I have spent the
past two days at West Virginia University attending a conference entitled “Business
and Human Rights: Moving Forward and Looking Back.” This was not a bunch of academic
do-gooders fantasizing about imposing new corporate social responsibilities on
multinationals. The conference was supported by the UN Working Group on
Business and Human Rights, and attendees and speakers included the State
Department (which has a dedicated office for business and human rights), the Department
of Labor, nongovernmental organizations, economists, ethicists, academics,
members of the extractive industry (defined as oil, gas and mining),
representatives from small and medium sized enterprises (“SMEs”), Proctor and
Gamble, and Monsanto.

Professor Jena
Martin organized the conference after the UN Working Group visited West
Virginia earlier this year to learn more about SMEs and human rights issues.
She invited participants to help determine how to ground the 2011
UN Guiding Principles on Business and Human Rights into business practices
and move away from theory to the operational level. The nonbinding Guiding
Principles outline the state duty to protect human rights, the corporate duty
to respect human rights, and both the state and corporations’ duty to provide
judicial and non-judicial remedies to aggrieved parties.  Transnational corporations applauded the
Principles when they were released perhaps because they are completely voluntary,
but also perhaps because those specific Principles that focused on due
diligence on human rights impacts in the supply chain were drafted after years
of consultation with businesses around the world.

The UN Working
Group has the daunting task of rolling out the Guiding Principles to over
80,000 companies and their suppliers in 192 countries.  Dr. Michael Addo of the Working Group
confirmed that the conference was the first of its kind in the US where such a
broad coalition of those affected by and thinking about these issues had
convened to talk about how the Principles can work in the real world.  Participants discussed the risk management
issues associated with human rights due diligence including avoiding reputational
harm; addressing investor and regulatory pressure; facing internal pressures
(recruiting and employee morale); and improved efficiency for project planning,
forecasting and value preservation. 
Other topics included strategies for transnational human rights
litigation after the Supreme Court’s Kiobel
decision, which significantly limited access to foreign litigants on
jurisdictional grounds; the use of supplier codes of conduct as contractual
vehicles; using contracts to implement the Principles; antitrust implications
of consortiums working together to address human rights issues with suppliers;
the benefits of hard law versus “soft law” 
(voluntary initiatives) in the human rights arena; how the US Government
is using its laws, trading leverage, procurement and investing power to support
the Principles both domestically and internationally; and recent steps in the European Union to implement
the Principles.

The issue of addressing
regulatory and investor pressure was particularly interesting to me, and I
addressed it in my remarks (which I will blog about separately when my paper is
complete). But here are some facts I shared with the audience. US investors,
international stock exchanges and governments increasingly value
information on environmental, social and governmental (“ESG”) factors. As of 2012, the governments or stock
exchanges of 33 countries require or encourage some form of ESG reporting. Earlier
this year, the European Union proposed a directive on nonfinancial disclosure,
which would require large companies to report annually on their major
environmental, social and economic impacts.

The US government
is farther behind than the Europeans but is catching up. The Federal
Acquisition Regulations now require prospective contractors and subcontractors
to certify that they are not engaging in a variety of human trafficking
activities in supplying end products, and require changes in
contractual clauses and compliance programs as well as cooperation with audits
and investigations. Since 2012, certain companies in California have had to
publicly disclose their efforts to eliminate human trafficking and slavery from
their supply chains. 

Investors also
seek nonfinancial information. Bloomberg publishes corporate ESG data for over
5,000 companies utilizing 120 ESG factors.  Currently, 95% of the Global 250 issues
sustainability reports, which generally include impacts on the environment, society
and the general economy. But these reports may be of limited utility to investors
because industries may view materiality differently. To address this gap, the
Sustainability Accounting Standards Board (“SASB”) is a 501(c)(3) organization developing
standards for publicly-traded companies in the United States in ten sectors
from 89 industries so that they can disclose material sustainability
information (including human rights) in 10-K and 20-F filings
by 2015. Once completed, the SASB framework, which adopts the SEC definition
for materiality, may have significant impact because its advisory council
consists of the former chair of FASB, who was also an IASB board member,
institutional investors, academics, several large corporations, representatives
from most of the major investment banks as well Institutional Shareholder
Services (“ISS”), the influential proxy advisory firm. According to today’s
SASB newsletter, thus far over 850 people representing five trillion in
market capital and 12 trillion in assets under management have participated in
working groups. The materiality standards for the health care industry have
been downloaded over 730 times since they were released at the end of July.

As more companies begin to
incorporate the Guiding Principles and consider human rights in their
enterprise risk management programs and not just as line items in a
sustainability report, business practices will start to change because
investors and members of the public will demand it.  This year a pension fund filed shareholder
proposals with three companies related to the Guiding Principles. All of them
failed, including one in which a company indicated that they were already
conducting the kind of diligence that the Principles recommend. ISS has issued
guidance specifically on human rights impacts. It’s time for directors and
executives to start considering their human rights footprint in anticipation of
future requests for disclosures from investors, the government, regulators and
the general public.

 

 

Next week (September 29th to be exact) an
experimental free-trade zone in Shanghai will open, the first of its kind in
mainland China.  The free trade zone
boasts the possibility for relaxed trade and foreign investment standards.  Just how radical the free trade zone will be
in its implementation is unknown, and will unfold as the operations being.  Allowing telecommunications companies to
compete with state-owned providers, lifting bans on video game sales, liberalizing
interest rates, and enhancing currency convertibility are among the stated
goals of the free trade zone. 
Additionally, a Hong Kong newspaper (note: Hong Kong is itself a free
trade zone) reported yesterday that Facebook, Twitter, the New York Times and
other previously banned websites will be allowed to operate within the free
trade zone.

Enhancing currency convertibility is a broader goal of
China, which has stated its intention for the renminbi to be fully convertible
by 2015.  Currency convertibility may in
turn elevate the renminbi to reserve currency status, where the central banks
of other countries hold the renminbi. 
Reserve currencies—the leader of which is the U.S. dollar and also
includes the Swiss franc, the Japanese yen, the sterling pound and the euro—benefit
the issuing country by reducing the transaction costs for international
commerce by eliminating exchange rate conversion risks and reduced borrowing
costs.  With China’s export economy,
attaining reserve status could mean big business and big bucks.

The free trade zone also has potential implications for the
U.S. and Chinese stock markets.  For
starters, the Chinese stock market has been climbing in the wake of the free
trade zone news, and climbed again yesterday on the heels of the internet
accessibility news.  The Chinese market,
while presently still considered instable, has seen tremendous growth since the
2005 reforms of non-tradeable stock, and backed by the second largest economy
in the world stands poised as “the” emerging market.  For domestic companies and U.S. exchanges,
the free trade zone presents opportunities as well.  For example, Microsoft
is the first U.S. company that has announced a joint venture with a Chinese
technology company in order to offer video game consoles in the free trade
zone, consoles like the Xbox, which have been banned since 2000.  If the free trade zone signals greater access
to the Chinese consumer markets on a broader scale, this could mean a large
market expansion for many U.S. companies.

-Anne Tucker

Over at the New York Times Dealbook,  the man responsible for a $6 billion hedge funds says just that in an article by Alexandra Stevenson: 

Mr. Spitznagel, the founder of Universa Investments, which has around $6 billion in assets under management, says the stock market is going to fall by at least 40 percent in one great market “purge.” Until then, he is paying for the option to short the market at just that point, losing money each time he does.

….

Mr. Spitznagel’s approach is unusual approach for a money manager: To invest with him, you’ve got to believe in a philosophy that is grounded in the Austrian school of economics (which originated in the early 20th century in Vienna). The Austrians don’t like government to meddle with any part of the economy and when it does, they argue, market distortions abound, creating opportunities for investors who can see them.

When those distortions are present, Austrian investors will position themselves to wait out any artificial effect on the market, ready to take advantage when prices readjust.

Apparently his primary reason for this coming purge, which he says is needed, is that the Fed will have to readjust its monetary policies at some point. When they do, he says, the purge will come.  

I am no expert in monetary policy, but I have wondered how long we can sustain an economy with interest rates so low.  My recollection was that one of the Fed’s key powers was to be able to raise and lower interest rates to spur growth or temper inflation.  With interest rates this low, it seems that power is greatly restricted on both counts.  I tend not to be one who thinks the sky is falling, but there is at least some reason to believe it may be getting a bit cloudy.  

 

Should we flip the way we teach Business Associations?

Last week I asked whether law schools are teaching the law of securities regulation, particularly Securities Act exemptions, backwards. I proposed that the current rule-by-rule approach be flipped to a more topical approach. This week, I’m asking the same question about Business Associations, but I’m much less sure of the correct answer.

The basic Business Associations course at most law schools today includes much more than the law of corporations. Most Business Associations courses cover partnerships and limited liability companies, and often limited partnerships and agency law as well. 

The leading publishers offer a number of business associations casebooks, but their basic organizational structure is the same: each entity is covered separately. A typical casebook might, for example, begin with partnership law, then cover the law of corporations, then limited liability companies. The topics covered for each entity are similar: formation, management, fiduciary duty, the liability of investors, exit rights, and so on. 

Why not flip this organizational structure and organize business associations courses by substantive topic rather than by entity? We could begin with a chapter on formation that discusses how all of the entities are created. A chapter on management would discuss how all of the entities are managed. A chapter on fiduciary duties would discuss the fiduciary duties of agents, partners, limited partners, corporate officers and directors, and the members and managers of LLCs. And so on, topic by topic.

This alternative approach would eliminate a lot of repetition, and foster discussion of the policies underlying the rules: Why are the fiduciary duties of partners different from the fiduciary duties of shareholders? Why do partners have the right to participate in the management of the business, but not shareholders? Much that can be said about, for example, corporate opportunity would also apply to business opportunities in the partnership and the LLC. The law may differ from entity, and often for good reason, but wouldn’t the policy reasons for those differences become more apparent if we discussed all the entities at the same time?

This approach would also make choice-of-entity concerns more apparent. Students would see how choice of entity does or does not matter with respect to each topic.

There would, however, be drawbacks, which is why I’m not sure of the correct answer. For one thing, it’s much easier pedagogically to deal with one entity at a time than to bounce around from statute to statute. And an entity-by-entity organization allows instructors to focus more on the relationships among the rules affecting a particular entity—for example, the relationship between the limited liability of shareholders and their limited participation in control.

In short, I’m not surprised that some authors choose to organize by entity. What surprises me is that all of the leading authors choose to organize by entity. Even if many professors prefer the entity-by-entity approach, surely there’s a market for at least one book that takes the alternative approach. But perhaps not. If my memory serves me, the late Larry Ribstein’s business associations book was at one time organized along topical lines, but he eventually changed to an entity-by-entity organization.

 

I recently came across a couple of seemingly related items
that I thought might be of interest to our readers:

Awrey, Blair & Kershaw on the “Role for Culture and
Ethics in Financial Regulation”

Dan Awrey, William Blair, and David Kershaw have posted “Between
Law and Markets: Is There a Role for Culture and Ethics in Financial
Regulation?” on SSRN.  Here is a portion
of the abstract:

The limits of markets as mechanisms for constraining
socially suboptimal behavior are well documented. Simultaneously, conventional
approaches toward the law and regulation are often crude and ineffective
mechanisms for containing the social costs of market failure. So where do we
turn when both law and markets fail to live up to their social promise? Two
possible answers are culture and ethics. In theory, both can help constrain
socially undesirable behavior in the vacuum between law and markets. In
practice, however, both exhibit manifest shortcomings.

To many, this analysis may portend the end of the story.
From our perspective, however, it represents a useful point of departure. While
neither law nor markets may be particularly well suited to serving as “the
conscience of the Square Mile,” it may nevertheless be possible to harness
the power of these institutions to carve out a space within which culture and
ethics — or, combining the two, a more ethical culture — can play a meaningful
role in constraining socially undesirable behavior within the financial
services industry. The objective of this article is to explore some of the ways
which, in our view, this might be achieved.

Jones & Mendenhall on Board “Oversight Responsibility
for Workplace Culture”

Earl “Chip” Jones and Amy Mendenhall have posted “Do
Directors Have an Oversight Responsibility for Workplace Culture?” on
Boardmember.com.  Here is an excerpt:

Recent legislative, enforcement and compliance trends all
suggest that corporate directors should focus on workplace culture and
corporate compliance. Shareholder activists have shown increasing willingness
to pursue actions to hold directors responsible when corporate scandal and
executive misconduct impair shareholder value. Further, with the Dodd-Frank
Wall Street Reform and Consumer Protection Act’s bounty program promising
million-dollar incentives for whistleblowers who report corporate misconduct to
the SEC and employee mistrust of management at an all-time high, those charged
with steering the corporate ship cannot afford to ignore employee perceptions
and on-the-ground effectiveness of compliance resources.

It is widely accepted that directors oversee the
organization’s strategy. To do so, directors must understand how corporate
culture and strategy interact in ways that affect organizational performance.
To illustrate, Bain & Company’s 2011 Great Repeatable Model Study
highlighted one way in which culture can impact the implementation of strategic
goals: executives charge that managers are too risk averse. Yet, the executives
do not know or appreciate that the managers’ risk aversion is often born of
mistrust or the perception that support is lacking from those very executives.
As part of their responsibility to oversee the CEO and organizational strategy,
directors must address such impediments to achieving corporate goals.

 

Ethan J. Leib, David L. Ponet, and Michael Serota have
posted “Mapping Public Fiduciary Relationships” on SSRN.  Here is the abstract:

Fiduciary political theorists have neglected to explore
sufficiently the difficulty of mapping fiduciary-beneficiary relationships in
the public sphere. This oversight is quite surprising given that the proper
mapping of fiduciary-beneficiary relationships in the private sphere is one of
the most longstanding and strongly contested debates within corporate law.
After decades of case law and scholarship directed towards the question of to
whom do a corporation’s directors or managers serve as fiduciaries, private law
theorists remain deeply divided. This debate within private law should be of
perennial interest to public fiduciary theorists because the cartography of
public fiduciary relationships is essential to operationalizing the project.
After all, it is only through identifying the relevant fiduciary and
beneficiary that one is able to determine the precise contours of the fiduciary
framework’s ethical architecture. As such, loose mapping of
fiduciary-beneficiary relationships in the public sphere precludes a clear
understanding of whose interests are pertinent to the public fiduciary’s
representation, and what the public fiduciary is to do when beneficiaries’
interests collide. The purpose of this chapter, then, is to explore the central
debate in corporate law about fiduciary-beneficiary relationships to help
translate fiduciary principles into public law configurations.

I received the following announcement in my inbox today, and felt the content would be of interest to readers of this blog even if they have no intention of attending the meeting or submiting a proposal.  For more information, go here.

We are pleased to announce the 2014 Midyear Meeting Workshop
on Blurring Boundaries in Financial and Corporate Law, June 7-9, 2014 in
Washington, D.C….

We invite you to submit a proposal to participate in this
two-day program, which is designed to explore the various ways in which the
lines separating distinct, identifiable areas of theory, policy, and doctrine
in business law have begun to break down….. Proposals are due October 25, 2013,
by e-mail, to 14blurringboundaries@aals.org.

Why Attend this Workshop? 

Understanding how capital is formed and transformed in
today’s economy and how financial risk is spread requires that scholars and
students understand financial and corporate law and the theory and policy
underlying the doctrine.  If scholars
work solely within the traditional boundaries of any single field in the
financial and corporate law spectrum, they risk having a parochial view of
vital legal questions.  Indeed, each area
of financial and corporate law faces a broader set of questions than it has
historically engaged.   Securities
regulation covers much more than initial public offerings.  The regulation of financial institutions can
no longer concern itself primarily with deposit-taking banks (indeed, the label
“banking law” seems now outdated). 
Insurance regulation is no longer entrusted exclusively to state
regulators, and those regulators can no longer ignore systemic risks or the
modernization of consumer products and consumer protection strategies.  Business associations involve more than
publicly traded corporations.  These are
but a few examples….

Continue Reading Request for Proposals: Blurring Boundaries in Financial and Corporate Law

I first became interested in the Dodd-Frank conflict
minerals law after leaving my former employer, which managed other companies’
supply chains, and while serving as a founding board member of Footprints
Foundation, a nonprofit that works with rape survivors, midwives and hospitals
in the Democratic Republic of Congo (“DRC”) (see here). During a fact-finding
mission for the foundation to the DRC in late 2011, I observed the law through two
lenses– both as a compliance officer who used to conduct audits around the
world, and as a board member trying to determine whether this law would really
help stem the unconscionable violence which I witnessed first-hand when I saw
five massacred civilians lying on the road on my way to visit a mine.  (Note, my blog posts reflects my views only
and should neither be attributed to Footprints nor my former employer).  My 2011 trip and subsequent research convinced
me that the conflict minerals law could have unintended consequences that Congress had not
sufficiently thought through, and that the SEC, in writing the rules, had not
adequately addressed. For an article that describes the mining in the DRC today and some of the compliance successes and challenges see here. 

For these reasons, I signed on to an amicus brief along with
two experts on Africa to the suit brought by the National Association of
Manufacturers, the Chamber of Commerce and the Business Roundtable, who argue
that the SEC’s rule: (1) failed to create a de minimis exception to the rule
for trace amounts of minerals in products or the manufacturing process despite
the authority to do so; (2) applied the wrong standard regarding whether
minerals originated in the DRC; (3) erroneously
included non-manufacturers within the law’s
purview; (4) provided a flawed phase-in period for reporting that requires
large manufacturers to report two years earlier than the smaller companies on
which they may depend on for data; and (5) violated the First Amendment by
requiring companies to state on their website that their products are “not DRC
Conflict free,” which may not only taint
their brands but  may also be false or misleading.  The business groups also
discuss the significant expense, arguing that the SEC failed to conduct the legally
required cost-benefit analysis.

Our amicus brief, filed yesterday, focused
on the potential for unintended consequences, specifically a de facto boycott
on the region. We maintain that the SEC erred in failing to consider whether
its final rule would advance the law’s objective of weakening armed groups in
the DRC (which in my view could include the national army, which has also been
implicated in rapes), and that the SEC compounded that error by exercising its
discretion in ways that render its rule more likely to harm legitimate economic
activity in the DRC and benefit the very armed groups that Congress sought to stifle. In essence we believe that the law will
lead many companies concerned about the cost, safety and administrative burdens
of compliance to simply pull out of the DRC and source their minerals
elsewhere.  This will leave even
more miners out of work exacerbating poverty in a country where the per capita
income was estimated at $210 USD per year in 2011.  While conditions are improving on the ground somewhat, I also personally know of companies that are looking to
bolster their supply chains in other countries.

In a recent law review article I argued that given the
corruption endemic in the country, companies could put themselves at risk of their middlemen violating anti-bribery statutes to
get minerals out of the country with “proper” certifications. By failing to
disclose illicit payments, companies could also violate Dodd-Frank §1504, the
resource-extraction rule that requires certain companies to report on payments
to governments. (Note-the SEC is now re-writing §1504 after a court vacated that
rule). More important, focusing on corporate buying power while not addressing
the needs for judicial, infrastructure and security sector reform will not
solve the problem. Indeed, the Government Accounting Office issued a report in
July indicating that infrastructure issues are hampering compliance. As we
pointed out in our amicus brief, the GAO also noted that according
to numerous government and NGO sources, the DRC is incapable of certifying
various mines as outside the control of armed groups, regularly inspecting
them, stemming corruption, or halting smuggling. Furthermore, based on my research, the
fighting, looting and use of rape as a weapon of war in the DRC occurs not only
because of a fight for minerals, but also because of deep-rooted political and
ethnic rivalries and disputes over land rights, among other things.

As
observers have written, depending on the
success of Dodd-Frank §1502, Congress could choose to legislate on a number
of resources that have questionable provenance- tin and palm oil from
Indonesia, wood from countries that do not place a premium on sustainability,
cobalt from illegal mines, and “dirty water.”  Will Congress direct the SEC to be the watchdog over corporate responsibility for
human rights in the supply chain? Should the SEC, which is supposed to maintain
fair and efficient markets, even be in the business of dealing with human
rights issues? Are corporate governance disclosures the right mechanism? More
generally, what level of responsibility should US-based transnational
corporations have when operating abroad in weak or failing states? Hint- I
believe that it’s more than the reader might think from these last two blog
posts. I will comment on these and other topics from the West Virginia
conference on business and human rights next week.

 

Apple
hasn’t released pre-order numbers yet for its highly anticipated iPhone 5s and
5c, but if media reports and my own call to the Apple Store are any indication,
throngs of consumers will be lining up tomorrow to get the latest product.  It’s very likely that most of the customers
have no idea of the highly successful campaign against Apple and other
electronics manufacturers that led in part to Dodd-Frank §1502, the conflict
minerals provision which is now up on appeal to the DC Circuit. Incorporated
into Dodd-Frank only days before its passage, it aims to focus investor and
consumer attention to potential corporate complicity in human rights abuses in
the Democratic Republic of the Congo (“DRC”), a country where the United
Nations recently deployed drones against rebel groups and where over five
million have died due to civil wars, malnutrition, disease and poverty in recent years. Eighty
thousand people were displaced from their villages due to fighting between rebels and the army in
just the last month according to a report out today from the UN. A UN
representative once called the country was once called the “rape capital of the
world.”

The
law affects an estimated 6,000 companies–almost half of all US publicly-traded
companies–
and hundreds of thousands of suppliers worldwide because so many products
use one of the four regulated minerals, often mined by hand, known as the ”3Ts +G”. Specifically, these are: (1)
columbite-tantalite also known as tantalum, which is used for cell phones,
computers, surgical implants and wind turbines; (2) cassiterite, or tin, used
for coatings for food cans, solders, catalysts stabilizers, shoe soles and even
fluoride compounds in toothpaste and mouthwash; (3) wolframite (tungsten) used
for light bulbs, aerospace components, and machine tools; and (4) gold used as
an electronic conductor, for jewelry, and in medical equipment, anti-lock
brakes, stained glass, and home pregnancy kits (in nanoparticles). Anyone who buys thread or diapers is also
using these minerals.

The rule  requires domestic and foreign companies
regardless of size that file reports with the SEC to conduct due diligence and disclose
the origin of minerals in their products from the DRC or adjoining countries to
ensure that they are not funding rebel groups engaged in rape, torture, the use
of child soldiers, exploitation of children and other activities that have, in
part, led to one of the world’s largest and most protracted humanitarian
crises.  Depending on the company’s findings, the rule also requires a private
sector audit and the filing of a Conflict Minerals Report that describes the
due diligence. Large
companies must file their first disclosures in May 2014 for activities
occurring in calendar year 2013. Some companies have 10,000 to 50,000
suppliers and several layers in their supply chains. Their suppliers can have
multiple levels and subcontractors within their own supply chains.

Significantly, the law does not
prohibit the use of conflict minerals. It merely requires companies to disclose
if they are using them or if they cannot determine whether or not their
products are “DRC-conflict free.” This law relies on consumers and investors
to pressure firms that depend on corporate social responsibility programs to
enhance
their images to change their business practices. Last week, the SEC
received a petition
for rulemaking requesting a temporary
delay in disclosure and an alternative disclosure, due to the expense and time
required to comply.

Regardless of the law’s fate in the
US, companies that operate in Canada and the EU may face similar legislation.
In some sense the proposed rules are broader than Dodd-Frank §1502  (e.g. applying to
recycled and scrap metal) and in some cases more narrow (eg. the level of
companies in the supply chain). The European Commission received recommendations from
NGOs that seek legislation regarding all
natural resources originating in any conflict-affected or high-risk areas worldwide. On the other hand, an
August report
by Oeko-Institut, an organization that guides policymakers in the EU, notes
that (1) smuggling by armed groups in DRC has increased; (2) a comprehensive DRC policy
that includes but does not rely solely on regulation of conflict minerals is
the only way to provide meaningful assistance to the DRC; and that (3) extensive mandatory verification and reporting requirements based on downstream due
diligence can cause “embargo reactions”  from those who source
from the country. I agree and will discuss why in Part II.