ESG vs WOKE: Politics vs Corporate Practice

ESG is the buzz-acronym for investing based on equity, sustainability and governance practices of a company.  WOKE is the buzz-acronym for a political movement reflecting one side of a cultural war.  Anti-WOKE legislation of varied sorts has been adopted in nineteen States, and is heavily lobbied against by vocal groups including climate change deniers, fossil fuel groups and the Republican governments of several important and growing States (think Florida and Texas for starters).  ESG has become a toxic phrase in some parts of the marketplace.

What does all these mean for the conduct of corporations?  The Spring issue of Directorship, the official publication of the National Association of Corporate Directors, attempts to get underneath the rhetoric on both sides to measure the actual impact of the WOKE movement on the ESG agendas adopted by a large majority of America’s biggest corporations.

The conclusions need a caveat.  The NACD article relies on anecdotal input from admittedly senior people, but the interviewees are few in number, and the survey jointly conducted by NACD and Wall Street Pro was pretty limited in content.

The conclusions generally are: corporations are committed to ESG values; 75% of S&P 500 companies factor ESG into CEO compensation; companies may scale back the rhetoric and stop using ESG as a catch-all, but remain committed to its values and for the most part will not alter substance; over time, companies likely  will  break apart the elements of ESG  and start pursuing and reporting them as separate issues to avoid political pressure.

The corporate mind-set is reported as of the view that ESG attentiveness is related to better economic performance.  By adhering to this view, corporations can end-run most of the anti-WOKE legislation, which tries to tie permitted corporate policy to economic factors only.  People may stop trumpeting ESG efforts (Blackrock itself, an earlier investor supporter, is reputed to have already done so) but they will continue to pursue them.

Finally, seems to me that adherence to the substance of ESG as related to profit, putting aside positive social impact for purposes of this narrow analysis, needs to be founded on actual economic success for the bottom line which justifies ESG for the entity and its investors.  I have not seen recently any robust studies of the correlation of ESG focus to corporate profits, but a year or two ago I did see (and post about) the majority (albeit not 100%) view that such correlation existed.  It does seem, at this point, that ESG is here to stay as an operational element if not a PR focus; the substantial infrastructure supporting ESG in  many corporations will remain in place.  No doubt some smaller number of corporations will declare themselves ESG-free, but not with the present assent of the world of corporate advisors (including NACD).

[Disclosure: I am on the Emeritus Board of NACD-New England.]





Update on FTC Rule Banning Most Non-Competition Agreements

First, there is no rush for employers or employees to react; the original FTC Rule was to take effect after 120 days of publication, but as anticipated litigation has been entered by several parties including the US Chamber of Commerce to void the proposed Rule as violative of the Constitution.  The crux of the claim is that a Federal agency (here, the FTC) does not have the constitutional power to in effect pass legislation which is not within the fair purview of the laws giving that agency its regulatory mandate.  Congress could, if it chose, address the matters addressed by the FTC–just not the agency absent Congressional mandate.

Interestingly and to me surprising: many recognized legal scholars agree that the Rule is an example of a Democrat-driven agency being overly aggressive in its regulatory posture.  And, I do not mean to engage that politically charged discussion which presents itself also and legitimately as a constitutional question.

Robust commentary in the last day or two has clarified certain elements of the proposed Rule, and those I address in part below.

First it is important to explore the different treatment between senior executives and “workers” who are not, as they are treated differently.  A senior executive is indeed a rare breed.  Not only must that person earn in excess of $151,000+ per year, but also must have authority to make policy.  Further, that policy-making power must be at a very senior level, it is not just making work rules or the like.  The power to make policy must have two attributes: the policy must be final and must be highly significant.  Sounds like CEOs and Presidents. These are the only people likely to be executives in this model; this category, which can be bound more profoundly to noncomps, is not a catch-all by which employers can just increase pay in order easily to bind high earners to noncomps.

If you are a worker and not an executive, you are not to be bound to any old noncomp nor to any noncomp imposed after the effective date of the Rule.

If you are an executive so defined, you can in many but not all circumstances be bound to noncomps you signed prior to the effective date; but even this group cannot be made party to a binding noncomp entered into after the effective date of the Rule.  The only difference is that executives prior to the effective date can be held after the effective date to those old noncomps.

This suggests employers today may be rushing to get noncomps from people who are executives under the Rule, if not already so bound.

Sales of businesses create one potential set of complexities.  It is often demanded by company purchasers that executives, founders and owners of corporations, or partners in a business being sold, enter into a new noncomp so that the business being purchased cannot be harmed by a person affiliated with the seller.  Here new noncomps can be obtained and enforced, in the future, against 25% shareholders (who presumably are being amply paid to stay away from competition).  Historically,  many lesser owners and employees were asked to sign non-comps in connection with an acquisition.

Impact on VC investments is interesting; VCs often seek noncomps from key workers and from defined executives before they invest.  Not getting such protection increases perceived risk to investors; will increased risk depress acquisition prices?

There may be issues for founders no longer employed.  Can an investor demand that a founder with <25% of the company who is not employed sign a noncomp?    Can an acquiror?  The Rule is supposed to protect only employees.

Seems in partnerships each partner may be deemed an employee?  What if a partner is a <25% owner (be careful how that is defined in the partnership documents) and is just an owner and not employed?

Impact on joint venture arrangements?  More an anti-trust issue?

Let us say someone is an executive as defined in the Rule, has an employment agreement with an embedded noncomp, the Rule becomes effective but the term of the employment agreement is running out–if the parties extend the term, is that deemed as to the noncomp an unenforceable new agreement?  What if the agreement self-renews every few years unless one party sends a notice of termination?

What about a separation agreement for any employee newly entered into that provides new compensation for a noncomp?  So-called garden party noncomps for which someone is paid?  They are being paid during the term of the arrangement, the person is “employed” and is not thereafter prohibited from competing. Seems okay?

Seems that normal accoutrements to basic noncomps will remain enforceable: protection of trade secrets and proprietary information, bans on hiring employees.  There is risk that some broader styles of articulating trade secret protection may constitute a de facto illegal noncomp, however:  what about a clause that says that trade secrets includes anything learned by the employee during the employment that could enhance a competitive effort?

There is a lot of law to be made if this Rule survives.  And if the Rule is killed now, and the Congress adopts anything like it (which may be unlikely), hopefully that law will address various scenarios with clarity or charge a committee to institute clear guidance in a wide variety of circumstances.

Sorry for reminder but it is super-important that readers understand this is NOT legal advice.  Take no action based on this post–see your friendly neighborhood lawyer.

FTC Rule Purports to Void Most Noncompetition Agreements for Individuals

The adopted FTC Rule voids all present and future employee non-comps after a 120 day waiting period.  This Rule will surely be challenged in court and such a challenge likely will delay implementation.  It should be noted that the scope of the Rule is unclear as to which executives it applies to, how it functions in an M&A transaction, how it impacts such ancillary prohibitions such as inability to take employees or marketing to existing clients, etc.  There is also a date before which institution of litigation by employers based on old noncomps (which would otherwise be voided) may be valid.

This post, and my firm’s Client Alert (just google and hit Alerts tab), are not legal advice.  Employees and employers are likely wise to review their particular situations and revert to their counsel with any questions. Much is unclear at this juncture but the driver of this action is to create competition in the marketplace and increase wage opportunities for the workforce.  No doubt future posts will seek clarity and will surely report on any delaying litigation.



AI Burdens Patent Office

Last week, the US Patent and Trademark Office issued guidance asking that lawyers submitting patent applications limit the number of references cited in the filing as constituting “prior art;” prior art refers to older inventions that should be considered in the patent review process.  Lawyers tend to cite all plausible prior art that could affect the novelty of the proposed patent, so that the subsequent grant of a patent after such disclosure is less subject to attack by a prior inventor claiming infringement.

AI is being used by attorneys filing patent applications to find and cite larger numbers of prior art; the theory is that such inclusion benefits client patent applicants and also meets the requirement that lawyers fully represent their client.  There therefore is a tension between applicants and PTO reviewers who seemingly are overworked or slowed down by so many references to prior art.

There is a tinge of “pot calling kettle black” on the part of the PTO, which itself is using AI to check prior art.  It takes a brave lawyer to omit a reference, although lawyers are required/expected to cull such references for applicability; and, applicants should be in favor of a maximal list (although they are harmed by processing delays).  Maybe more examiners?  Costs money–and although in fact the PTO also has increased filing fees based on number of references, the maximum fee of $800 per application remains seemingly modest.

Can we envision patent applications and patent review  being “assigned” to AI without human intervention?  I hope not to be practicing when two AI programs argue infringement in a proceeding being conducted by yet another AI-driven computer…..

The Boston Fed Discusses the Economy

Susan Collins, CEO of the Boston Federal Reserve Bank, spoke yesterday about the prospects for the US economy, at a program sponsored by National Association of Corporate Directors – New England.  After an erudite and informative presentation, the audience learned much about how the Fed operates, and little new about where the economy was going nor how fast it was going there.

I hasten to add that this is no criticism; the Fed’s public announcements are pretty specific about what their public stance will  be, and it is foolish to expect the head of one of the constituent Fed banks to say, in effect, “well, no, let me give you the real scoop.”  Below for the record, is an anecdotal summary of certain of her remarks:

The Fed’s mandate here is to achieve price stability and robust employment.  Recent inflation was very rapid, unusually so.  It is unclear when it will show sufficient drop to trigger the anticipated but now seemingly delayed decline in interest rates.

The US economy was remarkably strong during the rate hikes.  The reasons were: supply chain was fixed; employment surged, in part due to immigration; employee productivity surged; consumers had a nest-egg from the pandemic to fund domestic spending, which is two-thirds of GDP; salary increases were just catch-up to prices and were confined mostly to lower wage-earners,.

Are we assured of a so-called “soft landing”?  Unclear.  Just now, core inflation ticked up slightly.  “There is so much we don’t know.”  (If the Fed doesn’t know, what are we to conclude?)  The economy will slow down–unclear what that means in detail. “We have been surprised so often.”

As to their mission to support labor: problems abound in affordable housing, child care costs, transportation.  Not a surprise that these issues are significant in New England.  Nationally, housing costs actually declined in 2023, but not the future near-term trend and was not even true in New England.  Low mortgage rates now in effect, vs high rates now offered, means that owners do not move or downsize (they are in “houselock”) and this reduces housing stock for sale which further drives up housing prices for both purchase and rental.

The pandemic clearly altered current patterns of work, which has impact on housing also.  What does the Fed think about whether work patterns we are seeing now reflects the future of work?  “Not settled.”

Questioners probed for clues about rate cuts and soft landings, without eliciting new insight, just recitation of factors.  It was also noted that inflation creates higher income for retirees, who are spenders in the economy and a growing population segment.

My conclusions:  the Fed is weighing many factors relative to rate cut timing and amounts, given the numerous above-cited unknowns and lack of certainty of a soft landing;  Ms. Collins never once said in substance that a “soft landing” was the Fed’s main goal, and I was afraid to ask “so the primary goal is to kill inflation and not to assure a soft landing, is that right?”; thus it is  unclear to me whether or not the audience just assumed that a soft landing was primary; this assumption of mine, with lack of audience probing, was the most fascinating part of the entire program for me.

I leave to my readers the impact of all this on your spending, investment and life planning.  We are promised, from high authority, lack of clarity, lack of settlement, and a history of surprises.

Massachusetts Sustainability Industry

Today the National Association of Corporate Directors/New England and the Massachusetts Business Roundtable presented a panel program about making Massachusetts the leader in hosting businesses that support climate sustainability.  Globe business reporter Jon Chesto chaired the meeting. The accepted assumption was that climate change must be addressed by society.

Yvonne Hao, Secretary of the Commonwealth’s Office of Economic Development, maintained that Massachusetts is ideal for technological leadership, as our universities and business community can invent requisite technology.  Further, the Governor has proposed a billion dollar budget (part of a legally required  Four Year Economic Plan) to foster “climate tech” businesses with headquarters and production facilities all across Massachusetts.  She expects legislative action before the end of the July 31 term.  Her “pitch” also focused on the availability of investment capital in Massachusetts and the desire to echo Massachusetts’ eminence in med-tech (while also retaining production facilities here in the Commonwealth, which med-tech has not been able fully to achieve).

Lisa Wieland, President of National Grid New England and one of the two major utilities in attendance (Eversource also was represented), stated that Grid was exploring non-carbon energy solutions through hydro, wind and electrification, use of batteries, reducing carbon from sources which can be managed (lowering carbon from cattle, use of faux-leather), and applying A-I to analyze areas prone to negative effects of climate such as flooding.  Grid also is now working with 32 companies to explore cost and mechanics of alternative energy businesses and uses.  Also anticipated is a $2B new clean energy plant.

Kathleen Connors, President of Voltrek, explained the work of her company in installing devices to charge electric vehicles, with focus on companies electrifying fleets and parking facilities for employees.  She discussed the economic impossibility of wiring all parking spaces at scale due to cost and disruption, predicting something akin to “gas station” settings for bulk charging for non-industrial users.

In order to achieve a Massachusetts industrial base in climate-tech, including retaining a workforce of numerous skills, several problems must be addressed: legislative approval of $1B of tax credits (stated to have great ROI, so the audience was asked to call your State senators or reps) and addressing housing cost, child care and transportation issues. The Commonwealth’s Four Year Economic Plan contains task forces to address all of these.

Take-aways offered for corporate board members in the audience were straightforward: be imaginative, be flexible to embrace solutions, recognize that Massachusetts has great advantages for siting companies and facilities (including the best intellectual and political climates) to establish a new climate tech industrial center; and, that the business analysis in the long run should not turn on present tax rates but on overall opportunity.

Investment Advice On the Internet

Some investment advisers provide service only over the internet.  Until now they filed ADVs (disclosure of their practice) with the SEC but did not need to register with the SEC.  Until now they could advise only over the internet except they could talk directly with up to 15 advisees.  Until now their communications and advertising were not well regulated, and they could not register with the SEC (I do not address state law; note that the general SEC regulatory scheme requires advisers with small numbers of advisees to register only with states).

The SEC has just changed the law, effective after an 18-month transition period:

  1. Regardless of number of advisees, internet advisers may register federally.
  2. No internet adviser can now talk to advisees.
  3. Advertising, eg any communication offering services to new or present advisees, is limited.  Performance of portfolios must report net performance, and must include all portfolios and the entire portfolio and must specify the dates covered.
  4. Endorsers and ratings are allowed but must be identified as to whether the endorsers are clients and whether either is comped.
  5. Any internet adviser that does not register now must maintain digital investment services on an ongoing basis to at least one client.
  6. ADV forms must be amended to comply.

Of course, the SEC publicity announcing these new regulations had to mention that an ancillary benefit is to permit the SEC better to regulate performance of advisers of this type.  As a big fan of robust regulation of financial markets, by reason of the historical ease and magnitude of fraud, I nonetheless continue to be amazed at the granularity with which the present SEC is tightening the regulatory framework– if only to see it rolled back if there is a Republican administration elected in November….

Corporate Luxury=No Stockholders

Bose Corporation, a Boston area iconic company that has for decades manufactured top-of-the-line audio delivery systems, is a private entity whose stockholders do not seem to care about the value of their stock.  That is because there is no market for it and the controlling stockholder, MIT, seemingly is neither allowed to vote nor participate in management; and, it cannot sell its shares.

Thus sayeth the (fairly new) CEO, Lila Snyder, in remarks last Friday at Neptune Advisors’ ongoing and engaging  lecture series entitled C-Level Community. (I have no specific knowledge as to the corporate structure at Bose and the foregoing is my take-away from Ms. Snyder’s remarks.)

Is there a link between lack of shareholder pressure and the luxury to carefully and slowly engineer the absolutely best possible products?  It was asserted that lack of shareholder pressure on stock price or earnings does allow Bose products, wherever installed and whatever the form of the device, to cater to the highest standards of lovers of music.  Sound quality at Bose is evaluated in musical terms, far more demanding than clear transmission of human voices. This standard and the lack of stockholder pressure allowed Bose scientists to pursue “beautiful ideas.”

That said, over the last few years Bose had a series of layoffs of its inventive scientists.  Why did that happen?  The explanation, if I infer correctly, was that the company had previously aimed at perfect product performance, without regard for whether there was robust public demand for a given product.  Today, the product approach is to expose the scientists to the folks who evaluate what the broader public wants–all the time keeping the standard that products must produce music-quality sound.

While not clear to me that the story line is fully consistent– if you really were after perfect sound as your goal then why do you care that you only sell $5,000,000 of a gizmo and not $25,000,000– the result is pretty clear.  Smart people who are running companies want to make money whether public shareholders demand it or not.  And the new CEO, articulate and frankly quite impressive, came to Bose via McKinsey and a series of high-level positions which trained her to care about making money. And indeed, you cannot run an enterprise perpetually and lose money, as you simply go out of existence.

I apologize to Bose if I am too cynical to be completely in tune with the music that was played.  I have Bose equipment and it is indeed superb.  I will no doubt buy more of it in my lifetime.  I just don’t quite know how to process the offered take-away near the end of the session: as my notes have it, “values endure but culture is a living organism, it must evolve with strategy that addresses the market.”

Bottom line: I suggest that Bose today is operated substantially like any company that cares about the value of its shares of stock; what was in the past is in the past.

SEC Climate Control: Political Battleground

Today the SEC adopted sweeping disclosure requirements by which public companies over the next few years will compel detailed recitation of two kinds of climate information: what the company emits directly and indirectly, and what risk it fears from climate change.  The details are, well, very detailed and will be parsed minutely in numerous publications;  even this afternoon I see separate statements from the five SEC Commissioners putting different spins on this new rulemaking, and third party commentary reflecting different evaluations.

If you are not part of a public company, and not yet in receipt of disclosures as an investor as that stage is a year and more away, what are the present key take-aways aside from the fact that you will be deluged with both boilerplate (“we strive to reduce emissions” and ” hurricanes ruin our facilities in Florida and reduce the need for some of our products but then again we will sell more sandbags”) and inscrutable technical detail?

As starters, what kinds of emissions are to be analyzed?  You will hear about Scope 1 emissions (what is emitted from fuels and materials consumed within the company premises), and Scope 2 emissions (what is emitted by utilities supplying the company with electricity, heat, cooling, steam, etc.  You may miss the fact that removed from the new Rule is a requirement to disclose Scope 3 emissions, a requirement in the 2022 original proposal that  included reflection of some of the emissions created by a company’s suppliers.  No doubt that task would be very expensive and time-consuming and inaccurate, but the new Rule will favor offloading by manufacturers of emissions  to producers of components they acquire for assembly, thus hiding the real ultimate climatic impact of a given machine, automobile, detergent or any other product.

What is apparent also is the manner in which the political battlefield upon which SEC rulemaking, ostensibly designed to educate investors who are either concerned with the environment or concerned with an accurate financial evaluation of a security, reflects the growing philosophical divide between the Left and Right in this country.  No surprise that the new Rule was adopted by vote of all three Democratic SEC Commissioners over dissent from the two Republicans. Aside from favoring less regulation of business, the Republican position is also premised in the contention that the SEC does not have the legal right to in effect legislate climate policy and social policy.  Although the Rule is framed as disclosure useful to investors, and it will no doubt fulfill that function, the pressure of the marketplace will also no doubt alter the behavior of public companies which will fall under general social scrutiny.

This is part and parcel of the Right’s fight against the administrative state, which many Republicans vow to disembowel.  This is the argument against much of what the SEC decrees in the name of disclosure, and is also an argument advanced against many regulatory initiatives undertaken by other Federal agencies, particularly under Democratic administrations which tend to be more activist in promulgating affirmative regulation.  Among numerous examples, take a look at the recent case brought against the government’s sweeping reporting requirement contained in the Corporate Transparency Act which, in the name of uncovering illegal activity, requires most American businesses to disclose to the government their ultimate owners; one Federal court case just did declare the CTA legislation unconstitutional, setting off a firestorm of reaction in policy forums, courts and within the Federal government itself.

SEC Chair Gensler, a most activist sort of regulator,  has pushed through very many programs favored by the Left; same can be said for other agencies, particularly the FTC and DOJ in antitrust regulation (for which see several prior posts to this site).

I offer no opinion here as to who is more correct, the Left or the Right; I keep my opinions to myself in this regard. However, I recommend viewing current politics partly in light of this tension, and suggest that the results of the Presidential election, already fraught with numerous concerns on all sides, will have significant impact also in the manner in which our Federal government interacts with its citizens and its business organizations.

The Business Economy–Hints

I was struck today by the flow of news that continually pours over my desk from myriad sources, including  from the NYTimes, the legal press, several data services, the SEC, as well as thinking from my clients who are investors or advisers.  Those who know me understand that I do not give  legal advice in this blog site, and surely not investment advice in any setting, but I confess I am having trouble understanding where the corporate/investment landscape is going.

Anecdotal input just today (I vouch for none of this data but set forth what I was told in person or by incoming information):

after a heady 2023 the stock markets are taking a pause (NYT) and are not a source of 2024 optimism (very sophisticated equity investor);

the stock markets are ahead of the Fed (NYT column);

DOJ increased enforcement cutting down on M&A activity (several sources today including but not limited to the super-market merger) [and see posts December 13 and 20]

M&A activity for 2023 was extremely low in volume at 19% below 2022 and 46% below 2021 (recognized data service to the legal community);

tightening standards for private investors to obtain accredited investor status (and thus be able to invest in typically better equity offerings) is being considered by the SEC [see post of December 15], which  will harm private investment markets in parts of the US and prevent investors from exercising their own investment judgment with their own money (SEC Commissioner addressing the Commission’s Small Business Capital Formation Advisory Committee) ;

public company ownership and filing of IPOs is severely down, as from 2016 to mid-2022 the number of public US companies almost halved and rate of IPOs in last ten years is in substantial decline (same SEC Commissioner address).

The only news (at least that I found interesting enough to comment upon) which suggests uptick in deal pace was contained in my recent post on market pressure leading to a robust 2024 of sales of positions by PE firms [February 13].

Obviously there is a connection between corporate deal cycles and the stock market, and obviously I am not the right person to speculate on those mechanics;  I just was struck by today’s input.  As Sergeant Joe Friday used to say, “just the facts.”