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Is for-profit activity "inherently less civic-minded than not-for-profit endeavors"?

John McGinnis argues for answering "no" to the titular question and, in turn, argues that for-profit and not-for-profit entities should have the same rights "to participate in political and civic life." While I agree in general, his line of argument opens the door for the interpretation of Hobby Lobby that insists it opens the door to corporate social responsibility. (He writes, for example, that "an enterprise may aim to work for profit  but only while also advancing moral or religious objectives, as did Hobby Lobby.")

I deprecate that argument, as regular readers know.

Wang on using mail and wire fraud against insider trading

Leading insider trading expert William Wang has a very timely post up at the Blue Sky Blog reminding us of the potential uses of mail and wire fraud in insider trading prosecutions and how they can fill the gaps in insider trading law under Rule 10b-5. (I leave to another day whether that's a good thing.)

Donatiello and Pitt Propose "Protecting Shareholders From Activist Proxies"

Actually, the WSJ headline is somewhat misleading. What Donatiello and Pitt actually address in their provocative op-ed is the influence of proxy advisory services ISS and Glass Lewis. They argue that:

Voting decisions are often effectively controlled by proxy advisory firms—namely, Institutional Shareholder Services and Glass Lewis. There is considerable evidence that a “no” recommendation from such firms translates into about a 30% “no” vote by institutional shareholders. ...

While proxy advisory firms claim they merely advise and do not make voting decisions, their influence is unmistakable.

Donatiello and Pitt find that influence worrisome (as do I):

Proxy advisory firms have no financial interest in shareholder votes. They rarely understand the companies on which they report, their competitive situations or their strategic challenges. They use opaque processes, and they often solicit consulting fees from the same companies on whose issues they advise, without disclosing specific arrangements. Most important, proxy advisory firms claim no duty to the shareholders whose votes they effectively control. ...

The decoupling of proxy voting from the investment process, and in many cases from investor interests, might be less troublesome if it increased shareholder value, but it doesn’t. Research from 2009, also conducted by Stanford’s Rock Center, found that governance ratings by proxy advisory firms have no ability to predict future performance, and that their proxy voting policies are negatively correlated with shareholder value. Proxy advisory firms have offered no research showing that their recommendations do enhance shareholder value.

It's long since time that the government (especially the SEC but also the Department of Labor in its oversight of ERISA plans) reconsider the policies that encourage reliance on proxy advisory services. It's also long since time that the SEC start regulating proxy advisory services, especially given the rampant conflicts of interest inherent in their current business model.

Related articles

JPM's Dimon: 'Irresponsible' for Investors to Vote Solely on Proxy Adviser Recommendations

Dimon vs. 'Lazy' Investors

Critiquing Canadian Proxy Advisers

The WSJ pans proxy advisory services ISS and Glass Lewis

In an editorial, the WSJ today opined that proxy advisory services "have enjoyed far too much influence over companies they don’t own and been subject to far too little scrutiny given their potential conflicts of interest."

Gross rent seeking by LA labor unions

The LA Times reports:

Labor leaders, who were among the strongest supporters of the citywide minimum wage increase approved last week by the Los Angeles City Council, are advocating last-minute changes to the law that could create an exemption for companies with unionized workforces. ...

For much of the past eight months, labor activists have argued against special considerations for business owners, such as restaurateurs, who said they would have trouble complying with the mandated pay increase. ...

"I'd refer everyone back to the statements of labor leaders over the past seven months that no one deserves a sub-minimum wage," said Ruben Gonzalez, senior vice president for public policy and political affairs with the Los Angeles Area Chamber of Commerce, which opposed the minimum wage increase passed by the City Council.

So it turns out that the bill is going to be a massive boon for the unions. It raises costs (by a lot) for non-unionized employers. It keeps costs low for unionized employers. By making unionized employers more competitive, it helps grow their work forces, increasing the number of union members paying dues that support inflated union leadership salaries and perks. At the same time, by making non-unionized employers less competitive, it gives them an incentive to cave into organizing campaigns.

In theory, unions are a good thing. In practice, however, they're mostly an economic grag.

So remember this event the next time the unions and their liberal allies tell you how socially beneficial unions are.

How shareholder activism hurts the US economy

From today's WSJ:

U.S. businesses, feeling heat from activist investors, are slashing long-term spending and returning billions of dollars to shareholders, a fundamental shift in the way they are deploying capital.

Data show a broad array of companies have been plowing more cash into dividends and stock buybacks, while spending less on investments such as new factories and research and development.

The Journal lays much of the blame at the feet of activist investors:

An analysis conducted for The Wall Street Journal by S&P Capital IQ shows that companies in the S&P 500 index sharply increased their spending on dividends and buybacks to a median 36% of operating cash flow in 2013, from 18% in 2003. Over that same decade, those companies cut spending on plants and equipment to 29% of operating cash flow, from 33% in 2003.

At S&P 500 companies targeted by activists, the spending cuts were more dramatic. Targeted companies reduced capital expenditures in the five years after activists bought their shares to 29% of operating cash flow, from 42% the year before, the Capital IQ analysis shows. Those companies boosted spending on dividends and buybacks to 37% of operating cash flow in the first year after being approached, from 22% in the year before.

David McCullough's The Wright Brothers

I just finished the Wright Brothers, which I enjoyed, even though I don't think it's one of McCullough's best books. My main criticisms? The treatment of the events of December 1903 get relatively short shrift, especially compared to the elongated discussions of the Wright Brothers' adventures in France. Mainly, however, he provides almost no information about the patent lawsuits that preoccupied Wilbur until he died. I learned more about them from Wikipedia. Still, it's a good and fast read.

"Some Key Things U.S. Entrepreneurs Need to Know About the Law and Lawyers"

I recommend Trautman, Lawrence J. and Luppino, Anthony J. and Simmons, Malika, Some Key Things U.S. Entrepreneurs Need to Know About the Law and Lawyers (May 15, 2015). Available at SSRN: http://ssrn.com/abstract=2606808:

New business formation is a powerful economic engine that creates jobs. Diverse legal issues are encountered as a start-up entity approaches formation, initial capitalization and fundraising, arrangements with employees and independent contractors, and relationships with other third parties.  

The endeavors of a typical start-up in the United States will likely implicate many of the following areas of law: intellectual property; business organizations; tax laws; employment and labor laws; securities regulation; contracts and licensing agreements; commercial sales; debtor-creditor relations; real estate law; health and safety laws/codes; permits and licenses; environmental protection; industry specific regulatory laws and approval processes; tort/personal injury, products liability, and insurance laws; antitrust and other unfair competition laws; import/export laws; immigration laws; laws related to the internet, privacy and e-commerce; and possibly many other federal, state and/or local laws, and perhaps even international laws. Company founders need to develop familiarity with the effects of such laws and need to access qualified legal talent to address legal issues in the planning and implementation of their venture. This article is designed to provide entrepreneurs with an overview of several areas of law that commonly arise in for-profit start-up ventures and offer them some important tips on working with lawyers.

But not quite as highly as I recommend Mark McCormack's The Terrible Truth About Lawyers: How Lawyers Really Work and How to Deal With Them Successfully:

Publisher's Weekly said: "Lawyers labor inside "a wall of molasses," says McCormack (What They Don't Teach You at Harvard Business School) referring to the American system of jurisprudence and, as a result, their clients are often penalized in terms of time and cost. Proffering axiomatic, freewheeling advice, McCormack formulates action plans that will put clients on a more equal footing with their lawyers. How to cut through long-winded legalese and promote the expeditious settlement of contracts, divorces, real estate closings and other fee-bearing legal necessitiesand when not to take the legal routeis the main thrust of this primer for clients. McCormack, graduate of Yale Law School and founder of International Management Group, speaks with authority and conviction, cites cases and aims his arrows at the legal establishment in a good-humored way. Required reading before engaging a lawyer."

It's a book every business person -- and every business lawyer -- should read.

Remembering my dad on Memorial Day

Comparing EU and USA regulation of "insider" trading by "outsiders"

Gilotta, Sergio, The Regulation of Outsider Trading in EU and the US (May 15, 2015). Available at SSRN: http://ssrn.com/abstract=2605792

This paper examines the regulation of outsider trading in EU and the US, highlighting the differences between the two legal systems and investigating the main implications of the different regulatory choices made in the two jurisdictions. Outsider trading can be defined as the sale or purchase of listed securities on the basis of material nonpublic information by individuals who do not qualify as “insiders”. While US law leaves considerable room to outsider trading, EU law unconditionally prohibits it. Constraining outsiders’ exploitation of material nonpublic information has a sound efficiency-grounded justification, but an unconditional ban on all informed trading by outsiders appears harmful: it hinders investors’ incentives in ferreting out new information, decreasing market efficiency and increasing agency costs of publicly traded firms. US law, with its selective limitation of outsider trading, appears largely immune from these consequences. EU law, to the contrary, has the potential to carry on such drawbacks.

Critiquing Canadian Proxy Advisers

Tingle, Bryce C., Bad Company! The Assumptions Behind Proxy Advisors' Voting Recommendations (May 11, 2015). Dalhousie Law Journal, Vol. 37, No. 2 (Fall 2014) . Available at SSRN: http://ssrn.com/abstract=2605275

 

The corporate governance challenge for Canada is to improve the quality of its corporate performance, which has been declining relative to its international peers for decades. This is quite different from the usual assumption that corporate governance is primarily a matter of controlling managerial self-dealing. While important, board monitoring of management is only one aspect of its role in a corporation; research suggests corporate governance arrangements have a significant impact on corporate outcomes, particularly in areas such as innovation where Canada lags.

Third-party proxy advisory firms, which provide advice to institutional investors in Canada on corporate governance matters, have grown in influence over the past decade. As securities regulators consider whether (and how) to treat them, an examination of the assumptions that underlie these advisors’ voting recommendations, and the influence these assumptions have on corporate decision-making, suggest these assumptions create perverse governance incentives and are contradicted by empirical research.

Dupont shareholders vote for management, Dupont investors dump stock. Huh?

Marc Kodak offers an explanation.

Delaware Chancery Court throws plaintiffs' bar a huge chunk of raw meat

Steve Bradford:

The Chancery Court just entered its order awarding plaintiffs' counsel, Jones Day, $2 million dollars in attorneys' fees and expenses. That's right, the attorneys get $2 million even though, as the Vice Chancellor notes, "the quantifiable benefit obtained in this litigation was $0." Thus, the defendants have to pay $2 million to counsel for helping the court determine that nothing they did harmed the corporation or its shareholders.

It could have been worse; plaintiffs' counsel asked for $11 million.

I'm afraid that this opinion will give plaintiffs' attorneys an incentive to search for problems with the process in conflict-of-interest cases just so they can get in on the Nine-Systems action and collect attorneys' fees. No harm to the corporation? No problem!

The only thing that makes sense is that Chancery is trying to drum up some business and bring corporate law litigation back to Delaware.

Evidence for political targeting of Republicans by shareholder activists

Interesting new study:

Corporate political activity has become one of shareholders' top concerns. We examine whether firms targeted by shareholder proposals show different campaign contributions and lobbying activities compared to non-targeted firms. We also ask whether different sponsors of shareholder proposals target different firms depending on the firms' partisan orientation. Using data on S&P 500 companies during the period between 2007 and 2013, we find that firms that spend more on campaign contributions and lobbying are more likely to be targeted by shareholder proposals. After controlling for firms' financial performance, governance characteristics and ownership structure, we also find that public pension funds and labor unions sponsors are more likely to target Republican-leaning firms, measured by the firms' campaign contributions. This finding suggests that increasing corporate political activity can intensify a tension between management and public pension fund and labor union shareholders and lead to more activism by these shareholders.

Min, Geeyoung and You, Hye Young, Active Firms and Active Shareholders: Corporate Political Activity and Shareholder Proposals (April 30, 2015). Virginia Law and Economics Research Paper No. 15; Virginia Public Law and Legal Theory Research Paper No. 28. Available at SSRN: http://ssrn.com/abstract=2601181

My longstanding conviction that state and local government and union pension funds were using shareholder activism to advance a liberal political agenda appears to be validated, at least in part.

Foxen Ernesto Wickenden Vineyard Chenin Blanc (Santa Maria Valley) 2012

For dinner tonight I made Tyler Florence's Grilled Shrimp with Mango, Lime and Radish Salsa (cutting it by half). To make it into a main course salad, I added a package of Annie Chun's Rice Express Sprouted Brown Rice. I also omitted the chili powder, replacing it with half of a seeded and finely diced jalapeño pepper. Since the porch was sopping from our recent rains, I grilled the shrimp indoors using my trusty Cuisinart Griddler. Yum.

To go with this sort of light but spicy meal, I wanted a dry, fairly acidic, low oak white wine. The Foxen Chenin Blanc was a great choice. A lovely, clean bouquet dominated by apples and lemons. On the palate, it was crisp with bright acidity, clean, and suggestive of apples, pears, flint, lemons, and melon. Grade: B+

Recommended combination.