Race to the Bottom / delaware law / global

"What is it, and how does it apply?"

Ch3, Race to the bottom - means biz are courted by competing locations (states/countries) by imposing less and less restrictions on profit potential. "states outdoing each other to accommodate businesses." Delaware, famous for its extensive and management-friendly laws and judicial decisions governing corporations.

·      On a global scale, there is a fundamental asymmetry that parallels the “race to the bottom” of state control of corporate governance laws in the United States

o   A country’s capacity to control conduct stops at its borders, yet the preponderance of corporate activity takes place across many nations

o   The traditional notion that corporate conduct can be controlled by the country of its domicile is obsolete

o   At the risk of discouraging further investment from abroad, countries plainly have the power to control activities within their borders

Externalities- costs incurred by business but paid for elsewhere. 

-Each business imposes costs that are not usually reflected in its profit and loss statements

   - Some of this is Tradition

   - Some of it reflects the difficulty of valuing intangible elements

   - Some of it reflects the success of companies in having governments, regulators, and professional auditors make accommodating rules

Externalities exist when a third party bears costs or receives benefits arising from an economic transaction in which he or she is not a direct participant.   

A type of internal cost that arises from an agent acting on behalf of the principal.

Agency costs mainly result from conflicts of interest between shareholders and management (agent and principle).  But they can also arise anywhere there is agents that hold more information or power than their principle, or a decreased or low incentive for agents to continue acting on behalf of a principle

Example: Shareholders wish for management to run the company in a way that increases shareholder value. But management may wish to grow the company in ways that maximize their personal power and wealth that may not be in the best interests of shareholders.   

Theory that shareholders could send a powerful message to management by selling out, ideally in enough of a block to depress the share value. Ultimately,the stock price would fall enough to make the company an attractive takeover target. This risk would then keep management acting in the interest of shareholders.

If enough shareholders are unhappy and sell shares, the company would become a good takeover target, which would incentivize management to act in shareholders’ best interest. 

Buffet’s Four Criteria:

·      Owner-oriented

·      Business-savvy

·      Interested

·      Truly independent

The men sat on stools, around a long board placed across two sawhorses. The group was named “the board,” after the makeshift table they worked at. The leader of the group, who did not have to sit on a stool, by reason of his prestigious perch, was named the “chair-man.”

The lead directors surveyed said that the most significant contributions of the role were:

• Taking responsibility for improving board performance,
• Building a productive relationship with the CEO, and
• Providing leadership in crisis situations
• Taking on the delicate task of dealing with “difficult or underperforming directors
• Active role in an often-overlooked issue, board succession
• “Keep the board focused and the CEO informed

A  Lead director serves as the liaison for the outside directors and conducts the executive session meetings. A presiding director is a lead director with some responsibilities for conducting meetings. 

Directors have a fiduciary duty they owe to the shareholders that encapsulates a duty of care and a duty of loyalty. Within duty of loyalty, directors have a duty of good faith. If either of these is allegedly breached, the directors can defend their actions by claiming they used their business judgment.

Operation of the business judgment rule:

The bus judgment rule operates at 2 levels:

Justification for the Bus Judgment Presumption

-Encourages risk-taking

-Avoids judicial meddling

- Encourages directors to serve

Due to the takeover era, companies began to nominate directors for three staggered sets of three-year terms. The board would be divided into three sets, or classes, of directors who ran for re-election every three years.

- A hostile takeover would thus require running a dissident board for three years.

Pros: Independents will be less influenced if they have three year terms compare to one year terms. Also increases board stability and “continuity” of board service.

Cons: Breeds complacency and less accountable to shareholders. Directors are required to build close relationships w/ management

Doubles the odds that a company will remain independent

·      Source

     -Went into effect on November 1, 1991

     -Developed by U.S. Sentencing Commission, an independent organization within the judicial branch.

     -Boards of directors and senior management of organizations came to have an affirmative duty to implement internal corporate compliance programs to detect and prevent criminal misconduct by the organization’s employees and its agents, and then to monitor those programs to be sure that they were working properly.

·     

     Purpose

      Developed to create a consistent approach to addressing wrongdoing by organizations and the punishment for their transgressions.

·     

          Scope

     -Require an organization to remedy the harm caused by its offense and to pay a monetary fine for the violation of federal law.

     -The fine is calculated by applying a multiplier on a culpability score to the base fine.

     Culpability score is increased for:

-  Size of the organization

-  Number of years since any previous offense

-  Violation of a previous order

-  Obstruction of justice

Culpability score can be reduced by:

- Existence of organziations programs to prevent and detect noncompliance

- The organizations self-reporting of violations.

-  Cooperation with the regulators

- Acceptance of responsibility

1. Organizations must establish compliance standards and procedures to be followed by employees and agents of the organization.

2. The program must be administered and overseen by "high-level" personnel within the organization.

3. Organizations must ensure that substantial discretionary authority is not delegated to employees with a propensity toward criminal conduct.

4. Organizations must provide training programs and effective communications about their compliance standards and procedures.

5. Monitoring and auditing systems must be implemented, and a reporting system must be established through which employees can report wrongdoing without fear of retribution (e.g., whistle-blowing programs).

6. Organizations must provide incentives for employees and others to come forward to report issues and must establish disciplinary policies for those involved in wrongdoing.

7. After an offense has been reported, organizations must take reasonable measures to respond and prevent future incidents from occurring.

Small organizations need to have an effective compliance program but does not necessarily need to be as formal as big businesses’ compliance programs

"Small organizations shall demonstrate the same degree of commitment to ethical conduct and compliance with the law as large organizations. However, a small organization may meet the requirements of this guideline with less formality and fewer resources than would be expected of large organizations. In appropriate circumstances, reliance on existing resources and simple systems can demonstrate a degree of commitment that, for a large organization, would only be demonstrated through more formally planned and implemented systems."

Requires CEO and CFO sign attestation of financial information 

Code of Ethics

Auditing comittee makes procedures for complaints

Whistleblower protection

Penalties for obstructing records

Assessment and reporting on internal controls

1. Self-regulating organizations
2. Standard setting orgs
3. Credit rating agencies
4. Voluntary industry codes

• —  Criminal penalty up to $500,000 or twice monetary value of instrument involved or up to 20 years
• —  Civil penalty greater of $10,000 or value of property, funds, or instruments in transactions

1. Financial Expert

2. Independent

  -Section 301: relationship in terms of compensation and affiliations.

  -A committee member is precluded from accepting compensations and from being affiliation.

   Four key Facets of the SEC section

     a. Direct/indirect

        b. Non-financial services

        c. No look back

        d. Safe Harbor

 Exempt:

o   Are not covered under FLSA

o   Not entitled to overtime pay

o   Paid through salary rather than hourly wages

o   Typically, executives, administration, professionals, IT professionals, Highly compensated individuals, and outside sales positions are exempt

·      

    Nonexempt:

o    Are covered under FLSA

o   Entitled to overtime pay

o   Must be paid at least minimum wage

Money laundering is the process of making illegally-gained proceeds (i.e. "dirty money") appear legal (i.e. "clean").

-Typically, it involves three steps: placement, layering and integration. First, the illegitimate funds are furtively introduced into the legitimate financial system. Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts. Finally, it is integrated into the financial system through additional transactions until the "dirty money" appears "clean." Money laundering can facilitate crimes such as drug trafficking and terrorism, and can adversely impact the global economy.

Organizations generally assess their compliance risks from two perspectives:

False Claims Act: Whistle Blowing

"What are the recent amendments/adjustments that have been made?"

the federal government extended whistle-blowing protection to nongovernmental employees. The FCA allows individuals to sue government contractors on behalf of the U.S. government if they believe that the government is being defrauded.  

The government delegates considerable authority to SROs to design rules and regulations governing their members' practices, including disciplinary practices, licensing requirements, and certifications. 

Credit rating agencies exert enormous influence in their role of assessing the creditworthiness of organizations in the public, private, and nonprofit sectors.  

The past decade has seen a growth in the importance of private organizations, both U.S. and international, that promulgate industry standards and practices. A number of these organizations have been active in developing standards that are increasingly playing a key role in compliance management functions.  

This practice has become so ingrained in regulatory administration that in 1995 Congress passed the National Technology Transfer and Advancement Act, which requires federal agencies to adopt private- sector standards wherever possible, in lieu of creating proprietary, nonconsensus standards. 

Ex - EPA, Six Sigma, OSHA 

"designed to influence, shape, control, or benchmark behavior. Codes are unlike regulations in that they are not rules directly backed by the power of the state." 

Proponents of voluntary codes cite them as an effective alternative to government regulation in that they provide greater flexibility, recognize that achieving a desired state can be reached via many different practices 

Ex - US Apparel Industry 

Regulatory actions are in a constant state of movement. Organizations struggle to understand and manage within this maelstrom of rules and regulations. A former chairman of a global telecommunications corporation ruefully referred to the "universe of regulation" that his organization had to constantly struggle to manage within. 

Gov Regulations

Voluntary codes

company policies

Private sector orgs

ANSWER THIS YOURSELF ASSHOLE. CAN'T GIVE YOU EVERYTHING