International Business Law Advisor : Miami International Business Lawyer & Attorney : Santiago Cueto Law Firm : Florida and Global Business Litigation

Over at the Harvard Law School Forum on Corporate Governance, there’s an insightful article on the results of a research project that examined whether and how corporate and securities law in more than 40 jurisdictions around the world currently fosters corporate respect for human rights.

 It is believed to be the first in-depth, comparative study of the links between human rights and corporate and securities law.

Among the conclusions reached by the study:

• Current corporate and securities law does recognize human rights to a limited extent. Put simply, where human rights impacts may harm companies’ short or long term interests if they are not adequately identified, managed and reported, companies and their officers may risk non-compliance with a variety of rules promoting corporate governance, risk management and market safeguards. Even where the company itself is not at risk, several states recognize through their corporate and securities laws that responsible corporate practice should not entail negative social or environmental consequences, including for human rights. 

• At the same time, there is a lack of clarity in corporate and securities law regarding not only what companies or their officers are required to do regarding human rights, but in some cases even what they are permitted to do. Moreover, there appears to be only limited (to non-existent) coordination between corporate regulators and government agencies tasked with implementing human rights obligations. As a result, companies and their officers appear to get little if any official guidance on how best to oversee

In the wake several huge stories this summer involving corporate malfeasance such as the BP Oil Spill and the Foxconn labor-suicides, it’s about time that a study like this gets underway. The intersection between business and human rights requires corporations to strike a delegate balance. This study is a step in the right direction.

What do you think?

     -Santiago

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 James Bond , Jason Bourne and other international icons of intrigue may soon need to look elsewhere to keep their secret bank accounts. A Swiss parliamentary committee recommended yesterday that the full Parliament back an agreement with the United States to hand over the bank details of UBS’ 4,450 American clients in spite of Switzerland’s long-standing bank secrecy laws.

The Parliament will vote later this month on whether to permit Switzerland to make the disclosure. The vote would effectively end Switzerland’s storied history as a secret money haven.

Although the Swiss government agreed in August 2009 to share some details of secret Swiss accounts to end a dispute, a Swiss court ruling in January blocked that accord. Support for the deal in the Swiss Parliament would avert the risk of new tax litigation against UBS.

The Swiss are well aware of the high stakes in the UBS case. Failure to back the settlement would probably reopen the U.S. government’s lawsuit against UBS. Ultimately, the bank’s license in the United States could be revoked.

The UBS tax controversy was part of a scathing report issued by the Swiss Parliament into the Swiss government’s handling of the credit crisis. The report is an interesting read and embedded in its entirety below (Scroll down to page 10 to skip to the UBS tax controversy):

Swiss Parliament Report on UBS

Does all this spell the end of Swiss banking? Hardly. Despite the recent changes, the Swiss banking sector will remain one of the world’s premiere financial centers due to its skilled pool of managers, currency stability and low taxes. In a new age of transparency, Switzerland is sure to thrive (not so much with the secret agent crowd).

  -Santiago

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 As an international business attorney, I read my fair share of annual reports-- both domestic and foreign. While the amount of information disclosed in the reports varies widely depending on the industry and country, most reports fall on the far left of the transparency continuum i.e. on the fringe of what the law requires.  

There is no better illustration of the sharp contrast that exists among annual report disclosures than the distinct approaches taken by Goldman Sachs, the beleaguered Wall Street firm and Swiss pharmaceutical giant Novartis AG.  

Goldman Sachs Annual Report.

In the opening salvo of its annual report, Goldman is downright indignant and asserts that its only role in the financial markets has been positive.

To deflect attention away from Wall Street matters, Goldman went to great lengths to say that it spent the year acting in the interests of its clients and that these actions were the driving force behind its business.

That fails to address the huge sums of money that Goldman made in proprietary trading that did nothing to benefit clients, but enriched Goldman's shareholders and employees. The investment bank pressed the case that it paid workers only for their performances and nothing more.

Goldman Sachs Annual Report 2009

Did you catch it? There, on page 39, is Goldman’s disclosure in all its vague, generalized and broad-brush glory:

Substantial legal liability or a significant regulatory action against us, or adverse publicity, governmental scrutiny or legal and enforcement proceedings regardless of the ultimate outcome, could have material adverse financial effects, cause significant reputational harm to us or adversely impact the morale and performance of our employees, which in turn could seriously harm our businesses and results of operations. We face significant legal risks in our businesses, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. Our experiencehas been that legal claims by customers and clients increasein a market downturn and that employment-related claims increase in periods when we have reduced the total number of employees

Specific references to open Investigations, lawsuits, administrative actions? Move along. Nothing to see here.

Novartis AG's Annual Report.

Contrast Goldman Sachs'  smoke-and-mirrors approach, with the refreshingly transparent direction taken by  Novartis’ 2009 Annual Report.  Milton Moskowitz of Strategy + Business published a fascinating article extolling the virtues of Swiss-style annual reporting as seen through the lens of Novartis' Report.

As Moskowitz noted, the transparent nature of the Novartis report “sets a new standard for delivery of information in clear, nuanced, and felicitous prose. “ The Report, published in English, French, and German, is adorned with 33 striking black-and-white photographs shot by famed photographer Steve McCurry.

Novartis Annual Report 2009

While that baby picture makes for a great cover photo , the hallmark of the Novartis Report is its commitment to transparency, which extends to some embarrassing information. For example, in 2009 Novartis received 913 reports of misconduct, up from the 884 reported in 2008. Of these reports, 240 were substantiated; 155 employees were fired for misconduct. 

In addition, Sandoz, the generics division of Novartis, was faulted in 2008 by the Food and Drug Administration for improper practices at its plant in Wilson, N.C., resulting in a halt in new product approvals from that site.

Although this isn’t the kind of information an investor would like to read in an annual report, it makes for good decision making. Investors appreciate that.

Novartis' commitment to openness and transparency benefits shareholders, securities analysts, and the general public by presenting a warts-and-all picture of the workings of the company.  It reinforces the integrity of the markets and sets a high bar for others to follow.  

Goldman Sach's Annual Report, on the other hand? All smoke and mirrors.

     -Santiago

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The World Bank Group's Doing Business Project recently released the 2010 edition of its Paying Taxes Report. The report is unique in that it measures the ease of paying taxes across 183 economies, by assessing the time required for companies to prepare and file tax returns and pay taxes, and also the company’s total tax liability as a percentage of commercial profits.

The report measures three separate aspects of paying taxes. Two of these relate to the tax compliance burden and one to the cost of the tax burden.

Take a look at the report below:

Paying Taxes 2010 Global Report (via World Bank)

According to the report, more economies reformed their tax regimes than in any previous year of the study. A few economies such as Russia and Korea reduced corporate income tax rates or accelerated previously planned reform programs as part of economic stimulus packages.

In several economies small and medium sized businesses benefitted from other crisis response measures. Australia, for example, sought to encourage investments in assets by increasing capital allowance Twelve other economies introduced similar measures, including the Czech Republic Korea and Lebanon. Five economies reduced property tax rates: Denmark, the Netherlands, Niger, Portugal and Singapore.

Because there's a lot to digest, here's a quick snapshot of some of the Report's more interesting facts:

• The five easiest countries in which to pay corporate taxes are Maldives, Qatar, Hong Kong, UAE and Singapore:
• The top reformer was Timor-Leste, which introduced a new tax law, streamlined the business tax regime, and simplified tax administration.
• Between June 2008 and May 2009, 45 economies made it easier to pay taxes as measured by Doing Business, almost 25% more than in the previous year.
• Eastern Europe and Central Asia had the most reforms for the third year in a row, with 10 economies reforming.
• Around the world on average, the case study company faces a total tax rate (percentage of profit paid out in taxes) of 48.3% and spends 286 hours a year, and makes 31 tax payments, to comply with tax laws.
• The time to comply with tax requirements ranges from 212 hours a year on average in OECD high-income economies to 638 in Latin America.
• The number of payments also varies widely. The company makes the most payments in Eastern Europe and Central Asia, 53 a year on average. It makes the fewest in OECD high-income economies, just 14 on average.
• Survey respondents identified the way tax audits are dealt with and the approach of the tax authorities as the elements of the tax system most in need of improvement.
• Five European Union economies implemented tax reforms in 2008/09: Belgium, the Czech Republic, Finland, Poland, and Spain.
• In the EU the average total tax rate for the case study company fell from 46% to 44.5%. This reflects in part cuts in the corporate income tax rate implemented in 2007/08 in Germany and Italy.
• The average time required to comply with taxes in the EU is 232 hours, down from the previous year’s 257, with labor taxes requiring the most time (117 hours). The fall reflects continued efforts in implementing and enhancing electronic filing and payment systems and in streamlining regulations and improving tax returns to simplify compliance.
• While VAT stems from a common legal framework in the EU, the time required to comply with domestic legislation varies. VAT compliance takes 30 hours in Ireland, for example, and 178 in the Czech Republic.
• The number of taxes levied on the company averages 9.5 globally. The average for the EU is almost 11.

    -Santiago

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Swiss Parliament Must Still Approve Amended Protocol

The CBS news magazine 60 Minutes featured a story on January 3, 2010 concerning the tax controversy between Switzerland and the United States over Switzerland's secretive banking industry. At the time, it appeared there would be no end in sight to the impasse.

60 Minutes: A Crack in the Swiss Vault

Yesterday, however, the United States and Switzerland signed a landmark agreement to allow the Swiss government to provide information to the IRS on U.S. account holders of Swiss bank UBS. The agreement reached in Washington D.C. amends the income tax treaty between the two countries.

Watershed Moment for Swiss Banking

The agreement marks a watershed moment in the history of Swiss banking and its secrecy laws, which make the disclosure of client names a crime under Swiss law. With the Swiss government now on board, only Parliament’s approval is necessary to proceed with the disclosure.

In August 2009, the U.S. and Switzerland reached an agreement, under which the Swiss government was to hand over to the IRS for investigation information on approximately 4,450 UBS account holders.

In January, a ruling by the Swiss Federal Administrative Court threatened to torpedo the US-Swiss agreement. The court found shortcomings in the deal which the amended protocol now addresses.

Status as Bilateral Tax Treaty

The new protocol to the U.S.-Switzerland treaty establishes the necessary legal basis to allow the Swiss government to fulfill its obligations under the August 2009 agreement to provide information on UBS account holders to the IRS.

The protocol is designed to ensure the legality of the information release by raising the August 2009 agreement to the level of a bilateral tax treaty. According to the Swiss government, “the UBS Agreement now takes precedence over the older and more general convention, and permits Switzerland to provide treaty assistance in cases not only of tax fraud, but also of continued and serious tax evasion.”

However, the August 2009 agreement, having been raised to the level of a treaty, now must be ratified by the Swiss parliament. The Swiss government will not hand over any names until that ratification occurs, except in cases of persons who consent to the transfer or who have reported themselves to the IRS under last year’s voluntary disclosure program.  A non-conformed copy of the new protocol is below:

Amended Protocol Between the U.S. and Switzerland Amending August 2009 Agreement

Agreement Marks a Shift in Swiss Tax Law

Swiss law considers tax evasion — which it defines as the underreporting of income or filing incorrect returns — as a civil violation, different from tax fraud, which it views as a serious crime involving ill-gotten gains and the use of elaborate sham entities to hide assets. The I.R.S. views both tax evasion and tax fraud as criminal offenses.

The new protocol is significant because it shows that the Swiss government now effectively agrees with the American view that tax fraud and tax evasion are similar criminal offenses.

Switzerland to Remain International Banking Capital

Despite the changes, there are a number of reasons that Switzerland will continue to serve as a safe banking haven.  Apart from the controversy over its secrecy laws, Switzerland still has its advantages in safeguarding funds against such uncertainties as coup de main, coup d’etat, revolution and hyperinflation.

Moreover, a host of multinational corporations have recently moved their European headquarters to the Swiss power centers of Zurich, Geneva and Zug because of the rock-bottom tax rates these Cantons offer. I wrote about these tax advantages in an earlier post-- Why Relocating to Switzerland May be the Best Corporate Strategy

The current surge in the Swiss franc further serves to highlight Switzerland's appeal to international banking.  And the skiing is not too bad either.  

Swiss banking is here to stay. What do you think?

    -Santiago 

*This post follows-up on two previous articles I have writton the UBS tax controversy,  UBS Strikes Deal in U.S. Tax Case: The End of Switzerland's Bank Secrecy Rules a Boon to Singapore Banking? and Swiss Banks Shutting Out U.S. Clients Due to Unprecedented Banking Oversight.

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In a trend that could spread to other jurisdictions, Liechtenstein is asking wealthy UK investors who have assets hidden abroad to take advantage of its “unique and attractive” amnesty program.

The agreement reached between the UK and Liechtenstein combines generous terms with a promise by the principality to close the accounts of customers who could not prove they were tax-compliant. The disclosure facility offers minimal penalties, a guarantee of no prosecution in non-criminal cases and an exemption from the threat of “naming and shaming”.

You can read about the program in the Financial Times article Liechtenstein woos investors with tax amnesty.

While I think the deal comes close to striking a balance between banking confidentiality and tax transparency, it comes at the expense of rewarding the users of the most secretive jurisdictions.

Trend to Watch: Look for Similar Deals to Be Forged with Monaco, Singapore, Hong Kong and Gibraltar

      -Santiago

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Its incredible how every business discussion these days centers on China.  While the U.S. and Europe struggle to get things moving, China continues to dominate the world's leading economic indicators.  GNP. check. GDP. check. FDI. check.

As more U.S. companies shift production to China, competitive forces have upped the ante for businesses to deliver the best price points. Because of the hyper-competitive nature of Chinese sourced products, some companies either unwittingly or by choice engage in some questionable business maneuvering to gain even the slightest of price advantages.

Now more than ever U.S. enforcement agencies are  keeping a vigilant eye on these suspicious business practices. Fun fact: The Department of Justice and Securities and Exchange Commission set a record in 2009 by bringing more FCPA prosecutions than in any prior year in the FCPA’s history. It looks like 2010 is going to be even busier for these folks.

A short but thorough overview of the FCPA as applied to China was recently published in BusinessForum China. The article is a good read for anyone with business activities in China. One point discussed in the article concerns the application of vicarious liability. This is where most U.S. companies run into trouble with the FCPA, so its important to consider the implications carefully: 

U.S. authorities regularly apply vicarious liability theories to hold parents liable for the misconduct of their subsidiaries and agents. Not surprisingly, MNCs subject to the FCPA often unwittingly incur FCPA liability through the misconduct of their Chinese subsidiariesand agents, without ever operating in China themselves. Although non-US subsidiaries, including Chinese subsidiaries,are usually not directly subject to the FCPA, if the parent is a US corporation or issues US securities, and authorised the subsidiary’s illegal acts, the parent may incur liability. In one notable example, a US corporation agreed to pay a total of USD 22 million in FCPA penalties for, among other things, allegedly using its subsidiary to process payments to agents and Chinese officials associated with SOEs.

According to US authorities, even if the parent corporation does not explicitly authorise the illegal acts by the subsidiary, the parent may nonetheless incur liability if it was aware of and failed to stop the illegal acts (which may constitute implicit authorisation); if it acted with “wilful blindness” (being aware of a high probability that a bribe will be paid and taking steps to avoid learning that fact); or if it discovered the illegal acts after the fact and then accepted monetary benefits arising from such acts. Nor can the parent escape liability simply because it is a minority shareholder in a Sino-Foreign joint venture. If the parent corporation cannot control the actions of the joint venture, it is still obligated to object to illegal acts, take reasonable actions to prevent the joint venture from continuing future criminal activity, and refuse benefits arising from the same.

Because vicarious liability is the easiest way for a U.S. company to unwittingly trigger an FCPA investigation, it's critical to keep track of what's going on in the supply chains, particularly when one or more subs or agents are involved.

The way companies have handled this varies. Some use auditors in the host country and others send reps to oversee the whole thing. 

How does your company handle this?

Trend to Watch: Look for 2010 to Be Another Record Year for FCPA  Enforcement Actions.

   -Santiago

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And Why Relocating to Switzerland May be the Best Corporate Strategy

There’s nothing more annoying than finding hidden fees buried deep inside obtuse and mangled contract language. The only thing worse than finding hidden fees is learning about these punishing provisions from someone else—after you’ve signed the agreement. 

If you thought hidden fees provisions were the exclusive craft of credit card and cable companies, I’ve got bad news. The biggest offender just might be the drafters of the proposed federal budget making its way through Congress.

International Tax Increase Buried in Proposed Bill

Thanks to the keen eyes of the Wall Street Journal’s Matthew Slaughter, U.S. based Multinationals have a chance to lobby against what may be the largest hidden fee--an obscure tax provision--ever levied against them. Matthew writes in the article “How to Destroy American Jobs:”

Deep in the president's budget released Monday—in Table S-8 on page 161—appear a set of proposals headed "Reform U.S. International Tax System." If these proposals are enacted, U.S.-based multinational firms will face $122.2 billion in tax increases over the next decade. This is a natural follow-up to President Obama's sweeping plan announced last May entitled "Leveling the Playing Field: Curbing Tax Havens and Removing Tax Incentives for Shifting Jobs Overseas."

A proposed $122 Billion international tax burden? Placed on pg. 161? On a chart? Apart from the obvious lesson to carefully scrutinize the details of everything, and I do mean e.v.e.r.y.t.h.i.n.g., that comes across your desk, the substantive point of the article is absolutely correct—the proposed tax hike on U.S. based MNCs will bankrupt those that earn a significant amount of their revenue overseas.

Proposed Tax Will Force US-based MNCs to Relocate Overseas

As one commenter noted, it is the fiduciary responsibility of the board of a company to protect the investors in that company, and to provide them with the maximum safe return on their investment. In the new tax and regulatory environment the U.S. is in the process of imposing, any company that earns a large percentage of their revenues outside of the US simply cannot remain U.S. based.

Under the proposed tax hike on U.S. based MNCs, what incentive is there for Coca-Cola to remain a US based multinational? Why not move the corporation to Switzerland, where the favorable corporate tax structure has long been lured the operations of large MNCs such as Johnson & Johnson and Burger King Holdings Inc.

Switzerland Offers Optimal Tax Environment for MNCs

The timing could not be better for companies looking to relocate their operations overseas-- and to Switzerland in particular.  The Wall Street Journal recently reported on an emerging trend among Swiss cantons to compete for the business of MNCs by lowering their corporate tax rates. In the article Switzerland’s States Compete on Tax Cuts, the cantons of Zug, Schaffhausen (just north of Zurich) and Lucerne have all cut their tax rates in a heated battle to lure more MNCs.

For U.S.-based MNC’s looking to dodge the proposed international tax bullet, Switzerland provides the most favorable corporate tax environment in which to relocate U.S. based operations.

Conclusion

According to KPMG’s Corporate and Indirect Tax Survey 2009, the current effective U.S. Corporate tax rate is 40%, while in Switzerland the effective tax rate is 21.2%--and considerably less in some cantons. Under the proposed bill, the tax gulf will only grow wider.

It will be interesting to see what happens with the proposed tax. Until then, MNCs should take a look at Switzerland.

Trend to Watch: If the Proposed International Tax is Enacted Look for an Exodus of U.S.-based MNCs to Switzerland and to Other Favorable Tax Climates.

       --Santiago

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SEC Wants to Know: Is Your Carbon Footprint a "Material Risk" to International Climate Change Agreements?

Climate Change is a red hot area right now and is a top priority of discussion this week at the World Economic Forum in Davos, Switzerland.

It seems that everyone is throwing their hat into the ring in one way or another.  Now the Securities and Exchange Commission has, rather surprisingly, entered the climate change picture.

 In an unprecedented move, the SEC issued a directive that companies should warn investors of global-warming risks.The SEC directive is the first economy-wide climate risk disclosure advisory in the world.

This change of face marks a complete turnaround for the commission, whose former Chairman Christopher Cox refused to address investor concerns regarding climate risk disclosure. Under the stewardship of SEC's current chairwoman, Mary Schapiro, the commission has made climate change a high priority. For international business this is a big deal.

The SEC issued a press released entitled “SEC Issues Interpretive Guidance on Disclosure Related to Business or Legal Developments Regarding Climate Change” that lays out some of these potential impacts and what it means for disclosure.  Among the areas highlighted by the SEC release:

Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.

Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.

Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

The SEC’s involvement in climate change regulation drives the federal government deeper into the climate debate, potentially reshaping management decisions at companies across the country and the world.  

What do I think? I think it’s about time that international environmental issues are put on the national agenda.  This is also good for investors. This paves the way for the development of a consistent standard for companies to report climate risk that will help all investors make better-informed decisions.

Trend to Watch: Look for Securities Regulators in Other Nations to Issue  their Own Climate Change Directives in the Very Near Future

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Corporate Codes of Conduct Played a Major Role in the Collapse of Apartheid in South Africa and Are a Viable Means to End Digital Censorship in China.

The remarks of U.S. Secretary of State Hillary Clinton yesterday that “we stand for a single Internet where all of humanity has equal access to knowledge and ideas” echoed the stern tone of Ronald Reagan twenty years ago when he challenged Soviet leader Mikhail Gorbachev: "Mr. Gorbachev, tear down this wall!" 

Fast forward to 2010 where digital walls have replaced brick and mortar to divide repressed citizens of authoritarian regimes from the world’s free flowing current of information and ideas.

Corporate Codes of Conduct a Viable Means to Challenge Digital Censorship in China

Secretary Clinton’s remarks concerning the” information curtain” dividing the world, reminded me of the apartheid era where much greater injustice and unspeakable acts against humanity were challenged and ultimately overcome through the use of corporate codes of conduct.

These corporate codes of conduct, which came to be known as the Sullivan Principles, were pioneered by the African-American preacher Rev. Leon Sullivan, a zealous promoter of corporate social responsibility.

 In 1977 Rev. Sullivan was a member of the board of General Motors. At the time, General Motors was one of the largest corporations in the United States. General Motors also happened to be the largest employer of blacks in South Africa, a country which was pursuing a harsh program of state-sanctioned racial segregation and discrimination targeted primarily at the country's indigenous black population

Corporate Codes of Conduct Originally Developed to Challenge Apartheid

Rev. Sullivan developed the codes to apply economic pressure on South Africa in protest of its system of apartheid. Before the end of South Africa's apartheid era, the principles were formally adopted by more than 125 U.S. corporations that had operations in South Africa. Of those companies that formally adopted the principles, at least 100 completely withdrew their existing operations from South Africa. The principles eventually gained wide adoption among United States-based corporations and played a significant role in the collapse of that regime.

In reflecting on the success of his anti-Apartheid efforts, Rev. Sullivan recalled:

Starting with the work place, I tightened the screws step by step and raised the bar step by step. Eventually I got to the point where I said that companies must practice corporate civil disobedience against the laws and I threatened South Africa and said in two years Mandela must be freed, apartheid must end, and blacks must vote or else I'll bring every American company I can out of South Africa.”

Given the success of the Sullivan principles in ending apartheid, we should look at applying the same principles to lift the information curtain in China.

Why Multinationals Should Adopt Corporate Codes of Conduct

Google, to its credit has pioneered this movement, albeit not under the auspices of any articulated corporate code of conduct as far as I know. Google's defiance of China's censorship mandate illustrates the power of corporate social responsibility initiatives to influence and reshape the repressive policies of authoritarian regimes.

While most major multinational companies consider a presence in China critical to their future success, Google has demonstrated that even the largest of corporations are willing to forgo short term gain in the interest of an ultimate triumph over censorship--similar to how corporations sacrificed profits to challenge apartheid in the 1970s and 1980s.

In Google's case this will come at a cost of an estimated $300 million a year in revenue. Although it will hardly make a dent in Google’s coffers, it’s a step forward in the right direction. Sure, China can thumb its nose at Google and Yahoo by pointing to Baidu and Alibaba.

But it risks the alienation of countless other multinationals who could conceivably adopt corporate codes of conduct and refuse to do business with China until the Great Firewall is torn down.

Conclusion

While the preferred course of action of companies concerned about censorship is to avoid repressive regimes altogether, it is likely that some companies will not choose that course. Those that do not should consider a corporate code of conduct so that they can turn their involvement in oppressive systems from a potential human rights liability to a neutral or maybe even positive act of engagement.

The challenge now will be to put these ideas practice by incorporating them into diplomacy and trade policy to apply meaningful pressure on companies to act responsibly through the adoption of corporate codes of conduct.

What do you think?

       -Santiago

 P.S.   A little about my interest in this area: I’ve been an advocate for corporate codes of conduct for well over a decade and authored an extensive note on the topic for the Florida Journal of International Law to address industrial oil pollution in Latin America:  Oil's Not Well In Latin America: Curing The Shortcomings Of The Current International Environmental Law Regime In Dealing With Industrial Oil Pollution In Latin America Through Codes Of Conduct  Viewed as a cutting edge proposition, the article has since been cited by numerous textbooks and academic journals including West’s Environmental Law treatise, the New York University Journal of International Law and the Georgetown University Journal of International Environmental Law.   

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A must read study examining corporate governance issue in closely-held corporations was recently published by the Harvard Law School Forum on Corporate Governance and Financial Regulation.

Closely-held Corporations Integral part of Global Economy

The study is important to business owners and shareholders all over the world given the integral role closely-held corporations play in the global economy. Indeed, the vast majority of firms in the U.S. are closely-held corporations and are a significant part of the business landscape in other countries, e.g.  private corporation in Britain, the close corporation in Japan, the GmbH firm in Germany, and the SARL firm in France

Study Examined Benefit of Having Multiple Large Shareholders

The study, Governance Problems in Closely-held Corporations, examined the benefits of shared corporate ownership by using a large cross-sectional dataset of operating and financing patterns of closely-held corporations.  

The main problem in closely held corporations, according to the study, is the squeeze out of minority shareholders by the majority shareholders.

 The study found that performance is higher for private firms with a diluted ownership structure resulting in substantially higher net income relative to firms with one controlling shareholder and other minority shareholders.

The findings validates and bolsters the prevailing view that multiple large shareholders play an important role in mitigating expropriation and governance problems.

Failure to Take Advantage of Other Protections is a Big Mistake

There was one part of the study that I found particularly interesting. Although legislatures in the U.S. (and other countries) provide basic protection for minority investors in the form of boilerplate shareholder agreements that firms can choose by electing close corporation status, only around five percent of corporations elect to be covered under close corporation statutes, even though around ninety percent of the corporations in the U.S. are eligible.  While data for other countries is not available, it would be interesting to see if the pattern is similar.

I think it is a big mistake for shareholders in closely-held corporation to overlook the protections afforded by the laws of their state or province. One of the main advantages of electing close corporation status is that it provides minority shareholders with a comprehensive checklist of agreements, which they can subsequently adjust for their specific situations. This affords some semblance of control in deciding the scope of the relationship relative to the other shareholders.

The Take Away Lesson:

1. Consider structuring your closely-held corporation with multiple large shareholders. This will not only minimize corporate governance issues but may play a significant role in increasing net income as a result of the focus placed on the monitoring of performance indicators.
2. Take advantage of the laws and regulations afforded by the laws of your state or province to minimize corporate governance issues. These laws serve as important guideposts in determing the scope of your relationship relative to the other shareholders. 

What do you think?

     -Santiago

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The Wall Street Journal and the Heritage Foundation released its annual 2010 Index of Economic Freedom.   Of the world's 20 largest economies, Hong Kong ranked first while the U.S. came in at number eight.  

According to the Wall Street Journal article, The U.S. is Not as Free as It Used to Be,  a number of factors contributed to the United States’ ranking lower than in previous years. The federal government's heavy-handed intervention in the financial and economic crises of the last two years was cited as the main factor.

There is another factor not mentioned in the article that I believe contributed to the US’ lower ranking--the lack of confidence in our nation’s dispute resolution regime.

Businesses are unwilling to wade into a pool of uncertainty to either prosecute or defend valid claims given the exorbitant cost of litigation. While inroads were made in the past decade towards the arbitration of business disputes, the trend has reversed itself under mounting pressure from special interest groups.

While I have no empirical proof, I have a feeling that the top 7 nations have made great strides in their dispute resolution regimes. It's no surprise Hong Kong is number one given its focus on arbitration, which I wrote about in an earlier post.

Check out the rankings below--what do you think? 

   -Santiago

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They say timing is everything. Following on the heels of my last post about the Foreign Corrupt Practices Act, comes Transparency International's hot-off-the-presses 2009 Corruption Perception Index  The Index focuses on corruption in the public sector and uses surveys to establish how much corruption is perceived to exist within the country. This year's worst included Afghanistan, Iraq, Sudan, Myanmar and Venezuela.

You can find the full rankings index here.

Huguette Labelle, Chair of Transparency International, made the following remarks on why the index is so important in identifying and stemming corruption:

At a time when massive stimulus packages, fast-track disbursements of public funds and attempts to secure peace are being implemented around the world, it is essential to identify where corruption blocks good governance and accountability, in order to break its corrosive cycle…

Stemming corruption requires strong oversight by parliaments, a well performing judiciary, independent and properly resourced audit and anti-corruption agencies, vigorous law enforcement, transparency in public budgets, revenue and aid flows, as well as space for independent media and a vibrant civil society… At the same time, companies must cease operating in renegade financial centres.

You can read more of his poignant remarks on Transparency.org in the article Corruption Threatens Global Economic Recovery, Greatly Challenges Countries in Conflict.
 

What do you think about the United States' ranking?

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 Last month, I was honored to attend a press conference and speak with Robert F. Kennedy’s daughter, Kerry Kennedy, founder of the Robert F. Kennedy Center for Human Rights. The press conference centered on Mrs. Kennedy’s recent tour of the toxic drilling sites in the Amazon province of Sucumbios in Ecuador in connection with the ongoing Chevron litigation. I have written several posts on the subject here and here.

 One of the issues raised at the conference with Mrs. Kennedy concerned the scandal involving Chevron's alleged bribery of a foreign official. You can read about the scandal in the Wall Street Journal article, To Combat Overseas Bribery, Authorities Make It Personal and in the New York Times article, Ecuador Oil Pollution Case Only Grows Murkier.

As reported in these articles, Ecuador`s Attorney General, Washington Pesantez, called on the U.S. Department of Justice to investigate Chevron for possible violations of the Foreign Corrupt Practices Act (FCPA).

The timing for Chevron could not be worse.  Only several months ago, Robert Khuzami, director of the Enforcement Division of the Securities and Exchange Commission, announced the creation of a specialized unit dedicated to the enforcement of the FCPA.. According to Director Khuzami:

the new unit will focus on new and proactive approaches to identifying violations of the Foreign Corrupt Practices Act, which prohibits U.S. companies from bribing foreign officials for government contracts and other business".

There has been an enormous surge in FCPA and anti-corruption enforcement by U.S. and foreign governments all around the world. That surge has resulted in unprecedented risk for U.S. companies operating overseas. As the risks keep spreading to more and more industries, no U.S. enterprise can even remotely afford the consequences of non-compliance.

Is your business completely ready to tackle these risks?

The following four guidelines may help to minimize risk exposure and maximize the cost-effectiveness of FCPA compliance programs.

1. Determine Where the Greatest Risks Lie--Degrees of risk vary for each business segment. If your company’s main dealings with government officials are with regulators, you will have different compliance challenges than if you are marketing goods or services to government buyers, just as you may have different challenges if you operate overseas through joint ventures as opposed to local representatives.
2. Start at the Top--Management teams that are committed to creating a strong compliance culture are much better at transmitting compliance goals throughout the whole enterprise. Does your company's compliance culture start at the top?
3. Identify Red Flags--If employees who see a red flag know to stop and ask for guidance, many if not most FCPA issues can be avoided. Lawyers and compliance personnel can make the legal judgments, advise on what may and may not be done, and indicate where lines need to be drawn.
4. Minimize the Use of Third Parties-- Corporations can significantly reduce their FCPA risk by eliminating or minimizing their use of third party consultants and agents over whom they have less than full control, particularly those who are paid commissions, success fees, or bonuses. To the extent a corporation can eliminate or avoid its reliance on third parties, it can, by definition, reduce its FCPA risk profile.

The current economic downturn and the accompanying uncertainties about job security may increase the usual pressures on managers to “make their numbers.” These pressures may tempt those responsible for foreign sales and deals to operate close to the line, or even cross the line, in their efforts to secure new business. The guidelines outlined above will serve to offset some of the risks inherent in operating overseas while still allowing managers to "make their numbers."

Does your company have a FCPA compliance program in place?

Trend to Watch: Look for a Significant Increase in the Number of Companies Instituting FCPA-related Compliance Programs.

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