A coalition of consumer groups put together a study to evaluate the effectiveness of new disclosures proposed by the SEC.  In essence, the disclosures are supposed to help consumers recognize the differences between different types of financial advisers.  The study found that the proposed disclosures were not particularly effective:

To begin, participants in our testing probably read the CRS in more depth than they would on their own. Despite that more in-depth reading, participants struggled throughout with sorting out the similarities and differences between the Broker-Dealer Services and Investment Adviser Services. Both the formatting and the language contributed to the confusion.

On the upside, the testing provides a useful starting point for thinking about how the initial draft disclosures can be improved.  Instead of giving up on disclosure entirely, the authors argued for more work to get it right:

we believe that this report is an important first step in an iterative process designed to improve the SEC’s first published draft. This report helps to identify how typical investors read and misread, understand and misunderstand, and interpret and misinterpret efforts to communicate complex and technical concepts and information. We firmly believe that the results of our testing show that a usable document that communicates clearly and well with potential investors is a viable outcome.

The SEC should continue to work to make the disclosures more effective.  It should also work to increase standards to protect investors.

Corporate managers have long complained about proxy advisory services, such as ISS, Egan-Jones, and Glass Lewis.  They argue that proxy advisors provide governance advice to companies – for a fee – and then make influential voting recommendations to client shareholders, functionally creating a kind of shakedown service (“Pay us and we’ll be able to recommend that shareholders vote in your favor; don’t, and who knows what we’ll do?”).  Corporations argue that shareholders don’t conduct their own analysis of issues anymore, and blindly vote with however proxy services recommend – giving them far too much power.

There is plenty of reason to be skeptical of their complaints.  At least one study shows that most institutional investors take recommendations into account but ultimately make their own decisions.  And as John Coates recently testified before Congress on the issue, there is no evidence of a market failure necessitating congressional regulation, and regulation might make the industry more concentrated and less competitive, which is the exact opposite of what we should strive for.

I won’t deny that to the extent proxy advisory services potentially have conflicts, these should be known and their policies for cleansing should be clear.  But one cannot help but suspect that companies’ reasons for objecting to proxy advisors is the same as their objection to unions – it’s not conflicts or corruption, it’s that they overcome transactions costs of  a disaggregated constituency and facilitate coordination so as to create a countervailing power center.  Managers, in other words, just don’t want to be challenged – by anyone.

That said, corporate complaints have found a sympathetic ear among Republicans in Congress and now, apparently, in Jay Clayton at the SEC.  The SEC just announced that it was withdrawing two no-action letters from 2004 that have become the bete noire of corporate managers, in preparation for an upcoming Roundtable on the Proxy Process.  Clayton even went out of his way to issue a separate statement clarifying that staff guidance is non-binding, if we hadn’t gotten the message that anything done under previous administrations is now suspect.

You can’t read the letters online, because apparently withdrawing them means making them inaccessible unless you have access to a legal database – and that, by the way, is just terrible practice from a transparency point of view; I’d rather they just be clearly marked as withdrawn.

That said, I will summarize (and embed the letters in this post, if I can get the tech to cooperate).  But first, some background – and this is going to get long, so I’m putting the rest behind a cut.

[More under the jump]

Continue Reading Be careful what you wish for

On Sept. 4, it was reported 

Nike just lost about $3.75 billion in market cap after announcing free agent NFL quarterback Colin Kaepernick as the new face of its “Just Do It” ad campaign. It’s the 30th anniversary of the iconic TV and print spots.

At the time of this writing, the sneaker company’s intra-day market capitalization was $127.82 billion. On Friday, that number had been $131.57 billion.

Market capitalization is the market value of a publicly traded company’s outstanding shares.

Shares of NKE stock dropped about 4 percent on Tuesday morning, as #NikeBoycott has been trending on Twitter. The company’s valuation has since recovered a bit.

In light of the market cap loss, friend and co-blogger Stefan Padfield asked, via Twitter, “How much & what kind of information regarding projected backlash losses did Nike need to review in order to satisfy its duty of care to shareholders here?” My answer: very, very little and very, very limited.  

Now, it is worth noting that here it is Sept. 13, and as I write this, Nike is at or near its 52-week high. As such, the question is less pressing than it may have seemed a week ago.  But even then, I maintain, this is not really even in the realm of a duty of care concern. Or, at least, it shouldn’t be. (Also of potential interest, friend and co-blogger Ann Lipton provides a good overview of the varying takes on the ad here. 

A while back I wrote, This I Believe: On Corporate Purpose and the Business Judgment Rule, which provided my thoughts on how director )ecision making should be viewed (short answer: “I believe in the theory of Director Primacy”).  The business judgment rule provides that absent fraud, self-dealing or illegality, directors decisions cannot be reviewed. “Courts do not measure, weigh or quantify directors’ judgments. We do not even decide if they are reasonable in this context. Due care in the decisionmaking context is process due care only. Irrationality is the outer limit of the business judgment rule.” Brehm v Eisner, 746 A.2d 244 (Del. 2000)(emphasis added)(footnote omitted).     

Under this lens, regardless of the market cap impact, Nike’s advertising falls within the scope of the business judgment rule. Did the board even know this ad was coming out? I don’t know.  Probably. But I also think it is clearly proper for the board to delegate duties to CEO to handle day-to-day operations. And it is customary and proper for that CEO to delegate to a marketing VP and/or marketing agency the role of designing and placing advertising. Could the CEO and/or marketing VP get fired for their choices? Sure. Or they could get bonuses. Either way, that would be the call of the directors.  

I can come up with lots of reasons why Nike should not have done that ad, and I can come up with a lot of good reasons why it makes sense.  The biggest reason it makes sense? Nike knows marketing.  They won’t get everything right, but they have been taking calculated risks for a long time. In 1992, the Harvard Business Review noted that

in the mid-1980s, Nike lost its footing, and the company was forced to make a subtle but important shift. Instead of putting the product on center stage, it put the consumer in the spotlight and the brand under a microscope—in short, it learned to be marketing oriented. Since then, Nike has resumed its domination of the athletic shoe industry. It commands 29% of the market, and sales for fiscal 1991 topped $3 billion.

Phil Knight, Nike founder, futher explained how Nike looked at using famous athletes:

The trick is to get athletes who not only can win but can stir up emotion. We want someone the public is going to love or hate, not just the leading scorer. Jack Nicklaus was a better golfer than Arnold Palmer, but Palmer was the better endorsement because of his personality.

To create a lasting emotional tie with consumers, we use the athletes repeatedly throughout their careers and present them as whole people. So consumers feel that they know them. It’s not just Charles Barkley saying buy Nike shoes, it’s seeing who Charles Barkley is—and knowing that he’s going to punch you in the nose. We take the time to understand our athletes, and we have to build long-term relationships with them. Those relationships go beyond any financial transactions. John McEnroe and Joan Benoit wear our shoes everyday, but it’s not the contract. We like them and they like us. We win their hearts as well as their feet.

Read in this light, it all makes sense. This is part of Nike’s plan, and it always has been. Presumably, they expect that any business they lose because consumers are upset by the ads will be made up and then some by creating a “lasting emotional tie with consumers.”  That is, creating what we might call brand loyalty.

Not that is should matter to a court. While these explanations may be correct, they aren’t necessary.  The business judgment rule exists to allow companies, via their directors, to take these kinds of risks. It’s how you create companies like Nike (and Apple, for that matter). And that’s why there should be no question that this ad is beyond the scope of review, not matter how the public responds. If consumers don’t like it, they can buy other products. If shareholders don’t like it, they can vote the board out.  And that’s it.  That’s the recourse. It just doesn’t get much more “business judgmenty” than who you pick for your ads.  And that’s exactly how it should be.  

Slide1I am writing this fall about (among other things) business deregulation in the Trump era.  Given that the President’s campaign for office featured business deregulation as a prominent tenet, it seems like a good time to visit what’s been done to fulfill those campaign promises.  Business being a broad area for focus, I am trying to narrow the subject down a bit by picking some salient examples.

I reference the early executive orders on agency rule rulemaking and assessments of their success.  See, e.g., here and here.  But the deregulatory moves impacting business that have gotten the most media attention are the Trump administration’s tax cuts and a few smaller initiatives–like the tamp-backs to parts of bank regulation in the Dodd–Frank Wall Street Reform and Consumer Protection Act.  Apart from these headline items, what catches your attention, if anything, about the current administration’s forays into deregulation?  I would be interested in knowing.

Of course, there also are areas where it seems that there is new business regulation or business re-regulation rather than business deregulation.  Perhaps the most prominent area in which the current administration has taken a non-deregulatory approach to business operation is in international trade.  The reported outcome of recent trade talks with Mexico, for example, as well as the imposition of significant tariffs on Chinese imports earlier this year, have both been classified as contrary or counterproductive to a deregulatory agenda.  See, e.g., here and here, respectively.  Query whether and, if so, how these contrary or counterproductive measures should be weighed in any evaluation of business deregulatory success . . . .

And that’s just it.  Successful deregulation is somewhat in the eye of the beholder.  No single reference point represents an established determinant or embodiment of deregulatory triumph.  There are no standardized rules of the road governing the evaluation of efficacious deregulatory actions (taken individually or collectively).  Thus, political and other biases often underlie reports of effective or ineffective deregulatory initiatives, just as they underlie reports of effective or ineffective regulatory initiatives, even though deregulatory impact may intuitively seem to be more capable of simple measurement and objective assessment.

I will be presenting a draft paper on business deregulation during the Trump administration at an upcoming symposium sponsored by the Mercer Law Review.  The symposium, “Corporate Law in the Trump Era,” will be held on October 5 at the Mercer University School of Law.  I will have more to say on that essay in later posts, I am sure.  But for now, I invite you to let me know what current areas of business deregulation interest you most.  I would like to make my choices meaningful to the target audience for this essay, which likely includes many BLPB readers.

It was a busy second half of the week. More after the break:

Continue Reading ICYMI: #corpgov Weekend Roundup (Sep. 9, 2018)

I’ve been absolutely riveted by Nike’s decision to make Colin Kaepernick the face of its new ad campaign.  (I assume most readers are aware of the basics but here’s an article to catch you up if you need it.)  It’s a daring move, not just because of the controversy over Kaepernick himself, but also because of Nike’s relationship with the NFL: Nike is the official supplier of uniforms and sideline gear (a deal that was just extended through 2028), and presumably, in that capacity, Nike wants to keep the NFL popular and football fans happy.

So, there’s so much to chew over here.

We start with the ongoing tension between the fact that it is good marketing for companies to look like they care about various social causes – whatever those causes may be – and their fiduciary duty not to actually care about those things. (Assuming you buy into a shareholder primacy model, etc etc). 

My favorite example for my students is, well, this FT Alphaville blog post in reaction to Jamie Dimon’s ostentatious announcement that he was giving his employees a raise.  And then there’s Tax Exempt Lobbying, a new paper by Marianne Bertrand, Matilde Bombardini, Raymond J. Fisman, and Francesco Trebbi, finding that companies strategically direct charitable giving so as to please politicians that have control over their fates.

So on the one hand, it may be good business to promote Kaepernick, but Nike has to absolutely pretend that’s not really its motivation.

(More under the jump)

Continue Reading The revolution will be marketed

FINRA recently appointed Jack Ehnes as a public governor.  As the CEO of CalSTRS, he helps manage approximately $224 billion in assets.  

Although Mr. Ehnes does not seem to have many of the same kinds of conflicts as other Public Governors currently serving on FINRA’s governing board, he would not be my pick to represent the interests of public investors.  CalSTRs has significant business relationships with entities associated with other board members.  To illustrate, take a quick glance at this CalSTRS investment committee report.  It shows CalSTRS investing with Bridgewater and Blackstone.  Notably, persons affiliated with Bridgewater and Blackstone already serve on FINRA’s governing board.  CalSTRS likely has significant additional relationships with other large players.  

If FINRA is serious about serving as (and not just portraying itself as) an investor protection organization, it should add investor advocates without these entangling business relationships to its board as public governors.