Personal Note: New Poetry Book

Today please forgive a personal note; I try to keep my posts on a wholly professional level, which means mostly law, sometimes government, and (in years, unlike this, when the Red Sox field a professional baseball club) baseball.

Your friendly neighborhood electronic bookstore (Amazon, Barnes and Noble)n ow carries my third book of poetry, entitled OBLIGATORY COVID CHAPBOOK.  A chapbook is a trade term for a short book of poetry written around a theme; and, you can of course guess the theme of this one.  Just log on and enter my name or the name of the book,  and this book should pop up.  (If you have a problem just email me and I can get a copy to you.)

Although the theme of this book is no doubt deeply depressing, I hope that it helps put into perspective our commonly shared experience, and permits better processing of what is likely (hopefully) the most trying period of our respective lives. I would appreciate your ordering a copy of this volume and, if you find it favorable, a complimentary post on the vendor’s site is always greatly appreciated.

And to all of you, survivors: this one’s for you.

Best, Steve

Federal Ban on Non-Comps?

President Biden has announced that he will work with Congress to “eliminate all noncompete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets.”  In late February, Senators and Representatives introduced a bill to ban all non-comps except in acquisitions and partnership dissolutions.

Business people are well aware of the historical debate over non-comps, which have slowly fallen out of favor in some jurisdictions (including a near-ban in California and a sharp retrenchment in Massachusetts).  Without repeating all the arguments, what can we expect to see in the future?  Below, some speculations:

Big tech often has spoken about its need to protect the technology that made it big, a large employer and the bringer of modern science to the economy and to the entire population.  Big tech is under attack today from many quarters in many countries, not only in the US.  Will this mind-set also weaken the appeal of the big tech argument about needing non-comps?

If the American economy continues to move away from manufacture, would this trend place pressure on fostering start-ups which will replace other lost opportunities?  Will this broad societal trend lend support to a general perception that non-comps stifle start-ups which are the wave of the US’s future?

To the extent that non-comps become legally disfavored, enforcement of perceived rights of former employers will move to efforts to protect competitive advantage through enforcement of trade secret rights; we see this trend already under the Federal Defend Trade Secrets Act, which is premised on the almost unassailable legitimacy of claims of ownership rights by the businesses that invent a technology or process.  These are sometimes difficult cases, however; high requirements of proof, often involving technical matters of some subtlety.  Full-time employment for litigation attorneys?

Finally, there is substantive debate as to whether non-comps, on a net economic basis, actually do harm workers who sign them, rather than help them.  There are current claims, for example, that research shows that eliminating non-comps causes reduced employee compensation and satisfaction (putting aside impact on companies and innovation).

We put aside the logic of having the Federal Government act on this range of issues.  That is a wholly different debate.


ESG in Perspective

These past few years have been tidal, in the sense that ideas have become broadly perceived forces that sweep everyone standing on the beach up onto strange shores.  This is not to say that the phenomenon is bad — but it does create lack of clarity as to the path forward.

Enter the acting head of the SEC, Allison Herren Lee, who has signaled that the SEC is headed towards far more granular ESG disclosure than present regulations and practices elicit.  The reasons: investors have vastly increased interest in ESG, and the retail investor cannot get useful data from current practices.  This thinking is consistent with the Biden administration’s prompt reversal of Trump guidance designed to devalue attention to ESG in the investment of retirement funds.

Disclosure often does force substantive change, so in a sense the SEC is a strong tool for corporate change.  But that does not mean that the path forward is clear, even putting aside the view of supporters of the prior administration that ESG is not an important factor.

First, note that the pitch for better disclosure is couched in terms of aiding retail investors; they are of course not the primary market drivers.  Second, to the extent funds invest for the retail investor, they compete on performance metrics and thus the proposition that ESG assists the bottom line is put to the asset test by the market-place.  The ESG folks argue that ESG is better for the world and for profits.  It is hard to argue against the benefit to the world, but as to profits: that is a work in process as to whether profits are maximized in the longer run. (One can hope so, but by definition we cannot measure today the bottom lines in a decade.)  Third, as noted by Lee, funds often lend their shares and do not vote them at all when it comes to corporate meetings.

Shortly after the Business Roundtable call to ESG arms a couple of years ago, attempting to redefine the constituencies to which corporations should answer, the Harvard Governance Project sharply questioned whether that redefinition was going to get actual traction by action, as opposed to being just a PR-type thing to say.  Without having enough data to speak today as to whether the Crimson Guys were correct, there is no doubt but that enhanced disclosure will drive one of two results: palpable change in corporate action, or investor fear driving retrenchment from social policy and a return to current “total shareholder return” thinking.

NASDAQ Culture Wars

Should NASDAQ require disclosure of diversity on boards, or require such diversity?  Board diversity is mandated under California law in many instances, and same is true in several European countries.

Last December, NASDAQ asked the SEC to approve a rule requiring public disclosure for their listed companies, and requiring subsequent designation of up to two directors (one woman, one otherwise diverse).  Such proposal, somewhat softened as to timing by a February modification,  reflects much current thinking about both how our society works, and the benefit of diversity in governance.

This morning’s lawyer press reports the SEC has tabled for now any action on the NASDQ proposal.  This follows a letter sent to the SEC by twelve Republican members of the Senate Banking Committee, stating that the obligation of a company is to appoint the best board members and not be bound by a “narrowly defined” definition of diversity.

Here is the list of definitions of diverse candidates from the NASDAQ proposal; you be the judge if this list is “narrowly defined”:  a person who identifies as female; plus one person who self-identifies as either an underrepresented minority of LGBTQ+.”  Underrepresented= “Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander or two or more races or ethnicities.”

Even if diverse boards were proven to provide better governance (there is such research available although to my mind it is not adjusted for certain variables, including that boards with diversity may simply have better non-diverse directors; intuitively, it does seem to me likely correct), should a governmentally constituted self-regulatory organization enforce that viewpoint based on current evidence? Any evidence?  If a board is under-performing this can be judged by corporate performance, without inquiring as to why the board is not delivering best leadership.

Of course, securities markets are all about information, and the disclosure of diversity clearly is valued data on the part of some investors, who can reach their own judgment as to impact of diversity on board quality.

Are the regulated securities markets the proper arena in which National government should address societal prejudice?  While I sympathize with the NASDAQ, and may harbor unkind suspicions about the Republican letter, this question seems to me legitimately open to debate.

Wealth Gap Cure?

The role of corporate boards, and hence of corporations they lead, in addressing America’s growing wealth gap was explored at length by an expert panel convened yesterday by the New England Chapter of the National Association of Corporate Directors.  The themes were important but predictable.

Corporations should understand that the wealth gap is substantial and growing and represents a material threat to America and its businesses.  Action is suggested on two fronts: first to address the current gaps in race, gender and the like by instituting fair pay and by public company disclosure of meaningful statistics presented in a way that allows company-to-company comparisons to inform investors; second, to address root causes because our current system produces a constant flow of ill-prepared citizens who feed into the current wealth gap by reason of poor training and socialization.

Although current profit is of course important, the panel also echoed the Business Roundtable admonition that corporations must understand that ESG programs to address the wealth gap also will foster higher earnings in the long run.

An interesting admonition: corporations which may be on the correct track in their own practices often belong to trade associations or other groups where they pay dues, and where those organizations take contrary positions.  Corporations must speak up.

A personal observation: not mentioned was the issue of housing which to my mind is the root cause of the problem.  Programs that are palliative are important to assist the current work-force but we must stop producing citizens in need of remediation.  Unless we put all people together in communities where the schools, and parenting goals, and social expectations and pressures bring all children upwards in performance and aspiration, “the poor will always be with us.”

In this regard, the general sense of the panel that this is not a task that government can fully remediate misses the mark, as only government can drive long-term equality in establishing communities.  Nor will the task, even if undertaken, be rapid; the panel noted the wealth gap has exploded over the past 40-50 years, and something this big and engrained for so long will not admit of a quick, or even mid-term fix.

A daunting prospect.

Boards and Cyber

Is there anything new that Boards of Directors of companies, large and small, have not already heard? There has been two years of information bombardment: protect only high value assets as you cannot protect everything; what is our largest risk; use multi-factor authentication; do we have a cyber plan and do we test it; does the board question management on all the above and inquire if resources are adequately deployed?

The answer, per an expert panel convened yesterday by the National Association of Corporate Directors–New England, is– yeah, there’s lots of new stuff directors need to worry about. Examples below:

COVID froze budgets; is it time to review the numerous over-lapping protections that were added, ad hoc, over time, to make sure you have correct coverage?

Early stage tech companies have valuable secrets and weakest cyber defenses; early plans for start-ups must include cyber.

While you can do business with China (Cyber is not an IT matter, it is a risk matter so just calibrate), remember that by law the Chinese government has the right to access anything on demand and without process.

In M&A, as soon as there is an announcement of an acquisition of a smaller entity, hackers attack the target, usually with weaker defenses, to plant a Trojan Horse in that entity; upon acquisition, the Horse is used to infiltrate the usually more secure acquirer. Acquirers should address defenses.

Smart buildings are a huge risk to tenants. Google ICS-CERT to learn about defense to “unguarded back doors.” Apparently your company is at risk of being hacked through a water valve (?).

Again: Directors have noses in, but fingers out, of management; these are issues about which to inquire of the C-Suite. And, third party experts abound and the panel, impressive folks but in that business of third party cyber security, recommend it.

The Future of Business Travel

Last week, several Northeastern chapters of the National Association of Corporate Directors presented a disturbing webinar concerning the future of business travel and conventions. The composition of the panel is important to note as panelists were not mere talking heads but senior executives in their respective organizations, each with access to deep data: heads of the relevant New York and Massachusetts state agencies, Amtrak and the second largest business convention travel organizer in the world.

The key take-away: large gatherings of all sorts are kaput for at least 3-5 years and indeed to some degree quite possibly permanently. Gathering will not involve a thousand people, or large industry gatherings at indoor venues; business meetings will involve at most 50-100 people.

I note: this is a future prediction, always prone to material error; this is a prediction based on wide data but all gathered in the depths of the pandemic and thus perhaps biased to the bleakest conclusions; it is not clear how the benefits of gatherings of a thousand people, or the vast benefits of industry conventions with exhibits and programs and networking and keynotes, can be achieved by remote means.

But to the extent the takeaway is accurate, the new normal will not track old normal, which is disquieting.

Other interesting points: current softness in travel has allowed huge speed-ups in maintenance and repair of infrastructure; infrastructure in the USA remains deficient and will demand huge investment over the next decade and more to safely support even a reduced travel expectation; many CEOs will build in economic efficiencies in electronics and business travel will be permanently and materially reduced; although office use, and thus office space, will decline, certain human factors will drive the need for some continued office usage (human sociability; need for direct collaboration to process innovation; inability to onboard and integrate new talent without direct contact). Also noted: the possible use of government funding to solve the dual goals of societal solvency through work and infrastructure rehabilitation.

Finally, I cannot resist some fascinating factoids: Amtrak lacks studies of airflows in trains, although there is much work for airplane airflows; rail travel during the pandemic was 10% business-related, down from 40%; rail travel for the current fiscal year is projected at 16% and in fiscal ’22 at 27%: New York road use dropped at 50% during the pandemic, and today is at 85%; polled attendees at the webinar were ready to travel in the following percentages: today 7%, in 3 months 32%, in six months 46%; of polled attendees, over half saw travel returning only to 50% or less; Logan airport sees aviation recovery taking 3-5 years; the CEO of the travel booking agency sees rebound in 5-6 years; Amtrak saw a 90% total overall ridership drop, now ridership is 22%, and in fourth fiscal quarter (ending next September 30) they project mid-30% range of usage; Amtrak still running almost 50% of the number of trains per day notwithstanding less usage, in order to stay viable.

Baseball Perspectives

It has been a long time since I posted about America’s Game, although the art work at the top of my blog site is split between a court house and a baseball scene. COVID and the decline of the Red Sox both have been contributors to this hiatus. But as Major League baseball is cranking up for a full season notwithstanding the experience of football, basketball and hockey, thoughts turn to the diamond even though today it is covered with snow.

Television has taught us during COVID that sports can thrive at one level with cardboard fans sitting in the stands. And hopefully the pandemic curve will slowly allow the admission of live patrons. With this backdrop, I turn to the seemingly hapless Red Sox.

Quick summary: the organization is filthy rich and has ancillary businesses and seats are absurdly expensive and they have chosen to not spend money on players so as to build a farm system for the future, admitting between the lines they will not be competitive at a high level in 2021 (hmm: and with some of my loge seats at $160 each…) . While Billy Beane was able to build great teams at low cost, it ain’t easy. Seems to me the successful teams these days spend money: Dodgers, Yankees.

Fans view their team as a public trust, owners look to ROI. That makes fans feel like they are being used and exploited; at least it leads this fan to that conclusion.

I have shared with friends that my nostalgic view of baseball growing up was that the players lived in the neighborhood (Brooklyn), were middle class folks with a skill that was fun to watch; I would go to Ebbets Field for 25 cents and ten ice cream wrappers as the cost of admission, and I would go to the local park to play ball with my friends, carrying a wooden Louisville Slugger bat too heavy for me to swing, chewing gum like it was a tobacco chaw and looking forward to a YooHoo chocolate drink with my friends at the corner soda fountain after we ran around bases made out of parts of cardboard boxes.

Somehow, baseball as a Red Sox fan in the age of COVID doesn’t quite capture my love of the game. My only hope this year is that, when I turn on the TV, I will see in the Red Sox uniform at least a few people whose name I recognize.

And today– farewell to Andrew Benintendi– Andy, we hardly knew ye.

Future of American Health

Today’s webinar presented by the National Association of Corporate Directors (jointly by National and the New England chapter) and moderated by Boston-area director Ellen Zane (former CEO of Tufts Medical Center) explored the coming face of US healthcare delivery post-COVID. Although nominally focused on what corporate directors should be thinking when it comes to health care, the take-aways really were global in import. Key take-aways follow:

It is now news that is a couple of years old that the model for hospitals and care-giving organizations is moving from “fee for service” to a value care model where institutions are rated and paid based upon efficacy in creating a healthy constituency at lowest cost.

However, the expert panel held that increased reliance on technology is one of the keys to better health, and that technology comes with high up-front costs. Complaining that drug and device companies charge too much may miss the point that they enable ultimate better health at lesser per person cost.

Aside from new drugs and devices, efficiency can be delivered by remote medicine and use of AI; while these are not startling predictions at this point, there seemed to be consensus that visibly radical changes in health care delivery have begun and will accelerate. Hospitals in ten years will look very different. Health care will be delivered first on line, then at remote facilities, and to teaching hospitals only as a last resort.

Emphasis will be on better life styles and practices, keeping people away from needing care in the first instance. (I have noticed, btw, an increase in communications by email and snail mail from my own health care insurers urging regular care during COVID and inviting me to exercise, eat better and stay in touch with care providers.)

Focus for care providers must be to remove fear from the “ribbon of care”– the stream of experiences a patient has from complaint to cure — by creating predictability and efficiency; COVID is a prime experience in demonstrating the ill effects of inefficiencies in this experience.

For directors of health care provider entities, be prepared for PTSD staff impact and predicted future MD and nurse shortages affecting staffing; this is another reason to push to keep people out of care delivery in the first place. For directors of companies where their staff are patients and not care providers, directors must be involved in a total management focus on worker well-being, including ramifications of post-COVID work patterns at home which can increase depression and tension and negatively affect health.

SPACs: the New IPO

A review of last year’s SPAC activity is startling proof that SPACs are here to stay. There were 248 SPACs registered in 2020, compared with 59 the prior year, and the average raise was a robust $336Million.

(For those not familiar, a SPAC is a public US company with cash and no business, and its role is to acquire a privately held business and thus make that private company public; it replaces the IPO process for a private company obtaining operating cash by sale of shares.)

With thanks to KPMG for an excellent webinar today, here are some highlights:

SPACs are becoming popular with institutional and wealth management investors because the are a liquid short-term play with an option for future growth. When investors buy SPAC shares they are SEC-registered and can be sold at any time, or sold or redeemed once a target acquisition is identified if the investors do not like the deal, or at any time after the acquisition closes.

In fact, SPACs are so attractive that sponsors these days are often themselves institutional investors including PE and hedge funds.

During 2020, target companies often were very robust and successful private enterprises in a wide variety of industries. Owners of these acquired companies receive shares of the SPAC which are saleable and can also receive cash in the deal. To be acquired in this fashion, a private company needs to have financial audits and take other steps required to become public by an IPO process.

SPACs can hold investor cash for two years but if they fail to make an acquisition in that time they must refund the investments made in the SPAC. Over the last seven years, fully 95% of all SPACs have been successful in completing a deal within the two years.