Last week on the eve of the election, I shared a series of predictions regarding the market’s response to a Trump or Clinton presidential election victory.  Almost all of the predictions were for a swift and negative reaction to a Trump victory.  Immediate market predictions, like polling predictions, were, in a word: WRONG.  

From the Wall Street Journal:

Dow Posts Best Week Since 2011

Stocks were mixed on Friday, taking a pause to end an eventful week that pushed the Dow industrials to their best week since 2011.

The Dow climbed 0.2% on Friday to 0.2%, pushing the index up 5.4% for the week to 18847.66.

The S&P 500 dipped 0.1% on Friday to 2164.45, while the Nasdaq Composite jumped 0.5% to 5237.11.

I find myself so disorientated in this post-election reality.

Anne Tucker

Rep. John Shimkus (R-Ill.) has already started soliciting support as he seeks to chair the House Energy & Commerce Committee. He says in his letter: 

[W]e will use our oversight and investigative authority to rebalance the federal government, recommending changes so future administrations won’t have the same ability to abuse their power.  In particular, this will entail building the case against the Chevron Deference, which has enabled executive agencies to upend congressional intent through the courts.

Our success in this area will restore Congress as the sole lawmaking apparatus of the federal government.

This is rather funny to me.  First of all, Chevron was a case during the Reagan Administration in which the Administration decided to take a view of the Clean Air Act with which the Natural Resources Defense Council, Inc. disagreed. The court sided with the Administration.  The power of deference has value to who ever is in charge of the executive branch.  

More important, though, Congress has always been the sole lawmaking apparatus of the federal government. Congress can eliminate Chevron deference by statute. Congress can repeal Massachusetts v. EPA by statute.  Congress has the power.  They are just unwilling or unable to wield it.  This is true as to the EPA and SEC and FCC and any other agency.  So, sure, one can blame the role of the courts and the executive if they don’t like how agencies operate.  But I’d suggest that, for members of Congress who don’t like that, the first place they should look is in the mirror.  

The results of Tuesday’s election stunned most people – including internal analysts within the Trump camp –  because the polling seemed to give Clinton an insurmountable lead.  She was ahead of Trump in many states, and though there was great room for uncertainty in each poll, everyone assumed that even if there were some polling errors, there were not enough to make a difference in outcome.  I.e., she could lose Ohio and Florida and still win so long as she held Pennsylvania and so forth, so it seemed as though even accounting for polling error, there was little chance she could lose.

That assumption, however, ignored the possibility that all of the errors were correlated – so that an error in one state’s polls meant that the same error would be replicated across multiple states.  That’s something that Nate Silver accounted for in his model, however, and others rejected, and it contributed to Silver’s more bearish Clinton predictions.

And of course, that’s what happened with respect to mortgage backed securities as well.  Everyone knew that some mortgages would fail – and that some RMBS tranches would fail – but the assumption was that there were enough of them that any errors would not damage an entire pool.  What many (though, as with Clinton, not all) people failed to foresee was that the errors were correlated, so that they stood or fell in unison.  What seems so obvious in retrospect was difficult to understand at the time.

Yesterday, while at the annual SEALSB conference, a group of professors and I ate at Bull City Burgers in Durham, NC. I was somewhat surprised to see a framed B Corp. Certification on the restaurant wall. This restaurant’s main menu items, as the name suggests, were greasy (but tasty) burgers. While the menu did talk about how the cows were grass fed, I think there may be a hot debate over whether burgers are good for “society and environment.”

This got me thinking about whether there are certain industries that should be excluded from the B corp certification process or the benefit corporation legal entity form. If so, which industries and why? My initial reaction is that most companies in most industries – including burger joints – can be run in a socially responsible manner and can do better than their competitors, even if the product can have some negative impacts on society if used incorrectly (as burgers can if not eaten in relative moderation). There may be some industries that are irredeemable, but I am guessing they are few and far between. Most companies, if managed well, can have a positive impact on society, and even though you might not want a diet exclusively of burgers, Bull City Burgers definitely brightened our night. 

I have been on hiatus for a few weeks, and had planned to post today about the compliance and corporate governance issues related to Wells Fargo. However, I have decided to delay posting on that topic in light of the unexpected election results and how it affects my research and work.

I am serving as a panelist and a moderator at the ABA’s annual Labor and Employment meeting tomorrow. Our topic is Advising Clients in Whistleblower Investigations. In our discussions and emails prior to the conference, we never raised the election in part because, based on the polls, no one expected Donald Trump to win. Now, of course, we have to address this unexpected development in light of the President-elect’s public statements that he plans to dismantle much of President Obama’s legacy, including a number of his executive orders.

President-elect Trump’s plan for his first 100 days includes, among other things: a hiring freeze on all federal employees to reduce federal workforce though attrition (exempting military, public safety, and public health); a requirement that for every new federal regulation, two existing regulations must be eliminated; renegotiation or withdrawal from NAFTA; withdrawal from the Trans-Pacific Partnership; canceling “every unconstitutional executive action, memorandum and order issued by President Obama; and a number of rules related to lobbyists and special interests.

Plaintiffs’ lawyers I have spoken to at this conference so far are pessimistic that standards will become even more pro-business and thus more difficult to bring cases. That’s probably true. However,  I have the following broader business-law related questions:

  1. What will happen to Dodd-Frank? There are already a number of house bills pending to repeal parts of Dodd-Frank, but will President Trump actually try to repeal all of it, particularly the Dodd-Frank whistleblower rule? How would that look optically? Former SEC Commissioner Paul Atkins, a prominent critic of Dodd-Frank and the whistleblower program in particular, is part of Trump’s transition team on economic issues, so perhaps a revision, at a minumum, may not be out of the question.
    2. What will happen with the two SEC commissioner vacancies? How will this president and Congress fund the agency?
    3. Will SEC Chair Mary Jo White stay or go and how might that affect the work of the agency to look at disclosure reform?
    4. How will the vow to freeze the federal workforce affect OSHA, which enforces Sarbanes-Oxley?
    5. In addition to the issues that Trump has with TPP and NAFTA, how will his administration and the Congress deal with the Export-Import (Ex-IM) bank, which cannot function properly as it is due to resistance from some in Congress. Ex-Im provides financing, export credit insurance, loans, and other products to companies (including many small businesses) that wish to do business in politically-risky countries.
    6. How will a more conservative Supreme Court deal with the business cases that will appear before it?
    7. Who will be the Attorney General and how might that affect criminal prosecution of companies and individuals? Should we expect a new memo or revision of policies for Assistant US Attorneys that might undo some of the work of the Yates Memo, which focuses on corporate cooperation and culpable individuals?
    8. What will happen with the Consumer Financial Protection Bureau, which the DC Circuit recently ruled was unconstitutional in terms of its structure and power?
    9. What will happen with the Obama administration’s executive orders on Cuba, which have chipped away at much of the embargo? The business community has lobbied hard on ending the embargo and eliminating restrictions, but Trump has pledged to require more from the Cuban government. Would he also cancel the executive orders as well?
    10. What happens to the Public Company Accounting Board, which has had an interim director for several months?
    11. Jeb Henserling, who has adamantly opposed Ex-Im, the CFPB, and Dodd-Frank is under consideration for Treasury Secretary. What does this say about President-elect Trump’s economic vision?

Of course, there are many more questions and I have no answers but I will be interested to see how future announcements affect the world financial markets, which as of the time of this writing appear to have calmed down.

Prof. Bainbridge the other day commented on the following, which is item 10 from the Modern Corporation Statement on Company Law (available here):  

Contrary to widespread belief, corporate directors generally are not under a legal obligation to maximise profits for their shareholders. This is reflected in the acceptance in nearly all jurisdictions of some version of the business judgment rule, under which disinterested and informed directors have the discretion to act in what they believe to be in the best long term interests of the company as a separate entity, even if this does not entail seeking to maximise short-term shareholder value. Where directors pursue the latter goal, it is usually a product not of legal obligation, but of the pressures imposed on them by financial markets, activist shareholders, the threat of a hostile takeover and/or stock-based compensation schemes.

Bainbridge take a contrary position, citing Delaware Supreme Court Chief Justice Strine, who says, “a clear-eyed look at the law of corporations in Delaware reveals that, within the limits of their discretion, directors must make stockholder welfare their sole end, and that other interests may be taken into consideration only as a means of promoting stockholder welfare.” Strine further notes that “advocates for corporate social responsibility pretend that directors do not have to make stockholder welfare the sole end of corporate governance, within the limits of their legal discretion.”

I read these positions as consistent, though I think the scope of what is permissible is certainly implicitly different. I agree that Strine is right to say that “directors must make stockholder welfare their sole end.”  But I also agree that “disinterested and informed directors have the discretion to act in what they believe to be in the best long term interests of the company as a separate entity.” My read of the business judgment rule (BJR) is that, absent fraud, illegality, or self-dealing, courts should abstain from reviewing director decisions, meaning that the directors decide what”stockholder welfare” means and what ends to use in pursuit of that end.  That is, I think it’s wrong to say “directors generally are not under a legal obligation to maximise profits for their shareholders,” but I do think directors usually get to decide what it means to “maximise profits.” 

I am a firm believer in director primacy, and I believe directors should have a lot of latitude in their choices, subject to the BJR requirements.  Thus, if a plaintiff can show self dealing (like maybe via giving to a “pet charity” described in A.P. Smith v. Barlow), then the BJR might be rebutted (if the gift is inconsistent with state law and/or constituency statutes).   But otherwise, it’s the board’s call. Furthermore, where a company builds its brand and acts consistently with its prior actions, that might expand the scope of permissible behavior for a company (i.e., not be evidence of self-dealing).  Thus, companies like Tom’s Shoes and Ben and Jerry’s should be able to continue to operate as they always have when they bring in new directors, because what might look like self-dealing in another context, is consistent with the business model.  

eBay v. Newmark (pdf here) is often used to rebut that notion, but I still maintain that case is really about self-dealing  — the actions taken by Jim and Craig were impermissible not because they were working toward “purely philanthropic ends,” but because they took actions that benefited themselves to the detriment of their minority shareholder, such as use of poison pills).  

Anyway, I am still a believer in the BJR as abstention doctrine.  Show me some fraud, illegality, or self-dealing or I’m leaving the board’s decision alone. 

Each year, I rethink how I teach fiduciary duties in the corporate law context in my Business Associations course.  My learning objectives for the students are both limited and involved.  On the one hand, there’s little room in my three-credit-hour course for a nuanced understanding of all of the contexts in which corporate fiduciary duty claims typically occur.  In particular, I have determined to leave out the public company mergers and acquisitions context almost completely.  On the other hand, I find myself juggling uncertain classifications of duty components, explanations of seemingly mismatched standards of conduct and liability, and judicial review standards in and outside the Delaware corporate law context.  It’s a handful.  It’s teaching complexity.

Of course, fiduciary duty is not the only complex matter that one must teach in Business Associations.  But it is, for me, one of the topics I am least confident that I “get right” in my interactions with students in and outside the classroom.  Accordingly, as I again head toward the end of the semester, I find myself wondering whether I could have done–or could do–more with the students in my Business Associations course this semester.  This leads me to ask my fellow business law professors (that’s you!) whether any of you have materials, teaching techniques, exercises (in-class or out-of-class), etc. that you find to be particularly effective in educating law students the basics and nuances of corporate fiduciary duties.  

So, have at it!  Share your corporate fiduciary duty teaching successes in the comments, if you would.  I am all ears.  I know that what you report will benefit me and others (including our students), and I hope that your comments will generate a continuing conversation . . . .

 

As we gear up for the final show down and hopefully the end of the 2016 election (please, please, please let it end) I write today about the relationship between the markets and politics.  It is apparently THE business angle in the news cycle this week. This is an admitted punt on substantive work and am instead providing you with a host of hyperlinks to nervously check and re-check in between nervously checking and re-checking polling estimates and vote counts.  Please note, I am passing along a compilation of articles, a list that I have not editted to reflect a certain viewpoint.

Historical Accounts of the Relationship between politics and the markets

Call Levels, History of Past Presidential Elections and Their Effect On Stock Market

Merrill Lynch, How Presidential Elections Affect the Markets

ABC, History on how presidential elections affect stock markets

Predictions regarding market reactions to the outcome of the 2016 election

Forbes, Trump Vs. Clinton: How Will The Stock Market React To The Election?

CNBC, Wall Street reacts: Here’s what the markets will do after the election  

The Street, If Hillary Clinton Is Elected President, Here’s What Will Happen to the U.S. Economy

Market Watch, Here are all possible election outcomes — and how markets will react

Telegraph, US election 2016: this is the global market turmoil that would be triggered by a Donald Trump victory

The Guardian, Wall Street surges and FTSE 100 posts biggest rise since September ahead of US election – business live

Fortune, Citigroup: Stock Market Will Fall if Donald Trump Is Elected President

 

-Anne Tucker