Professor  Timothy D. Lytton, Associate Dean for Research and Faculty Development at Georgia State Univeristy, recently published his new article, Using Insurance to Regulate Food Safety: Field Notes from the Fresh Produce Sector, in the New Mexico Law Review. Here’s the abstract:

Foodborne illness is a public health problem of pandemic proportions. In the United States alone, contaminated food sickens an estimated 48 million consumers annually, causing 128,000 hospitalizations and 3,000 deaths. Nowhere is this crisis more acute than in the fresh produce sector, where microbial contamination in growing fields and packing houses has been responsible for many of the nation’s largest and deadliest outbreaks. This Article examines emerging efforts by private insurance companies to regulate food safety on farms that grow fresh produce.

Previous studies of using insurance to regulate food safety rely on economic theories that yield competing conclusions. Optimists argue that insurance can promote efficient risk reduction. Skeptics counter that insufficient information regarding the root causes of contamination renders insurance impotent to reduce food safety risk. This Article adds a sociolegal perspective to this debate. Based on interviews with insurance professionals, the Article documents how, notwithstanding limited information, underwriters employ a variety of techniques to encourage compliance with government food safety regulations and conformity to industry standards. These techniques include premium discounts for clients who adopt state-of-the-art food safety practices, coverage exclusions for high-risk activities, and loss control advice about how to avoid contamination.

Insurance plays a growing and potentially transformative role in advancing food safety. Government food safety regulation has traditionally been hampered by inadequate inspection resources. This Article advocates expanding insurance to fill oversight gaps in the U.S. food safety system, and it offers specific recommendations for how to nurture emerging markets for food safety coverage.

The findings presented in this Article have implications for understanding how insurance regulates risk more generally. Economic analysis of many well-established types of insurance—for example, life, health, homeowners, and auto—emphasizes the role of actuarial data in pricing premiums, determining coverage limits, and informing loss control advice. However, the underwriting professionals in this Article who describe their efforts to improve food safety on farms tell a different story. They operate in an emerging market with a low volume of claims and a dearth of actuarial data. Three aspects of their work stand out. First, underwriting in this area is more impressionistic than economic analysis assumes. When assessing the risk of microbial contamination on farms, underwriters rely more on their intuitions about a farmer’s competence and on media coverage of high-profile foodborne illness outbreaks than on actuarial data. Second, the mindset of these underwriters is more administrative than economic. They think in terms of regulatory compliance and standards conformity rather than optimal risk reduction. Third, farm size determines the role of insurance in managing risk. High-premium coverage for larger farms provides more underwriting resources for risk management than low-premium policies priced for small farms. These findings suggest that although economics explains the logic of insurance as form of risk regulation, understanding how underwriters regulate risk in practice, especially in emerging markets, requires attention to professional judgment, bureaucratic thinking, and resource constraints.

Earlier this year I wrote about a startling Georgia decision finding that FINRA’s arbitrator selection process had been manipulated.  In response, FINRA announced that it would retain an independent firm to conduct an investigation. 

The results of that investigation are now publicly available in a Report from Christopher W. Gerold.  The report found that the outside firm “not believe that there was any agreement between Weiss and FINRA regarding the panels for Weiss’s cases.”  It did not find any “documentary evidence – including any emails or other material – suggested in any way that such an agreement existed.”

The Report also recommended a series of changes to improve FINRA’s dispute resolution system, including:

  • Implementing ongoing, mandatory training for staff;
  • Requiring written explanations, upon a party’s request, of approval or denial of a causal challenge to the selection of an arbitrator or an arbitrator removal by the DRS Director for cause;
  • Conducting an updated external procedural review of the arbitrator selection algorithm to determine if it is still the most effective means for creating random, computer-generated arbitrator lists; and
  • Updating the DRS Manual and rules to clarify staff roles and procedures, and to ensure consistency and transparency.

Hopefully FINRA will move swiftly to implement the Report’s recommendations.

 

Dear BLPB Readers:

“The Institute for Law & Economics (ILE) at The University of Pennsylvania Carey Law School is pleased to announce its inaugural Junior Faculty Business and Financial Law Workshop. The Workshop will be held in person on December 8, 2022 at Penn Law School, unless pandemic protocols require otherwise.

The Workshop supports and recognizes the work of untenured legal scholars in accounting, banking, bankruptcy, corporations, economics, finance and securities regulation and litigation , while promoting interaction among them and selected tenured faculty and practitioners. By providing a forum for the exchange of creative ideas in these areas, ILE also aims to encourage new and innovative scholarship in the business and financial arena.”

The complete call for papers is here.

Last week, I posted the abstract to my paper Crony Stakeholder Capitalism (here).  One of the comments to that post perspicaciously noted the issue of “how to ensure democratic accountability for private actors that are taking on social goals historically reserved for democratically accountable government.”  In my brief reply, I focused on the duties to shareholders, but I want to follow-up here to note that I do in fact flag the relevant threat to democracy in a footnote in my paper:

A related concern is the potential for stakeholder capitalism to undermine our political system by shifting governmental power to private actors, thereby undermining public accountability of government. Cf. Dorothy S. Lund, Asset Managers as Regulators, THE CLS BLUE SKY BLOG (June 16, 2022) (“allowing three private investment companies that lack political accountability to set regulatory policies for the U.S. economy is dangerous for our democracy”), available at https://clsbluesky.law.columbia.edu/2022/06/16/asset-managers-as-regulators/ ….

Along these lines, I recently came across some related podcast comments from Vivek Ramaswamy, author of Woke, Inc.: Inside Corporate America’s Social Justice Scam, and co-founder and Executive Chairman of Strive Asset Management (“Our mission is to restore the voices of everyday citizens in the American economy by leading companies to focus on excellence over politics.”):

[W]hat the ESG movement has allowed … the progressive movement to do in this country is to allow government actors to do through the back door what they could not get done through the front door. Let’s take the green new deal for example. There was not enough political support to get the green new deal done through the front door of congress so what they did is they deputized companies like Blackrock … just like they did to big tech by the way … to force … asset managers to enforce these values through the back door. So it is politics, but it’s politics in the avatar of the free market. And this is a threat to both capitalism and democracy…. A lot of Milton Friedmanites … worry that this makes companies less effective. I think that’s definitely true. I’ve seen that firsthand and I have a concern about it. But the real problem is that it is a threat to democracy. And that’s the part that the left especially misses. But the left and the right both miss [this] because what this says is the questions that we should be sorting out through free speech and open debate in the public square as citizens in a democracy … we should sort them out through the political process — we’re instead working it out through force using capital as a vehicle of force in the private sector to decide on one monolithic view of how to fight systemic racism or how to fight environmental challenges like global climate change by enforcing one orthodoxy and using capital as the vector to do it. That’s the real threat to democracy.

Some relevant questions that flow from this are: (1) To what extent, if any, are these concerns about ESG and stakeholder capitalism valid and what, if anything, should be done in response? (2) Even if the substance of the concerns should be dismissed as some sort of conspiracy theory what, if anything, does the perception of such a threat tell us about the challenges faced by the ESG and stakeholder capitalism movement going forward?  

Greetings from Cervera, Spain.  As you know from my post last week, I am traveling in the Catalonia region of Spain for a few days this week after the 2022 Law and Society Association Global Meeting on Law and Society, which was held in Lisbon, Portugal this year.  I have the blessing of staying with a friend (whom I met through Zoom mindful yoga practices during the pandemic) in her private home.

I want to offer a quick post this week to reflect on what turned out to be a mini-theme in the presentations I attended at the Global Meeting on Law and Society.  That mini-theme was, perhaps unsurprisingly, corporate stakeholderism.  (And I note with some interest that Stefan has recently written and blogged on an aspect of corporate stakeholderism as well.)  The following programs from the collaborative research network (CRN) to which I belong picked up on this theme, in one way or another:

  • an entire paper panel entitled: “Corporations, Shareholders, and Other Stakeholders,” which featured academic work focusing on corporate governance and finance from a number of different stakeholder perspectives;
  • a roundtable discussion entitled “Corporations & Engendering Public Trust,” billed as a session that “brings together corporate law experts to investigate how information and communications with stakeholders, investors, and the market can enhance trust in corporations and the corporate sector as a whole”;
  • an Author Meets Reader session celebrating Reconstructing the Corporation: From Shareholder Primacy to Shared Governance (2021), co-authored by Grant Hayden and Matt Bodie (which, as many of you likely know, takes a hard look at the current state of corporate governance and offers a new model in which shareholders and employees play a stronger role);
  • a paper panel entitled, “Corporations and Society,” which featured Grant and Matt’s new paper, Democratic Participation as Corporate Purpose;
  • a roundtable session entitled “Present and Future of Corporations in Society,” which addressed ways in which corporate law and securities regulation impact the relationship of corporations to environmental and social concerns; and
  • a roundtable entitled “Awakening Capitalism,” catalyzed by Alan Palmiter’s Capitalism, heal thyself essay (which I wrote about in an earlier post).

Of course, papers and commentary in other programs and papers also raised the stakeholderism theme and related issues.  And, of course, the prominence of this theme may not be news to any of you, given the central role that ESG has been playing in recent corporate finance and corporate governance discussions.  Finally, of course, I may be suffering from anchoring, an immediacy effect, or other cognitive biases in identifying this substantive thread that tied together so many programs and presentations.  Yet, I do not remember a dominant theme like this emerging from our CRN’s programming in the past.  In any event, it seems we should be looking out for a bunch of business law research publications in the coming months that offer insights on stakeholder rights, opportunities, and concerns . . . .

I’m excited to share that my most recent article, Derivatives and ESG, is forthcoming in the American Business Law Journal (Vol. 59, no.4)!  I recently posted a draft of this article to SSRN.  As the abstract below suggests, it examines the role of the derivatives ecosystem – the instruments themselves, trading exchanges, and clearinghouses – in promoting ESG objectives. 

I’ve written a lot about credit default swaps (for example, here and here).  So, in researching this topic, I was especially struck by the potential for well-known past and existing challenges in credit default swap markets – specifically, decentralized decision-making and conflicts of interest – to eventually become issues in the currently nascent sustainability-linked derivatives (SLDs) market, a type of over-the-counter ESG derivative.  Undoubtedly, the SLDs market is set to grow, so I’ll likely be posting on this topic again in the future!   

Here’s the abstract:

“Financial markets are increasingly developing innovative, ESG-related derivatives and relying upon these instruments to hedge ESG-related risks. The global derivatives markets are among the largest, most consequential financial markets in the world. Derivatives are financial contracts that derive their value from an underlying reference entity which can be almost anything, including interest rates, credit, equities, foreign exchange, the weather, or the price of carbon. They provide for hedging, investment (speculation), and arbitrage, and trade on regulated exchanges and in the over-the-counter markets. Derivatives can also facilitate access to the tremendous amounts of capital necessary for the transition to a cleaner energy future and to the objective of net zero emissions by 2050 of governments around the world.

Through an exploration of recent innovations and developments in the exchange-traded and over-the-counter derivatives markets, this Article explores the role of the derivatives ecosystem – the instruments themselves, trading exchanges, and clearinghouses – in promoting ESG objectives. It also highlights the potential for the nascent sustainability-linked derivatives market to face certain challenges experienced by and present in the market for credit default swaps.”

I have posted a draft of my latest paper, Crony Stakeholder Capitalism (Kentucky Law Journal, forthcoming), on SSRN (here).  The abstract is below.  Comments are most welcome.

Capitalism in the context of corporate governance may be understood as an economic system that equates efficiency with corporate managers only pursuing projects that they reasonably expect will have a positive impact on the value of the corporation’s shares (accounting for opportunity costs). Such projects may be referred to as positive net-present-value (NPV) projects. Stakeholder capitalism, on the other hand, may be understood a number of different ways, including: (1) an improved form of calculating NPV; (2) a conscious choice to sacrifice some NPV in order to advance broader social objectives; (3) a form of rent-seeking; (4) a form of green-washing; (5) a manifestation of the agency problem whereby managers prioritize their personal political preferences over NPV; (6) a manifestation of the agency problem whereby managers prioritize their personal financial wealth over NPV; (7) a form of crony capitalism. Of these, an argument can be made that only the first is both legal and efficient, at least in the case of Delaware corporations operating under the relevant default rules. Given the high risk of stakeholder capitalism thus constituting illegal or inefficient conduct, this Essay argues that decisions justified on the basis of stakeholder capitalism (as opposed to NPV calculations) should not be presumed to be fully informed and free of material conflicts, as is the case when the business judgment rule otherwise applies. Rather, such conduct should be subject to enhanced scrutiny to account for the omnipresent specter of illegal/inefficient motives. Such a rule would be similar to what is already often the case in Delaware when corporations defend against hostile takeovers, due to the omnipresent specter of managerial entrenchment motives.

Following an Introduction, this Essay proceeds as follows. First, because the argument that stakeholder capitalism can constitute a form of crony capitalism is at least somewhat novel, the connection between the two is fleshed out. Second, Senator Marco Rubio’s Mind Your Own Business Act (MYOBA) is analyzed as a potential solution to the problem of crony stakeholder capitalism. Finally, recommendations are made for improving MYOBA.

is something I said on Twitter in connection with l’affaire de Musk. 

What I meant by that is not the specific legal rule of Revlon regarding directors’ fiduciary duties, but the orientation of Revlon, meaning, shareholder wealth maximization as the raison d’etre of corporate law, with the recognition that once a company is sold for cash, it is effectively dead, at least as far as its former investors are concerned.  It had no purpose other than as a vehicle for their wealth, and, once liquidated, that purpose is fulfilled.

Much of the commentary regarding the Twitter dispute – usually, though not always, coming from pundits outside the corporate space – is genuinely disorienting for a corporate law person, because it treats Twitter as an entity that exists as the collective sum of its stakeholder interests, rather than as an avatar for investor interests.

Which is a totally normal, human way to think about the problem from the perspective of a citizen or as a person who inhabits this planet, but is almost entirely illegible from the perspective of Delaware corporate law.

To wit:

 

Yes, that one hundred percent is the goal, because $54.20 is a really big number for Twitter’s investors. It didn’t look so at the time (hence Musk’s attempt to back out), but given where we are now, it would be a windfall.  Why should the board care about whether a buyer is willing or unwilling? Once the company is sold, it is dead (from the perspective of the now-former board members and now-former stockholders).

 

If Twitter wins in Delaware, it doesn’t matter what damage was done, because the shareholders have got their $54.20.

The board’s lack of conviction in the company’s long-term future will linger over employees, partners and shareholders regardless of the outcome with Elon.

(source)

If the outcome is Elon is forced to buy the company, it doesn’t matter what the former board’s view of the company’s future was.  Elon is the board now, and Elon is the shareholders.

If Mr. Musk doesn’t want to buy Twitter, it doesn’t make much sense for a court to make him do so. Twitter might be worse off under his ownership at this point, a fate Twitter’s board is legally obligated to try to avoid.

(source)

If Musk buys the company, the board is not there any more.  The shareholders are not there any more.  They do not care if Twitter is “worse” under his leadership; the concept of it being “worse” doesn’t even read because the company will no longer be owned by public investors.  “Worse” does not have much of a definition.

What company wants to be owned by someone who does not want it?

(source)

Twitter does not have a preference; Twitter is not a person.  If Musk loses in court, the current shareholders will be bought out and they are unlikely to have sentimental feelings about what happens to the company after that.

People do deals to do the deals. They don’t do deals to litigate, they don’t do deals to collect breakup fees. They do the deal because they thought the deal made sense….Who’s gonna really win here is the lawyers.

(source)

I am sure the lawyers will win, but I really must emphasize that if Twitter wins, Twitter shareholders will get $54.20 per share for stock currently trading at around $36 (a figure which itself is probably inflated somewhat by the possibility that Musk will be forced to make good on his offer), and they will have done so without personally having to sit for depositions or be pilloried on Twitter itself.  The shareholders, therefore, would win.

I think [the board is] scared, and they want to get out of this. They want to get him away from them. What I’d ask is for him to sell back his shares. He sells his shares, maybe at a loss, pays the billion dollars and goes. I would let him just move. I know we’re like “justice against Elon,” but I think the board wants to get out of this. Employees are pretty pissed, too, I’ll tell you that….. I don’t think they want this to go into court by any means at all. It’s not good for anybody….Ultimately, you have to do a cost-benefit analysis, and there’s no benefit from fighting with him publicly. There isn’t.

(source)

I claim no insight into the personal feelings of the board members, their fears, their hopes, their dreams, but their legal obligation here is to maximize stockholder wealth, and though they could, consistent with those duties, decide that in the long term Twitter is more valuable as a standalone company than the $44 billion Musk agreed to pay right now, that seems … unlikely … and so their legal obligation is to pursue that $44 billion.  And if investors can win in a courtroom, there is absolutely a benefit to fighting with Musk about it.  The $1 billion dollar break fee won’t begin to compensate the company for the damage Musk has done, but more importantly, $1 billion is less than $44 billion.

I am being snarky here but I do need to emphasize that I don’t blame most of these commenters for thinking about Twitter this way; it’s the default, almost natural, way to approach the dispute.  I teach Revlon; I know from experience I have to train students to think exclusively in terms of shareholder wealth; it does not come intuitively.  And that is why, for example, a lot of commentary does not seem to understand that Twitter “settling” for $1 billion but shedding a troll is a loss for Twitter and a win for Musk.  It’s pocket change for Musk and far, far less than what Twitter’s shareholders are owed.

It’s not that Delaware courts are literally indifferent to the plight of other constituencies; it’s simply that they don’t consider them to be the objects of corporate law.  I note, for example, that every modern Caremark opinion begins with an acknowledgement of the vulgarity of viewing horrible tragedies solely through the lens of their effects on stock prices, before going on to do just that.

And it’s good, in a way, that this public conversation be happening right now, because we are in the midst of a reinvigorated debate about whether corporate law should have a shareholder-only orientation, and nothing could be more salient in terms of demonstrating what that means.   And what that means is, “Twitter” is not an entity with independent interests; the interests that legally matter are those of shareholders; those interests are legally presumed to include only Twitter’s monetary value, and “if what’s best for the shareholders is forcing the incredibly short-sighted, impossibly impetuous, trolling billionaire to pay them a decent premium on their shares, then… that may be exactly what happens.”

That said, as I’ve repeated in other spaces, that does not mean a Delaware court will be indifferent to the equities of the situation.  Indeed, the standard for granting specific performance and forcing Musk to buy the company requires that the order “not cause even greater harm than it would prevent.”  Though Delaware courts have ordered mergers to be completed by unwilling buyers in the past, the most comparable precedent is In re IBP Shareholders Litigation, where then-Vice Chancellor Strine considered the social equities of foisting a merger on an unwilling buyer (although it should be noted that in that case, the target shareholders could receive stock in the combined entity rather than cash, and so the target investors also had a continuing interest in the successful functioning of the new company.)   It would be irresponsible for a Delaware court to entertain an order of such enormous political and social consequence without considering the effects on the broader society.  But the critical point here is that consideration of these collateral constituencies would be a departure from Delaware’s usual orientation, not the norm.  And the countervailing consideration will be that not requiring Musk to buy the company would call into question the basic stability and credibility of Delaware corporate law and the Delaware legal system – which is valued precisely because these concerns are generally absent. 

FINRA recently filed a proposed rule change with the SEC to “to release information on BrokerCheck® as to whether a particular member firm or former member firm is currently designated as a ‘Restricted Firm.'”  A restricted firm is one that poses “a high degree of risk to the investing public, based on numeric thresholds of firm level and individual-level disclosure events.”  Essentially, these are firms with “a significant history of misconduct.”

As it stands, the public does not know which firms have been designated by FINRA as “restricted firms.” FINRA’s proposal would release this information through BrokerCheck®. This would be a strong signal to investors to more closely monitor their accounts or move them to a different brokerage. 

Only two comment letters were filed in response to the proposal.  One letter of support came from PIABA. The other was filed by Professors Nicole G. Iannarone and Christine Lazaro.  The Professors’ letter supported the proposal and urged FINRA to also “provide a plain English explanation of what restricted firm designation means on the BrokerCheck report if a firm is so designated.”  The Professors are undoubtedly right that retail customers simply won’t understand what “restricted firm” means without clear contextual information.  The Professors also recommended that information about prior times a firm has been designated as a restricted firm be disclosed.  A firm that bounces on and off the restricted list surely poses more risk to investors than the average brokerage.  Without FINRA making historical information, available investors will not be able to protect themselves and the disclosure will not have sufficient deterrent effect for firms.

Hopefully the new disclosures will be approved and implemented in a way that both informs investors and deters misconduct.

Vanderbilt is starting a new law and business fellowship.  The job posting can be found here.  Thanks to Brian Broughman for passing this on to us. 
 
From the posting:
 
Vanderbilt Law School invites applications for a fellowship working with the school’s Law and Business Program. The fellowship is a two-year appointment that can start either Spring 2023 or Fall 2023. Applications will be considered on a rolling basis.

The fellow will spend four semesters in residence at the law school and will have the opportunity to work under the mentorship of Vanderbilt law faculty, particularly faculty affiliated with the Law and Business Program. The position is designed to give the fellow time to focus on research and writing and to prepare for a tenure-track position at a US law school. Consistent with this goal, the fellow is only expected to teach one upper-level business law course each year, and the fellow will have an opportunity to present their research while at a Vanderbilt.

The fellow will earn a competitive salary, commensurate with the candidate’s relevant experience and educational background, and will be provided a budget for conferences and research expenses, and health benefits. Applications are invited from law school graduates. Preference will be given to candidates with relevant work experience.

 
The posting also addresses other aspects of the fellowship, including the details about how to apply.