ProfessorBainbridge.com

Pitfalls in forming a benefit corporation

Keith Paul Bishop notes "a few drafting pitfalls" to be avoided when forming a flexible purpose corporation or benefit corporation.

"Why Is Creating Value Good, Profits Bad?"

Paul Hiseh discusses the titular question:

"Profit" is a dirty word. Profit-seeking businessmen are stock villains in Hollywood movies. "Occupy Wall Street" protestors demand, "People not profits" (whatever that means). Companies reporting healthy profits are automatically assumed to be exploiting customers and can only atone for this by "giving back" to their communities. "Making a profit" has an unsavory, morally suspect taint.

Yet simultaneously, Americans have a far more positive view of the concept of "creating value." The mainstream press lauds visionary businessmen who "create value," such as the late Steve Jobs of Apple. The business literature routinely emphasizes the importance of "creating value." So many organizations wish to be seen as "creating value" that it has become a business cliche, like "best practices" and "thinking outside the box."

But in a free society, "creating value" and "making a profit" are just two sides of the same coin.

He goes on to explain why in detail. Recommended reading.

More on "The Dodd-Frank Conflict Minerals Disclosure, Corporate Responsibility and Compliance in a Human Rights Crisis"

Marcia Narine has posted further thoughts on conflict minerals disclosure. Since she's a former general counsel and compliance professional, she brings real insights to the table. A recommended read.

Conflict Minerals Disclosure

Newly minted law professor and loingtime general counsel/compliance officer/NGO member Marcia Narine examines the forthcoming disclosure rules on conflict minerals, concluding:

My foundation work in Congo and Rwanda in September, my dialogue with local Congolese including rape survivors and NGOs, US business leaders, and activists on both sides of the debate and my former experience conducting audits confirmed my skepticism, although many want the law enacted immediately. While I don’t doubt the good intentions of the law and the urgency of stopping the rape, child slavery and forced labor, in my next post, I will discuss why I believe that the legislation will likely have serious unintended consequences, may hurt the very people its designed to help, and what Congress and the SEC should have done differently.

I look forward to the next post.

 

Bainbridge Joins Comment to ISS on Corporate Political Spending

Along with former California Commissioner of Corporations and Manhattan Instiutute Center for Legal Policy Director, I today submitted a comment letter to Institutional Shareholder Services with regard to ISS' proposed change in policy on corporate political spending. As Commissioner Bishop explains:

The ISS Global Policy Board recently solicited comments with respect to its proposed updates to its benchmark proxy voting guidelines. One of the policy changes under consideration relates to corporate political spending disclosure proposals. Under ISS’ current guidelines, these proposals are evaluated on a case-by-case basis. ISS is now proposing to change its position to a “generally vote FOR recommendation”.

This week, I joined Professor Stephen Bainbridge (UCLA Law School) and James Copland (Director, Center for Legal Policy at the Manhattan Institute) in submitting this comment letter
opposing the change. ISS’ proposed change is unwarranted for a number of reasons, including:

• From 2008 through August 1, 2011, no shareholder proposal concerning political speech came close to achieving majority support;

•  All public companies are not similarly situated with respect to either the potential beneficial or negative impacts of disclosures;

• The actual proposals submitted to date differ materially; and

• The evidence suggests that nearly all of these proposals have been “sponsored by funds affiliated with labor unions or social or religious interests—investors who either may or expressly do seek goals apart from investment return”.

I hope that ISS eschews a “one size fits all” approach corporate spending proposals. 

Ditto.

Has the SEC "Misunderestimated" the Cost of Conflict Minerals Disclosure?

Steve Bradford:

The SEC estimated that the cost to implement the new requirements would be just over $70 million. As I indicated yesterday, the SBA's Office of Advocacy disputes the SEC's cost estimates. Now, a study out of Tulane University claims that the actual cost will be $7.93 billion, more than 100 times the SEC's estimate. The study is available here. I haven't reviewed the Tulane study carefully but, as I said yesterday, none of this bodes well for the SEC if it adopts the rule and it is challenged in the D.C. Circuit.

"12 US Senators Urge the SEC to Promptly Implement Conflict Minerals Provision of Dodd-Frank"

Jim Hammilton reports that:

n a bi-partisan letter to the SEC, Senators Barbara Boxer (D-CA), John Boozman (R-AR) and Christopher Coons (D-DE), along with nine other Senators, urged the Commission to promptly implement Section 1502 of Dodd-Frank, the conflict minerals provision. Despite a mandated April 2011 deadline, noted the Senators, the SEC has delayed the adoption of regulations implementing Section 1502, which requires companies to disclose the origin of minerals purchased from the Democratic Republic of Congo and establish transparency and accountability in the mineral supply chain to help ensure that conflict minerals are not purchased by companies in the United States or abroad. The letter was also signed by Senators Mark Begich (D-AK), Sherrod Brown (D-OH), Robert P. Casey, Jr. (D-PA), Frank R. Lautenberg (D-NJ), Patrick J. Leahy (D-VT), Jeff Merkley (D-OR), Barbara A. Mikulski (D-MD), Sheldon Whitehouse (D-RI) and Ron Wyden (D-OR). 

This remains a very bad idea on the merits.

"Coming Soon: #Occupy [Name of Your Company Here]"

Broc Romanek muses on "the potential of major disruptions at [corporate] annual shareholder meetings as Occupy Wall Street-type protests quickly spread ...."

Colorado's experience with trying to legislate B Corps

As Bill Callison explains, a B Corp a.k.a. a benefits corporation is a new type of corporate form recognized in a few states that "allows a modification of shareholder primacy/shareholder wealth maximization principles." Bill recounts his experience with a legislative effort to get B Corps recognized in Colorado, concluding:

Moral to the story:  When people approach you with “socially beneficial” business organization gifts, unwrap them (and try the clothes on) before accepting.  You may find that the gift is a mule rather than a horse, and perhaps one does not want to look in a mule’s mouth.

Another moral to the story:  Colorado’s corporate legislative drafting group includes at least two very good academics (and more, if one defines the term broadly), and their participation in the process was invaluable.  They help us unbundle and understand problems from a unique perspective.  Be involved.

Go read the whole thing, as he details some serious problems with the benefits corporation statute being pushed by the main promoter of the idea.

Relatedly, you'll want to read Bill's post Low-Profit Limited Liability Companies (L3Cs): Will Someone Rid Us of These Pesky Beasts

More moronic social disclosure

Broc Romanek reports that:

On Friday, I blogged a member's negative reaction to the obscure provision in Dodd-Frank that requires the SEC to adopt rules eliciting disclosure regarding "conflict minerals" in the Congo. Many corporate lawyers and others in the corporate community (which includes many shareholders) share that member's reaction. Now, Rep. Carolyn Maloney (D-NY) has introduced a House bill entitled the "Business Transparency on Trafficking and Slavery Act" (H.R. 2759) that would require companies to disclose efforts to identify and address the risks of human trafficking, forced labor, slavery and child labor in their supply chains.

Although these bills are well-meaning, attempting to solve the world's problems through SEC filings simply is the wrong - and very expensive - way to go. How in the world did Congress start thinking they should influence foreign policy, as well as domestic social and environmental issues, through SEC filings to the determent of shareholders? Well, before Dodd-Frank, Rep. Frank Wolf (R-Va.) used an omnibus appropriations bill in early '04 to require companies to disclose business activities in countries designated by the State Department as sponsoring international terrorism (Wolf particularly was targeting Iran). Corp Fin's "Office of Global Security Risk" was born.

Social disclosure is inconsistent with the purposes of the securities laws, costly to shareholders, contributes to information overload on shareholders, and doesn't add information that most investors find useful. It should be cast into the outer darkness.

CSR and Branding

Do corporate efforts at "responsibility" count when motivated by a desire to brand their business rather than out of the goodness of management's heart? The question was prompted by a recent paper, which argues that:

In this paper, we ... critically engag[e] with marketing campaigns of so‐called ‘ethical’ bottled water. We especially focus on a major CSR strategy of a range of different companies that promise to provide drinking water for (what they name as) ‘poor African people’ by way of Western consumers purchasing bottled water. Following Fairclough's approach, we unfold a three‐step critical discourse analysis of the marketing campaigns of 10 such ‘ethical’ brands. Our results show that bottled water companies try to influence consumers' tastes through the management of the cultural meaning of bottled water, producing a more ‘ethical’ and ‘socially responsible’ perception of their products/brands.

Corporate social responsibility is a problem, IMHO, when, as Milton Friedman observed, a manager spend "someone else's money for a general social interest. Insofar as his actions in accord with his 'social responsi­bility' reduce returns to stockholders, he is spending their money." If on the other hand, the manager is engaging in corporate activity that is "responsible," "green," "sustainable," or any other buzzword for what left-liberals regard as socially ethical behavior, the manager is pursuing the proper corporate purpose, as Friedman defined it, "to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom."

So it doesn't count as CSR. Just as good advertising to bleeding hearts.

The NLRB, Boeing, and Bringing Corporate Social Responsibility in Through the Back Door

Hans A. von Spakovsky & James Sherk:

The National Labor Relations Board (NLRB) raised a lot of eyebrows by filing a complaint against Boeing for opening a new plant in a right-to-work state. But that action is just the beginning of the board’s aggressive new pro-union agenda. An internal NLRB memorandum, dated May 10, shows that the board wants to give unions much greater power over employers and their investment and management decisions.

Under current NLRB rules, companies can make major business decisions (like relocating a plant) without negotiating with their union — as long as those changes are not primarily made to reduce labor costs. For example, a business can unilaterally merge several smaller operations into one larger facility to achieve administrative efficiencies. Companies only have to negotiate working conditions, not their business plans.

The NLRB apparently intends to change that. ... Specifically, the NLRB wants to force companies to provide detailed economic justifications (including underlying cost or benefit considerations) for relocation decisions to allow unions to bargain over them — or lose the right to make those decisions without bargaining over them. It is a “heads I win, tails you lose” situation for unions. Either way, businesses would have to negotiate their investment plans with union bosses. I

The NRLB’s goal is not just to prevent companies from investing in right-to-work states. The board apparently also wants to force employers to make unions “an equal partner in the running of the business enterprise,” something the Supreme Court ruled in First National Maintenance Corp. v. NLRB is specifically not required by the NLRA. But the board wants business decisions made to benefit unions, not the shareholders, owners, and other employees of a business, or the overall economy. The Boeing charges are evidently just a first step toward that goal.

Corporate social responsibility through the back door of labor law? That's a major change in the purpose of the labor laws being effected without any Congressional approval.

CSR is bad public policy. See, e.g., my article The Bishops and the Corporate Stakeholder Debate (April 2002). Villanova Journal of Law and Investment Management. Available at SSRN: http://ssrn.com/abstract=308604.

But sneaking it into the law in this way is far worse.

A corporation's obligation to obey the law

Stephen Padfield takes issue with my assertion that "Corporations have the same obligation to obey the law as natural persons":

To the extent that corporations don't actually exist and thus can't be physically put in jail, this seems not quite correct.  Furthermore, the actual human decisionmakers and "owners" often appear to be significantly immunized from jail for corporate malfeasance because of the responsibility dilution inherent in doing business in the corporate form.  This is obviously to a significant degree an empirical question, but I'm certainly not going to take at face value the assertion that corporations are precisely as subject to the law as natural persons.  Particularly when that assertion is trotted out in support of fending off attempts to regulate corporations more rigorously because, "They have no soul to save and they have no body to incarcerate."

Point well taken. The overlap may not be precise. But I think both theory and law suggest that the corporation has a duty to obey the law that is at least analogous to that of a natural person.

• American Law Institute Principles of Corporate Governance sec. 2.01(b) provides that a corporation "Is obliged, to the same extent as a natural person, to act within the boundaries set by law."
• Even Milton Friedman in his famed critique of corporate social responsibility opined that the corporation's proper objective is "to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom"
• Although they can't be sent to jail, corporations can be fined and sued. In the extreme case, to the point of being forced out of business (e.g., Arthur Anderson), although admittedly that is rare.
• It is true that directors and officers often escape liability due to the corporate form's insulating powers. Yet, as Martin Petrin has pointed out, "it has gone mostly unnoticed that corporate directors and officers can be held personally liable in tort to non-shareholder third parties based on failures in exercising their core corporate duties." Indeed, such liability seems to be on the upswing.

So maybe the parallel isn't all that inapt after all.

Schumpeter on Corporate Personhood

The Economist's Schumpeter has an interesting column on corporate personhood in the most recent issue. He (?) argues:

The legal conceit that companies are natural persons is vital to capitalism. It simplifies litigation greatly: companies can act like individuals when it comes to owning property or making contracts. Timur Kuran of Duke University argues that the idea of corporate personhood goes a long way to explaining why the West pulled ahead of the Muslim world from the 16th century onwards. Muslim business groups were nothing more than temporary agglomerations which dissolved when any partner died or withdrew. Legal personhood gave Western firms longevity. ...Western companies turbocharged the industrial revolution and laid the foundations for mass prosperity.

I agree, as regular readers know. I also agree with Schumpeter's implicit concern that US law confers personhood on the corporation without a coherent theory of why it does so or where the boundaries of that legal fiction are to be located. As I complained after the recent AT&T decision:

Chief Justice Roberts could have summed up his opinion far more succinctly: "Because at least 5 of us say so."

The Citizens United decision last term attracted much criticism--not least from Con Law Professor-in Chief Obama--for holding that a corporation is a person and as such has certain constitutional rights. While I agreed with the holding, I was disturbed that the Chief Justice's majority opinion for the Supreme Court so obviously lacked a coherent theory of the nature of the corporation and, as such, also lacked a coherent theory of what legal rights the corporation possesses.

The utterly specious word games that drive this opinion simply confirm that Chief Justice Roberts  has failed to articulate  a plausible analytical framework for this important problem.

Returning to Schumpeter, however, I disagree rather strongly with his chief concern:

Nor is it unreasonable to wonder why the idea of corporate personhood should only cut one way: if companies enjoy the same rights as flesh-and-blood humans then shouldn’t they be under the same obligations? The conservative majority on the Supreme Court is in danger of digging a trap for itself: strengthening the arguments of people who insist that companies have a moral duty to pursue social rather than merely business ends.

It's not clear why Schumpeter is worried on this score.  On the one hand, corporations already have the "same obligations" as natural persons in the key respects. Corporations have the same obligation to obey the law as natural persons. Corporations are taxpayers, just like natural persons. In time of war, corporations have even been conscripted, being told by the government what to make and what pricesto charge. So why is Schumpeter worried?

In any case, Schumpeter seems also to be concerned that corporate personhood strengthens the arguments of the corporate social responsibility crowd. But how? Just as natural persons are free to refuse to be Good Samaritans, corporations remain free to decline to comply with "moral" duties. Giving the corporation recognition as a legal person, doesn't change that analysis as far as I can tell. Granted, he is subject to strict word limits, but some elaboration would have been helpful.

As it is, I think Schumpeter gets it exactly backwards. The CSR crowd sees corporate personhood as an obstacle to their goals rather than a means to their ends. Corporate personhood gives corporations legal rights and protections that help protect them from the demands of CSR activists.

Finally, Schumpeter offers a propsoed "fix" for the problem:

What would help is if the Supreme Court (and indeed corporate law in general) adopted a clear principle when it comes to the analogy between artificial persons and real ones: that companies should be treated as people only in so far as it is expedient. They clearly need to be able to enter into contracts just like individuals. But they should not be treated as if they experience such essentially human emotions as embarrassment and a desire for self-expression. Thus they should not have the same rights to privacy and political freedom as a citizen, but should have only as much of a right to confidentiality and political participation as is helpful for the efficient functioning of business (including letting firms contribute to the public debate on the regulation of business).

But who decides what is expedient? Ultimately, whether it is expedient for corporations to have some right or another will depend on whether 5 justices of the SCOTUS think it's expedient.

As a decision rule, Schumpeter's proposal sucks. It provides no certainty or predictability, due to the lack of a bright-line test. It relies on a concept-expediency--that is inherently ambiguous and, worse yet, largely subjective.

Consider, for example, his suggestion that firms be granted free speech rights to "contribute to the public debate on the regulation of business." Given how pervasive business is in our culture and how pervasively business is regulated, virtually any corporate speech arguably would fall under that protection. E.g., a corporation could argue against recognition of same-sex marriage because doing so would affect employee benefits.

We need is a better rule, but relying on 5 old men and women in robes--most without any business experience--and their wet behind the ears law clerks to decide what is and what is not expedient is not a better rule. In fact, sub silentio, it's essentially what we do know.

Gender diversity on boards and shareholder access

Jay Brown has been on a gender diversity on corporate boards kick recently, with a number of posts on the topic. He links diversity to shareholder access:

The real explanation for the dearth of women is the closed system for determining nominees for the board of directors.  As we have noted often on this Blog, shareholders rarely receive a choice when electing directors.  In all but a very small number of cases, shareholders are asked to vote on the slate of directors submitted by the board of directors.

But why do we think shareholder access would lead to more women nominees, unless one posits that there are shareholder activists who will nominate women simply because they are women. It may be that there are such shareholders, but if so they will acting not from economically rational motives but from a political correctness agenda. After all, as Brown himself acknowledges, "Given all of the factors that go into an investor's decision about the purchase of shares, there is no evidence that board diversity is sufficiently influential to materially effect capital raising."

In other words, most shareholders don't care, because they don't see gender diversity on boards as economically relevant. Those who do care therefore presumably either have highly idiosyncratic views on the economic benefits or have some other agenda. My guess is that it's the latter.