I’ve been thinking a lot about whistleblowers lately. I serve as a “management” representative to the Department of Labor Whistleblower Protection Advisory Committee and last week we presented the DOL with our recommendations for best practices for employers. We are charged with looking at almost two dozen whistleblower laws. I’ve previously blogged about whistleblower issues here.

Although we spend the bulk of our time on the WPAC discussing the very serious obstacles for those workers who want to report safety violations, at the last meeting we also discussed, among other things, the fact that I and others believed that there could be a rise in SOX claims from attorneys and auditors following the 2014 Lawson decision. In that case, the Supreme Court observed that: “Congress plainly recognized that outside professionals — accountants, law firms, contractors, agents, and the like — were complicit in, if not integral to, the shareholder fraud and subsequent cover-up [Enron] officers … perpetrated.” Thus, the Court ruled, those, including private contractors, who see the wrongdoing but may be too fearful of retaliation to report it should be entitled to SOX whistleblower protection.

We also discussed the SEC’s April KBR decision, which is causing hundreds of companies to revise their codes of conduct, policies, NDAs, confidentiality and settlement agreements to ensure there is no language that explicitly or implicitly prevents employees from reporting wrongdoing to the government or seeking an award.

Two weeks ago, I spoke in front of a couple hundred internal auditors and certified fraud examiners about how various developments in whistleblower laws could affect their investigations, focusing mainly on Sarbanes-Oxley and Dodd-Frank Whistleblower. I felt right at home because in my former life as a compliance officer and deputy general counsel, I spent a lot of time with internal and external auditors. Before I joined academia, I testified before Congress on what I thought could be some flaws in the law as written. Specifically, I had some concerns about the facts that: culpable individuals could receive awards; individuals did not have to consider reporting wrongdoing internally even if there was a credible, functioning compliance program; and that those with fiduciary responsibilities were also eligible for awards without reporting first (if possible), which could lead to conflicts of interest. The SEC did make some changes to Dodd-Frank. The agency now weighs the whistleblower’s participation in the firm’s internal compliance program as a factor that may increase the whistleblower’s eventual award and considers interference with internal compliance programs to be a factor that may decrease any award. It also indicated that compliance or internal audit professionals should report internally first and then wait 120 days before going external.

Before I launched into my legal update, I gave the audience some sobering statistics about financial professionals:

  • 23% have seen misconduct firsthand
  • 29% believe they may have to engage in illegal or unethical conduct to be successful
  • 24% would engage in insider trading if they could earn $10 million and get away with it 

I also shared the following awards with them:

  • $875,000 to two individuals for “tips and assistance” relating to fraud in the securities market;
  • $400,000 to a whistleblower who reported fraud to the SEC after the employee’s company failed to address internally certain securities law violations;
  • $300,000 to an employee who reported wrongdoing to the SEC after the company failed to take action when the employee reported it internally first;
  • $14 million- tip about an alleged Chicago-based scheme to defraud foreign investors seeking U.S. residency; and
  • More than $30 million to a tipster living in a foreign country, who would have received more if he hadn’t delayed reporting

I also informed them about a number of legal developments that affect those that occupy a position of trust or confidence. These white-collar whistleblowers have received significant paydays recently. Last year the SEC paid  $300,000 to an employee who performed “audit or compliance functions.” I predicted more of these awards, and then to prove me right, just last week, the SEC awarded its second bounty to an audit or compliance professional, this time for approximately 1.4 million.

I asked the auditors to consider how this would affect their working with their peers and their clients, and how companies might react. Will companies redouble their efforts to encourage internal reporting? Although statistics are clear that whistleblowers prefer to report internally if they can and don’t report because they want financial gain, will these awards embolden compliance, audit, and legal personnel to report to the government? Will we see more employees with fiduciary duties coming forward to report wrongdoing? Does this conflict with any ethical duties imposed upon lawyers or compliance officers with legal backgrounds? SOX 307 describes up the ladder reporting requirements, but what happens to the attorney who chooses to go external? Will companies consider self-reporting to get more favorable deferred and nonprosecution agreements to pre-empt the potential whistleblower?

I don’t have answers for any of these questions, but companies and boards should at a minimum look at their internal compliance programs and ensure that their reporting mechanisms allow for reports from outside counsel and auditors. In the meantime, it’s now entirely possible that an auditor, compliance officer, or lawyer could be the next Sherron Watkins.

And by the way, if you were in Busan, South Korea last Wednesday, you may have heard me on the morning show talking about whistleblowers. Drop me a line and let me know how I sounded. 

Almost three years ago, I helped organize a conference on social enterprise law. (The law review members, especially Rachel Bauer and Sam Moultrie, were responsible for most of the organizing and did an excellent job). 

My co-bloggers Joan Heminway and Marcia Narine were among the speakers.

Also joining us was Michael Pirron of Impact Makers, one of the first certified B corporations in Virginia. While Impact Makers was a certified B corporation at the time of the conference, it was organized as a Virginia nonstock corporation; now Impact Makers is organized as a benefit corporation. Michael did an excellent job serving as a panelist and the keynote speaker.

Recently, I saw Michael back in the news. He transferred ownership of his company (valued at approximately $11.5 million) to two foundations. As Michael mentioned to me over e-mail, this was not a radical departure from his previous business model for Impact Makers. Previously, Impact Makers donated 100% of its profits to area charities, so this move just formalized their previous commitment.  Impact Makers has given away approximately $1 million to date.

At the University of Connecticut social enterprise and entrepreneurship conference I attended and presented at last week, Mike Brady (Greyston Bakery) and Jeff Brown (Newman’s Own) presented. Jeff called Newman’s Own a “grandfather of social enterprise” Both companies started business in 1982, well before heavy use of the term “social enterprise.”

Also, both Greyston Bakery and Newman’s Own appear to have adopted a structure where a foundation owns the stock of their for-profit company. You can learn a bit more about the structure of Newman’s Own here. Greyston Bakery’s annual reports are here and you can view a video about Greyston Bakery (and their client Ben & Jerry’s).

From a legal perspective, Greyston Bakery and Impact Makers are benefit corporations, under New York and Virginia law respectively (in addition to being certified B corporations.)  Newman’s Own, however, is a traditional c-corporation. With foundations owning 100% of the stock, the benefits of using the benefit corporation form are likely limited. There still may be some branding value and most benefit corporation statutes require consideration of a broad group of stakeholders, which might prevent the foundation from focusing on a smaller subset of stakeholders.  That said, shareholders are the one expected to bring lawsuits to enforce this consideration requirement in the benefit corporation statutes, so as a practical matter, the benefit corporation and c-corporation forms may operate similarly when wholly-owned by one or more foundations. 

Perhaps this post would have been timelier before the spring submission cycle, but hopefully it will be helpful in framing title options for pieces being developed this summer.  One of the many benefits of co-authorship is learning substantive and procedural knowledge from your collaborators.  On a recent article, I worked with three economists who have different skill sets, perspectives, and discipline standards.  When we were trying to finalize our title, we came up with several different categories or types of article titles—a framework that I will utilize again in the future and which I am sharing with you today.  We selected the “themed” based title for our article, Institutional Investing When Shareholders Are Not Supreme, and a play on words, Institutional Investors’ Appetite for Alternatives, for a shorter piece appearing on Columbia Blue Sky Blog.

 Title Framework:

SOBER: Institutional Investing after Constituency Statutes

QUESTION:  Does Changing Shareholder Value Maximization Standards Change Institutional Investors’ Behavior?

CONTRAST:  Institutional Investors Behavior Before and After Constituency Statutes

PLAY ON WORDS:  Appetite for Alternatives:  Institutional Investors’ Behavior in the Fact of Shareholder Value Maximization Pressures

FORWARD THINKING:  What Does Institutional Investors Behavior after Constituency Statutes Tell Us Regarding Benefit Corporations?

HISTORICAL:  The Changing Landscape of Directorial Duties: Constituency States to Alternative Purpose Firms

SLATE/OP-ED:  Who’s Afraid of Alternative Purpose Firms?

THEME:  Agency Investing When Shareholders Are Not Supreme

For those interested and perhaps to put the title options in perspective, here is a little background on our article, Institutional Investing When Shareholders Are Not Supreme.  In an earlier BLPB post, I linked to our short piece appearing in Columbia Blue Sky Blog.  Our article examines institutional investors’ response to corporate director duty changes embodied in constituency statutes and links our findings to current questions of institutional investors’ potential acceptance of alternative business entities. Our paper surveys the 30+ year literature debate on directors’ duties to maximize shareholder value, a case law analysis of constituency statute litigation, and an empirical study (utilizing a difference-in-differences approach) of institutional investors’ divestment of stock held in companies incorporated in constituency statute jurisdictions.  We first verified that courts enforced constituency statutes, or in other words, that constituency statutes represented at least a small change to directors’ legal duties. In our empirical section, we found no statistically significant departure of institutional investors after the passage of constituency statutes, focusing specifically on institutions with high fiduciary duties. If institutional investors had fled constituency statute investments, which are subject to lower director duties changes than with say benefit corporations, then there would be grounds to think that institutional investors would not invest in alternative purpose firms.  Finding no such negative reaction to constituency statutes does not conclusively indicate institutional investor’s acceptance of alternative purposes firms, especially given the greater deviation from shareholder value maximization by requiring (rather than permitting) directors to consider nonshareholder interests codified in benefit corporation statutes.  It does suggest, however, some latitude for institutional investors to consider alternative purpose firm investments without running afoul of fiduciary duties.  If I were explaining the results to a student, I would say that our study could have produced strong evidence shutting the door on this possibility, but instead the findings leave the door open. This paper is valuable in the absence of direct information on the question, and will certainly give way to findings utilizing empirical data directly on point with publicly-traded benefit corporations and/or B Corporations.

-Anne Tucker

OK.  So, Tennessee is not Delaware.  But the Tennessee legislature and Supreme Court have been busy bees this spring on business law matters.   Here’s the brief report.

In the last week of the legislative term, the Tennessee Senate and House adopted the For-Profit Benefit Corporation Act, about which I earlier blogged here, here, and here.  Although I remain skeptical of the legislation, it looks like the governor will sign the bill.  So, we will have benefit corporations in Tennessee.  We’ll see where things go from there . . . .

The Tennessee legislature also passed a technical corrections bill for the Tennessee Business Corporation Act.  The bill was drafted by the Tennessee Bar Association’s Business Entity Study Committee (on which I serve and to which I have referred in the past), a joint project of the Tennessee Bar Association’s Business Law Section and Tax Law Section.  The governor has already signed this bill into law.

Separately, in a bit of a stealth move (!), the Tennessee Supreme Court recently announced the establishment of a business court, an institution many other jurisdictions already have.  The court is being introduced as a pilot project in Davidson County (where Nashville resides)–but only, as I understand it, to iron the kinks out before introducing the court on a permanent basis.  Interestingly, the Tennessee Bar Association Business Law Section Executive Council was not informed about the new court project until its public announcement in the middle of March.  Although we found that a bit odd, the “radio silence” is apparently attributable to the excitement of the Tennessee Supreme Court to get the project started effective as of May 1 and the deemed lack of need for a study on the subject before proceeding.  Regardless, I think it’s safe to say that the bar welcomes the introduction of a court that specializes in business law cases as a matter of principle.  Again, we’ll see where it goes from here.

A few reflections on all this follow.

Continue Reading Tennessee . . . . The Business Law State? Yay For Us!

Last week, the Deal Professor, Steven Davidoff Solomon, wrote an article titled, The Boardroom Strikes Back. In it, he recalls that shareholder activists won a number of surprising victories last year, and more were predicted for this year. That prediction made sense, as activists were able to elect directors 73% of the time in 2014.  This year, though, despite some activist victories, boards are standing their grounds with more success.  

I have no problem with shareholders seeking to impose their will on the board of the companies in which they hold stock.  I don’t see activist shareholder as an inherently bad thing.  I do, however, think  it’s bad when boards succumb to the whims of activist shareholders just to make the problem go away.  Boards are well served to review serious requests of all shareholders, but the board should be deciding how best to direct the company. It’s why we call them directors.  

As the Deal Professor notes, some heavy hitters are questioning the uptick in shareholder activism: 

Some of the big institutional investors are starting to question the shareholder activism boom. Laurence D. Fink, chief executive of BlackRock, the world’s biggest asset manager, with $4 trillion, recently issued a well-publicized letter that criticized some of the strategies pushed by hedge funds, like share buybacks and dividends, as a “short-termist phenomenon.” T. Rowe Price, which has $750 billion under management, has also criticized shareholder activists’ strategies. They carry a big voice.

I am on record being critical of boards letting short-term planning be their primary filter, because I think it can hurt long-term value in many instances.  I don’t, however, think buybacks or dividends are inherently incorrect, either.  Whether the idea comes from an activist shareholder or the board doesn’t really matter to me.  The board just needs to assess the idea and decide how to proceed.  

[Please click below to read more.]

Continue Reading Shareholder Activists Can Add Value and Still Be Wrong

The following guest blog post on my recent article,  Institutional Investing When Shareholders Are Not Supreme, is available at Columbia’s Blue Sky Blog discussing institutional investors’ attitudes towards alternative business forms and similar issues raised by Etsy’s IPO.

-Anne Tucker

Many of you have probably heard of bitcoin, the private digital currency that some mainstream merchants are now accepting. (Rand Paul recently became the first presidential candidate to accept donations in bitcoin.)

Bitcoin was developed by a software programmer who used the pseudonym Satoshi Nakamoto. It is built on cryptography software known as the blockchain, which both issues the currency and authenticates transactions using it.

If you haven’t heard of bitcoin or you don’t know much about it, I strongly recommend an interesting, informative new book : The Age of Cryptocurrency: How Bitcoin and Digital Money are Challenging the Global Economic Order, by Paul Vigna and Michael J. Casey.

Vigna and Casey are reporters for the Wall Street Journal. I think they’re a little too optimistic about the future of digital currency, but their book is an excellent non-technical introduction to the bitcoin phenomenon and the blockchain software that underlies it. The book isn’t limited to bitcoin; Vigna and Casey talk about other digital currency. They also discuss other potential applications for the blockchain software, such as gambling, self-enforcing “smart” contracts, and currency exchange.

The book’s discussion of regulatory issues is limited. If you’re looking for a discussion of the legal issues, I suggest you look elsewhere. But the book is a very good introduction to digital currency and how it works.

Bain Deval

The New York Times DealB%k recently reported that Deval Patrick, former governor of Massachusetts, will join Bain Capital to head a new social impact fund.

These types of social impact funds seem to becoming more and more common. Social impact funds, however, vary greatly. Some social impact funds appear to be primarily focused on profits (while simply avoiding some “sin stocks“), others focus on serious social enterprises, and others fall somewhere in-between.  

I recently finished my law review submission season, placing two articles: The Social Enterprise Law Market at Maryland Law Review (on jurisdictional competition and social enterprise entity forms) and An Early Report on Benefit Reports at West Virginia Law Review (on data collected last summer on statutory reporting compliance by benefit corporations).

Below, I share a few words of advice for my new law review editors and any law review editor readers. I share this advice acknowledging that I disregarded much of it when I was an editor on my school’s law review. Also, as mentioned below, I fully recognize and appreciate the work law review editors put into our articles.   

Consider Blind Review. I still haven’t heard a good argument against law reviews moving to blind review of articles. A very few, maybe two, of the top-ranked journals appear to have made the move, but the vast majority have not. 

Consider Peer Review. I understand, a bit better, the pushback against a traditional peer-review system, but consider involving your faculty in the process more heavily and consider obtaining outside faculty reviewers (as some of the elite journals are already doing). 

Consider Exclusive Submission Windows. A few journals are doing this, and it seems to be a smart move for many journals and authors. The editors have many fewer articles to review — from authors who are serious about their journal — and the authors get the assurance that their articles are receiving more attention in the review.

Respond. Typically, 40-50% of the journals I submit to never respond. Some of those journals are starting to get reputations for never responding. While we realize that law students have plenty on their plate, divide and conquer with your editorial team and try to respond (at least to the expedites). Even a form response, saying that the journal is full or expects a certain delay reviewing articles, is appreciated. 

Express Excitement. When extending an offer, show that you appreciated and are excited about the article. Both Maryland and West Virginia did this with my articles, and I chose them over some similarly ranked journals that sent boilerplate acceptance e-mails.

Call. Extending an offer to publish over the phone is often much more personal and effective than an e-mail offer.

Provide an Editing Schedule. Providing an editing schedule early in the process can be helpful.

Edit Lightly, if at All, on Style. I violated this rule repeatedly when I was an editor, but I now see that edits that appear to be style-based can often change the very precise message that the author is trying to communicate. If a sentence is unclear or poorly written, simply note this in a comment – perhaps with a suggested revision in the comment – rather than rewriting the sentence in the text.

Edit Heavily on Bluebook and Typos/Clear Errors. Editors typically know the Bluebook better than authors, so do not be afraid to edit heavily on Bluebook issues. Also, attempt to catch any typos or other clear errors. Some editors who claim to “respect the author’s voice” do too light of an editing job on Bluebook issues and clear errors. 

Not Every Sentence Needs a Footnote. Be reasonable on whether a sentence actually needs a citation or not.  

Provide Redlines. In the past, a few editors have not provided redlines, which makes it incredibly difficult to check what has been changed. Also, on occasion, editors have not provided complete redlines – They provide redlines, but I found changes that did not show up on the redline, which reduces confidence and slows the process.

Stick to the Editing Schedule. As much as possible, stick to the editing schedule. Authors need to honor the schedule as well. Of course there are emergencies and those are understandable, but editors might want to build in some additional time in the schedule for these unpredictable occurrences. 

Communicate. Much can be forgiven if editors communicate clearly, promptly, and respectfully with the authors. 

Twitter. Post-publication, Twitter can be a great tool to promote the journal’s articles. Many, but definitely not all, journals now have Twitter accounts.   

All of that said, I vividly remember the hard work and long hours of editing – on top of classes and interviews and internships and other responsibilities. We professors appreciate all that law review editors do, and we probably should express our thanks more often.

My co-bloggers and readers likely have additional thoughts – as many are more experienced than I. All are encouraged to share in the comments.