The string of posts here on Conglomerate regarding the current global financial crisis has been illuminating. While I am tempted to further this discussion with my contributions as a guest over the next couple weeks, I have decided instead to stick with my original plan, which is to discuss the recent innovative efforts of a number of academics, international organizations and NGOs on the intersection of economic activity and human rights, particularly in the context of autocratic states or conflict zones.
There has been a significant amount of attention to sovereign wealth funds and the possibility that they may disrupt global financial markets or that they may act as Trojan horses, entering a country in the form of investments in private enterprises and then ultimately being used to influence political decisions and foreign policy. Relatively little attention has been paid to the potential implications of sovereign wealth funds for the protection and promotion of human rights. This was among the topics discussed at a University of Chicago workshop last February organized by Professors Tom Ginsburg, Patrick Keenan and myself, and in which my fellow guest blogger, Anna Gelpern, participated, together with other academics and staffers for international and non-governmental organizations. It is also the subject of a forthcoming article by Patrick Keenan, due to be published in the coming months by the Virginia Journal of International Law.
Patrick Keenan points to the potential of sovereign wealth funds to contribute to the project of long term economic stability and development, especially in capital-exporting countries that bear what he calls “social arrears,” which he defines as unmet, basic development needs. He observes that some states with substantial sovereign wealth resources are also home to some of the world’s poorest populations. In a draft paper (available here) Anna Gelpern reports on the efforts of a group of leading sovereign wealth funds and the IMF to draft a set of Generally Accepted Principles and Practices (GAPP, also called the Santiago Principles) for sovereign wealth funds. In that paper she lays out what she calls the “four-fold accountability challenge” posed by sovereign wealth funds. Among them are public internal accountability, including the sort Patrick Keenan addresses and also public external accountability, under which she observes that “acting as a market participant should not absolve the state of its basic public duties: for example, not to fund genocide.”
Whether and how the GAPP addresses these internal and external public accountability concerns may provide valuable insights into the new role international organizations will play in connecting international economic activity and human rights. The IMF and others have made significant contributions in forming these connections in recent years. This is among the many areas in which we should be watching the relative effect of the IMF as its power shifts from that of “the power of the purse” to the power of expertise.
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On Sunday the Washington Post ran a story on the greening of higher education. The story pointed out various ways in which "environmental fervor" has swept college campuses. Moreover, the story indicated that such fervor had moved beyond pushes for recycling bins toward a real transformation of the academic environment, including impacting curriculum and research endeavors. The article suggests that interests in the environment and sustainability issues may no longer be just a passing fad, but instead may have become "fully entrenched in academic life." If this is true, what accounts for the more permanence of such interests?
First, the growing fears of climate change coupled with a growing consensus on the validity of evidence regarding climate change. Second, consumer demand--in this case, in the form of students. According to the Washington Post, a Princeton Review poll not only shows that students have a commitment to environmental issues, but that such a commitment may impact their decision regarding which college to attend. Once students get to college, this commitment translates into a push for a more environmentally-friendly atmosphere, prompting colleges to make small changes like those focusing on changing light bulbs and implementing recycling efforts as well as larger changes like re-evaluating their heating systems. Moreover, students not only have pushed to ensure an increase in classes aimed at environmental issues (including ensuring that traditional classes incorporate an environmental perspective), but also have pushed for more experiential learning activities aimed at changing the neighborhoods around them. Then too, students have tried to maintain their commitment post-college. Hence, many students have signed pledges to continue to push for environmental awareness in their jobs.
Of course the question is, what is the likelihood of that they will be able to do so? To be sure, it seems easier to change academia, than the business world. And yet there are signs that even this may be possible. Indeed, even a casual observer can see that companies apparently have increased their commitment to going green. And while some it may just be rhetoric, some of it does seem to be a real increase in policies aimed at sustainability. Moreover, proxy data and other research related to corporate social responsibility indicates that sustainability and environmental issues have been the CSR issues gaining the most traction with corporations within the last few years. In other words, they seem to be the kinds of issues about which corporations are most willing to engage and the most likely to devote resources.
In this regard, the research appears to confirm the notion that interests in this area may be more than just a passing fad, while also suggesting that students' environmental fervor can reach beyond the classroom and graduation. In fact, perhaps the research reflects that it already has done so.
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You have heard of S Corporations and C Corporations. Meet B Corporations:
B Corporations™ are a new type of corporation that are purpose-driven and create benefit for all stakeholders, not just shareholders.
B Corporations™ are unlike traditional responsible businesses because they:
- Meet comprehensive and transparent social and environmental performance standards.
- Institutionalize stakeholder interests.
- Build collective voice though the power of a unifying brand.
The founders of B Lab, the promoter of B Corporations, are Jay Coen Gilbert, Bart Houlahan, and Andrew Kassoy, and they describe their idea in a podcast of the Stanford Entrepreneurial Thought Leaders.
At root, this is nothing more than a certification. For the corporate lawyers in the crowd, however, the most interesting part of this idea is the requirement that certified B corporations hard-wire their social responsibility into their governing documents. This is from Bart Houlahan:
It's really kind of cool. We have found a way to expand the responsibilities of corporations to include more than just shareholders. That in their day-to-day operations, an organization must take into consideration a broader set ... employees, community, and environment.
Yeah, cool. But not new. Compare Easterbrook and Fischel writing almost 20 years ago (and the idea wasn't new then):
If the New York Times is formed to publish a newspaper first and make a profit second, no one should be allowed to object. Those who came in at the beginning actually consented, and those who came in later bought stock at a price reflecting the corporation's tempered commitment to a profit objective. If a corporation is started with a promise to pay half of the profits to the employees rather than the equity investors, that too is simply a term of the contract. It will be an experiment. We might not expect the experiment to succeed, but such expectations by strangers to the bargain are no objection.
Despite the condescension in the foregoing passage, I think the idea is interesting for a couple of reasons. First, Vic would see some of his prior work in this exchange from the podcast:
Debra Dunn: What do you think these founding B corps hope to get out of this?
Bart: I think there's a couple things. The first and most obvious is differentiation.
So the governing documents of B Corporations are influenced importantly by branding considerations. As I noted in my comment on Vic's second branding article:
Victor Fleischer is after something completely different from transaction cost economization. The branding effect is not aimed at reducing the potential for opportunism by a counterparty to a contract, but rather at increasing the attractiveness of a product to present and future users, or at improving the image of a company in the eyes of regulators, judges, and juries.
But there's more. Remember that Bart said "there's a couple things" companies wanted to get out of B Corporation certification. Back to Bart:
The second element is that legal component we were talking about. What that legal component allows a business to do is to make sure that the mission that is so central to the organization is maintained over time. Because that legal framework can withstand new employees, it can withstand new management, it can withstand new investment dollars, and it can even withstand a change of ownership. So you are in fact baking into the DNA of the business this social mission. And if you talk to those entrepreneurs, that's incredibly critical to them. It's who they are. It's why they started their business. To know that it's going to last over time and not going to be dependent on that innovative inspirational leader ... that's really important to them.
Bart has very quaint notions about the persistence of legal documents. It's very endearing.
But putting that to one side, you will notice, because I bolded it, the statements of identity embedded in this explanation. You can read more about the concept of identity in contracts here.
Finally, listening to this podcast prompted me to accept an invitation to participate on a panel entitled "Toward Sounder Corporate Governance and Financial Regulation" at the National Convention of the American Constitution Society for Law and Policy. My role, according to the invitation, is to provide "balance," which I understand to mean that I will be opposing the views of the other panelists. My hunch is that B Corporations could provide an fun point of departure for that discussion. In any event, my views on corporate social responsibility are already quite public, most recently in my forthcoming essay on The Dystopian Potential of Corporate Law.
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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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Earlier this month, David posted a list of the 10 highest paid CFOs of last year. Since I study and write about nonprofits, I thought I’d share a similar top ten list… of the 10 philanthropic superstars of 2007. The Chronicle of Philanthropy has just released its annual list of the Philanthropy 50 (an annual ranking of the 50 most-generous Americans of the year). Go here for the full details. Evidently, there were twenty gifts of $100 million or more last year, just one gift short of matching 2006’s record of 21 mega-gifts. (Anonymous gifts—a growing phenomenon in philanthropy—are not counted on the list.) So, who really opened up their wallets for charity last year? How much did they give (well, technically, pledge)?
1. William Barron Hilton (Family wealth, Hotels)
$1.2-billion
2. Jon M. Sr. and Karen H. Huntsman (Chemicals)
$750.0-million
3. T. Denny Sanford (Finance)
$474.6-million
3. George Soros (Finance)
$474.6-million
5. John W. Kluge (Media and entertainment)
$400.0-million
6. Sanford I.and Joan H. Weill (Finance)
$328.5-million
7. Michael R. Bloomberg (Media and entertainment)
$205.0-million
8. T. Boone Pickens (Investments, Oil)
$200.8-million
9. Robert Day (Finance)
$200.0-million
10. Eli and Edythe L. Broad (Finance, Real estate)
$176.0-million
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Apparently, being a “green” company is not only the “in” thing to do, but it also the profitable thing to do. Indeed, today the Washington Post dedicated most of its Business Section to the query “Can Green Be Gold?” On the one hand, there are many signs to suggest that it can. Indeed, anecdotal evidence suggests that people are willing to pay more for goods and services that are—or that purport to be—environmentally friendly. Indeed, we can see many areas where this appears to be true. One example, Wal-Mart’s successful light bulb campaign, pursuant to which thousands of customers willingly paid more for light bulbs that saved energy and were good for the environment. Another example, customers’ willingness to purchase more expensive groceries so long as they are organic. Indeed, the market strength of these “green” groceries can be seen in the fact that traditional grocery stores now dedicated aisles in various sections of the store to organic fruits, vegetables and other staples. These traditional grocery stores are not alone. That is, being green is not reserved for small companies whose primary business model is to create environmentally-friendly products or services. Rather, traditional companies have gotten into the act, finding ways to integrate environmentally-friendly practices and policies into their more traditional business models. Of course the need and desire for such integration has generated opportunities for environmental consultants who help businesses in their efforts to adopt socially and environmentally suitable policies. So everybody is making money. In this way, being green appears to reflect the perfect example of corporations’ ability to “do well by doing good.” But as the Washington Post points out, being green is not all golden. Instead, there are significant costs that may not be getting sufficient attention.
Indeed, environmental activists worry that the green trend may not be sustainable. Indeed, the notion of being green is not a new phenomenon, and environmental activists have been stressing its importance for years. Now apparently they have found an audience. People not only appear to be paying closer attention to environmental issues, but also appear to be willing to put their environmental preferences into action in the marketplace. But this willingness may wane. And if it does, corporations may discover that it is no longer profitable to market their wares as environmentally friendly. In this regard, green may be gold, but only for a brief period of time.
Environmental activists also worry that businesses are just engaging in window-dressing that takes advantage of the green trend without committing to changes that will have a significant long-term impact on the environment. On the one hand, this worry may be overstated. Indeed, it appears that corporations professing to be “green” do engage in at least some form of environmentally friendly behavior. So in fact such corporations adopt practices that support their professed behavior, indicating that their actions are not just good PR. On the other hand, being green is not costless. Instead, sometimes it involves sacrificing profits without any clear economic upside. The current rhetoric, suggesting that everything green can turn gold, may undercut corporations’ willingness or ability to engage in green practices that involve significant costs. In this regard, it may be all we can expect that corporations only embrace being green when it can produce gold. Because who wants to focus on the possibility that being green can put you in the red?
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October is Breast Cancer Awareness Month, and it seems like everywhere a consumer turns there is an ad to purchase a product so that a portion of the proceeds will go to breast cancer research or outreach. Last Fall, I was shopping for a new vacuum cleaner and chose a pink Dyson because $40 of the purchase price went to the Susan G. Komen Foundation. However, a new organization wants consumers to be more savvy before they make purchases solely because of the pink ad campaign. In particular Think Before You Pink challenges those who would "shop for the cure" to ask these questions before making a purchase:
Bottom line: "If shopping could cure cancer, it would be cured by now."
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Daniel Gross strives to depants Simpson Thacher's "Chow for Charity" program. (Via W$J Law Blog) Here is a sample:
The greatest desideratum of firms is to undertake publicity-generating good works that don't require them to spend extra money or change the way they do business. Buy some renewable energy, by all means, but continue to maintain that fleet of corporate jets. Chow for Charity is a perfect case, since it doesn't cost the firm a dime.
So who is being smugger: Simpson Thatcher or Daniel Gross?
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I'm spending the summer in Washington, DC, which makes sense for someone interested in administrative law. I'm a DC veteran, too; before I went into academia, I litigated on behalf of DOJ. DC is a great place for lawyers and people interested in law ... but it is different than the city you live in.
- Last night and the night before that I found myself talking about the energy bill on the floor of the Senate (surprisingly efficient overview here, given that it's an editorial from the Post, the big money issue is the likely increase in fuel efficiency standards through the CAFE process to fleet averages of 35 mpg). Once to a reporter on its prospects for passage, and once for a "blue-green" (that means union-environmentalist) coalition lobbyist on a part of the bill of particular interest to them.
- I also met someone recently back from Guantanamo, who is keeping an eye on the sputtering military tribunal process there.
- And I'm getting into the feverish interest by trade-related businesses in the House and the Senate's competing bills authorizing (in a likely WTO-inconsistent way) countervailing measures (i.e., tariffs) against countries with "misaligned" currencies. This began with China, but now, much to the consternation of many a well-heeled lobbyist, the legislation might apply to Japan as well. The bills both follow the traditional trade paradigm: a Congress that is more protectionist than the President, as my inside-baseball tip sheet notes: <>
to the surprise of no one, Treasury this morning refused, again, to "cite" China for the currency misalignment the Administration has been complaining about for the past several years. Treasury says it is "unable to determine that China's exchange rate policy was carried out for the puspose of preventing effective balance of paymentsd adjustment or gaining unfair competitive advantage in international trade."... USTR this afternoon rejected the House Ways & Means petition (signed by 42 lawmakers) to go after the RMB with a 1988 Trade Act Section 301 case. "We do not believe that this Section 301 petition is likely to be the most productive way to secure Chinese movement towards currency flexibility,'' U.S. Trade Representative Susan Schwab said in a statement.
Only in DC, kids, only in DC. Yesterday, I was learning some of this from an impromptu workspace in the young adult section of the Cleveland Park branch of the DC public library. Does that sound weird? It was the only part of the building with free outlets. Perhaps next week I'll seek advice about how to be productive when one's office is more virtual than tangible - say, when one is on the road for the summer.
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I’m currently at the Critical Tax Theory Conference, which is being held this year at UCLA. Steve Bank and Kirk Stark have done a terrific job organizing the conference, and we heard four papers this afternoon, all of which were really interesting. This post focuses on a project Neil Buchanan from GW is in the early stages of, which he plans to develop into a series of articles or a book. I borrowed his title for the title of this post: What do we owe future generations?
This question is of course much, much broader than tax. As Neil pointed out, all major policy issues can fit under the rubric of the question. Among the specific questions he raised is how we balance the interests of current and future generations. One question that comes out of that, which I believe Joseph Dodge raised, is whether there are positive duties to future generations, or just negative ones. At a minimum, it seems to me that we should be cautious in closing doors that future generations will have difficulty reopening. So I raised the question of whether we appropriately internalize the externalities our behavior imposes on future generations.
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In sharp contrast, in January the Ford Motor Company reported a $12.7 billion loss for 2006, the biggest in its 103 year history, topping a $7.39 billion loss in 1992. The company also has announced that it anticipates losses for at least 2 more years. Moreover, the company plans to build fewer cars, close plants and shed jobs, offering buy-outs and early retirement packages to its factory workers and other employees.
On the one hand, this contrast underscores the changes in the auto industry as well as changes that can occur more generally at a corporation. On the other hand, it raises interesting issues about the age-old debate regarding the proper aims of a corporation. Indeed, Dodge centers around shareholders objections to Ford Motor Company’s plans to withhold dividends in order to sell more cars at a cheaper price and, in then chairman Henry Ford’s words, “do as much good as we can, everywhere, for everybody.” Notwithstanding the court’s pronouncement that “A business corporation is organized and carried on primarily for the profit of the stockholders,” the case sparked debate about whether corporations can or should engage in more altruistic enterprises. For those who believe that corporations should behave more altruistically, the Ford Motor Company of 1916 was an ideal application of this concept—it seemingly had more than enough money to meet its business needs and engage in socially responsible behavior.
Some ninety years later, its situation has changed dramatically. To be sure, there are some who claim that social responsibility and profit-making are not at odds. Yet it seems that during times of financial instability, these concepts are at least in significant tension. Indeed, Ford Motor Company's anticipated job shedding and plant closings suggest that the corporation cannot meet its profit needs without some negative impact on employees. As a result, one wonders if even proponents of social responsibility would be comfortable with such a company continuing to engage in actions that seek to “do as much good” as possible, or if only extremely profitable companies can afford to be socially responsible.
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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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The French cosmetics powerhouse L'Oreal has agreed to acquire Body Shop for $1.15B and perhaps break into the retail business. So, how does one reconcile the branding of "Because I'm Worth It" L'Oreal and crunchy granola Body Shop? The short answer is that although the Body Shop caused a stir by being one of the first companies not to do animal testing, to sell you products in returnable, reusable containers, and to make products in developing countries paying developed wages, Body Shop founder Anita Roddick realized once the UK company went public that shareholders aren't really that interested in using a business model as a model for social change. (BBC article here.) So, certain parts of Body Shop that increase profits by attracting customers can stay, but other aspects that decreased the bottom line were out. And now, Body Shop is being bought by L'Oreal. Will Heather Locklear start hawking Mango Body Butter and the footsie roller?
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Apropos of our ongoing Kelo discussion (see comments), Branch, Banking & Trust (BB&T)announced yesterday that it would not lend its financial power to developers building monuments to commercial taxation at the expense of residential landowners. (Tip to Tyler Cowen at VC). Specifically, the bank will not loan money to finance private projects on land that was taken from homeowners by eminent doman. The bank's CEO and chairman stated:
The idea that a citizen's property can be taken by the government solely for private use is extremely misguided, in fact it's just plain wrong.
As others discuss whether Google's vow to protect its users against the government subpoena power is profit-sacrificing social responsibility, profit-seeking/brand-strengthening social responsibility, or expensive folly, I ponder the same questions about this move by BB&T. These questions are answered in the Law.com article. Although BB&T is the ninth largest bank, its customer base is almost entirely consumers. The chief credit officer proudly admits that this new policy will not reduce revenues by even a "fraction of a percent." In addition, Tom Merrill (Law - Columbia) is quoted as saying that banks will ultimately benefit by not loaning money for projects that may be held up for years in litigation and protests from anti-Kelo advocates.
So, it sounds like BB&T's strategy falls into the "profit-seeking social responsibility" category.
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What is America's most hated company? When I saw the title of this Economist article, I immediately thought of Wal-Mart, and it appears that I was not alone:
A straw poll by Fred Bateman, a professor of economics at the University of Georgia's Terry College of Business, brings us to the present. He asked three classes in economics, about 100 students in all, which company they thought was the most hated in America. They almost all said Wal-Mart.
Without delving into the merits, I think Wal-Mart is the obvious choice for the current top spot, but I wonder whether Wal-Mart hatred is a class thing. The "elites" hate Wal-Mart, but ordinary people don't?
What are the most widely despised companies in the U.S.? Microsoft is the object of derision in technology circles, but most ordinary folks don't hate Microsoft. Cigarette companies have had their day, but oil companies seem to be a perennial whipping boy. Of course, the companies that inspire the most vigorous feelings are companies that have close contacts with consumers. Automobile manufacturers are an easy target, for example. So is McDonald's.
Did Americans hate Enron? I suspect that most Americans had never heard of Enron prior to its collapse and didn't have enough knowing contact with the company to hate it.
Larry Ribstein has often argued that envy is at the root of many of these feelings. So how long before Google makes the list?
Kudos to my friend Mason Carpenter for his contributions to the article, and thanks to my colleague Anuj Desai for the pointer.
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There's a thread at Marginal Revolution today on giving efficiently to charity. One commenter notes that one should give to charities that then won't bombard you with solicitations on a daily basis, reducing your personal utility. Coincidentally, I was complaining about this phenomenon yesterday.
The holidays are upon us, and I have to admit that each year I get a little depressed at the thought of buying some junk from catalogs that my loved ones don't need and receiving in return some junk from catalogs that I don't need. (Maybe if I had a bigger house, I wouldn't mind so much!) This cycle seems to detract from the meaning of the holidays and leaves me sort of blah. So, last year for a few people I made donations in their name to World Vision. However, I felt slightly guilty because I was sentencing them to the World Vision Direct Mail Avalanche that I live with every day. In print or in email, I receive something from World Vision about every other day. This cannot be the most efficient way to raise funds. I understand from hanging out with development people that the best predictor of giving is previous giving, but shouldn't giving to World Vision (on a monthly, automatic basis) exempt me from the sorting costs of the Avalanche?
Surely a charitable organization could come up with a marketing plan that didn't create a response in the recipient similar to seeing a credit card bill or a collection agency notice. Maybe it's not charitable of me to be distressed at the level of solicitations, but I can't help thinking how much it costs to send me something that I throw away.
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Gordon's post this morning on franchising reminded me that I wanted to post on Chick-Fil-A. I love Chick-Fil-A, and the scarcity of these Southern restaurants in the Midwest causes me some grief. On a VC post yesterday, Juan N-V used Chick-Fil-A as an example of why Blue Laws are unnecessary to allow stores that close on Sundays to compete with other stores. However, a commenter noted that Chick-Fil-A is a privately held company, so we don't know what the trade-offs of that policy are in terms of profits.
I wish we had data to determine whether Chick-Fil-A's mission is an example of CSR that actually cuts into profits or an example of CSR that benefits the company because of branding and customer loyalty. Chick-Fil-A is different; besides being closed on Sunday, Thanksgiving and Christmas, it has books and other "value-based" materials in kids' meals, and it offers caffeine-free Diet Coke and both regular and diet lemonade (one of the reasons we love it). It's website lists the following mission:
Our official statement of corporate purpose says that we exist "to glorify God by being a faithful steward of all that is entrusted to us and to have a positive influence on all who come in contact with Chick-fil-A." That's why we invest in scholarships, character-building programs for kids, foster homes and other community services. Come to think of it, it's also not a bad motive for striving to serve a really, really good sandwich.
Could Chick-Fil-A exist as a public company? Is there a trade-off between the mission and profits? Does Chick-Fil-A make 6/7 of the profits of its competitors? If true, would public shareholders be satisfied with that?
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Vic has posted some interesting comments (here and here) on hedge funds. Since (a) investments in hedge funds have grown exponentially, (b) the SEC recently enacted new rules for this investment vehicle, and (c) there is a paucity of scholarly literature (at least by legal academics), hedge funds represent a terrific opportunity for young scholars looking for a research niche.
Vic raises the question, “What if the defining characteristic of hedge funds is the compensation scheme, not the underlying portfolio? What are the normative implications?”
According to a detailed SEC Staff Report (Sept 2003), most hedge funds have two financing components: (1) a 1 to 2 percent asset-based investment management fee (similar to mutual funds), and (2) an incentive allocation, which tend to be “20 percent” of “the hedge fund’s net investment income, realized capital gains and unrealized capital appreciation.” Re #2, “high water marks” and “hurdle rates” are contractual terms that reduce the likelihood that a hedge fund manager will profit from poor performance. The SEC Report suggests (and James Cramer’s entertaining book, Confessions of a Street Addict, corroborates) that the “20 percent / high-water mark” are fairly standard. So I think that Vic is correct that compensation scheme is “a” (or “the”) defining characteristic of hedge funds.
Regarding the normative implications of that observation, I will take off my academic hat and speak only as a concerned citizen.
Just like there are good and bad lawyers or doctors, there are good and bad money managers. It is now obvious that the best money managers are running hedge funds. Last month, the N.Y. Times reported that the top money managers for Harvard University quit because their annual compensation would be capped at $20 to $25 million—far below what professionals with similar performance records would earn if they were managing hedge funds (their current jobs). There are countless other stories documenting the migration of the “best and brightest” to hedge funds.
That said, absence a Long Term Capital Management problem, the compensation schemes of hedge funds is an issue that only affects rich people. (SEC rules like Reg D generally prohibit low-net worth people from investing in hedge funds; and regardless, most successful hedge funds require very high minimum investments.) Most of us are stuck in the lackluster world of 401K’s and mutual funds.
I’ll never forget the SEC roundtable discussion in
which David Swensen, Chief Investment Officer of Yale University
[W]e've got thousands and thousands of mutual funds. On average, the experience of individual investors is quite poor there. They would be far better off with an index fund than with the high cost active management that they've got in the mutual fund world. Of the thousands of mutual funds, there are probably several dozen that are worthy of investment.
Okay, Dave, just tell me the top dozen—or better yet, manage my money.
To my mind, the academic debate on the Efficient Capital Market Hypothesis was settled when I saw the gleaming marble floors of Citadel Investment Group, one of the nation’s leading hedge fund managers (note that I was not permitted past the lobby because of airtight security). The longstanding success of hedge funds like Citadel—and there are many others—is clear evidence that supra-normal returns are possible over the long term. Of course, fund managers have zero interest in sharing their trading strategies in order to settle academic debates.
So what is my normative bottom-line?
I worry that the retirement of most Americans depends upon “B” quality money managers at mutual funds. At least with defined benefit pension plans, managers have—in theory, anyway—sufficient resources and negotiating leverage to tap into truly talented investment advisors. Unfortunately, many of these plans are being shed in bankruptcy proceedings (e.g., airlines, steel industry). With the ascendancy of 401K plans and talk of privatizing social security—so more of the Wall Street “B” crowd can collect management fees—I fear we are headed for an economic and political train wreck.
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I said I'd post more on the Community Interest Company. But then Vic and Steve and Larry and Steve weighed in, and they pretty much said exactly what I would have said. Precisely, and in the same words, no less. I even said a little more myself.
So I won't belabor the point. I'll just add this bit:
One more aspect of the CIC troubles me: The Regulator. What on earth could the world need with yet another agency to regulate yet another corporate entity? In this case, the entity is, as I said, essentially a nonprofit. So I can understand the (knee-jerk) sentiment that organizations that purport to operate in the "community interest" must be monitored by the community's representatives (for those of you unsure, that's the gubm'nt). But is that right? Is there another way? I would submit that there is. In fact, I did so submit in an article, Agency Costs and the Oversight of Charitable Organizations, in the Wisconsin Law Review about 5 years ago. The full text isn't on SSRN, but here's the abstract:
This article uses property rights theory and the theory of the firm to analyze the behavior of the participants in nonprofit organizations. It locates the failure of nonprofit oversight in the confluence of strict standing rules and nearly insurmountable agency costs. The article repudiates the conventional solutions to the problem (ranging from relaxing standing limitations to restricting the use of the nonprofit form), and proposes a contractual solution through which nonprofits or their founders would secure the services of a set of independent agents to monitor and, where appropriate, enforce the nonprofit's charter and the relevant fiduciary rules through judicial action. Because the monitoring agents would function within a market framework, market controls should operate to constrain the behavior of these agents. Thus donors, philanthropists, and beneficiaries would receive the benefit of effectively monitored corporate (or trust) agents who do not present a significant agency cost problem. The result should be increased accountability on the part of nonprofit agents to their donors or patrons without the serious threat of frivolous suits or politically-selective attorney general enforcement.You can find the whole thing on Westlaw or Lexis, of course, or just e-mail me (manne-at-lclark-dot-edu) if you'd like a copy.
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Like Homer Simpson discovering a meal between breakfast and brunch, the British government has recently “discovered” an organizational form between charity and public company. It’s called a Community Interest Company or CIC.
If Henry Hansmann is right that the nondistribution constraint is the defining feature of nonprofit organizations, the CIC is essentially a nonprofit. (“A nonprofit organization is, in essence, an organization that is barred from distributing its net earnings, if any, to individuals who exercise control over it, such as members, officers, directors, or trustees.” 89 Yale L. J. 835, 835 (1980)). As the British government Fact Sheet on CICs notes, CICs are “restricted from distributing profits and assets to their members. This is known as an ‘asset lock’ – a transparent and entrenched way of ensuring that assets are used to benefit the community.”
What’s unique about the CIC is that it is nevertheless permitted to pay some dividends to investors. Quoth the British government Fact Sheet again, “In order to raise investment, CICs limited by shares will have the option of issuing shares that pay a dividend to investors. The dividend payable on these shares will be subject to a cap, set by the Regulator (after consultation), in order to protect the asset lock.”
There’s more, to be sure. See, e.g., in addition to the links above, here and here.
While there might be some benefit here in providing an off-the-rack form that could have been difficult to contract into otherwise (or not -- more on this in a later post), the form surely seems tailor made to deal with the CSR problem. (On which see here, here, here and here). If corporate directors want to maximize something other than shareholder interests, let them. But why not also make them (permit them to?) identify their organizations accordingly -- call it Whole Foods, CIC –- and subject them to dividend monitoring by regulators (and see how well that goes over).
Part of the stated purpose with the CIC is, in fact, branding, and this might be its real appeal: “The CIC legal form was specifically designed to provide a purpose-built legal framework and a ‘brand’ identity for social enterprises that want to adopt the limited company form.” It’s a way for “socially-conscious” corporations cheaply to identify their consciousness (and a way for the rest of us cheaply to avoid investing in them). (But I will note that some fascinating recent research by Anup Malani and Guy David has suggested that there may be less value in nonprofit branding than we might have thought, and the benefits of a CIC designation may be accordingly limited).
As I said, more on this topic in later posts . . . .
And before I go -- many thanks to Christine, Gordon and Vic for having me here.
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Tyler Cowen analyzes a debate in Reason magazine between Milton Friedman, John Mackay (Whole Foods) and T.J. Rodgers (Cypress Semiconductors). Friedman maintains his long-held view that social responsibility means maximizing shareholder wealth (without fraud, etc., of course). The interesting aspect of the article to me is Mackay's view of what I would call the stakeholder theory of the corporation. He wants us to know that Whole Foods was founded to make the world a better place, with better nutrition and better places to work. However, his justification for this is what I will call today "entrepreneur primacy":
I believe the entrepreneurs, not the current investors in a company’s stock, have the right and responsibility to define the purpose of the company.
Mackay even admits that if a founder creates a company solely to make profits, like Cypress, then it is being social responsible by following that aim. However, he says that Whole Foods and thousands of others were created with different goals.
I have two comments. First, maybe that's the answer. State your mission in your articles of incorporation at IPO, and let's let the investors sort themselves. Then, we'll see (1) if there is a difference in the success of each company and (2) if investors really want what they say they want. Second, I can't read the article without thinking that Mackay's company has a brand. And so, if Mackay gets in Reason magazine and starts saying that the sole responsibility of a corporation is to maximize profits, that could hurt the Whole Foods Brand, make the share price go down, and hurt profits. And then my brain started to hurt.
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My friend and co-author Tracy McGaugh (South Texas College of Law) writes a first-hand account of her visit to the Astrodome. Churches are coordinating volunteers to hand out food there, at an estimated cost of $4.2M a week. They are also coordinating hygeine kits, clean-up kits, and comfort kits for kids (www.mercystreet.org). Tracy's detailed description is below the fold:
After a few hours sleep, Prof. Bergin and I did go back to the Astrodome last night/early this morning (around 1:00 a.m.). Conditions at the Astrodome were pretty much the same as when we left early Friday morning. However, we found less of a police presence outside the dome,
without more presence inside. We did notice some National Guard in an offsite parking lot in the new volunteer sign up spot, which is also where the evacuees are processed when they arrive. The volunteer effort is more organized now. However, it's difficult to understand why the
organization of volunteers that's been accomplished since 5:00 a.m. Friday morning couldn't have been accomplished before the evacuees arrived -- it wasn't a complex operation and didn't require supplies, personnel, or organization that weren't already there 24 hours earlier.
The medical situation seems to have stabilized -- more medical personnel, fewer emergencies, and more supplies -- however, they apparently need band-aids and Neosporin. Insulin is still an issue.
There's a station at which clothes and toiletries are being handed out. It's about the length of two standard conference tables. At 4:00 this morning, it was being tended by about 6 volunteers and had about 10-12 evacuees requesting items. Nevertheless, the wait was pretty long -- it took a while for volunteers to locate needed items, and -- even then --the items found were pretty makeshift (not the right size, out of season, etc.). While some makeshift items are to be expected, I was surprised to find that the supplies being offered in terms of clothing and shoes, in particular, were so makeshift since local media and electronic signs around Houston had been advising citizens for hours to STOP making donations at the Astrodome. It's hard to imagine, with over 15,000 people in the Dome and surrounding buildings, that they have too much of anything for the next few days -- but the reality is even more shocking -- they don't have enough of some items *at the time donations are being turned away.* This was the only clothing and toiletry item distribution station, and this was the situation at 4:00 in the morning with most folks asleep. It's hard to imagine what the situation is as people are starting to wake up right about now.
We left the Dome around 4:30 and headed back to the law school for me to pick up my car for the first time in two days. Because the law school is a couple of blocks from the George R. Brown Convention Center, where the next wave of evacuees will be housed, we decided to stop in and see how setup was going. What we saw at first cheered us immeasurably. The distribution center was a huge convention hall. Clothing and shoes in all sizes, shapes, seasons, ranges, and colors was bountiful, organized, and pleasingly arranged. Shirts were neatly folded in high, clean stacks. Dresses hung on hangers. Shoes were paired with their mates in row upon row of size-sorted bounty. Tables overflowed with books, games, writing implements, and paper for all ages. Everything was neatly stacked and carefully arranged. The hall was well lit. Two police officers guarded the street-side entrance. Two volunteers wearing Center Point Energy polo shirts tended the exit leading to another exhibit hall. When we asked how things would be distributed, a careful and efficient distribution system was cheerfully explained to us.
We left that hall and went into the next hall. This hall was dimly lit and very cool. However, it didn't have the same spooky feel that the dimly lit areas of the Dome did. Probably because volunteers walked quietly in between rows of double-bed sized air mattresses where
evacuees slept quietly. Very few evacuees had arrived so far -- probably 50 at the most -- mostly folks who had managed to get to Houston on their own, as one volunteer told us. He also told us that the convention center was set up so that volunteers could register at either end of the Convention Center and that there was an information booth at the middle of the Center.
We continued walking around George R. Brown -- however, unlike the Dome, where we had complete access to anyplace we wanted to go, we were stopped at every entrance, asked who we were, regarded with skepticism, and even refused entrance to some areas by either police officers, security guards, or state troopers. While this could be explained by the simple passage of time and more organization, we had just come from the Astrodome where still had unfettered access and we counted 1 law enforcement officer per 1,000 people (still). At George R. Brown, our estimate was about 1 law enforcement officer per 2 evacuees.
As we continued walking around, we found an official Press Room set up. Now, at the Dome, locations are denoted by hand-written signs. At George R. Brown, areas are denoted with color laser-printed signs like the ones we used as trial exhibits. The Press Room was no exception.
We went into the Press Room and found a nice facility ready for a press conference with some very fancy diagrams of how the building is set up to accommodate the evacuees. A couple of halls over, we found another meeting room clearly set up for another meeting with conference tables set up in a large square, linen table clothes, bottles of water on the table, next to the kind of water glasses we all only use when we have meetings in a square with linen table cloths. There was a coffee setup in the back. Looks like that's probably where city officials will meet to discuss the situation. We noticed no such press room at the Dome, and city officials are definitely not meeting there.
So what's the difference between the Dome and the Convention Center. The Hilton of the Americas is connected to the Convention Center by a skywalk. That means a couple of things. First, people get to see first-hand how we're treating the evacuees. Second, we can't have unruly evacuees roaming the streets in front of and adjacent to the Hilton -- best to the keep them happy and calm. Race politics and white guilt are bad enough to think about. They are heart breaking and outrageous to watch unfold in front of you. Some folks have asked if there is a more direct way to help than donating money. Of course, donations of money through the Red Cross are greatly needed. However, if you would like to donate money or goods more directly, South Texas would be happy to take your items and deliver them along with the items that will be collected in the school's relief efforts in the coming weeks.
http://www.stcl.edu/students/hurricane/
You can send your items to:
Katrina Relief
South Texas College of Law
1303 San Jacinto Blvd.
Houston, TX 77002
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I just watched President Bush, speaking to reporters, refer several times to the devastation caused by this "natural disaster." I suspect those words were carefully chosen.
The real damage in New Orleans is man-made. The natural disaster part of the story -- the storm surge, rain and wind of the hurricane -- was a near miss. Were it not for the failure of the levees, the flooding that followed, the inadequate disaster plan, and the lack of supplies, transport, communication, and organized response, my sense is that this would have been a significant but not nearly so tragic storm. Katrina is a story about the failure of government. We have had the system of levees, and the vulnerability that comes with it, for a long time. The risks were known. We could have and should have been better prepared. Katrina led to the loss of life, but our own failures led to the loss of many more.
The words matter. Calling it a "natural disaster" suggests there is little we could have done, as if some unknown and unknowable force struck without warning. The choice of words reminds me of what I have read and heard about the Buffalo Creek disaster. After the Buffalo Creek disaster, defense lawyers stressed that the flood was caused by rain. (According to West Virginia lawyer lore, one lawyer went so far as to insist on calling it the "alleged" flood.) In any relevant sense, of course, that tragedy was caused by the improper disposal of coal waste, not rain. Buffalo Creek was a man-made disaster. So too with Katrina. Perhaps it is fair to call the devastation in the gulf a natural disaster, but the situation in New Orleans is not. It is man-made.
I do not say this in order to throw sludge at the president and the federal government. There is plenty of blame to go around to the state governments, to the culture of corruption in local government, to all of us for tolerating inadquate preparedness. We should step up the pressure on the government, at all levels, to improve our ability to respond to disasters, whether caused by natural forces, man-made ones, or terrorists. It is all too easy to imagine the social fabric of Washington DC (or countless other resource-deprived cities) tearing apart in the face of disaster without adequate support from the government.
The good news is that we are a rich country with smart people, and we can improve our ability to respond in the future. I hope we do so.
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I apologize for my blogging silence. Nothing this week has seemed remotely appropriate to talk about with New Orleans in the backdrop. I have refrained from blogging about New Orleans because it seemed inappropriate to be theorizing about how many looters can fit on the head of a pin when mothers are sitting outside the Superdome next to dead bodies while their babies cry for food -- in America.
Today, two friends ask important questions. Todd Z. asks Where's Rudy?, and Orin asks Where's George?. These bloggers are pointing to individuals that they believe have both the ability and the responsibility to help. I will add my voice here: Where's Fred Smith?
Mr. Smith, no one seems to be able to figure out the logistics of moving supplies and people quickly, safely, and efficiently. Your company, FedEx, does this every day at lightning speed. You invented the concept of branding, and guarantee you that if CNN showed fleets of FedEx trucks and planes in New Orleans, that your social responsibility efforts would be applauded by shareholders and customers alike. I personally pledge to use FedEx exclusively for the rest of my life if you will get down there and do something.
I don't want to sit here and argue about whether there should be a market response, a conservative response, a humanitarian response, a liberal response, etc. There has to be a response, and someone needs to step up and say, "Here am I. Send me." And I don't mean a helicopter fly-by, either.
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Becker and Posner take on whether corporations should act in a way that is "socially responsible" when it conflicts with shareholder value. No big surprises: they think the social responsibility of the corporation is to maximize profits. They both seem more sympathetic to corporate charitable giving than I would have expected. I like the symphony as much as the next guy, but if I'm a shareholder in DuPont, and DuPont gives money to the Wilmington Symphony, I'm pretty sure that's just another form of camouflaged rent extraction -- more about improving the lives of Mozart-loving executives than anything else.
Recently I have been wondering whether the focus on shareholder vs stakeholder is misguided. Maybe consumers, not shareholders, are the key. Even if shareholders are willing to give up some value, and even if we allow managers to promote CSR policies (as we generally do now), CSR-sensitive shareholders face collective action problems in trying to figure out what they really care about and how to demand it from management. And, as Becker points out, most institutional investors don't care much for social responsibility -- they just want to maximize returns.
Consumer-driven pressure might be a better strategy.
(A brief aside: I have mixed feelings about CSR. I do personally invest in a "socially responsible" mutual fund.
I'm willing to trade off a few basis points of return for a little bit
of pressure on management. But I recognize that I'm throwing a pretty
small pebble into a very big pond.)
Consumer-driven pressure might be a better strategy for CSR. Instead
of asking shareholders to make big, clunky, difficult decisions through
financial intermediaries, we should ask consumers to make little,
marginal decisions when they buy products. They can buy their coffee
at Peet's instead of Starbucks. They can shop at Whole Foods instead
of Safeway. They can eat at a local diner
instead of McDonalds. We should make executives maximize shareholder
value, and make them explicitly justify their CSR in terms of sales.
Social responsibility entrepreneurs can play around in the marketplace,
and consumers can tell companies what matters to them, a few dollars at
a time.
And this is not just about things like recycling and dolphin-safe tuna. As I argue in my Google/branding paper, consumers are increasingly savvy about business, and brand image can even affect corporate governance decisions. To be sure, a consumer-driven CSR movement faces high hurdles, but it still seems more promising to me than the basically hopeless excuse-for-managerial-rent-extraction current state of shareholder-driven CSR.
UPDATE: Ribstein weighs in here. His main point is that it doesn't matter since management can do whatever they feel like anyway until we figure out a way of making them accountable. Larry's point about accountability is a good one, and part of an important paper he is working on, so go take a look. Plus, he uses "Becker, Posner and Fleischer ... " together to start a sentence. I like the sound of that.
If I am pro-CSR, which is how I have been leaning recently after years of skepticism ... am I really the only pro-CSR person who believes in markets? I do think that of all the methods of holding managers accountable when it comes to CSR, the product market has the most promise.
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One idea discussed in corporate social responsibility circles is to have corporations be more specific about their social responsibility plans in their annual reports so that if corporations are really just being fluffy, then they can be sued. (I think I heard Cheryl Wade propose that at the Law & Society conference). Virginia Postrel throws out a similar idea with a post-Kelo spin: "I'd suggest another front: shareholder and consumer activism to get businesses to pledge not to use eminent domain for their own private purposes."
Tip: Instapundit.
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Here is an elaborate spoof of Dow Chemical by The Yes Men ("Honest people impersonate big-time criminals in order to publicly humiliate them. Targets are leaders and big corporations who put profits ahead of everything else.") You can see that the website isn't written in quite the way the company would have written it:
Acceptable Risk™ and the ARC were launched on April 28, 2005 at the International Payments 2005 conference, London, in solemn commemoration of the April 30 anniversary of the withdrawal of troops from Vietnam. Dow owes a debt of gratitude to the people of Vietnam for helping Dow define the limits of Acceptable Risk™. Dow's contribution to the War effort was very profitable, and recent appeals for damages by Vietnamese people who received coatings of special Dow herbicides were rejected by US courts two weeks ago, proving the Dow adage: "A skeleton in the closet is quite often golden."
The golden skeleton is nicknamed "Gilda," by the way. The site includes an "Acceptable Risk Calculator" (that's the ARC referenced above), which allows you to input potential profits and "casualties" for your project. You then enter the locations you are considering for the project, along with estimates of the area's daily income, litigiousness, and and potential problems (e.g., "widespread civil unrest"). The output is a rating based on skeleton heads.
Check out the "launch" at the International Payments 2005 conference, including a video (near the bottom). Hat tip to Metafilter.
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