April 27, 2021

Stakeholder Capitalism: Lessons From The Super League Fiasco

The rise of non-financial priorities in corporate governance and the focus on corporate purpose has attracted a lot of attention in recent years.  Some have dismissed the increasing corporate emphasis on “stakeholder” interests & ESG issues as “woke capitalism,” which one pundit recently defined as the belief that “businesses ought to obey orders from the progressive elite, regardless of how thin its connection to any company may be.”

I’ll be the first to admit that some of this stuff is downright silly, but I don’t think this phenomenon can be tossed aside with a talk radio sound bite like “woke capitalism.”  It seems to me that there’s something deeper going on, and that the recent Super League fiasco provides some insight into what that might be.

In case you’ve been living under a rock, last week, some of Europe’s wealthiest & most successful soccer teams decided to strike out on their own with an exclusive, multi-national “Super League.”  While it was announced with great fanfare, the Super League imploded almost immediately. Fans, players, coaches, and even governments all expressed outrage over the attempted greed grab. The reaction appears to have caught the league’s organizers & financial backers by surprise. It shouldn’t have, and this excerpt from a recent Axios newsletter explains why:

A small group of 12 ultra-elite soccer clubs had access to the finest strategy, polling and public relations advice that money can buy. The deal they unveiled on Sunday night was years in the making. But they and their advisers missed something big — that society as a whole is now willing to forego wealth if it means more equality.

– Brexit made almost everybody in Britain worse off, for instance — but it also hit the rich London cosmopolitans and bankers the hardest.

– The Fed is openly embracing the prospect of higher inflation — something that erodes wealth and hits rich savers, while inflating away the debts of the poor.

The article sums up the current zeitgeist by stating that “when the source of a company’s profits is manifestly unfair, those profits are more likely than at any time in decades to be facing existential threats.”  If you buy that conclusion, then business leaders aren’t falling in line with progressive elites – they’re just “reading the room.”  Many appear to have decided that society’s decades-long embrace of “winner take all” capitalism is coming to an end, and that their companies need to think & act differently in order to continue to prosper in a more egalitarian environment.

Of course, so far this new attitude among business leaders hasn’t extended to their own compensation, but perhaps we can hope for a “Super League moment” there in the not too distant future as well.

#MeToo: Impact on CEO Employment Contracts

Speaking of executive comp, the Conflict of Interest Blog recently flagged a new study reviewing the impact of the #MeToo movement on the terms of executive employment agreements.  This excerpt from the study’s abstract indicates that the growing public outcry about sexual misconduct has prompted companies to take a more aggressive approach when it comes to “for cause” termination provisions:

In the wake of MeToo, we find a significant and growing rise in the prevalence of contracts that allow companies to terminate CEOs without severance pay in response to harassment, discrimination, and violations of company policy. We discuss the implications of these “MeToo termination rights” for corporate governance, executive contracting, and gender equity. We conclude that our results offer promising evidence of increased corporate control of CEO behavior and greater accountability for sex-based misconduct in the wake of the MeToo movement.

The study reviewed over 400 CEO contracts and found that publicly traded companies are reserving greater discretion to terminate executives for sex-based misconduct in statistically significant numbers. The authors say that by “insisting on expanded contractual definitions of ’cause’ to terminate, these companies are signaling to CEOs that such behavior will not be tolerated, while ensuring that corporate boards are reducing the costs of penalizing wayward CEOs.”

The authors also suggest that the changes resulting from the #MeToo movement prove that the terms of CEO employment agreements aren’t immune from “exogenous shocks,” which gives some reason to believe that hopes for a Super League moment in executive comp may not be in vain.

PPP Loans: Seeking Forgiveness? If You’re a Gov Contractor, Think Twice!

For most companies, the decision to seek forgiveness of a PPP loan is the proverbial “no-brainer” – but this Hunton Andrews Kurth memo says that’s not necessarily the case if the borrower is a government contractor. Here’s an excerpt:

For government contractors, however, the rules are very different. If a government contractor received a PPP loan and thereafter obtains forgiveness of that loan, it is required to credit the amount of the forgiveness back to the government. For the reasons set forth below, a government contractor should carefully consider whether seeking forgiveness of a PPP loan makes good business sense. In some cases, government contractors might be worse off financially if they obtain forgiveness of that PPP loan than if they simply pay it back.

The problem is that the federal acquisition regulations make it clear that a contractor that has already received payment for contract costs cannot also receive PPP Loan forgiveness funds for those identical costs. The memo notes that this isn’t just an academic issue – the DOJ is aggressively prosecuting fraud in PPP loans, and while this issue hasn’t yet come up, there’s no reason that it couldn’t. What’s more, there are also potential issues under the False Claims Act that need to be taken into account.

PPP loans have pretty borrower-friendly terms, so although each company’s situation is different, for some government contractors, the economics of simply repaying the loan in accordance with its terms may be more favorable that seeking forgiveness.

John Jenkins