Corporate Governance

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Hao Liang & Luc Renneboog have posted “The Foundations of Corporate Social Responsibility” on SSRN.  Here is the abstract:

We investigate the roles of legal origins and political institutions – believed to be the fundamental determinants of economic outcomes – in corporate social responsibility (CSR). We argue that CSR is an essential path to economic sustainability, and document strong correlations between country-level sustainability ratings and various extensive firm-level CSR ratings with global coverage. We contrast the different views on how legal origins and political institutions affect corporations’ tradeoff between shareholder and stakeholder rights. Our empirical evidence suggest that: (a) Legal origins are more fundamental sources of CSR adoption and performance than firms’ financial and operational performance; (b) Among different legal origins, the English common law – widely believed to be mostly shareholder-oriented – fosters CSR the least, (c) Within the civil law countries, firms of countries with German legal origin outperform their French counterparts in terms of ecological and environmental policy, but the French legal origin firms outperform German legal origin companies in social issues and labor relations.Companies under the Scandinavian legal origin score highest on CSR (and all its subfields); (d) Political institutions – democratic rules…

On Tuesday, I attended the oral argument for the National Association of Manufacturers v. SEC—the Dodd-Frank conflict minerals case. Trying to predict what a court will do based on body language and the tone of questioning at oral argument, especially in writing, is foolish and crazy, but I will do so anyway.

I am cautiously optimistic that the appellate court will send the conflict mineral rule back to the SEC to retool based on the three arguments generated the most discussion. First, the judges appeared divided on whether the SEC  had abused its discretion by changing the statutory language requiring issuers to report if minerals “did” originate from the DRC or surrounding companies rather than the current SEC language of “may have” originated. This language would sweep in products in which there is a mere possibility rather than a probability of originating in covered countries. One judge grilled the SEC like I grill my law students about the actual statutory language and legislative intent, while another appeared satisfied with SEC’s explanation that issuers did not have to file if the lack of certainty was due to a small number of responses from suppliers or for lack of information. My prediction-…

I am currently taking a break from the day-long AALS Section on Socio-Economics program.  The last session before lunch was entitled “Socio-Economics: Changing the Debate – Perspectives on Growth and Distribution.” During that session, Robert Ashford mentioned his paper “Binary Economics: The Economic Theory that Gave Rise to ESOPs,” and I thought I’d pass on the abstract to our readers:

Many people know about Employee Stock Ownership Plans (ESOPs) which, along with profit-sharing and pension plans, are treated as deferred compensation plans under Section 401 and related sections of the Internal Revenue Code. ESOPs have been established by thousands of American corporations, including some of the largest, and cover millions of employees. There is a national trade association (The ESOP Association), that is now celebrating its 50th year in existence, and other organizations established to support employee ownership, including the Ohio Center for Employee Ownership that first published this article in its publication entitled Owners At Work (2006/2007)

Most people aware of ESOPs, however, do not realize that ESOPs are part of a broader approach to expanded capital ownership, broader prosperity, and economic justice known as binary economics. Binary economics was first advanced by…

Yesterday, I attended the Annual Meeting of the Society of Socio-Economists.  Unfortunately, I was only able to participate in the second half of the program due to flight delays, but the discussions I did participate in were fantastic and I hope to publish a number of posts passing on some key points.  Today, I’d like to start by highlighting the book “The Citizen’s Share: Putting Ownership Back into Democracy” by Joseph R. Blasi, Richard B. Freeman, and Douglas L. Kruse (I understand Joseph Blasi was one of the presenters at the meeting–though I was chairing a concurrent plenary session at the time).  Here is a description from the Yale University Press:

The idea of workers owning the businesses where they work is not new.  In America’s early years, Washington, Adams, Jefferson, and Madison believed that the best economic plan for the Republic was for citizens to have some ownership stake in the land, which was the main form of productive capital. This book traces the development of that share idea in American history and brings its message to today’s economy, where business capital has replaced land as the source of wealth creation.   Based on…

The Generation Foundation (the “Foundation”), which focuses on sustainable capitalism, commissioned Mercer and Canadian law firm Stikeman Elliott LLP to study ways to foster more long-term thinking in the capital markets. In a prior report the Foundation proposed five actions to counteract the effects of short-termism including: (1) identifying and incorporating risks from stranded assets; (2) mandating integrated reporting; (3) ending the default practice of issuing quarterly earnings guidance; (4) aligning compensation structures with long-term sustainable performance; and (5) encouraging long-term investing with loyalty-driven securities. 

Loyalty-driven securities provide differentiated rights or rewards to shareholders based on their tenure of shareholding.  These rewards could include extra dividends, warrants or additional voting rights for owners who held shares for three years (or some other time period), limiting proxy access to shareholders of a specified minimum duration, or inferior voting rights for short-term shareholders.   The idea is not far-fetched. Apparently, the European Commission is considering proposals to reward certain shareholders with additional voting rights. 

In a report issued in December 2013 the Foundation, Mercer and the law firm outline the results of their legal review of almost a dozen countries and the interviews of over 120 experts. Interviewees included academics, pension funds, investors…

Lyman Johnson, Robert O. Bently Professor of Law at Washington & Lee, has a new article out in the Delaware Journal of Corporate Law titled, Unsettledness in Delaware Corporate Law: Business Judgment Rule, Corporate Purpose.

Abstract:  This Article revisits two fundamental issues in corporate law. One — the central role of the business judgment rule in fiduciary litigation — involves a great deal of seemingly settled law, while the other — is there a mandated corporate purpose — has very little law. Using the emergent question of whether the business judgment rule should be used in analyzing officer and controlling shareholder fiduciary duties, the latter issue having recently been addressed by Chancellor Strine in the widely-heralded MFW decision, this Article proposes a fundamental rethinking of the rule’s analytical preeminence. For a variety of reasons, it is suggested that fiduciary duties should be made more prominent and the business judgment rule should be dramatically deemphasized. The policy rationales for the rule are sound, but they have no relevance for shareholders and introduce needless complexity. For directors, those rationales do not apply in the loyalty setting, and in the care setting, can be achieved by recalling simply that there is no substance to

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Robert H. Sitkoff recently posted “An Economic Theory of Fiduciary Law” on SSRN.  Here is the abstract:

This chapter restates the economic theory of fiduciary law, making several fresh contributions. First, it elaborates on earlier work by clarifying the agency problem that is at the core of all fiduciary relationships. In consequence of this common economic structure, there is a common doctrinal structure that cuts across the application of fiduciary principles in different contexts. However, within this common structure, the particulars of fiduciary obligation vary in accordance with the particulars of the agency problem in the fiduciary relationship at issue. This point explains the purported elusiveness of fiduciary doctrine. It also explains why courts apply fiduciary law both categorically, such as to trustees and (legal) agents, as well as ad hoc to relationships involving a position of trust and confidence that gives rise to an agency problem.

Second, this chapter identifies a functional distinction between primary and subsidiary fiduciary rules. In all fiduciary relationships we find general duties of loyalty and care, typically phrased as standards, which proscribe conflicts of interest and prescribe an objective standard of care. But we also find specific subsidiary fiduciary duties, often…

Over at The Race to the Bottom Blog, Jay Brown has posted a 3-part series reviewing Klaassen v. Allegro Development, a case currently pending before the Delaware Supreme Court, which deals with the issue of how much notice a board is required to provide a CEO before firing him or her.  What follows are brief excepts from each of the three parts, but you should definitely follow the links for the full discussion if this material is of interest to you.

Part 1

Increasingly … governance cases involve disputes among directors.  What does a management friendly approach mean in that context?  Most likely, it means an approach that favors management directors (i.e., the CEO) over non-management directors, particularly independent directors…. This hypothesis provides an interesting template for a review of Klaassen v. Allegro Development.  The case essentially involved a dispute between a CEO and the non-management directors…. At a meeting held on Nov. 1, 2012, the board voted to remove the CEO [Klaassen].  Klaassen eventually filed suit challenging the dismissal…. The board in turn asserted that the actions were at most voidable and subject to equitable defenses.  They argued for, and the Chancery Court found applicable…

Sofya Manukyan has published “Can the ICESCR Be an Alternative for Environmental Protection? Analysis of the Effectiveness of the ICESCR in Holding State and Non-State Actors Accountable for Environmental Degradation” on SSRN.  Here is an excerpt of the abstract:

[O]ne method for tackling the problem of environmental degradation is creating universal mandatory norms to which all corporations would adhere. Another method, however, which is considered in this work in more details, is the approach to the issue of environmental degradation from the human rights perspective, particularly from the perspective of each human being having the right to live in a healthy, clean environment. As the reflection of this right is found in the state binding UN Covenant on Economic, Social and Cultural Rights (ICESCR), we consider this indirect approach to the environmental protection as a possible effective method for addressing the issues of environmental degradation.

Therefore, in this work we first justify our choice of approaching the environmental protection from the perspective of state’s human rights obligations, rather than from the perspective of voluntary guidelines adopted by corporations and financial institutions. We then analyze how relevant articles of the ICESCR address the issue of environmental degradation. After…

On December 5th and 6th I attended and presented at the third annual Sustainable Companies Project Conference at the University of Oslo.  The project, led by Beate Sjafjell began in 2010 and attempts to seek concrete solutions to the following problem:

Taking companies’ substantial contributions to climate change as a given fact, companies have to be addressed more effectively when designing strategies to mitigate climate change. A fundamental assumption is that traditional external regulation of companies, e.g. through environmental law, is not sufficient. Our hypothesis is that environmental sustainability in the operation of companies cannot be effectively achieved unless the objective is properly integrated into company law and thereby into the internal workings of the company.  

Members of the Norwegian government, the European Commission, the Organisation for Economic Cooperation and Development (“OECD”), and the United Nations Environmental Programme  (UNEP) Finance Initiative also presented with academics and practitioners from the US, Europe, Asia and Africa.

I did not participate in the first two conferences, but was privileged this year to present my paper entitled “Climate Change and Company Law in the United States: Using Procurement, Pay and Policy Changes to Influence Corporate Behavior.” The program and videos of…