My interview on quotas for women on boards and an incidental viewpoint diversity argument

In my writing, I have taken the view that quotas for women on corporate boards will not necessarily result in gender equality in companies. A quota is a cosmetic fix at the top. Unless there is willingness to go and fix the various reasons for women not progressing up the pipeline, we will not fix underlying issues.

In a recent article for the Conversation (New Zealand edition), I wrote that “quotas, whether imposed by governments or market players, tend to result in companies appointing diverse people from within their own networks”. I have instead argued in favour of viewpoint diversity on boards, to strengthen board decision-making. To have people with different viewpoints, and the willingness to challenge the CEO when required, boards should be looking to appoint outside existing networks.

I was interviewed by an RNZ podcast, The Detail, based on my article in the Conversation (referred to above). The podcast aired this morning and also included an interview with Rob Campbell, a prominent businessman in New Zealand. You can catch the podcast here.

I have to add here that the article accompanying the podcast does not make any mention of me or my argument. I wasn’t sure if this meant that they are against highlighting women interviewees or against highlighting an unpopular view.

When I wrote to the person who interviewed me, he said that the written piece is a teaser for the podcast and that the “written pieces focus on ONE talent and ONE angle to the story, and due to word limits this tends to be the simplest and most easily digestible angle, as the point of it is to encourage people who read the piece to listen to the more nuanced podcast”. However, he has accepted that I’m “quite right” that my “name should be in there as part of this preview”. He says it is an oversight and RNZ will amend it.

This has allowed me to stress that viewpoint diversity is important, albeit in a different context. The article accompanying the podcast would have read much better had it been balanced and mentioned both views and both interviewees.

Update: Three hours after posting this blog on social media, RNZ has mentioned me, my argument and my institution at the bottom of the written piece accompanying the podcast. But they call me Ms. Kamalnath instead of Dr. Kamalnath. I welcome the acknowledgement of my contribution, but was hoping that it would be a respectful one.

Corporate Law as an Existential Project – Go read it!

I had blogged a while back about keeping in good spirits during the tough times.

I’ve read an amazingly entertaining essay on corporate law – although I’m not sure if the author, Professor David Yosifon, would like that classification – and want to pass on that joy to my readers! I was sold the moment he made a reference to 42 from Douglas Adams’ book which this blog is named after. (There is also a bat reference for legal philosophers and a Dylan reference for everyone.)

I have referenced (but not always agreed with) Professor Yosifon’s work previously so I was not surprised to see this statement: “Wanting to know what corporate law can do for me or you is wrapped up in the question of what we can do, and might better know how to do, for society.”

I won’t add any more spoilers.

Would we see more companies becoming state owned as a response to the COVID-19 crisis?

This question was posed by one of my students and it is indeed something I have thought about in the context of the terms on which companies are being bailed out in various countries. (See here and here).

In a recent post in the Oxford Business Law Blog, Professors Maribel Saez and Maria Gutirrez say that one of the likely consequences of corporate nationalism as a reaction to the COVID-19 crisis is state ownership. Focusing on Europe, they say:

In order to save their domestic crown jewels, various European governments have announced the nationalization of, or large capital injections into, airlines and other (supposedly) strategic industries. The re-nationalization of Alitalia is a good example. The EU has adopted recently the amendments to the rules of public aid that could relax state-aid rules, and thus facilitate nationalizations of distressed companies.

State ownership of many companies would bring its own set of agency problems. The State, owning a sizable chunk of the company would mean that vested political interests would affect corporate decisions. I will illustrate the issue with a colourful twitter spat (reported by RNZ) about Air New Zealand two years ago. (As another student reminded me, the government has a 51% stake in the company.)

Covid-19 winners – Start-ups and big businesses that can adapt quickly

While many businesses are running under losses, seeking state aid, or entering rescue proceedings, here have also been some “winners” in the Covid-19 time. I will discuss two relatively distinct business winners here. The first is delivery companies and the second is animation. In a sense of these types of businesses are “essential”. Both are essential businesses in their own right. (On the importance of entertainment during this time, see my earlier post here.)

Delivery companies have become important because buying has moved online in the era of social distancing. While this has often meant that big companies like Amazon take on a significant role, Australian grocery chairs are reportedly using start-ups that provide “last mile” delivery services (Drive Yello, Sherpa, 13 Cabs and Uber).  This is a positive development and grocery chains in other markets should embrace it. Restaurants in various countries have already re-focused on deliveries; perhaps some other businesses in troubled sectors might be better off pivoting into deliveries.

Just like shopping, entertainment has moved online too. Although web streaming companies became popular long before Covid-19, the lockdown across countries has been a big blow to physical theatres. One New Zealand web streaming platform (Screen Plus) is looking to tie-up with cinemas and stream their content, while using the existing customer base of each cinema. Even if the issue of content delivery may be solved by tie-ups with web streaming services, the issue of content creation still remains. Although countries like Iceland, South Korea and New Zealand have indicated that they are open for filming, Hollywood studios remain cautious. In this backdrop, animation has become more popular (with some live action shows taking the help of animated sequences during COVID-19).

With start-ups becoming essential to the “new normal” it should be a no-brainer that some resources should go into rescuing start-ups. An excellent discussion of possible concerns and how to account for them is here. It should also be obvious that survival plans of companies in various sectors should be geared at pivoting to market requirements.

From benign stewardship to a power grab?

By now, most of us are well acquainted with Larry Fink’s 2019  annual letter, in his capacity as the head of Blackrock Inc., one of the largest fund management firms, addressed to the CEOs of companies in which Blackrock invests, emphasising on the social responsibilities of business.

In bold letters, Fink’s letter said, “I believe we are on the edge of a fundamental reshaping of finance”. Indeed, Blackrock is taking stewardship over the edge and transforming it into something more sinister.

One of the core ideas underpinning stewardship codes is that institutional investors put the interests of their beneficiaries and clients first. Blackrock on the other hand seems to be driven by other motives. As Bernard Sharfman argues in his recent article, “while BlackRock’s shareholder activism may be a good marketing strategy, helping it to differentiate itself from its competitors, as well as a means to stave off the disruptive effects of shareholder activism at its own annual meetings, it seriously puts into doubt BlackRock’s sincerity and ability to look out only for its beneficial investors and therefore may violate the duty of loyalty that it owes to its current, and still very much alive, baby-boomer and Gen-X investors”.

Blackrock’s ESG activism may also be politically intertwined. BlackRock is an adviser to the U.S. Federal Reserve’s financial intervention to rescue corporations from the lockdown crisis and an advisor to the Bank of Canada. This again brings its duties to beneficiaries and clients into question. Terence Corcoran, discussing these developments warns of corporatism. As he says: “The state has no business in the boardrooms of the nation. And corporations have no business in the staterooms of the nation”.

From a corporate law perspective, we should also worry that the stewardship focus seems to have brough us to a point where corporate decision-making is becoming hijacked by institutional investors like Blackrock.

Covid-19 hastens the tech transition in reluctant companies

I’d posted earlier about the focus of of BCP (Business Continuity Planning) in teh wake of COVID-19. As we learn to do more and more things remotely, one dimension to BSP that is becoming a focus is obviously technology. Ayushman Baruah recently noted in the liveMint that CIOs should consider cyber security related priorities and that organizations should invest in newer technologies.

The focus on IT in the corporate context is not sudden. There have been many discussions on AI taking over corporate boards. (My own article on this argued that AI will not replace human directors). Even before thinking of dramatic technological innovations like AI, the current imperative for companies and boards is simply that they cannot ignore advances in technology. In a recent article Professors Stevelman and Haan suggest that the IT revolution has turned board governance into information governance. An excellent article by Professors Luca Enriques and Dirk A. Zetzsche that addresses the move into the “CorpTech Age” is here.

While firms battle to survive the impacts of Covid-19 and the consequent lockdown, they should also be thinking about longer term transitions into terms of integrating new technologies into various aspects of their functioning.

Stablecoins ecosystem- a promise that can be kept

By Tripti Dhar*

The past year saw the introduction of a stablecoin by the name of Libra into the public domain. Libra is a blockchain based cryptocurrency that has sought to alter the landscape of traditional banking. However, it has been received with a lot of scepticism and central banks across the globe which have in particular been critical of the use of blockchain in the implementation of Libra.

The instability so created is anticipated to further compound with the element of risk ultimately resulting in concerns as stated by the G7 Working Group in their report of October 2019. These are (i) legal certainty; (ii) sound governance; (iii) financial integrity; (iv) safety, efficiency and integrity of payment systems; (v) cyber security and operational resilience;(vi) market integrity; (vii) data privacy, protection and portability; (viii) consumer/ investor protection; (ix) tax compliance; and (x) national security.

Since Libra seeks to transcend national boundaries, the regulators are concerned as to how legal remedies would be affected between two persons belonging to countries having varying levels of legislations, controls, mechanisms and compliances in place. This would call for agreements and negotiations at international levels to be entered into.

In October 2019, the G7 Working Group on Stablecoins released its report on the impact of global stablecoins. In the report, the Working Group acknowledged that stablecoins have numerous features of cryptoassets and that stablecoins seek to do better in terms of stabilizing the price of the currency by linking its value to a pool of assets and hence capable of serving better as (i) a means payment and store of value; and (ii) by contributing to the development of global payment arrangements that are faster, cheaper and tend to be more inclusive than the existing arrangements. However, it was also observed that stablecoins as an initiative is still a technology that is in its nascent stages and remains largely untested. Finally, the Working Group concluded that prior to the commencement of any global stablecoin project, a host of risks and issues associated with stablecoins like legal, regulatory, oversight, operational and public policy must be addressed.

On 05 December 2019, referring to the G7 report of October 2019, the Council of the EU and the European Commission published a joint statement on stablecoins acknowledging that technological innovation can produce great economic benefits for the financial sector, promoting competition and financial inclusion, broadening consumer choice, increasing efficiency and delivering cost savings for financial institutions and the economy at large, however that it was to be ensured that no global “stablecoin” arrangement should begin operation in the European Union until the legal, regulatory and oversight challenges and risks have been adequately identified and addressed.

In the backdrop of the above, in October 2019, Libra saw crucial partners like Mastercard, Visa, eBay, Paypal, Stripe and Mercado back out. Most recently, in January 2020, Vodafone, decided to step out of the currency project. The list of 29 partners in the Libra Network has been reduced to 21 in under a year.

Whilst many countries like China, Russia, and EU, amongst others are exploring Central Bank Digital Currency (CBDC), the private actors are determined to make stablecoins a success. However, in order to reap the benefits of stablecoins, close international cooperation is a necessity, especially in the realm of data protection and privacy. It has been recommended by the G7 Working Group that that public sector authorities should engage with these groups by defining their regulatory expectations with global stablecoins arrangements. Moreover, the relevant stakeholders and international organizations should jointly develop roadmaps in an effort to improve the inclusiveness and efficiency of payment systems and financial services.

I argued in a conference paper (available here) that if a provider of stablecoin can demonstrate the successful fulfilment of the expectations through the roadmaps decided upon by  joint efforts by relevant stakeholders, the regulators all over the world may be willing to consider stablecoins as a form of payments.

I am currently evaluating the recent developments around (i) stablecoins with specific reference to Libra; and (ii) CBDC and how the central banks are working towards making them a success. Your feedback on this post is welcome and will provide me insights on how to further develop my current and future work on this.

(Tripti Dhar is a partner at Reina Legal LLP and heads their data protection & privacy practice for India and the Middle East.)

Creditor cooperation duties proposed – India should take a look

In a recent post Professors Horst Eidenmüller and Kristin van Zwieten propose that “creditor cooperation duties” should be developed to stabilise corporate workouts. At a minimum, they say that the duty would require various creditors to negotiate in good faith. Such duties would kick in only after a workout process has been initiated and to the extent that they were necessary to stabilize a workout.

They give many reasons for the need for such duties but I will focus on one reason here:

…we cannot rely on the threat to force a formal bankruptcy process such as Chapter 11 to discipline holdouts, because this threat is not credible in every jurisdiction. Bankruptcy courts are or will be overwhelmed by failing firms.  Even more important, the bankruptcy costs for firms that may fail because of the pandemic are very high (the overwhelming majority of these firms will just have a cash flow problem).

Well, in India, because of  filings under the IBC being suspended, there is no threat of filing at all. So the proposal for creditor cooperation duties is even more relevant.

 

 

TRYING TO MAKE BAD DECISIONS WORK

India’s move to suspend filings under the IBC is mistaken. However, the government seems to have gone ahead and approved an amendment to suspend filings under the IBC (by introducing s 10A into the IBC). As Mr. Shardul Shroff has rightly said in a well-reasoned op-ed, “there has been no dialogue with industry or with financial creditors of these severe consequences when Section 10A is introduced and becomes law”. This is indeed true and it is unfortunate that the government has not attempted to take stakeholder opinion or even international best practice on board at such a crucial time.

Suspending IBC filings will leave companies and creditors in limbo and while in this state, a number of concerns emerge. Mr. Shroff has outlined some of the key issues that need to be addressed now. While I disagree with his general concern about the merits of a debtor-in-possession model, he has raised some very important points. Like him, I think that we need to have some rules around directors’ duties in the zone of insolvency.

In an article written prior to the COVID-19 crisis and the suspension of IBC filings, I had proposed a modified Revlon duty which would require directors who have entered the zone of insolvency and are actively seeking bids, to either sell to the highest bidder or initiate the resolution process under the IBC. This proposal aimed to prevent promoters seeking to retain control and reject bids merely because they were conditioned on the promoter ceding control. (Jet Airways is a prominent example of a company that could have benefited from such a duty.)

Now that IBC filings have been suspended, new rules should be devised for directors in control of companies that are insolvent or in the zone of insolvency. As Mr. Shroff notes, when a company is insolvent or near insolvent, the directors’ duties shift from shareholders to creditors. Mr. Shroff has rightly suggested that “a new ‘Code of Corporate Governance’ and ‘Duties of Directors’ during the period of applicability of Section 10A (proposed) for discharging the obligations towards creditors should be urgently introduced…”. Here, I will discuss some principles to be borne in mind while such a code or set of duties is proposed.

Once a company is in the zone of insolvency or insolvent, the directors will have two choices. The last choice is to liquidate the company. The more preferable option for a viable company is to attempt to restructure by negotiating with creditors. However, this would only be possible if there is a moratorium on all actions against a company and so as a first step, the government will have to allow companies to activate the moratorium despite IBC filings being suspended. The next step is for directors to call a meeting of the creditors and attempt to restructure. All parties may be able to agree upon appointing an insolvency professional to help with restructuring. These professionals have gained expertise since the introduction of the IBC and it would be unwise not to utilise their skills.

While these restructuring efforts are being undertaken, the directors should act primarily in the interest of creditors. Professor Amir Licht has proposed in a recent post on the Oxford Business Law Blog that at the point when the duty to creditors is triggered the directors’ duty of care changes.

Specifically, directors should change the strategic management of the company from implementing an entrepreneurial strategy to implementing a custodial strategy that focuses on protecting the company’s assets with a view to returning it to a profit-oriented, entrepreneurial strategy when practical.

He goes on to explain that the custodial strategy required of directors at this point is similar to what is required from trustees which is to preserve the trust fund.

Prof Licht’s formulation is partially suited to the Indian context where there is no possibility of entering the resolution process. As I had argued in a post responding to Prof Licht’s proposal, directors should also be incentivised to restructure and rescue the company. Thus, while good faith efforts at restructuring should be allowed, directors should also have a duty to preserve the property of the company.

These principles should inform the rules formulated to provide guidance on directors’ duties in the zone of insolvency.

Finally, the government should allow the pre-negotiated agreement to be taken to the NCLT for approval so that the agreement is not open to being challenged in court.

By proposing these principles to inform directors’ duties during insolvency and to facilitate restructuring, I am simply tying to make a bad decision work. It would of course be a better course of action for the government to simply abandon the proposal to suspend filings under the IBC.

 

An acknowledgment that the ‘New Normal’ needs something new

By Sreekar Aechuri*

Shareholder primacy as an approach has been one of the long standing principles of Corporate Governance. Dr. Kamalnath argued here and here that shareholder primacy as a guiding principle to put forth ‘company interests’ should be preferred over stakeholderism especially when the world is in the midst of a pandemic. She also talks about companies such as Uber, Google and Zoom stepping up to the needs of customers, employees and other stakeholders in this uncertain time as instances of the ‘Enlightened Shareholder Value’ (ESV). It is important to appreciate the distinction that Dr. Kamalnath draws in the above posts – instead of shareholder primacy as the approach, she vouches for shareholder primacy to be a guiding principle for attaining the ‘best interests of the company’ à eventually leading to an ‘enlightened shareholder value’.

This post intends to critically examine some of these arguments and highlight the concerns with this approach especially in the present times: “new normal”. There are four important concerns with this approach –

Firstly, ESV suffers from the same functional concern that stakeholderism suffers from i.e. the dilemma of uncertainty and vagueness of ‘best interests of the company’ guided by shareholder primacy. This leaves discretion with directors due to its vagueness and uncertainty as to their decisions which can be rationalized as guided by shareholder primacy (especially in the midst of a pandemic). This concern is similar to the assertion of the realist school of thought that judicial pronouncements are often influenced by prejudices, notions and beliefs of judges which are later rationalized in the garb of laws (instead of the other way around).

Secondly, the structural concern that there is no assurance/convention that the directors of a company continue to guide their decisions by ESV after a period of time (assuming that they even adopt this approach at a particular point of time). If mandated/regulated, then it effectively pans out as stakeholderism because these two approaches only differ in their form (not practice).

Thirdly, blurring of the distinction between different stakeholders whose interests may be considered as ‘company interests’. The advent of digital technology has greatly shifted market interests and operations. Eight of the ten most valuable brands in the world operate largely on digital platforms. These shifts also changed the traditional conceptions of corporate operations mainly with the ‘free labour phenomenon’ i.e. contributions of customers/users of digital companies (without any monetary considerations) mainly by providing personal data and monitoring online activity. The fact that the labour of these customers in one country contribute to profits of the companies in another country can also expand the scope of ‘company interests’ without any guiding framework to proceed, for making decisions by directors.

Finally, the humungous control, influence and resources of big corporations and their ability to influence public considerations especially from the last three decades (due to advent of capitalist economic policies across the world) must derive correlative public responsibility on these corporations. In 2019, 26 people (incidentally but not surprisingly, all shareholders in big corporations) owned as much as the poorest 50% of the world’s population. (This article examined 25 companies which had more revenues than many countries of the world.) This context is to understand the potential that big companies have influence over public policies, debates, opinions and considerations among other important spheres of human life.

In this new socio-political context (a collation of the above four concerns), we cannot simply suggest anymore that legal sanctions should be enough to contain the concerns because in addition to their structural constraints, there are implementation issues as well. We cannot anymore accept Prof. Gordon’s argument that problems of stakeholders is government’s responsibility and Dr. Kamalnath’s argument that requiring public duties would mean passing the buck to corporations. When big corporations operate (and profit) on performing important functions (many a times ‘public’), they should not be allowed to escape from correlative responsibilities that tag along with these functions. With this much public power, there cannot not be correlative public responsibility.

What must be understood is that in this new normal, principles of ‘shareholder primacy’ and ‘enhanced shareholder value’ in their current form cannot be continued to operate any longer. These conclusions cannot be mistaken with author suggesting that directors guide their decisions through stakeholderism. What approach/changes ought to be adopted in the new normal is another debate altogether but what cannot be escaped any longer is an acknowledgement that big corporations owe some duty/responsibility/obligation to persons beyond their shareholders.

 

* The author is currently pursuing a bachelor’s degree in law at National Academy of Legal Studies and Research, India. He would like to thank and express his sincere gratitude to Dr. Akshaya Kamalnath for her continuing insights, guidance and support which made this post possible.