Corporations

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CEOs and executives just can’t get a break in the news
lately.  A jury found both former Countrywide
executive Rebecca Mairone and Bank of America liable for fraud for
Countrywide’s “Hustle” loans in 2007 and 2008 (see
here). Martha Stewart has had to renegotiate her merchandising agreement
with JC Penney to avoid hearing what a judge will say about that side deal in
the lawsuit brought against her by Macy’s, with whom she purportedly had an
exclusive merchandising deal (see
here).  JP Morgan Chase is in talks
to pay $13 billion to settle with the Department of Justice over various
compliance-related failures, but the company still faces billions in claims
from angry shareholders. The company isn’t out of the woods yet in terms of potential
criminal liability (see
here). CEO Jamie Dimon isn’t personally accused of any wrongdoing, and in
fact has been instrumental in achieving the proposed settlements. But in the
past he has faced questions from institutional shareholders about his dual
roles as chair of the board and CEO. Those questions may come up again in the
2014 proxy season.

The Bank of America verdict and the recent JP Morgan Chase
settlement may herald a…

Sarah C. Haan has posted “Opaque Transparency: Outside
Spending and Disclosure by Privately-Held Business Entities in 2012 and Beyond”
on SSRN.  Here is a portion of the
abstract:

In this Article, I analyze data on outside spending from the
treasuries of for-profit business entities in the 2012 federal election – the
very spending unleashed by Citizens United v. FEC. I find that the majority of
reported outside spending came from privately-held, not publicly-held
companies, including a significant proportion of unincorporated business
entities such as LLCs, and that more than forty percent of spending by
privately-held businesses was characterized by opaque transparency: Though
fully disclosed under existing campaign finance disclosure laws, something
about the origin of the money was obscured. This happened when political
expenditures were spread among affiliated business-donors, typically donating
similar amounts to the same recipient(s) on similar dates, and when for-profit
business entities were used as shadow money conduits. I also argue that, due to
differences between access-oriented and replacement-oriented electoral
strategies, for-profit businesses engaged in outside spending in a federal
election are likely to be experiencing insider expropriation. The expropriation
of a business entity’s political voice by a controlling person is another
potential

…

Really great piece by Justin Fox on “What We’ve Learned from
the Financial Crisis” over at the Harvard Business Review.  What follows is a brief excerpt, but you’ll want to go read the whole thing.

Five years ago the global financial system seemed on the
verge of collapse. So did prevailing notions about how the economic and
financial worlds are supposed to function. The basic idea that had governed
economic thinking for decades was that markets work…. In the summer of 2007,
though, the markets for some mortgage securities stopped functioning…. [T]he
economic downturn was definitely worse than any other since the Great
Depression, and the world economy is still struggling to recover…. Five years
after the crash of 2008 is still early to be trying to determine its
intellectual consequences. Still, one can see signs of change…. To me, three
shifts in thinking stand out: (1) Macroeconomists are realizing that it was a
mistake to pay so little attention to finance. (2) Financial economists are
beginning to wrestle with some of the broader consequences of what they’ve
learned over the years about market misbehavior. (3) Economists’ extremely
influential grip on a key component of the economic

…

1. Russell
G. Pearce & Brendan M. Wilson on Business Ethics

 

This Essay
makes three contributions to the field of business ethics …. First, the Essay
identifies the dominant approaches to business ethics as profit maximization,
social duty, and ordinary ethics, and summarizes the claims made by proponents
of each perspective. We intend this categorization as a way to refine the
distinctions between and among various views of business ethics and to address
the conundrum that John Paul Rollert has described as the “academic anarchy
that is business ethics…. Second, the Essay explores the strengths and
weaknesses of these three approaches. It suggests that their emphasis on
viewing business persons and organizations as existing autonomously, rather
than within webs of relationships, helps explain why the field of business
ethics has had minimal influence on business conduct, as does the false
dichotomy between economic and ethical conduct that proponents of these
approaches often embrace…. Third, the Essay proposes an alternative approach
that would locate business ethics at the center of business conduct. This approach
embraces the relational character of business behavior. It offers a conception
of self-interest that recognizes the relational dimension of self-interest and
identifies mutual benefit as the…

Hardcover book forthcoming. 
Here is a description from the Amazon product page:

Since the 1980s,
society’s wealthiest members have claimed an ever-expanding share of income and
property. It has been a true counterrevolution, says Pierre Rosanvallon–the
end of the age of growing equality launched by the American and French
revolutions. And just as significant as the social and economic factors driving
this contemporary inequality has been a loss of faith in the ideal of equality
itself. An ambitious transatlantic history of the struggles that, for two
centuries, put political and economic equality at their heart, The Society of
Equals calls for a new philosophy of social relations to reenergize egalitarian
politics. For eighteenth-century revolutionaries, equality meant understanding
human beings as fundamentally alike and then creating universal political and
economic rights. Rosanvallon sees the roots of today’s crisis in the period
1830-1900, when industrialized capitalism threatened to quash these
aspirations. By the early twentieth century, progressive forces had begun to
rectify some imbalances of the Gilded Age, and the modern welfare state
gradually emerged from Depression-era reforms. But new economic shocks in the
1970s began a slide toward inequality that has only gained momentum in the
decades since.

On October 16th, the US Chamber of Commerce’s
Center for Capital Markets Competitiveness will host a half-day event to
examine trends from the 2013 proxy season and look ahead to 2014.  The day
will start with a presentation from the Manhattan Institute about the 2013 season
and then I will be on a panel with Tony Horan, the Corporate Secretary of
JP Morgan Chase, Vineeta Anand from the Office of Investment of the AFL-CIO,
and Darla Stuckey of the Society of Corporate Secretaries and Governance
Professionals. Our panel will look  back at the 2013 proxy season and discuss hot
topics in corporate governance in general.  Later in the day, Harvey Pitt
and other panelists will talk about future trends and reform proposals, and
depending on the state of the government shutdown, we expect a
member of Congress to be the keynote speaker. The event will be webcast for
those who cannot make it to DC.  Click here
to register.

Dodd-Frank requires the SEC to issue rules barring national exchanges
from listing any company that has not implemented a clawback policy that does
not include recoupment of incentive-based compensation for current and former
executives for a three-year period.  Unlike the Sarbanes-Oxley clawback rule,  Dodd-Frank requires companies to recover compensation,
including options, based on materially inaccurate financial information,
regardless of misconduct or fault.

Although the SEC has not yet issued rules on this provision,
a number of companies have already disclosed their clawback policies, likely
because proxy advisory firms Glass Lewis and Institutional Shareholder Services
have taken clawback policies into consideration when making Say on Pay voting
recommendations. Equilar has reviewed the proxy statements for Fortune 100
companies filed in calendar year 2013 for compensation events for fiscal year
2012. The organization released a report
summarizing its findings, which are instructive. 

Of the 94 publicly-traded companies analyzed by Equilar, 89.4%
publicly disclosed their policies; 71.8% included provisions that contained
both financial restatement and ethical misconduct triggers; 29.1% included
non-compete violations as triggers and 27.2% had other forms of triggers.  68% of the policies applied to key executives
and employees including named executive officers, while only 14.6% applied to
all employees. 7.8%…

I gave a talk
today about sustainable development, where I talked about the challenges of
trying to balance resource development with the need to preserve the
environment and deal with the social issues that come from increased
activity. 

One thing
came to mind: People matter.  Whether you work for EQT or the EPA, you’re a
person who has a job to do, which can have beneficial outcomes.   When we
discuss sustainable development, we also need to recognize the need for sustainable
conversation. Development doesn’t happen without conversation, which can lead to
compromise, which can lead to progress.  

Governments
and corporations are both made up of people.  Isolating either governments
or corporations as inherently evil entities is missing the point.  We can
disagree about the goals of either, but we need to be more careful about who we
vilify.  Negotiations don’t happen against governments or corporations,
they happen with people in governments or in corporations.  And we need to
remember that.

Too bad I
didn’t have this information from today’s
Wall Street Journal to add to my arsenal of reasons of why I think the Dodd-Frank conflict minerals
SEC disclosure is a well-intentioned but bad law to address rape, forced labor,
plundering of villages, murder, and exploitation of children in the Democratic
Republic of Congo. I won’t reiterate the reasons I outlined in my two-part blog
post a couple of weeks ago.  According
to press reports, while acknowledging her responsibility to uphold the law, SEC Chair Mary Jo White mirrored some of the arguments about
discretion that business groups and our amicus brief raised on appeal to the DC
Circuit, and further explained, “seeking
to improve safety in mines for workers or to end horrible human rights
atrocities in the Democratic Republic of the Congo are compelling objectives,
which, as a citizen, I wholeheartedly share … [b]ut, as the Chair of the SEC, I
must question, as a policy matter, using the federal securities laws and the
SEC’s powers of mandatory disclosure to accomplish these goals.”  I couldn’t agree more. While I have no problems with appropriate and relevant disclosure, corporate responsibility, and due diligence related to human rights, Congress should…

Professor Haskell Murray is presenting on
Delaware’s new Public Benefit Corporation Act on October 5th at the
Southeastern Law Scholars Conference.  Delaware is the 19th state to
pass such legislation and given the influence that the state has on others in the area of
corporate law, it may prompt the many states that are considering it to pass their
own pending legislation.  Many question
the need for benefit corporations in general given the constituency statutes that are already in
place in many states and the debate about the shareholder wealth maximization norm. Others worry about unintended consequences (see
here for example).  

Haskell has
probably written more extensively on these entities than almost anyone else (see here).
Although his latest article is not yet on SSRN, the abstract is below.  I look forward to reading his article and to
seeing how many Delaware corporations jump on the benefit corporation
bandwagon.

“Systems should exist to serve
society.  Right now our capitalist system is not serving society; it’s
serving shareholders.  And we can’t run around expecting different
outcomes until we change the rules of the game.”   -Jay Coen Gilbert
(Co-founder, B-Lab)

“Delaware, the leading incorporation state…