As I sat through what (as you all can now tell) I believed to be a terrific conference on takeovers, it dawned on me that I had yet to hear anything about non-shareholder constituents.  Indeed, I watched almost all of the panels and, at least during the time I was there, no one on the panels or in the audience mentioned other constituents and their impact on takeovers or the M&A market.  I found the absence of such a conversation interesting for a couple of reasons. 

First, some panelists and participants stressed the apparent breadth of discretion afforded to corporate officers and directors during takeovers and acquisition.  Given that one oft-cited explanation for such broad discretion has been the board's need to take account of interests beyond shareholders and profits, I found it interesting that no one discussed the explanation--even if only to attack it as illegitimate.  Second, there was discussion of Delaware cases such as Unocal and Time, which enable boards broad discretion to thwart takeovers.  These cases mark one the first times that Delaware courts appeared to acknowledge corporate directors' ability to focus on other constituents and issues beyond shareholder maximization when carrying out their fiduciary duties.  And thus I found the absence of discussion on this acknowledgment interesting.  Third, I suspect that many proponents of corporate social responsibility and the notion that corporations should pay heed to other constituents believe the takeover period to be critical for the interests of other constituents.  On the one hand, that period is viewed as a time when the interests of shareholders and non-shareholders overtly collide, and hence that period brings to the fore the question of whether and to what extent corporate managers can ignore short term profit in favor of a focus on non-shareholder concerns.  On the other hand, the takeover period can be viewed as a time when some important doctrines recognizing the corporate ability to pay heed to non-shareholder constituents emerged, not only in the form of some case law, but also in the form of so-called other constituency statutes. 

So now I am left to wonder if there is any relevance to the absence of dialogue on other constituents.  On the one hand, that absence may appear to confirm that such constituents are not apart of the main-stream conversation about corporate acquisitions generally, and fiduciary duties specifically. On the other hand, the conference theme was to commemorate the Williams Act and hence a discussion of other constituents may be seen as not directly on point with such a theme.  Then too, given its focus on acquisitions both in the US and around the globe, there were no doubt many important conversations that had to be left for another day.  And perhaps it is as simple as that. 

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A while ago I commented on the notion that corporations may be less likely to focus on other constituents during an economic downturn.  The most recent scores for the American Customer Satisfaction Index both confirm and undercut that notion as it relates to customers.  Indeed, those scores, which reflect results for the first quarter of 2008, find that there has been a slight rise in customer satisfaction for the first time in a year, while commentators to the Index indicate that--unless corporate resources are "too depleted or misallocated"--a focus on customers is critical during times of economic turmoil.

Indeed, commentators to the Index note that companies actually feel pressure to focus on customer satisfaction because of the economic downturn.  This is because customers have few resources and hence are not inclined to spend more.  As a result, companies must work hard, not necessarily to get new customers, but to make sure that they keep the customers that they have.  In this regard, the economic downturn appears to make every customer that much more important, providing incentives for companies to make sure that they do not lose any customers to competitors.  Thus, the Index revealed a slight increase in customer satisfaction.  Moreover, when viewed by industry, the Index indicated that there was more gain than decline in customer satisfaction in each industry.

To be sure, it appears that not every company, or in some cases not every industry, can afford to spend resources on improving customer satisfaction.  Cue the airlines.  With American Airlines' recently announced plans to cut jobs and charge customers for their first checked bag, it is little wonder that many customers are dissatisfied with airlines.  Reflecting this, the Index revealed that the airline industry as a whole had some of the lowest customer satisfaction scores, with some companies showing double digit declines in customer satisfaction.  In fact, commentators note that too often airlines with low satisfaction numbers merge, creating even more dissatisfaction among their customer base.  Hence, low customer satisfaction numbers seem to be an industry wide problem with no real winners--including  shareholders.  But alas Southwest appears to be the one exception to this problem.  Indeed, the Index reveals that Southwest has particularly high customer satisfaction numbers, and points out that if not for those numbers, customer satisfaction for the airline industry would be at an all time low. Of course, while Southwest's focus on customer satisfaction may be some part of the reason why it is doing better than many other airlines, it also may be the case that the fact that Southwest is doing better than others gives it the flexibility to focus on customer satisfaction.  (And hence the increasing gas prices may change the Southwest story as well).  These observations only confirm commentators' initial observation--that is, the economic downturn makes focusing on customers critical, unless a company is so economically challenged that it cannot afford such a focus.   

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Oregon recently amended its corporate code to expressly permit corporations to include in their charter a provision authorizing or directing the corporation to conduct its business "in a manner that is environmentally and socially responsible." The legislative history of the amendment notes that courts in other jurisdictions have interpreted corporations' obligation to act in shareholders' interest to mean that corporations must maximize shareholder profit, even if it results in a corporate failure to act environmentally and socially responsible. Apparently the amendment is designed to counteract this kind of interpretation, and encourage corporations to engage in sustainable behavior. On the one hand, some may argue that this kind of amendment is not necessary. Indeed, to the extent the amendment is designed to ensure that corporations are not prohibited from engaging in socially responsible behavior, the business judgment rule appears to give corporations the flexibility to pay heed to other interests, except perhaps in limited contexts such as takeovers. On the other hand, the amendment appears to go farther, suggesting that corporations that embrace such an amendment have an affirmative responsibility to be socially responsible. From that perspective, it is a clear change. What is not clear, however, is the precise contours of a corporate commitment to engage in responsible behavior, and the kind of exposure generated by the failure to live up to that commitment. Interestingly, the legislature apparently discussed the fact that many corporations have embraced a commitment to engage in responsible behavior in their corporate documents. I have also noticed this trend. But it seems that expressing a commitment to responsibility on a corporate website or even in an annual report is a far cry from embracing such a commitment in the articles of incorporation. Nevertheless, it is an interesting development.

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A recent piece in the Economist notes the various orderings of CSR priorities across different countries.  For example, the 3 most important CSR issues in the US are health care, the environment, and job losses from outsourcing, according to survey data.  In Brazil, only the environment makes it into the top 3.  Job losses from outsourcing ranks 13th in Brazil.  Brazil's other two top CSR concerns are safer products and affordable products.  Besides priorities, CSR institutional endowments--NGOs, think tanks, technical expertise--and traditions likewise vary across countries, such that countries' progress and priorities may tend to diverge over time. 

Developing countries, especially the BRICs--Brazil, Russia, India, China--are likely to grow in influence as their economies expand.  They may become important sources of standards setting, especially for the developing world.  Observers predict that China, for example, will be "deeply involved in the management of standards" in the next five years, and then "they'll build their own, and they'll become exporters of standards."  Given their differing priorities from industrial countries, China and other emerging markets are likely to want to define corporate responsibility to account for these differing priorities. 

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Dell and Microsoft have teamed up to sell “(Red)” computers, promising to donate up to $80 for every product sold to the Global Fund’s effort to fight HIV/AIDs in Africa.  As I have posted before, (Red) is a product brand founded by U2 singer Bono and Bobby Shriver, pursuant to which corporations that use the brand make a commitment to donate profits from the branded products to help fight HIV/AIDs in Africa.  In fact, Bono apparently helped design the (Red) Dell PC.  The initiative seems like one of those ideal instances where corporations can do well and do good.  Indeed, even though the price of the (Red) branded Dell model is apparently the same as non-(Red) branded Dell models, it is clear that there are many people who not only gravitate towards products that promise to divert some of the proceeds to charity, but there are also people who are willing to pay more for such products.  And perhaps the seeming transparency associated with the (Red) product brand gives both investors and consumers some comfort because corporations make an up-front commitment about how proceeds will be diverted to charitable endeavors.  In addition, corporations divert such proceeds to a particular and established charitable entity, limiting managerial discretion (and potential abuses of that discretion) sometimes associated with corporate charitable giving.  In this regard, it is an ideal mechanism for encouraging corporations to engage in charitable works.

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Apparently Wal-Mart’s campaign to encourage its customers to buy compact fluorescent light bulbs has paid off. Today Wal-Mart announced that it has surpassed its goal to sell 100 million compact fluorescent light bulbs by the end of this year. In fact, Wal-Mart’s goal in its "Change a Light. Change the World." campaign is to sell 100 million more by the end of 2008. At about $2 to $3 each, the bulbs are at least eight times more expensive than an ordinary light bulb. However, the bulbs preserve energy resources because apparently one bulb keeps half a ton of greenhouse gas out of the air. Moreover, the bulbs last longer, saving customers money over the long run. The bulbs also reduce electricity costs--100 million bulbs saves about $3 billion in electricity costs.  With all that going for them, one would think they would have been selling without Wal-Mart's campaign.  However, these light bulbs have been around for years and companies have not experienced significant success in selling them or otherwise getting people to purchase them as an environmentally-friendly alternative.  According to one source, in the beginning of 2007, only six percent of households used them. But Wal-Mart launched an aggressive campaign to change that, and its announcement today suggest that the campaign has been successful.  So whether just a clever marketing ploy to spruce up its image or a genuine effort to preserve the environment (or a little of both), Wal-Mart has certainly used its resources in a way that has had a positive impact on the environment.

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Thanks for the welcome!   I'm glad to be guesting on Conglomerate;  any blog where people post about both corporation law and Webkinz is my kind of place.

My phrase for the day:  "Labeling Fatigue."  I'd never heard it until yesterday, when Michael Vandenbergh of Vanderbilt Law mentioned it in a (very interesting) talk he gave here at Temple.  But a little looking around on the web shows that the phrase pops up in both debates over drug labeling and corporate social responsibility -- it describes what happens when the number of warnings on a package (for drugs) or possible certifications (for CSR products) overwhelms the average consumer.   I loved it; for one, it perfectly describes my frustrations when shopping at the local Whole Foods ("hmmm...do I want 'Organic' eggs, or 'United Egg Producers' certified eggs, or is it enough that the chickens were 'Certified Humane Raised & Handled' by the Humane Society?").  But it also nicely sums up a problem with a certain strand of CSR that relies on private certification of products as "socially responsible."  As more and more products make claims to being socially responsible, and even gain some third-party certification to that effect, it will become more difficult for consumers to tell which products are "truly" responsible and which just have a label slapped on them.  In the end, consumers may be so daunted by competing claims that they disregard them altogether.

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Last week after the market took its first tumble, I read a story in the Financial Times regarding corporate social responsibility during times of economic distress.   Although the author believed that there were clear arguments in favor of corporate engagement in socially responsible behavior, the author prefaced his comments by noting that corporate social responsibility was a “bourgeois luxury” during times of economic turmoil or shake-ups in the capital markets.  In other words, only corporations in strong financial health can afford to engage in socially responsible behavior.  While this notion may be troubling to advocates of social responsibility—after all, employees and other stakeholders certainly experience hardships during economic downturns—I think it is a concept that many corporations embrace. 

Indeed, in my research regarding social responsibility I have found that the more resources a corporations has, the more likely it is to engage in “socially responsible” behavior.  Moreover, even if a corporation does not engage in such behavior, corporations with lots of resources are more likely to engage in rhetoric suggesting a commitment to corporate responsibility.  The near uniformity in social responsibility rhetoric for extremely profitable corporations suggest that those corporations feel some pressure to project an image of responsibility even when there is no corresponding desire to engage in socially responsible practices.  However, if you look at corporations in the Fortune 1000, you will find that corporations at the bottom of the list are much less inclined to engage in either socially responsible rhetoric or practices.  This suggests that, unlike their counterparts at the top of the list, such corporations do not feel as much public or social pressure to project an image of social responsibility.  My research also found that even for corporations at the top of the list, any social responsibility rhetoric decreases significantly whenever such corporations experience economic instability.  This, I think, reflects a belief that social responsibility is a luxury that corporations can ill-afford during times of financial instability.

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This week the Washington Post pointed out that there were several proposals pending in Congress seeking to encourage the government to at least consider offering its employees a socially responsible investment option. The federal government offers employees the equivalent of a 401K plan through a fund known as the Thrift Savings Plan, which has over 3 million participants. Apparently in the same vein as socially responsible mutual funds, several members of Congress have offered proposals that seek to pave the way for the adoption of a kind of social investment option under the Thrift Savings Plan. However, unlike most socially responsible funds which screen companies for a of different issues ranging from their environmental policies to their behavior regarding employees, the Congressional proposals seem to be much more focused on single issues. Thus, one proposal would require Congress to determine the extent of Plan investments in companies whose business in Sudan directly or indirectly supported genocide in Darfar. Another proposal would authorize state and local governments to “direct divestiture from companies with investments of more than $20 million in Iran's oil and gas industry.”

On the one hand, attempting to create a social fund in the government context seems particularly challenging and problematic. As an initial matter, the focus on these single issues makes the funds appear more political than social. In this regard, one can argue that the proposals seem motivated by political agendas rather than a desire to enable government employees to engage in socially responsible investment. Then too, the problems with creating a social fund may be more acute in the governmental arena. Every socially responsible investment fund acknowledges the difficulty of creating such a fund. This is because corporations engage in a variety of different behaviors and screening corporate behavior involves judgment calls regarding the appropriateness of that behavior. And these judgment calls do not yield consistent results, as evidenced by the fact that there are corporations that appear in some socially responsible funds and not others. It seems that the problems inherent in creating a social fund would be magnified in the context of a government fund and the multiple political agendas of Congress. Indeed, efforts to generate some kind of social investment for federal government employees are not new. However, managers of the Thrift Savings Plan have resisted those efforts in the past, insisting that the Plan should focus only on financial concerns, and that its founding law requires it to resist the political manipulation of investments.

On the other hand, it seems that the public appetite for socially responsible investment is increasing, and it seems that government employees should at least be allowed the opportunity to make a choice about their investment options. Then too, while many funds focus on multiple social issues, others, like those contemplated by Congressional proposals, focus on single issues. Moreover, social responsible investing has its roots in a single issue—that is, screening for companies that supported apartheid in South Africa. Hence, the fact that Congress has chosen to focus on single issues does not make its objectives illegitimate. Then too, while creating a social fund is challenging in any context, it has not prevented several state governments from adopting such funds. Indeed, according to the Social Investment Forum, at least a dozen states offer their employees investment options that take social issues into account. As I have indicated in other posts, social responsible investment often appears to be an end in itself, enabling shareholders to signal their social preferences in the context of their investment decisions. However, it seems that in the governmental context, such investment has a greater potential to alter corporate behavior. From this perspective, while the challenges posed with screening individual companies should cause governments to tread cautiously, it seems appropriate for governments to at least be able to provide their employees the option of socially responsible investment.

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We like to follow Wal-Mart goings-on here at the Glom.  Usually it's about downward price pressure in specific geographic or product markets that Wal-Mart chooses to enter, whether it's good or bad, and community responses. 

Now an interesting new paper has come out describing another Wal-Mart effect, this time on global environmental governance.  The paper, by Michael Vandenbergh at Vanderbilt, describes how Wal-Mart and other large firms may plausibly be improving global environmental governance by imposing environmental requirements on their suppliers.  Responding to social, economic, and regulatory pressures, large importers are in effect exporting industrial country environmental standards to developing countries via private contract, a move that may help fill regulatory gaps that result from global trade.  An interesting read.

Here's the abstract:

This Article argues that networks of private contracts serve a public regulatory function in the global environmental arena. These networks fill the regulatory gaps created when global trade increases the exploitation of global commons resources and shifts production to exporting countries with lax environmental standards. As critics of trade liberalization have noted, public responses often are inadequate to address the attendant environmental harms. This Article uses empirical data to examine how private contracting regulates firm behavior, focusing on supply-chain contracting. The Article shows that more than half of the largest firms in eight retail and industrial sectors impose environmental requirements on their domestic and foreign suppliers. This contracting, which the Article terms "the new Wal-Mart effect," reduces externalities by translating a complex mix of social, economic, and legal incentives for environmental protection into private contractual requirements. After demonstrating that private environmental contracting is an important part of global environmental governance, the Article examines the efficacy and accountability of this regime. The Article concludes that the private contracting regime often is preferable to the alternatives: lax national and international regulation of firms in many exporting countries, and markets that lack private environmental contracting. Finding much promise in the private contracting regime, the Article concludes by suggesting new strategies for governments, nongovernmental organizations, and firms.

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Last week IKEA announced a new program to allow preferential parking for drivers of Hybrid cars. Under the program, several IKEA stores in Canada plan to reserve two parking spaces up-front for such drivers. If customers respond favorably to the program, IKEA could increase the number of reserved parking spaces. IKEA stores in the US have expressed interest in the new program, and hence are watching customer reaction to the new policy. The program is designed to enhance the environment by encouraging and rewarding customers that drive cars designed to reduce the levels of vehicle emissions. (In fact, it appears to compliment IKEA’s anti-idling policy, which encourages drivers to turn off their engines while loading their vehicles). While the program’s goal is certainly laudable, I must admit I was a bit skeptical about the program.

On the one hand, one can argue that IKEA could certainly adopt a more direct (though more costly) method of encouraging greater use of Hybrid cars. Indeed, it could follow the model adopted by Bank of America and Google and reimburse some the expenses of employees who purchase such cars. When compared to reserving a few parking spaces, such a model seems like a more effective way of insuring that more people purchase Hybrids and hence reduce the level of harmful emissions in the environment. The fact that there are seemingly better ways for IKEA to achieve its stated goal leaves the company open to the criticism that it is adopting the measure as a mere public relations ploy to curry favor with its “green” customers.

On the other hand, it seems to be a good idea for companies to make an effort to devise their own strategies for promoting the environment. Moreover, it seems unfair to criticize a program just because it appears to be less effective than other programs or it does not appear to go far enough. After all, each company has to start somewhere. And in other context, we are certainly willing to give officers and directors the discretion to explore the viability of different programs and policies. And at least for IKEA, the program seems to be part of a larger effort to implement environmentally friendly policies. And from that perspective, it appears to be part of a legitimate effort to preserve the environment.

Nevertheless, the policy does appear a bit counterproductive. Indeed, unless you are willing to pay for delivery, at least for some customers, IKEA tends to be the kind of store for which large vehicles are necessary to haul away bulky purchases. Those customers may not be too thrilled with IKEA’s new green space.

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This Sunday’s Washington Post featured a story on the increase in socially responsible investing over the last decade, and particularly the rise in such investing over the last five years. According to the Washington Post, over the past decade the number of socially responsible investment funds has increased by 39% while the amount of assets in such funds has nearly tripled. But the thrust of the Post article seemed to be pondering the point of such investing.

Certainly many advocates of socially responsible investing have attempted to argue that investment in socially responsible funds allows shareholders to “do well and do good.” However, research suggests that socially responsible investing requires some sacrifice in profits. Thus, one study by professors at Wharton revealed that the annual average returns for actively managed socially responsible investment funds lag behind comparable traditional funds by about 3.5 percentage points. While socially responsible index funds apparently perform better, existing research makes it relatively clear that shareholders who want their investments to “do good,” should not count on their investments doing as “well” as more traditional funds.

In addition, it does not appear that socially responsible investing has any significant impact on corporate policy. Thus, aside from a few anecdotes, there is nothing to suggest that the increase in socially responsible investing has pressured corporations to alter their corporate policies. Of course there are many reasons why such investing may not have any appreciable impact on corporate policy. As an initial matter, while such investing may represent a growing market, it may not be big enough for corporations to take notice. The even bigger problem is the lack of agreement on what counts as socially responsible behavior. Indeed, even on issues that seem relatively uncontroversial, there is no agreement on the kinds of policies that would achieve the socially responsible result. In my study on socially responsible investment funds, I found that there were many corporations that were screened out of some funds, but included in others. In this regard, socially responsible investing may not serve as a good signaling device. These kinds of issues help explain why socially responsible investing has not served as a vehicle for altering corporate policies.

So what is the point? The point appears to be the investment itself. More and more people apparently want their investment decisions to better reflect their social values, and are wiling to sacrifice profits (at least within reason). Thus, socially responsible investing appears to be an end in itself. However, the fact that some people find such investing gratifying for its own sake suggest that corporations interested in attracting such investors need not promote the perhaps unrealistic notion that they can do well and do good. Instead, there is a market for corporations that do good while doing well enough.

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Okay I will admit that I am a huge American Idol fan.  Of course, I do appreciate its flaws, including the fact that it does not necessarily result in America choosing the "best" singer, and that it is often a vehicle for shameless self-promotions.  This latter is evidenced not only by the "videos" in which contestants promote products, but also by the various celebrities who just happen to be in the audience on a date close to their upcoming movie/TV show/latest CD release.  Nevertheless, I enjoy the singing and I do think the show gives some people with real talent a potentially life-altering opportunity to showcase their talent.  And of course whatever I may think of the show, it is a huge hit, which means big money.  And last night the show made an effort to "give back" some of its success, and I am among those who think that the show's efforts were commendable. 

American Idol got several corporate sponsors to agree to donate money to charities that fight hunger in the US and Africa.  On American Idol, the voting for contestants occurs through telephone calls or text messaging.  Usually the audience has two hours to vote via a toll free number, and callers can vote as many times as they like for their favorite contestant.  Last night, voting was open for four hours and American Idol sponsors agreed to make donations in connection with the calls the show received.  Idol often gets more than 30 million calls--so that agreement could potentially translate into a lot of money.  The show has been vague on how much sponsors would donate.  However, last night, I believe the host of American Idol indicated that sponsors would donate ten cents for every call received up to a maximum of 50 million calls.

To be sure, the "gives back" campaign could just be a plug for good will, and the donations being made may just be a "drop in the bucket" in the context of the amount of profit the show ultimately generates, but it is nevertheless a good deed that is worthy of recognition.  American Idol has become a phenomenon that translates into big business and millions of dollars in profits.  I appreciate the Idol using the show as a platform to raise awareness about, and money for, hunger.  Moreover, I appreciate the fact that the show got the audience to participate.  In fact, fans of the show could make individual donations to charities.  Given the many young people who watch American Idol, last night's show sent a positive message that giving back is an important part of being a success in business or otherwise.  Hence, regardless of what one may think of the motives, I applaud the show's efforts to use even a portion of its success to try and impact issues of social and economic significance.

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Can corporate law save the world? Kent Greenfield says yes. I say no. We decided to write up our views, and you can find my side of the debate in a paper called "The Dystopian Potential of Corporate Law," which is now available for download from SSRN.

I have a strong preference for simple titles, and I normally don't use ten-dollar words like "Dystopia." In this instance, however, I invoked Edward Bellamy's famous utopian novel, Looking Backward, which was written in 1887. (If you teach corporate law and you haven't read Looking Backward, you should put it on your summer reading list. You can find it online here or here.) Looking Backward presents a horrifying vision:

Early in the last century the evolution was completed by the final consolidation of the entire capital of the nation. The industry and commerce of the country, ceasing to be conducted by a set of irresponsible corporations and syndicates of private persons at their caprice and for their profit, were entrusted to a single syndicate representing the people, to be conducted for the common interest for the common profit. The nation, that is to say, organized as the one great business corporation in which all other corporations were absorbed; it became the one capitalist in the place of all other capitalists, the sole employer, the final monopoly in which all previous and lesser monopolies were swallowed up, a monopoly in the profits and economies of which all citizens shared.

My argument is that Kent's proposals for reforms are motivated by the same impulses that motivated Bellamy, and the results of implementing those proposals ... well, I think you can see why I used the word "dystopian."

Kent and I had live debates on this subject at the University of Chicago and Boston College. You can see a write-up from the latter event here.

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Today's Houston Chronicle contains an editorial supporting closure of the federal Hutto Detention Center located in my home state. The medium security facility, run by Corrections Corporation of America imprisons infants and children who have done no wrong themselves, but whose parents have pending political asylum applications or are subject to deportation. As confirmed by The Chronicle and documented more fully elsewhere, the children are treated essentially as one would treat serious criminals, locked in their small cells much of the day, compelled to wear prison navy uniforms -- even in size one -- not permitted to own toys, and given minimal schooling and recreation. Apparently, during even a mild Texas December, the children were not allowed outside even once. Although it may be that some parents prefer this arrangement to those in which the kids are sent to some sort of foster care pending resolution of their legal cases, these parents were not given that choice.

I will add my voices to those who find this sort of imprisonment of children who have done no wrong and who are not demonstrated to be a threat to anyone to be an absolute disgrace to our government. It is also, as The Houston Chronicle has also reported, at odds with the way we treat at least some children who themselves have entered the United States and who have deportation pending. We do not need to lavish resources on those who have entered unlawfully, or perhaps even on those who are merely alleged to have entered unlawfully, but fostering these children (no panacea, to be sure) may well be cheaper anyway than incarcerating them. Regardless, however, the United States is wealthy enough that it can afford a lot better treatment than Hutto of innocent infants.

The issue I want to raise on this business-oriented blog, however, is what responsibility a private corporation, CCA, bears in this situation. To be sure, running prisons is not a business designed to win friends. It's a dirty business and I'm grateful in most instances that there are people willing to do it. I don't even have a particular problem in privatizing corrections. But surely there comes a point at which a private corporation has to say no. Hutto, in my view, goes way across the line. If the government doesn't shut it down or vastly improve conditions there, the shareholders of Hutto should insist that their management rapidly get out of a profoundly immoral activity that, amongst the least of its consequences, it not likely to improve that company's long run profitability.

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I must say that some of the stories in the airplane magazines are quite fascinating. On the plane ride to California, I read about Honest Tea, a company that produces all-natural teas and strives to create “healthy and honest relationships with its customers, suppliers and the environment.” According to the story, Seth Goldman, the company’s founder, initially avoided both business school and for-profit companies because he believed that for-profits could not satisfy his desire to do good. However, while in business school he realized that even for-profit companies could promote admirable goals. In fact, recent studies have indicated not only that business school students increasingly have gravitated towards student organizations that meld profit and social good, but also that such students, at least in surveys, are willing to forego financial rewards to work for companies with strong social responsibility reputations.

With such a perspective, Seth founded Honest Tea and has sought to maintain his commitment to social responsibility by creating relationships with the communities in which his products are sold as well as the communities in which his products are made. To this end, Honest Tea has partnered with the Crow community to help them develop the ability to harvest peppermint growing on their reservation to be used in teas. The result, “First Nation Peppermint” reflects a product that embodies the company’s desire to build business relationships with economically disadvantaged communities. And according to the story, the company is doing well financially. I always enjoy stories that reinforce the notion that making money does not prevent doing good and making a positive impact. If more people went into the business arena with such a belief, then we will continue to have companies that seek to do both.

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One of my favorite pieces on corporate social responsibility is Henry Manne's debate with Henry Wallich, published in 1972. Manne is his usual combative and insightful self, and his portion of the debate is full of little nuggets. In re-reading the debate, I was surprised to see a reference to Schumpeter:

The late Joseph Schumpeter argued, in his Capitalism, Socialism and Democracy, that as corporations grew and became bureaucratized, business executives would cease to think and act like entrepreneurs and would, therefore, cease to defend capitalism. Schumpeter may have been correct for the wrong reason. Contrary to his view, businessmen still behave precisely as the utility maximizers classical economic theory described. But today's maximizing behavior includes advocating the non-maximization of profits. So, it is true that businessmen have largely ceased to defend business, but only because that was the businesslike thing to do.

Lisa has posted several times about the "rhetoric of social responsibility." According to Manne, such rhetoric is an attempt to gain PR points by "promising something for nothing." This seems the very definition of cheap talk.

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The WSJ has an interesting report on the eighth-annual Harris Interactive/The Wall Street Journal ranking of the world's best and worst corporate reputations. The surprise winner was Microsoft on the strength of Bill Gates' philanthropic endeavors. The bottom three companies: Comcast, ExxonMobil, and Halliburton.

I compared the stock prices of each of the bottom feeders with Microsoft over the past year. Here are the stock charts, in the order listed above:

Hmm.

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Yesterday the independent panel set up to investigate safety processes at BP in the wake of the 2005 explosion at BP’s Texas refinery that killed 15 people and injured about 170 others, issued at 374 page report the primary gist of which was that ineffective monitoring procedures coupled with the adoption of aggressive cost-cutting measures created an unsafe work environment at BP.

I found the report an interesting commentary on how corporations’ social, and in this case environmental, commitments can get thrust to the side.  As I have mentioned before, BP seemed to go out of its way to project an image of environmental responsibility, in some sense embodied by its own use of BP to signify “Beyond Petroleum.”  Indeed, the report notes that BP should be commended for adopting a goal of “no accidents, no harm to people and no damage to the environment.” Yet the report makes it clear that BP failed to live up to this goal.  The report suggests that this occurred primarily because the company failed to provide any guidance regarding how that goal should be implemented or any incentive for that implementation.  Indeed, the report points out that BP placed a lot of emphasis on programs that rewarded people who focused on profit and cost-cutting measures, but did not do the same thing with regard to its social and environmental initiatives.  As a result, the report indicated that many workers believed that profit was more important than safety, and thus were less likely and less willing to report safety deficiencies. 

BP did not do enough for its managers either.  Apparently BP is a decentralized organization pursuant to which a lot of autonomy rest with managers of plants.  Thus, managers were not given clear directives regarding how to implement an appropriate safety system.  In the face of that lack of guidance coupled with the pressure to engage in cost-cutting measures, the report suggests that it was inevitable that safety-related efforts would be placed on the back burner. 

In the end, the report discusses the need for BP to put in place measures to ensure that management considers safety concerns in all aspects of its decision-making.  In essence, the report calls on BP to alter its corporate culture.  The report suggests that this can only occur when BP creates affirmative mechanisms for ensuring that everyone in the organization views BP’s environmental goals as a component of its business goals. 

Then too, BP seemed to have an ineffective internal control system when it came to safety issues.  As a result, many of the report’s recommendations are reminiscent of internal control requirements associated with financial auditing.  Thus, the report calls for BP to strengthen executive accountability, establish a comprehensive monitoring system that identifies and manages safety risks, create an integrated set of safety performance indicators, and hire an independent monitor to report on safety-related measures to the board.  Of course the entire time I was reading the report and the recommendations as they related to the ineffective monitoring system I was thinking about Caremark.

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I also attended AALS and heard some very interesting discussions. I heard a talk by Ralph Smith, former professor at Penn, who in passing mentioned the first of its kind IPO aimed at giving people in a low-income community the ability to participate in the earnings associated with community redevelopment. I was so intrigued that I did some further research. About 10 years ago, the Jacobs Center for Neighborhood Innovation began developing the Market Creek Plaza, a 10-acre commercial development project in one of the poorest neighborhoods in San Diego. The Plaza sits on a formerly neglected site in a neighborhood where the median income is $32,000 and 30% of the people live on less than $20,000 a year. The Plaza itself was one of the first redevelopment projects to partner with teams of residents for its design and implementation.

But Jacobs wanted to go further and give residents an ownership stake in the Plaza. Thus, at the end of last year the Plaza hosted an IPO. But not without a struggle. Over the course of about six years, dozens of IPO proposals were rejected because of concern about the risks of the venture and investors lack of sophistication. Eventually a formula allowing investors to invest up to 10% of their income or net worth was approved. A maximum of 450 people who lived, worked, volunteered or owned a business within the neighborhood were invited to participate in the IPO. Participants who met the financial and residential tests had to buy at least 20 units at $10 a unit, with a maximum investment of $10,000. Under this structure, residents would be able to own up to 20% of the Plaza with Jacobs owning 60% and a community- controlled organization owning the remaining 20%. Jacobs plans to divest its holding by 2018 so that the entire enterprise is community-controlled. As you can imagine, the units have some unique features. Thus, residents are first in line for any profits paid out. The units also entitle each owner, regardless of her stake, one vote to elect a 9 member advisory board that runs the day-to-day affairs of the Plaza.

More than 400 investors, including local churches, took part in the offering, which raised $500,000. Many groups are watching the project, evaluating the risks and benefits associated with converting residents into shareholders to determine if it can or should be duplicated. While the venture certainly contains many risks, the idea itself is just extraordinary on many levels. Based on what I have read, the offering provided residents with their first (and perhaps only) investment opportunity, it also served to educate people about investments more generally, all the while giving residents an economic stake in their community as well as the ability to benefit from redevelopment efforts. I am definitely hoping that the Plaza has a good year.

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Congrats to my friend, Kent Greenfield, whose book is now coming off the University of Chicago presses. Here is the blurb for The Failure of Corporate Law: Fundamental Flaws and Progressive Possibilities:

When used in conjunction with corporations, the term “public” is misleading. Anyone can purchase shares of stock, but public corporations themselves are uninhibited by a sense of societal obligation or strict public oversight. In fact, managers of most large firms are prohibited by law from taking into account the interests of the public in decision making, if doing so hurts shareholders. But this has not always been the case, as until the beginning of the twentieth century, public corporations were deemed to have important civic responsibilities. 

With The Failure of Corporate Law, Kent Greenfield hopes to return corporate law to a system in which the public has a greater say in how firms are governed. Greenfield maintains that the laws controlling firms should be much more protective of the public interest and of the corporation’s various stakeholders, such as employees. Only when the law of corporations is evaluated as a branch of public law—as with constitutional law or environmental law—will it be clear what types of changes can be made in corporate governance to improve the common good. Greenfield proposes changes in corporate governance that would enable corporations to meet the progressive goal of creating wealth for society as a whole rather than merely for shareholders and executives.

As readers of Conglomerate know, I disagree with Kent from page one on. Indeed, the two of us have written up a separate debate on the topic "Can Corporate Law Change the World (for the Better)" (he says "yes" and I say "no") and we will hit the circuit starting next month. Despite our differences, I think this book is thought-provoking and challenging, and if you are interested in issues relating to "corporate social responsibility," I encourage you to read it.

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Last month the New York Times did an article regarding how retailers are increasingly linking merchandise with charitable causes—and finding profit in the effort.  You may have seen products associated with (Product) Red, a campaign started by Bono to help fight AIDs.  (Product) Red represents a brand licensed to companies that then create products (usually, but not necessarily, red) whereby a percentage of the profits from the products are donated to the Global Fund to help fight AIDs.   For example, Motorola has been selling a red phone under this brand.  Gap also has a variety of different products using the brand, and apparently 50% of the profits from the sales of such products will be donated to the Global Fund.  But it is not just the (Product) Red campaign.  Many retailers are choosing to develop products that are explicitly linked to a particular cause, from MAC cosmetics, which sells a line of lipstick to Bath & Body Works, which sells a scented candle where a portion of the proceeds are donated to charity.

Interestingly, corporations used to resist affirmatively linking their products to a cause because of the potential controversy and hence negative publicity associated with such efforts.  Hence, the New York Times reports that people used to experience difficulty convincing corporations to sell caused-linked products.  However, recently retailers have been more receptive to this concept, possibly because of corporations’ efforts to resurrect their images after corporate governance scandals.  Moreover, retailers have found that consumers respond extremely well to these kinds of products.  Thus, more and more retailers have gotten into the act.  Interestingly, the New York Times notes that the recent trend of linking products to some worthy cause can be traced back to the Lance Armstrong “Livestrong” bracelets.  Retailers were surprised by how well they sold.  And hence many companies began promoting bracelets aimed at supporting other causes.  And then companies clued into the fact that consumers were willing to purchase more than just bracelets for a worthy cause.

As the New York Times suggest, because consumers like them, these products clearly enable corporations to make money.  With these products, corporations have found a new market that can boost their bottom line and give them a competitive edge.  Yet it is also a unique and widespread way for both individuals and corporations to engage in charitable giving.  Indeed, corporate philanthropy in the retail industry is up, buttressed at least in part, by these kinds of products.  Showing that corporations really can do well by doing good.  Then too, this trend may have staying power.  Indeed, by integrating their philanthropic efforts into their product lines, corporations appear to have made a long-term commitment to charitable giving.  For example, GAP has made a commitment to sell its products for five years, with different clothing introduced each season.  In this respect, so long as consumers continue to respond well to these kinds of products, there is a strong potential that corporations producing them will sustain their philanthropic efforts over the long-run.

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One of my ongoing projects is analyzing the relationship between corporate rhetoric and behavior.  One of my hypothesis is that when a corporation engages in significant amounts of rhetoric, there is an increased likelihood that the rhetoric will influence corporate behavior because by building its reputation around the rhetoric, the corporation or rather corporate decision makers will feel some obligation to conform corporate behavior to that rhetoric and even shape corporate policy to be in tune with the rhetoric.

BP appears to negate that hypothesis--and with tragic consequences.  Indeed, the company adopted what seemed to me an aggressive marketing strategy seeking to define itself as socially and environmentally responsible.  In fact not just its commercials, but also the company’s website, annual report and sustainability report are saturated with rhetoric about its responsibility and the importance of translating its values into action.  Yet the allegations of BP’s behavior in Texas—and not merely the tragic accident itself, but rather allegations that the company ignored significant safety problems at the plant—discredit any notion that BP felt any behavioral allegiance to its rhetoric.  (Although one could argue that it was not BP but certain officers at BP that were out of step with the rhetoric).  Nevertheless, those allegations seem to confirm the common intuition that corporate rhetoric of responsibility is just a marketing ploy with no impact on behavior.

 

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As our amazing Illinois Corporate Colloquium speaker series wraps up this week, Larry Mitchell is speaking today on corporate behavior.  Coincidentally, the NYT yesterday had a section on "Giving," with the focus being on corporate types who turn "philanthropreneurs."  Although the article lumps a lot of billionaire entrepreneur giving into the same bucket, philanthropreneurs may take their profits and (1) start a traditional nonprofit foundation that disburses funds to other nonprofits in traditional ways; (2) start a foundation that disburses funds to nonprofits in nontraditional, "active" ways; (3) start a foundation that disburses funds to both nonprofits and for-profit firms with positive social value; (4) start a for-profit fund that invests in for-profit firms with positive social value; or (5) some combination of the above.

Note that the for-profit funds recognize that instead of a deduction for a donation, investors require a return and that any profits will be taxed.

One of the criticisms (or maybe praises) of corporate social responsibility is that most, if not all, acts of social responsibility add to the bottom line through goodwill or branding.  Although some of this hybrid philanthropy is done by individuals who no longer have a product to sell, some is done by founders of other entities that may benefit from the good PR, such as Google and Virgin Group.  Sir Richard Branson, who is profiled as creating both a Virgin-branded nonprofit foundation and a venture capital fund, acknowledges the mixed motives quite openly:

If I'm 90 years old and people look to the Virgin brand and say that's the brand they respect most in the world, I would be happy. . . Now, if we can in my lifetime come up with a fuel that is a clean fuel and does something to help save the world from global warming, that will be good for the brand, something everyone who works for Virgin can be proud of, but it will also be a good thing for the world, too.

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In my research on the issue of corporate social responsibility I have run across many studies that all have the same theme: whenever they are surveyed people—from consumers to business students to shareholders—not only express a desire for corporations to engage in socially responsible behavior, but also seem to believe that engaging in such behavior has a positive impact on the corporation’s bottom-line.  The studies or surveys are then of course used to support the proposition that corporations should engage in socially responsible behavior.  The studies and surveys I believe are also used to support the notion that—at the very least—there will be some negative reputational impact on corporations who fail to engage in such behavior.  While I certainly like the results of the study, I always find myself a bit skeptical about their validity as well as their import.

First, I am ever mindful of the possibility that when surveyed people tend to respond as they believe they should respond.  Thus, one can argue that it is relatively unremarkable that surveys in the post-Enron era would reveal a public preference for corporations to engage in socially responsible behavior.  I think there are plenty of people who agree with the sentiment, but many more who believe that they should agree with the sentiment. For example, who’s going to say that they DON’T believe that a corporation should be environmentally friendly?  In this regard, I am not sure that the surveys actually capture people’s genuine belief.

Second, I think it is possible that the surveys and studies are capturing people’s aspirations for corporations rather than their expectations regarding actual corporate behavior.  While this may have some normative implications (i.e. suggesting that many people believe that corporations OUGHT to be more socially responsible), it may not have any behavioral implications.  As a result, it may not be proper to use the surveys as an indication of the type of conduct in which people expect their corporations to engage.  Or to put it differently, it may not be appropriate to use the surveys as support for the proposition that people will impose costs on corporations that fail to engage in socially responsible behavior.  Part of the reason why this may be true is that the surveys appear to be asking the wrong question.  Indeed, surveys appear to assess the extent to which the public desires corporations to engage in certain kinds of conduct.  The better question is whether and to what extent the public will impose costs on corporations who fail to engage in that behavior.  I have a feeling that there may be different outcomes if this latter question is asked.   

Finally, I think many of the surveys do not probe the deeper question—to what extent do people believe that corporations should sacrifice profits (even short-term profits) do engage in socially responsible behavior?  Instead, my assessment of the surveys is that they presuppose either that corporations can pursue profits and these other aims without any tension or that pursuit of these other aims inevitably will lead to enhancing profits.  Again, I must say that framed in this way, the survey responses appear relatively unremarkable.  Who’s going to say that a corporation should NOT be environmentally friendly when it is posed as a costless and even beneficial proposition?  It seems a different matter altogether when there are trade-offs. 

Thus, I remain skeptical both of the data and how it is being used. 

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I did a lot of traveling this summer and if you have traveled recently I am sure you have seen the hotel towel policies offering you the opportunity to hang your towels as an indication that you do not want the hotel to wash them during your stay.  The signs generally inform hotel guests that hotels around the world use millions of gallons of water and detergent every day when they wash towels.  Such daily washing not only uses water and energy, but also puts harsh detergent into the environment.  The last hotel I stayed in explained that it had a “commitment to preserving the environment and the Earth’s vital resources,” and thus was offering its guest the option of reusing their towels and helping the hotel to make a difference.  In fact, the sign stated that “we can all take part in ensuring a bright future for ourselves, our children, and generations to come.” 

I have seen similar type messages in many hotels.  Maybe I am becoming cynical, but I could not help but think that the sign does not mention that the reuse of towels by hotel guests must surely cut down on hotel expenses.  Thus, it seems likely that hotels have implemented these environmentally friendly hotel towel policies because they have a positive impact on the bottom-line.   The good thing, though, is that these hotel towel policies appear to represent at least one area where businesses can legitimately do both—enhance their profits and engage in socially responsible behavior.   My cynicism notwithstanding, I did appreciate the fact that companies are trying to implement policies that allow them to do both.

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A new empirical paper has come out offering yet more evidence that firms generally treat corporate social responsibility as a tool for profit maximization:  firms that anticipate economic benefits from CSR are more likely to do it.  (See here, e.g.).  Theory suggests that firms that need to resolve information asymmetry for their consumers may rely on CSR activities to do so.  For example, firms selling difficult-to-evaluate goods may use CSR activities to signal product quality.

This recent study by Siegel and Vitaliano (both from RPI) offers confirmation of this prediction, showing that firms selling experience goods and credence goods are more likely to be socially responsible than firms selling search goods.  (Search goods are goods that consumers can generally evaluate before they buy--clothing, for example.  Experience goods and credence goods are more difficult to evaluate.  Experience goods generally need to be used by the consumer before she can evaluate their quality.  An automobile may be such a good.  Credence goods are difficult to evalute even after the consumer has used the good.  Vitamins or car repairs are examples.).

Siegel & Vitaliano show that firms selling a credence good are 23% more likely to engage in CSR; firms that sell experience goods are about 15% more likely to be socially responsible.

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One of the intangible assets that a company has is its reputation.  Corporate reputation is a perception of high esteem or respect for a firm's activities, strategies, etc.  The quality of a firm's choices and outcomes are one driver of reputation, but reputation also has a life of its own.  Once a firm establishes strong visibility in the media and among investors and analysts, improvements in quality tend to lead to stronger gains in reputation.  Reputation is also related to non-financial performance criteria, such as the ability of a firm to deal well with its stakeholders.  When a firm is viewed as being fair to employees and the larger global community, its reputation is enhanced.

I bring up corporate reputation because it is one way that firms that are attentive to nonshareholder constituencies may improve their total market value.  As I mentioned in my earlier posts, attending to all stakeholder demands may be important to maximizing the total market value of the firm.  Corporate reputation is the mechanism linking stakeholder management with market value maximization.  A lot of good organizational research indicates that improved corporate reputation leads to improved financial performance (e.g. Fombrun and Shanley 1990; Landon and Smith 1997).   Roberts and Dowling  (2002) demonstrate that reputation actually enhances long-term financial performance, which assuages critics who argue that reputation offers only temporary financial gains.  They argue that reputation is important to market value creation because it is so difficult to replicate.  If it were easy to create a good reputation, any firm would do it and it would immediately lose its value.  Thus, reputation is a source of persistent competitive advantage.

One of the most well known researchers of corporate reputation is Charles Fombrun of the Reputation Institute.  For anyone looking for a straightforward and comprehensive treatment of the subject, I recommend Fombrun's (coauthored with Cees Van Riel) Fame and Fortune: How Successful Companies Build Winning Reputations.  In the book, Fombrun and Van Riel outline the pathways from reputation to financial performance. One path is by improving the operating performance of a company.   

In general terms, a good reputation can improve a company's efficiency and effectiveness by stimulating employee productivity.  It also creates a reservoir of goodwill toward the company that derives from partners, suppliers, dealers, creditors, and regulators whose support often manifests itself in the form of lower input prices, including a lower cost of capital, and translates into higher margins.  The company's lower input costs are supported by its ability to charge better prices for its offerings, a factor that enhances the company's margins, encourages financial analysts to give favorable ratings to the company and fuels demand for its shares (pg. 27).

The logic is similar to that offered by Joel Podolny in his book Status Signals.  He argues that status (which is similar but not sociologically synonymous with reputation) exhibits the Matthew Effect.  Firms that have high status typically attract better employees who are willing to work for the firm at a lower wage, simply because of the status benefits it provides to their ego.  Suppliers want to do business with high status firms, so they are willing to take some profit hits in order to do so.  The result is that high status (or high reputation) firms can offer the same quality product for a lower price than their competitors.  The result of this feedback process is that high status firms become firmly embedded in a status hierarchy.  Status and reputation, thus, tend to reproduce themselves.

Of course, the whole point of Fombrun's project is to encourage managers to do things that will enhance their reputation, so he believes that there is at least some mobility in reputational assessments.  How do firms improve their reputations?  One of the most crucial things that they can do is improve their standing among stakeholders that are often ignored by profit-seeking companies.  In chapter 3, Fombrun and Van Riel demonstrate empirically that the best way to enhance reputation is to "improve its emotional appeal to consumers" (pg. 59).  To improve these perceptions by 7 percent, a firm could improve perceptions of its social responsibility by 26 percent.  Thus, doing good things for the environment, for communities, and for activist-related stakeholders inevitably feeds back on consumer perceptions, which in turn leads to improve reputation and enhanced market value.

The link between corporate reputation and market value shouldn't be forgotten when discussing directors' or managers' dealings with nonshareholder constituencies.  Secondary stakeholders are, in this sense, important to the total market value of the firm.  In extremely competitive industries, the firm that comes out on top may be the firm that is best able to handle its stakeholders and consequently enhance its reputation.

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The debate over the merits of Walmart is hardly new (it's been done here at the Glom as well).  But I ran across a good email debate over at Slate entitled "Is Walmart good for the American working class?"  The debate is between economist Jason Furman and author-activist Barbara Ehrenreich, who worked as a new hire at Walmart as part of the research for her book Nickel and Dimed, which portrays life as a low-wage worker in the US.  Of particular interest, they fight about the empirical data--both its quality and meaning. 

Worth a read.

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Recently I have been doing some empirical research on the connection between a corporation’s rhetoric regarding social responsibility and its actual behavior. The research led me to a list published by Business Ethics of the Top 100 Socially Responsible Corporations. What I find interesting about the list is that the corporations making the list significantly vary from year to year. Thus, there are only sixteen corporations that have made the list all seven years. I find this interesting because I would have predicted a much larger segment of repeat players. This prediction would have confirmed my suspicion that there are certain companies that engage in socially responsible behavior as a matter of course and other companies that do not. The wide variation in the companies making the list seems to discredit that notion while raising some interesting questions.

First, does the list suggests that corporate engagement in such behavior is random? Apart from a core group of companies, one can certainly argue that the variation reveals that a corporation’s commitment (or ability) to engage in “socially responsible behavior” changes from year to year.

Second, perhaps the variation confirms the difficulty with engaging in socially responsible behavior. In fact, anecdotal evidence suggests that sometimes corporations are dropped from the lists because of their poor policies related to one category (environmental practices), even when the company seems to score high in other areas (employment issues or community involvement). Certainly, one of the weaknesses of social responsibility as a governance theory is that it encourages a focus on multiple constituents/issues, which focus is difficult to meet. The high turnover on the list suggests that socially responsible behavior is a moving target that very few companies can hit on a consistent basis.

Third, the variation may suggest that these kinds of lists may not be having their desired effect on corporate behavior. Some have maintained that creating these “top 100" lists (like best companies to work for, etc) not only confers some tangible benefit on corporations engaging in such behavior, but also encourages those corporations to sustain their behavior. There is some evidence that corporations perceive their appearance on the list as beneficial. Hence, virtually every company that appears on the list advertises that fact in a press release or on their website. Yet the fact that corporations appear to fall off the list more than they stay on suggests that such lists have no long-term significance for corporate behavior.

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On June 15, Bill Gates announced that he will transition away from his day-to-day activities with Microsoft to a full-time role with the Bill and Melinda Gates Foundation. Yesterday, Warren Buffett announced that he will donate much of his vast fortune to the Gates Foundation, with smaller amounts going to various Buffett foundations.

Prior to Buffet's gift, which will be made in installments, the Gates Foundation had assets of nearly $30 billion -- over double the amount in the next largest philanthropic foundation in the U.S. (Ford Foundation). Last year, the Gates Foundation gave $1.25 billion in grants -- much more than any other foundation -- and the Buffett gift eventually will more than double that amount. According to Buffet, "We agreed with Andrew Carnegie, who said that huge fortunes that flow in large part from society should in large part be returned to society."

I started writing this post many hours ago, in the wee hours of the morning, but I got stuck right here. What are we to think of this? There is, of course, a substantial "wow" factor associated with these developments. Mostly, we are wowed that anyone has $30 billion to give away, but I am also wowed that Bill Gates would devote his full time and energy to his foundation. That is impressive.

But the big story here has to do with the role of philanthropic foundations in performing what might be considered "governmental" functions. Peter Dobkin Hall has written extensively about philanthropy in the U.S., and his essay "Philanthropy, The Welfare State, and the Transformation of American Public and Private Institutions, 1945-2000" offers some interesting thoughts that seem relevant here:

Constrained by deep-seated hostility to "big government," policymakers and legislators devised governmental mechanisms that enabled them to achieve these ends without creating European-style central state bureaucracies. While centralizing revenue gathering (through universalization of income taxation) and policymaking in the federal government, the actual tasks of implementing policies was allocated to states, localities, and private sector actors.

Among those policies, of course, is tax policy, which encourages the formation of foundations by people like Gates and Buffett. The NYT noted that the Gates Foundation distributed over twice as much last year as the United Nations Educational, Scientific and Cultural Organization (UNESCO). That's before the Buffett gift!

All of which makes me wonder: is this a rational way to organize the world?

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A couple of weeks ago Christine posted about Bank of America and other companies that had programs offering incentives to employees who purchase hybrid cars. In addition to Bank of America, Google gives employees $5000 if they purchase a hybrid and $2500 if they lease one, while Timberland apparently gives employees up to $3000 back plus front row parking for purchasing a hybrid.

As Christine noted, this kind of incentive program receives a boost from the federal government in the form of tax credits. However, as the New York Times reports, apparently this boost is getting ready to evaporate. This is because when the federal government created the program it capped the number of cars from any single manufacturer eligible for a tax credit. For example, unless Congress changes the law, because Toyota has reached its cap, by October 2007, buyers of the Prius will not be eligible for a tax credit.

Of course with corporate incentives and rising gas prices, such a program may still represent a good deal for employees.

Regardless of how long it lasts, one would think that the program would be viewed in a positive light given that recent surveys suggest that the public believes corporate commitment to socially responsible behavior should focus more on employees than other efforts like charitable contributions. Yet not all employees appear to be happy with such programs. Indeed, while some think it is a positive development, others express resentment because they believe either that the program reflects an effort by corporations to force employees to be PC or that the program gives an unfair advantage to employees who have the money to purchase new cars, while apparently penalizing those employees who protect the environment by walking or riding their bikes to work. Given the number of employees who appear to be taking advantage of corporate hybrid incentives, these reactions may reflect the views of just a small percentage of employees. Nevertheless I find them troubling because they suggest (a) the tendency to treat all corporate expenditures as a zero sum game, and (b) some hostility towards corporate efforts to engage in socially responsible behavior—or perhaps employees simply believe those efforts to be disingenuous.

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Bank of America has unveiled a pilot program to offer employees in Boston, L.A. and Charlotte $3000 toward the purchase of a hybrid car.  This type of "corporate social responsibility" is the kind that is actually aimed toward maximizing profits as the company states that the program hopes to boost employmee recruitment efforts and build customer loyalty.  Does this program make you want to open an account at Bank of America?  Maybe if they gave me a lower interest rate on a hybrid car loan?

According to the WSJ, Google already offers employees $5000 to purchase any car with an mpg of 45 or more.  Also, Massachusetts has a bill pending that would give residents a $2000 tax credit for purchasing a hybrid, in addition to the $3000 federal tax credit.  So, if you worked for BoA in Boston, you could effectively get a $8000 discount on a hybrid vehicle.  That's starting to get to be a real incentive.

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As more and more old-line companies--Generous Motors, Ford, Delta--struggle to retool around their legacy costs, the Kaiser Family Foundation has recently released a survey report detailing some of the costs of this retooling.  The report describes the effect of two major steel company bankruptcies--LTV and Bethlehem Steel—on health coverage for retirees and their dependents.  The two bankruptcies left approximately 200,000 retirees and dependents without health coverage between 2002 and 2003. While most respondents (about 74%) were able to find health coverage after the loss of their retiree benefits, the loss of benefits caused significant disruption to their lives and retirement plans. For example, about one-half of pre-65 retiree respondents reported that they or a spouse returned to work or delayed retirement as a result. Twenty-five percent of pre-65 respondents reported that they cashed in “a lot” of their savings or assets to cover health care or insurance premium costs. Also 49% of pre-65 respondents reported postponing or going without needed physician care, and 29% reported postponing or going without need hospital care, because of cost concerns.

The old-line corporate social contract is probably no longer sustainable except in a handful of less-than-competitive industries, and companies seem to be transitioning to more defined-contribution type arrangements.  Some folks are getting caught in the transition.

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Starbucks made its first foray into the movie industry by teaming with Lion’s Gate to help promote and distribute “Akeelah and the Bee,” a movie about an inner-city black girl’s struggle to make it to a national spelling bee. Starbucks’ backing of the movie represents an interesting commentary on corporations that attempt to engage in socially responsible behavior.

On the one hand, Starbucks’ entrance into the movie business reflects a movement towards diversification that has proved profitable for many other fast food chains such as McDonalds and Burger King. In exchange for its marketing efforts, Starbucks will receive a percentage of the movie’s revenue. Starbucks already has had some success in the entertainment industry by selling music CDs, and with Akeelah and the Bee looks to broaden its participation into other arenas. In this regard, Starbucks is taking part in the more general trend of corporate engagement in a variety of different endeavors.

On the other hand, Starbucks foray is somewhat novel because it reflects an attempt by Starbucks to “do well while doing good.” Starbucks chair Howard Schultz explained that the company selected Akeelah and the Bee because the movie, which emphasizes the importance of community and education, was consistent with Starbucks’ core values. Then too, one could argue that Starbucks’ efforts to “do good” encompassed not only the promotion of a movie with a laudable message, but also marketing the movie in a less traditional fashion. Thus, Starbucks’ sought to engage in a “classy” marketing campaign. Hence, no action figures, glitzy commercials or large posters. Instead, Starbucks’ marketing campaign consisted of placing stickers with spelling words on its doors and windows, as well as distributing flash cards and cup sleeves with spelling words on them.

So was Starbucks successful in meeting its dual objectives? It depends on how one measures success.

Although inspirational, the movie does not appear to have met revenue expectations. The movie opened with less than expected earnings, coming in at number eight during its opening weekend and then number nine the second weekend. Starbucks claims to be upbeat despite the numbers, and hopeful that the revenues will improve. This hope seems a bit unfounded given that movies tend to generate the highest amount of revenue during their opening week.

Unfortunately, the pressure to meet revenue expectations may undermine Starbucks’ ability to “do good.” When financial analysts questioned Schultz about Akeelah and the Bee during a conference call, Schultz apparently did not feel comfortable focusing analysts on the strength of the movie’s message. Instead, he appeared to distance himself from the movie by stressing that Starbucks had invested no cash in the movie, and had no plans to invest in films in the future. Then too, other than some games and soundtracks, there was little evidence of continued marketing for Akeelah and the Bee at the Starbucks I visited today. Gone are the spelling stickers that graced the doors, windows and counters. I am not sure if it was pre-planned, but the withdrawal of these more visible signs of promotion is interesting, to say the least. It suggests that Starbucks has encountered difficulties with seeking to do well and do good.

Ultimately, of course, there are many reasons why Akeelah and the Bee did less well than expected. The movie opened at the same time as “RV,” another big family movie. It also may have been too formulaic for some. Or perhaps Starbucks’ customers were not interested in the movie’s themes. Regardless of the reasons for its seemingly lackluster performance, however, one wonders if the next time Starbucks seeks to promote a movie it will feel pressured to pick a movie or a marketing strategy that resonates less with its core values. If it does, it will be a setback for those who insist that corporations can maintain a commitment to “do good” while ensuring the corporation’s profitability.

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It must be tough to be a Coca-Cola executive nowadays. Two recent news stories have alleged that Coca-Cola was responsible for killing people but for very different reasons. One argues that Coca-Cola has supported human rights abuses in Colombia and Turkey and environmental pollution in India that have resulted in deaths in those countries. The other argues that sugary drinks, like Coke, are a significant part of the obesity crisis in the United States. Obesity leads to health problems that kill 112,000 Americans annually. This post will deal with the first allegation and I will follow up with another post that deals with the second.

The first allegation arises out of attempts to hold Coca-Cola liable for the alleged actions of its subsidiaries and affiliated companies in Colombia and Turkey. AP and several other media outlets recently reported that Macalester College, a small liberal arts college located in St. Paul, Minnesota, is considering joining a boycott against Coke products based on allegations that Coca-Cola through its local subsidiaries abuses human rights, labor and the environment in Columbia, India and Turkey. An editorial in The University of Minnesota’s newspaper urged the UofM to follow Macalester’s lead. New York University and the University of Michigan instituted boycotts of Coca-Cola last year.  The Chronicle of Higher Education also has an article on this campaign to boycott Coke that will be published in the April 14^th issue (although it is already available online).  (Note: This boycott is not at issue at the University of St. Thomas (UST), where I teach, because Pepsi already has an exclusive contract to supply soft drinks to UST.)

Yesterday, according to the Ann Arbor News, the University of Michigan, however, announced that it would allow Coca-Cola back on campus.  What was the reason for this change of heart at Michigan? Coca-Cola and a federation of labor organizations got the United Nations International Labour Organization to agree to conduct an independent, third-party investigation of the human rights abuse allegations in Colombia. Coke is talking with TERI, a NGO based in Delhi, to conduct a third party assessment of Coke’s environmental record in India. In addition, Coca-Cola joined the UN Global Compact on March 8, 2006. The Global Compact asks companies to embrace and enact ten core principles in the areas of human rights, labor, the environment, and anti-corruption measures.

Unfortunately for Coke, the organizer of this campaign and some activists supporting this campaign have not welcomed these developments and continue to call for boycotts against Coke.  Some of these activists feel that the ILO investigation is tainted by conflicts of interest even before it has begun.  The Macalester Social Responsibility Committee, which originally recommended that the college ban Coke at the end of March, has refused to reconsider its recommendation in light of the recently announced ILO investigation.

The fact that the organizer of the campaign hasn’t welcomed these developments is not surprising. The organizer behind the Killer Coke campaign is SINALTRAINAL, the Colombian National Union of Food Industry Workers, which filed a lawsuit against Coca-Cola and its Colombian bottler in the U.S. District Court for Southern District of Florida in 2001.  In 2003, the District Court dismissed Coca-Cola and Coca-Cola Colombia from the suit.  In dismissing Coca-Cola and Coca-Cola Colombia from the suit, the District Court noted:

The Bottler's Agreement does not give Coca-Cola U.S.A. or Coca-Cola Colombia the duty or right to control all aspects of the Bebidas plant operation as alleged; rather, it is the type of agreement typically found in a franchise relationship. It permits Coca-Cola U.S.A. to require Bebidas, as a Coca-Cola bottler, to meet certain standards necessary to protect Coke's product in the marketplace (i.e. use of the trademark, packaging, quality control, etc.). Nothing in the agreement gives Coca-Cola U.S.A. the right, obligation, or much less the duty, as Plaintiffs argue, to control the labor policies or ensure employees' security at Bebidas. The Bottler's Agreement clearly refutes Plaintiffs' allegation that Coca-Cola U.S.A. had total control. Without such control, Plaintiffs cannot tie the Coca-Cola Defendants with their alleged alter egos or agents (Kirby, Kielland, Bebidas and Mosquera). Hence, Plaintiffs cannot prove that the Coca-Cola U.S.A. or Coca-Cola Columbia violated international law by conspiring or acting jointly with the paramilitary in Carepa to murder Gil under color of law.

The owners of the Bebidas bottling plant in Colombia, Richard Kirby and his son, are both residents of Florida. The District Court allowed SINALTRAINAL to pursue its case against them and Bebidas.  Nevertheless, SINALTRAINAL is not satisfied with just these defendants.  Since it couldn't hold Coca-Cola liable in court, SINALTRAINAL commenced the Killer Coke campaign.

In pleading its case to the student activists and others, SINALTRAINAL wants to ignore fundamental aspects of contract and agency law, such as the rule that an entity contracting with an independent contractor is not automatically liable for the actions of the independent contractor just because it has a contract with them.  On the Killer Coke website, SINALTRAINAL cites the fact the Coca-Cola was the largest shareholder in Panamerican Beverages Inc., one of Coca-Cola's largest bottlers in Latin Amerca (Panamco), as grounds for finding that Coca-Cola had sufficient control over Panamco to be held responsible for the alleged human rights abuses committed at the bottling plant owned and operated by Bedidas.  SINALTRAINAL doesn't disclose that Bebidas is a small, closely held corporation, which is owned and managed by Richard Kirby and his son, Richard Kirby Kielland, not Coca-Cola or Panamco.  The only control that Coca-Cola and Panamco had over Bebidas was through the Bottling Agreement, which, as the District Court noted, did not give them a say in the labor policies or practices of Bebidas.

I doubt that the student activists fully appreciate the extent to which their goodwill is being manipulated by SINALTRAINAL to force a settlement from Coca-Cola, which the law says SINALTRAINAL is not legally entitled.   In addition, I doubt that the undergraduate students pushing these boycotts understand the legal principles involved and why they are important.  If every corporation that wanted to operate in or make an investment in a developing country knew that it would be held 100% liable for everything that went on within the businesses with which it dealt, there would be considerably less foreign investment and trade with developing countries and the people in those developing countries would be worse off than they are now.  If 100% liability was the rule, corporations that did business in developing countries with weak legal regimes would have substantially higher monitoring costs than their competitors, which they may not be able to pass along to consumers.  Except in limited circumstances, consumers have not show a willingness to pay higher prices for goods made by companies that act more socially responsible. 

Campaigns like Killer Coke, which target some firms in an industry but not all of them, put the targeted firms at a competitive disadvantage relative to their peers.  In order to quell the negative publicity, such firms frequently spend more money and resources trying to monitor their affiliates and subcontractors than their competitors do.  If they can, such firms try to push these added expenses off on their subcontractors, which puts many developing country companies in a Catch-22 situation. If they don't comply with the labor and environmental standards demanded by Western companies, then they might lose their contracts.  If they do comply with the labor and environmental standards demanded by Western companies, then they might lose their contracts to a lower cost producer.

In addition, I doubt that the students would be willing to sponsor a boycott against both Coca-Cola and Pepsi, even though both Pepsi and Coca-Cola are facing allegations of polluting the environment in India.  At the time of the alleged human rights abuses in Colombia (1996), Pepsi was subject to student boycotts for operating in Myanmar (Burma). SINALTRAINAL had attempted to start a student boycott of Coke in 1996-97 when the students were boycotting Pepsi, I think that it would have had considerable difficulty finding supporters. Students might not mind switching from Coke to Pepsi or vice versa, but I don't think that they could easily be convinced to give up both.

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David Vogel of the University of California, Berkeley, has produced an interesting book on corporate social responsibility (CSR) entitled The Market for Virtue.  The goal of the book is “to assess the impact of civil regulation, or the market for virtue, on important corporate policies and practices that are associated with contemporary definitions of corporate social responsibility.” 

Vogel notes that a major driver of CSR recently is the argument that good corporate citizenship is good for business. He provides evidence that socially responsible firms are not necessarily more profitable or less profitable than firms that do not factor CSR concerns into their business decisions.  He argues that the business case for CSR is strongest in firms who have specifically made CSR part of their business plan for attracting customers, employees and investors and for highly visible international companies which are targeted by activists. Most businesses do not fall into either camp.

I was particularly interested in the book’s discussion of the phenomenon of social entrepreneurship (businesses started for the purpose of achieving social or environmental goals) and of socially responsible investing (SRI).  I am interested in these topics because I don’t think that law schools or business schools do enough to make their graduates aware of how much the goals of a private socially concerned business will change due to market forces if it decides to go public. 

Most business associations casebooks discuss why a corporation may want to go public for financial reasons.  I have not found one that discusses how going public may force the business to change or reprioritize its goals.  Businesses, like the Body Shop and Ben & Jerry’s, have weakened their commitments to the social and environmental goals that their founders embraced after they went public or were acquired by a public corporation. The market pressure for public companies to make the maximum profit possible usually is the force behind these shifts.  Social entrepreneurs cannot rely on SRI to save the businesses’ CSR commitments. Most SRI funds currently promise their clients that the fund will equal or exceed the rate of return of mainstream investment funds. SRI funds have not shown a willingness to invest in companies that earn less because they have chosen to be more responsible. As a result, some social entrepreneurs have refused to take their companies public or allow them to be acquired because they didn’t want the businesses to lose their ability to promote the social or environmental goals that lead the business to be founded in the first place.

I think that lawyers who are counseling social entrepreneurs need to be aware of these issues and need to bring it to their clients’ attention when helping their clients decide whether to take the business public or not. While I try to raise these issues in my Business Associations and Securities Regulations course (in part because some of my students are joint JD/MBAs and may be taking classes at the University of St. Thomas has a School of Entrepreneurship), I would be interested in learning to what extent corporate or business law courses at other law schools do this.  I also would be interested in hearing from lawyers about how they discuss these issues with their clients when they are making the decision about whether or not to go public or to allow the business to be acquired by a public company.

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First, thank you to Gordon, Christine, and Vic for inviting me to serve as a guest and for extending to me such a warm welcome. It is a pleasure to join such a robust discussion group.

I hesitate to divert the discussion on the first day of the Enron trial, but my attention was captured by an article in the Sunday edition of the Washington Post regarding Target Corp.’s involvement in assisting local, state and government agencies in their crime control efforts. According to the article, Target increasingly has worked with law enforcement agencies in this area. On the one hand, I must say I found it slightly ironic that some major corporations are providing assistance in ferreting out wrongdoing in society, when Enron and other corporate governance scandals suggest that such companies have been less than successful in uncovering such wrongdoing within their own ranks. On the other hand, the article highlights some interesting issues related to corporate philanthropy.

Recently, I have been researching whether corporate rhetoric on social responsibility has any normative or behavioral repercussions for corporations. You may remember that in January of 2005 The Economist featured several articles on the issue of corporate social responsibility. One of the articles proclaimed that the prevalence of social responsibility rhetoric in the corporate documents of many major corporations revealed that “corporate social responsibility has won the battle of ideas.” However, the article suggested that the rhetorical victory was relatively insignificant, particularly because corporate rhetoric is often inconsistent with corporate behavior. My research has sought to measure the extent of social responsibility rhetoric within corporate documents and determine its relationship, if any, to corporate behavior.

This brings me to Target. Target has taken an active role in helping law enforcement agencies. Target has built a forensic lab in Minnesota, has helped investigators set up and operating criminal surveillance systems, and has contributed money to help with the prosecution of repeat criminal offenders. The Washington Post describes Target’s efforts as “part of a trend in corporate donations directed at solving societal problems,” and compares Targets efforts to those by other corporations that build hospitals or schools. Certainly Target’s corporate website and annual report tout its involvement in the community and its charitable donations to a variety of worthy endeavors. Viewed as a component of its corporate philanthropic efforts, Target’s programs helping law enforcement appear consistent with Target’s corporate rhetoric on social responsibility. These programs, however, raise some interesting issues.

First, they appear to be a subtle form of privatization. The Washington Post begins by pointing out that arson investigators in Houston needed help restoring a damaged surveillance tape and turned to Target for help because other local experts and NASA apparently could provide no assistance. This fact suggests that our law enforcement agencies lack necessary resources. No surprise. From this perspective, Target brings important, and potentially life-saving, resources to the table. However, the provision of important services by for-profit entities poses important issues, both ethical and otherwise. For example, one may be concerned that those agencies benefiting from Target’s assistance may feel beholden to Target. Also, because Target’s provision comes in the form of a charitable donation, there is apparently no oversight over its arrangements with various agencies. Thus, while Target’s efforts in this area are laudable, there is a need to be vigilant about these kinds of endeavors.

Second, I wonder if we should be concerned about the implications of this kind of charitable giving on support for other causes and programs. Corporations have a limited pool of resources to allocate among various charitable endeavors. While many corporations, like Target, allocate their resources to a variety of different causes, others do not. Does it matter if corporations follow Targets lead and devote some or most of their corporate philanthropic resources to crime control as opposed to building schools, hospitals and playgrounds?

Third, Target’s actions illustrate the difficulties with measuring whether and to what extent corporations are engaged in socially responsible behavior. Indeed, in my research I have found that corporations include many programs under the rubric of “corporate social responsibility.” In other words, the fact that corporations tend to define corporate social responsibility in different ways makes it difficult to draw conclusions about the extent of corporate social responsibility among major corporations. It also potentially dilutes the meaning of corporate social responsibility.

In the end, I am ambivalent about Target’s actions. While I find them commendable on a personal level, I worry about the unintended negative implications of those actions, particularly when they are characterized as corporate giving.

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What is the line between corporate social responsibility, bribery, and blackmail?  Today's WSJ explores this question by looking at Exxon's complex relationship with the government of Angola.  A brief description of Exxon's activities in Africa is here.  As background, readers may know that when a foreign company wants to do business in a particular country, each country has foreign investment laws which may be loose or tight.  In addition, oil companies generally are only allowed to explore in a particular country (or off the coast of a country) by entering into a concession agreement with the government or perhaps a production agreement with a state-owned oil company as a partner.  Obviously, the government granting the concession and various licenses and permits has quite a bit of negotiating power both financially and politically. 

The WSJ story focuses on how governments may persuade U.S. oil companies to provide charitable donations to the public good of the country in exchange for being able to develop oil fields.  In fact, in one Indian project that I worked on as an attorney, our client was asked to build a hospital, school, and basic infrastructure for the workers who would be moving to the project.  Although this kind of CSR sounds quite reasonable, there are some basic agency problems inherent when the government officials requesting specific donations may not be acting in the interest of the "public."  Some of the philanthropic projects mentioned seem more pet projects of individual politicians than general social programs.  In addition, even for worthwhile projects, apparently oil companies bear the risk of continued support of donated infrastructure such as schools, hospitals, roads, and generating facilities that the government is unable or unwilling to support long-term.  Companies may even be wary that at some point a company that runs a hospital, school, or other social program may be seen as a para-governmental organization.  According to the article, Exxon is required to spend as much as $2.7 million a year on philanthropic expenditures, in addition to a $4 million/year malaria project.

I think this topic should be included in the CSR dialogue.  Although we definitely don't want U.S. companies leaving foreign countries worse than when they found them, we also don't want U.S. companies to be blackmailed into having to make payments in the gray area between bribe and charitable donation. 

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Coke is in trouble on college campuses because of reports that it has been complicit in anti-union activities in Columbia (Coke in Columbia? Are we sure this is the soft drink?) and in environmental degradation in India. NYU implemented a ban earlier this month, and the University of Michigan just decided to join the boycott.

These are not new charges. The United Steelworkers Union and the International Labour Rights Fund sued Coca-Cola Co. in 2001 over the Columbian allegations, and the company was dismissed as a defendant, though its bottlers remain as defendants. Although Coke denies the allegations, the universities are demanding independent investigations. The sticking point is that Coke doesn't want the reports of those investigations to be used against its bottlers.

Maybe it's time to bring back the Olympia Cafe.

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