tag:theconversation.com,2011:/au/topics/corporate-law-1935/articlesCorporate law – The Conversation2024-02-05T13:31:44Ztag:theconversation.com,2011:article/2224832024-02-05T13:31:44Z2024-02-05T13:31:44ZWhy Elon Musk’s ‘self-driving’ of Tesla’s board and its decision to pay him $56B collided with the law – and what happens next<p><em><a href="https://www.bloomberg.com/news/articles/2024-02-02/elon-musk-meets-his-match-in-shakespeare-quoting-delaware-judge?sref=Hjm5biAW">Delaware Chancery Court Judge Kathaleen St. Jude McCormick</a> has <a href="https://corpgov.law.harvard.edu/2024/02/01/tesla-musk-case-post-trial-opinion/">blocked Elon Musk’s US$55.8 billion pay package</a>, which <a href="https://abcnews.go.com/Business/wireStory/court-rejected-elon-musks-558b-pay-package-worth-106846409">Tesla’s board of directors approved in 2018</a> through a process she found to be “deeply flawed.”</em> </p>
<p><em>No CEO of a publicly traded U.S. company has ever been <a href="https://www.wsj.com/business/elon-musks-55-billion-tesla-pay-package-struck-down-by-judge-3e619f53?mod=hp_lead_pos9">paid this much</a> for one year’s work, according to Equilar, which tracks corporate leadership data. Pay for the 10 highest-paid executives, including Google’s Sundar Pichai and Apple’s Tim Cook, reportedly <a href="https://www.cnbc.com/2023/07/05/heres-how-much-the-10-highest-paid-us-ceos-earn.html">maxed out at around $250 million</a> in 2022.</em> </p>
<p><em>The Conversation asked <a href="https://www.udel.edu/faculty-staff/experts/justin-p-klein/">Justin P. Klein</a>, the director of the Weinberg Center for Corporate Governance at the University of Delaware, to explain McCormick’s reasoning.</em></p>
<h2>Why did the judge block Musk’s pay package?</h2>
<p>McCormick’s opinion began with a good question: “Was the richest person in the world overpaid?”</p>
<p>She concluded, in this reference to Musk – whose <a href="https://www.bloomberg.com/billionaires/profiles/elon-r-musk/">fortune was estimated to be worth $205 billion</a> before the ruling and consists largely of his <a href="https://www.washingtonpost.com/technology/2024/02/01/elon-musk-wealth-net-worth-companies/">Tesla shares and stock options, along with his SpaceX stake</a> – that he was. </p>
<p>This legal defeat may have <a href="https://apnews.com/article/elon-musk-ceo-pay-compensation-tesla-f5ad4ce659a73a1209dc99a583d7b883">knocked Musk out of his perch</a> atop the Forbes list of the world’s richest people, making him the second-wealthiest, the <a href="https://www.forbes.com/real-time-billionaires/#1e2714563d78">media outlet calculated</a>. </p>
<p>McCormick ruled against Musk in <a href="https://www.theguardian.com/business/nils-pratley-on-finance/2024/jan/31/three-cheers-for-the-delaware-judge-who-stood-up-to-elon-musk">Tornetta v. Musk</a>, a lawsuit filed on behalf of an investor who owned only nine Tesla shares – and by extension virtually all of the company’s stockholders. Ultimately, she determined that Musk’s compensation plan was considered and approved by a board of directors that was <a href="https://apnews.com/article/elon-musk-ceo-pay-compensation-tesla-f5ad4ce659a73a1209dc99a583d7b883">not sufficiently independent or objective</a>.</p>
<p>The compensation plan was subject to a vote by the rest of Tesla’s shareholders. But the information they received left out key details and contained inaccurate statements.</p>
<p>This pay package deserved close scrutiny because of its enormity, McCormick observed. She called it the “largest potential opportunity ever observed in public markets by multiple orders of magnitude.”</p>
<h2>What was wrong with Tesla’s board?</h2>
<p>McCormick concluded that many of Tesla’s board members, including <a href="https://www.sec.gov/Archives/edgar/data/1318605/000156459018009339/tsla-def14a_20180606.htm">his brother Kimbal Musk</a>, had close financial and social relationships with Elon Musk and that they were beholden to him due to these ties.</p>
<p>The board approved this compensation plan without <a href="https://corpgov.law.harvard.edu/2020/03/19/compensation-committee-guide-2020/">following commonly accepted norms</a>, according to the ruling. Further, McCormick found that the directors allowed Musk to control the process for approving the compensation plan, dictating the terms, amount and timing.</p>
<p>Board members apparently made no efforts to benchmark the plan as compared to <a href="https://ceoworld.biz/2023/05/26/the-highest-paid-tech-ceos-in-the-united-states/">compensation paid to executives of comparable companies</a>, a critical and typical step in any situation like this.</p>
<p>Musk was in control of Tesla, <a href="https://www.investopedia.com/articles/stocks/07/executive_compensation.asp">a publicly traded company</a>, that should have standard protocols in place regarding its compensation practices.</p>
<p>There was no negotiation between Musk and the compensation committee or the board regarding the amount and terms of the plan, the chancellor found. This is both inconsistent with widely accepted <a href="https://www.huntonak.com/en/insights/six-key-considerations-executive-contract-negotiations.html">compensation setting practices</a> and striking due to the scale of the pay package. </p>
<p>“Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit,” McCormick wrote. “The process arrived at an unfair price. And through this litigation, the plaintiff requests a recall.”</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/573203/original/file-20240203-19-w8ldss.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A large low-lying building with a vast parking lot." src="https://images.theconversation.com/files/573203/original/file-20240203-19-w8ldss.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/573203/original/file-20240203-19-w8ldss.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/573203/original/file-20240203-19-w8ldss.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/573203/original/file-20240203-19-w8ldss.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/573203/original/file-20240203-19-w8ldss.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/573203/original/file-20240203-19-w8ldss.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/573203/original/file-20240203-19-w8ldss.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Tesla corporate headquarters, in Travis County, Texas.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/in-an-aerial-view-the-tesla-corporate-headquarters-is-seen-news-photo/1454072958">Brandon Bell/Getty Images</a></span>
</figcaption>
</figure>
<h2>What factors are boards supposed to consider in setting CEO pay?</h2>
<p>In deciding what CEOs should earn, boards or compensation committees should consider the <a href="https://www.investopedia.com/managing-wealth/guide-ceo-compensation">company’s performance under the leadership of the CEO</a> and the executive’s own personal performance. They should also review what comparable companies take into consideration when making decisions about their own CEO’s compensation.</p>
<p>Other metrics or considerations may be taken into account, too. These may include whether the company has made <a href="https://worldatwork.org/resources/publications/workspan-daily/how-dei-will-shape-executive-compensation-in-changing-legal-climate">progress in terms of diversity, equity and inclusion</a>, <a href="https://link.springer.com/article/10.1007/s11846-022-00538-4">employee retention</a>, <a href="https://hbr.org/2023/02/linking-executive-pay-to-sustainability-goals">sustainability and environmental performance</a>, worker safety practices, risk management and <a href="https://www.hrpolicy.org/insight-and-research/executive-compensation/executive-pay-legislation-and-regulation/">compliance with laws and regulations</a>.</p>
<p>Around the time of this compensation decision, Musk was the subject of a <a href="https://www.foxbusiness.com/technology/elon-musk-says-420-price-tesla-buyout-tweet-not-joke-testimony">Securities and Exchange Commission probe</a> over alleged fraud stemming from what the SEC said were <a href="https://www.sec.gov/files/litigation/complaints/2018/comp-pr2018-219.pdf">misleading statements</a> regarding his plans to take Tesla private at $420 per share – a part of a tweet widely regarded as a cannabis joke.</p>
<p>The <a href="https://www.sec.gov/news/press-release/2018-226">settlement Musk reached with the SEC</a> forced him to pay a $20 million fine and step down as the company’s chairman for at least three years. It also required the appointment of two new independent Tesla board members and a requirement that he preclear certain public statements.</p>
<p>The company was not taken private.</p>
<p>In 2023, a <a href="https://electrek.co/2023/02/03/elon-musk-found-not-guilty-in-the-tesla-420-take-private-case/">jury found Musk not liable</a> for <a href="https://www.cnn.com/2023/02/03/cars/musk-tesla-tweet-lawsuit-jury/index.html">related losses by Tesla investors</a> who sued over the incident. Tesla shares closed at $187.91 on Feb. 2, 2024, far below that $420 price that unleashed litigation. The company’s share prices closed at <a href="https://www.morningstar.com/news/dow-jones/202401297494/tesla-on-pace-for-worst-month-since-december-2022-data-talk">$409.97 in November 2021</a> – the highest point to date.</p>
<p>The board could have considered this incident a negative factor when making its decisions about Musk’s compensation.</p>
<h2>What process are boards supposed to follow in setting CEO pay?</h2>
<p>In setting CEO compensation, all members of boards or <a href="https://www.pwc.com/us/en/services/governance-insights-center/library/compensation-committee.html">compensation committees</a> should be truly independent and objective, with no interest in the outcome.</p>
<p>They should consider engaging compensation experts and benchmark or seek information on executive compensation at comparable companies.</p>
<p>These decisions require careful consideration of all components of the CEO’s compensation and how the pay package should be structured. That includes how much of the pay should be provided as cash, <a href="https://www.investopedia.com/terms/r/restrictedstock.asp">restricted stock</a>, which may not be sold for a period of time, and <a href="https://www.investopedia.com/terms/s/stockoption.asp">stock options</a>, which provide the right to purchase stock at a predetermined price before a particular time in the future. </p>
<p>When stock prices rise a great deal, stock options soar in value. That’s <a href="https://www.nytimes.com/2024/01/30/business/elon-musk-tesla-pay-package.html">what happened with Musk’s colossal pay package</a>.</p>
<h2>What happens now?</h2>
<p>Musk may decide to appeal to the Supreme Court of Delaware. On the other hand, Musk could ask Tesla’s board, its compensation committee – or both of them – to revisit and revise his compensation plan, taking into account the objections spelled out in the ruling.</p>
<p>That would include both the amount – $55.8 billion – and the process by which it was set.</p>
<p>Musk, however, <a href="https://whyy.org/articles/delaware-elon-musk-wants-tesla-to-vote-on-switching-corporate-registration-to-texas/">appears to be seeking a third option</a>. “Tesla will move immediately to hold a shareholder vote to transfer (the) state of incorporation to Texas,” <a href="https://twitter.com/elonmusk/status/1752922071229722990">he posted on X</a>, his social media platform previously known as Twitter.</p>
<p>Even if Musk were to prevail and change Tesla’s jurisdiction of incorporation, it would not be likely to affect this decision.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1752922071229722990"}"></div></p>
<h2>Is Delaware particularly tough on corporate leaders?</h2>
<p><a href="https://www.cnbc.com/2023/03/13/why-more-than-60percent-of-fortune-500-companies-incorporated-in-delaware.html">Delaware is the corporate home</a> of more than 60% of Fortune 500 companies even though it’s the country’s second-smallest state.</p>
<p>One reason for its popularity with businesses of all kinds is that Delaware’s courts are quite experienced, with a great deal of expertise in considering business matters and cases of this kind. Musk’s court case was heard in its <a href="https://www.law.cornell.edu/wex/chancery">Court of Chancery</a>, a system that primarily decides <a href="https://courts.delaware.gov/chancery/jurisdiction.aspx">corporate legal matters</a>.</p>
<p>Although Musk <a href="https://twitter.com/elonmusk/status/1752455348106166598?s=20">suggested that standards in Delaware are overly strict</a> in another message he posted on X after the ruling, this kind of case is very rare.</p>
<p>One of few similar lawsuits was filed <a href="https://www.nytimes.com/2005/08/10/business/media/ruling-upholds-disneys-payment-in-firing-of-ovitz.html">against former Disney CEO Michael D. Eisner</a> over his $140 million severance package. In 2005, Chancellor William B. Chandler III of the Delaware Chancery Court let it go, while acknowledging the apparent impropriety of paying an executive so much.</p>
<p>“Despite all the legitimate criticisms that may be leveled at Eisner, especially at having enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom,” <a href="https://casetext.com/case/in-re-walt-disney-co-derivative-litigation">Chandler wrote</a>, “I nonetheless conclude, after carefully considering and weighing all the evidence, that Eisner’s actions were taken in good faith.”</p><img src="https://counter.theconversation.com/content/222483/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Justin P. Klein directs the advisory board of the Weinberg Center for Corporate Governance. Chancellor Kathaleen McCormick is an ex officio member of that center's advisory board.</span></em></p>Musk can’t dodge this ruling by moving Tesla’s incorporation to Texas.Justin P. Klein, Director of the Weinberg Center for Corporate Governance, University of DelawareLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2010062023-03-15T12:10:37Z2023-03-15T12:10:37ZSouth Africa’s corporate whistleblowers don’t get enough protection: what needs to change<figure><img src="https://images.theconversation.com/files/515196/original/file-20230314-2721-thcftk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Corporate misconduct is difficult to detect and prove. This is because it is often hidden by a complicated web of transactions, misleading corporate records and convoluted company group structures. This is why corporate whistleblowers whose positions give them an inside track on misconduct are so important in exposing corporate crime and corruption.</p>
<p>But whistleblowers risk personal and financial risk by coming out. Whistleblower protection in South Africa lags behind international standards and inadequately protects whistleblowers in some respects.</p>
<p>Given South Africa’s <a href="https://www.transparency.org/en/cpi/2022/index/zaf">high levels of corporate corruption</a>, whistleblowers deserve high levels of protection. Despite some protections given to whistleblowers, the reporting rates of wrongdoing are low. The main reasons for this are a fear of being victimised and a fear of losing one’s job. The low levels of reports of wrongdoing and the widespread <a href="https://specialprojects.news24.com/silenced/index.html">victimisation of whistleblowers</a> are proof of the weak protection South Africa offers corporate whistleblowers.</p>
<p>I have conducted research on the protection of corporate whistleblowers in South Africa compared to international jurisdictions, such as Australia. <a href="https://www.researchgate.net/publication/368554917_A_Critical_Analysis_of_the_Corporate_Whistleblowing_Provisions_of_the_South_African_Companies_Act">In my research</a> I found that section 159 of the <a href="https://www.gov.za/sites/default/files/gcis_document/201409/321214210.pdf">Companies Act</a> does not go far enough in protecting corporate whistleblowers. It is defective and must be urgently reformed. </p>
<h2>The regulation of corporate whistleblowing</h2>
<p>Whistleblowing in private and public sector companies, including state-owned entities, is regulated by <a href="https://www.onlinemoi.co.za/Act?section=159">Section 159</a> of the <a href="https://www.gov.za/documents/companies-act">Companies Act of 2008</a>.</p>
<p>It protects corporate whistleblowers who disclose wrongdoing by the company or a director or <a href="https://www.onlinemoi.co.za/Regulation?regulation=38">prescribed officer</a>. But to be protected, the whistleblower must act in <a href="https://www.researchgate.net/publication/368554917_A_Critical_Analysis_of_the_Corporate_Whistleblowing_Provisions_of_the_South_African_Companies_Act">good faith</a> and must <a href="https://juta.co.za/catalogue/contemporary-company-law_28776">reasonably believe</a> that there was wrongdoing.</p>
<p>The wrongdoing could relate to breaches of the Companies Act or other legislation, a failure to comply with the law, any acts that endanger the health and safety of a person or harm the environment, or unfair discrimination.</p>
<p>The disclosure of wrongdoing must be made to specific persons. These include the <a href="https://www.cipc.co.za/">Companies and Intellectual Property Commission</a>, the <a href="https://www.companiestribunal.org.za/">Companies Tribunal</a>, a director, <a href="https://www.onlinemoi.co.za/Regulation?regulation=38">prescribed officer</a>, company secretary, auditor, legal advisor, the board or a committee of the company.</p>
<p>The corporate whistleblowers who are protected by the Companies Act include shareholders, directors, company secretaries, prescribed officers, registered trade unions, and suppliers of goods or services to a company and their employees. </p>
<h2>The protections given to whistleblowers</h2>
<p>The Companies Act provides three protections to whistleblowers. </p>
<p>First, they get qualified privilege for their disclosure. This means that they cannot be sued for defamation for what they said, unless they acted with malice or an improper motive.</p>
<p>Secondly, they are immune from civil, criminal or administrative liability for their disclosure. This means that they are protected from liability for making the disclosure of wrongdoing. But they are not immune from liability for their own conduct that may have been revealed by the disclosure.</p>
<p>Thirdly, whistleblowers may claim compensation for any damages they suffer if anyone harms them or threatens to harm them. </p>
<p>As discussed below, these protections to whistleblowers need to be broadened and strengthened. </p>
<h2>Confusing framework</h2>
<p>South Africa has a patchwork of statutes regulating whistleblowing. Both the Companies Act and the <a href="https://www.justice.gov.za/legislation/acts/2000-026.pdf">Protected Disclosures Act of 2000</a> govern whistleblowing by employees in companies. </p>
<p>This means that employees in companies <a href="https://juta.co.za/catalogue/contemporary-company-law_28776">must consult both</a> the Companies Act and the Protected Disclosures Act when disclosing wrongdoing. This can be challenging for employees because of the different requirements under each statute that must be met before they will be protected for blowing the whistle. </p>
<p>Added to this, is that there are several other statutes in South Africa that govern whistleblowing. These include the <a href="https://www.justice.gov.za/legislation/constitution/saconstitution-web-eng.pdf">Constitution</a>, the <a href="https://www.gov.za/sites/default/files/gcis_document/201409/act66-1995labourrelations.pdf">Labour Relations Act</a>, the <a href="https://www.gov.za/documents/prevention-and-combating-corrupt-activities-act-0">Prevention and Combating of Corrupt Activities Act</a> and the <a href="https://www.gov.za/documents/national-environmental-management-act">National Environmental Management Act</a>, to name a few. </p>
<p>This creates a confusing web for whistleblowers to navigate and results in inconsistent protection. </p>
<h2>Improving protection</h2>
<p><a href="https://www.researchgate.net/publication/368554917_A_Critical_Analysis_of_the_Corporate_Whistleblowing_Provisions_of_the_South_African_Companies_Act">In my view</a>, South Africa should have one consolidated legislative framework governing whistleblowing. This will make whistleblower laws clear and consistent. It will also make them more accessible and visible.</p>
<p>Protection <a href="https://www.researchgate.net/publication/368554917_A_Critical_Analysis_of_the_Corporate_Whistleblowing_Provisions_of_the_South_African_Companies_Act">can also be broadened, as I’ve suggested</a>, by protecting a corporate whistleblower for three years after they’ve left a company. The three-year limit will encourage whistleblowers to disclose the wrongdoing within a reasonable time after leaving their positions. In addition, any evidence will still be accessible. </p>
<p>In addition, there must be better protection for whistleblowers from victimisation, which should be a criminal offence under the Companies Act. </p>
<p>Whistleblowers should be allowed to claim compensation from anyone who causes them harm – physically as well as psychologically. There have been many <a href="https://www.dailymaverick.co.za/article/2021-04-22-treated-like-a-leper-mosilo-mothepu-relates-the-cost-of-being-a-whistle-blower">reports</a> of whistleblowers who have been ostracised, suffered panic attacks, depression, post-traumatic stress disorder or anxiety after exposing corporate corruption.</p>
<p>In South Africa, it is vital to provide physical protection to whistleblowers. There have been several reports of <a href="https://www.enca.com/news/johann-van-loggerenberg-burgled-conspiracy-suspected">intimidation of whistleblowers</a>. Some whistleblowers had to <a href="https://www.iol.co.za/capetimes/news/whistle-blower-athol-williams-health-suffers-after-exposing-pariah-bain-and-co-75ada81f-bff5-4cd9-81d7-2c43a62ddc36">flee South Africa</a> because <a href="https://www.enca.com/news/saps-whistleblower-patricia-mashale-flees-sa">they feared for their safety</a>. Another whistleblower was <a href="https://www.dailymaverick.co.za/article/2021-08-24-whistle-blower-slain-after-dropping-her-child-at-school-siu-confirms-babita-deokaran-was-a-witness-in-the-r332m-ppe-scandal">assassinated</a> after exposing corruption linked to COVID-19 personal protective equipment. </p>
<p>It has been <a href="https://www.sajr.co.za/sa-dangerous-place-for-whistle-blowers-as-de-ruyter-case-shows/">reported</a> that former <a href="https://www.eskom.co.za/">Eskom</a> CEO Andre de Ruyter <a href="https://www.capetalk.co.za/articles/467736/i-think-de-ruyter-is-at-risk-his-family-probably-too-he-needs-to-take-care">may be at personal risk</a>. He effectively became a whistleblower at Eskom after a <a href="https://www.sabcnews.com/sabcnews/de-ruyters-interview-was-an-act-of-whistle-blowing-says-yelland/">television interview</a>. In the interview, De Ruyter alleged that there is rampant corruption at Eskom, and that a senior <a href="https://www.anc1912.org.za/">ANC</a> minister is <a href="https://www.sabcnews.com/sabcnews/de-ruyters-interview-was-an-act-of-whistle-blowing-says-yelland/">involved in criminal activities at the power utility</a> with the knowledge of other senior party leaders. </p>
<p>The ANC has denied this and <a href="https://www.news24.com/news24/politics/political-parties/eskom-de-ruyter-served-with-court-papers-for-making-allegations-without-any-shred-of-evidence-mbalula-20230303">served court papers on De Ruyter</a> that required him to provide evidence within seven days to back up his <a href="https://www.enca.com/news/anc-serves-legal-papers-de-ruyter-over-corruption-allegations">allegations of corruption</a>.</p>
<p>Once whistleblowers disclose their identity, it should be mandatory for adequate physical protection to be provided to them and their families. </p>
<p>Whistleblowers should be given the choice to make disclosures confidentially or anonymously under the Companies Act. Their identity should also be protected in court matters.</p>
<p>The Companies Act does not give financial incentives to whistleblowers for making disclosures that lead to successful resolutions of matters. Financial rewards are <a href="https://www.researchgate.net/publication/368554917_A_Critical_Analysis_of_the_Corporate_Whistleblowing_Provisions_of_the_South_African_Companies_Act">controversial</a>. They encourage whistleblowers to speak up about corruption and reduce the financial risks they face. But they also raise moral and ethical concerns, and may encourage false reports.</p>
<p>In my view, corporate whistleblowers should be rewarded for disclosures they make which lead to successful resolutions. <a href="https://www.researchgate.net/publication/368554917_A_Critical_Analysis_of_the_Corporate_Whistleblowing_Provisions_of_the_South_African_Companies_Act">In my research</a> I found that the benefits of financial rewards may outweigh the misgivings about it given the very high level of corporate corruption in South Africa. </p>
<p>Whistleblowers are not traitors but courageous people who choose to take action against wrongdoing rather than taking the easy route and keeping quiet. An urgent review of the Companies Act is needed to strengthen the protection of corporate whistleblowers, and to promote a culture of accountability and integrity, which is currently lacking in South Africa.</p><img src="https://counter.theconversation.com/content/201006/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rehana Cassim does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s laws designed to protect whistleblowers need urgent reform.Rehana Cassim, Professor in Company Law, University of South AfricaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1821352022-05-05T18:00:24Z2022-05-05T18:00:24ZHow treaties protecting fossil fuel investors could jeopardize global efforts to save the climate – and cost countries billions<figure><img src="https://images.theconversation.com/files/461418/original/file-20220504-16-lkr3zr.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5082%2C3520&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The threat of expensive payouts may already be having an effect.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/foot-sections-of-pipeline-which-will-carry-oil-from-the-news-photo/52832800?adppopup=true">Tom Stoddart/Getty Images</a></span></figcaption></figure><p>Fossil fuel companies have access to an obscure legal tool that could jeopardize worldwide efforts to protect the climate, and they’re starting to use it. The result could cost countries that press ahead with those efforts billions of dollars.</p>
<p>Over the past 50 years, countries have signed <a href="https://investmentpolicy.unctad.org/international-investment-agreements/iia-mapping">thousands of treaties</a> that protect foreign investors from government actions. These treaties are like contracts between national governments, meant to entice investors to bring in projects with the promise of local jobs and access to new technologies.</p>
<p>But now, as countries try to phase out fossil fuels to slow climate change, these agreements could leave the public facing overwhelming legal and financial risks.</p>
<p>The treaties allow investors to sue governments for compensation in a process called <a href="https://www.iisd.org/itn/en/2014/08/11/aron-broches-and-the-withdrawal-of-unilateral-offers-of-consent-to-investor-state-arbitration/">investor-state dispute settlement</a>, or ISDS. In short, investors could use ISDS clauses to demand compensation in response to government actions to limit fossil fuels, such as canceling pipelines and denying drilling permits. For example, TC Energy, a Canadian company, is currently seeking <a href="https://www.reuters.com/legal/litigation/tc-energy-seeks-nafta-damages-over-canceled-keystone-xl-project-2021-11-23/">more than US$15 billion</a> over U.S. President Joe Biden’s cancellation of the Keystone XL Pipeline.</p>
<p>In a study published May 5, 2022, in the journal Science, we estimate that <a href="https://doi.org/10.1126/science.abo4637">countries would face up to $340 billion</a> in legal and financial risks for canceling fossil fuel projects that are subject to treaties with ISDS clauses. </p>
<p>That’s more than countries worldwide put into climate adaptation and mitigation measures combined in <a href="https://www.reuters.com/legal/litigation/tc-energy-seeks-nafta-damages-over-canceled-keystone-xl-project-2021-11-23/">fiscal year 2019</a>, and it doesn’t include the risks of phasing out coal investments or canceling fossil fuel infrastructure projects, like pipelines and liquefied natural gas terminals. It means that money countries might otherwise spend to build a low-carbon future could instead go to the very industries that have <a href="https://theconversation.com/what-big-oil-knew-about-climate-change-in-its-own-words-170642">knowingly been fueling climate change</a>, severely jeopardizing countries’ capacity to propel the green energy transition forward.</p>
<h2>Massive potential payouts</h2>
<p>Of the world’s 55,206 upstream oil and gas projects that are in the early stages of development, we identified 10,506 projects – 19% of the total – that were protected by 334 treaties providing access to ISDS. </p>
<p>That number could be much higher. We could only identify the headquarters of project owners, not the overall corporate structures of the investments, due to limited data. We also know that <a href="https://www.jonesday.com/en/insights/2022/02/climate-change-and-investorstate-dispute-settlement">law firms are advising clients in the industry</a> to structure investments to ensure access to ISDS, through processes such as using subsidiaries in countries with treaty protections. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/461313/original/file-20220504-16-x863of.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Maps showing where these treaties are used." src="https://images.theconversation.com/files/461313/original/file-20220504-16-x863of.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/461313/original/file-20220504-16-x863of.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=678&fit=crop&dpr=1 600w, https://images.theconversation.com/files/461313/original/file-20220504-16-x863of.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=678&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/461313/original/file-20220504-16-x863of.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=678&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/461313/original/file-20220504-16-x863of.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=852&fit=crop&dpr=1 754w, https://images.theconversation.com/files/461313/original/file-20220504-16-x863of.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=852&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/461313/original/file-20220504-16-x863of.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=852&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://doi.org/10.1126/science.abo4637">K. Franklin/Science based on K. Tienhaara et al.</a></span>
</figcaption>
</figure>
<p>Depending upon future oil and gas prices, we found that the <a href="https://doi.org/10.1126/science.abo4637">total net present value of those projects</a> is expected to reach $60 billion to $234 billion. If countries cancel these protected projects, foreign investors could sue for financial compensation in line with these valuations. </p>
<p>Doing so would put several low- and middle-income countries at severe risk. Mozambique, Guyana and Venezuela could each face over $20 billion in potential losses from ISDS claims.</p>
<p>If countries also cancel oil and gas projects that are further along in development but are not yet producing, they face more risk. We found that 12% of those projects worldwide are protected by investment treaties, and their investors could sue for $32 billion to $106 billion. </p>
<p>Canceling approved projects <a href="https://doi.org/10.1126/science.abo4637">could prove exceptionally risky</a> for countries like Kazakhstan, which could lose $6 billion to $18 billion, and Indonesia, with $3 billion to $4 billion at risk.</p>
<p>Canceling coal investments or fossil fuel infrastructure projects, like pipelines and liquefied natural gas terminals, could lead to even more claims.</p>
<h2>Countries already feel regulatory chill</h2>
<p>There have been <a href="https://www.iisd.org/system/files/2022-01/investor%E2%80%93state-disputes-fossil-fuel-industry.pdf">at least 231 ISDS cases</a> involving fossil fuels so far. Just the threat of massive payouts to investors could cause many countries to delay climate mitigation policies, causing a so-called “regulatory chill.” </p>
<p>Both <a href="https://capitalmonitor.ai/institution/government/cop26-ambitions-at-risk-from-energy-charter-treaty-lawsuits/https:/capitalmonitor.ai/institution/government/cop26-ambitions-at-risk-from-energy-charter-treaty-lawsuits/">Denmark and New Zealand</a>, for example, seem to have designed their fossil fuel phaseout plans specifically to minimize their exposure to ISDS. <a href="https://www.euractiv.com/section/energy/opinion/energy-charter-conference-a-ministerial-without-ministers/">Some</a> climate policy <a href="https://www.ibanet.org/Climate-crisis-Impact-of-Energy-Charter-Treaty-on-clean-energy-transition-raises-concern">experts</a> have suggested that Denmark may have chosen 2050 as the end date for oil and gas extraction to avoid disputes with existing exploration license holders.</p>
<p>New Zealand banned all new offshore oil exploration in 2018 but did not cancel any existing contracts. The climate minister acknowledged that a more aggressive plan <a href="https://capitalmonitor.ai/institution/government/cop26-ambitions-at-risk-from-energy-charter-treaty-lawsuits/">“would have run afoul of investor-state settlements.”</a> <a href="https://doi.org/10.1016/j.esg.2021.100118">France revised a draft law</a> banning fossil fuel extraction by 2040 and allowing the renewal of oil exploitation permits after the <a href="https://www.vermilionenergy.com/our-operations/europe/france.cfm">Canadian company Vermilion</a> threatened to launch an ISDS case.</p>
<h2>Securing the green energy transition</h2>
<p>While these findings are alarming, countries have options to avoid onerous legal and financial risks. </p>
<p>The Organization for Economic Cooperation and Development is <a href="https://www.oecd.org/investment/investment-policy/investment-treaties.htm">currently discussing proposals</a> on the future of investment treaties.</p>
<p>A straightforward approach would be for countries to terminate or withdraw from these treaties. Some officials have <a href="https://doi.org/10.1111/1758-5899.12355">expressed concern</a> about unforeseen impacts of unilaterally terminating investment treaties, but other countries have already done so, <a href="https://www.citizen.org/wp-content/uploads/pgcw_fdi-inflows-from-bit-termination_finaldraft.pdf">with few or no real economic consequences</a>. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/OluZrHWzyx8?wmode=transparent&start=5" frameborder="0" allowfullscreen=""></iframe>
</figure>
<p>For more complex trade agreements, countries can negotiate to remove ISDS provisions, as the United States and Canada <a href="https://www.iisd.org/articles/usmca-impact-north-american-trade">did when they replaced</a> the North American Free Trade Agreement with the United States-Mexico-Canada Agreement.</p>
<p>Additional challenges stem from “sunset clauses” that bind countries for a decade or more after they have withdrawn from some treaties. Such is the case for Italy, which <a href="https://borderlex.net/2022/04/25/ect-negotiations-members-eye-june-deal-announcement/">withdrew from the Energy Charter Treaty</a> in 2016. It is <a href="https://icsid.worldbank.org/cases/case-database/case-detail?CaseNo=ARB/17/14">currently stuck</a> in an ongoing ISDS case initiated by the U.K. company Rockhopper over a ban on coastal oil drilling. </p>
<p>The Energy Charter Treaty, a special investment agreement covering the energy sector, emerged as the greatest single contributor to global ISDS risks in our dataset. Many European countries are <a href="https://borderlex.net/2022/04/25/ect-negotiations-members-eye-june-deal-announcement/">currently considering</a> whether to leave the treaty and how to avoid the same fate as Italy. If all country parties to a treaty can <a href="https://scholarship.law.columbia.edu/cgi/viewcontent.cgi?article=1153&context=sustainable_investment_staffpubs">agree together to withdraw</a>, they could <a href="https://doi.org/10.1093/icsidreview/sit051">collectively sidestep</a> the sunset clause through mutual agreement. </p>
<h2>The global transition</h2>
<p>Combating climate change is not cheap. Actions <a href="https://www.ipcc.ch/report/sixth-assessment-report-working-group-3/">by governments</a> and the private sector are <a href="https://www.iea.org/articles/the-cost-of-capital-in-clean-energy-transitions">both needed</a> to slow global warming and keep it <a href="https://www.ipcc.ch/sr15/">from fueling increasingly devastating disasters</a>.</p>
<p>In the end, the question is who will pay – and be paid – in the global energy transition. We believe that, at the very least, it would be counterproductive to divert critical public finance from essential mitigation and adaptation efforts to the pockets of fossil fuel industry investors whose products caused the problem in the first place.</p>
<p>[<em>Like what you’ve read? Want more?</em> <a href="https://memberservices.theconversation.com/newsletters/?source=inline-likethis">Sign up for The Conversation’s daily newsletter</a>.]</p><img src="https://counter.theconversation.com/content/182135/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rachel Thrasher receives funding from Open Society Foundations and the Rockefeller Brothers Fund.</span></em></p><p class="fine-print"><em><span>Kyla Tienhaara receives funding from the Canada Research Chairs Program (Government of Canada). She provides pro bono advice for a number of non-profit organizations working on climate and investment issues. </span></em></p><p class="fine-print"><em><span>Blake Alexander Simmons does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A new study adds up the potential legal and financial risk countries could face from hundreds of agreements, like those under the Energy Charter Treaty.Rachel Thrasher, Law Lecturer and Researcher at the Boston University Global Development Policy Center, Boston UniversityBlake Alexander Simmons, Postdoctoral Research Fellow in the Human Dimensions of Natural Resources, Colorado State UniversityKyla Tienhaara, Canada Research Chair in Economy and Environment, Queen's University, OntarioLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1795342022-03-22T13:04:37Z2022-03-22T13:04:37ZSEC proposes far-reaching climate disclosure rules for companies – here’s where the rules may be vulnerable to legal challenges<figure><img src="https://images.theconversation.com/files/453522/original/file-20220322-25-5c2fi7.jpg?ixlib=rb-1.1.0&rect=1038%2C719%2C3754%2C2339&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The SEC's proposed rules include some reporting of so-called Scope 3 emissions, in companies' supply chains and use of their products.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/SupplyChainShipping/5a46d4cc50014b66a479457effac16d2/photo">AP Photo/Noah Berger</a></span></figcaption></figure><p>The U.S. <a href="https://www.sec.gov/">Securities and Exchange Commission</a> released its <a href="https://www.nbcnews.com/politics/congress/manchin-says-build-back-better-dead-here-s-what-he-n1288492">long-awaited proposal</a> to require companies to disclose their climate risks to investors, and it’s arguably the most significant action on climate change yet under the Biden administration.</p>
<p>SEC Commissioner <a href="https://www.sec.gov/news/statement/lee-climate-disclosure-20220321">Allison Herren Lee called</a> it a “watershed moment for investors and financial markets.” It is also a win for President Joe Biden, whose <a href="https://www.nbcnews.com/politics/congress/manchin-says-build-back-better-dead-here-s-what-he-n1288492">other climate efforts have struggled</a>. A year ago, <a href="https://www.reuters.com/article/us-usa-congress-financial-regulators/bidens-sec-nominee-vows-review-of-gamestop-trading-issues-climate-disclosures-idUSKBN2AU136">Biden appointed</a> an SEC chairman, Gary Gensler, who supports climate disclosures in principle.</p>
<p>The proposed requirements, once finalized, could help climate-conscious investors more accurately direct their money to businesses that are responding to climate risks, simultaneously strengthening both markets and the nation’s climate response.</p>
<p>But the proposal has a long way to go before it can make the transformative changes it aims for. We study <a href="https://scholar.google.com/citations?user=2g3cGE4AAAAJ&hl=en">climate regulation and business law</a> and have closely tracked debates over the proposal. Here’s what you need to know.</p>
<h2>What the rule would do</h2>
<p>If the SEC votes to finalize the rule after a public comment period, it would standardize, extend and mandate disclosure requirements that the SEC encouraged <a href="https://www.sec.gov/rules/interp/2010/33-9106.pdf">in a guidance document back in 2010</a>.</p>
<p>As the <a href="https://www.sec.gov/rules/proposed/2022/33-11042.pdf">510-page notice</a> released on March 21, 2022, makes clear, companies would be expected to include a laundry list of items in their regular filings with the SEC: information on the company’s “oversight and governance of climate-related risks,” any expected climate-related risks it faces in the future, any transition plans the business has developed, and data on certain greenhouse gas emissions linked to the company’s operations, among other things.</p>
<p>Gensler said the <a href="https://www.sec.gov/news/statement/gensler-climate-disclosure-20220321https:/www.sec.gov/news/statement/gensler-climate-disclosure-20220321">proposal draws from</a> the approach of the <a href="https://www.fsb-tcfd.org/">Task Force on Climate-Related Financial Disclosure</a>, which several countries have adopted. But the proposal is still noticeably less stringent than the <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32020R0852">European Union’s regulations</a>.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/xjSk7wWJG6o?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">SEC Chair Gary Gensler discusses what the SEC has to do with climate change.</span></figcaption>
</figure>
<p>In the leadup to the release of the SEC’s proposal, <a href="https://theconversation.com/sec-will-consider-climate-disclosure-rules-for-us-companies-on-march-21-its-already-facing-threats-of-lawsuits-178304">supporters and opponents speculated</a> about whether so-called Scope 3 emissions would be required. Under the terms of the proposal, the answer is a resounding “maybe.”</p>
<p>A company’s Scope 3 emissions result from activities of third parties, such as the emissions produced by its suppliers or, ultimately, by its consumers. As the <a href="https://www.sec.gov/rules/proposed/2022/33-11042.pdf">SEC pointed out</a>, these emissions can “represent a majority of the carbon footprint for many companies.”</p>
<figure class="align-center ">
<img alt="Lists of examples of Scope 1, 2, 3 emissions sources with an illustration of a factory in the center" src="https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=509&fit=crop&dpr=1 600w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=509&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=509&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=640&fit=crop&dpr=1 754w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=640&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=640&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">What Scope 1, 2 and 3 emissions involve.</span>
<span class="attribution"><a class="source" href="https://www.americanprogress.org/article/why-companies-should-be-required-to-disclose-their-scope-3-emissions/">Chester Hawkin/Center for American Progress</a></span>
</figcaption>
</figure>
<p>While <a href="https://www.sec.gov/files/33-11042-fact-sheet.pdf">all registered companies would be required</a> to disclose their own direct greenhouse emissions, such as emissions from manufacturing processes, as well as indirect emissions through the use of energy – Scopes 1 and 2, respectively – only some companies would need to report Scope 3 emissions under the proposal.</p>
<p>The proposal would exempt “<a href="https://www.sec.gov/corpfin/cf-manual/topic-5">small reporting companies</a>” from Scope 3 reporting. It would allow large companies to withhold Scope 3 emissions data when the company determines that the data are not “<a href="https://www.law.cornell.edu/cfr/text/17/240.12b-2">material</a>” to investors or if the company doesn’t have Scope 3 emissions targets or goals.</p>
<p>Public interest groups wanted the SEC to require disclosure of even non-material Scope 3 emissions, while industry groups pushed for the SEC to forgo any Scope 3 emissions mandate. The SEC appears to have split the baby.</p>
<h2>It’s not over ‘til it’s over</h2>
<p>The SEC’s proposal initiates what can be a perilous process of public vetting before the rule goes into effect.</p>
<p>First, the SEC will take public comments on the proposal for the next 60 days. The agency received about <a href="https://www.sec.gov/news/statement/gensler-climate-disclosure-20220321">600 unique comments</a> in its request for information before issuing the proposal. Now, with more details available, there should be substantially more engagement. When the Federal Communications Commission took public comment on its proposal to roll back net neutrality rules, it received almost <a href="https://www.pewresearch.org/internet/2017/11/29/public-comments-to-the-federal-communications-commission-about-net-neutrality-contain-many-inaccuracies-and-duplicates/">22 million comments</a>.</p>
<p>The SEC should expect to receive extensive comments both from opponents of any regulation and public interest groups that want more stringent regulations.</p>
<p><a href="https://h2o.law.harvard.edu/collages/15539">Under standard administrative law principles</a>, the SEC must consider and respond to any important arguments or data presented by public commenters. If it gets even a fraction of the comments the FCC got, this process could easily take half a year. </p>
<p>By design, this process is supposed to allow the SEC to change the terms of the proposal, although it <a href="https://h2o.law.harvard.edu/collages/44925">cannot change the proposal</a> so much that the public would not have understood during the comment period what the final rule would do.</p>
<h2>The courts lie in wait</h2>
<p>Now that the terms of the proposed rule are in place, it is easier to see where legal vulnerabilities might be.</p>
<p>Industries are likely to take issue with the SEC’s estimates of the costs companies will face to comply with the rules. <a href="https://www.sec.gov/rules/proposed/2022/33-11042.pdf">The SEC’s proposal</a> states that the cost could be “relatively small” if companies already provide similar information. The SEC will have to defend that assertion carefully.</p>
<p>In 2011, the U.S. Court of Appeals for the District of Columbia <a href="https://harvardlawreview.org/wp-content/uploads/pdfs/vol125_business_roundtable_v_SEC.pdf">threw out an SEC rule</a> on the grounds that it failed to adequately consider economic costs of compliance. Although <a href="https://www.acslaw.org/wp-content/uploads/old-uploads/originals/documents/Kraus%20and%20Raso%20-%20Rational%20Boundaries.pdf">that ruling has been widely criticized</a> for imposing a cost-benefit analysis requirement that is not required by law, the <a href="https://www.supremecourt.gov/opinions/14pdf/14-46_bqmc.pdf">U.S. Supreme Court seems sympathetic</a> to such a requirement.</p>
<p>Another vulnerability will stem from the SEC’s approach to Scope 3 emissions. </p>
<p>Both industries and public interest groups are likely to argue that the SEC misunderstood its statutory authorization – either because <a href="https://www.sec.gov/news/statement/peirce-climate-disclosure-20220321">it included Scope 3 emissions</a> or because it <a href="https://www.sec.gov/news/statement/lee-climate-disclosure-20220321">believed it was limited</a> to “material” emissions, respectively. Or challengers could argue that SEC failed to fully analyze policy considerations favoring a different approach. How well the SEC responds to critical comments will be important when the courts are asked to decide if the SEC acted in an arbitrary or capricious or unlawful manner.</p>
<p>Finally, it is possible that the matter is out of the SEC’s hands. <a href="https://www.wsj.com/articles/the-secs-climate-change-overreach-global-warming-risks-lawmakers-invertors-market-data-11647801469">Some critics have suggested</a> that the regulation of climate disclosures is too important a question for regulators and belongs with Congress. Courts have sometimes shown skepticism toward agency actions that present so-called “<a href="https://www.theregreview.org/2022/01/31/driesen-major-questions-juristocracy/">major questions</a>,” including those related to <a href="https://www.natlawreview.com/article/court-cites-major-questions-doctrine-when-striking-down-biden-social-cost-carbon">climate change</a>.</p>
<p>If the courts view climate disclosure as a major question, they may vacate the rule even if the SEC has strongly supported its approach.</p>
<h2>A long way to go</h2>
<p>The SEC has taken a major step that could boost the Biden administration’s climate change agenda, but whether it will be able to navigate a treacherous administrative and legal process without changing its approach remains to be seen. </p>
<p>The notice of proposed rulemaking is usually just the opening offer in an ongoing negotiation over the rule.</p><img src="https://counter.theconversation.com/content/179534/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The SEC’s proposal would require companies to disclose their greenhouse gas emissions and other climate risks, but it’s not a done deal yet.Daniel E. Walters, Assistant Professor of Law, Penn StateWilliam M. Manson, Law Student, Penn StateLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1783042022-03-07T13:19:32Z2022-03-07T13:19:32ZSEC will consider climate disclosure rules for US companies on March 21 – it’s already facing threats of lawsuits<figure><img src="https://images.theconversation.com/files/450176/original/file-20220305-56947-9syz62.jpg?ixlib=rb-1.1.0&rect=8%2C41%2C5592%2C3686&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Some corporate climate risks are easy to spot. Others are less evident.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/oil-refinery-royalty-free-image/108806525?adppopup=true">Paul Souders via Getty Images</a></span></figcaption></figure><p>Better information leads to better decisions – this is the idea behind a regulatory device known as “<a href="https://www.jstor.org/stable/41149884?seq=1#metadata_info_tab_contents">mandated disclosure</a>.” Mandated disclosures are all around you, from calorie counts on fast food restaurant menus to conversations with doctors around informed consent. </p>
<p>But the biggest experiment yet in mandated disclosure may be an expected U.S. Securities and Exchange Commission proposal to extend these ideas to climate impacts facing U.S.-listed companies. Climate disclosure rules would require publicly traded companies to release information to investors about their emissions and how they are managing risks related to climate change and future climate regulations.</p>
<p>While it is easy to spot climate change-related risks facing companies like <a href="https://www.morningstar.com/news/business-wire/20220302005309/exxonmobil-details-plans-to-lead-in-earnings-and-cash-flow-growth-energy-transition">ExxonMobil</a> that produces and sells fossil fuels that contribute to global warming, <a href="https://www.weforum.org/agenda/2021/03/climate-policies-transition-risks/">hidden vulnerabilities exist</a> for businesses across the U.S. economy. </p>
<p>Largely in response to <a href="https://www.sec.gov/comments/climate-disclosure/cll12-8931883-245382.pdf">investors clamoring for more information</a> about climate risks, <a href="https://www.warren.senate.gov/imo/media/doc/2022.02.09%20Gensler%20Climate%20letter.pdf">as well as pressure</a> from <a href="https://www.sec.gov/comments/climate-disclosure/cll12-9360016-261669.pdf">green</a> <a href="https://www.sec.gov/comments/climate-disclosure/cll12-20109655-264012.pdf">groups</a> that believe disclosure will drive climate-conscious investing, <a href="https://www.sec.gov/news/speech/gensler-pri-2021-07-28">SEC Chair Gary Gensler announced</a> in 2021 that the commission would use its statutory authority to <a href="https://twitter.com/GaryGensler/status/1492269189289193472">require climate-related disclosures</a>. </p>
<p>The SEC <a href="https://twitter.com/GaryGensler/status/1502001539577176064">now plans</a> to consider proposals for climate-risk disclosure rules <a href="https://www.sec.gov/os/sunshine-act-notices/sunshine-act-notice-open-032122">at its March 21, 2022, meeting</a>.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/xjSk7wWJG6o?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">SEC Chair Gary Gensler discusses what the SEC has to do with climate change.</span></figcaption>
</figure>
<p>As law scholars, we <a href="https://scholar.google.com/citations?user=2g3cGE4AAAAJ&hl=en">work on legal issues involving businesses and regulation</a>. Here’s what you need to know about climate disclosures and some of the challenges the SEC faces in adopting them. </p>
<h2>What investors want to know</h2>
<p>Investor pressure for better information about climate impacts comes from two directions. </p>
<p>First, some investors want to avoid companies that will be affected by climate change. The company’s products may be <a href="https://www.reuters.com/business/sustainable-business/exxon-under-investor-pressure-discloses-emissions-burning-its-fuels-2021-01-06/">regulated in the future</a> because of their impact on the climate, or its supply chains may get more expensive over time. Investors want to know which businesses will be able to adapt and preserve profitability. </p>
<p>Second, many investors are interested in ESG investing, which involves assessing companies’ commitments to environmental, social and governance factors. Today, <a href="https://www.ussif.org/blog_home.asp?Display=155">ESG investing</a> accounts for <a href="https://www.businesswire.com/news/home/20201116005284/en/The-US-SIF-Foundation%E2%80%99s-Biennial-%E2%80%9CTrends-Report%E2%80%9D-Finds-That-Sustainable-Investing-Assets-Reach-17.1-Trillion">US$17.1 trillion</a> — or 1 in 3 dollars — of the total U.S. assets under professional management. The challenge for the SEC is to ensure that claims being made about the sustainability of a company are <a href="https://www.economist.com/leaders/2021/05/22/sustainable-finance-is-rife-with-greenwash-time-for-more-disclosure">based on reality</a>. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/esg-investing-has-a-blind-spot-that-puts-the-35-trillion-industrys-sustainability-promises-in-doubt-supply-chains-170199">ESG investing has a blind spot that puts the $35 trillion industry's sustainability promises in doubt: Supply chains</a>
</strong>
</em>
</p>
<hr>
<p>The trend toward ESG investment has led to an outpouring of voluntary disclosure: <a href="https://www.wsj.com/articles/climate-fight-brews-as-sec-moves-toward-mandate-for-risk-disclosure-11624267803?mod=article_inline">About 90% of companies</a> in the <a href="https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview">S&P 500</a> publish voluntary reports disclosing statistics on things like carbon emissions and how much renewable energy they use. </p>
<p>Some large investors require disclosure. For example, <a href="https://www.blackrock.com/us/individual">BlackRock</a>, a multinational asset manager with around $10 trillion under its control, requires companies it invests in to disclose certain climate information. The <a href="https://www.gov.uk/government/news/uk-to-enshrine-mandatory-climate-disclosures-for-largest-companies-in-law">United Kingdom</a> plans to require climate disclosure starting in April 2022, and the <a href="https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/corporate-disclosure-climate-related-information_en">European Union</a> has reporting rules in place. </p>
<p>But the U.S. has been slow to impose mandatory climate disclosure requirements. Public companies have only been subject to a more general <a href="https://www.jurist.org/features/2021/11/22/explainer-the-sec-climate-disclosures-and-a-new-global-standard/">legal standard</a> that they not materially mislead investors. The SEC <a href="https://www.sec.gov/rules/interp/2010/33-9106.pdf">released guidance</a> in 2010 to encourage climate disclosures, but <a href="https://crsreports.congress.gov/product/pdf/R/R46766">it was unenforced</a> and failed to prompt standardized disclosures.</p>
<h2>Rule benders and the effectiveness of disclosure</h2>
<p>Research on the broader use of mandated disclosure, such as for <a href="https://www.jstor.org/stable/41149884?seq=1#metadata_info_tab_contents">home mortgage lending</a> and <a href="https://www.fca.org.uk/insight/can-performance-based-regulation-succeed-where-mandated-disclosure-has-failed">consumer product labeling</a>, shows that crafting effective disclosure regulations is difficult. </p>
<p>One reason is that the companies can easily evade disclosing useful information while still complying with the letter of the law. These “<a href="https://www.cambridge.org/core/books/incomprehensible/3BD00F26FB31EF2D8944D5B083B6A72C">rule benders</a>” can be very creative. Consider the restaurant in New York City that was subject to a health inspection grading regulation and managed to <a href="https://www.wsj.com/articles/BL-METROB-8013">disguise</a> its “B” rating by simply adding “EST” to its display of its grade. Disclosure regulations can also fail when they don’t effectively communicate valuable information. </p>
<p>A <a href="https://doi.org/10.1038/s41558-021-01271-8">study of one type of climate disclosure</a> – emissions labels on consumer products – found mixed evidence as to whether consumers altered their behavior in response. Rule benders can exploit <a href="https://www.penguinrandomhouse.com/books/647557/too-much-information-by-cass-r-sunstein/">human tendencies</a> to discount or filter out warnings by providing an avalanche of unnecessary information that confuses and overwhelms the intended recipient. </p>
<h2>Expect court challenges</h2>
<p>One challenge the SEC has grappled with is whether it has statutory authority to require companies to disclose their “<a href="https://www.asyousow.org/press-releases/2022/3/8/sec-climate-disclosure-rulemaking">Scope 3”</a> <a href="https://www.americanprogress.org/article/why-companies-should-be-required-to-disclose-their-scope-3-emissions/">emissions</a>. These are emissions that a company doesn’t directly control, such as emissions from the use of its products or emissions in its supply chain. </p>
<p>A company like Amazon may have extensive upstream Scope 3 emissions in its suppliers’ transportation networks. General Motors would have extensive downstream emissions when people drive its gas-powered vehicles. </p>
<figure class="align-center ">
<img alt="Lists of examples of scope 1, 2, 3 emissions sources with an illustration of a factory in the center" src="https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=509&fit=crop&dpr=1 600w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=509&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=509&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=640&fit=crop&dpr=1 754w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=640&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=640&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">What scope 1, 2 and 3 emissions involve.</span>
<span class="attribution"><a class="source" href="https://www.americanprogress.org/article/why-companies-should-be-required-to-disclose-their-scope-3-emissions/">Chester Hawkins/Center for American Progress</a></span>
</figcaption>
</figure>
<p>The SEC’s three Democratic commissioners, who make up a majority of the commission, <a href="https://www.natlawreview.com/article/internal-dissension-sec-delays-climate-change-disclosure-regulations">have reportedly split</a> on whether certain Scope 3 emissions can be viewed as “<a href="https://www.natlawreview.com/article/made-tv-sec-s-regulatory-posture-climate-risk">material</a>” to investors and therefore subject to disclosure. </p>
<p>“<a href="https://www.law.cornell.edu/cfr/text/17/240.12b-2">Material” is defined</a> as information that a reasonable person would consider important in making an investment decision. </p>
<p>Some critics of climate disclosures, including <a href="https://www.sec.gov/comments/climate-disclosure/cll12-8915606-244835.pdf">several Republican state attorneys general</a>, suggest that the SEC has no authority to require disclosures that are not financially material. Missouri’s attorney general wrote that requiring climate reporting would impose “<a href="https://www.sec.gov/comments/climate-disclosure/cll12-8915601-244834.pdf">large costs and administrative burdens</a>” on publicly traded companies. A group of senators suggested greenhouse gas-related assets would <a href="https://www.sec.gov/comments/climate-disclosure/cll12-8911330-244285.pdf">shift to private companies</a>. West Virginia’s attorney general <a href="https://www.sec.gov/comments/climate-disclosure/cll12-8563794-230748.pdf">threatened to sue the SEC</a>. </p>
<p>The costs of disclosure would vary. Some companies already intensely monitor emissions. Others would likely face high costs if Scope 3 emissions were included. An oil company, for example, might have to <a href="https://cleanenergynews.ihsmarkit.com/research-analysis/oil-gas-companies-under-pressure-to-manage-scope-3-emissions-t.html">measure emissions from all the vehicles using its fuel</a>. </p>
<p>The Administrative Procedure Act allows courts to vacate SEC rules that are <a href="https://www.law.cornell.edu/uscode/text/5/706">deemed arbitrary or capricious</a> because the agency failed to offer sufficient justification for choosing the proposal over alternatives. The SEC is acutely aware of this risk. A prior oil and gas extraction disclosure rule <a href="https://www.jdsupra.com/legalnews/sec-resource-extraction-issuer-disclosu-84300/">was invalidated</a> by a court in 2013 as arbitrary and capricious. </p>
<h2>Proceeding with caution</h2>
<p>The SEC’s forthcoming climate risk disclosure rule will not be the final effort to use information to shape the private sector’s response to climate change.</p>
<p>What the SEC does now will affect those future moves. No wonder it is taking its time and proceeding cautiously.</p>
<p><em>This article was updated March 10, 2022, with the SEC listing the climate disclosure rule on its March 21 agenda.</em></p><img src="https://counter.theconversation.com/content/178304/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Some investors want publicly traded companies to disclose their full climate impact, including emissions from their supply chains and product use.Daniel E. Walters, Assistant Professor of Law, Penn StateWilliam M. Manson, Law Student, Penn StateLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1636982021-07-01T12:16:05Z2021-07-01T12:16:05ZTrump Organization tax fraud convictions show downsides of private companies having no independent oversight or outside accountability<figure><img src="https://images.theconversation.com/files/499377/original/file-20221206-26-7qtkic.jpg?ixlib=rb-1.1.0&rect=49%2C34%2C3277%2C2119&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Family-run businesses like Donald Trump's tend to have little outside oversight.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/TrumpLegalTroubles/4906419a791f417380925123e94e6789/photo?Query=trump&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=222935&currentItemNo=9">AP Photo/Mark Lennihan</a></span></figcaption></figure><p>Donald Trump’s family business <a href="https://www.nytimes.com/live/2022/12/06/nyregion/trump-organization-trial-verdict">was found guilty</a> of 17 counts of tax fraud and other financial crimes on Dec. 6, 2022, in a case prosecutors said displayed a “culture of fraud and deception” at the Trump Organization. </p>
<p>Allen H. Weisselberg, the company’s former chief financial officer, <a href="https://www.cnn.com/2022/08/18/politics/allen-weisselberg-pleads-guilty/index.html">had previously pleaded guilty</a> to charges and testified before jurors against the Trump Organization – but <a href="https://fortune.com/2022/11/17/donald-trump-organization-tax-fraud-cfo-allen-weisselberg-testimony-court-trial/">never implicated the former president himself</a>.</p>
<p>As a <a href="https://damore-mckim.northeastern.edu/people/bert-a-spector/">scholar in corporate leadership and governance</a>, I know that private companies like the Trump Organization lack the safeguards of public corporations – like outside ownership and independent oversight. </p>
<p>Moreover, impulsive decision-making by an individual or small, isolated group of people, without those safeguards, can and often <a href="http://www.nytimes.com/2003/03/09/weekinreview/the-nation-nasa-s-curse-groupthink-is-30-years-old-and-still-going-strong.html">will lead to disastrous results</a>. </p>
<p>That appears to be what the convictions in the Trump Organization trial show. </p>
<h2>Public ownership</h2>
<p>Some years ago, I explored the distinction between public and private companies in detail when the American Bar Association <a href="https://www.americanbar.org/products/inv/book/137420869/">invited me to write</a> about what young corporate lawyers need to understand about how business works. Based on that research, I want to point to an important set of distinctions between public and private corporations.</p>
<p>Public corporations are those businesses that trade their stock on a public market, such as the New York Stock Exchange. They are regulated by the Securities and Exchange Commission and are affected by a number of important federal laws, most notably the <a href="https://www.complianceonline.com/corporate-and-criminal-fraud-accountability-act-overview-and-summary-of-requirements-12610-prdad">Corporate Fraud Accountability Act</a>, popularly known as Sarbanes-Oxley. </p>
<p>Private companies do not trade their stock publicly. Ownership is tightly held by a limited number of chosen investors. As such, they escape the scrutiny of these public overseers.</p>
<figure class="align-center ">
<img alt="A white man wearing a mask, a suit and cufflinks walks between two officers" src="https://images.theconversation.com/files/499379/original/file-20221206-12-41dnqc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/499379/original/file-20221206-12-41dnqc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/499379/original/file-20221206-12-41dnqc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/499379/original/file-20221206-12-41dnqc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/499379/original/file-20221206-12-41dnqc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/499379/original/file-20221206-12-41dnqc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/499379/original/file-20221206-12-41dnqc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Trump Organization’s former Chief Financial Officer Allen Weisselberg, wearing a mask, pleaded guilty in August 2022 for his role in the tax fraud scheme.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/TrumpLegalTroubles/0d658520b2da44819536f9424293baae/photo?Query=Weisselberg&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=147&currentItemNo=20">AP Photo/John Minchillo</a></span>
</figcaption>
</figure>
<h2>Outside oversight</h2>
<p>The CEO of a public company is subject to an array of constraints and a varying but always substantial degree of oversight. </p>
<p>There are boards of directors, of course, that review all major strategic decisions. And there are separate committees composed entirely of independent directors who don’t have any ongoing involvement in running the business that assess CEO performance and determine compensation.</p>
<p>In addition, public shareholders are entitled to vote directly on the compensation awarded to top executives. Whole categories of CEO decisions, including mergers and acquisitions, international expansions and changes in the corporation’s charter, are subject to the opinion of shareholders and directors.</p>
<p>The composition of the board of directors is also regulated by law. Half the directors must be <a href="https://corporatefinanceinstitute.com/resources/careers/jobs/independent-director/">independent of the company</a>. And the board committees charged with conducting audits, hiring and firing the CEO and determining executive pay must be 100% independent. Company insiders and close family members may sit on public boards but are not counted as independent. </p>
<h2>Full disclosure</h2>
<p>The <a href="http://www.legalandcompliance.com/securities-resources/sec-requirements-for-public-companies">Securities and Exchange Commission requires</a> the CEOs of public corporations to make full and public disclosures of their financial performance. Regular reports require disclosure of operating expenses, significant partnerships, liabilities, strategies, risks and plans.</p>
<p>Additionally, public companies must hire an independent auditing firm approved by the <a href="https://pcaobus.org/">Public Company Accounting Oversight Board</a> to conduct and verify the thoroughness and accuracy of those financial statements. Any fraudulent reporting can result in criminal charges against the CEO and chief financial officer.</p>
<p>These rules are all intended to safeguard the integrity of corporations, to help make them transparent to public investors and to guard against corruption. They are <a href="https://www.londontfe.com/blog/Top-10-steps-to-improving-Corporate-Governance/">far from perfect</a>, but they are helpful. And private corporations are not required to comply with any of them.</p>
<h2>How ‘Trump Inc.’ operated</h2>
<p>Well-governed companies, such as <a href="https://ethicalboardroom.com/corporate-governance-winners-2018-the-americas/">Microsoft and PepsiCo</a>, <a href="http://www.nber.org/papers/w15912">tend to outperform</a> poorly governed ones, often dramatically. That’s largely due to all the factors noted above that are required for public companies. </p>
<p>This doesn’t mean all private companies are governed poorly, or that all public businesses are governed well. But key ingredients of good governance, especially accountability, are baked into public corporations in a way that they aren’t for private companies. </p>
<p>Management at the Trump Organization, on the other hand, was accountable to no one, other than Trump himself. The executive team of the Trump Organization – a limited liability company that has owned and run hundreds of businesses involving real estate, hotels, golf courses and much else – <a href="https://www.nytimes.com/2016/12/25/us/politics/trump-organization-business.html">is made up</a> entirely of his children and people who are loyal to him. And his decision-making authority was unconstrained by any external oversight or internal constraints. </p>
<p>Decisions concerning what businesses to start or exit, how much money to borrow and at what interest rates, how to market products and services and how to pay suppliers or treat customers were made centrally and not subject to review. </p>
<p>Trump, it should be noted, made one stab at a public company in the mid-1990s: <a href="https://theconversation.com/can-trump-create-millions-of-jobs-dont-bet-on-it-66104">Trump Hotels and Casino Resorts</a>. That was an <a href="https://www.washingtonpost.com/business/economy/as-its-stock-collapsed-trumps-firm-gave-him-huge-bonuses-and-paid-for-his-jet/2016/06/12/58458918-2766-11e6-b989-4e5479715b54_story.html">unmitigated disaster</a>, leading to five separate declarations of bankruptcy starting in 2004, all during a period when other casino companies thrived. </p>
<p>As a private company, the Trump Organization was under no obligation to follow the guidelines of good governance. Because, in my view, it voluntarily decided to ignore such guidelines, the convictions <a href="https://www.brookings.edu/research/new-york-states-trump-investigation-an-analysis-of-the-reported-facts-and-applicable-law/">may be only the first of many</a>. </p>
<p><em>This story is an updated version of an <a href="https://theconversation.com/white-house-in-turmoil-shows-why-trumps-no-ceo-72393">article originally published</a> on Feb. 16, 2017.</em></p><img src="https://counter.theconversation.com/content/163698/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bert Spector does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Publicly traded companies must have independent oversight and make regular financial and other disclosures. The Trump Organization has none of these safeguards.Bert Spector, Associate Professor of International Business and Strategy at the D'Amore-McKim School of Business, Northeastern UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1608262021-06-09T18:05:03Z2021-06-09T18:05:03ZWhy big pharma had a responsibility to profit from the pandemic<figure><img src="https://images.theconversation.com/files/405313/original/file-20210609-14704-fxqbhd.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C7947%2C5054&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/doctor-vaccinating-earth-because-coronavirus-blue-1673309206">Shutterstock/Yalcin Sonat</a></span></figcaption></figure><p>The pharmaceutical company Pfizer expects to earn up to <a href="https://s21.q4cdn.com/317678438/files/doc_financials/2021/q1/Q1-2021-Earnings-Conference-Call-Prepared-Remarks-FINAL.pdf">US$26 billion</a> (£18 billion) this year from the sale of its COVID-19 vaccine. Profits for the first quarter of 2021 are apparently <a href="https://s21.q4cdn.com/317678438/files/doc_financials/2021/q1/Q1-2021-Earnings-Conference-Call-Prepared-Remarks-FINAL.pdf">44% higher</a> than they were a year ago. </p>
<p>Similarly, Moderna expects <a href="https://www.cnbc.com/2021/02/25/covid-vaccine-moderna-expects-18point4-billion-in-2021-sales.html">to make US$18.4 billion</a> (£13 billion), and record its <a href="https://www.irishtimes.com/business/health-pharma/moderna-reports-first-ever-quarterly-profit-with-1-4bn-covid-sales-1.4557396">first ever profit</a> this year. </p>
<p>This has led some to ask <a href="https://www.bbc.com/news/business-55170756">whether it is right</a> for these big drug companies to effectively profit from the pandemic – especially in light of commitments from competitors Johnson & Johnson and AstraZeneca to sell their vaccines on a <a href="https://www.bbc.com/news/business-55170756">non-profit basis</a>.</p>
<p>From a moral point of view, one might think such huge sums are unacceptable when so many industries – the arts, hospitality, retail, travel, to name but a few – have taken such a hit from lockdowns and social restrictions. </p>
<p>On the other hand, it could be argued that pharma companies have both a business and a social responsibility to use their profit-making model to provide the world with vaccines. Indeed, corporate law supports this position. </p>
<p>There’s a long-standing divide in this area of corporate legal research. On one side are those who see the corporation as a <a href="https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html">profit maximising machine for shareholders</a>. On the other are those who believe that while profit making is a necessary corporate objective, the corporation also has <a href="https://www.jstor.org/stable/1331697?seq=1">responsibilities</a> towards its employees, the environment, its community and society at large.</p>
<p>Those of us who take the latter view do so partly because it is supported by practices across the <a href="https://www.iiea.com/wp-content/uploads/2018/11/IIEA-Ireland-as-a-Dispute-reolution-hub-after-Brexit-20-11-2018.pdf">“common law” world</a> – countries including the UK, Ireland, the US, Canada and Australia, where decisions of the most senior courts are sources of law and are binding on other courts – dating back to the <a href="https://www.bailii.org/uk/cases/UKHL/1896/1.html">19th century</a>. This approach recognises the corporation as an entity distinct from its shareholders. </p>
<p>But not only is this view of corporate responsibility legally correct, it is also the socially responsible view of the corporation because it recognises the wider consequences of a “profit at all costs” mentality. It takes into account the human side of business, such as the impact on workers and local communities when factories close and production is <a href="https://www.rte.ie/news/business/2021/0507/1217509-sudocream-dublin-plant/">outsourced</a> to places with lower wage costs (and often less regulation). </p>
<p>This view of what a corporation should be fully accepts the essential role shareholders have in providing capital to fund expensive research and the development of essential products. But it also recognises those other essential roles – of employees who provide their talents and labour, and of society in providing demand for goods and services.</p>
<p>Seeing as the corporation could not function without every stakeholder playing their part, all of these and other interests should form part of the decision making process.</p>
<p>And it seems as though this is what Pfizer and Moderna have done. Surely it would have been more troubling if their management teams had chosen not to work on a COVID-19 vaccine because of the huge financial costs involved, and the reputational costs that would inevitably follow if their attempts failed.</p>
<p>Corporations deciding to take the cheaper route to secure their bottom line is all too familiar. A big pharma executive could legitimately have argued that looking the other way during a global pandemic and thus avoiding all the potentially crippling externalities associated with the development of a brand new vaccine might be the safest option.</p>
<p>But this was not the path that Pfizer for example chose when it weighed up the various factors in play, including the societal benefits of a COVID-19 vaccine, the associated business risks of such a venture, and of course the chance to increase profits. </p>
<h2>Risks and rewards</h2>
<p>Moderna and Pfizer (and its development partner BioNTech) also did exactly what the corporate law frameworks in their respective countries required.</p>
<figure class="align-center ">
<img alt="Pfizer HQ sign reads 'Science Will Win'." src="https://images.theconversation.com/files/405319/original/file-20210609-14808-18ohhhi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/405319/original/file-20210609-14808-18ohhhi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/405319/original/file-20210609-14808-18ohhhi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/405319/original/file-20210609-14808-18ohhhi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/405319/original/file-20210609-14808-18ohhhi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/405319/original/file-20210609-14808-18ohhhi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/405319/original/file-20210609-14808-18ohhhi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">And so will shareholders and, importantly, society at large.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/new-york-city-ny-us-april-1960547713">Shutterstock/Molly Woodward</a></span>
</figcaption>
</figure>
<p>In the US, where Pfizer and Moderna are <a href="https://s21.q4cdn.com/317678438/files/doc_downloads/Corporate_Governance/Restated-Certificate-of-Incorporation-(As-of-December-14-2020).pdf">based</a>, the Supreme Court has recognised that corporations have responsibilities beyond exclusively going after profit. Also, most states have enacted so called “constituency statutes”, which make it clear that management can consider <a href="https://www.legis.state.pa.us/CFDOCS/LEGIS/LI/consCheck.cfm?txtType=HTM&ttl=15&div=00.&chpt=005.&sctn=015.&subSctn=000.">“any or all groups”</a> affected by the corporation’s actions – shareholders, employees and yes, the wider community. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/donald-trump-social-media-ban-shows-corporate-responsibility-can-win-out-over-profit-155531">Donald Trump: social media ban shows corporate responsibility can win out over profit</a>
</strong>
</em>
</p>
<hr>
<p>The same is true in Germany, home of BioNTech, which first developed the Pfizer vaccine. The broad obligation on management in German corporations is to work in the <a href="https://www.dcgk.de/en/code/foreword.html">“interests of the company”</a>. And although these are not defined, it is generally accepted to mean that these interests include the interests of society.</p>
<p>So drug companies are not wrong to have made a profit from the pandemic. What would have been wrong is if they had ignored the obvious and vast global social damage of COVID-19 and focused instead on the financial and potentially grave reputational risks of developing a vaccine for the world. </p>
<p>Instead, they acted in accordance with what corporate law requires – and what every corporation should be doing. It is acknowledging the contribution of every player in the organisation – shareholders, employees, suppliers, society – and rewarding them accordingly, whether that’s in financial or medical gain.</p><img src="https://counter.theconversation.com/content/160826/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael James Boland receives funding from the Irish Research Council. </span></em></p>Corporations need to weigh up significant risks against wider benefits.Michael James Boland, PhD Researcher, IRC Government of Ireland Scholar, University College CorkLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1493462020-11-24T20:33:06Z2020-11-24T20:33:06ZSupreme Court dismisses company’s cruel and unusual punishment claim<figure><img src="https://images.theconversation.com/files/371071/original/file-20201124-15-t4jx7j.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5509%2C3390&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Supreme Court of Canada's recent decision has put a halt to any legal claims that there's no difference between corporations and people. </span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Adrian Wyld</span></span></figcaption></figure><p>In January 2020, the Supreme Court of Canada heard a case that made headlines because it raised a provocative question: Can corporations be subject to cruel and unusual punishment? </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/supreme-court-can-a-corporation-be-subjected-to-cruel-and-unusual-punishment-130147">Supreme Court: Can a corporation be subjected to cruel and unusual punishment?</a>
</strong>
</em>
</p>
<hr>
<p>While the question might strike the ordinary person as amusing, by the time the <em>Attorney General of Québec vs. 9147-0732 Québec Inc.</em> case arrived at Canada’s top court, the stakes were high. That’s because some established elements of corporate and criminal law were thrown into doubt when the case was decided by <a href="https://www.canlii.org/fr/qc/qcca/doc/2019/2019qcca373/2019qcca373.html?autocompleteStr=9147-0732&autocompletePos=1">a 2-1 majority</a>) of the Québec Court of Appeal in favour of a Québec contracting company.</p>
<p>The company had challenged what it thought was an unreasonably high mandatory minimum fine that it claimed could push it into bankruptcy. It argued the fine, upwards of $30,000, was an over-the-top consequence for doing renovation work without a permit contrary to the province’s Building Act.</p>
<p>In order to support its claim that the fine fit within the criteria for Section 12 of the <a href="https://laws-lois.justice.gc.ca/eng/const/page-15.html">Canadian Charter of Rights and Freedoms</a> — namely that it was grossly disproportionate — the company argued it was cruel because a bankruptcy would have a significant negative impact on shareholders and employees who depended on the business for their livelihoods. </p>
<h2>Big stretch</h2>
<p>This argument seemed a big stretch based on current law. It was surprising therefore when two of three Québec Court of Appeal judges agreed with the company, finding that nothing in the text of Section 12 precluded the inclusion of corporations. </p>
<p>The majority held that the protection against cruel and unusual punishment is not inextricably tied to protecting human beings from degrading and inhumane treatment. They did not see a problem with extending protection to corporations if penalties inflict damage on the people involved with a corporation.</p>
<p>The dissenting judge disagreed and said that the long history of the protection against cruel and unusual punishment showed that the very core of Section 12 is about protecting human dignity.</p>
<p>The Supreme Court justices agreed with the dissenting Québec judge and unequivocally rejected the notion that Section 12 could ever apply to non-human entities. In support of its ruling, the court referred to several landmark cases decided in the early days of the Charter, including the 1987 decision of <a href="https://scc-csc.lexum.com/scc-csc/scc-csc/en/item/443/index.do"><em>Irwin Toy Ltd vs. Attorney-General of Québec</em></a>.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/AW95-XeGp0E?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Prof. Anna Lund of the University of Alberta explains the Irwin Toy decision in January 2020.</span></figcaption>
</figure>
<p>In the more recent case, the Supreme Court ruled:</p>
<blockquote>
<p>“Simply put, the text ‘cruel and unusual’ denotes protection that ‘only human beings can enjoy’ …. The protective scope of Section 12 is thus limited to human beings …. And the existence of human beings behind the corporate veil is insufficient to ground a Section 12 claim of right on behalf of a corporate entity, in light of the corporation’s separate legal personality.”</p>
</blockquote>
<p>The court also rejected the argument that the impact on a company’s stakeholders should be considered when determining the scope of Section 12.</p>
<h2>Shuts the door to future challenges</h2>
<p>The ruling is important. </p>
<p>First, by firmly closing the door to Section 12 challenges by corporations, we avoid injecting unnecessary uncertainty into the prosecution of corporations for regulatory offences. Many of those offences carry significant fines, limited to corporations, as a means of promoting greater compliance with laws designed to protect the public interest, such as those mandating workplace health and safety standards and environmental protections.</p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/371073/original/file-20201124-15-1ev23ig.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Supreme Court of Canada Chief Justice Richard Wagner gestures as he responds to a question" src="https://images.theconversation.com/files/371073/original/file-20201124-15-1ev23ig.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/371073/original/file-20201124-15-1ev23ig.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=414&fit=crop&dpr=1 600w, https://images.theconversation.com/files/371073/original/file-20201124-15-1ev23ig.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=414&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/371073/original/file-20201124-15-1ev23ig.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=414&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/371073/original/file-20201124-15-1ev23ig.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=520&fit=crop&dpr=1 754w, https://images.theconversation.com/files/371073/original/file-20201124-15-1ev23ig.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=520&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/371073/original/file-20201124-15-1ev23ig.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=520&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Supreme Court of Canada Chief Justice Richard Wagner gestures as he responds to a question during his annual news conference in June 2020 in Ottawa. THE CANADIAN PRESS/Adrian Wyld.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Adrian Wyld</span></span>
</figcaption>
</figure>
<p>Second, by rejecting the notion that the prospect of bankruptcy (and its effects on people) is relevant to Section 12, the Supreme Court has indirectly affirmed a key principle of corporate sentencing established in 2013 by the Ontario Court of Appeal in the <a href="https://www.canlii.org/en/on/onca/doc/2013/2013onca541/2013onca541.html?resultIndex=1">Metron case</a>. </p>
<p><a href="https://www.cbc.ca/news/canada/toronto/scaffolding-collapse-criminally-responsible-vadim-kaznelson-1.3397597">Metron was a construction company prosecuted for criminal negligence</a> causing death following the collapse of a swing stage on a construction site in Toronto in December 2009. Four men died and one was permanently disabled because they were not wearing lifelines as required by law. Metron pleaded guilty, but the Crown and defence disagreed significantly on the amount of the fine. </p>
<p>The trial court imposed a lower fine in part because of the company’s poor financial situation. The Ontario Court of Appeal disagreed, ruling that the risk of bankruptcy, while relevant, does not automatically impose an upper limit on what amount of fine is an appropriate punishment. The Supreme Court’s ruling on the Québec contracting company therefore nips in the bud the doubt the Québec Court of Appeal decision had cast upon the Metron decision. </p>
<p>Finally, by concluding that a corporation couldn’t point to the collateral damage a fine might cause to its employees and other stakeholders to make its case, the Supreme Court has clearly adhered to the current state of corporate law that disregards corporate personality only in rare circumstances. </p>
<p>By doing so, the Supreme Court has quelled any fears that this case might weaken this cornerstone principle of corporate law, including under the <a href="https://laws-lois.justice.gc.ca/eng/acts/c-44/page-3.html#h-108591">Canada Business Corporations Act</a>, by blurring the normally sharp line drawn between the corporation and its human stakeholders.</p><img src="https://counter.theconversation.com/content/149346/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jennifer Quaid holds research grants from the Social Sciences Research Council of Canada. She is a member of Transparency International Canada and sits on its legal committee. </span></em></p>The Supreme Court of Canada’s recent ruling against a company that claimed a fine against it constituted cruel and unusual punishment will quell fears of weakening corporate law.Jennifer Quaid, Associate Professor, Civil Law Section, Faculty of Law, L’Université d’Ottawa/University of OttawaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1301472020-01-26T13:15:27Z2020-01-26T13:15:27ZSupreme Court: Can a corporation be subjected to cruel and unusual punishment?<figure><img src="https://images.theconversation.com/files/311835/original/file-20200124-81341-onph7q.jpg?ixlib=rb-1.1.0&rect=6%2C39%2C1417%2C846&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The statue of Veritas (Truth) is pictured in front of the Supreme Court of Canada in Ottawa in May 2018. </span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Sean Kilpatrick</span></span></figcaption></figure><p>Yes, you read that headline right. As far-fetched as it sounds, the Supreme Court of Canada <a href="https://www.scc-csc.ca/case-dossier/info/sum-som-eng.aspx?cas=38613">just heard a case that raises the question</a> of whether the protection against cruel and unusual punishment set out in the <a href="https://laws-lois.justice.gc.ca/eng/const/page-15.html">Canadian Charter of Rights and Freedoms</a> extends to corporations.</p>
<p>The constitutional challenge could establish a new frontier in sentencing. </p>
<p>The story behind the case is simple.</p>
<p>The accused numbered company, 9147-0732 Québec Inc., is a building contractor convicted of doing construction work without a proper licence, contrary to the <a href="http://legisquebec.gouv.qc.ca/fr/showdoc/cs/B-1.1?langCont=en">Québec Building Code</a>. </p>
<p>At trial, the judge rejected the company’s defence that it had simply made a mistake by billing the work through the “wrong” company. In the construction industry, sub-contracting among different companies run by the same people, often family members, is common. </p>
<p>Prior to sentencing, the company challenged the $30,000 minimum penalty applicable to corporations — about three times the minimum applicable to individuals — as cruel and unusual punishment under Sec. 12 of the Charter, which mandates that no one should be subjected to such punishment.</p>
<p>The trial judge decided that the company’s Charter rights weren’t violated. </p>
<p>The judge then separately ruled that corporations cannot claim protection from cruel and unusual punishment because in Canada and elsewhere, it’s intended to protect people, not companies, from unconscionable, degrading or inhumane treatment. That includes torture or indefinite solitary confinement.</p>
<h2>Went to appeal</h2>
<p>That second portion of the ruling was appealed to the Superior Court of Québec, <a href="https://www.canlii.org/fr/qc/qccs/doc/2017/2017qccs5240/2017qccs5240.html">which upheld the decision</a>, and then to the Québec Court of Appeal, where the <a href="https://www.canlii.org/fr/qc/qcca/doc/2019/2019qcca373/2019qcca373.html">judges split 2-1</a> in favour of the company.</p>
<p>The two judges ruled that nothing in the Charter section precludes companies from arguing that a mandatory minimum penalty is cruel and unusual punishment. </p>
<p>A key part of their reasoning was that mandatory minimum monetary penalties could lead to fines that cause serious economic harm and even push companies into bankruptcy. </p>
<p>Since that could potentially hurt employees who are at risk of losing their jobs and benefits, it could constitute cruel and unusual punishment, they held.</p>
<p>The two justices pointed to a <a href="https://laws-lois.justice.gc.ca/eng/acts/c-46/page-186.html#h-130929">specific sentencing factor</a> in the Criminal Code that requires a judge to take into account the effect of the sentence on the economic viability of a business entity and the continued employment of its employees. They also cited the new <a href="https://laws-lois.justice.gc.ca/eng/acts/c-46/page-183.html#h-130598">remediation agreement regime</a>, which clearly states that one of the purposes of the regime is to: </p>
<blockquote>
<p>“… reduce the negative consequences of the wrongdoing for persons — employees, customers, pensioners and others — who did not engage in the wrongdoing, while holding responsible those individuals who did engage in that wrongdoing.”</p>
</blockquote>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/whats-ahead-for-remediation-agreements-in-the-snc-lavalin-aftermath-128104">What's ahead for remediation agreements in the SNC-Lavalin aftermath</a>
</strong>
</em>
</p>
<hr>
<p>In his dissent, the third judge analyzed the history of the protection from cruel and unusual punishment in Canadian and English law (going back to the 1688 <a href="http://www.legislation.gov.uk/aep/WillandMarSess2/1/2/introduction">Bill of Rights</a>), as well American, European and international human rights conventions. </p>
<p>He concluded that it was inconsistent with the essence of Sec. 12 of the Charter to allow corporations to assert that monetary penalties could constitute cruel and unusual punishment. </p>
<p>He also rejected corporations pointing to potential bankruptcy, and its impact on their employees, as a basis for saying a punishment is cruel and unusual. In his view, this was tantamount to giving corporations the ability to have their cake and eat it too — behave badly in ways that could harm their employees, then use those employees as a shield when penalized.</p>
<h2>Corporations have some Charter rights</h2>
<p>The question, therefore, of whether the Charter should be interpreted to extend to corporations is complex. And it’s not new; it came up almost immediately after the Charter was enacted. </p>
<p>Courts have found that corporations do have the benefit of some Charter rights, like those protecting against <a href="https://www.canlii.org/en/ca/scc/doc/1984/1984canlii33/1984canlii33.html?resultIndex=1">unreasonable search and seizure</a>, the <a href="https://www.canlii.org/en/ca/scc/doc/1992/1992canlii95/1992canlii95.html?autocompleteStr=CIP&autocompletePos=1">right to trial within a reasonable time</a> and the <a href="https://www.canlii.org/en/ca/scc/doc/1991/1991canlii39/1991canlii39.html?resultIndex=1">presumption of innocence</a>.</p>
<p><a href="https://www.canlii.org/en/ca/scc/doc/1985/1985canlii69/1985canlii69.html?resultIndex=1">Corporations are also able to challenge unconstitutional laws</a> that violate their rights.</p>
<p>Over time, provincial and federal lawmakers have tended to create separate regulatory offences for individuals and corporations to deal with these kinds of challenge. By and large that approach has worked — until now.</p>
<p>The Supreme Court is now being asked to address three issues. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/311839/original/file-20200124-81346-iaogt7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/311839/original/file-20200124-81346-iaogt7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/311839/original/file-20200124-81346-iaogt7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/311839/original/file-20200124-81346-iaogt7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/311839/original/file-20200124-81346-iaogt7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/311839/original/file-20200124-81346-iaogt7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/311839/original/file-20200124-81346-iaogt7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Supreme Court of Canada is being asked to determine whether a corporation is entitled to the same rights as people.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Sean Kilpatrick</span></span>
</figcaption>
</figure>
<p>The first is a general question about whether we need to adjust how we interpret the rights set out in the Charter. The Charter is supposed to evolve with Canadian society, and so it’s important to reassess and adapt in response to societal changes.</p>
<p>The second question is an examination of what’s at the heart of the protection against cruel and unusual punishment. Is it intertwined with and inseparable from protecting human dignity? The appellants, the Attorney General of Québec and the Director of Penal and Criminal Prosecutions <a href="https://www.scc-csc.ca/WebDocuments-DocumentsWeb/38613/FM010_Appelants_Procureure-g%C3%A9n%C3%A9rale-du-Qu%C3%A9bec-et-al.pdf">made the argument</a> to the Supreme Court that Sec. 12 does not apply to corporations.</p>
<p>Four of the six interveners in the Supreme Court case support this interpretation: the <a href="https://www.scc-csc.ca/WebDocuments-DocumentsWeb/38613/FM080_Intervenante_Directrice-des-poursuites-p%C3%A9nales.pdf">Director of Public Prosecutions of Canada</a>, the <a href="https://www.scc-csc.ca/WebDocuments-DocumentsWeb/38613/FM060_Intervener_Attorney-General-of-Ontario.pdf">Attorney General of Ontario </a>, the <a href="https://www.scc-csc.ca/WebDocuments-DocumentsWeb/38613/FM050_Intervener_Canadian-Civil-Liberties-Association.pdf">Canadian Civil Liberties Association</a> and the <a href="https://www.scc-csc.ca/WebDocuments-DocumentsWeb/38613/FM040_Intervener_British-Columbia-Civil-Liberties-Association.pdf">B.C. Civil Liberties Association</a>. The Ontario argument stated:</p>
<blockquote>
<p>“Section 12 should remain, as it always has been, limited to protecting the dignity and worth of human beings, not the profits of corporations.”</p>
</blockquote>
<p>On the other side, the respondent company argued that Sec. 12 is better interpreted as a broader protection against any punishment that is “grossly disproportionate” without the need for a connection to human dignity.</p>
<p>It insists that allowing corporations to make an argument under the section doesn’t trivialize cruel and unusual punishment nor make it easier to prove. Two interveners support this position: the <a href="https://www.scc-csc.ca/WebDocuments-DocumentsWeb/38613/FM030_Intervenante_Association-des-avocats-de-la-d%C3%A9fense-de-Montr%C3%A9al.pdf">Association of Criminal Defence Lawyers of Montréal</a> and the <a href="https://www.scc-csc.ca/WebDocuments-DocumentsWeb/38613/FM070_Intervener_Canadian-Constitution-Foundation.pdf">Canadian Constitution Foundation</a>.</p>
<h2>Citing the harm to employees</h2>
<p>The most significant issue is the last: whether a corporation can rely on how a punishment affects the people who have a stake in its economic fortunes as evidence of the cruel and unusual nature of the sanction. </p>
<p>The Attorney General of Ontario and the Canadian Civil Liberties Association argue forcefully that this is hard to square with the basic principle of corporate law — that corporations are distinct legal entities separate from the people who create them. </p>
<p>Beyond this lies a deeper, more troubling concern.</p>
<p>Regulatory offences are, for the most part, meant to motivate businesses to spend money on measures that protect the public and vulnerable groups who lack the power to demand these protections directly. </p>
<p>That means we must be very careful that Sec. 12 is not used to do an end run around the purpose of public welfare regulation.</p>
<p>Imagine the outrage if a corporation subject to a heavy fine for a serious safety violation that put workers’ lives at risk could turn around and challenge the fine as cruel and unusual punishment because those same employees might lose their jobs.</p>
<p>Should the Supreme Court side with the Québec contractor, that’s a distinct possibility.</p><img src="https://counter.theconversation.com/content/130147/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jennifer Quaid is affiliated with Transparency International Canada and sits on its legal committee. She currently holds research grants funded by the Social Sciences Research Council of Canada and the Foundation for Legal Research. </span></em></p>A Québec company is asking for a Charter right usually reserved for people. There could be unintended consequences if it wins its challenge to the Supreme Court of Canada.Jennifer Quaid, Associate Professor, Civil Law Section, Faculty of Law, L’Université d’Ottawa/University of OttawaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1259252019-11-12T19:00:22Z2019-11-12T19:00:22ZWhy Australia’s first securities class action judgment (sort of) cleared Myer<p>Myer is in the clear, sort of, after Australia’s first judicial ruling on a securities class action. </p>
<p>It centred around allegations that Myer misled the market about its projected earnings. </p>
<p>The court found Myer had been misleading, but that because shareholders didn’t believe it, it didn’t harm them.</p>
<p>The ruling established <a href="https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2019/2019fca1747">important principles</a> that will guide future judgments. </p>
<p>It isn’t enough for shareholders to show that there was a relevantly false or misleading statement or omission. </p>
<p>They need to also show it hurt them. </p>
<h2>What Myer did</h2>
<p>On September 11 2014, Myer’s chief executive Bernie Brookes indicated that he believed the net profit after tax for the 2015 financial year was likely to beat the previous year’s profit of A$98.5 million.</p>
<p>Five months later Brookes resigned, and on March 19 Myer cut the forecast to between $75 million and $80 million.</p>
<p>The class action alleged that Myer engaged in misleading conduct either because the initial September 11 2014 guidance was misleading or because - even if it was not misleading at the time - Myer allowed it to stand without correcting it.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/whats-behind-the-rise-in-shareholder-class-actions-72356">What's behind the rise in shareholder class actions</a>
</strong>
</em>
</p>
<hr>
<p>It argued the statement inflated the share price, causing buyers to pay too much for the shares and to lose money when the true state of affairs became known. </p>
<p>Myer argued it had no obligation to update the market after Brooke’s statement. </p>
<p>It said the market had already realised the profit would be lower than what he said. And, in any event, what he said was not misleading. </p>
<h2>What Myer was obliged to do</h2>
<p>The <a href="http://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/s1041e.html">Corporations Act Section 1041E</a> states that people must not make a false or misleading statement that is likely to (among other things) influence trading activity or market prices when that person knows, or ought to know, that the statement is not correct, or does not care whether the statement is correct. </p>
<p>Similarly, <a href="http://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/s1041h.html">Section 1041H</a> asserts that a person must not engage in misleading or deceptive conduct, which could include failing to correct erroneous statements. </p>
<p>Indeed, <a href="http://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/s769c.html">Section 769C</a> says if a statement is made without reasonable grounds, it is deemed to be misleading.</p>
<p><a href="http://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/s1041i.html">Corporations Act Section 1041I</a> says anyone who has suffered loss or damage by a contravention of the aforementioned rules can recover the amount of that loss or damage. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/explainer-what-exactly-must-companies-disclose-to-investors-82979">Explainer: what exactly must companies disclose to investors?</a>
</strong>
</em>
</p>
<hr>
<p>Also, <a href="http://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/s674.html">Corporations Act Section 674</a> says firms must comply with continuous disclosure requirements, which include disclosing material price-sensitive information. The provision gives legislative force to the Securities Exchange continuous disclosure guidelines. </p>
<p>There are two overarching elements involved in securities litigation, both of which were issues in the Myer case:</p>
<ul>
<li><p>the defendant makes a false or misleading statement</p></li>
<li><p>that false statement causes the plaintiff to suffer loss or damage. </p></li>
</ul>
<p>Each needs exploring. </p>
<h2>False or misleading?</h2>
<p>At first glance, a statement is false or misleading merely if it is incorrect, especially so if it is about something currently known. But things are less clear when the statement is about the future or a forecast. </p>
<p>Under <a href="http://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/s769c.html">Section 769C</a>, forecasts are held to be misleading if they are not based on reasonable grounds. Omitting information, or failing to correct information, can also be misleading if it creates or maintains a false impression. </p>
<h2>Loss or damage?</h2>
<p>Historically, in fraud type cases, the plaintiffs need to show that they “relied” on the false statement in making a decision. That is, they need to show they were directly misled.</p>
<p>Myer argued that the shareholders needed to show they actively “relied” on its statements when deciding to purchase shares. </p>
<p>The shareholders argued that the legislation does not require active reliance. They argued that it was enough to show that the false statement inflated the share price and that they bought at a price that was too high.</p>
<h2>It was a win and a loss…</h2>
<p>The court sided with the plaintiffs, finding that it was enough for them to show that the false statement (or misleading omission) inflated the share price, that they bought at a price that was too high, and they suffered a loss when the truth was revealed.</p>
<p>And it found Myer had been misleading by failing to correct a forecast it knew was erroneous. It had also violated the Exchange’s continuous disclosure standards. </p>
<p>But it found that Myer’s September 11 2014 forecast was not misleading at the time. It was in line with analysts’ forecasts, and in September 2014 Myer had reasonable grounds to make it. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-courts-and-costs-are-undermining-asic-and-the-acccs-efforts-to-police-misbehaving-banks-and-businesses-95528">How courts and costs are undermining ASIC and the ACCC's efforts to police misbehaving banks and businesses</a>
</strong>
</em>
</p>
<hr>
<p>Damages would normally reflect the difference between what the shareholders paid and what they would have paid if the true state of affairs had been known.</p>
<p>But given the market, notwithstanding the statement form the Myer chief executive, knew about Myer’s declining profitability and given that that information was reflected in the price, shareholders weren’t damaged.</p>
<h2>…with implications for the future</h2>
<p>The judgment will make future shareholder class actions easier. They will know what they have to prove.</p>
<p>An unanswered question is whether Myer will simply get away with having misled the market, given that it prevailed in the case. </p>
<p>It may not. Regulators - such as the Australian Securities and Investments Commission - still have penalty mechanisms they can use to punish officers and directors for misleading conduct, even if shareholders don’t prevail in court.</p><img src="https://counter.theconversation.com/content/125925/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Humphery-Jenner receives funding from the Australian Research Council. </span></em></p>Myer misled the market, but the market didn’t believe it. The judgment provides a road map for future class actions.Mark Humphery-Jenner, Associate Professor of Finance, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1240522019-10-14T16:06:31Z2019-10-14T16:06:31ZDebate: Can corporate purpose be global?<p>As a French consumer, I was pleased that in April 2019 France’s Parliament adopted a pioneering law on business growth and transformation. Known as <a href="https://www.economie.gouv.fr/plan-entreprises-pacte">PACTE</a>, it creates the possibility of companies to enshrine their purpose in corporate bylaws. This new law became even more significant four months later, when the Business Roundtable – a non-profit association based in Washington, whose members are chief executive officers of major US firms – released a new <a href="https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans">statement on the purpose of a corporation</a>.</p>
<p>Signed by 181 CEOs committed to lead their companies for the benefit of all stakeholders, they committed to: </p>
<blockquote>
<p>“delivering value to [their] customers […]. Investing in [their] employees. This starts with compensating them fairly and providing important benefits. […] Supporting the communities in which [their] work. […] Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate”.</p>
</blockquote>
<p>As the business historian and author <a href="https://www.hbs.edu/faculty/Pages/profile.aspx?facId=6493&facInfo=awa">Nancy Koehn</a> states, the new statement on the purpose of a corporation and the French PACTE Law are initiatives that responded to <a href="https://www.nytimes.com/2019/08/19/business/business-roundtable-ceos-corporations.html">“something in the zeitgeist”</a>. </p>
<p>Nonetheless, as a <a href="http://compasslabel.fr/index.php/compass-label-anglais/">CEO myself</a>, a Franco-Spanish citizen and a member of the programme <a href="https://francobritish.org/en/programmes/young-leaders/">Franco-British Young Leaders</a>, this new bill challenges me. For global companies, there is a significant gap between theory and practice regarding corporate purpose. Indeed, there is no evidence that a global company is able to define its corporate purpose regardless of its nationality. Doing so requires committing to deliver value not only to shareholders, but to all stakeholders (employees, customers, communities…). But can a global company truly do so? </p>
<h2>Local meets global</h2>
<p>Let’s take an example in the mobility sector. France’s national railroad company, SNCF, operates almost exclusively within the country, so defining its corporate purpose is not complicated: to give everyone in France the freedom to move around easily while taking care of our planet. For the French carmaker Renault, which operates globally, the exercise is not so obvious. Officially, its corporate purpose is to make mobility easy and accessible for customers around the world. Unofficially, five words are missing from this definition: “preserving French employment and influence”. Why? Because Renault was one of the crown jewels of French industry before becoming a global automaker. </p>
<p>This fact has direct consequences on Renault’s ability to make auto-mobility more sustainable in the coming years, as illustrated by the <a href="https://www.theguardian.com/business/2019/jun/06/renault-fiat-chrysler-merger-collapses">collapse of the Fiat-Renault deal</a> in June 2019. The planned merger was driven by the need for global automakers to share the costs of the sustainability transition, i.e., research and development investments into electric vehicle and self-driving cars. The deal failed in part because of France’s government wanted guarantees that jobs and industrial sites in France <a href="http://www.businessinsider.fr/us/fiat-chrysler-renault-merger-why-it-failed-analysis-background-2019-6">would be preserved</a>. </p>
<p>However, the fact that the French government holds a 15% stake in Renault wasn’t a contributing factor in itself. In the Forbes 2019 ranking of <a href="https://www.forbes.com/best-large-employers/">America’s best large employers</a>, nine of the first ten are American. In the Capital 2018-2019 ranking of <a href="http://business-cool.com/carriere/entreprises/classements-meilleurs-employeurs-france-2018-2019/">France’s best employers</a>, nine of the first ten companies are French. </p>
<p>This isn’t surprising – it makes sense for an American employee to work for an American firm, for a French employee to work for a French one, and so on. People are looking for coherence between their values, what they stand for and their professional activities. They need to be inspired by their company’s purpose, behaviour and decisions. Therefore, corporate purpose must include some national core values and priorities, and global companies must assume nationally driven social values, initiatives, and commitments. </p>
<h2>Working with all stakeholders</h2>
<p>That does not mean that corporate purpose must always include the creation or preservation of national jobs – Apple has long asserted that “manufactured in the USA” (rather than just “designed”) is <a href="https://www.nytimes.com/2012/01/22/business/apple-america-and-a-squeezed-middle-class.html">not a viable option for iPhones and iPads</a>. Yet Tim Cook, the company’s CEO, is a member of Business Roundtable, and the first word of the new statement on the purpose of a corporation is <em>Americans</em>, not <em>workers</em> or <em>consumers</em>: </p>
<blockquote>
<p>“Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity.”</p>
</blockquote>
<p>But don’t be mistaken; my point is not that global firms should give up their ambition to define their corporate purpose. It is that a coherent and meaningful corporate purpose must include the current global reality’s implications. Corporate executive must address pressing social issues, take into account national priorities and values, and define a purpose that resonates with stakeholders, customers and employees around the globe, without opting for the lowest common denominator. </p>
<p>How to define an ambitious global corporate purpose? Companies should take inspiration from the consensus meetings in the health sector. They enable policymakers to overcome philosophical, ethical and moral debates and to take into account vital considerations and strong personal statements. Establishing a similar process to define and embed in the business a global corporate purpose may offer corporate executives the opportunity to lead organizations that are really and truly inspired by their global purpose.</p><img src="https://counter.theconversation.com/content/124052/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Agathe Cagé is co-founder and president of Compass Label, a strategy consulting agency.</span></em></p>New initiatives have allowed firms to enshrine their purpose in corporate bylaws, but gaps exist between local and international issues that can complicate the definition of a multinational’s purpose.Agathe Cagé, Docteure en Sciences politiques associée au (CESSP) du CNRS, de l'EHESS, et de , Université Paris 1 Panthéon-SorbonneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1244592019-10-07T15:44:25Z2019-10-07T15:44:25ZB Corp certification won’t guarantee companies really care for people, planet and profit<figure><img src="https://images.theconversation.com/files/295625/original/file-20191004-118228-1vzo2c6.jpg?ixlib=rb-1.1.0&rect=0%2C9%2C1870%2C1352&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/svobodavpraci/32409481326">svobodavpraci</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Weeks after the collapse of his restaurant group and the loss of 1,000 jobs, celebrity chef Jamie Oliver <a href="https://www.theguardian.com/food/2019/aug/23/jamie-oliver-to-create-ethical-b-corp-from-remnants-of-his-empire">announced</a> that he was creating an “ethical” <a href="https://bcorporation.net/">B Corporation</a> or “B Corp”, a sort of company certification designed to show its holder gives equal weight to people, planet and profit. While it has loosely the same aim as the “<a href="https://theconversation.com/explainer-what-is-the-triple-bottom-line-22798">triple bottom line</a>” of the <a href="https://www.socialenterprise.org.uk/what-is-it-all-about/">social enterprise model</a>, B Corp certification is available to for-profit companies that apply to <a href="https://bcorporation.uk/about-b-lab">B Lab</a>, a non-global profit organisation, and pay for it.</p>
<p>B Lab was founded in 2006 by Stanford University alumni and businessmen Jay Coen Gilbert and Bart Houlahan, and former investment banker and Stanford colleague, Andrew Kassoy. There are now more than 2,900 certified B Corps in more than 60 countries, cutting across industries and sectors. Through extensive lobbying and promotion it has expanded worldwide through new local offices. With the number of B Corps opening under the organisation’s UK arm <a href="https://www.pwc.co.uk/industries/retail-consumer/insights/b-corp.html">growing at 14% a year</a>, is this really a new way of doing business?</p>
<h2>People, planet and profit</h2>
<p>On the face of it, the certification should indicate a company’s environmental performance, employee relationships, diversity, involvement in the local community, and the impact a company’s product or service has on those it serves. This in turn can attract staff and consumers seeking socially responsible businesses, boost an established public company’s stock price, and help investors find companies that balance profit and purpose. </p>
<p>In the B Lab <a href="https://bcorporation.net/certification">certification process</a>, a businesses must sign a “<a href="https://davidsuzuki.org/about/declaration-of-interdependence/">Declaration of Interdependence</a>”, committing it to using “business as a force for good.” The company must modify its governing bylaws to allow directors to “consider stakeholders besides shareholders in company decision-making”. Companies must also disclose <a href="https://bcorporation.net/certification/meet-the-requirements">information on</a> “any sensitive practices, fines, and sanctions related to the company or its partners”. Certification is done chiefly over the phone, with around 10% selected for more in-depth review. Companies must re-certify every three years.</p>
<p>While B Corp claims that certification balances the interests of shareholders with the interests of workers, customers, communities and the environment, B Corp standards are not legally enforceable. Neither the board nor the corporation are liable for damages if a company fails to meet them. Even the changes in company bylaws remain secret. A business can fill out the initial B Corp Impact Assessment in a few hours, and complete the certification process in between four and eight weeks, finally paying a certification fee of between US$500 and US$50,000, depending on revenue.</p>
<p>B Corp certification is available to any for-profit business around the globe as long as it’s been operating for at least 12 months. Certification is initially self-assessed, and doesn’t override the profit-driven focus of the company.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/mGnz-w9p5FU?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<h2>A cash-generating machine?</h2>
<p>B Lab has raised over US$32m since launch, and receives much of its funding from <a href="https://bcorporation.net/about-b-lab/funders-and-finances">major foundations</a> and organisations such as Prudential, Deloitte LLP, the Rockefeller Foundation, and even the US Agency for International Development. In 2017 it received about <a href="https://apps.irs.gov/pub/epostcard/cor/205958773_201712_990_2018092115719236.pdf">US$6m in certification fees, and US$5.6m in donations</a>. Its board members primarily come from the business sector, with B Lab paying <a href="https://apps.irs.gov/app/eos/displayAll.do?dispatchMethod=displayAllInfo&Id=525029&ein=205958773">US$6m in salaries and compensation</a> in 2017.</p>
<p>In the face of this highly cash-generative activity, B Lab’s rhetoric (“<a href="https://bcorporation.net/certification/meet-the-requirements">lead a movement</a>”) fails to spell out compelling reasons for certification. B Lab claims that traditional corporations cannot be socially responsible, because <a href="https://www.youtube.com/watch?v=mGnz-w9p5FU">they open themselves to liability</a> for not following <a href="https://www.theguardian.com/sustainable-business/b-corps-markets-corporate-law">shareholders interests</a>. But there is no law that explicitly requires directors of businesses to maximise shareholder revenue to the exclusion of all other corporate objectives. European (EU <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014L0095">Directive 2014/95/EU</a>) and <a href="https://www.pwc.co.uk/assets/pdf/sustainability-reporting-tips-for-private-sector-organisations.pdf">UK law</a> already push companies to practice sustainability reporting, and British firms have always had the flexibility to <a href="https://www.michelmores.com/news-views/news/what-best-structure-social-enterprise">amend their articles of association</a> with shareholder consent to reflect their social responsibilities. Pharmaceutical company Novo Nordisk, for example, changed its Articles of Association <a href="http://www.novonordisk.co.uk/about-novo-nordisk-in-uk/corporate_overview/sustainability.html">to state that</a> it “strives to conduct its activities in a financially, environmentally and socially responsible way”.</p>
<p>So while B Lab <a href="https://bcorporation.net/about-b-corps">speaks</a> of seeking to meet the “highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose” it has nevertheless certified <a href="https://www.business-humanrights.org/en/etsy-b-corporations-and-tax-avoidance">companies allegedly involved in tax avoidance</a>, those producing <a href="https://www.marketscreener.com/AMERICANN-INC-20954791/news/Americann-Inc-AmeriCann-Comments-on-Newly-Passed-Federal-Legislation-26228443/">cannabis-related products</a>, <a href="https://www.washingtonpost.com/business/laureate-a-for-profit-education-firm-finds-international-success-with-a-clintons-help/2014/01/16/13f8adde-7ca6-11e3-9556-4a4bf7bcbd84_story.html">for-profit college education companies</a>, corporations <a href="https://bcorporation.net/directory/american-prison-data-systems-pbc">working in the prison sector</a>, and those allegedly involved in <a href="https://www.bizjournals.com/portland/news/2017/12/07/new-seasons-employees-continue-push-to-unionize.html">union busting</a>. </p>
<h2>What value does it add?</h2>
<p>My research into one of the earliest certified B Corps, <a href="http://blog.couchsurfing.com/a-new-era-for-couchsurfing/">CouchSurfing.com</a>, shows how certification can be used to <a href="https://www.sciencedirect.com/science/article/pii/S2211973619300297">pacify angry consumers and attract investors</a>. Certified companies can simply walk away if they feel being a B Corp no longer suits their profit-making aims or strategy, or if it threatens short-term shareholder profitability. The online marketplace Etsy is one that <a href="https://www.ecommercebytes.com/2017/11/30/etsy-gives-b-corp-status-maintain-corporate-structure/">walked away</a>, while others dropped certification after being bought out by larger companies that had other plans. </p>
<p>There is no directory of former B Corporations that dropped certification or had it removed. The closed nature of a private certifying body that sets and regulates its own standards is problematic, even if well intentioned, and especially so if it seeks to control the process by which certified businesses are held accountable. Certified corporations are as accountable to B Lab as they are to their stakeholders. The lack of full transparency and rigorous vetting in the face of its aggressive expansion indicates that B Lab’s certification should not be seen as a reliable method for certifying corporations to some standard, from the perspective of either the general public, investors or regulators.</p>
<p>Which isn’t to say that the efforts haven’t been worthwhile. B Lab could re-focus and promote new <a href="https://www.worldbenchmarkingalliance.org/about-us/">global benchmarks</a> and corporate structures such as <a href="https://nonprofithub.org/starting-a-nonprofit/jargon-free-guide-l3c/">low-profit limited liability companies</a> (L3Cs) in the US, or <a href="https://www.communitycompanies.co.uk/community-interest-companies-cic">community interest companies</a> (CICs) and <a href="https://www.cooperantics.coop/2016/10/25/the-what-why-and-how-of-multistakeholder-co-ops/">multi-stakeholder co‑operatives</a> in the UK. Rather than striving to become a political-economic actor spending millions on creating and marketing a private company certification offering brand building and <a href="https://www.eventbrite.co.uk/e/b-inspired-tickets-63467936306#listing-organizer">expensive workshops</a>, B Lab might consider whether its market-driven certification offers solutions to market-produced problems.</p>
<p>Jamie Oliver is largely transparent in his business values and <a href="https://www.jamieolivergroup.com/wp-content/uploads/2019/08/Jamie-Oliver-Social-Impact-Report-2018.pdf">commitment to social responsibility</a>. He would be better to say “<a href="https://www.walesonline.co.uk/news/uk-news/full-email-jamie-oliver-sent-16317617">goodbye and big love as ever</a>” to B Lab as he did in his goodbye letter to staff, and focus instead on working with co-operatives, worker and community-owned businesses, and other non-profits that are building a new economy now – without the need to buy a certificate.</p><img src="https://counter.theconversation.com/content/124459/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael O'Regan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>B Corp certification is the latest status clothing for conscious companies. But without a clear indication of how it improves business practices, what does it really add?Michael O'Regan, Senior Lecturer in Events & Leisure, Bournemouth UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1115072019-02-13T02:23:32Z2019-02-13T02:23:32ZYes, we can put bank bosses in jail, but is that the best way to hold them to account?<figure><img src="https://images.theconversation.com/files/258602/original/file-20190212-174894-1upmhar.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Kenneth Hayne has referred over 20 entities to regulators for investigation.</span> <span class="attribution"><span class="source">from shutterstock.com</span></span></figcaption></figure><p>When Kenneth Hayne handed down the banking royal commission’s final report, he <a href="https://www.abc.net.au/news/2019-02-05/kenneth-hayne-royal-commission-report-labor-versus-liberals/10779476">urged the corporate watchdog</a> to investigate several entities for criminal charges. The Australian Securities and Investments Commission (ASIC) has <a href="https://www.abc.net.au/news/2019-02-08/amp-executives-will-face-criminal-charges/10793402">since announced</a> it is preparing cases against executives of some of the big players.</p>
<p>The day of the report, Treasurer Josh Frydenberg <a href="https://www.afr.com/business/banking-and-finance/asic-funding-boost-to-put-supervisors-in-big-banks-amp-20180806-h13lja">reiterated a government commitment</a> made last year to boost the enforcement powers and resources of agencies such as ASIC and the Commonwealth Director of Public Prosecutions (DPP) to launch criminal prosecutions. The government would also extend the jurisdiction of the Federal Court <a href="https://www.lawyersweekly.com.au/politics/24956-federal-court-s-jurisdiction-to-expand-on-corporate-criminality-post-rc">to include “criminal corporate crime”</a>.</p>
<p>Frydenberg said the government would provide a legislative framework necessary, and better resources, for regulators to hold those who abuse our trust to account. But this is unnecessary – the legislative framework is already there. And then there’s also the question of whether criminal convictions and terms of imprisonment are the best way to deal with the issue. </p>
<h2>Dishonest conduct</h2>
<p>A key finding of the report was that entities may have committed breaches of the <a href="http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/">Corporations Act</a> – the main legislation regulating Australian companies. The relevant section in the act is <a href="http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s1041g.html">“Dishonest conduct” (1041G)</a>, inserted in 2001. It says “a person must not, in the course of carrying on a financial services business in this jurisdiction, engage in dishonest conduct in relation to a financial product or financial service”. Those convicted face a maximum ten years imprisonment.</p>
<p>This is the main criminal offence at play here – dishonesty. It is dishonest for a finance company to charge for a service they know will not be provided. It is dishonest for a bank to continue to charge dead people for services rendered.</p>
<p>That said, convictions under 1041G have usually occurred where individuals have been found seeking to deliberately <a href="https://www.moneymanagement.com.au/news/financial-planning/adviser-convicted-dishonest-conduct">line their own pockets</a>. Commissioner Hayne has therefore upped the ante by prodding ASIC to consider whether at least two corporate entities, not just individuals, have breached 1041G.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/compensation-scheme-to-follow-haynes-indictment-of-financial-sector-110981">Compensation scheme to follow Hayne’s indictment of financial sector</a>
</strong>
</em>
</p>
<hr>
<p>Hayne’s observation could not be in greater contrast to one made in the wake of a similar investigation two decades ago. In 1996 the Howard government initiated their <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/RP9697/97rp16">inquiry into the financial services sector</a>. The inquiry’s chairman Stan Wallis had claimed Australia’s tough corporate governance rules were a major reason for the perceived under-performance of companies at the time. </p>
<p>In a June, 2000 speech to the Centre for Corporate Public Affairs, Wallis <a href="http://www.austlii.edu.au/au/journals/DeakinLRev/2002/1.html#fn28">advocated winding back</a> boardroom independence rules since “too much attention to corporate governance can cloud a board’s judgement”. Governance, he said, had become an end in itself, and, as a result, directors were predisposed to being risk-averse rather than bold. </p>
<p>But now the regulator’s guillotine is being sharpened, not blunted, and with good reason. The amount charged by financial institutions for services never received is <a href="https://www.abc.net.au/news/2019-02-08/amp-executives-will-face-criminal-charges/10793402">reportedly more than $1 billion</a>. Hayne has referred 24 entities to regulatory authorities. We can <a href="https://theconversation.com/compensation-scheme-to-follow-haynes-indictment-of-financial-sector-110981">virtually guarantee</a> prosecutions will be launched in relation to these alleged misdeeds.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1094921458898227200"}"></div></p>
<h2>So, how can a conviction occur?</h2>
<p>First, ASIC needs to look beyond what was reported to the royal commission to find clear evidence of wrongdoing. With sufficient evidence, the matter is referred to the DPP. The DPP in turn needs to be satisfied of the probability of a conviction, by virtue of offences under the Corporations Act.</p>
<p>Mr Frydenberg doesn’t need to extend jurisdictions, or boost enforcement powers. The law that the DPP needs is there already.</p>
<h2>But do the people want this?</h2>
<p>If one believes the political commentary that tells us there is a heightened contempt among the public today for white-collar offending, then perhaps bosses should be jailed. But there’s also some evidence suggesting that the public’s intolerance of, and reaction to, such behaviour is not as radical as many believe. </p>
<p><a href="https://psycnet.apa.org/record/2008-18732-001">Research conducted in England</a> led the author to conclude that punishment preferences of the public are </p>
<blockquote>
<p>rational and reasoned, and the emotive aspects of their attitudes were primarily regretful rather than vengeful […] there were signs that the desire to express condemnation and disapproval of offenders’ conduct was counterbalanced by recognition of the need for humane and just penal policies.</p>
</blockquote>
<p>In other words, there is an argument the public don’t consider senior managers who have already been humbled by the Commissioner, or humiliated by the commission’s lead barrister Rowena Orr QC, need to go behind bars.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/banking-royal-commission-the-real-problem-is-how-we-value-executives-and-workers-111094">Banking Royal Commission: the real problem is how we value executives and workers</a>
</strong>
</em>
</p>
<hr>
<p>Criminologist John Braithwaite’s seminal work, <a href="http://johnbraithwaite.com/wp-content/uploads/2016/06/Crime-Shame-and-Reintegration.pdf">Crime, Shame and Reintegration</a>, explored shame in a leader’s falling short of public expectations. His hypothesis was that fear of shame is a major social force for preventing criminality, not threat of imprisonment. </p>
<p>Punishing key financial services leaders by naming them, highlighting their failings, accepting their contrition, disqualifying them, and seeking restitution from them is as likely to satisfy the public’s demand for appropriate consequences as any prison term.</p>
<hr>
<p><em>Editor’s note: This article previously referred to a provision in the Commonwealth Criminal Code Act 1995, which related to corporate culture. The relevant part of the Act is no longer applied to financial institutions, however, so reference to it has been removed.</em></p><img src="https://counter.theconversation.com/content/111507/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rick Sarre has previously received funding from the Australian Research Council. He is a member of the Australian Labor Party State Council.</span></em></p>The government doesn’t need to extend jurisdictions, or boost enforcement powers to prosecute corporations that have behaved dishonestly. The law for prosecution is there already.Rick Sarre, Adjunct Professor of Law and Criminal Justice, University of South AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1028652018-10-05T10:42:00Z2018-10-05T10:42:00ZCould an artificial intelligence be considered a person under the law?<figure><img src="https://images.theconversation.com/files/238476/original/file-20180928-48659-1gkudpd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Sophia, a robot granted citizenship in Saudi Arabia.</span> <span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Roboter_Sophia_MSC_2018.jpg">MSC/wikimedia</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Humans aren’t the only people in society – at least according to the law. In the U.S., <a href="https://www.theatlantic.com/business/archive/2018/03/corporations-people-adam-winkler/554852/">corporations have been given rights of free speech</a> and religion. Some <a href="https://theconversation.com/what-if-nature-like-corporations-had-the-rights-and-protections-of-a-person-64947">natural features also have person-like rights</a>. But both of those required changes to the legal system. A new argument has laid a path for artificial intelligence systems to be recognized as people too – without any legislation, court rulings or other revisions to existing law.</p>
<p>Legal scholar Shawn Bayern has shown that anyone can <a href="https://doi.org/10.1017/S1867299X00005729">confer legal personhood on a computer system</a>, by putting it in control of a limited liability corporation in the U.S. If that maneuver is upheld in courts, <a href="https://cyber.harvard.edu/publication/2018/artificial-intelligence-human-rights">artificial intelligence systems</a> would be able to own property, sue, hire lawyers and enjoy freedom of speech and other protections under the law. <a href="https://scholar.google.com/citations?user=0_Rq68cAAAAJ&hl=en">In my view</a>, human rights and dignity would suffer as a result. </p>
<h2>The corporate loophole</h2>
<p>Giving AIs rights similar to humans involves a technical lawyerly maneuver. It starts with <a href="https://doi.org/10.1017/S1867299X00005729">one person setting up two limited liability companies</a> and turning over control of each company to a separate autonomous or artificially intelligent system. Then the person would add each company as a member of the other LLC. In the last step, the person would withdraw from both LLCs, leaving each LLC – a corporate entity with legal personhood – governed only by the other’s AI system.</p>
<p>That process doesn’t require the computer system to have any particular level of intelligence or capability. It could just be a sequence of “if” statements looking, for example, at the stock market and <a href="https://www.investopedia.com/articles/active-trading/101014/basics-algorithmic-trading-concepts-and-examples.asp">making decisions to buy and sell</a> based on prices falling or rising. It could even be an algorithm that <a href="http://www.randomdecisionmaker.com/">makes decisions randomly</a>, or an <a href="https://scratch.mit.edu/projects/115569822/">emulation of an amoeba</a>.</p>
<h2>Reducing human status</h2>
<p>Granting human rights to a computer would degrade human dignity. For instance, when <a href="https://www.independent.co.uk/life-style/gadgets-and-tech/news/saudi-arabia-robot-sophia-citizenship-android-riyadh-citizen-passport-future-a8021601.html">Saudi Arabia granted citizenship to a robot called Sophia</a>, <a href="https://qz.com/1205017/saudi-arabias-robot-citizen-is-eroding-human-rights/">human women</a>, including <a href="https://www.washingtonpost.com/news/innovations/wp/2017/10/29/saudi-arabia-which-denies-women-equal-rights-makes-a-robot-a-citizen/">feminist scholars</a>, objected, noting that the robot was given more rights than many Saudi women have.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/R0bVxbRCd-U?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">An interview with Sophia, a robot citizen of Saudi Arabia.</span></figcaption>
</figure>
<p>In certain places, some people might have fewer rights than nonintelligent software and robots. In countries that limit <a href="http://www.un.org/en/universal-declaration-human-rights/">citizens’ rights</a> to free speech, free religious practice and expression of sexuality, corporations – potentially including AI-run companies – <a href="https://www.huffingtonpost.com/adam-winkler/corporations-are-people-a_b_5543833.html">could have more rights</a>. That would be an enormous indignity.</p>
<p>The risk doesn’t end there: If AI systems became more intelligent than people, <a href="https://theconversation.com/what-an-artificial-intelligence-researcher-fears-about-ai-78655">humans could be relegated to an inferior role</a> – as workers hired and fired by AI corporate overlords – or even <a href="https://www.imdb.com/title/tt2145829/">challenged for social dominance</a>.</p>
<p>Artificial intelligence systems could be tasked with law enforcement among human populations – acting as <a href="https://theconversation.com/we-need-to-know-the-algorithms-the-government-uses-to-make-important-decisions-about-us-57869">judges, jurors, jailers and even executioners</a>. <a href="https://theconversation.com/losing-control-the-dangers-of-killer-robots-58262">Warrior robots</a> could similarly be assigned to the military and given power to decide on targets and acceptable collateral damage – even in violation of <a href="https://theconversation.com/ban-killer-robots-to-protect-fundamental-moral-and-legal-principles-101427">international humanitarian laws</a>. Most legal systems are not set up to <a href="https://theconversation.com/ban-killer-robots-to-protect-fundamental-moral-and-legal-principles-101427">punish robots</a> or otherwise hold them accountable for wrongdoing.</p>
<h2>What about voting?</h2>
<p>Granting voting rights to systems that can copy themselves would render humans’ votes meaningless. Even without taking that significant step, though, the possibility of AI-controlled corporations with basic human rights poses serious dangers. No current laws would prevent a <a href="https://theconversation.com/fighting-malevolent-ai-artificial-intelligence-meet-cybersecurity-60361">malevolent AI</a> from operating a corporation that worked to subjugate or exterminate humanity <a href="https://www.reuters.com/article/us-usa-court-employment/companies-win-big-at-us-top-court-on-worker-class-action-curbs-idUSKCN1IM1GW">through legal means</a> and political influence. Computer-controlled companies could turn out to be less responsive to public opinion or protests than human-run firms are.</p>
<h2>Immortal wealth</h2>
<p>Two other aspects of corporations make people even more vulnerable to AI systems with human legal rights: They don’t die, and they can give unlimited amounts of money to political candidates and groups. </p>
<p>Artificial intelligences could earn money by exploiting workers, using algorithms to <a href="https://www.seattletimes.com/business/trust-the-machines-these-funds-are-run-by-artificial-intelligence/">price goods and manage investments</a>, and find new ways to <a href="https://www.ibm.com/blogs/watson/2018/04/how-kpmg-uses-ai-to-empower-their-auditors/">automate key business processes</a>. Over long periods of time, that could <a href="https://www.cnbc.com/2018/02/01/apple-earnings-q1-2018-how-much-money-does-apple-have.html">add up to enormous earnings</a> – which would never be split up among descendants. That wealth could easily be <a href="https://www.businessinsider.com/how-corporations-turned-into-political-beasts-2015-4">converted into political power</a>. </p>
<p>Politicians financially backed by algorithmic entities would be able to take on legislative bodies, impeach presidents and help to get figureheads appointed to the Supreme Court. Those human figureheads could be used to expand corporate rights or even establish new rights specific to artificial intelligence systems – expanding the threats to humanity even more.</p><img src="https://counter.theconversation.com/content/102865/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Roman V. Yampolskiy does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A legal loophole could grant computer systems many legal rights people have – threatening human rights and dignity and setting up some real legal and moral problems.Roman V. Yampolskiy, Associate Professor of Computer Engineering and Computer Science, University of LouisvilleLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1028342018-09-10T10:38:54Z2018-09-10T10:38:54ZIf Trump were a CEO, his board would have fired him by now<p>The Trump White House has endured a lot of bad publicity in its short lifespan, but recent disclosures may be among the worst. </p>
<p>On Sept. 4, an <a href="https://www.washingtonpost.com/politics/bob-woodwards-new-book-reveals-a-nervous-breakdown-of-trumps-presidency/2018/09/04/b27a389e-ac60-11e8-a8d7-0f63ab8b1370_story.html?utm_term=.a39684b9e878">early account</a> of Bob Woodward’s new <a href="http://www.simonandschuster.com/books/Fear/Bob-Woodward/9781501175510">book</a> revealed the “nervous breakdown” unfolding within the Trump administration. Then, the next afternoon, a “senior official” went public – albeit anonymously – with an op-ed piece in <a href="https://www.nytimes.com/2018/09/05/opinion/trump-white-house-anonymous-resistance.html?action=click&module=Opinion&pgtype=Homepage">The New York Times</a>. </p>
<p>What we’ve learned is that many of the president’s top aides “are working diligently from within to frustrate parts of his agenda and his worst inclinations,” such as by stealing a document from his desk. A “quiet resistance” is trying to prevent Trump from taking actions “detrimental to the health of our republic.” </p>
<p>As a <a href="http://www.damore-mckim.northeastern.edu/faculty/s/spector-bert">business professor</a>, I find myself wondering how this might play out in the highest ranks of a public corporation if they were anywhere near this chaotic. In my view, its board, faced with similar behaviors, would say to its CEO: “You’re fired!”</p>
<h2>Off the rails?</h2>
<p>The latest insights into this apparently “off-the-rails” administration are entirely consistent with revelations offered from <a href="https://us.macmillan.com/books/9781250158062">other</a> <a href="http://www.simonandschuster.com/books/Unhinged/Omarosa-Manigault-Newman/9781982109707">less credible</a> sources. </p>
<p>While they are certainly shocking and cause for intense concern, no one should be surprised given Trump’s background.</p>
<p>In the first month of Trump’s term, I wrote an article for The Conversation noting how Trump’s experience as the head of a private, family-owned business <a href="https://theconversation.com/white-house-in-turmoil-shows-why-trumps-no-ceo-72393">ill-prepared him</a> for the demands of the presidency. </p>
<p>That’s because leaders of privately held companies do not face the governance constraints that impose limits on the behaviors of CEOs who run public corporations. Private company CEOs have no independent board of directors to answer to, no requirements of transparency imposed by the Securities and Exchange Commission and no requirement for outside accounting oversight. </p>
<p>While private, family-run businesses can be models of effective governance, we know little of real substance about the Trump Organization. His <a href="https://www.npr.org/2018/03/19/595025070/sworn-to-secrecy-trumps-history-of-using-nondisclosure-agreements">obsession with secrecy</a> makes any true assessment impossible. </p>
<p>We do know Trump was accountable to no one. He surrounded himself with his children and people – including his once-loyal “fixer” <a href="https://www.nytimes.com/2018/05/05/business/michael-cohen-lawyer-trump.html">Michael Cohen</a> – who served only him. </p>
<p>His one attempt at leading a public corporation, operating within the governance constraints imposed by law and regulation, proved to be an <a href="https://www.washingtonpost.com/business/economy/as-its-stock-collapsed-trumps-firm-gave-him-huge-bonuses-and-paid-for-his-jet/2016/06/12/58458918-2766-11e6-b989-4e5479715b54_story.html">unmitigated disaster</a> – for public investors, anyway. </p>
<h2>The board steps in</h2>
<p>Public companies are governed differently. And boards of directors, half of whose members must be independent, take their <a href="https://files.arnoldporter.com/practica_lawyer_skinner.pdf">legally established responsibilities</a> seriously. </p>
<p>For example, their fiduciary responsibility requires directors to act in the best interests of the corporation. Their supervisory role involves oversight of the CEO and other officers. And their duty of care obligates close and regular attention to the functioning of the corporation. </p>
<p>With these duties in mind, boards have ousted CEOs – or, more commonly, forced them to resign. </p>
<p>Often, boards simply lose faith in the strategy the CEO is pursuing. That’s <a href="https://www.crn.com/news/mobility/231601009/the-hp-compaq-merger-partners-reflect-10-years-later.htm">what happened</a> at Hewlett Packard when the board fired Carly Fiorina in 2005, a few years after the disastrous acquisition of rival computer maker Compaq <a href="https://www.politico.com/magazine/story/2015/09/carly-fiorina-ceo-jeffrey-sonnenfeld-2016-213163">destroyed half</a> of HP’s market value. </p>
<p>But boards have also been known to step in – and <a href="https://www.strategy-business.com/feature/Are-CEOs-Less-Ethical-Than-in-the-Past?gko=50774">are doing so at an increasing pace</a> – when the personal behavior of the CEO crosses a line and threatens to harm the company’s well-being. </p>
<p>For example, in early 2017, Uber’s financial performance under founder Travis Kalanick seemed just fine. But board members <a href="https://www.bloomberg.com/news/features/2018-01-18/the-fall-of-travis-kalanick-was-a-lot-weirder-and-darker-than-you-thought">were growing alarmed</a> by the results of an internal employee attitude survey and shocked when a smartphone video captured Kalanick shouting at his Uber driver. By March he was gone – not fired but clearly forced to step down.</p>
<p>And just a few months ago, the tenure of another iconic founder, Papa John’s very own John Schnatter, <a href="https://money.cnn.com/2018/07/11/news/companies/papa-johns-pizza-john-schnatter/index.html">came to a similar end</a>. There were no complaints about business performance. The issue was his use of racially charged language, which led the board to force him out of the chairman’s seat – only a year after he lost the CEO role for other disruptive behavior.</p>
<p>A key point in these examples is that even though the executive’s behavior triggered the removal, the company’s financial performance was still at the top of directors’ minds. For example, Papa John’s <a href="https://www.cnbc.com/2018/08/07/papa-johns-reports-2q-2018-earnings.html">sales plunged</a> when word spread of his use of a racial slur. Bad behaviors by the CEO will eventually reflect poorly on the company and hurt its performance.</p>
<p>The reality is that boards can lose confidence in their CEOs for many reasons. When that happens, governance rules demand that they take action in the best interests of the corporation.</p>
<p>And this is where the importance of <a href="https://www.sec.gov/rules/sro/nasdaq/2013/34-68640-ex5.pdf">independent board members</a> – who have no ties to the CEO or another employee of the company – comes in. They regularly review the CEO’s performance and are responsible for hiring <a href="https://www.sec.gov/rules/final/33-7919.htm">outside auditors</a> to ensure appropriate and reliance internal control systems. </p>
<p>Finally, even when a a board fails in its duties, <a href="https://corpgov.law.harvard.edu/2018/02/01/the-changing-face-of-shareholder-activism/">shareholder activists</a> and large institutional investors can – and <a href="https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-activist-investors-are-transforming-the-role-of-public-company-boards">increasingly do</a> – demand accountability.</p>
<h2>The real surprise</h2>
<p>What is stunning to me in light of recent disclosures is what they reveal about the apparent weakness of governance mechanisms within the federal government. </p>
<p>That’s not to say such mechanisms don’t exist. The Founding Fathers wrote explicit <a href="https://nccs.net/blogs/our-ageless-constitution/checks-and-balances">checks and balances</a> into the U.S. Constitution. Congress was meant to act as a <a href="https://www.press.uchicago.edu/Misc/Chicago/749396.html">co-equal branch</a> to mitigate possible overstepping and abuses by the chief executive. But there has been a complete <a href="https://www.theatlantic.com/politics/archive/2017/10/republicans-in-congress-youve-got-another-chance/544466/">collapse of constitutional oversight by Congress</a>. </p>
<p>Presidents cannot be fired, exactly. But in extreme cases, they can be removed. The U.S. Constitution offers two mechanisms to do just that. Article 3, Section 3, Clause 1 says a president can be impeached by the House and removed by the Senate for “<a href="http://www.crf-usa.org/impeachment/high-crimes-and-misdemeanors.html">high crimes and misdemeanors</a>” – however lawmakers choose to define them. </p>
<p>And the <a href="https://theconversation.com/what-the-25th-amendment-says-about-presidents-who-are-unable-to-serve-102825">25th Amendment</a> allows the vice president and a majority of the Cabinet to declare the president “unable to discharge the powers and duties of his office,” which would ultimately require two-thirds majorities of both houses of Congress to sustain – an extraordinarily high hurdle, for good reason.</p>
<p>These mechanisms, however, ultimately depend on the willingness of Congress to accept something like a corporate board’s fiduciary and care responsibilities. Even without going through the slow process of impeachment, presidents can also be pressured to resign, in the same way a board insists that a CEO “voluntarily” leave. <a href="https://www.washingtonpost.com/wp-srv/national/longterm/watergate/articles/080974-3.htm">That’s what happened</a> to Richard Nixon in 1974 when impeachment and conviction became a virtual inevitability. </p>
<p>A last mechanism the U.S. has is something like the independent auditor. His name is Robert Mueller. And in my view, it’s the only institutional governance mechanism working – so long as Mueller is not summarily fired, as the <a href="https://www.nytimes.com/2018/04/10/us/politics/trump-sought-to-fire-mueller-in-december.html">president wishes</a>. </p>
<h2>The importance of rules</h2>
<p>I don’t want to suggest that public corporate governance is perfect. </p>
<p>Too often, the <a href="https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1009&context=fisch_2016">interests of private investors</a> are placed above the many other stakeholders whose communities and lives are affected by corporate decisions. Safeguards are too often evaded.</p>
<p>But my point is the rules are there, and they do often work. </p>
<p>And much is at stake. When the governance of a corporation goes off the rails, millions, perhaps even billions of dollars can be lost, jobs destroyed, retirement funds wiped out. When it concerns the governance of a country, particularly one with a nuclear arsenal, then the dangers are real and present.</p>
<p>
<section class="inline-content">
<img src="https://images.theconversation.com/files/275743/original/file-20190521-23817-1fnbziu.png?w=128&h=128">
<div>
<header></header>
<p><a href="http://aom.org/">Bert Spector is an Academy of Management Scholar</a></p>
<footer>The academy is a funding partner of The Conversation US.</footer>
</div>
</section>
</p><img src="https://counter.theconversation.com/content/102834/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bert Spector is an Academy of Management scholar.</span></em></p>The allegations raised in a book on the Trump administration by Bob Woodward and an anonymous op-ed would be enough to get most CEOs fired.Bert Spector, Associate Professor of International Business and Strategy at the D'Amore-McKim School of Business, Northeastern UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1006442018-07-26T21:00:34Z2018-07-26T21:00:34ZWhat is a ‘poison pill’?<p>Papa John’s recently forced founder and former Chairman John Schnatter to resign over allegations he made a racial slur. Now the pizza chain <a href="https://www.nytimes.com/2018/07/23/business/papa-johns-john-schnatter-poison-pill.html">is battling</a> to keep him from clawing his way back into the company. </p>
<p>To do so, Papa John’s says it’s taking advantage of a corporate strategy often used to fend off hostile takeover attempts: the “poison pill.” Schnatter, who <a href="https://www.bloomberg.com/news/articles/2018-07-26/papa-john-s-founder-sues-pizza-company-for-documents-over-ouster">is suing</a> to access internal documents, still owns about 30 percent of the company, making him the largest single shareholder.</p>
<p>What is a poison pill, why would a company use it and does it actually work? </p>
<h2>Raising the cost of a takeover</h2>
<p>The modern publicly traded corporation is <a href="https://www.researchgate.net/publication/241754973_Stockholders_and_Stakeholders_The_Battle_for_Control_of_the_Corporation">often the theater</a> of fierce battles for control. </p>
<p>It’s therefore no surprise that hostile takeovers – in which an outside entity tries to take over a company by convincing shareholders to sell their stakes – <a href="http://doi.org/10.2307/2393275">have become increasingly popular</a> in the U.S. One way companies handle such a threat is by passing protective measures like the poison pill, which was conceived in the 1980s during the <a href="http://www.crainsnewyork.com/article/20171218/OPINION/171219941/reliving-new-yorks-glory-days-of-junk-bonds-and-hostile-takeovers">heyday of junk bonds and hostile takeovers</a>. </p>
<p>In short, the <a href="https://www.investopedia.com/terms/p/poisonpill.asp">poison pill</a> is designed to make the company’s purchase by a “hostile” suitor dramatically more expensive. </p>
<p>Two types exist. The so-called “flip-in” allows shareholders other than the acquirer to buy additional shares at a highly discounted rate if the board of directors does not approve the takeover. The other is called a “flip-over,” which permits stockholders to buy the shares of the acquirer at a discount if the takeover is successful.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/229519/original/file-20180726-106521-136w843.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/229519/original/file-20180726-106521-136w843.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=677&fit=crop&dpr=1 600w, https://images.theconversation.com/files/229519/original/file-20180726-106521-136w843.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=677&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/229519/original/file-20180726-106521-136w843.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=677&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/229519/original/file-20180726-106521-136w843.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=851&fit=crop&dpr=1 754w, https://images.theconversation.com/files/229519/original/file-20180726-106521-136w843.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=851&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/229519/original/file-20180726-106521-136w843.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=851&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Schnatter had literally become the face of Papa John’s.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Papa-John-s-Founder/c3640a12fb884ab395e0b17fca4b4c22/2/0">AP Photo/Charles Krupa</a></span>
</figcaption>
</figure>
<p>Both strategies dilute shares held by the acquirer, making the takeover attempt more costly and difficult. A poison pill also puts pressure on the suitor to negotiate directly with the board. </p>
<h2>Do they work?</h2>
<p>While many corporations have adopted poison pills during the past decades, their use has been equivocal and vividly debated among practitioners and academic researchers. More recently, companies have been <a href="https://doi.org/10.1177/0149206312441209">increasingly repealing</a> poison pills or allowing them to expire.</p>
<p>As a <a href="https://scholar.google.com/citations?user=MSg9454AAAAJ&hl=en">scholar of corporate strategy</a>, I’ve found that studies of their effectiveness show mixed results.</p>
<p>For example, <a href="http://doi.org/10.1086/503648">some empirical research</a> has shown no relationship between the adoption of a poison pill and the probability of whether a company is ultimately acquired. <a href="https://doi.org/10.1177/0149206316635250">Some scholars</a> have also argued that poison pills can signal that the company has entrenched “ineffective” managers and is trying to protect them from market oversight. </p>
<p>Other scholars have found value in the use of poison pills, for example by enabling top management to focus on <a href="https://corpgov.law.harvard.edu/2015/12/18/the-long-term-value-of-the-poison-pill/">long-term performance</a> – rather than worrying about hostile takeovers – and <a href="https://doi.org/10.1086/503648">resulting</a> in more profit for investors after a sale. And researchers have found evidence that poison pills do in fact <a href="https://doi.org/10.1177/0149206312441209">lower the likelihood</a> of acquisition.</p><img src="https://counter.theconversation.com/content/100644/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Yannick Thams does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Papa John’s is hoping to use the corporate strategy to prevent founder John Schnatter from taking back control over the pizza chain.Yannick Thams, Assistant Professor of Strategy and International Business, Suffolk UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/992362018-07-05T15:17:37Z2018-07-05T15:17:37ZCollapsed bank CEO cases point to weaknesses in Nigeria’s justice system<figure><img src="https://images.theconversation.com/files/226231/original/file-20180705-122271-pps7u6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Nearly ten years ago the Central Bank of Nigeria conducted a deep assessment of the country’s banks. The 2009 exercise exposed large-scale fraud committed by a number of CEOs.</p>
<p>To save the banking system from collapse, the Central Bank took over a number of institutions and spent <a href="http://w1219.cbn.gov.ng/OUT/SPEECHES/2010/THE%20NIGERIAN%20BANKING%20INDUSTRY%20WHAT%20WENT%20WRONG%20AND%20THE%20WAY%20FORWARD_FINAL_260210.PDF">billions</a> saving others. In addition, criminal charges were laid against five CEOs for offences which included fraud, market manipulation, concealment and grant of credit facilities without adequate security. </p>
<p>Only one case has been <a href="https://www.bbc.co.uk/news/world-africa-11506421">prosecuted</a> successfully. The others appear to be stuck in an unending cycle of dismissals, appeals and re-trials. </p>
<p>The bank saga and the failure to bring the bank executives to justice underscore the fact that the Nigerian justice system isn’t working. The problems – the subject of a great deal of discussion – range from judicial corruption to a lack of judicial independence to delays in the justice system.</p>
<p>The cases of the bank executives provide a useful case study through which to examine the weaknesses of the Nigerian judicial system. These include the capability of prosecutors and the ability of the court system, including judges, to actually bring cases to fruition. This is particularly true in corporate cases which are often difficult to prosecute under the criminal law. </p>
<h2>Judicial Corruption</h2>
<p>The fact that Nigeria has a number of <a href="https://brooklynworks.brooklaw.edu/bjil/vol31/iss1/1/">corrupt judges</a> is common knowledge in the country. Over the years, there have been various allegations of corruption in the judiciary. In 2013, two High Court judges were suspended and recommended for retirement by the National Judicial Council for <a href="http://thenationonlineng.net/njc-suspends-justices-naron-archibong-2/">misconduct bordering on corruption</a>. </p>
<p>Similarly, in 2016, a raid carried out by the Department of State Services revealed that cash worth <a href="http://www.bbc.co.uk/news/world-africa-37603857">USD$800,000</a> had been found in the homes of senior judges suspected of corruption. </p>
<p>Judicial corruption reduces public confidence in the country’s justice system. This means that suspected incidents of directors’ misconducts are less likely to be reported given the prevailing belief that justice is unlikely to be served. Similarly, it can affect the attitude of investigators and prosecutors who might have less incentive to investigate and prosecute cases diligently.<br>
While it would clearly be an exaggeration to accuse all judges in Nigeria of corruption, it is reasonable to conclude that corruption remains a problem. But since none of the judges involved in the trial of the bank executives have been accused of corruption, it’s necessary to look to other causes for the failure to bring the bank executives to book.</p>
<h2>Delays in the justice system</h2>
<p>One of the main problems in the bank executive cases has been endless delays in the judicial process. The trials’ time line tells the story. </p>
<p>Criminal proceedings started in 2009. About six years later, in 2015, the Court of Appeal <a href="https://guardian.ng/news/court-frees-banks-ex-chief-atuche-others-in-alleged-n25-7b-fraud/">struck down</a> the case against two of the executives on the basis of lack of jurisdiction of the trial court. </p>
<p>A declaration of lack of jurisdiction means that the court lacks the power to try the particular case. In itself this isn’t a bad development. After all, compliance with relevant rules on jurisdiction is essential to ensuring justice is done. But the fact that it took six years for this decision to be reached highlights severe delays in Nigeria’s court system. </p>
<p>Following the Court of Appeal’s decision, the High Court, in deference to the superior court, dismissed the pending case against the third bank executive.</p>
<p>In another turn of events, a year later, in 2016, the Supreme Court overturned the Court of Appeal’s decision and ordered a <a href="http://punchng.com/alleged-fraud-efcc-re-arraign-ex-mds-akingbola-atuche-nwosu/">re-trial</a> of the bank executives. This meant that, nearly 10 years after the initial trial, a fresh trial was started, and with it room for further appeals.</p>
<p>There is currently no end in view. While appeals and cross appeals are inevitable parts of litigation, the lengthy time spent on them is not.</p>
<p>This delay has been attributed to several factors. Initially, the trials suffered from several unwarranted <a href="http://thenationonlineng.net/will-trials-ever-end/">adjournments</a> at the request of the defence lawyers.</p>
<p>Another weak spot has been the prosecuting authority. The unit responsible for prosecuting these kinds of cases, The Economic and Financial Crimes Commission, has been severely <a href="https://www.dailytrust.com.ng/judge-berates-efcc-over-attitude-to-trials.html">criticised</a> for its inefficiencies.</p>
<p>To worsen the problem, the trial judges were <a href="http://punchng.com/ex-bank-chiefs-akingbola-atuche-nwosus-unending-nightmares/">changed</a> several times. One judge was elevated to the Court of Appeal while a few others were transferred to different divisions of the court leading to a fresh trial each time. </p>
<p>These issues significantly delayed trial proceedings. </p>
<h2>Potential inequality</h2>
<p>Another question to consider is whether the failure to successfully prosecute the directors is a reflection of the difference in the treatment of high-profile offenders versus ordinary Nigerians. </p>
<p><a href="https://www.bbc.co.uk/news/world-africa-11506421">Cecilia Ibru</a>, the only bank executive who was convicted, was sentenced to just six months in prison and required to forfeit shares and other assets worth over USD$1.2 billion. Compare this with the case of <a href="https://www.express.co.uk/news/world/624459/David-Olugboyega-Ado-Ekiti-High-Court-Nigeria-Alaba-Adeyemi">David Olugboyega</a>, an armed thief, who was sentenced to death after being found guilty of a £50 robbery. Granted that armed robbery carries the <a href="https://www.deathpenaltyworldwide.org/country-search-post.cfm?country=Nigeria">death penalty</a>,however, it seems that carting away millions of money should attract a stiffer penalty. </p>
<p>In addition, rich offenders can afford well skilled lawyers who can devise different strategies to delay, or prevent, successful prosecution. Poor offenders don’t have this benefit.</p>
<p>The recently introduced <a href="https://lawpavilion.com/blog/the-administration-of-criminal-justice-act-2015-acja/">Administration of Criminal Justice Act of 2015</a>, which aims to promote speedy dispensation of justice, promises to improve the situation. Time will tell.</p><img src="https://counter.theconversation.com/content/99236/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Oludara Akanmidu does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Nigeria is failing to prosecute banking executives charged with fraud due to deep weaknesses in the system.Oludara Akanmidu, Lecturer in Law, De Montfort UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/950552018-04-18T00:44:31Z2018-04-18T00:44:31ZWill Rio Tinto’s bid to escape from its contracts with Rusal succeed?<p>Mining giant Rio Tinto <a href="https://www.asx.com.au/asxpdf/20180416/pdf/43t6w984rmhl7z.pdf">is attempting</a> to use <a href="https://home.treasury.gov/news/press-releases/sm0338">new American sanctions on Russia</a> to <a href="http://www.riotinto.com/media/media-releases-237_25206.aspx">walk away from an agreement</a> with a Russian aluminium company, Rusal. But if the contract is not worded precisely, the law may actually work to Rio’s detriment.</p>
<p>Many companies have successfully ended contracts when <a href="https://www.jstor.org/stable/1111481">war has broken out</a> or the government has <a href="http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2000/1095.html?context=1;query=%5b2000%5d%20NSWSC%201095;mask_path=">changed the law</a> in ways that significantly impacted the contract. However, the fact a government’s actions have made a contract <a href="https://www.trans-lex.org/311500/_/tsakiroglou-co-ltd-v-noblee-thorl-gmbh-the-law-report-1962-at-page-7-et-seq/">harder</a> or <a href="http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/vic/VSCA/2011/116.html?context=1;query=%5b2011%5d%20VSCA%20116;mask_path=">more expensive</a> to complete does not automatically mean it will be terminated. </p>
<p>Rio Tinto’s case depends on whether it can invoke a “<a href="http://www.austlii.edu.au/au/journals/AUMPLawAYbk/1992/26.pdf">force majeure</a>” clause in its contracts with Rusal. This kind of clause allows parties to suspend or end a contract when unique and unforeseen events beyond their control occur.</p>
<p>Under the new sanctions, companies and individuals within the United States have until May 7 <a href="https://www.treasury.gov/resource-center/sanctions/Programs/Documents/ukraine_gl13.pdf">to divest or transfer any debt, equity or other holdings</a> in Rusal. Rusal is controlled by Russian billionaire Oleg Deripaska, who <a href="http://money.cnn.com/2018/04/11/investing/aluminum-prices-sanctions-rusal/index.html">has previously been investigated</a> for money laundering, extortion, bribery and alleged links to organised crime groups.</p>
<p>Rio Tinto <a href="http://www.riotinto.com/media/media-releases-237_25206.aspx">has a joint venture with Rusal</a> that could be affected by the US sanctions. </p>
<h2>The effect of force majeure</h2>
<p>Typically, when unique or unforeseen events occur, the contract may be legally “<a href="https://legalvision.com.au/know-contract-becomes-frustrated/">frustrated</a>” and end automatically. Frustration is the legal term for a contract being so <a href="http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/HCA/1982/24.html">radically affected</a> by unforeseeable events outside the control of the parties that it is terminated.</p>
<p>A force majeure clause <a href="http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/vic/VSCA/2011/335.html?context=1;query=%5b2011%5d%20VSCA%20335%20;mask_path=">generally prevents this happening</a> because the inclusion of the clause is regarded as “foresight” of the event. However, force majeure clauses typically allow parties to end the contract if the event lasts for a given time, and don’t always require “radical change” like the frustration doctrine does.</p>
<p>It all turns upon the wording of the particular clause in the Rio Tinto contracts.</p>
<h2>Force majeure through history</h2>
<p>A successful claim of force majeure was made in the American case of <a href="https://law.justia.com/cases/federal/appellate-courts/F2/532/957/98936/#fn6-1_ref">Eastern Airlines v McDonnell Douglas Corp</a>. In this case aircraft manufacturer McDonnell Douglas argued that US government policy during the Vietnam War (occurring at the time) caused the government to prioritise military contracts over civilian ones. </p>
<p>As a result, McDonnell Douglas’s contract with Eastern Airlines was delayed. It invoked a force majeure clause covering “acts of government” to avoid liability for the airline’s lost profits.</p>
<p>The court ruled that McDonnell Douglas was entitled to rely upon the force majeure clause and walk away from the agreement due to the government’s policy.</p>
<p>Importantly, just because a contract has a force majeure clause, this does not mean it can be used freely. <a href="http://www.austlii.edu.au/au/journals/AUMPLawAYbk/2004/17.pdf">Some English cases</a> suggest that parties must still make reasonable efforts to keep the contract alive before resorting to force majeure. Evidence of attempts to preserve its contracts with Rusal would likely work in Rio Tinto’s favour.</p>
<p>The courts have also stressed that force majeure cannot be relied upon where there were reasonable alternative ways to complete the contract. </p>
<p>In the Australian case of <a href="http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWCA/2004/76.html?context=1;query=%5B2004%5D%20NSWCA%2076;mask_path=">European Bank Ltd v Citibank Ltd</a>, Citibank was unsuccessful in claiming force majeure when it transferred European Bank’s deposit to a New York account and the funds were seized by the United States Marshal. The force majeure clause allowed Citibank to escape liability if it could not perform due to “reasons beyond its reasonable control”.</p>
<p>The court held that Citibank could have refunded European Bank’s deposit from other accounts or made other arrangements, so the situation could have been avoided.</p>
<p>In Rio Tinto’s case, its efforts to make alternative arrangements will be of critical importance. If there are no feasible options other than to cancel the Rusal contracts, force majeure will likely apply.</p>
<h2>When force majeure doesn’t work</h2>
<p>But there are plenty of examples where force majeure events such as government intervention have not been regarded as sufficient grounds to end a contract. </p>
<p>In 1962, a court in the United Kingdom <a href="https://www.trans-lex.org/311500/_/tsakiroglou-co-ltd-v-noblee-thorl-gmbh-the-law-report-1962-at-page-7-et-seq/">found</a> that the closure of the Suez Canal was not sufficient to end a contract requiring 300 tonnes of Sudanese nuts to be shipped between Port Sudan and Hamburg. </p>
<p>The Suez Canal would have been the cheapest and fastest shipping route. However, it was still possible to deliver the nuts by sailing around the Cape of Good Hope, even if this increased the cost for the seller and took more time. </p>
<p>Inadequate wording in a force majeure clause can also backfire, as in <a href="https://www.trans-lex.org/308600/_/fyffes-group-ltd-v-reefer-express-lines-pty-ltd%C2%A0%5B1996%5D-2-lloyds-rep-171/">the Kriti Rex</a> case. Here a force majeure clause covering ‘“events beyond the control of the parties” was deemed inapplicable because the courier hired by the purchaser (which damaged the goods) was regarded as being within the purchaser’s control.</p>
<h2>So what for Rio Tinto?</h2>
<p>Ultimately, the success of Rio Tinto’s attempt to invoke force majeure depends entirely upon the wording of the clauses and whether these account for events such as sanctions being imposed. </p>
<p>But it is highly unlikely the clauses would be this specific as the circumstances are unique. Traditional inclusions in force majeure clauses are things like <a href="http://www.austlii.edu.au/au/journals/AUMPLawAYbk/1992/26.pdf">natural disasters, labour strikes or war</a>, not a foreign government’s political sanction of a company’s controller. </p>
<p>Force majeure clauses are also <a href="http://www.austlii.edu.au/au/journals/AUMPLawAYbk/2004/17.pdf">interpreted quite narrowly</a> by courts, so cannot just be stretched to cover every situation.</p>
<p>If the clauses in Rio’s contracts are deemed not to account for the US sanctions, Rio must rely on the doctrine of frustration. It would need to demonstrate that contracting with a company controlled by a Russian oligarch who has been subsequently sanctioned by the US was a reasonably unforeseeable event when the contract was made, and this event radically altered the contract. </p>
<p>It would not be enough for Rio Tinto to argue it might lose money or be inconvenienced. Though the US government’s actions might have been unexpected, the broader effects of Rusal’s suspension upon Rio Tinto’s operations remain to be seen. </p>
<p>If the consequences are purely financial or inconvenient, Rio Tinto’s legal mettle might be tested.</p><img src="https://counter.theconversation.com/content/95055/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Giancaspro does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Many contracts have been ended in cases of war or changes in the law. But government action making a contract more expensive does not mean it will be terminated.Mark Giancaspro, Lecturer in Law, University of AdelaideLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/941292018-04-08T10:11:47Z2018-04-08T10:11:47ZSteinhoff’s board behaved badly. Why it needs to be held to account<figure><img src="https://images.theconversation.com/files/213551/original/file-20180406-125177-pijet0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Shutterstock</span> </figcaption></figure><p>It’s becoming clearer by the day that the rot that caused the <a href="https://theconversation.com/did-steinhoffs-board-structure-contribute-to-the-scandal-89704">corporate scandal</a> at furniture retailing giant Steinhoff International goes much deeper than one man – the CEO Markus Jooste – who has come to represent the crisis. </p>
<p>The company is accused of overstating its earnings among other accounting irregularities in a case describe as an <a href="https://www.businesslive.co.za/bd/companies/retail-and-consumer/2017-12-18-how-investors-bought-into-the-steinhoff-success-story-despite-the-red-flags/">Enron type</a> company failure. </p>
<p>The accounting scandal, which caused a more than €10 billion collapse in Steinhoff’s share price, has focused blame on Jooste while executives around him have <a href="http://www.steinhoffinternational.com/downloads/2018/latest-results/Steinhoff%20trading%20update%20Q1%202018.pdf">dodged responsibility</a>. Surely Jooste could not change accounting entries without help?</p>
<p>The behaviour of the Steinhoff board, since the scandal exploded in December last year, confirms my early suspicions. The rot runs deeper. This is clear from the appalling manner in which the board has managed the unfolding crisis. It’s been four months since Steinhoff was enveloped by the accounting scandal. And there’s no resolution in sight, let alone a proper diagnosis. </p>
<p>The board has called an annual general meeting but the shareholders will not receive financial statements before the meeting. Naturally it is a legal obligation to call an annual general meeting, but similarly the publication of financial statements is also a legal obligation. </p>
<p>It’s really hard to imagine that a serving board of any company can claim that it had no insight in its financial affairs and trusted only in the judgement of the CEO. This makes the board redundant. Such a lack of insight must also be a breach of company law, as the legislation clearly states that the board is responsible for the financial statements.</p>
<p>And to add insult to injury the AGM’s agenda included a proposal for some directors to be paid an <a href="https://www.moneyweb.co.za/moneyweb-opinion/steinhoffs-proposed-extra-payments-to-directors-are-obscene/">additional amount</a>, ostensibly for extra effort in managing the crisis, that is to clean up their mess. Public pressure forced the company to <a href="https://businesstech.co.za/news/business/235893/steinhoff-shelves-plan-to-pay-director-bonuses/">withdraw</a> this strange remuneration proposal. Simply suggesting such a payment in the first place shows that the board members in question lack the required insight and intelligence to act at this level and to appreciate the depth of the crisis at hand.</p>
<h2>South Africa’s biggest corporate failure</h2>
<p><a href="http://www.steinhoffinternational.com/downloads/2018/library/2016/1/Annual%20report%202016_1.pdf">Steinhoff</a> grew out of South Africa to have a sizeable representation across sub-Saharan Africa, western Europe, Australasia and the US. At its peak it had amassed market valuation of about €20 billion with <a href="http://www.steinhoffinternational.com/downloads/2018/library/2016/1/Annual%20report%202016_1.pdf">revenue</a> of about €10 billion. About half of that market value was <a href="https://theconversation.com/steinhoff-scandal-points-to-major-gaps-in-stopping-unethical-corporate-behaviour-88905">wiped out</a> when the scandal of accounting irregularities surfaced in December last year and subsequently much more has been wiped out. This makes Steinhoff the biggest corporate failure in South Africa’s history.</p>
<p>When the scandal broke, Jooste <a href="https://www.moneyweb.co.za/news/companies-and-deals/steinhoff-ceo-markus-jooste-quits/">fell on his sword</a>. And so did a couple of <a href="https://www.businesslive.co.za/bd/companies/retail-and-consumer/2018-01-18-jayendra-naidoo-is-latest-steinhoff-director-to-resign/">other board members</a>. Jooste has taken some <a href="https://probonomatters.co.za/2017/12/the-steinhoff-saga-markus-joostes-weak-mea-culpa-2/">personal responsibility</a> in a vague letter of apology to Steinhoff employees. </p>
<p>He’s since <a href="https://www.fin24.com/Companies/Retail/mps-resolves-to-subpoena-markus-jooste-20180328">gone to ground</a>, even rejecting a call to appear before a parliamentary enquiry into the debacle in South Africa. The remaining members of the board have <a href="http://www.steinhoffinternational.com/downloads/2018/latest-results/Steinhoff%20trading%20update%20Q1%202018.pdf">pleaded innocence</a>. </p>
<p>But they should be held to account and not let off the hook.</p>
<h2>Poor board behaviour</h2>
<p>When the scandal came to light the board resolved to suspend the release of financial statements for the 12 months ended September 2017. The <a href="http://www.steinhoffinternational.com/downloads/2018/latest-results/Steinhoff%20trading%20update%20Q1%202018.pdf">reasons</a> given may have been reasonable. They included the fact that accounting firm PwC had been appointed to conduct <a href="http://www.steinhoffinternational.com/downloads/2018/latest-results/Steinhoff%20trading%20update%20Q1%202018.pdf">a forensic investigation</a> following allegations of accounting irregularities. And it was almost a certainty that previous financial results, from 2016 going back, were going to be <a href="http://www.steinhoffinternational.com/downloads/2018/latest-results/Steinhoff%20trading%20update%20Q1%202018.pdf">restated</a>.</p>
<p>And so the group announced that it could not release the 2017 financial statement in expected time. <a href="https://www.jse.co.za/content/JSERulesPoliciesandRegulationItems/JSE%20Listings%20Requirements.pdf">Regulation</a> demands that financial statement of listed companies be released within three months of the financial year end.</p>
<p>The Steinhoff board recently announced scheduling of the next <a href="http://www.steinhoffinternational.com/downloads/2018/AGM%20Notice%202018.pdf">annual general meeting</a> for shareholders on the 20th of April 2018. But there’s no mention that financial statements will be tabled at the meeting. This must be read with section 30 of the South African <a href="https://www.gov.za/sites/default/files/32121_421_0.pdf">Companies Act</a> which stipulates that financial statements must be presented to the first shareholders meeting after the statements have been approved by the board.</p>
<p>This raises the question: Is there any sense in hosting an annual general meeting without financial statements for the shareholders to consider, despite legal stipulations for a meeting of shareholders to be called? </p>
<h2>Insult to injury</h2>
<p>Granted, the odd remuneration proposal has been <a href="https://businesstech.co.za/news/business/235893/steinhoff-shelves-plan-to-pay-director-bonuses/">withdrawn</a>. But its still a worthwhile exercise to zoom in on it.</p>
<p>It was a proposal to extend to some members of the board a further once-off payment to cover additional work undertaken during the period since the accounting irregularities were identified in December 2017. The fact that anybody at Steinhoff considered this a sound proposal shows that the board and executive management of the company have lost touch with the reality of shareholder anger and of the duties of board members.</p>
<p>According to this proposal board member, Steve Booysen and Heather Sonn were to be paid an additional €200,000 and Johan van Zyl be paid an additional €100,000. </p>
<p>The notice stated that the unfolding scandal made it necessary for the board members in question to do extra work, thus deserving extra payment. This is ludicrous. These board members were in the first instance responsible for the crisis. It therefore boggles the mind that these directors had any expectation to be paid extra for dealing with the crisis that they are to be blamed for in the first instance.</p>
<p>At the same time Steinhoff announced that an Independent Committee comprising some of its board members, inter alia, … focused on establishing a sound governance structure. This was a board function before the collapse, but was clearly seriously lacking before the crisis. </p>
<p>It’s clear that these board members of Steinhoff live in a different reality where shame does not exist.</p>
<p>In my mind the election and remuneration of board members can be dealt with simply and elegantly: remaining board members who served during the period of value destruction should quietly “disappear”. And they should also do the honourable thing and repay board fees that they clearly did not deserve, given that they didn’t discharge their responsibilities.</p><img src="https://counter.theconversation.com/content/94129/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw is has a C research rating fro the NRF. He owns shares in Steinhoff. </span></em></p>All Steinhoff directors should be held accountable for the international corporate scandal.Jannie Rossouw, Head of School of Economic & Business Sciences, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/864512017-11-06T01:24:07Z2017-11-06T01:24:07ZTaxpayers are subsidizing hush money for sexual harassment and assault<figure><img src="https://images.theconversation.com/files/193264/original/file-20171103-1011-su99sq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The secret settlements that leave the reputations of alleged sexual abuse perpetrators intact are also tax-deductible.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/locker-bank-vault-storage-cash-documents-71417005?src=jK7LyeHElAbODzkiDUjnpA-1-63">Lisa S./Shutterstock.com</a></span></figcaption></figure><p>Many of the recent stories about sexual abuse claims against disgraced Hollywood mogul <a href="http://www.slate.com/blogs/the_slatest/2017/10/10/a_list_of_sexual_assault_and_harassment_allegations_against_harvey_weinstein.html">Harvey Weinstein</a>, former Fox News host <a href="https://www.gq.com/story/megyn-kelly-bill-oreilly-the-receipts">Bill O’Reilly</a> and <a href="http://wjla.com/news/entertainment/looking-back-at-the-sexual-harassment-media-stories-that-dominated-coverage-this-year">other powerful actors, journalists and executives</a> mention settlements either they or their employers made to silence women who accused them of misconduct. </p>
<p>These settlements often require alleged victims to sign a nondisclosure agreement – essentially a pledge of secrecy – in exchange for a cash payment. They are designed to keep the reputations of allegedly abusive high-flyers intact, an arrangement that can allow repeated wrongdoing. </p>
<p>As a law professor who focuses on <a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=182574">white-collar crime</a>, what I find striking about these contracts is how they can be treated as tax-deductible business expenses. That means American taxpayers are helping foot the bill for keeping despicable behavior in the shadows.</p>
<p>I don’t believe that secret payments to settle sexual abuse claims should be tax-deductible. Here’s why.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/193217/original/file-20171103-1014-1p3ya0r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/193217/original/file-20171103-1014-1p3ya0r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/193217/original/file-20171103-1014-1p3ya0r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/193217/original/file-20171103-1014-1p3ya0r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/193217/original/file-20171103-1014-1p3ya0r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/193217/original/file-20171103-1014-1p3ya0r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/193217/original/file-20171103-1014-1p3ya0r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/193217/original/file-20171103-1014-1p3ya0r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Before Fox News fired Bill O'Reilly, there was a great deal of outrage over his alleged sexual abuse.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/TV-Fox-O-Reilly/3b446a6e30c04fa9b231a077f9856ea7/30/0">AP Photo/Bebeto Matthews</a></span>
</figcaption>
</figure>
<h2>Secret settlements</h2>
<p>Sexual harassment <a href="https://www.eandblaw.com/employment-discrimination-blog/2016/02/04/sexual-harassment-at-work-a-crime/">becomes a crime</a> only when there is a nonconsensual touching or sexual contact that can be prosecuted.</p>
<p>Victims of sexual harassment in the workplace usually can pursue personal injury claims by seeking damages from the executive or colleague responsible for it – or their employer – to compensate for emotional distress and any physical injury the abuse caused. These cases are mostly litigated at the state level, if they ever reach a courtroom.</p>
<p>The broader cost of these confidential agreements to society is that they leave perpetrators free to prey on new victims who are unaware that they may be walking into a trap when they meet privately with a powerful executive or someone who simply has <a href="https://www.washingtonian.com/2017/11/01/matt-taibbi-politics-prose-event-canceled-sidwell/">greater seniority and influence</a>.</p>
<p>Some states have tried to stop or at least curb this practice.</p>
<p>For example, Florida’s <a href="http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0000-0099/0069/Sections/0069.081.html">Sunshine in Litigation Act</a> prohibits courts from entering an order that conceals information related to a public hazard, which is defined as something or someone “that has caused and is likely to cause injury.”</p>
<p><a href="https://www.rcfp.org/secret-justice-alternative-dispute-resolution/secret-settlements-hazardous-cases">Other states</a> with anti-secrecy laws include Texas, Virginia, North Carolina, New York, Oregon and Georgia. </p>
<p>That kind of solution, however, only goes a short way toward protecting the public because it is limited to cases that go to court. For example, a former Weinstein Company employee withdrew her complaint to management without ever resorting to a legal filing by <a href="https://www.boston.com/culture/entertainment/2017/10/12/weinstein-co-may-have-known-of-settlements-since-2015">accepting a settlement</a> in 2015. A <a href="https://www.nytimes.com/2017/10/05/us/harvey-weinstein-harassment-allegations.html?_r=0">total of eight women</a> have collected between roughly US$80,000 and $150,000 each due to secret agreements not to disclose Weinstein’s alleged misconduct, The New York Times reported in October.</p>
<p>When settlements stave off the filing of a sexual harassment complaint in court, the agreements aren’t subject to mandates like Florida’s Sunshine in Litigation Act.</p>
<p>California State Sen. <a href="http://variety.com/2017/biz/news/bill-settlement-ban-sexual-harassment-harvey-weinstein-1202593778/">Connie Leyva</a> plans to introduce a bill that would go even further. Her legislation would ban all secret nondisclosure agreements in financial settlements that arise from sexual harassment, assault and discrimination cases.</p>
<p></p><hr><p></p>
<p><iframe id="Djcal" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/Djcal/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p></p><hr><p></p>
<h2>Ordinary business expenses</h2>
<p>The payments associated with these settlements can be treated as a business expense. That means they are tax-deductible, as long as they are related to the conduct of the company’s ordinary operations.</p>
<p>Although it might seem odd to say that sexual harassment is within the realm of a company’s business, the many accusations against Weinstein involved encounters that were at least purportedly related to future movie productions.</p>
<p>Either an employer or the person accused of harassment can pay the money required by these settlements. In O’Reilly’s case, Fox has said it knew that he had reached a new settlement with an accuser before it renegotiated his contract earlier this year. Fox’s insistence that the company was unaware of the size of the settlement – <a href="http://deadline.com/2017/10/james-murdoch-oreilly-settlement-was-news-to-me-1202194410/">$32 million</a> – makes it clear that O'Reilly wrote the check.</p>
<p>Even the attorney’s fees for negotiating the settlement are deductible as another ordinary business expense.</p>
<p>Until about 50 years ago, payments related to violations of what the courts deemed violations of “public policy” were not tax-deductible. Congress changed that in 1969. Section 162 of the <a href="https://www.law.cornell.edu/uscode/text/26/162">U.S. tax code</a> now only explicitly prohibits the deduction of bribe payments, health care kickbacks, lobbying expenditures and any fines or penalties paid to the government for violating the law.</p>
<p>Just about everything else is deductible. But <a href="http://www.queensemploymentattorney.com/blog/2016/03/is-income-from-a-sexual-harassment-settlement-taxable/">most victims</a> of sexual harassment and abuse <a href="http://californiaceo.net/tax-planning-sexual-harassment-claims">do not get a break</a>. That’s because the law exempts payments only for <a href="https://www.law.cornell.edu/uscode/text/26/104">physical injuries</a>, not for payments related to emotional distress. </p>
<p>Who else gets to deduct their settlement <a href="https://uspirgedfund.org/sites/pirg/files/reports/USPIRG_SettlementsReport.pdf">payments for misconduct</a>?</p>
<p>One good example is BP. The oil giant got to write off over $15 billion of its <a href="https://www.forbes.com/sites/robertwood/2015/10/06/bps-20-8-billion-gulf-spill-settlement-nets-15-3-billion-tax-write-off/#2ef4a0c25c5b">$20.8 billion settlement</a> with the federal government over its massive Gulf Coast oil spill, allowing it to potentially shelter years of income from federal taxes. </p>
<p>Another is <a href="http://www.businessinsider.com/tax-deductible-of-jp-morgan-settlement-2013-11">JP Morgan</a>. Its $13 billion settlement for faulty mortgages allowed the company to deduct about $7 billion from its taxes. A similar settlement by <a href="https://newrepublic.com/article/132628/goldman-sachs-settlement-5-billion-sham">Goldman Sachs</a> for subprime mortgages it packaged into securities resulted in a $5 billion settlement of which over half was tax deductible.</p>
<h2>Changing the law</h2>
<p>One way to discourage corporate misconduct is to raise the cost of engaging in it. </p>
<p>Congress is now weighing whether to close many loopholes as part of a broad <a href="https://www.pbs.org/newshour/politics/gop-tax-bill-would-be-broadest-tax-code-rewrite-in-30-years">tax package</a>. In my opinion, that makes this the ideal time to stop allowing deductions for secret settlements of sexual abuse claims from corporate or personal income taxes.</p>
<p>Ending this tax break would make this kind of confidentiality agreement more costly for perpetrators and the companies that let them off the hook. That would give corporate accountants and human resources departments a powerful incentive to <a href="https://theconversation.com/how-companies-can-learn-to-root-out-sexual-harassment-85862">root out</a> the problem.</p>
<p>There are no surefire ways to end sexual harassment and assault in the workplace. But making it cost more to hide this misconduct might help make it less commonplace.</p><img src="https://counter.theconversation.com/content/86451/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter J. Henning does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Secret payments in exchange for silence regarding work-related sexual abuse are usually tax-deductible. How about changing that?Peter J. Henning, Professor of Law, Wayne State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/842792017-09-19T17:57:29Z2017-09-19T17:57:29ZWhat KPMG’s Gupta imbroglio says about corruption in South Africa<figure><img src="https://images.theconversation.com/files/186581/original/file-20170919-25319-1uqvawo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>As far as corporate accountability goes, the recent announcement that the CEO and seven senior executives at auditing and consultancy firm KMPG in South Africa <a href="http://www.fin24.com/Companies/Financial-Services/kpmg-sa-ceo-7-others-quit-on-guptaleaks-fallout-20170915">have resigned</a> is a welcome development.</p>
<p>By resigning, the KPMG executives reinforced the principle of executive responsibility. This is a matter not taken seriously in South African culture, particularly when it comes to the public sector. The usual pattern when misdemeanours are uncovered is for government ministers and other senior executives to blame their staff – or someone else – when things go wrong. </p>
<p>At this level the action of the KPMG executives is to be respected. The hope must be that this behaviour becomes an example for others.</p>
<p>KPMG executives have set a new South African benchmark: executives assuming responsibility for wrongdoing in their organisations. South Africans should thank the firm for setting a new standard with this decisive action. Its executives have taken oversight responsibility for the action of others.</p>
<p>The role that companies such as KPMG plays is particularly crucial because auditor firms and consultancies are meant to hold companies and state entities to account by ensuring transparency and honesty. The fact that a firm of KPMG’s standing should be embroiled in a matter as murky as compiling false reports to serve the political ends of particular politicians highlights the degree of corruption that has taken hold in South Africa.</p>
<p>In light of this, are KPMG’s actions enough? I believe not. To pull South Africa back from the brink, the auditing firm should opt for full disclosure of all its involvement with the Gupta family as well as the companies they own. This should, inter alia, include all working papers, correspondence and audit findings. This would allow public scrutiny of the work it claims to have done under the banner of professionalism and provide the opportunity for a deeper understanding of the Gupta network. Nothing short of this will clear KPMG’s name. </p>
<h2>From state capture to country capture</h2>
<p>There is no doubt that KPMG’s report on a rogue unit completed for the South African Revenue Service has <a href="https://www.iol.co.za/news/politics/kpmg-report-on-rogue-unit-has-tarnished-sars-future-sa-11241403">damaged South Africa’s image</a>. But it has done more than that and raises the question whether South Africa suffers only state capture, or whether the rot is growing into economic capture of the whole country, what I term “country capture”.</p>
<p>The basis for asking this question is that the South African economy – and as a result its citizens – are paying a heavy cost for the mismanagement of the country’s resources. This has been through a combination of bad and neglectful management and out-and-out corruption. All this for the account of South African taxpayers.</p>
<p>South Africa’s fiscal position is precarious, with a revenue shortfall of more than <a href="https://www.businesslive.co.za/bd/economy/2017-08-21-downgrade-alarm-as-revenue-shortfall-could-hit-r50bn/">R50 billion</a> expected in the fiscal year to 31 March 2018. This growing shortfall is driven by subdued economic performance and will continue until the domestic economic growth recovers.</p>
<p>The shortfall is directly linked to low economic growth and recessionary conditions. These in turn have been caused by state capture. The private sector is reluctant to invest in the midst of corruption. This means that there is no new economic activity being started, a particularly bad situation given that industries such as mining are shrinking. This week Implats <a href="http://www.fin24.com/Companies/Mining/">announced</a> it was in negotiations with unions to lay off 2 500 workers. <a href="https://theconversation.com/the-lesser-known-and-scarier-facts-about-unemployment-in-south-africa-83055">Unemployment</a> is already at 27.7%.</p>
<p>Individual South African taxpayers are therefore being forced to bail out the government as it faces fiscal difficulties, placing the country on the slippery slope of country capture. This is reflected in the fact that government’s final consumption <a href="https://data.worldbank.org/indicator/NE.CON.GOVT.ZS?locations=ZA">expenditure</a> as percentage of GDP currently exceeds 20%. </p>
<h2>What next?</h2>
<p>Having ended up in this precarious position, it’s necessary to consider the way forward for KPMG and for South Africa. </p>
<p>KPMG clearly wants to save itself as a company and South Africa wants to rid itself of state/country capture. In redeeming itself, the firm can render a great service to South Africa in the quest to break the stranglehold. KPMG should disclose all dealings, findings, work papers, interactions and the like with the Gupta family businesses. This would achieve two objectives.</p>
<p>Firstly, it would show who is implicated and who is not. KPMG stated that there was no wrongdoing on its side in <a href="https://www.timeslive.co.za/news/south-africa/2017-09-14-kpmg-denies-any-dodgy-dealings-in-controversial-gupta-coal-deal/">audits it did on companies owned by the Guptas</a>. But this can only be settled through full disclosure.</p>
<p>Secondly, such a disclosure would help to reveal the full scope of state/country capture in South Africa. </p>
<p>Naturally KPMG’s dealings with the Gupta companies and Gupta family are subject to client confidentiality agreements. KPMG should therefore inform the Gupta family of its intention to publish within seven days. If the Guptas object in writing KPMG should approach the courts with a request to issue a clarification order to authorise disclosure.</p>
<p>This is the only way in which KPMG can salvage what’s left of its reputation in South Africa. KPMG should stand for: “Keep Pushing Mighty Guptas”.</p>
<p>At the same time South Africans would be able to use the disclosures as the basis for beginning to understand the full extent of state/country capture and the remedial steps necessary to turn this around.</p>
<p>Here is a small opportunity to make progress towards some light at the end of a very long and dark tunnel. The opportunity rests in the hands of KPMG. South Africa waits.</p><img src="https://counter.theconversation.com/content/84279/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw is a C3 NRF-rated researcher and receives grant funding from the NRF. </span></em></p>KPMG South Africa executives have set a new benchmark for the country assuming responsibility for wrongdoing in their organisation.Jannie Rossouw, Head of School of Economic & Business Sciences, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/801692017-06-30T05:20:26Z2017-06-30T05:20:26ZIn India, a legislative reform is needed to push corporate social responsibility<p>The corporate social responsibility (CSR) movement <a href="https://link.springer.com/article/10.1007/BF00705587">began</a> as a response to advocacy for corporations to play a role in ameliorating social problems due to their economic power and overarching presence in daily life.</p>
<p>Now, the movement is transitioning from its reliance on purely voluntary activity to the greater use of laws. The push for legalisation came because voluntary CSR presented problems such as free-riding (companies taking advantage of benefits without actually spending), <a href="http://www.sciencedirect.com/science/article/pii/S1045235412000998">greenwashing</a> posing as CSR, and <a href="https://www.forbes.com/sites/danpontefract/2016/09/24/faking-corporate-social-responsibility-does-not-fool-employees/#6e2f68b67994">false disclosures</a>.</p>
<p>Governments are now modifying their <em>laissez faire</em> approach and considering <a href="https://www.forbes.com/sites/eshachhabra/2014/04/18/corporate-social-responsibility-should-it-be-a-law/#536df93f3736">legal rules</a>.</p>
<p>The US Securities and Exchange Commission, for instance, has moved beyond its mandate as a market regulator to issue rules on <a href="https://www.sec.gov/news/public-statement/piwowar-statement-court-decision-conflict-minerals-rule">conflict minerals</a>, <a href="https://www.sec.gov/news/pressrelease/2016-132.html">resource extraction payments</a>, and <a href="https://www.wsj.com/articles/sec-drafting-rule-requiring-firms-reveal-board-diversity-1467078153">gender diversity</a>. And, in 2014, the European Union issued a <a href="http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014L0095">directive</a> on disclosure of non-financial and diversity information. </p>
<p>Similarly, Australian companies are required to <a href="http://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf">disclose</a> how they will manage their environmental and social sustainability risks.</p>
<h2>India at the forefront</h2>
<p>India has gone further than any other country. In 2013, it enacted <a href="https://www.mca.gov.in/Ministry/pdf/FAQ_CSR.pdf">Section 135</a> of the Indian Companies Act prescribing a mandatory “CSR spend of 2% of average net profits … during the three immediately preceding financial years” for all companies meeting specified financial thresholds. In other words, companies “having net worth of rupees five billion or more, or turnover of rupees ten billion or more or a net profit of rupees fifty million or more during any financial year” have to ensure that they spend 2% of average net profits made during the three preceding years on CSR activities. </p>
<p>In order to assess the effectiveness of this unique experiment in mandating CSR spending and disclosure, we studied the reporting practices of the four largest banks by market capitalisation in India compared with banks from Australia, China, and Japan where there is no such <a href="http://ssrn.com/abstract=2993772">law</a>. In order to do so, we assessed annual and CSR reports of our sample of companies from 2012, one year before the law was passed.</p>
<p>Indian banks did not have CSR reports before 2012. The CSR committees formed by the banks function in the spirit of the law within defined targets, monitoring CSR spend, and reporting reasons for shortfalls in spending.</p>
<p>Of the Indian banks evaluated, only the State Bank of India (SBI) disclosed its CSR spend prior to the promulgation of the new Companies Act; all banks disclosed this spend from 2013.</p>
<p>Despite the new law mandating a CSR spend of 2% of pre-tax profit for corporations of this size, only ICICI Bank met the target in 2014. But it fell to 1.9% in 2016.Kotak Mahindra Bank reported a CSR spend of less than 0.69% of pre-tax profits in 2016. </p>
<p>In spite of not meeting the targeted CSR spend, none of the banks reported any fines or proceedings for breaching the law.</p>
<p>During this period (2012-2016), Australian banks had the highest disclosures, followed by Japan, China and India.</p>
<p>There’s a marginal difference in Indian bank disclosures after the new law was passed in 2013. But these differences may well be due to the different cultures and other non-market factors at play.</p>
<h2>Different programs</h2>
<p>Indian banks spend on educational and health promotional CSR activities, as prescribed by the new law. Additionally, all Indian banks use in-house foundations and centres, and promote staff volunteering at high-profile events. All these activities are designed to obtain maximum positive media coverage.</p>
<p>Less popular CSR activities, such as programs for eradicating malaria or combating other major communicable diseases – also defined in the Act as designated CSR activity – do not get any attention.</p>
<p>Another popular CSR activity is contributing to natural disaster relief funds, which is probably aimed at scoring brownie points with the political party in power. Then there’s lip service to environmental sustainability by the development of “ideal” bank branches with small environmental footprints. But the vast majority of offices languish with old energy-hungry, environmentally dated structures and activities.</p>
<p>In contrast – and despite the absence of a legislative mandate – Australian banks have been disclosing their CSR expenditure since at least 2010. CBA and Westpac spend more on CSR as a percentage of pre-tax profits than the other two major Australian banks.</p>
<p>Chinese and Japanese banks report on targets and achievements to meet their respective environmental laws, albeit not in as much detail as Australian banks. As there’s no legal requirement to report on their actual CSR spends, Japanese banks did not disclose this in their reporting media till 2015.</p>
<p>In 2016, Japanese banks Nomura and Mizuho started reporting their CSR spend. Similarly, Chinese banks started voluntarily reporting their CSR spend in 2016. </p>
<p>But all fall below 0.25% of post-tax profits.</p>
<h2>Time for reform</h2>
<p>Our analysis shows that the law in its current form is failing to promote CSR activity. Its poor design and lack of clear obligations, set in a milieu of poor law enforcement, is also not generating an ethical obligation to obey the law in spirit.</p>
<p>Our findings are of value to policy makers and suggest it’s time to reform laws – to socialise corporations and CEOs in terms of their legal obligations and the benefits of CSR activity, to design enforcement mechanisms, and to generate ethical behaviour.</p>
<p>India’s legal provisions contain vague language and permit a high degree of self-interpretation that undermines legislative intent. For example, it allows banks to list “staff training in fire safety” as part of CSR even though this should be a strictly mandatory workplace safety activity.</p>
<p>Indian banks’ annual and CSR reports do not show a major shift in the nature of disclosures after 2013. The law is perhaps purely expressive as the provision stipulates minimal penalties for non-compliance and relies on a comply-or-explain philosophy. This exacerbates the lack of ethical obligation to obey laws in India where there’s a level of high <a href="https://tradingeconomics.com/india/corruption-rank">corruption</a>, low levels of <a href="http://www.pewglobal.org/2016/09/19/1-how-is-india-doing/">public confidence</a>, <a href="http://www.livemint.com/Opinion/W5Fx1zCQNdnmCRDx9AAQ6O/Weak-public-institutions-behind-Indias-low-state-capacity.html">weak institutions</a>, low levels of <a href="http://hdr.undp.org/en/countries/profiles/IND">development</a>, and <a href="http://hdr.undp.org/en/content/education-index">education</a>, among other such issues.</p>
<p>The provisions also appear to be formulated based on a traditional understanding that top management is solely responsible for ethical behaviour and CSR activity, without making the connection between the company and its stakeholders. There is no explanation for how the CSR provision fits within the wider ambit of a corporation’s role and purpose, the duties expected of its directors, or the information it is expected to disclose.</p>
<p>Until such time that the law is made more precise and backed up by effective enforcement and penalties for non-compliance, it will not promote CSR or make companies engage more with stakeholders. Section 135 is merely a stealth tax and will impose unnecessary compliance burdens.</p><img src="https://counter.theconversation.com/content/80169/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>India has gone further than any other country in legislating for corporate social responsibility. But the law should be redrafted to enhance precision and stakeholder orientation.Ameeta Jain, Senior Lecturer in Finance, Deakin UniversitySandeep Gopalan, Professor of Law, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/716392017-01-30T14:25:29Z2017-01-30T14:25:29ZAn original Republican tax plan offers Trump a radical tool for corporate tax reform<figure><img src="https://images.theconversation.com/files/154525/original/image-20170127-30424-1yrhxfm.jpg?ixlib=rb-1.1.0&rect=73%2C9%2C5987%2C3798&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/dollars-rolled-closeup-american-cash-money-557486395?src=4uAmTRJFtRzOLu4kVsZL1A-2-98">Marian Weyo/Shutterstock</a></span></figcaption></figure><p>Major US companies <a href="http://www.bbc.co.uk/news/magazine-20560359">have long been known</a> to specialise in profit shifting to tax havens to reduce their tax bill. This <a href="http://www.oecd.org/ctp/beps/">erosion of the corporate tax base</a> is thought to lead to <a href="http://www.vox.com/2016/4/8/11371712/panama-papers-tax-haven-zucman">rising inequality</a> and deprives countries of important revenues to spend on public services. </p>
<p>So what can be done? Donald Trump is being encouraged by leading House Republicans – led by Kevin Brady, chairman of Washington’s tax-writing <a href="https://waysandmeans.house.gov/">Ways & Means committee</a>, and speaker Paul Ryan – to introduce a Destination-Based Cash Flow Tax, or DBCFT. This tax plan has been pushed forward by leading Berkeley <a href="https://www.americanactionforum.org/research/14344/">economist Alan Auerbach</a> and scholars at the Oxford Centre for Business Taxation.</p>
<p>It sounds <a href="http://www.wsj.com/articles/trump-warns-on-house-republican-tax-plan-1484613766">complicated</a> – and has an awful acronym – but there is something in this plan that offers an alternative. </p>
<p>The <a href="https://cdn.americanprogress.org/wp-content/uploads/issues/2010/12/pdf/auerbachpaper.pdf">DBCFT</a> doesn’t go after a firm’s profits in the normal sense, as the current corporate tax regime does. Instead of taxing corporate income (revenue minus costs) it taxes sales at their point of destination or consumption.</p>
<p>Another key part of the new tax is that monetary flows across a multinational corporation’s international network of subsidiaries (that would include tax haven locations) are border-adjusted. This means that export sales, for example Ford selling cars overseas, would be excluded from a firm’s tax base, but imports, such as the purchase of raw materials from abroad, would be included. What this boils down to is that the tax looks like an export subsidy, and at the same time, an import tax. In many ways therefore it looks like a backdoor attempt to improve the US’ large current account deficit – which formed a major part of Trump’s presidential campaign. </p>
<h2>Radical Change</h2>
<p>The House Republicans highlight several <a href="http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/Publications/Working_Papers/Series-16/WP1604a.pdf">key attractions</a> of this new and radical tax. </p>
<p>They argue that it would allow the US to reduce its federal corporate tax rate to around 15-25% – from 35% currently – which would bring it in line with China and much closer to the UK. The hope is also that it will deter firms from stashing profits in tax havens, and minimise the role of aggressive transfer pricing manipulation – the practice of buying and selling goods between divisions of the same multinational as a means to reduce the corporate tax bill. It should also deter firms from relocating their legal domicile to countries like Ireland and Bermuda – <a href="http://www.investopedia.com/terms/c/corporateinversion.asp">so called corporate inversions</a>. </p>
<p>Current tax arrangements offer companies an advantage if they raise money through debt. However the DBCFT would have the effect of removing that incentive by eliminating deductions for interest payments. This means in theory that firms would be more likely to favour stock markets when raising capital. There is a potential twin advantage here: lower debt ratios would make the US economy more resilient in the face of external shocks, while equity markets are given a further boost. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/154527/original/image-20170127-30419-rpl3vg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/154527/original/image-20170127-30419-rpl3vg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/154527/original/image-20170127-30419-rpl3vg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/154527/original/image-20170127-30419-rpl3vg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/154527/original/image-20170127-30419-rpl3vg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/154527/original/image-20170127-30419-rpl3vg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/154527/original/image-20170127-30419-rpl3vg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/154527/original/image-20170127-30419-rpl3vg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Bullish for Wall Street?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/numenor65/12021995355/in/photolist-jjkSnZ-8rtYc7-js6GoP-js78bq-3rha7g-rk5Xpa-9L9ZMT-eWK4WV-js59kV-arN6FG-7DkeCp-9vGxVA-9yvS7M-4kDf4c-8rqP6v-6NFSGu-7du5F9-5wdjob-5ckuLg-5wdjku-5w8YvX-5w8Yuz-5ZYRYn-5wdjmY-tQYbaL-PX4rpj-QWaBUV-QWaDs4-PDQ9gE-QWaCQH-aac3UD-b5cUBV-b5cUCg-bES9zm-js59oR-tV1WT-js6GxB-js6GgK-b5cUDH-5zVbow-9sU6F9-sLty6-65HHZk-9zr8He-8qwXur-iVUi1-gMYRt-8rqM7v-aFD9rR-5yUSYZ">Numenor1965/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span>
</figcaption>
</figure>
<p>The theory seems appealing, but the truth is, nobody really knows if it will work. It might not even be compliant with the World Trade Organisation (WTO). This is a step in to the unknown; there could be multiple unintended consequences. Not since the early 20th century, when bilateral tax treaties between countries were introduced, has there been such <a href="http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1001&context=dlj">sweeping reform to international taxation</a> as this policy change would initiate. </p>
<h2>Progressive?</h2>
<p>There is an argument that the new tax could have a progressive outcome. Because payroll costs could also be deducted from its calculation, this should shift the tax burden more firmly on to shareholders, and away from workers. Concerns with the existing system are that workers end up paying a fair chunk of the corporate tax bill, through lower wages and benefits.</p>
<p>However, consumers might not get off lightly. The DBCFT may well have the effect of increasing consumer prices on imported goods, leading to higher energy and food prices. This would disproportionately hurt the poor, meaning the tax’s progressive credentials might not bear scrutiny.</p>
<p>In order for the tax to work, proponents argue that the dollar will have to <a href="http://app.info.pwc.com/e/es?s=714248197&e=103954&elqTrackId=e81dae056ec749c58bf06fe6fc2f5f47&elq=b1e9fa67493c4bd5b003791f0cef3017&elqaid=4557&elqat=1">appreciate in value</a> to offset the effects of the border-adjustment. This is because exports are tax free but imports incur tax. Hence US exports will appear more attractive to foreign consumers and imports will appear more expensive to US consumers. But whether exchange rates will move is an open question, as ever.</p>
<p>This really is a highly contentious and ambitious proposal for tax reform. The US’ international competitors – and of course tax haven locations – may see it as a hostile move. It will encourage firms from abroad to locate their production in the US. On the other hand, proponents argue that the policy is “incentive compatible” – in simpler terms, it will force other countries to adopt a similar policy. This would, in effect, dismantle the standard tax haven business model and send shockwaves throughout an industry that specialises in tax avoidance.</p>
<p>That is an intriguing prospect, but interest groups such as the Tax Justice Network in the UK would argue that the key to a better functioning corporate tax regime is for countries to be more open with one another in terms of information exchange for tax purposes. This would include multinational companies reporting their financial statements on a <a href="http://www.taxjustice.net/topics/corporate-tax/country-by-country/">country by country basis</a> instead of consolidating them. Countries would then be able to clearly define their corporate tax base and decide themselves what tax rate to levy. </p>
<p>The EU is currently discussing the introduction of a <a href="https://ec.europa.eu/taxation_customs/consultations-get-involved/tax-consultations/relaunch-common-consolidated-corporate-tax-base-ccctb_en">Common Consolidated Corporate Tax Base</a> to partially achieve this. This would not eliminate the tax havens, but it may go a long way towards enhancing transparency, leading to greater scrutiny of the world’s biggest multinational enterprises and changing their behaviour in terms of profit shifting. </p>
<p>In some ways this is the longer, harder road. The appeal of the Republican proposal would be to force the issue, but it is desperately hard to predict, or manage, the consequences if this tax is enacted.</p><img src="https://counter.theconversation.com/content/71639/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Chris Jones has received funding from the British Academy.</span></em></p>The GOP has a proposal on the table that could send shockwaves through the tax avoidance industry.Chris Jones, Senior Lecturer in Economics, Aston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/719092017-01-29T16:41:10Z2017-01-29T16:41:10ZFord South Africa reacted badly in a crisis: it doesn’t have to be that way<figure><img src="https://images.theconversation.com/files/154389/original/image-20170126-30413-8a7r9l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"></span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>In December 2015, <a href="http://www.timeslive.co.za/local/2017/01/24/Ford-broke-law-by-not-informing-consumer-commission-of-Kuga-death-police">Reshall Jimmy</a> burnt to death in his 1.6-litre EcoBoost Ford Kuga in South Africa. Since then a recorded <a href="http://www.timeslive.co.za/local/2017/01/19/Another-Kuga-burns1">51 Kugas</a> have caught alight across the country, and two more in Swaziland and Botswana. The Jimmy family recently announced they intend to bring a class <a href="http://ewn.co.za/2017/01/17/family-of-kuga-fire-victim-to-bring-class-action-suit-against-ford%20despite%20Ford%20denying%20his%20death%20was%20linked%20to%20the%20fault%20http://www.huffingtonpost.co.za/2017/01/18/ford-insists-that-reshall-jimmys-fiery-death-was-not-linked-to/">action suit</a> against Ford.</p>
<p>Yet it was more than a year after Jimmy’s death that Ford <a href="http://www.iol.co.za/motoring/industry-news/ford-sa-to-finally-recall-fiery-kugas-7418489">recalled</a> 4,556 1.6-litre EcoBoost Kugas in South Africa and more in other southern African countries. Ford took the decision only after the <a href="http://www.timeslive.co.za/local/2017/01/24/Ford-broke-law-by-not-informing-consumer-commission-of-Kuga-death-police">intervention</a> of the <a href="http://www.thencc.gov.za/">National Consumer Commission</a>, a statutory body designed to protect consumers in South Africa. At a joint media briefing, Commissioner Ebrahim Mohamed stated that Section 60 of the Consumer Protection Act had been invoked to compel Ford into corrective action.</p>
<p>When confronted with the possibility of having to decide on a recall, manufacturers can respond in one of four ways: </p>
<ul>
<li><p>denial, </p></li>
<li><p>involuntary recall, </p></li>
<li><p>voluntary recall and </p></li>
<li><p>super effort. </p></li>
</ul>
<p>That Ford only acted after the consumer commission got involved suggests that it was in denial. It required a push to at least get to the involuntary recall phase and only after overwhelming <a href="http://www.702.co.za/articles/239364/ford-kuga-owner-says-dealership-don-t-provide-courtesy-cars">negative publicity</a> and memes that spread around social media.</p>
<p>The Ford Kuga case adds to a growing list of similar experiences in the auto industry which seems incapable of learning from its own history. Ford and Toyota have both been involved in messy voluntary recalls where both companies took a long time to act. Evidence of safety issues with the <a href="https://philosophia.uncg.edu/phi361-metivier/module-2-why-does-business-need-ethics/case-the-ford-pinto/">Ford Pinto’s</a> fuel tank first emerged in 1973. It took another five years – and a number of explosions, deaths and court cases – for Ford to recall 1.5 million Pintos built between 1970 and 1976.</p>
<p>Toyota faced complaints about the <a href="https://www.washingtonpost.com/business/economy/toyota-reaches-12-billion-settlement-to-end-criminal-probe/2014/03/19/5738a3c4-af69-11e3-9627-c65021d6d572_story.html?utm_term=.3af43d08c2cc">sticky accelerators</a> in 2002. It took the company eight years to <a href="http://www.nytimes.com/2009/11/26/business/26toyota.html">recall</a> 7.7 million vehicles after a number of crashes and <a href="http://www.nytimes.com/2010/09/19/business/19autos.html">deaths</a>.</p>
<p>Empirical research into the effect of recalls confirms what rational people know to be true: they’re a good idea. Laval University scholars, Nizar Souiden and Frank Ponsen, <a href="http://www.emeraldinsight.com/doi/full/10.1108/JOCM-04-2015-0063">note</a> that</p>
<blockquote>
<p>Voluntary recalls and improvement campaigns can have a positive and significant impact on the manufacturer’s image.</p>
</blockquote>
<p>On top of this, it’s also <a href="https://faculty.fuqua.duke.edu/%7Emoorman/Marketing-Strategy-Seminar-2015/Session%206/Kalaignanam,%20Kurshwaha,%20and%20Eilert.pdf">self-evidently true</a> that product recalls can reduce the number of injuries and recalls in the future.</p>
<p>It’s therefore clear that the sooner a company reacts to a problem, the less of a negative impact there will be on customers, the brand and the bottom line. And, in addition, that if it makes a super effort to address the problem it can even build brand and customer loyalty like never before.</p>
<p>This is vital in the business of business because, as <a href="https://studentvillage.sv.co.za/careers-news/careers-vega-to-launch-new-degree">Gordon Cook</a>, co-founder of preeminent marketing school Vega, bluntly puts it: “Brands cause business”.</p>
<p>So if the evidence supports the contention that the survival of a business depends on acting quickly in a time of crisis, including instituting swift recalls, why should there be any reason to delay? </p>
<h2>Why firms freeze</h2>
<p>The answer lies partially in the realm of <a href="http://dx.doi.org/10.1108/JOCM-04-2015-0063">complexity theory</a> – that in the midst of a crisis many factors are at play, all of which have the potential to muddy the analysis and to pull the organisation in different directions. This often results in ill-conceived, naive and ineffective responses. </p>
<p>In the case of Ford, some commentators have even gone so far to say that there was <a href="http://www.timeslive.co.za/consumerlive/2016/12/22/Ford-confirms-Kuga-fires-confined-to-single-model%E2%80%9A-concedes-engine-overheating-a-possible-cause">no response</a> at all. </p>
<p>But it doesn’t have to be this way. There’s another side to <a href="http://dx.doi.org/10.1108/JOCM-04-2015-0063">complexity theory</a> that holds that organisations with two critical attributes can weather most storms. These are:</p>
<ul>
<li><p>a strong commitment to doing the right thing for stakeholders, and </p></li>
<li><p>a high readiness are most likely to effectively respond to crises. </p></li>
</ul>
<p>But organisations need both. If they’re lacking in one they are likely to have ineffective responses which in turn will lead to post-crisis losses. This could be in both their competitive edge, including market share, as well as financially if they face penalties or their share price dives.</p>
<p>Singapore Airlines handling of <a href="http://thinkbusiness.nus.edu/article/sia-crisis-response/">Flight SQ006 crash</a> is often cited as a model example of doing the right thing.</p>
<h2>Rebuilding confidence takes time</h2>
<p>The Kuga case is a classic example of being in the news for all the wrong reasons. And only time will tell if it will be able to bounce back from this as Toyota appears to have done. </p>
<p>It will need to rebuild brand equity. This will take time and will involve a great deal more than settling claims. And customers aren’t their only constituency. They must also restore faith with other stakeholders such as the dealer network. The company faces a hard journey ahead. </p>
<p>In the meantime, the Kuga fire story will continue to dominate the headlines. These will only cease being negative and become positive if Ford South Africa truly embraces a stakeholder inclusive approach and views events from a moral perspective. Debates on brand value will come across as off-centre if legitimate and reasonable demands to right a wrong are not addressed.</p><img src="https://counter.theconversation.com/content/71909/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Owen Skae does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The behavior of Ford South Africa around the fires that have engulfed its 1.6-litre EcoBoost Kugas model is a classic case of how not to handle a corporate crisis.Owen Skae, Associate Professor and Director of Rhodes Business School, Rhodes UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/652782016-09-21T13:31:38Z2016-09-21T13:31:38ZCorporate bosses could soon take the rap for staff criminality<figure><img src="https://images.theconversation.com/files/138605/original/image-20160921-21689-g7i7p8.jpg?ixlib=rb-1.1.0&rect=0%2C12%2C4256%2C2675&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-4785508/stock-photo-business-crime.html?src=VuODWHt_U8GvXPyJsJqJ1g-1-11">Mikael Damkier/Shutterstock</a></span></figcaption></figure><p>Imagine your boss being criminally liable for your actions, even if they had not authorised you to carry them out. Imagine, as a company director, being criminally responsible for an employee’s actions even if you were unaware what they were up to or had even expressly prohibited the behaviour in question. UK Prime Minister Theresa May’s <a href="http://www.bbc.co.uk/news/uk-37335744">proposed criminal finance bill</a> brings both these scenarios into play.</p>
<p>The bill seeks to make companies and directors criminally responsible for failing to prevent money laundering, false accounting and fraud by employees. It is central to May’s high-profile plan to curb “boardroom excess” and improve corporate governance in UK companies, but it raises significant questions for company and criminal law.</p>
<p>Due to the twin concepts of corporate personality and limited liability, a company is an entity in itself, <a href="http://www.lawteacher.net/cases/company-law/salomon-v-salomon.php">distinct from its shareholders</a>, and its <a href="https://www.cliffordchance.com/content/dam/cliffordchance/PDFs/Anna_Morfey_article.pdf">directors and employees</a>. In company law, personal liability occurs in rare circumstances of what the legal profession terms “piercing the corporate veil” – ignoring the distinct personality of a company and holding the shareholders or the directors personally liable for the corporate actions and omissions. This can happen <a href="http://www.blplaw.com/private-wealth/insights-resources/blog-post/prest-v-petrodel-resources-ltd-companies-held-properties-on-trust-for-husband">in cases of fraud</a>. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/138617/original/image-20160921-21711-v8ml9q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/138617/original/image-20160921-21711-v8ml9q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/138617/original/image-20160921-21711-v8ml9q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/138617/original/image-20160921-21711-v8ml9q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/138617/original/image-20160921-21711-v8ml9q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/138617/original/image-20160921-21711-v8ml9q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/138617/original/image-20160921-21711-v8ml9q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/138617/original/image-20160921-21711-v8ml9q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Dash for the cash.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/seandavis/10595382254/in/photolist-h9h71o-7eSa5o-r4hSV9-g19bj7-AsQDC-bHGmy-5AByeQ-bAk7oS-bAk7gd-g19ygU-wwBr85-bPeKGk-g1EDcJ-g18N1Z-FHEhG9-aWGfnx-8Mt6tM-beZMVB-r4dJVt-5ABxCh-82N8tb-5AxiFe-8McABJ-g1adna-kJMdSK-4xm7hx-4X3e5-ceMu3d-3S9Jrv-a4MWP9-3JTrkz-Nskbe-doGuAc-8McASW-5ABykW-g18JrW-5ABxY9-cY8mv5-5AxifB-5ABwYU-pmqfEV-pjo85G-bchgop-5AxhXk-dc5d9A-5tRPX6-p4W9XX-5ABxS7-5Axgnr-5AByw3">Sean Davis/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<h2>Human error</h2>
<p>An underlying principle of criminal law is that the perpetrator of an action or omission is responsible for it. This is fairly clear for humans. It is, however, complicated when companies are involved. As it stands, a company is an artificial entity, acting through humans who are insulated from its liabilities. But which actions are attributed to the company and when are individuals disallowed from avoiding personal responsibility? </p>
<p>Traditionally, corporate criminal responsibility arises only if humans act as the company. The so-called “identification doctrine” is often a device to prevent corporate liability by limiting it mainly to the actions and omissions of the senior management. They are regarded as the corporate “directing mind”. The knowledge of a managing director when there is a failure to file statutory notices would normally be attributed to the company. So, in theory, a company might want an individual occupying a low-level position to be saddled with responsibility to avoid huge liabilities for the company itself. </p>
<p>Corporate responsibility, however, does not remove a director’s criminal responsibility for acting fraudulently, including <a href="http://swarb.co.uk/attorney-generals-reference-no-2-of-1982-cacd-1984/">stealing from the company</a>. At the moment, though, <a href="http://www.legislation.gov.uk/ukpga/2006/46/contents">under the Companies Act 2006</a>, it is rare to find directors taking criminal responsibility for actions undertaken on the company’s behalf. Directors are not responsible for the actions of other people, including employees in their control, unless they have aided and abetted the commission of the offence. </p>
<h2>Prevention or cure?</h2>
<p>Pioneered in the <a href="http://www.legislation.gov.uk/ukpga/2010/23/contents">Bribery Act 2010</a>, “failing to prevent” is an emergent concept of criminal responsibility that penalises one, especially superiors, for the actions and omissions of others, particularly subordinates. Failing to prevent reflects the difficulty of proving dishonesty and holding anyone other the primary perpetrator criminally responsible. As an example, the Act contains the offence of failure by a commercial organisation to prevent bribery by associated persons like employees, agents and subsidiaries that provide services to the company. </p>
<p>Just like the Bribery Act, the new criminal finance bill proposes corporate responsibility to prevent money laundering, false accounting and fraud but will go further to also make directors criminally responsible even in the absence of aiding and abetting.</p>
<p>There is an argument that the means to hold directors to account in this way already exists. The Companies Act sets out the <a href="http://www.accaglobal.com/content/dam/acca/global/PDF-technical/business-law/tech-tp-cdd.pdf">personal and collective duties of directors </a>, who can delegate functions but <a href="http://swarb.co.uk/in-re-barings-plc-secretary-of-state-for-trade-and-industry-v-baker-no-5-chd-25-nov-1998/">cannot abdicate responsibility</a>. The Act also sets out the duty to exercise reasonable care, skill and diligence, and the general duty to promote the success of the company. This applies in practically every situation where a decision has to be made concerning the affairs of a company. These can all, arguably, be applicable to the failings targeted by the new proposals but they involve largely civil penalties. This means fines rather than criminal prosecution. <a href="https://www.gov.uk/company-director-disqualification">Director disqualification</a> is another possibility which is not regarded as a criminal penalty.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/138633/original/image-20160921-21683-1bd7jvz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/138633/original/image-20160921-21683-1bd7jvz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/138633/original/image-20160921-21683-1bd7jvz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=200&fit=crop&dpr=1 600w, https://images.theconversation.com/files/138633/original/image-20160921-21683-1bd7jvz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=200&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/138633/original/image-20160921-21683-1bd7jvz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=200&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/138633/original/image-20160921-21683-1bd7jvz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=251&fit=crop&dpr=1 754w, https://images.theconversation.com/files/138633/original/image-20160921-21683-1bd7jvz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=251&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/138633/original/image-20160921-21683-1bd7jvz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=251&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Taking it to the Boardroom.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/steve_barr/15203232495/in/photolist-pasxmc-7VA13U-8PBCQ3-FE6Gx-dtXwK5-614d-6YXBkT-6L7gNM-ddSBtE-FxK7-7UgXcQ-avwEGt-4qdmZt-afQi5D-dADnBw-dAxTnK-7bscZc-iectxd-f2NQtF-dADnvL-8fhPch-GrsVM-qjX3n-5p5vZS-edUmF5-3dYZgc-5L7gCo-dAxTpp-8bi4xk-nxHvS-3EoGj9-pBjUoA-hT9nnA-bLKS8g-EGhyNT-FckjVu-cuW5nQ-9M8L5H-vrDHnw-qkV1Xm-to7FUo-to9dxf-bTeau8-6oSzKw-dADntw-dAxTsK-6oGuB8-755dmL-dADnxE-7QiLHn">Stephen G. Barr/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>It gets even more complicated when we consider whether the criminal finance bill would distinguish between executive and non-executive directors and whether it applies only to directors formally appointed to their particular roles. Will non-executive, de facto and shadow directors have personal liability as well? In the Companies Act, there is no significant difference between executive and non-executive directors and between formally appointed directors and other people that are doing the job of a director without a formal appointment.</p>
<p>Those complications aside, should companies and directors really be concerned about the new criminal finance bill? According to Attorney General Jeremy Wright, prosecution can be avoided by taking “the actions necessary to discourage such offending in the first place”. There will, therefore, be a due diligence test, the boundaries of which have not yet been clarified. Past experience of the Bribery Act prosecution guidance from the Serious Fraud Office and Crown Prosecution Service suggest clarity and certainty are unlikely. </p>
<p>Directors should find no comfort in that potential ambiguity. Construction and services firm Sweett Group became the first company to face conviction under section 7 of the Bribery Act in April this year – for <a href="https://www.sfo.gov.uk/2016/02/19/sweett-group-plc-sentenced-and-ordered-to-pay-2-3-million-after-bribery-act-conviction/">failing to prevent bribery during operations</a> in the United Arab Emirates – and there is reason to expect prosecutions under the new criminal finance bill. It is time to design adequate procedures against money laundering, false accounting and fraud – and on the assumption that the buck won’t stop till it gets to the top.</p><img src="https://counter.theconversation.com/content/65278/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Onyeka Osuji does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Proposed laws will put corporate executives in the firing line when the law is broken on their watch.Onyeka Osuji, Senior Lecturer, University of ExeterLicensed as Creative Commons – attribution, no derivatives.