When a Child Rules the Parent: The Problem of Corporate Domicile in a Global World

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A corporation is the creature of the state. There is no such thing as corporate Common Law. Each of the earliest corporations was literally created by specific statute, a condition which has been diluted over the last four centuries. The original social contract that made creation of corporations attractive was explicit: what business, what term, what invested capital. These corporations were created to serve human interests and they were tied inextricably to the interests of society.

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A True Tale About the True Cost of Coal

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When was the last time that there was so much buzz about coal. First, there was news that Stanford, one of the major university endowments in the country, was divesting from coal. More recently, the EPA announced new regulations on coal emissions. Both are very big and very interesting announcements. However, coal is entrenched in our utility grid and coal provides 50% of electricity in the United States and even 100% in some states. Divestment & even the new regulations won’t solve our problems with fossil fuels but there is a solution – Integrated Reporting.

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An Outsider's History of Harvard & Responsible Investment: 1970-2014

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In an effort to make sense of Harvard's investment practices and (apparent) unwillingness to be a leader in responsible investing, I have spent the past weeks looking at the history.  This forty-some-odd year span correspondes with my work in corporate governace so it seemed a good and handy timeframe for investigation.  Copies have been sent to various contacts at Harvard but I hope you'll read it and comment. Feel free to share it because the issues apply all university and charitable endowments.  An Outsider's History of Harvard & Responsible Investment: 1970-2014.

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Board Oversight of Sustainability

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There’s a lot of talk about sustainability in the business world these days but what does that mean and who makes decisions about sustainability? I have a new piece in the Corporate Governance Bulletin on just this issue. We found that, “relatively few firms indicate that directors are asked to evaluate the risks and opportunities posed to the business by sustainability issues.” That means either these issues are getting short shrift or they’re being addressed by management without board input.

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Obamacare — the question we really should be asking

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I remember how difficult it was to pass Medicare back in the sixties (see also). Now many consider this a basic government service meeting the needs of hundreds of thousands of citizens. The fact that Obama got any kind of healthcare billed passed when Lyndon Johnson couldn’t, Jack Kennedy couldn’t and Bill Clinton couldn’t is really something. Hillary Clinton put together a task force of the smartest people in the world and they got nowhere but Obama got something done. That, in itself, is an accomplishment.

There’s a troubling aspect to the Affordable Care Act that no one seems to be talking about (aside from the fact that some people think the ACA and Obamacare are two different things…). We have a habit in this country of assuming the profit-making entities can deliver a service better than the government and it’s become something of a religion in the last few decades. The idea, I suppose, is that you’re going to get a more efficient process if it’s done through the private sector. Maybe some think that it’s even going to save money. But, you have to consider the profit-making factor and the desire for profit never goes down. It never even really levels off. Both the consumer and the government are held hostage to corporations that want to make more and more money for providing basic, necessary services. In fact, privatization and government contracts take market forces out of the equation when a mandated government service is provided by corporations.

Just look at the deals states are cutting with for-profit prisons – guaranteed occupancy levels. That means they’re promising to pay for services even if crime levels go down and we have fewer prisoners. Not much incentive to cut crime there. So, the question we really should be asking is: just how will this play out in Obamacare?

Instead, the discussion – if you want to call it a discussion – is about how the badly the ACA launch has done. That’s news and boy do the anti-government types love it. To them, it’s proof-positive that government can’t work. But let’s be fair: these things almost never work right out of the box. Could they have done a bit more testing of the software – yes, and it’s hard to believe that with all of the computer expertise in this country they couldn’t have gotten some advice on this. Still, do the initial glitches mean that the ACA is a complete bust? No. So let’s hope we can get beyond these surface issues and address the real potential problems of corporations providing government-mandated services.

 

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Who picks up the tab when a corporation is fined?

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I can’t think of anybody who was satisfied with the way in which the consequences of the financial crisis of 2008 have been handled. There have been some indictments but always against very minor figures, and no prosecutions have been directed toward the major players in any of the large institutions.
 
Who takes responsibility?
This is in contrast to prior disasters in American history when we saw the Pujo Commission and later the Pecora Commission. Government then was determined to investigate what brought about the problems, find out who was at fault and then brought prosecution against those people. Nothing like this happened this time. Oh, there was the Financial Crisis Inquiry Commission but by the time they completed their investigation Congress had already taken what little action they were going to – which is to say nothing came of it. Senator Levin has probably made the best effort to address the root of the problems but Washington seems to have little interest in doing anything about them.
 
In the end, no one wants to bring a criminal case against a corporation. The memory of the Arthur Anderson case is still strong in people’s minds when thinking about this. The unintended consequences of criminal charges in that case led to one of the country’s largest and most prestigious accounting firms to go out of business. Except in the most extreme cases, it doesn’t do anyone any good to drive a company out of business, and so there has been an aversion to charging corporations with crimes.
 
Business as usual…
Take, for example, British Petroleum which is involved in an enormous amount of private liability on account of the spills in the Gulf, and in the case of BP, if they were found guilty of a crime they wouldn’t be eligible any longer to bid for drilling on U.S. government property. Well as a matter of national policy, do we really want to eliminate one of the major players to drill on government property? On the other hand, BP is a habitual offender and never seems to address the persistent problems that led to loss of life and environment disaster. But we haven’t figured out a way to deal with these issues as a country either. What’s the best way to address corporate crime and negligence without undermining our economy?
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Without addressing that question, we’ve allowed the situation to carry on in a sort of limbo so that corporations pay fines but don’t have to admit wrongdoing or change the way they do business. In fact, many corporations have enough cash reserves on hand that they factor in potential fines. Not only does the system have no teeth, it’s tantamount to a licensing scheme. 
 
Why doesn't the captain go down with the ship?
Little attention is paid to the people making the decisions at the head of the corporations. They alone are responsible for the (sometimes repeated) offenses, and yet the financial burden is borne by the shareholders. Bonuses and salaries are paid to top management regardless of company performance. Even when a CEO is fired, more often than not he or she has craftily arranged a golden parachute and walks away with a fortune. 
 
When the government imposes a fine, the intention is to reduce the book value of the stock which is to the detriment of the shareholders — and nobody else. They end up in the disagreeable position of having their cash reserves depleted and having been misled by executives. We see a vast discrepancy between salaries for corporate managers and their personal risk. We’re told that they warrant outrageous compensation because of the risks they take. What risks? No responsibility for corporate misdeeds or failure is carried by executives. Their contracts remove all personal and financial risk.  No, all financial burdens fall to the shareholders.
 
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What if…
So, here’s a question: Why shouldn’t fines be paid out of executive bonuses & board of director’s fee? Once that amount is met then any amount over and above could be paid out of shareholders’ equity. Obviously there would be consequences — I’m sure compensation consultants, lawyers and mangers would find a way to wrap that bonus money into regular salaries. For the time being, though, it would be an interesting and useful way of addressing a problem. I mean, if an executive knows he or she will be held personally, financially liable then wouldn’t they less likely to break the law? If a director knows there are ramifications wouldn’t they be more likely to take their oversight duties seriously?
 
Shareholders have no say in the day to day decisions of a company – and I don’t think they should. But why are they the ones who foot the bill for corporate malfeasance? Some of the so-called negligence or mistakes are barely disguised “business as usual” tactics exercised by executives.  We see this all across the corporate spectrum but it’s been especially notable in the pharmaceutical industry. For example, Abbot Industries paid a fine of over $1 billion last year for “for illegal marketing practices, including promoting prescription drugs for uses not approved by the FDA, paying financial inducements to increase sales and engaging in practices that pose grave danger to patients’ health and lives.”
 
Collecting fines out of executive bonuses could have two very desirable effects:  it would send a message to the management that this is not acceptable corporate behavior and they, as the decision makers, are responsible for fines; and that shareholders will not bear the financial burden of executive negligence or misdeeds. This could create an attention to obedience with law that is obviously lacking now.  
 
Corporate crime as a breach of fiduciary duty.
And, it would resolve a clear default of fiduciary duty. When executives repeatedly sanction corporate negligence or crime they leave shareholders to pick up the tab for the fines. How does that square with an obligation to provide shareholders with the best possible returns? All the recent talk about corporate need to pay no taxes or as few taxes as possible because they are obligated by fiduciary duty to shareholders is bunk. Corporations would be much closer to fulfilling fiduciary duty if they didn’t break laws and incur fines. If they’re looking to meet fiduciary obligations, they should follow this simple solution: don’t break the law and avoid paying fines with cash reserves. 
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Government Shutdown as Protest

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Does the government shutdown, as a form of protest, resemble Occupy Wall Street? The current state of government dominated by business has caused protest on both ends of the political spectrum in the U.S. – and cries out for public recognition that something is very, very wrong.
 
In chapter two of Citizens DisUnited, I write about the extent to which the corporate community has taken over the US government. In many ways, I see this as a driving factor for the faction that has brought about the government shutdown. This group in Congress represents people who have perceived the same things that I point out in my book, and they’re fed up with it. Citizen dissatisfaction with the Washington circus is at an all-time high and one sector of the population is in favor of – if not the shutdown, specifically – some action that addresses government spending that favors corporate interests. 
 
 The illicit union of commerce and government is unacceptable and this group, like the Occupy Wall Street movement, is protesting in the only way they can. The Congressmen realize that in standing up like this they are incurring every imaginable kind of enmity and blame, and from their point it is worthwhile – because they and their constituents see the Citizens DisUnited America as unacceptable. 
 
Look, the shutdown is creating a mess and we will all feel the repercussions the longer it continues. I may not agree with many things this group supports, but I think we have come to the same conclusion about corporate influence in Washington. The shutdown may be further undermining citizen confidence that any good comes out of DC – BUT, I think the citizens behind it are trying to stop government driven by the Chamber of Commerce from pushing us over the cliff.
 
And, of course, this is what business-dominated government does: It uses national credit to create business and profit for big corporations. The citizens who support the Republican faction feel that unchecked government spending and incurring of debt must be stopped. However, where this group goes wrong is when they try to shape the issues within right-wing party ideology. The issue of our national debt is not new – and the hysteria surrounding it is misplaced because George W. Bush slapped a couple of trillion dollars onto our liabilities and severely hampered our financial security. It didn’t begin with the Obama Administration and it didn’t begin with the Affordable Care Act. But, the insurance companies bought and paid for the Affordable Care Act – whether or not it helps people is a side issue. It was passed because the insurance executives supported it and because it’s a bonanza for the insurance industry. We didn’t get what the people wanted – we got what Wall Street wanted. In the end, both parties have been captured by corporate interests.
 
So, to my mind the citizens supporting the rogue Congressmen are similar to Occupy. They are both, in a sense doing something outside the norm, outside the system, something unexpected. They are trying to call people’s attention to the problem — they won’t succeed but they could use this opportunity to call peoples’ attention to the problem. Unfortunately, they are rather ham-fisted and inarticulate about it. And, the preoccupation with blaming Obama will not help them. Their entire program seems to be to withhold funding for Obama Care. Instead of looking at the larger problem of corporate influence driving government spending, they are stuck on a loop of party politics that is making them look foolish and will ultimately fail. It raises the wrong issues. 
 
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