Corporate Governance

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This week I have found myself reading the co-authored, empirical piece by C.N.V. Krishnan, Frank Partnoy, and Randall Thomas titled, Top Hedge Funds and Shareholder Activism.  Through their sample they observe that top hedge funds have repetitional capital in that the market responds more positively to announcements by certain hedge funds with certain features, like a longer track record, larger assets under management and management participation through board of director seats.  Its an interesting and insightful article on the role, and value, of hedge funds. The authors conclude that 

The market appears to anticipate the superior performance of these top hedge funds even before announcement of intervention. Moreover, post-intervention target-firm operating performance associated with these top hedge funds is significantly superior to that of other hedge fund activists.

The focus on reputation reminded of Elisabeth de Fontenay’s good work on reputation in private equity.  Her article, Private Equity Firms as Gatekeepers, 33 Review of Banking & Financial Law 115-189 (2014).  de Fontenay argues in her piece that: 

private equity firms act as gatekeepers in the debt markets. As repeat players, private equity firms use their reputations with creditors to mitigate the problems of borrower adverse selection

…

I haven’t met Hollywood producer Edward Zwick, who brought the movie and the concept of Blood Diamonds to the world’s attention, but I have had the honor of meeting with medical rock star, and Nobel Prize nominee Dr. Denis Mukwege. Both Zwick and Mukwege had joined numerous NGOs in advocating for a mandatory conflict minerals law in the EU. I met the doctor when I visited Democratic Republic of Congo in 2011 on a fact finding trip for a nonprofit that focuses on maternal and infant health and mortality. Since Mukwege works with mass rape victims, my colleague and I were delighted to have dinner with him to discuss the nonprofit. I also wanted to get his reaction to the Dodd-Frank conflict minerals regulation, which was not yet in effect. I don’t remember him having as strong an opinion on the law as he does now, but I do remember that he adamantly wanted the US to do something to stop the bloodshed that he saw first hand every day.

The success of the Dodd-Frank law is debatable in terms of stemming the mass rape, use of child slaves, and violence against innocent civilians. Indeed, earlier this month…

My last post outlined the criminological and behavioral ethics theories that help explain why corporate executives commit unethical and illegal acts.  I’d like to unpack that a bit more by providing some specific rationalizations used by white collar offenders.  This list includes the first five rationalizations to be identified by researches (sometimes called the “famous five”), and then supplements three others that are particularly relevant.  Not surprisingly, there are disagreements as to exactly how many rationalizations there are and precisely how they operate.  But, as one team of researchers put it, what is interesting about rationalization theory is what rationalizations do, “not the flavors they come in.”

Denial of Responsibility.  Called the “master account,” the denial of responsibility rationalization occurs when the offender defines her conduct in a way that relieves her of responsibility, thereby mitigating “both social disproval and a personal sense of failure.”  Generally, offenders deny responsibility by claiming their behavior is accidental or due to forces outside their control.  White collar offenders deny responsibility by pleading ignorance, suggesting they were acting under orders, or contending larger economic conditions caused them to act illegally.

Denial of Injury.  This rationalization focuses on the injury or harm caused …


Business and Human Rights Junior Scholars Conference
                          
The Rutgers Center for Corporate Governance, The University of Washington School of Law, and the Business and Human Rights Journal (Cambridge University Press) announce the first Business and Human Rights Junior Scholars Conference, to be held September 18, 2015 at the Rutgers School of Law – Newark in Newark, New Jersey, just outside of New York City.  The Conference will pair approximately ten junior scholars writing at the intersection of business and human rights issues with senior scholars in the field.  Junior scholars will have an opportunity to present their papers and receive feedback from senior scholars.   Upon request, participants’ papers may be considered for publication in the Business and Human Rights Journal (BHRJ), published by Cambridge University Press.
 
All junior scholars will be tenure-track professors who are either untenured or have been tenured in the past three years.  The Conference is interdisciplinary; scholars from all disciplines are invited to apply, including law, business, human rights, and global affairs.  The papers must be unpublished at the time of presentation.
 
To apply, please submit an abstract of no

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Last week, I looked lovingly at a picture of a Starbucks old-fashioned grilled cheese sandwich. It had 580 calories. I thought about getting the sandwich and then reconsidered and made another more “virtuous” choice. These calorie disclosures, while annoying, are effective for people like me. I see the disclosure, make a choice (sometimes the “wrong” one), and move on.

Regular readers of this blog know that I spend a lot of time thinking about human rights from a corporate governance perspective. I thought about that uneaten sandwich as I consulted with a client last week about the California Transparency in Supply Chains Act. The law went into effect in 2012 and requires retailers, sellers, and manufacturers that exceed $100 million in global revenue that do business in California to publicly disclose the degree to which they verify, audit, and certify their direct suppliers as it relates to human trafficking and slavery. Companies must also disclose whether or not they maintain internal accountability standards, and provide training on the issue in their direct supply chains. The disclosure must appear prominently on a company’s website, but apparently many companies, undeterred by the threat of injunctive action by the state Attorney…

My post from last week posed the question of why corporate executives do what they do.  Why do they commit unethical and illegal acts?  If you ask almost anyone this, the answer comes back the same: corporate executives are greedy.  That’s why they lie, cheat, and steal.  Follow that up with the question of what should be done about it, and most people say that more law and more prison time is the solution. 

I’ve never bought into that thinking (as to the cause or the fix).  Sure, some of us are greedy.  And some small percentage of us are looking to break the law to advance our own interests at every opportunity.  But I’ve seen too many good people do bad things, and vice versa, to think that the cause of illegal corporate behavior (or almost any behavior) is somehow an inherently binary condition—good or bad, right or wrong, greedy or selfless.  The reality is that many of us are both good and bad at the same time.  But how does that actually work?  How can someone like Rajat Gupta, the former managing director of Goldman Sachs, spend his time chairing three international humanitarian organizations and …

Earlier today, Reuters published a fascinating investigative journalist piece by Joshua Schneyer & Brian Grow raising questions about Dow Chemical’s CEO Andrew Liveris.  Drawing facts and allegations from internal auditor reports, filings in retaliation and employment suits, Dow documents regarding Liveris’s nearly $720,000 reimbursement of improper spending, and documents related to an alleged pet charity in Greece create the backdrop for an interesting story that suggests officer wrong-doing and raises fiduciary duty concerns.  This may be an interesting story to watch unfold, or at least a great afternoon procrastination excuse.

-Anne Tucker

I’ve been thinking a lot about whistleblowers lately. I serve as a “management” representative to the Department of Labor Whistleblower Protection Advisory Committee and last week we presented the DOL with our recommendations for best practices for employers. We are charged with looking at almost two dozen whistleblower laws. I’ve previously blogged about whistleblower issues here.

Although we spend the bulk of our time on the WPAC discussing the very serious obstacles for those workers who want to report safety violations, at the last meeting we also discussed, among other things, the fact that I and others believed that there could be a rise in SOX claims from attorneys and auditors following the 2014 Lawson decision. In that case, the Supreme Court observed that: “Congress plainly recognized that outside professionals — accountants, law firms, contractors, agents, and the like — were complicit in, if not integral to, the shareholder fraud and subsequent cover-up [Enron] officers … perpetrated.” Thus, the Court ruled, those, including private contractors, who see the wrongdoing but may be too fearful of retaliation to report it should be entitled to SOX whistleblower protection.

We also discussed the SEC’s April KBR decision, which is causing hundreds…

OK.  So, Tennessee is not Delaware.  But the Tennessee legislature and Supreme Court have been busy bees this spring on business law matters.   Here’s the brief report.

In the last week of the legislative term, the Tennessee Senate and House adopted the For-Profit Benefit Corporation Act, about which I earlier blogged here, here, and here.  Although I remain skeptical of the legislation, it looks like the governor will sign the bill.  So, we will have benefit corporations in Tennessee.  We’ll see where things go from there . . . .

The Tennessee legislature also passed a technical corrections bill for the Tennessee Business Corporation Act.  The bill was drafted by the Tennessee Bar Association’s Business Entity Study Committee (on which I serve and to which I have referred in the past), a joint project of the Tennessee Bar Association’s Business Law Section and Tax Law Section.  The governor has already signed this bill into law.

Separately, in a bit of a stealth move (!), the Tennessee Supreme Court recently announced the establishment of a business court, an institution many other jurisdictions already have.  The court is being introduced as a pilot project in Davidson County (where Nashville resides)–but only, as I understand it, to iron the kinks out before introducing the court on a permanent basis.  Interestingly, the Tennessee Bar Association Business Law Section Executive Council was not informed about the new court project until its public announcement in the middle of March.  Although we found that a bit odd, the “radio silence” is apparently attributable to the excitement of the Tennessee Supreme Court to get the project started effective as of May 1 and the deemed lack of need for a study on the subject before proceeding.  Regardless, I think it’s safe to say that the bar welcomes the introduction of a court that specializes in business law cases as a matter of principle.  Again, we’ll see where it goes from here.

A few reflections on all this follow.

Last week, the Deal Professor, Steven Davidoff Solomon, wrote an article titled, The Boardroom Strikes Back. In it, he recalls that shareholder activists won a number of surprising victories last year, and more were predicted for this year. That prediction made sense, as activists were able to elect directors 73% of the time in 2014.  This year, though, despite some activist victories, boards are standing their grounds with more success.  

I have no problem with shareholders seeking to impose their will on the board of the companies in which they hold stock.  I don’t see activist shareholder as an inherently bad thing.  I do, however, think  it’s bad when boards succumb to the whims of activist shareholders just to make the problem go away.  Boards are well served to review serious requests of all shareholders, but the board should be deciding how best to direct the company. It’s why we call them directors.  

As the Deal Professor notes, some heavy hitters are questioning the uptick in shareholder activism: 

Some of the big institutional investors are starting to question the shareholder activism boom. Laurence D. Fink, chief executive of BlackRock, the world’s biggest asset manager, with $4 trillion, recently issued a well-publicized letter that criticized some of the strategies pushed by hedge funds, like share buybacks and dividends, as a “short-termist phenomenon.” T. Rowe Price, which has $750 billion under management, has also criticized shareholder activists’ strategies. They carry a big voice.

I am on record being critical of boards letting short-term planning be their primary filter, because I think it can hurt long-term value in many instances.  I don’t, however, think buybacks or dividends are inherently incorrect, either.  Whether the idea comes from an activist shareholder or the board doesn’t really matter to me.  The board just needs to assess the idea and decide how to proceed.  

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