I previously posted about Delaware’s approval of fee-shifting bylaws, and a legislative attempt to ban them.  That attempt was tabled until next year. 

In the meantime, several companies have adopted such bylaws, although some early challenges to the bylaws ended up being settled before courts could rule on their validity.   J Robert Brown at Race-to-the-Bottom blog reports that a company just went public with a fee shifting charter provision in place (the provision purports to cover securities claims as well as governance claims, but, as I previously posted, I don’t think that’s possible).

Most interestingly, Oklahoma recently passed a law requiring “loser pays” rules for all derivative litigation.  Which certainly creates an opportunity for a natural experiment in the idea of the market for corporate charters – will companies flock to Oklahoma?  Will investors pressure managers to stay out of Oklahoma (or to go to Oklahoma, if they doubt the value of derivative litigation)?

Stephen Bainbridge reports that the SEC’s Investor Advisory Committee will be considering fee-shifting bylaws at its next meeting, and asks (via approving linkage to Keith Paul Bishop) why should the Investor Advisory Committee be conferring with the SEC on a state law contract question?

Well, my answer would be, because the corporate form – by definition – includes judicial oversight as part of the corporate “contract” (if you call it a contract).  Judicial construction of “terms” (if you call them terms) is inherent in its nature, and an important part of ensuring that corporate managers do not exploit shareholders.  Fee-shifting undermines that bargain, especially if applied to representative litigation (where the shareholder has only a small upside but a very large potential downside).  For that reason, the Investor Advisory Committee and the SEC have an interest in making sure that investors “get” what they expect to get – a corporation, which includes judicial oversight as inherent in the organizational form.

And it’s not like the SEC hasn’t – under the guise of investor protection – policed matters of internal corporate governance before.  For example, the NYSE (which acts under the SEC’s direction) requires shareholder votes for certain large new stock issuances in terms of equity or voting power.  The NYSE also forbids disparate reduction in common stock voting power.  One could easily imagine that, even if the SEC doesn’t act directly, the NYSE could adopt a rule requiring that listed companies not adopt fee-shifting bylaws.

Oklahoma, however, adds a new wrinkle – I imagine it’s not home to many publicly traded corporations, but it’s difficult to imagine the SEC relishing the idea of preempting Oklahoma law on this subject, or the NYSE categorically refusing to list Oklahoma corporations.

Joseph Yockey (Iowa) has posted a new paper on social enterprise.  I have not read this one yet, but enjoyed his first article on the subject and have added this second one to my long “want to read” list.  The abstract is below.

Social enterprises generate revenue to solve social, humanitarian, and ecological problems. Their products are not a means to the end of profits, but rather profits are a means to the end of their production. This dynamic presents many of the same corporate governance issues facing other for-profit firms, including legal compliance. I contend, however, that traditional strategies for corporate compliance are incongruent to the social enterprise’s unique normative framework. Specifically, traditional compliance theory, with its prioritization of shareholder interests, stands at odds with the social enterprise’s mission-driven purpose. Attention to this distinction is essential for developing effective compliance and enforcement policies in the future. Indeed, arguably the greatest feature of the social enterprise is its potential to harness organizational characteristics that inspire the values and culture most closely linked with ethical behavior — without resort to more costly or intrusive measures.

 

The below is from an e-mail I received earlier this week about an impact investment legal symposium on October 2, 2014 from 8:30 a.m. to noon (eastern):

Bingham, in conjunction with the International Transactions Clinic of the University of Michigan Law School, Aspen Network of Development Entrepreneurs (ANDE) Legal Working Group and Impact Investing Legal Working Group, is proud to present a legal symposium on Building a Legal Community of Practice to Add Still More Value to Impact Investments.

The symposium will be held at Bingham McCutchen LLP’s New York offices at 339 Park Avenue or you can attend virtually by registering here.

The panelists include Deborah Burand (Michigan), Jonathan Ng (Ashoka), Keren Raz (Paul Weiss), and many others.   

Professor Dionysia Katelouzou of Kings College, London has written an interesting empirical article on hedge fund activisim. The abstract is below:

In recent years, activist hedge funds have spread from the United States to other countries in Europe and Asia, but not as a duplicate of the American practice. Rather, there is a considerable diversity in the incidence and the nature of activist hedge fund campaigns around the world. What remains unclear, however, is what dictates how commonplace and multifaceted hedge fund activism will be in a particular country.

The Article addresses this issue by pioneering a new approach to understanding the underpinnings and the role of hedge fund activism, in which an activist hedge fund first selects a target company that presents high-value opportunities for engagement (entry stage), accumulates a nontrivial stake (trading stage), then determines and employs its activist strategy (disciplining stage), and finally exits (exit stage). The Article then identifies legal parameters for each activist stage and empirically examines why the incidence, objectives and strategies of activist hedge fund campaigns differ across countries. The analysis is based on 432 activist hedge fund campaigns during the period of 2000-2010 across 25 countries.

The findings suggest that the extent to which legal parameters matter depends on the stage that hedge fund activism has reached. Mandatory disclosure and rights bestowed on shareholders by corporate law are found to dictate how commonplace hedge fund activism will be in a particular country (entry stage). Moreover, the examination of the activist ownership stakes reveals that ownership disclosure rules have important ramifications for the trading stage of an activist campaign. At the disciplining stage, however, there is little support that the activist objectives and the employed strategies are a reflection of the shareholder protection regime of the country in which the target company is located.

 

 

UCF

University of Central Florida is advertising for an associate or full professor in the area of legal studies, international law, and/or national security law.

The full listing is after the break and the position has been added to my legal studies position list.

Continue Reading Senior Faculty Legal Studies Position – University of Central Florida

Randall Thomas (Vanderbilt Law School) and Lawrence Van Horn (Owen Graduate School of Management, Vanderbilt University) have posted a new article entitled Are Football Coaches Overpaid? Evidence from Their Employment Contracts.

This is a rare article that appeals to both my academic interests and my interest in football. Rarely do these two set of interests overlap in my life, and the article has prompted me to think of ways I might incorporate my football knowledge into future academic articles. 

The article’s abstract reads:

The commentators and the media pay particular attention to the compensation of high profile individuals. Whether these are corporate CEOs, or college football coaches, many critics question whether their levels of remuneration are appropriate. In contrast, corporate governance scholarship has asserted that as long as the compensation is tied to shareholder interests, it is the employment contract and incentives therein which should be the source of scrutiny, not the absolute level of pay itself. We employ this logic to study the compensation contracts of Division I FBS college football coaches during the period 2005-2013. Our analysis finds many commonalities between the structure and incentives of the employment contracts of CEOs and these football coaches. These contracts’ features are consistent with what economic theory would predict. As such we find no evidence that the structure of college football coach contracts is misaligned, or that they are overpaid.

The world can rest easy; a policy debate has been resolved. Leonardo DiCaprio says climate change is real. I was waiting to see what Jennifer Lawrence and Ben Affleck have to say, but I guess Leonardo DiCaprio is good enough for me.

Seriously, why should anyone care what an actor or any other celebrity has to say about scientific issues? DiCaprio’s position on climate change–yes or no–should have no effect on anyone’s beliefs.

But, if you think opinions like this really do matter, here are some new law review articles that might change your views on business law issues:

Ryan Gosling, Director Primacy is Wrong: A Reply to Professor Bainbridge

Jennifer Lawrence, Rethinking General Solicitation in Private Placements

Hugh Jackman, Director Liability in Hostile Takeovers

And, finally, one you should really pay careful attention to:

Steve Bradford, Why String Theory is Wrong.

A study by the Center for Political Accountability finds that more public companies are voluntarily disclosing their political spending.  

The survey this year looked at disclosure by the top 300 companies on the Standard & Poors 500 list, up from 200 firms surveyed last year. Of the firms studied, sixty percent disclosed at least some spending on behalf of candidates, parties and political committees. Nearly half described their membership or payments to politically active trade associations, such as the U.S. Chamber of Commerce.

The report is available here, as is the full story at the Washington Post. 

-Anne Tucker

Earlier this week, the Wall Street Journal ran an interesting op-ed titled The West’s Bruised Confidence in Capitalism. In the op-ed the author summarized the findings of the recently published Corporate Perception Indicator survey, which found that 36% of those surveyed reported that they viewed corporations as a source of “hope,” while 37% viewed corporations as a source of “fear.” Broken down by generation, 44% of respondents over the age of 65 view corporations as a source of “hope,” compared to 36% of millennials (defined as those aged 18-34 – darn it, I just missed the cut off!) who view corporations as a source of “fear” rather than “hope.” The survey was not limited to the U.S. and one of the more interesting findings was that 61% of all respondents wanted to hear more about the ways in which corporations help to address broader social issues. The op-ed concluded by offering this thought: “For business leaders, six years after the financial crisis and amid continuing economic uncertainty, the challenge is to show how they use their positions of power to contribute to the common good. The public world-wide wants corporations to promote shared values around growth and opportunity, even as they build shareholder value. Their long-term success depends on it.”

In two previous posts (available here and here) I have discussed potential models for businesses to leverage their “positions of power to contribute to the common good.” As I have discussed, one of the most compelling business frameworks is “Corporate Impact Venturing,” which was developed by Dr. Maximilian Martin and is part of the Impact Economy portfolio. The basic idea is to “achieve actual financial returns, greater effectiveness, and more leverage potential for both business and society by updating patterns of value creation in new and existing multi-trillion dollar markets.” Ultimately, this means applying the promise of impact investing to business innovation. Examples of emerging patterns of value creation in a new market would include the 540 billion dollar LOHAS market (Lifestyles of Health and Sustainability), while an example in an existing market would be the modernization of the welfare state.

For executives and corporations interested in meeting the challenge of using their “positions of power to contribute to the common good,” compelling business frameworks are obviously a must. However, because corporations operate as part of a larger ecosystem, other conditions need to exist if widespread success is to be achieved. In my mind, such conditions for success include, but are not limited to:

  • Having shareholders who share this vision of marrying corporate potential with the common good. This can be achieved to some extent by cultivating shareholders who have the capacity for, and are interested in, stewardship – a process I refer to as Shareholder Cultivation.
  • Having a regulatory environment that helps move the needle – in particular, one thing to consider is whether moving to something like an integrated reporting model of disclosure would be preferable to the SEC’s current financial disclosure model.
  • Reframing the debate on the nature of corporations and corporate governance. For example, the concept of corporate governance in the West is captured by the OECD  principles of corporate governance, which in many ways cast corporations as being separate and apart from society. This of course is in contrast to, let’s say, the King’s Code, which views corporations as being part of society.

So are corporations sources of “hope” and “good” or are they “bad” and worthy of “fear”? While the perception among a majority of survey respondents (some 51%) reflect the latter, I’d like to think that the reality is closer to the former. Corporations can and often do contribute to the common good. They are centers of enormous potential for value creation, but many are still laboring under an outdated model and operating norm.