would seemingly wreak havoc on any sort of regulation of commerce. How can you regulate commerce if you can't regulate commercial speech? If the Court goes the way of offering strict scrutiny protection to a lot of commercial speech it may make debate about reform of the financial sector moot. Not to mention the idea that corporations need protection against discrimination is a fairly difficult one to swallow. (It makes for some good editorial cartoons though! This month's Vanity Fair has a great one which you can only see if you buy the magazine; but you can find in the table of contents here under the Vanities section. A similar cartoon showed up earlier in the Boston Phoenix and that one you can view here .)
This is not just a theoretical proposition. There is a case now pending before the Supreme Court which (arguably) involves commercial speech and at least one amicus brief suggests that this is the case in which the Court can resolve the status of commercial speech (in favor of more protection, natch) and answer the question raised but not answered in Nike v. Kasky. Guess which case is included in its list of authorities? Yep. Citizens United. I will save for another post which case this is and where else Citizens United is popping up. But this is one of those First Amendment cases that could have very widespread impacts on all sorts of regulation of business. That may be a happy thing if you think less is more in the regulatory arena for business. May be not so happy if you think the government should have more of a hand in the regulation of the safety of food, drugs or... financial services.
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Google is abandoning its China-based search engine--this despite China being the world's largest internet market, with huge growth potential. Why?
Thesis one: corporate social responsibility. Forget recycling more or reducing your carbon footprints--small potatoes. Facilitating government surveillance of dissidents sounds downright evil. (The catalyst for Google's policy change was a cyberattack originating with the Chinese government that targeted human rights activists emails.) As Larry Ribstein notes: "When Google went public it promised investors that it is not "evil" or "conventional" and will "make the world a better place." Larry calls this Google selling corporate social responsibility, and concludes (quite rightly, I think), that a China pull-out can be viewed as a good business decision, as well as the ethical choice. Larry quotes a WSJ article:
Heavily reliant on consumer trust given its vast store of personal information, Google needs to show it guards the data jealously and uses it judiciously. Meanwhile, pushing for the free dissemination of information everywhere is hard to square with accepting ever greater curbs and interference in China.
Thesis two: Corporate identity. Identity is important to Google, and maintaining a presence in a censoring China is antithetical to that identity. This notion is part of a larger idea I've been working on, mostly in the nonprofit space, that an organization's form can create a specific kind of identity. Usually for-profit public corporations don't create an identity for their shareholders, but some can. Google, with its unofficial "Don't Be Evil" motto, is one of them.
Vic Fleischer has a great case study on the branding effects of Google's IPO, a deal structure that helped reinforce its image as "innovative, egalitarian, playful, and trustworthy." My concept of identity is like branding, but is more inward looking. In other words, CSR and branding are about the face a corporation shows to the outside world; identity is about how it fundamentally sees itself. A friend at Google tells me that when free Google T-shirts or caps are on offer at the company, no one takes more than one "because it's not the Google way."
Google's ownership structure offers a clue as to why identity might matter so much to this particular organization. By all accounts the risky move to pull out of China resulted from co-founder Sergey Brin's lobbying. A Russian immigrant, Brin saw in China's actions evidence of totalitarianism that was "personally quite troubling." Resisting government oppression appears to be a large part of Brin's identity--and Brin controls almost 30% of Google's votes. Most public companies aren't still dominated by founders, but when they are, I suspect that corporate identity matters more.
Which raises the question: if Brin's personal politics is driving the decision to pull out of China, and it turns out to be a disastrous mistake to exit the Chinese market, do shareholders have a cause of action against Google?
Global Corporate Citizenship ("GCC") emerged in management and business scholarship in the 1990s. GCC posits that corporations have rights and obligations in society similar to citizens. It addresses the ethical responsibilities of companies operating in a global market and the values that should guide corporations' engagement with society. In effect, GCC requires that corporations engage with both financial and societal stakeholders as well as acting as stakeholders themselves.
GCC is closely related to corporate citizenship (without the “global”). Corporate citizenship is a business strategy, a voluntary model for business practice that is believed to incorporate core values while simultaneously supporting the pursuit of financial goals. According to the Boston College Center for Corporate Citizenship, there are four key principles of corporate citizenship: (1) minimize harm, (2) maximize benefit, (3) accountability and responsiveness to key stakeholders, and (4) support strong financial results.
Theories of GCC infuse the discussion of the role of corporations in society with questions of ethics, morality, and societal values, which are substantially lacking in the scholarly lineage that followed Berle’s line of argument. (See my earlier Conglomerate post on Corporate Purpose.) It is inherently interdisciplinary and draws from several fields such as management studies, political philosophy, international relations, sociology, and legal studies. GCC already plays an important role in the actual business practices of transnational corporations ("TNCs"), goals and agendas of international institutions, and theoretical advancements in academic fields such as management, business, and economics.
The underlying values of GCC are recognized by an increasing number of corporations and business leaders and many TNCs have incorporated GCC into their business goals and policies. For example, in 2003 CEOs of numerous TNCs published a joint statement with the World Economic Forum ("WEF"). This statement set out a framework for the implementation of GCC principles in the business context. Since that time, the integration of GCC into the policies of TNCs has moved beyond the group of companies and CEOs associated with the joint statement. For example, TNCs have begun including GCC in the portfolios of their in-house counsel and corporations are becoming increasingly engaged in promoting GCC.
In addition to its integration into business policy and practice, GCC is also becoming institutionalized at the international level and an increasing number of non-governmental organizations are supporting GCC. For example, GCC is being promoted by international institutions such as the United Nations Global Compact ("Global Compact") and the WEF. The Global Compact is a public-private initiative that seeks to promote ten principals that focus on human rights, labor standards, the environment, and anti-corruption. The WEF is a Swiss non-profit foundation that focuses on the equality of values and rules in shaping corporate governance and ensuring that economic progress and social development go hand-in-hand. Both organizations support the creation of a framework that incorporates values and morals into corporate governance and operations while taking the interests of both financial and societal stakeholders simultaneously into consideration – key elements of GCC.
A body of scholarship on GCC has developed in some academic fields, for example, management and business theory. In 1997, good GCC was defined as "meeting, within reason, the expectations of all its societal stakeholders to maximize the company's positive impact and minimize the negative impact on its social and physical environment, while providing a competitive return to its financial stakeholders" in a publication funded by the Hitachi Foundation. Over the past decade GCC has continued to be discussed in the management and business literature. In the management literature, GCC is used at times as an umbrella to include a range of corporate social responsibility and corporate social accountability initiatives. The stakeholder model rather than a shareholder model for corporate responsibility has played and continues to play an important role in the management literature. Recent articles argue that corporations are citizen-stakeholders in the global society and, therefore, they should play a more direct role in the advancement of society.
However, although the question of shareholder versus stakeholder models continues to be debated by legal scholars, GCC theory has received only minimal resonance in the U.S. legal discourse. GCC has been mentioned briefly in several international law articles in connection with descriptions or discussions of the Global Compact and the Millennium Development Goals. While some legal articles mention GCC in discussions of Corporate Social Responsibility and human rights, others go further and contemplate the definition a good global corporate citizen or propose regulating accountability for GCC. A few legal articles briefly mention GCC in discussing how NGOs can strengthen their international roles and the role of NGOs in building global democracy. Still others briefly mention the role that policymakers have in promoting GCC and how the tax advice of law firms and accounting firms may undermine GCC. Despite brief acknowledgement of GCC in a handful of legal articles since 2000, there has not yet been an attempt to develop a theoretical framework for GCC in the legal context.
I believe that GCC offers a useful theoretical framework with which to integrate and analyze the interests of both financial and societal stakeholders in this age of globalization and my current scholarship focuses on exploring ways that GCC can inform legal theory and corporate, international, and human rights law. Voluntary measures are an important way to create and realize behavior that is influenced by societal morals and values. However, reliance on voluntary initiatives is insufficient to assure the protection of key human rights and societal values. Although the body of scholarship that has developed in the business and management fields is a promising starting point, I believe that developing a legal theory of GCC offers another perspective from which to approach and, hopefully, make a useful contribution to discussions about how to regulate and govern corporations.
*The main body of this post is excerpted from my article entitled Toward Global Corporate Citizenship: Reframing Foreign Direct Investment Law, 18 Mich. St. J. Int'l L. 1 (2009), which is available on SSRN here.
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In an effort to stop the economic freefall of the most severe financial disaster since the stock market crash of 1929 Great Depression, the United States and governments around the world took action. Government intervention ran the gamut from conservatorships, partial nationalization, rescue plans, guarantees, and aid requests to the International Monetary Fund. While these measures may have prevented a total collapse of the global economy, they do not suggest a model for the future. Two of the many questions one could ask in this situation are: What can we do differently and who should be doing what?
As corporate law scholars and economists know, the role and responsibilities of public corporations has been the subject of debate since the birth of large public corporations in the late nineteenth century. Corporate responsibility can be categorized as: economic, legal, ethical, and discretionary. In the United States corporations generally are considered to have a primarily economic function with corresponding economic goals and responsibilities that are then tempered by legal and ethical restraints while still allowing corporations to take on discretionary responsibilities such as philanthropy. However, both practitioners and theorists have questioned the primacy of the economic function.
Generally, when U.S. legal scholars question the primarily economic role of corporations in society, they do so either in the context of Corporate Social Responsibility ("CSR") or Corporate Social Accountability ("CSA") or both. These theoretical frameworks can be traced back to arguments advanced by E. Merrick Dodd in a debate between Adolph Berle and E. Merrick Dodd in the 1930s. Berle essentially argued for the primacy of obligations to financial stakeholders. Dodd essentially argued that corporations have responsibilities to both financial and societal stakeholders. The modern legal discourse on CSR has its roots in Dodd’s position. In more recent decades the CSA movement has expanded the discourse.
The exact scope and contours of CSR are disputed within the U.S. legal discourse and also varies from country to country. However, it is fair to say that CSR relates to the scope of ethical obligations that corporations have to stockholders, stakeholders, and society more generally. In corporate legal theory, CSR generally focuses on economic and governance issues. The underlying question revolves around the purpose of the corporation. In the U.S. corporate law context, the rules governing CSR tend to be found in state and federal statutes and these "hard laws" are generally enforceable in a court of law. In international legal theory, CSR generally focuses on human rights. The underlying question revolves around what is acceptable conduct from a moral and societal standpoint. In the international and transnational business arena, the rules governing CSR tend to be found in codes of conduct or documents produced by international organizations. These types of "soft law" tend to be non-binding and unenforceable in a court of law. In the U.S. legal discourse, domestic corporate governance and international human rights occasionally have uncomfortable meetings. However they not yet been integrated into one overarching theoretical framework.
The CSA movement attempts to implement the principles of CSR as legally enforceable "hard law." Among other things, CSA is an attempt to link human rights, the environment, and other societal issues to the economic and corporate governance concerns of corporations. This can take the form of disclosure rules, national and international standards, and legal liability for the social and environmental effects of corporate actions. CSA is a shift from CSR because it moves from a discussion of moral and ethical obligations and responsibilities to a discussion of socially and legally enforceable obligations and responsibilities. However, CSA is more instrumental than theoretical. It allows us to link domestic corporate governance with international human rights in an instrumental manner. However, it does not offer a theoretical framework for bridging the gaps between the interests of financial and societal stakeholders.
From where I sit, the recent financial crises suggest both a need and an opportunity to bring the corporate purpose and corporate social responsibility and accountability discussions to the forefront of legal scholarship. I plan to continue this discussion in an upcoming post.
*The main body of this post is excerpted from my article entitled Toward Global Corporate Citizenship: Reframing Foreign Direct Investment Law, 18 Mich. St. J. Int'l L. 1 (2009) (citations omitted), which is available on SSRN here.
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Following the panel, Bruce Aronson (Creighton) kicked off the paper presentations. He discussed a comparative work in progress that examined stock exchange competition, with an emphasis on the Tokyo stock exchange. Professor Aronson found the race to the bottom/race to the top paradigms less than satisfying since the scholarly debate seems to cycle between these two arguments.
Miriam Cherry and Jarrod Wong (McGeorge) presented an interesting paperthat proposes reforming clawbacks. The paper build off two arguments. First, clawbacks may be a draconian remedy. Second, Professors Cherry and Wong argue that a prospective approach of drafting clawback language into contracts is far more effective and raise less constitutional and other legal barriers than trying to convince courts to claw back retroactively without explicit contractual language. They applied this argument not only to executive compensation, but to clawback money from the early investors in what turn out to be Ponzi schemes as well. Cherry and Wong argue that private ordering and best practices (and not necessarily regulation) could result in the adoption of these clawback provisions.
J.W. Verret (George Mason) presented his paper on “Treasury Inc.: How the Bailout Reshapes Corporate Theory and Practice.” which looks at what government ownership stakes in private companies mean for corporate governance. He finds that corporate governance theory and practice in the U.S. are ill-equipped to handle questions raised by the federal government acting as a controlling shareholder. Professor Verret find that shareholder primacy, director primacy, the team-production model, and progressive/corporate social responsibility approaches all have significant shortcomings when the government acts as controlling shareholder. In terms of practical problems, Verret outlines how the government as controlling shareholder might give rise to:
- different private companies becoming “affiliates” for some of the 33 Act exemptions;
- a new potential for insider trading;
- the U.S. Treasury to avoid being subject to fiduciary duties as a controlling shareholder;
- the government to have the right to be lead plaintiff in securities class actions; and
- the government wielding outsized power to elect directors.
An interesting Business Association Section meeting (chaired by our own Lisa Fairfax) closed out AALS Sunday morning. The topic of the meeting was how the crisis and the government response changed our perspective on corporate governance.
The panel discussion was kicked off by an analysis of Alan Beller, a partner at Cleary Gottlieb and the former head of the SEC’s Division of Corporation Finance. Mr. Beller spoke on why the crisis got as bad as it did. He posited that one reason was that regulators mistook what was a solvency or capital crisis for what he said first looked like a liquidity crisis because of Bear Stearns.
Teresa Tritch of the NY Times editorial board then spoke how she was tracking how the change in change in proxy voting to enable shareholders to vote “no” was playing out. She speculated that even though directors were not being voted out in significant in significant numbers, no votes were sending a message of shareholder discontent. She argued that this discontent over corporate governance must be seen as a broader issue for policymakers not merely as a private matter within individual corporations.
Hilary Sale (Washington Univ. – St. Louis) asked the question, “How is Delaware responding to the crisis?” Her short answer: “not by doing very much.” She does believe that boards are working hard now to figure out risk should be managed, but noted that the Delaware courts have sent a clear message that the board does not manage risk, but oversees risk management.
Jeff Gordon (Columbia) responded by questioning whether the answer to the financial crisis was empowering shareholders. He argued that corporate governance was a “third order” contributor to the crisis and should be a third order policy response. He contended that making corporations more responsive to shareholders could be counterproductive as shareholders may prefer that corporations take actions that increase shareholder value but also increase systemic risk. Among the pieces of evidence he cited: although the U.K. affords shareholders greater rights, U.K. financial institutions fared no better in the crisis. He also parsed through an empirical study by Beltratti and Stulz, “Why Did Some Banks Perform Better during the Credit Crisis?”. Gordon says that the clearest conclusion from this study is that the banks with the most shareholder friendly boards fared the worst. Professor Gordon’s conclusion: we should give more thought to proposals to let bondholders vote in director election and tie banker compensation to enterprise value – that is to both share and bond values.
Renee Jones (Boston College) gave a tour of several of the scandals and crises in the past “Decade of Disaster”: stock analyst misdeeds, market timing by mutual finds, options backdating, and the current financial crisis. She argued that each of these incidents shared three common factors: (1) conflicts of interest, (2) issues of compensation, and (3) lack of accountability, including poor regulatory oversight. Her conclusion: conflicts of interest of key and the repeal of Glass Steagall -- which she faults for causing conflicts to mushroom -- needs to be revisited.
As you can see there were clear divergences over whether and what role corporate governance should play in response to the crisis, but there was consensus among some panelists on a few issues. For example, several panelists agreed with Professor Jones’ suggestion that, as an alternative to director liability, we should explore further barring directors of public corporations that have failed or committed misdeeds from being directors of other corporations (the panel didn’t specify what the trigger would be.
Panelists also agreed that more attention needs to be paid by scholars and policymakers to international dimensions of corporate governance, including cooperation among securities regulators.
A number of questions came on how to make regulators nimbler, stronger, and more aggressive to ward off future crises. Former regulator Beller agreed with the sentiment, but noted that regulators now face pressure to act with foresight, but if they attempt to regulate in anticipation of problems, they get pushback from industry – “how can you regulate if nothing bad has happened?”
Ms. Tritch also made an interesting point when referring to lobbying efforts by derivative “end users” and community banks to obtain exemptions from proposed derivative regulations. She argued that the arguments of these firms that they didn’t “cause” the crisis doesn’t mean that they should be exempted; all derivative counterparties were part of a system and it is the entire system that needs to be regulated.
A good number of you will bring school-aged children to AALS with you, and there's plenty to do with them while you're in town.
Both the Aquarium of the Americas and the Audubon Insectarium are within walking distance of the conference. They are operated by the same organization, so you can get a day pass to both if you are so inclined. The aquarium is bigger and a better stand-alone trip than the insectarium, but my kids love both.
There are several things you can do for little or no money. One of our recent favorites is riding the streetcar round trip. It begins downtown on Canal Street, meanders all the way up St. Charles Ave., turns briefly onto Carrollton, and then turns around and heads right back downtown. Also, wandering around the French Quarter can be fun. Street musicians will set up shop on different corners, artists line around Jackson Square, and Cafe du Monde serves beignets at all hours.
If you're willing to venture out from the conference area, the amusement park in City Park has lots of rides that are fun for grade school kids. Also, Storyland is right next door and caters to younger kids. Also, the Zoo is a few miles uptown along the river and is always a pretty solid choice.
Many of you will be coming to New Orleans in early January for AALS. Over the next few weeks, I will intersperse posts about New Orleans among the usual fare of Business, Law, Economics, and Society. My plan is to make a variety of posts covering four topics - adult entertainment (music clubs and bars, not THAT kind of adult entertainment), fun things for the whole family, restaurants, and Katrina recovery.
As I mentioned, I've lived here a while and have strong opinions about my hometown. When dispensing advice about what to do, I follow the same motto I use when playing cards - Often Wrong but Never in Doubt. I guess that's my way of saying, I hope you find this useful, but recognize that your mileage may vary.
If there is something you're hoping I'll cover, let me know in the comments or shoot me an e-mail.
To get the ball rolling, the 2010 Jazz Fest lineup came out this week!
A very important corporate governance case seems to be quietly underway in Delaware. Yesterday, eBay and Craigslist took their troubles to the Chancery Court, with eBay, a minority shareholder in Craigslist, complaining that eBay was secretly diluted. In rebuttal, Craigslist charges eBay with secretly making plans to compete with Craigslist. And intermixed with these two discrete allegations seems to be a picture of what can happen in a close corporation when a majority camp and a minority camp do not have the same "vision thing." Usually, we discuss in Business Associations the cases in which there are three individual shareholders, who begin life as friends or relatives or a mixture, and two end up against the other. The Craigslist power dynamic seems the same, only the poor, oppressed shareholder would have to be. . . . .eBay?
This case has been coming down the river for awhile, and I posted on the pleadings back in May 2008. That post tried to analyze the dilution of eBay's stake to just below 25%, making the supermajority voting and cumulative voting rights eBay had negotiated for ex ante not really mean that much. It also goes into more detail about eBay's competitive activities.
Stay tuned for exciting testimony from the powerful (eBay) and the very interesting (Craigslist) on the different philosophies of each shareholder. The eBay folks seem dismayed to find out that the two Craigslist founders really didn't care about maximizing profit. The Craigslist founder seem dismayed to find out that eBay wanted Craigslist to become, well, another eBay. Fun stuff.
I'm sure that the crisis will make my end-of-the semester class on Corporate Social Responsibility even more lively. I wish I had remembered, but I meant to talk about why Bear Stearns didn't just abandon their two hedge funds in the context of my veil piercing classes. Moral or implicit recourse seems an important lesson; just because shareholders have protection of the corporate veil, doesn't mean they will use it. The crisis also came up in the context of executive compensation and the Disney and Jones v. Harris cases.
The progression in the Klein Ramseyer book from Disney to Jones v. Harris also allowed a brief discussion on unintended consequences of corporate law reform. We talked a little bit about how option based compensation resulted from a desire to cure management entrenchment and better align management incentives with those of shareholders. We then talked a bit about the lesson of being careful in designing options or other compensation or you might stimulate short-term decision-making and accounting gamesmanship.
Jones v. Harris (subject of the Glom's forum two weeks ago) provided an opportunity to talk about how the rise of institutional shareholders was supposed to play a key role in corporate governance. We also discussed how institutional investing just pushes the agency costs to another level.
The law of unintended consequences should be sobering as we discuss reforms to this crisis too.