Tagged: Corporate Law

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Director Bonuses for Performance, Prawf Debate and the Bigger Picture for Hess

A hot debate rages among corporate law professors amid one of the largest proxy battles in a decade: Hess Corp., the $20 billion oil giant, is the focus of a contest between its longstanding incumbent management and the activist shareholder Elliott Associates.   Ahead of Hess’s annual meeting on May 16, where 1/3 of the seats on Hess’s staggered board are up, antagonists offer dueling business visions.  They battle bitterly over such fundamentals as sectors to pursue, degrees of integration to have and cash dividend policy.

The professorial debate, more civil, is about a novel pay plan Elliott proposes for its director nominees, which Hess’s incumbents condemn and Elliott defends as suited to shareholders. On one side, all quoted in Elliott’s investor materials circulated April 16, are meLarry Hammermesh (Widener), Todd Henderson (Chicago), Yair Listoken (Yale) and Randall Thomas (Vanderbilt); on the other  Steve Bainbridge (UCLA), Jack Coffee (Columbia) and Usha Rodriques (Georgia), all of whom have blogged since the matter was first reported by Steven Davidoff (Ohio State) in the New York Times April 2 (for which he connected with me for comment).

As in all such cases, Elliott proposes to pay nominees a flat fee of $50,000 each for their troubles and to indemnify them for legal liability.  The novelty is that Elliott will provide incentive compensation to the group: if any Elliott nominee is elected as a result of this year’s  contest, all nominees receive a bonus at the end of three years if Hess’s stock performs better than a group of industry peers. Elliott, not Hess, pays all bonuses.

Hess incumbents portray the bonuses as objectionable (and Steve, Jack and Usha agree). Incumbents say they give nominees incentives to maximize short-term shareholder value rather than serve as long-term stewards.   They say the pay somehow makes the directors beholden only to Elliott, preventing the exercise of business judgment for the benefit of the corporation and its shareholders as a whole.

I have taken a different view, set out in Elliott’s materials last month (p. 148):  The bonuses seem surgically tailored to tie the payoff to Hess’s stock price performance compared to competitors. That is intended to align the interests of those directors with those of the company’s shareholders.  Elliott makes the promise at the outset and then has no role to play afterwards, other than to pay up if milestones are met.  No one is beholden to Elliott and the independence of those directors is not compromised.  There is no incentive to liquidate the company or concentrate on the short term but every incentive to manage to outperform peer company stock price performance over three years.

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Has the Obama Justice Department Reinvigorated Antitrust Enforcement?

Stanford Law Review

The Stanford Law Review Online has just published an Essay by Daniel Crane entitled Has the Obama Justice Department Reinvigorated Antitrust Enforcement?. Professor Crane assesses antitrust enforcement in the Obama and Bush administrations using several empirical measures:

The Justice Department’s recently filed antitrust case against Apple and several major book publishers over e-book pricing, which comes on the heels of the Justice Department’s successful challenge to the proposed merger of AT&T and T-Mobile, has contributed to the perception that the Obama Administration is reinvigorating antitrust enforcement from its recent stupor. As a candidate for President, then-Senator Obama criticized the Bush Administration as having the “weakest record of antitrust enforcement of any administration in the last half century” and vowed to step up enforcement. Early in the Obama Administration, Justice Department officials furthered this perception by withdrawing the Bush Administration’s report on monopolization offenses and suggesting that the fault for the financial crisis might lie at the feet of lax antitrust enforcement. Even before the AT&T and Apple cases, media reports frequently suggested that antitrust enforcement is significantly tougher under President Obama.

For better or worse, the Administration’s enforcement record does not bear out this impression. With only a few exceptions, current enforcement looks much like enforcement under the Bush Administration. Antitrust enforcement in the modern era is a technical and technocratic enterprise. Although there will be tweaks at the margin from administration to administration, the core of antitrust enforcement has been practiced in a relatively nonideological and nonpartisan way over the last several decades.

He concludes:

Two points stressed earlier should be stressed again: (1) statistical measures of antitrust enforcement are an incomplete way of understanding the overall level of enforcement; and (2) to say that the Obama Administration’s record of enforcement is not materially different than the Bush Administration’s is not to chide Obama for weak enforcement. Rather, it is to debunk the claims that antitrust enforcement is strongly dependent on politics.

This examination of the “reinvigoration” claim should not be understood as acceptance that tougher antitrust enforcement is always better. Certainly, there have been occasions when an administration would be wise to ease off the gas pedal. At present, however, there is a high degree of continuity from one administration to the next.

Read the full article, Has the Obama Justice Department Reinvigorated Antitrust Enforcement? by Daniel Crane, at the Stanford Law Review Online.

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Where Have All of the Storefronts Gone?

Have you noticed the number of empty storefronts around? (For a list of recent store closings, see here.) Business failure unfortunately is part of an economic recession, but it also follows changes in consumer patterns and market demands. Although studies debate the advantages of online versus brick and mortar stores (see herehere and here), consumers are increasingly more comfortable shopping online. Increased security and user-friendly return policies (not to mention all of those free shipping deals) appear to be fostering that trend.

Online or virtual stores also have a very different business model and cost structure (see, e.g., here). A small workforce in one location can service all of a company’s online customers. Compare that model with the brick and mortar model where a company operating in more than one location needs, at a minimum, to own or lease property in each location, pay maintenance and taxes for each facility, retain employees at each facility and comply with the law of each jurisdiction.  (For interesting comparisons, see here, here and here.) Accordingly, brick and mortar stores are relying to some extent on certain intangibles—e.g., consumers wanting to touch and see what they are buying, wanting personal service, etc.—to offset these additional costs.

So is it the economy, the changing market or (as is likely) some combination of factors causing companies like Blockbuster, Borders and Harry and David’s to struggle? (For my prior post related to Borders’ financial challenges, see here.) And if it is the latter, will traditional brick and mortar retail stores make a strong comeback when the economy recovers? I am not so sure. I think we may see more retail bankruptcies end like Circuit City’s case—i.e., Circuit City’s core business continues, as does the use of its name, but only in an online form (and under new ownership; see here). Although I appreciate the efficiencies of this model for both the company and the consumer, I do not think it is necessarily the best trend for us as communities and neighbors. As the commercial says, having a face-to-face conversation with a salesperson about your product questions: “priceless.”

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The Great Sport of Entrepreneurship

Being a huge sports fan and a corporate law geek, I have truly enjoyed the attention garnered by the Green Bay Packers’ ownership structure in the build up to the Super Bowl (see, e.g., here). The success of the Packers’ non-profit, fan-owner structure raises several interesting questions (see here). That structure also is a refreshing departure from the commercialization of the sports industry generally.

Nevertheless, the Packers’ appearance in Super Bowl XLV also highlights opportunity for innovation and small business profit in the sports context. Indeed, the infamous cheesehead hats were created by a Wisconsin sports fan on his way to a Brewers’ game (see here). Talk about innovation—he apparently ripped the foam from his couch and painted it orange. Before he knew it, he owned and operated a small foam-manufacturing company that caters to Wisconsin sports fans’ every need.

Interestingly, the cheesehead hat entrepreneur is not alone. There is an entire cottage industry of sports entrepreneurs who seek to profit from the loyalty of sports fans everywhere (see, e.g., here and here). And these are not just the high-profile athletes turned entrepreneurs. These are ordinary people with unique or innovative ideas. Take those sports entrepreneurs who are operating online sports stock exchanges (see, e.g., here). I suspect that Aaron Rodgers’ stock price is at an all-time high at the moment.

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The Very Active Activist Investors

Activist investors have been very busy in recent months, both in the U.S. (see here, here and here) and elsewhere. Among other things, Bill Ackman, through Pershing Square Capital Management, obtained seats on the board of J.C. Penney and was named Chairman of Howard Hughes Corp.—the spinoff of General Growth Properties. Ackman invested in both the equity and debt of General Growth Properties shortly before its chapter 11 bankruptcy filing and, by many accounts, hit a home run on this particular investment. The governance structure of the resulting company, Howard Hughes Corp. (which is reportedly named for the former filmmaker/entrepreneur), also is very interesting. According to Ackman, “it’s a company you can buy stock in. You can throw out the board. The board is elected annually. You can call a shareholder meeting with 15 percent of the vote…so, you know, you can get me back.” So is this a sign of things to come?

Many predict a very active proxy season for activist shareholders and the companies they target. (For an explanation of this trend, see here.) Commentators also suggest the activist agenda likely will include “proliferation of majority voting for directors from the larger public companies to mid-size and smaller companies (which we believe will see the largest number of proposals), separation of the offices of Chairman of the Board and CEO, 10 percent or lower thresholds for shareholders to call special meetings and enabling shareholders to act by majority written consent.” This agenda includes governance features that are similar to those ascribed to Howard Hughes Corp., but Ackman was able to achieve that structure without a proxy fight. Ackman, like a growing number of activists, turned to the chapter 11 bankruptcy process to win control and implement a specific governance agenda.  (For an explanation of this loan-to-own strategy, see here.)

Activist distressed debt investors recently acquired ownership and control of companies like Lear Corp., Philadelphia Newspapers, Reader’s Digest, Six Flags and Tropicana Casino & Resorts through chapter 11. Certainly, not all activist distressed debt investors are focused on governance changes, and the value added by their activism is subject to debate. And interestingly, much of their activism goes unnoticed, unlike their shareholder counterparts. So will these debtholder activists follow Howard Hughes Corp.’s lead and implement investor-friendly governance policies? Will these policies truly enhance enterprise value? These important questions—related to both shareholder and debtholder activism—will only be answered with time and performance results, but create many issues for corporate boards and governance scholars to consider in the interim.

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Creating Corporate Culture Through Comedy?

As I was preparing to fly home from a conference yesterday, I was watching msnbc’s Your Business, which was profiling a small business that uses comedy to create a positive corporate culture. The company, Peppercom (a public relations firm), employs a comedy coach to work with its employees not so much to help employees tell good jokes but to build confidence and communication skills. Although this approach may not work for every business, Peppercom apparently has landed several large accounts based on its approach to business and the personality of the firm and its employees. (For an example of using comedy to discuss corporate ethics with employees, see here.)

I have to admit that I initially thought the msnbc segment was entertaining but not really applicable to the larger business community. I then boarded my Southwest Airlines’ flight and, along with the other passengers, was serenaded by one of the flight attendants who actually got most of the people on the flight to join her in the chorus of “Rolling Down the Runway” (adapted from John Fogerty’s “Proud Mary”). This experience made me reflect further on the importance of corporate culture to the overall productivity of a firm (see here and here) and the tools available to cultivate that culture.

I have previously written about corporate culture and “tone at the top” in the context of enterprise risk management (see here and here), but certainly the benefits of a positive corporate culture do not end there. Employing a workforce that enjoys coming to work, is comfortable communicating throughout the firm and portrays that positive image to the outside world potentially holds real value. (For interesting discussions of corporate culture at AIG and Lehman Brothers prior to the crisis, see here, here, here and here.) I think the challenge in this broader context, as in the enterprise risk management context, is finding the right people to foster that culture. Policymakers can impose incentives and perhaps even a process designed to promote a positive, ethical and risk aware culture at any given company, but those regulations only go so far. The people leading the company must be committed to the endeavor and the implementation of that culture—checking the box or adopting an ethical code or employee handbook is not enough.

This notion of good corporate governance being tied to the individuals serving on boards of directors and management teams was one of the issues explored during the conference I was attending. That conference, hosted by the Adolf A. Berle, Jr. Center on Corporations, Law and Society at the Seattle University School of Law, was a wonderful collection of corporate scholars from various disciplines discussing the issues we continue to face in corporate governance generally and how Adolf Berle’s work informs that discussion. I am not sure we uncovered any definitive answers, but I certainly am encouraged by the discourse and energized to continue the pursuit.

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Let the Good Times Roll

The PR departments of the Big 3 automakers are working overtime. With the public opening of the North American International Auto Show just days away, Ford, General Motors and Chrysler released financial results showing a significant increase in sales in 2010 and promising outlooks for 2011. And the flurry of news coverage certainly has a different feel than the doom and gloom of the coverage just two years ago (see, e.g., here).

Why the difference? Is the economic recovery helping the Big 3? Is chapter 11 bankruptcy the reason for the apparent rebirth of General Motors and Chrysler? If so, what explains Ford’s current success (for some interesting perspectives on this, see here and here)?

Many commentators have analyzed the General Motors and Chrysler bankruptcy cases, and they thoughtfully dissect what was novel, not so novel and somewhat troubling about those cases (see, e.g., here, here and here). It is difficult to assess exactly what role chapter 11 played in General Motors’ and Chrysler’s recoveries, other than to state the obvious that both companies used the process to reduce overhead and balance sheet liabilities significantly. That certainly can provide new life to a company; the question then becomes what the company does with the opportunity.

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Creative Reconstruction

In my opening post, I referenced the slow pace of change and how it can be exceedingly painful for individual consumers. I want to follow up on that concept in the business context, where slow change—or the failure to change at all—can be fatal.

Consider, for example, Borders, which recently announced that it was suspending payments to vendors and trying to refinance its debt obligations (see here and here). Borders, like its competitor Barnes & Noble, is struggling to compete with big box retailers that offer steep discounts on traditional books and the growing popularity of e-Books (see here, here and here). Also like many retailers, Borders was hit hard by the economic recession (see here).

Some may say that Borders is a victim of the recession and creative destruction. And that may, in part, be accurate. (For interesting perspectives on the utility of recessions and creative destruction, see here and here.) But anyone who follows the retail industry or is an avid reader had some sense that this was coming (see here, here and here). So why didn’t Borders’ management? Or rather, why didn’t they react more quickly to the changing market and economy?

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Mad Glee-actica: The Virtues of Extreme Recycling

I don’t watch much TV.  So, I am hardly the person to make strong claims about its quality or trends.  That said, I find it fascinating that three of the best shows of the past few years—Battlestar Galactica, Madmen, and Glee—share a really odd structural feature:  They have all taken ridiculously bad ideas from cringe-able eras and turned them around completely, made them not only fresh, but evocative, disturbing, intriguing.

Where's the goo?

They are, in short, evidence of the virtues of extreme recycling.

Just imagine the pitch meeting for Galactica:  We’ll take what has to have been one of the dumbest pop-culture packing peanuts ever and make it stronger, faster, better:  How about an allegory about civil liberties and faith after 9/11 using Cylons and vats of goo?

Or what about Madmen:  Let’s explore the most virulent cancers on our culture with lovingly pornographic attention to detail, to demonstrate the complex symbiosis among banality, beauty, evil and exculpation.  Madmen is the money shot of commodity fetishism, proving once again the truth of Chomsky’s admonition that if you want to learn what’s wrong with capitalism, don’t read The Nation, read the Wall Street Journal.

And Glee?  Well, all I can say is:  Don’t Stop Believing.

Which may lead you to this question:  No one really takes the “and everything else” part of CoOps’s desktop mantra seriously, so what the frak does this have to do with law? Read More

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Encouraging Sustainable Business

Sustainability, according to the Brundtland Report, entails “meeting the needs of the present without compromising the ability of future generations to meet their own needs.”  Businesses can act sustainably by treading lightly on the planet, and by developing products, services, and technologies that contribute to larger societal efforts to live more sustainably.  The business literature describes this as focusing on the “triple bottom line”: how the company is doing financially, how the company is doing environmentally, and how the company is doing socially.  Thus, sustainable businesses are managed with an eye toward profit, people, and the planet.

If corporate law permits but does not require firms to act sustainably, how can we encourage corporations to be more sustainable?  Corporate law reform is one possibility, although I am skeptical whether either Congress or the Delaware legislature would force sustainability on corporations.  Tax incentives are more likely, and the forthcoming Senate climate change legislation may well include carbon taxes or a cap and trade system that would increase corporate attention to the environment.  The recent SEC guidance on climate change reporting likewise encourages, but does not force, corporations to act more sustainably, and while many companies currently voluntarily engage in triple bottom line reporting, I doubt the SEC would go there any time soon.

The market, for its part, seems to encourage sustainable business practices; energy and resource efficiency are two areas typically ripe for cutting costs, and consumers will often pay more for sustainable goods and services.  One interesting trend along these lines is private certification labels that highlight, for consumers mostly, firms’ sustainability commitments.  The B Corporation certification and mark is one popular example of this: a firm qualifies according to the organization’s sustainability survey, inserts sustainability language in its corporate charter, and pays a modest fee in exchange for use of the B Corporation mark.  (LEED building certifications and the Forest Stewardship Council offer similar examples, and I’ve developed a public law version for state legislatures to consider.)  We shall see whether this trend continues to catch on and what other innovations develop to encourage sustainable business.