September 11, 2019, will mark the one-year anniversary of a clearinghouse-related event reported on in the NYT as: How a Lone Norwegian Trader Shook the World’s Financial System.  Ironically, the story unfolded during the ten-year anniversary week of Lehman Brothers’ collapse and AIG’s $180B+ rescue by the U.S. government.  Global policymakers’ clearinghouse mandates, implemented in the U.S. in Title VII of Dodd-Frank, were supposed to be the solution to the AIG problem, not potentially the next big problem.    

And speaking of the financial crisis, resolving the ownership status of Fannie Mae and Freddie Mac is once again in the news.  These institutions have been in government conservatorship for over 10 years.  I’m skeptical that a long-term, viable solution has been found to return the housing GSEs to private ownership that will not return us right back to where we are now the next time these institutions get into trouble.          

I’m no expert in housing finance, but I do know a good deal about clearinghouses.  Important parallels exist between the housing GSEs and systemically-significant clearinghouses.  Most such clearinghouses are privately-owned, publicly-traded corporations.  Yet here too, the government holds the tail risk of these institutions.  As I’ve argued in The Federal Reserve As Last Resort, this is the “why” behind the Federal Reserve’s expansive new lending authority in Title VIII of Dodd-Frank. 

Stakeholders have also been much in the news lately (see BLPB posts here , here, and here).  We’re all clearinghouse stakeholders.

In Incomplete Clearinghouse Mandates, 56 Am. Bus. L. J. 507 (2019), I argue that it’s time to find a workable solution for the recovery of a troubled clearinghouse.  My article focuses on the three areas of time-critical cooperation that will, at a minimum, be necessary between the clearinghouse and its members for a successful recovery: continuation of clearing member membership; assistance to the clearinghouse if one or more clearing members has defaulted; and, continuity of any critical services clearing members (or their affiliates) provide to the clearinghouse.  Yet it also uses transaction cost economics to examine underlying legal and regulatory structures that will increase the cost of this necessary cooperation.  Those structures include: ownership arrangements, federal lending limits for national banks, interdependent security problems, and the organization of client-clearing.  It ends by proposing reforms designed to ensure that the incentives of the clearinghouse and its members promote a successful recovery. 

Let’s not repeat the ongoing history of the housing GSEs in the clearinghouse area.  Here’s an abstract of my article (draft recently posted to SSRN):

In the 2007-2008 financial crisis, over-the-counter (OTC) derivatives triggered the collapse of colossal financial institutions.  In response, global policymakers instituted clearinghouse mandates.  As a result, all standardized OTC derivatives must now use clearinghouses, and global financial market stability now depends upon these institutions.  Yet certain underlying legal and regulatory structures threaten to undermine clearinghouse stability, particularly were a significant clearinghouse to become distressed.  This article argues that the clearinghouse mandates are incomplete in falling short of also reforming these problematic arrangements.      

As with electric utilities, the lights at the financial market infrastructures known as clearinghouses must always be on.  Yet the legal frameworks for handling a distressed clearinghouse, the problem of clearinghouse recovery and resolution, remain uncertain.  This article advances debate on this issue.  It argues that recovery, a private market restructuring process, can be conceptualized as a bargaining game dependent upon time-critical cooperation between a clearinghouse and members.  This article uses transaction cost economics to demonstrate, however, that certain underlying legal and regulatory structures could work at cross-purposes to this necessary cooperation, and actually increase its cost.  Based upon this analysis, it proposes reforms designed to ensure that parties’ incentives promote efficient recovery.  In the absence of efficient recovery frameworks, the path of a distressed, significant clearinghouse is likely to resemble that of the government-backed mortgage lenders whose fate more than ten years after their entry into conservatorship remains uncertain.  This article aims to help avoid a repeat of this history.

             

Just after I posted my paper, Not Everything is About Investors: The Case for Mandatory Stakeholder Disclosure, arguing for a stakeholder-focused corporate disclosure system, the conversation about corporate obligations to noninvestor interests exploded.  That’s because the Business Roundtable released a new “statement on the purpose of a corporation” which Marie Kondo-ed the traditional focus on shareholder interests, in favor of, well:

While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:

– Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.  

– Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.

– Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions. – Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.

– Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders. 

The reception has been … mixed. 

There are two basic schools of thought.  The first is that the BR’s statement represents a real change going forward, either because it will drive business decisionmaking or, more subtly, because the fact that the BR felt it necessary to issue the statement at all illustrates a societal shift that has already occurred.

The second is that this is a public relations ploy to stave off more onerous business regulation. 

I posted about “stakeholder capitalism” a few weeks ago and how it often translates into a fairly naked attempt to avoid accountability to shareholders or anyone else.  Which is why the Council of Institutional Investors (CII) immediately issued its own statement decrying the BR’s attempt to disclaim any responsibility to shareholders as a unique constituency.

Right on cue, Martin Lipton* – who, as I discussed in my prior post on the subject, has a very long history of using appeals to stakeholders as a mechanism for shielding management decisions from scrutiny – posted a statement in support of the BR, in which he warned that failure to embrace its vision would bring about calamity:

The failure of the Council of Institutional Investors to join the Business Roundtable in rejecting shareholder primacy and embracing stakeholder corporate governance is misguided. The argument that protection of stakeholders other than shareholders should be left to government regulation is an even more serious mistake. It would lead to state corporatism or socialism.

The failure to recognize the existential threats of inequality and climate change, not only to business corporations but also to asset managers, institutional investors and all shareholders, will invariably lead to legislation that will regulate not only corporations but also investors and take from them the ability to use their voting power to influence the corporations in which they invest.

In other words, corporations have to appear to be good citizens to avoid being forced to be good citizens. At least he’s honest.

Meanwhile, the Wall Street Journal published its own view in which it agreed this is all fine for PR purposes but if anyone really means to pursue profits with anything less than religious devotion, that would be bad.

Let’s just say it’s an odd day when Martin Lipton is fighting both the CII and the WSJ editorial page.  Usually, the alignment would be more CII versus Lipton and the WSJ, because the reality is, CII members are all about protecting corporate stakeholders – after all, the CII is an organization of employee pension plans – they just, you know, want shareholders to be the ones making those decisions, not corporate managers.  And the WSJ and Lipton are very much in the opposite camp.  Indeed, the BR is currently fighting to make it harder for shareholders to introduce proposals that would force corporations to focus on – you guessed it – stakeholder interests, so this looks a lot less like an issue of what is best for society than about who should be the decisionmaker.

But there’s more.  First, not everyone’s on board with the BR’s statement; there are some notable absences from BR’s list of signatories.   Second, the BR’s statement puts it at odds with the Trump Administration, which seems to have formally declared shareholder wealth maximization as the only appropriate corporate purpose.  It also puts the BR at odds with SEC Commissioner Hester Peirce, who has done the same. 

So, what do we make of all of this?

Well, first and most obviously, abstract notions of corporate purpose – and the near-unenforceable fiduciary duties that follow – are likely to have very little direct influence on corporate behavior. But that doesn’t mean they’re entirely irrelevant, because they can impact the legal regime in which corporations operate.  As I discuss in What We Talk About When We Talk About Shareholder Primacy, it matters if the Trump Administration and the SEC think corporate purpose = shareholder wealth maximization, because that means they’ll develop legal rules to make it so, including defining “materiality” for securities law purposes to mean only matters relevant only to financial return, and prohibiting shareholders from pushing for greater accommodation of stakeholders.  And so far, the BR is fully on board with that agenda.

That said, the true drivers of corporate decisionmaking are real-world incentives that corporate managers have to favor one constituency or the other.  And because shareholders are the only constituency who get a vote, managers are particularly likely to attend to their concerns.  Which brings me to this op-ed by Chief Justice Strine and Antonio Weiss, published in Friday’s New York Times.  In it, they make an argument that Strine has often advanced, namely, that large mutual fund investors should vote for policies that protect the worker-beneficiaries of those funds, and thus force managers to accommodate their interests as employees and consumers.  (For recent academic commentary in that vein, see Nathan Atkinson here and Michal Barzuza, Quinn Curtis, & David Webber here.) 

Now, Strine has made this argument before – I posted about one iteration here – and as I pointed out at the time, Strine has also long argued that managers have fiduciary duties to shareholders alone.  So there’s some tension in his argument that mutual funds should advocate for corporate policies that, at least according to formal (if not practical) Delaware law, cannot be advanced to the extent they favor employee interests over those of investors.  The op-ed, though, squares that circle by equating protections for workers and the environment with the long-term best interests of the corporation itself (and thus, by extension, its investors).

(The op-ed also makes the odd argument that there are too many meaningless items on the corporate ballot.  Which is unexpected because most of the non-critical items are, like, proposals that deal with corporate social responsibility, which is what the op-ed just said funds should advocate for, so, I’m confused.)

Now, the claim that long-term corporate interests are identical to those of society as a whole is an ancient way of papering over the very real conflicting interests of different stakeholders.  As an example, Larry Fink’s famed letter about corporate purpose gets a lot of attention as advancing a stakeholder-primacy view, but the letter actually said that accommodating stakeholders was in the long-term interest of business, and therefore is better for investors.

That’s the (purported) thinking behind the new Long-Term Stock Exchange (LTSE), which just received SEC approval of its listing standards.  Among other things, the standards require that listed companies have policies that are “consistent with” the notion that they should “consider a broader group of stakeholders and the critical role they play in one another’s success,” and requires listed companies to “adopt and publish a Long-Term Stakeholder policy explaining how the issuer operates its business to consider all of the stakeholders critical to its long-term success.”

Now, I say “purported” here because – going back to where all this began – arguments about managers accommodating corporate stakeholders are frequently code for “activist shareholders leave us alone,” which has little to do with corporate well-being and everything to do with management entrenchment.  Still, we’ll see how the LTSE works out – whether it attracts listings, investors, and (most critically) whether LTSE-listed companies insist their long-term policies were merely puffery as soon as they find themselves in the crosshairs of a securities fraud lawsuit.

Where does that leave us?

In my view, the hypothesized alignment between shareholder and stakeholder interests is … complicated.  This is my argument in Not Everything is About Investors: corporate profit-seeking is only aligned with the interests of society writ large if corporations pay a price for inflicting harms on non-shareholder constituencies.  Which is why I think disclosure for non-shareholder audiences, while not a cure-all, is important: it helps society extract that price so that corporate managers are incentivized to act in society’s best interest as an inherent aspect of profit-seeking.

Whew. 

That was a lot.

In closing, I’ll just describe one particular colloquy that occurred at Tulane’s Corporate Law Institute earlier this year.  One panel was devoted to corporate social responsibility, and the panelists included Strine and Myron Steele, former chief justice of the Delaware Supreme Court. 

The moderator of the panel turned to Steele and asked him directly, is it ever permissible for a board of directors to decide that they will prioritize the needs of employees over earning a higher profit?  And Steele said, well, if the board sits down, and carefully studies the issue, and decides that prioritizing employees is in the best interests of the company’s long-term profitability, then yes, the board can make that decision.

And the moderator asked again, okay, but what if there’s a tradeoff between prioritizing employees and earning profits?  Can the board choose to favor employees?

And Steele said, if the board studies the issue, documents its process, and comes to a reasoned determination that it’s better for the corporation’s long-term prosperity if benefits are conferred on employees, then yes, that’s permissible.

So.  There you have it.

*yeah, I have to keep saying – no relation

I had planned to write about the Statement on the Purpose of a Corporation signed by 200 top CEOs. If you read this blog, you’ve likely read the coverage and the varying opinions. I’m still reading the various blog posts, statements by NGOs, and 10-Ks of some of the largest companies so that I can gather my thoughts. In the meantime, many of these same companies  will be at the UN Forum on Business and Human Rights touting their records. I’ve been to the Forum several times, and it’s worth the trip. If you’re interested in joining over 2,000 people, including representatives from many of the signatories of the Statement, see below. You can register here:

The UN annual Forum on Business and Human Rights is the global platform for stock-taking and lesson-sharing on efforts to move the UN Guiding Principles on Business and Human Rights from paper to practice. As the world’s foremost gathering in this area, it provides a unique space for dialogue between governments, business, civil society, affected groups and international organizations on trends, challenges and good practices in preventing and addressing business-related human rights impacts. The first Forum was held in 2012. It attracts more than 2,000 experts, practitioners and leaders for three days of an action- and solution-oriented dialogue.The Forum was established by the UN Human Rights Council in 2011  “to discuss trends and challenges in the implementation of the Guiding Principles and promote dialogue and cooperation on issues linked to business and human rights, including challenges faced in particular sectors, operational environments or in relation to specific rights or groups, as well as identifying good practices” (resolution 17/4, paragraph 12).

The Forum addresses all three pillars of the Guiding Principles:

    • The State duty to protect against human rights abuses by third parties, including business, through appropriate policies, regulation and adjudication;
    • The corporate responsibility to respect human rights, which means to avoid infringing on the rights of others and to address adverse impacts with which a business is involved; and
    • The need for access to effective remedy for rights-holders when abuse has occurred, through both judicial and non-judicial grievance mechanisms

The Forum is guided and chaired by the UN Working Group on Business and Human Rights and organized by its Secretariat at the Office of the UN High Commissioner for Human Rights (OHCHR).

If you have any questions about the value of attending the Forum, feel free to reach out to me at mweldon@law.miami.edu. 

Elizabeth Chamblee Burch has a new book out, Mass Tort Deals: Backroom Bargainin in Multidistrict Litigation.  At this point, I’ve only made it through the introduction, but I’m getting the sense that, like her academic papers, it’s going to be good.  She seems to have zeroed in on the big problem–the system works well for all repeat players (lawyers, courts, and defendants) but does not seem to do much for class members.  Looking forward to reading the rest of it!  I’ll do a series of posts on it in the coming weeks.  Stay tuned.

 

A recent California court order granting a motion for final settlement in an antitrust class action suit appears to have left LLCs out as “person(s)” in the definitions.  Here’s the clause, which is repeated a few times in the Settlement Agreement: 

(w) “Person(s)” means an individual, corporation, limited liability corporation, professional corporation, limited liability partnership, partnership, limited partnership, association, joint stock company, estate, legal representative, trust, unincorporated association, government or any political subdivision or agency thereof, and any business or legal entity and any spouses, heirs, predecessors, successors, representatives or assignees of any of the foregoing.

IN RE: LITHIUM ION BATTERIES ANTITRUST LITIGATION, 2019 WL 3856413, Slip Copy (N.D.Cal. Aug. 16, 2019) (emphasis added). 

A “limited liability corporation” and a “corporation” are the same thing.  I am certain the “limited liability corporation” language was intended to cover “limited liability companies” or LLCs.  But it doesn’t cover LLCs, which are different entities. Of course, the fact that the definition includes all “unincorporated associations,” LLCs are included, but this is sloppy and in my humble view, should never have been approved. 

California has been know to make this distinction murky (see here) and some California courts like to just plain get it wrong. But this is a settlement that is being reviewed by the court, and I am willing to bet this language is in all sorts of settlement agreements because they are cutting and pasting the definitions from settlement to settlement. 

From now on, I say courts should deny these agreements when proposal gets things like this wrong.  Or better yet, reduce the legal fees, so it doesn’t harm the class, but let’s the lawyers know they should be drafting carefully. Sure, it’s not a huge deal in this case, but it sure would be nice if more courts would send the message that LLCs are not corporations.  Because they’re not. 

The City University of New York (CUNY) School of Law seeks highly-qualified candidates for a tenured or tenure-track faculty appointment to begin in Fall 2020. The principal responsibility of this faculty member will be to teach business law related courses, including Business Associations, U.C.C. Survey, and Contracts. All faculty are also expected to teach our first-year Lawyering course on a rotating basis, and all faculty are expected to teach in both the day and evening programs on a rotating basis.

CUNY SCHOOL OF LAW: “LAW IN THE SERVICE OF HUMAN NEEDS“

CUNY School of Law is a national leader in progressive legal education: we are ranked first in the country for public interest law and third in the county for clinical programs, and we are one of the most diverse law schools in the nation.

Our mission at CUNY School of Law is two-fold: training public interest attorneys to practice law in the service of human needs; and providing access to the profession for members of historically underrepresented communities. The Law School advances that mission though an innovative curriculum that brings together the highest caliber of clinical training with traditional doctrinal legal education to train lawyers prepared to serve the public interest. The basic premise of the law school’s program is that theory and abstract knowledge cannot be separated from practice, practical skill, professional experience and the social, cultural, and economic context of law. The curriculum therefore integrates practical experience, professional responsibility, and lawyering skills with doctrinal study at every level.

QUALIFICATIONS

 Successful candidates will have:

a)      J.D., L.LB., or Ph.D in a law-related discipline;

b)      admission to law practice;

c)      social justice lawyering experience;

d)      a demonstrated commitment to the mission of CUNY School of Law;

e)      availability and willingness to teach in the day and evening programs on a rotating basis;

f)       availability and willingness to teach the first-year Lawyering course on a rotating basis (experience teaching legal writing preferred);

g)      commitment to scholarly engagement (established scholarly record preferred);

(a)   a demonstrated commitment to excellent teaching (ability to teach in both a classroom and clinical setting preferred); and

(b)   demonstrated success as a faculty member, including the ability to collaborate with others and share responsibility for committee and department assignments.

COMPENSATION

CUNY offers faculty a competitive compensation and benefits package covering health insurance, pension and retirement benefits, paid parental leave, and savings programs. We also provide mentoring and support for research, scholarship, and publication as part of our commitment to ongoing faculty professional development.

HOW TO APPLY

Interested candidates should apply at www.cuny.edu by accessing the employment page, logging in or creating a new user account, and searching for this vacancy using the Job ID (20886) or Title (Assistant, Associate, or Full Professor of Law) then selecting “Apply Now” and providing the requested information. (Link at : 
https://cuny.jobs/queens-ny/assistant-associate-or-full-professor-of-law/07654EF690374350BED697DD5EBAE1F4/job/)

The application requires a CV/resume and a cover letter, indicating the position to which you are applying.

Apropos of my post last week on female founders and leaders of beauty unicorns (and women-founded unicorns more generally), I want to highlight this recent piece from our local paper here in Knoxville.   The women featured in the article range from high school students to holders of advanced degrees in their respective fields.  Their businesses are all technology driven and have received significant start-up funds through competition awards and grants.  None may become unicorns.  Their growth and exit strategies may not take them there.  Regardless, their ideas have apparent traction and their businesses are experiencing early-stage success.  I found each woman and her ideas totally inspiring.

Speaking of inspiring, I also will note that a day earlier, the same news outlet published an article that focused on women-led businesses in our community–and more specifically, on advice that local female CEOs desired to offer to others who are starting or managing their own businesses.  Their counsel (which includes, among many other things, encouragement to step away from business operations to achieve greater business success, as well as life balance) is priceless.  So are some of the observations these businesswomen make along the way.  Here are a few of my favorite quotes, each of which is a great lesson in leadership:

  • “I want everybody to be continual learners, and to continue to grow and take chances and do things they didn’t think they could do . . . .”
  • “Never underestimate the power of sheer determination . . . .”
  • “If you take a group of subject matter experts in whatever they do, that are mission focused, put their egos out the door and they’re really interested in solving whatever the problem is, whatever the situation is in front of them, that you are going to come up with more innovative, robust, diverse, comprehensive solutions because of that diversity, because you’re coming together as a team . . . .”

Great stuff.

Knoxville hosts a lot of business formation and development activity.  UT Law’s business and trademark law clinics engages with some of the related legal services work.  As someone who practiced in BigLaw and worked predominantly with publicly held and larger privately owned firms, I have found my work in the Knoxville community over the past nineteen academic years to be a welcome change and, overall, very rewarding.  As I enter my twentieth year of law teaching this week, I plan use all of the goodwill that work has generated (as well as the inspiration offered by the two articles I link to above) to motivate my teaching.  I look forward to a happy and productive semester!  And if you are a law teacher (or a teacher of any kind, for that matter), I wish you the same.

Last week, I posted about the Annual Conference of the Academy of Legal Studies in Business.  Since then, I reflected on Robert Prentice’s fantastic presentation at this event on Ethical Decision Making and the Conformity Bias.  So, I decided to mention the conference again both to highlight Prentice’s extensive and important work in business ethics, and to remind – and perhaps in some cases, introduce – BLPB readers of a phenomenal teaching resource: Ethics Unwrapped, a program within the Center for Leadership and Ethics (CLE) at the McCombs School of Business at the University of Texas.

Prentice’s conference talk was entertaining, engaging, and thought-provoking.  Here’s the description: Even the best people are only boundedly ethical. A wide range of social and organizational pressures, cognitive heuristics and biases, and situational factors affect (often adversely) people’s ethical decision making. This paper explores one of these influences that is often underestimated—the conformity bias, which is the tendency that people have to take their cues as to what to think and how to act from those around them, particularly members of their in-group.  Click here to download the paper: Download Conformity Bias Paper Montreal 

One of the many videos offered by Ethics Unwrapped is on the conformity bias.  As with other videos on this site, it is also accompanied by related discussion questions, case studies, teaching notes, and additional resources.  If you’ve never browsed the website, I highly encourage you to spend a few minutes familiarizing yourself with [t]his free educational program…used around the world by more than 1,200 colleges and universities, in hundreds of businesses and organizations, and by tens of thousands of ethics learners.  It will definitely be time well spent!

Revised 8/20/19