Corporate Political Spending

In days of pandemic, social unrest, global warming, ESG and demands for social justice, companies are finely attuned to their public relations image. Both through direct advertising and the usual output during proxy season, companies try to find the right thing to say in meeting public expectations on key issues.

A recent survey from the Center for Political Accountability examined corporate political spending through so-called “527 non-profit organizations” and found that the money does not always support professed corporate policies. This may be a reflection of lack of rigor in supervising the donations for compliance; hopefully, it is not a conscious effort to divert attention from what a company actually intends to support by putting forth false statements of belief.

Some recent academic suggestions, that boards conduct scenario playing to evaluate risk and consider mitigation responses in cases of failure to put their money where their PR indicates, seem too granular (boards should obey the maxim of “noses in, hands out” of company business). But, given reputational risk in the current environment, it does seem to me that as part of risk management a board should inquire about the mechanism that management applies to monitor political spends for consistency with public policy.

Work at Home: Tax Impact

I thought I had read something about every aspect of COVID’s tax impact on businesses and individuals, until the morning’s receipt of a tax alert from my own firm’s inside CPA firm. Consider this a shameless plug for going to the DuaneMorris website and then follow the obvious path to our COVID posts. However, here is a teaser :

First, say a company has a home office in Boston but all its employees for a long time are working from home in five other states. Where is the employee taxed? Where is the employer taxed; does the employer need to register as doing business (not likely) or to pay taxes (big question) in each state where an employee’s home sits?

The bad news is there is no uniform rule and you must look at the laws and waivers granted by each state; a dozen states including Massachusetts have provided written waivers and guidance which means conversely you are on your own in the other 38.

A gross generalization for Massachusetts: employees sitting at home in other states will not affect income tax apportionment for employers. Mass employers should continue to withhold for employees who normally work in the Commonwealth but now work at home elsewhere; further, rules are relaxed for business withholding obligations for telecommuters.

The above is general and as of today. Stay in contact with your CPA for personal and business advice; confirm your adviser has promised proactive communication, as laws and practices change.

It is usual for blog sites, as mine, to state that nothing here is formal legal advice, and for this subject that warning is doubly important.

Opening America: Discussion

This is my first post in over four months. There is so much “writing” out there, so many alerts and zoom conferences and reports, that it seemed to me that the last thing anyone needed was another talking head.

I am posting this blog based on a conversation this morning conducted by the New England Chapter of the National Association of Corporate Directors, which addressed factors that will bear on the nature and timing of the opening of American business, and indeed on the shape of future business and society.

Much that was covered was not novel: the acceleration of remote modes of business, the decline of brick and mortar and office space, the difficulties of workers of all levels in dealing with the present situation and the upcoming transitions.

But I did want to share a few comments that I found to be enormously telling, and here they are.

First, the pandemic is accompanied by an awakening of pervasive institutionalized prejudice. As the workforce is re-imagined and as delivery of services to customers is altered, there is a need to examine old practices to see if they included implicit bias and to make sure replacement modalities do not perpetuate that bias. This may fall in the category of never wasting a crisis.

Specifically, as an example, hiring often will be done on-line, including via interviews. Mechanics are needed to avoid bias. Interviewing for white collar jobs often was done at certain colleges which, on examination, have an ethnic mix that makes it unlikely to find diverse candidates; one presenter said, in effect, we just aren’t going to go there in the future.

Another example: delivery of services requires concern for the front-line service providers. To protect them they have been told to stay out of COVID hot spots. But many such hot spots are densely populated poorer areas, and additionally poorer areas lack basic infrastucture that service delivery would enhance; there has been no reason to offer improvements where basis services do not yet exist. The result is systemic failure to provide support services to certain populations, doubling down on resulting prejudice and poverty.

Another speaker hit the same general dynamic of societal inequality in a different way, noting that government policies applied during COVID are likely to have a net societal effect that increases the economic disparity in America at the very time that there is growing demand to identify and shrink that disparity; governmental and business policies need to be sought to counter this trend.

These comments lead to a call to action by business which is more human-centric. They lead to many foci coming to the forefront of business practices today: greater scheduling flexibility for workers under stress or with children needing care; accommodations in collections of loans, mortgages or bills for purchases; rethinking hiring patterns and delivery patterns with a conscious effort to alleviate economic disparity and poor treatment of labor as well as of diverse consumer groups.

Corporate charity, down to funding things as basic as food, has begun to be reallocated and is presumed will remain more socially conscious. Companies employing office workers are stockpiling protective gear and reconfiguring space. HR departments will need to allocate resources to mental health issues, as the lasting psychological effects of the pandemic will almost surely outlast the virus itself.

It is true that executives who are asked to speak, and are willing to speak, at programs such as I have described will tend to be articulate and view themselves as sensitive to the joint lessons of the pandemic and the social unrest in America. Put another way, business persons of a less enlightened viewpoint are likely to avoid articulating social views that are out of tune with the empathetic thread of much current business discussion.

But as Americans slowly, ever so slowly meander back to the euphemistic “new normal,” working different hours using more technology and meeting in person far less as everyone hopefully predicts, at least some business leaders are seeing the emergence from COVID as an opening to meet the challenges that have converged on us with sharper focus: discrimination, inclusion, economic justice,environmental issues personal stress, injury to children, and more human-sensitive approaches to labor and to consumers.

So on this day, which opened with our newspapers unsettling us with news that a couple of hundred thousand Google employees would be remote for what amounts to almost another entire year, perhaps there is an opportunity for business to plan a newly configured and improved future.

As one speaker noted: “Chance favors the prepared mind.”

Sole Discretion in Delaware Contracts

Sometimes, in order to give yourself a complete “free pass” in making a decision under a contract, you will provide that you may reach that decision “in the party’s sole discretion, with or without cause.”  Does that work?

Circumstances vary based on the facts, and the treatment of such language in a contract, for example for the sale of goods, may face a different standard from that applied to individuals in a joint business relationship.

In the recent Skye Mineral case, the Delaware Court of Chancery determined that a provision relied upon by a member of a limited liability company, permitting a decision which by the terms of the LLC agreement could be made in such party’s “sole discretion,” does not really mean what it says.

Parties engaged in a joint enterprise owe fiduciary duties in certain circumstances.  In partnerships particularly, the obligation is high.  Limited liability companies are often thought to be analogous to partnerships.  The situation in corporations is more muddied, and while in Massachusetts fellow shareholders in closely held corporations often are found to have various fiduciary duties to each other, the rulings in Delaware can fairly be said to be not quite so clear.

In Skye Mineral, the Court held that “sole discretion” language did not waive fiduciary duties of loyalty.  In order to waive those fiduciary duties, the document must specifically waive all “fiduciary duties, including duties of loyalty.”

Reference is made to my immediately prior post concerning “Contracts and Virus.”  These two post, taken together, make it clear that “boilerplate” contract language does not constitute good drafting.  I suggest recipients of this post take a look at their present form documents; is it time for a careful review?

Virus and Business Contracts

Seems these days that everything written has to do with Coronavirus.  Whether this proves to be an earth-shattering event remains to be seen.

If you are in business, you no doubt deal with a variety of contracts.  Many contain what is known as a “force majeure” clause.  This clause exonerates a party from liability for failure to perform the contract by reason of catastrophic events.

Does your force majeure clause exempt you if there is a Coronavirus outbreak in the United States?  Or in China? 

The annoying answer is “it depends.”  Among other things, what exactly does your force majeure clause say?  These clauses often are boilerplate, copied from one agreement to another over time, and may not be specific.

Obviously, specific reference to viral epidemics or to health issues make it much more likely that a clause will protect you if your China supply chain is interrupted, or if your factory must close or your staff falls ill here in the United States.

If your force majeure clause contains general language (“any material event not within the reasonable control of a party”), then the answer may be fact-based; will Coronavirus be like a severe flu but historically foreseeable and within contemplation, or will it be truly major, and unforeseeable?

Has your contract included absolute guarantees of delivery, time of the essence, come hell or high water?  Does your contract have specific provisions about what happens if there is a delay, in terms of deferred delivery and/or repricing?  Does your contract require a particular kind of notice, in substance or timing, in order to invoke your force majeure clause?

A government agency in China will offer force majeure certificates to clients of Chinese companies in certain circumstances.  Whether these certificates will be dispositive when you invoke a force majeure clause will nonetheless relate back to the terms of your contract.

There are other issues to consider:  does your contract entirely fail of purpose by reason of events outside of anything that anyone contemplated (“frustration”); do you have insurance coverage for lost profits or for liability; have you been diligent in attempting to mediate the impact of the virus?

While I generally don’t tout my law firm’s “client alerts” on various subjects (although they are numerous and quite good), in this instance I suggest you take a look at https://www.duanemorris.com/alerts/coronavirus_covid19_force_majeure_contract_clauses_0320.html.

Nonprofit Boards

The problem with some nonprofits is that they lose sight of their mission.  The obligation of a nonprofit board is to pursue the mission, not necessarily to preserve the nonprofit entity itself at all costs.

This and other nonprofit issues were explored by an expert panel held March 10 under the auspices of the National Association of Corporate Directors-New England.

A prime example of loss of sight of a mission was a recent college closure, where the board of directors went to extraordinary means, through unusual financial transactions, to save the institution, and when they failed they had not provided for faculty, students, transfers and the like.  Nonprofits with these kinds of existential issues are urged to speak with Courtney Aladro, Assistant Attorney General in Massachusetts who heads the nonprofit/public charities division of the AG’s office.

Another focus was on risk; the board must be proactive in establishing a “risk matrix” and following through to make sure that traditional risk issues, and also financial risk and exceptional risk (a pandemic?) are addressed in light of fulfilling the mission.

Lastly, the panel emphasized the necessity of having a diverse board, including representation from clients serviced by the mission.  Boards were warned of drifting into a “clubbiness” where they rubber stamp management, and do not challenge management.  While it is important for directors to “play well with others,” that does not mean neglecting the fiduciary obligation to speak one’s mind as a director.

Boston Traffic Report

Everyone knows Boston traffic is gridlocked and public transportation does not perform.  Current ambitious State plans to fund public transportation, by an $18Billion bond offering, presently are pending in the Legislature.  According to an expert panel convened by the National Association of Corporate Directors-New England and the Business Roundtable held February 11 at the Boston Harvard Club, that $18Billion is a drop in the bucket.

Compared to other cities, Boston (which needs a lot of help as a very old and congested city) is a piker.  Seattle has a $54Billion transportation program and Los Angeles has a program in excess of $100Billion.  Further, it seems that the $18Billion is designed merely to make things operable, and not to address an expansion of transportation options.  That will take a lot more money.

The panel noted that businesses are moving out of Boston and Cambridge into surrounding suburbs, and as far west as Worcester.  The problem is that many in the high tech millennial population want to be in Boston or in Cambridge.  But housing is so expensive that housing becomes part of the problem.

What can directors do?  In terms of fixing geographic location and commuting policy for employees, management should be asked to listen to employees in detail: what their needs are.  Many current surveys, which ask a few simplistic questions such as “how do you typically get to work,” are not useful.  You need to know when people travel and what their problems are, specifically and then statistically. Sometimes subsidies for mass transit are not the answer.

A board can also ask management to become politically active, putting pressure on government and the Legislature to address the problems presented.

The presenting panel included the President of Zip Car, the Vice President for Public Policy for Verizon in New England, the President of the Massachusetts Biotechnology Council and the Marketing Director for JLL New England (serving business real estate clients).  If this panel thinks it may get worse before it gets better, we all are in for trouble.

Director Review of Risk

Lots of advisers at this time of year circulate publications relative to the upcoming proxy season, and the obligations of boards of directors.  This is the year of “rethinking risk.”

Boards are advised to “assess risk” in the following areas:  does the board have expertise to evaluate the full range of risks?; does the board treat corporate culture as an enterprise asset which must be assessed for risk?; does management integrate risk into its strategy (this really ought to be an implicit no-brainer)?; is the board assessing the risk of not being either a leader or an “agile follower” with respect to the digital revolution and the expanding role of AI?; given the labor market, is the board deeply enough involved in assessing workforce risk?

There also is renewed interest in a series of Delaware litigations described as “Caremark cases.”  Almost twenty-five years ago, the Court of Chancery established a standard, requiring that directors be not only loyal and non-corrupt, but also that they had an obligation to conduct “oversight.”  Thereafter many cases were brought alleging directors were neglectful, and that injury to the corporation was actionable against them. 

Making a “Caremark case” was a very tough hill to climb, but recent litigation (involving claims against Blue Bell Creamery’s directors in connection with product contamination) did find a lack of oversight that created director liability.

Although analysis suggests that the Court considered this particular case a slam dunk (the company manufactures food and it is not a far step to say that directors ought to be aware of the risk of contamination), the Court noted not one specific failure but, rather, the categorical lack of board oversight of food safety.

Boards should not only identify risks, but also must allow specific identifiable time on board agendas in risk review.

Corporate Political Contributions

Ever since the Supreme Court established the rights of corporations to exercise “political” speech (Citizens United), debates have raged concerning ground rules for corporate political action.

Sometimes the general public “votes with its purse” with respect to popular or unpopular political positions taken by companies, or by their executives (note particularly but not only the case of Chick‑fil‑A).

How do public corporations, with high profiles in terms of exposure to the securities market and to the consuming public, approach spending by the corporation?  Are political contribution decisions the bailiwick of management, or does the board have a strategic role? 

As noted in NACD Directorship magazine’s current issue, a poll of 399 public companies disclosed remarkable governance involvement: 276 such companies had a dedicated political spending webpage; 189 had board committee review of political spending policy; 201 had direct committee review of specific contributions.  Well over half also reported “general board oversight.”

Further, over 84% of S&P 500 companies make some disclosure concerning election-related corporate expenditures, and almost 60% post a detailed policy statement.  Conversely, only about 40% describe which political entities to which they may or may not contribute. 

Proxy advisory firm ISS reported a large number of shareholder proxy proposals relating to corporate political contributions (and lobbying), and is pushing for formal SEC regulation of disclosure.  Notably, almost all proposals regarding political contributions have to date failed of shareholder passage.

Whether you are publicly held or privately held, if you have a public profile (perhaps through the offering of products and services), how should a board of directors approach political contributions?

Best thinking:  boards should be actively involved; boards should adopt a corporate strategy for political contributions, based upon a business case (what is the economic benefit sought to be gained); boards must consider risks attendant to political expression.  Do political contributions line up with company statements of mission or values; is there preclearance of content and expense; what is your control for compliance with law, including the Federal Lobbying Disclosure Act.

In this highly politicized time, political expenditures can be volatile.  Interesting that of the S&P 500, only 141 companies categorically prohibit contributions to State candidates, political parties and committees.  This statistic alone suggests an open playing field for companies to support political action; and, an open invitation to foot‑fault by proceeding without due care.

Coronavirus Scams?

Occasionally we are reminded that securities law scams are not only illegal, but also often prey on the worst instincts of their victims.

Yesterday, the SEC announced a formal warning to the investing public not to be tricked into offerings by companies claiming vaccines, cures or other strategies for the containment of coronavirus. 

One might not think, of all the potentially horrible fallouts of an aggressive world disease, that we would also find people attempting to illegally profit from the hysteria.  That the SEC, so quickly, should feel constrained to issue such a warning release is both startling and depressing.