The Law and Other Anomalies

Big problems just keep getting bigger.

In 2003, hackers succeeded in reaching their targets 74% of the time with a 20% detection rate by those being hacked.

In 2015, detection increased to 25%, but hackers were now successful 95% of the time.

What is the current thinking with respect to the obligations and best practices of a corporate board of directors in the face of this reality? This issues was discussed by an expert panel, headed by the Chief Technology Officer for Cyber Security in the Department of Homeland Security, at an October 18^th breakfast meeting of the New England Chapter of the National Association of Corporate Directors. Major takeways:

Consistent with the role of boards as supervisors and not direct implementers, boards should monitor management instituting robust protection measures. Aside from having a plan for remediation and crisis control, the board should be fully involved with monitoring cyber security as part of a company-wide enterprise risk management program.

Boards should obtain outside consultative help and analysis; boards should be trained in cyber security or, at a minimum, one board member should have expertise in the space.

It may not be wise for the CIO, with responsibility for running the networks, to also have primary responsibility for security. Increasingly, companies are designating cyber security officers. It was suggested that this be a report directly to the CEO and not to the CIO.

Boards often use commercial portals for intra-board communication. These portals are safer than the open use of the internet, but they should not be treated as fully secure. Some companies are providing secure, dedicated I-Pads to board members, the only function of such device being to communicate with the board portal.

The internet of things is making life more complex. Since everything is connected, and there are no standards for manufacture or testing of devices, and since manufacturers therefore are “all over the place” (according to Homeland Security), there is a need to standardize all that is interconnected so that it can be policed and defended.

Speaking of Homeland Security, right now they are deeply focused on protecting the election functions of the various States so that the presidential election cannot be compromised.

One question from the floor raised the issue as to whether block-chain technology might be promising in terms of increasing internet security. The answer: block-chain is a promising technology, currently being studied, but it is complex and we are a long way from being able to harden our systems using it.

For boards, there are two things to keep in mind: the first is to be sufficiently acquainted with the technology of cyber security as to be able monitor; the second is to document the board’s robust process, so as to be safe from criticism (and lawsuits) when the seemingly inevitable occurs: you will be hacked.

Everyone know that office and RD space in greater Boston is facing a “tight” market.

There are well over 2,000,000 square feet of office and RD space within the 495 band, according to Tom Hynes (CEO of Colliers International, presenting at the Thursday morning ACG breakfast). Boston itself contains about 30% of that space, and Boston A buildings draw an average of $58/sq. ft.; Cambridge A space, with only a 3% vacancy rate, draws an average of $64/sq. ft.

Real estate is affected by a variety of economic factors external to Boston, including but not limited to the attractiveness of investing in our buildings for foreign government funds and investors from China, Japan, Canada, Norway, Qatar and Australia. But the principal local drivers for the real estate market are our innovation and life science economy, and the growth of Boston-based hospitals. The largest general draw seems to be MIT (not Harvard); MIT was the institution cited by GE in its relocation to Boston.

Current construction plans are generally known, spear-headed by the $1,000,000,000 Wynn Casino but including redevelopment of garages at Winthrop Square, Harbor Towers and Bullfinch Crossing, as well as proposals for One Dalton Street, Back Bay Station and South Station.

One problem is to provide affordable housing; the City itself, having peaked in population at 801,000 in 1950, fell to about 562,000 in 1980 but now has recovered to 667,000. Can housing (and our shaky transportation infrastructure) effectively support this continuing influx? The economics of constructing affordable residential housing in Boston are daunting.

Asked about the difference between the “bid” and “ask” for class A high-rise space in Boston, Hynes thought that there was very little spread and not nearly the kind of spread that obtained in the past. [I do however note that, per a recent meeting with the senior leasing folks at Cushman and Wakefield, selective opportunities for modest front-end free rent and enhanced build-out allowances in certain sectors of the market were still available.]

Finally, Hynes noted the real risk presented by climate change, citing the flooding in other cities where recent storms hit head-on and with back-up generators and other support facilities often housed in basements. Real estate expansion in Boston needs to think long and hard about climate change in our law-lying coastal city.

“The world is in a pretty bad place,” intoned State Street CEO Joseph L. Hooley at a September 13^th panel held in Boston under the auspices of the National Association of Corporate Directors/New England Chapter. He, Marcy Reed (President of National Grid in Massachusetts) and Niraj Shah (CEO of Wayfair) discussed our economy, and their major business problems, as we move out of the summer doldrums.

Hooley noted that Japan is in a decades-long recession, the UK is growing at only 1%, the BRICs are in trouble or have slowed growth ( except for India which is “too small to matter”), and that central banks have run out of tools to provide economic stimulus. He sees this as the fifth year in a row of below-average world business growth; the United States remains steady but is impacted negatively by global developments.

It should be noted that State Street garners more than half its income from non-US operations. Reed runs a utility centered in New England and New York, and is enjoying the relatively robust United States economy, where utility bills are getting paid (defaults are at half the rate suffered during the 2008 recession). Her problems have to do with an aging blue collar work force and a lack of sufficiently trained younger employees (the Grid used to hire high school graduates but now there are “computers on top of poles”).

Wayfair is an online vendor of relatively mundane products. Although most of their products are discretionary purchases, Shah noted that his company has benefited from the explosion of online sales (Wayfair’s business grew even during the recession years). Additionally, during times of financial pressure consumers become more “value-conscious.”

There is clearly a hiring crunch in the United States. Hooley noted that we have college graduates who need jobs, and businesses which need workers, but the grads can’t fit into those jobs; a failure in training. Shah says much of the training in his company is done onsite, they just try to hire smart people. Reed, interestingly, noted that they used to assign senior workers to train younger workers but now (with an average worker age at Grid of 49 years) she assigns the younger employees to train the older ones in “new economy” skillsets.

Finally, there was discussion of how to hire and nurture millennials, who are “wired differently” with shorter attention spans, a desire to change jobs; and their “paper is already on the street” by reason of social media. 78% of millennials report that they enjoy some version of flex time. They also care about the community and the environment. In order to attract and retain millennials, companies are attempting to adjust to these differences.

August 1 means the Massachusetts General Court has adjourned and, notwithstanding debate and passage of bills in both Houses, the legislature prior to its adjournment failed to pass ANY law affecting the enforcement of noncompetition clauses.  The two chambers failed to merge their bills which is not too surprising as there were several significant differences; however, the failure likely also reflects the division within the Massachusetts business community, with larger enterprises supporting stronger non-comp enforcement.  I would not be surprised to see this issue come up next session but, meanwhile, it is business (and lack of predictability) as usual here in the Commonwealth.

The below interim report is from my Boston labor law partner Bronwyn Roberts:

The Massachusetts noncompete and trade secret bill passed the House today 150-0.  To become law, the bill still needs to pass the Senate and be signed by Governor Baker.  (So not ripe for a client alert – in my opinion).

Here are some highlights (lowlights as the case may be):

Noncompete entered into at the commencement of employment must be provided the earlier of a formal offer of employment or 10 business days before commencement of employment.

Noncompetes must expressly state that the employee has a right to consult with counsel prior to signing.

There is a 1 year limit to noncompetes unless there is a breach of fiduciary duty or employee theft in which case the duration cannot exceed 2 years.

Noncompetes must be supported by “Garden leave” or “other mutually agreed consideration” specified in the agreement.  “Garden leave” is payment during the restricted period of at least 50% of the employee’s annualized base salary within the 2 years preceding termination.  There is no definition of “other mutually agreed consideration.”

Noncompetes are unenforceable as to nonexempt workers under the FLSA, student interns, employees terminated without cause (not defined) or laid off, employees under age 18.