Category Archives: Corporate Governance

Blacklisted Businesses: Social Activists’ Challenges and the Disruption of Corporate Political Activity

Source: Mary-Hunter McDonnell, Timothy Werner, Administrative Science Quarterly, vol. 61 no. 4, December 2016
(subscription required)

From the abstract:
This paper explores whether and how social activists’ challenges affect politicians’ willingness to associate with targeted firms. We study the effect of public protest on corporate political activity using a unique database that allows us to analyze empirically the impact of social movement boycotts on three proxies for associations with political stakeholders: the proportion of campaign contributions that are rejected, the number of times a firm is invited to give testimony in congressional hearings, and the number of government procurement contracts awarded to a firm. We show that boycotts lead to significant increases in the proportion of refunded contributions, as well as decreases in invited congressional appearances and awarded government contracts. These results highlight the importance of considering how a firm’s sociopolitical environment shapes the receptivity of critical non-market stakeholders. We supplement this analysis by drawing from social movement theory to extrapolate and test three key mechanisms that moderate the extent to which activists’ challenges effectively disrupt corporate political activity: the media attention a boycott attracts, the political salience of the contested issue, and the status of the targeted firm.

Why companies like Wells Fargo ignore their whistleblowers – at their peril

Source: Elizabeth C. Tippett, The Conversation, October 24, 2016

Enron. Worldcom. The Madoff scandal. The mortgage meltdown. Now Wells Fargo.

High-profile corporate frauds like these all seem to follow the same pattern. First the misconduct is discovered, and then we learn about all of the whistleblowers who tried to stop the fraud much earlier. Congress then tries to enhance whistleblower protections, with varying success.

The Sarbanes-Oxley Act, passed in 2002 after the Enron and Worlcom scandals, was supposed to protect whistleblowers who uncovered accounting frauds, but judges typically rejected their retaliation claims. The Dodd Frank Act, approved in 2010, provides financial rewards for certain whistleblowers. Its success is still unclear.

While these laws may protect employees who expose wrongdoing from retaliation and encourage more to do the same, nothing requires employers to take their disclosures seriously. And as we saw with the latest scandal involving Wells Fargo, several former employees say they tried to get the company’s attention in 2005 and 2006, to no avail….

Offshore Shell Games 2016: The Use of Offshore Tax Havens by Fortune 500 Companies

Source: Richard Phillips, Matt Gardner, Kayla Kitson, Alexandria Robins, Michelle Surka, Citizens for Tax Justice, Institute on Taxation and Economic Policy, U.S. PIRG Education Fund, October 2016

From the summary:
U.S.-based multinational corporations are allowed to play by a different set of rules than small and domestic businesses or individuals when it comes to paying taxes. Corporate lobbyists and their congressional allies have riddled the U.S. tax code with loopholes and exceptions that enable tax attorneys and corporate accountants to book U.S. earned profits to subsidiaries located in offshore tax haven countries with minimal or no taxes. The most transparent and galling aspect of this is that often, a company’s operational presence in a tax haven may be nothing more than a mailbox. Overall, multinational corporations use tax havens to avoid an estimated $100 billion in federal income taxes each year.

But corporate tax avoidance is not inevitable. Congress could act tomorrow to shut down tax haven abuse by revoking laws that enable and incentivize the practice of shifting money into offshore tax havens. By failing to take action, the default is that our elected officials tacitly approve the fact that when corporations don’t pay what they owe, ordinary Americans inevitably must make up the difference. In other words, every dollar in taxes that corporations avoid must be balanced by higher taxes on individuals, cuts to public investments and services, and increased federal debt.

This study explores how in 2015 Fortune 500 companies used tax haven subsidiaries to avoid paying taxes on much of their income. It reveals that tax haven use is now standard practice among the Fortune 500 and that a handful of the country’s wealthiest corporations benefit the most from this tax avoidance scheme.

The main findings of this report are:
– Most of America’s largest corporations maintain subsidiaries in offshore tax havens. At least 367 companies, or 73 percent of the Fortune 500, operate one or more subsidiaries in tax haven countries. ….

– The most popular tax haven among the Fortune 500 is the Netherlands, with more than half of the Fortune 500 reporting at least one subsidiary there. ….

– Approximately 58 percent of companies with tax haven subsidiaries have set up at least one in Bermuda or the Cayman Islands — two particularly notorious tax havens. ….

– Fortune 500 companies are holding nearly $2.5 trillion in accumulated profits offshore for tax purposes. Just 30 Fortune 500 companies account for 66 percent or $1.65 trillion of these offshore profits. ….

– If we assume that average tax rate of 6.2 percent applies to all 298 Fortune 500 companies with offshore earnings, they would owe a 28.8 percent rate upon repatriation of these earnings, meaning they would collectively owe $717.8 billion in additional federal taxes if the money were repatriated at once. Some of the worst offenders include: Apple, Citigroup, Nike ….

– Some companies that report a significant amount of money offshore maintain hundreds of subsidiaries in tax havens, including the following: Pfizer, PepsiCo, Goldman Sachs ….

– The proliferation of tax haven abuse is exacerbated by lax reporting laws that allow corporations to dictate how, when, and where they disclose foreign subsidiaries, allowing them to continue to take advantage of tax loopholes without attracting governmental or public scrutiny. ….

– Congress can and should take action to prevent corporations from using offshore tax havens, which in turn would restore basic fairness to the tax system, fund valuable public programs, possibly reduce annual deficits, and ultimately improve the functioning of markets. ….

The “Good Work Code” Greed-Washing the On-Demand Economy?

Source: Jay Youngdahl, New Labor Forum, Vol. 25 no. 3, September 2016
(subscription required)

Readers of New Labor Forum are familiar with the depleted state of America’s unions, workers’ depressed living standards, as well as of the emergence of responsive ideas, strategies, and struggles. The current ferment will surely lead to successes, but in the process, a number of counterproductive strategies are emerging.

Although led by smart, empathetic activists, one of the oddest and most problematic of the new efforts is the Good Work Code (GWC or the Code) for the on-demand or “gig” economy, formulated by the National Domestic Workers Association (NDWA). While the Teamsters and the Service Employees International Union (SEIU), in particular, are engaged in unionizing strategies in the tech sector, and enterprising wage and hour lawyers are confronting the sector’s wage theft, the NDWA, working with a number of corporate partners such as the Uber-like delivery company DoorDash, has created an aspirational code for tech-sector employers.

An analysis of the GWC is a lesson in the problematic nature of a number of trends in the Philanthropic Labor Movement (PLM). Unfortunately, within the non-profits in the foundation-funded PLM, worker agency, power, and democracy, the bedrocks of a strong movement, are often hard to find…..

Who Pays for White-Collar Crime?

Source: Paul M. Healy, George Serafeim, Harvard Business School, June 29, 2016

From the abstract:     
Using a proprietary dataset of 667 companies around the world that experienced white-collar crime we investigate what drives punishment of perpetrators of crime. We find a significantly lower propensity to punish crime in our sample, where most crimes are not reported to the regulator, relative to samples in studies investigating punishment of perpetrators in cases investigated by U.S. regulatory authorities. Punishment severity is significantly lower for senior executives, for perpetrators of crimes that do not directly steal from the company and at smaller companies. While economic reasons could explain these associations we show that gender and frequency of crimes moderate the relation between punishment severity and seniority. Male senior executives and senior executives in organizations with widespread crime are treated more leniently compared to senior female perpetrators or compared to senior perpetrators in organizations with isolated cases of crime. These results suggest that agency problems could partly explain punishment severity.

Informing Shareholders: Providing a Roadmap for the SEC to Act to Require Public Corporations to Disclose Political Spending

Source: William Alan Nelson II, George Washington University – Law School, Public Law Research Paper No. 2016-2, January 5, 2016

From the abstract:
The Supreme Court erred by not revisiting its holding in Citizens United v. Federal Election Commission (FEC). I made this argument in a previous article. The Supreme Court’s decision “removed the prohibition on corporate independent political expenditures, and allows corporations to spend unlimited sums from corporate treasuries to expressly advocate the election or defeat of a political candidate.” Unfortunately, my pleas to the high court went unanswered. However, the Securities Exchange Commission (SEC) has a chance to shine light on this issue by requiring public corporations to disclose to shareholders the use of corporate resources for political activities.

Disclosure of corporate political spending would ensure that directors adhere to their duties of full and fair disclosure to shareholders. Additionally, disclosure of corporate political spending would diminish monitoring costs by informing shareholders of harmful political spending and will provide potential investors with key information for making informed, rational investment decisions. Due to the misguided decision in Citizens United, it is legal for corporations to spend an unlimited amount of money on political issues; however, this Article submits that shareholders need to know about those expenditures and that if corporations truly believe their political spending benefits their bottom lines, they should not oppose disclosure of that spending.

The Article begins by discussing the original and amended petitions for rulemaking, including the reasoning behind them and the response received from shareholders and the community at large. The Article then transitions into an analysis of why the rule is both constitutional and within SEC’s jurisdiction; responds to opposition arguments alleging that a rule is not necessary; discusses the recent lawsuit filed to compel the SEC to promulgate a rule; and researches possible benefits and costs imposed by a mandatory disclosure obligation. The Article concludes by providing shareholders with options under the current regulatory regime to investigate corporations’ political spending, provides a model structure for SEC if and when they decide to initiate a rulemaking on this issue and provides a model for firms to establish programs to supervise corporate political spending.

Proxy Preview 2016

Source: Heidi Welsh, Michael Passoff, As You Sow, 2016

From the summary:
Shareholder activists have filed fewer resolutions in 2016 concerned solely with environmental and social issues at U.S. companies—a total of 370 as of February 15, down from the record 433 filed at this point last year and 417 in 2014. But when you add in the 72 sustainability resolutions from the New York City pension funds that ask for “proxy access” rights to enable large investors to easily nominate their own directors, the total is about where it has been for the last several years. (The resolutions are at companies that have high carbon footprints, low levels of board diversity and low investor support for executive pay.)

The Invisible Hand of Law: Private Regulation and the Rule of Law

Source: Joel Bakan, Cornell International Law Journal, Vol. 48 no. 2, Spring 2015

…Until the 1980s, and over the previous half century, law had served (albeit unevenly and incompletely) as the main institutional vehicle for policing corporations in aid of public interests, thereby protecting people, communities, and the environment from corporate excess and malfeasance. Over the course of the 1980s and thereafter, however, law’s protective role began to diminish, and privately promulgated voluntary regimes (hereinafter “private regulation”) emerged in its place.

Importantly, no such diminishment occurred in relation to law’s parallel and prominent role in protecting corporations and their interests. Here, state legal regimes continued to operate as robustly as ever; incorporate companies; establish their mandates; protect their rights as “persons”; shield their managers, directors, and shareholders from legal liability; compel their officers to prioritize their “best interests” (typically construed as increasing shareholder value); articulate and enforce their contract and property rights; and repress dissidents and protesters who opposed their growing power.

Corporations— indeed, corporate capitalism— could not exist without these legal foundations and supports, which taken together represent a massive infusion of state legal power into society. Despite that massive infusion, many private regulation advocates and commentators presume that globalization eviscerates state legal power, and prescribe, on that basis, that private regimes should take law’s place. This Article challenges that presumption and prescription. Following examination of the rise of private regulation in Part I, Part II reveals how private regulation advocacy and commentary often obscure, and effectively render invisible, law’s robust role in constituting and protecting corporations, thereby exaggerating globalization’s alleged diminishment of state legal power. Part III claims that private regulation weakens the rule of law and its democratic potential, with the effect, Part IV explains, of exacerbating corporate threats to public interests…..

Investigate – What are you invested in?

Source: American Friends Service Committee, 2015

This free investment screening tool is provided to help individuals and institutions identify companies on their investment portfolios that are directly complicit in ongoing severe violations of human rights and international law. These corporate violations have not been researched or reported by the investment community until recently, and the information provided is meant to encourage investors to make fully informed decisions as shareholders of these companies.

Securities Enforcement Empirical Database (SEED)

Source: New York University – Pollack Center for Law & Business and Cornerstone Research, 2015

From the press release:
The NYU Pollack Center for Law & Business, in partnership with Cornerstone Research, has announced the launch of the Securities Enforcement Empirical Database (SEED), located at SEED tracks and records information for US Securities and Exchange Commission (SEC) enforcement actions against public companies. With data on SEC actions filed since October 1, 2009, SEED offers insight into multiyear trends and priorities in federal securities enforcement.