Recruiting Non-Profit Directors

When adding non-profit directors, the key attributes are finding people who have a passion for the mission, who work well with others in groups, who feel empowered to ask questions and not just go with the flow, who can assist in providing funding either personally or from others, and who are significantly diverse.

An expert panel convened in Boston today by the New England Chapter of the National Association of Corporate Directors noted that robust statistical evidence, in both the for-profit and not-for-profit sectors, supports the proposition that diverse boards perform better; diversity is not just a moral issue, it is an element of good governance.

What is diversity?  It includes but is by no means limited to racial, ethnic and gender diversity.  It is an inclusiveness of generational diversity and of representatives of the cohorts which a non-profit entity may serve or with which it interfaces. It includes differences in thought and experience and, sometimes, geography.

What about the pressure to place large donors on boards?  It is appropriate if they are otherwise engaged and provided they do not confuse the board function of supervision with attempting to run the organization itself, or with believing they are entitled to great influence based on their personal financial contribution.  The panel noted that raising funds on the part of board members who cannot afford to make a fixed contribution is a teachable skill that also cements younger supporters into  future leadership.

Onboarding diverse board members is a critical task; one panelist stated that his large non-profit provides in effect a director’s boot camp for new and often diverse board members, and provides an assigned mentor for the first year of service.

Money and Old Age: Installment Four


The fourth panel on May 3 discussed aging and wealth from the standpoint of the “financial solutions provider” (the investment product provider). Representatives of Allianz, PIMCO, Empower Retirement and Eaton Vance suggested the following:


A hot topic in investment today is how a company stacks up on the ESG analysis: is the company Environmentally responsible, are its business practices Sustainable, how transparent and ethical is its Governance? While 70% of European investment is driven by ESG to some degree, the U.S. experience is far lower. But ESG will become more important in the U.S. First, there is a positive correlation between higher market value as a percentage of book value where companies have high ESG scores, so these companies are better investments. Second, millennials are more and more demanding ESG compliance.


Discussion of “target date” funds, that aim for liquidity at a set date (e.g. when a person is to retire or a child starts college). These funds generally change portfolio mix away from possibly volatile equities as the target date approaches. Consistent with all other panels, there was agreement that investors need to stay in equities for the long haul. Target date funds are “outmoded.”


People with advisors are 33% more successful than those without (source or detail not explained). Younger investors can invest without great customization of advice until they reach their fifties. At that point, peoples’ life situation, style, goals etc. become individualized and at that point they need individual advice.

And again echoing a prior panel, this group discussed who bears the economic risk of providing economic guarantees for a life-time annuity? How does the insurer hedge the risk? Hedging mechanisms (not identified) are costly. But there is need that some part of retirement funds be like a salary, a defined lifetime periodic payment (annuity).


Discussion of resistance of some advisees to paying management fee. Per the panel: “cost is not expense.” It is a mistake for investors to look for “no fee” programs. The issue is the net result. It is true that pressure on fees will continue, but without “workplace savings” there is great need for advisors.



Money and Old Age: Third Installment


 The third May 3 panel discussed wealth and aging from the vantage point of leading financial advisors. Four successful on-the-ground advisors offered the following perceptions of the advisory business, prodded by observations from Professor Joe Coughlin, director of the MIT Age-Lab.


Investors must stay in equities longer or forever. A suggested mix for aging investors: 70% equity.


Advisors to date have sold investment advice. In the future they must offer broader services, about life. Advisors generally work with educated and financially more secure people, and since the greatest indicators of long life are money and education, planners must be very focused on the end game. It was even suggested that what advisors are now paid for, portfolios, should be given for free, and what advisors now are being pressed to provide for free should be what is compensated. Here are examples of services which advisors might need to master: housing in old age, transportation cost and availability, updating homes so people may stay in them as they age, concierge medicine, health insurance, fighting boredom and staying independent longer.


The statistic of loss of advisor business on the death of parents was stunning. It was suggested that the next generation changes financial advisors 98% of the time. The solution, says highly successful financial advisor Susan Kaplan of Newton, MA, is for the advisor to meet with, and include in all family meetings, the next generation, to create a direct bond. Furthermore, Kaplan suggests thinking of the advisor as providing, psychologically, a virtual family office.


How do advisors deliver more service than today, at economic scale? Technology, and staffing a team with varied skill-sets.


What will happen with fees, given the new concierge model of the RIA? Why base fees on AUM? No clear prediction of future fee models emerged from the discussion.


Money and Old Age: Second Installment


The second panel on wealth and aging discussed financing retirement through the lens of the asset management firm, with participants from the highest executive levels of Putnam, MFS, BOA, Columbia Threadneedle and BlackRock. Major take-aways:


Placing retirement costs on employees through 401k plans has not been successful. We lost old-style pension plans. We need new solutions, perhaps annuities purchased over time by “forced savings.” The average 401k on retirement contains only $91,000. But attractively priced products are not now available.


Discussion of who incurs the “risk” of “age liability.” With lengthening lives, not many financial product companies are anxious to incur that risk.


Given longevity, we must keep equity in portfolios all our lives (a theme in all panels). Also, we may consider using Health Savings Accounts as part of retirement planning (not explained.)


There is a need for easy-to-understand retirement products. People now insist on understanding. Millennials are risk-adverse (perhaps due to the experience of their parents and the 2008 recession).


Women continue to outlive men. Women will own a majority of retirement assets. Women now are 57% of the U.S. workforce. Women retire two years earlier than men, are underpaid, take more time off due to family roles, start investing later than men, want to be “scholars” understanding everything before they act when they should be investing ASAP. Earnings in society also are not growing robustly. Women thus need to be thought about in detail in terms of advisory services, as they tend to be less prepared to retire.


In investing, traditional company value could be seen on a balance sheet. Today, value is in technology, which gets quickly written off. How do you judge a company in terms of investment? Tech investment is attractive to millennials. Part of the answer: look at cash-flow.


Discussion of effect on the market by discontinuation of the government’s program of quantitative easing. How will retail investors react to a major increase in the supply of bonds in the marketplace?


You must invest with a long view, a 20-year window. One recommendation: U.S. equities, which show the ability to promote the “most profound value growth,” to which ultimately should be added Chinese equities when the market becomes less opaque.


Current investors need to be better prepared for the future by advisors. Markets are always subject to drops. It has been a decade since “we have been discussing loss and volatility.”



Money and Old Age–First Installment


  This is the first of four posts based on panels convened in Boston on May 3 by Big Brothers/Big Sisters of Massachusetts Bay. In conjunction with a fund-raising event, BBBS presented four discussion forums on how society, and individuals, should deal with the fact that we are living longer, while our business community has moved away from company-funded retirement plans and has placed the obligation to fund this lengthened retirement period on the employee.


  The first panel approached the question from the standpoint of the broker-dealer community. As with all the panels, participants were very senior executives, including the heads of investment at Citizens Bank, Mass Mutual, Commonwealth and Fidelity (Clearing and Custodial). Below, key take-aways:


 Sixty is the new fifty. People are working longer. Restructuring investment portfolios to move away from equities is not wise. Emphasis on immediate liquidity also is unwise as that impacts performance. People don’t need all their assets liquid at all times.

There is a trend to seeking a “pay check” in retirement, such as an annuity payment, as part of an overall plan.

We need to pay attention to tax efficiency and starting to plan earlier in life. The single largest lifetime expense is tax.

We need to rely more on technology to simulate future results over a longer period of time to give better advice to people planning retirement.

The average couple today, aged 65, will incur $280,000 in medical expenses during the balance of their lives.

There is a continuing gap in attracting young people to the advisory field at a time when advisors are badly needed by both current baby boomers and the millennial generation. Robo-advising tools and other AI tools will help make advisors more efficient, but there will be shortages. And racial and sexual diversity will be difficult to achieve but important.

Advisory fees will be under downward pressure, particularly through technological innovation. Will we move to flat fees or hourly charges, away from the current general practice of a percentage of AUM (assets under management)? Not clear and in any event not immediately.






How Hacking Works

Some facts:

  1. Per the National Institute of Standards and Technology of the Department of Commerce, the biggest risk in maintaining cyber security is that people suffer from “security fatigue.”  We are tired of all those passwords and security questions and verifications.  We take shortcuts.  We reuse and do not change, and we duplicate, passwords.
  2. 95% of evil hacks start with phishing, sending an email seeking to trick the recipient as to the identify of the sender; and of these, the majority and the most effective are spear fishing, not general emailing.  The hacker has information about you, your employer, your job, enough to make the communication seem authentic.  As these are one-offs, they cannot be blocked by a spam filter.
  3. The incidence of successful hacks via people far exceeds the hacks on “systems.”  Of course, even one soft spot (eg person) in a given organization is all you need.
  4. A program presented in my law firm cautions as to possible vulnerability of commercial drop boxes, where the data may be shared and where search warrants are generally honored and without prior notice to the data owner.
  5. A visitor to your office may want to plug in a thumb drive to download information or print it.  OR to prepare access to the system after the visitor leaves.

How Great is America?

This is not a political post.  It is about perceptions and nomenclature and is not designed to be provocative (sorry for the disclaimer but this is necessary so that we can focus on ideas and not polemics).

Nor is the fundamental premise original here; thanks to Jacob Shapiro who writes for the on-line service GPF (Geopolitical Futures), which by the way I recommend.

Is America today still THE dominant superpower in the world, or has it declined or is it declining and are we facing a “multi-polar world?”

Proposed Fact #1: American clearly and for the foreseeable future is the dominant world player.  Witness by way of simple example the North Korean confrontation: who send three aircraft carriers to the Sea of Japan and was not in the slightest challenged?

Proposed Fact #2: State the reasons that there is a sense that America has faded:  First, aspects of domestic US politics.  Second, saying so serves the interests of various foreign powers jockeying for local advantage, and plays into the narrative that these future would-be co-powers aspire to achieve (primary players: Russia, China, India).

But hoping for a multi-power world doesn’t make it so, maintains Jacobs; and, rather persuasively.  And the last time America was perceived as slipping (before the last election) was in the Nixon years, with Viet Nam and domestic unrest, which led many to see the US in decline; Nixon himself suggested the decline of American hegemony.

It is unclear, having lived through the years since the end of the Second World War and the nuclear birth of the USSR and its decline and the recessions almost too numerous to mention and Reagan and Iraq and 2001 and 2008, whether this analysis of US history is correct or merely convenient to the argument, but the position of the US in the world is one of both fact and the perception of that fact.  Many nations are nibbling at us, but we seem to be able to weather absolutely any position we take.  Whether we are great again or never were not great may be a potent political issue but, at least to Jacobs, it is mere nomenclature.

PEs, Delaware Entities and Anomalies

The formal title of this blog site is Law and Other Anomalies.  An anomaly is something that is incongruous and inconsistent.  Welcome to Delaware business law.

Let us say your are a fund investing in a Delaware corporation; you have preferences in the waterfall and the power to trigger a sale through board control or contract.  You trigger a sale and by definition you are getting a preference in the proceeds.  You run the risk of breaching your fiduciary duty to the minority, and deal terms likely are subject to fairness review under the “heightened fairness standard.”  Those of us in the business are aware of the complex charts that have been published trying to explain the various levels of review and approval that interested parties must go through to navigate safely the corporate fiduciary duties of the majority or the control parties or the favored parties, in order to avoid a claim of breach of duty.  And this is true even though Delaware, in closely held smaller enterprises, is less wedded to treating small companies as if the players owed each other the same high standard of loyalty as is owed in simple partnerships.

Same facts but let’s swing over to an LLC.  The standard paper for an LLC will have the same business terms but also will state that all fiduciary duties are waived and that the fund may well have discretion to call for a sale in its own judgment.  Such waivers of duties are not unusual in LLCs.

In claims brought against controlling investors in a Delaware LLC by junior investors, objecting to a sale that paid out the controlling interests but left virtually nothing for the junior tier, recognizing that the language of the Operating Agreement waived fiduciary arguments, the plaintiffs asserted a claim under the general contractual doctrine of breach of the obligation of good faith and fair dealing in the operation of any contract.

In a February decision (Miller v HCP), the Delaware Chancery Court threw out the claim.  Their decision basically was “can’t you plaintiffs read English?”  Fiduciary duties were waived.  It was clear on the face of the paper that the controlling parties could trigger a sale and be paid first.  And the argument that there is an obligation of good faith and fair dealing applies only if unexpected events arise which would work an unfairness.  Nothing unexpected here: it is all spelled out in the Operating Agreement you signed.

An argument can be made that the difference in result based on the choice of entity type is anomalous; the entity type should be driven by other business and tax considerations.  Further, in order to stimulate capital formation it is likely that the best rule is the LLC rule and that one ought to be able to draft effectively into corporate documents the same result you get with an LLC.  There are no doubt situations which create abuse and one would draft very carefully, but the ability of investment funds (for example) to obtain contractual leverage for their money should not depend on the type of entity — in a rational system.

As a side-note: I have written in the last year or so about the problems of the Delaware law in dealing with authorizing the sale of a corporate business, for which I respectfully direct you to my CV at my firm’s website;  at that point you can link to the relevant articles.

Forgive another side-note: when I first encountered the concept of an anomaly it was many years ago as an astronomy major in college; the concept if I recall correctly had to do with degrees of arc for the apogee or perigee of a body from its primary.  Understanding astronomy was difficult but at least there were logical answers — unlike Delaware business law on occasion.

Bankruptcy Waivers

This last cold, gray drizzling day of April here in Boston might as well be the day on which we discuss bankruptcy, itself a gray subject.  I am sure all readers are fascinated by waivers in bankruptcy proceedings, so do read on.

When a company goes into bankruptcy, the law imposes an automatic “stay” on litigation against the bankrupt company which may be pending in another court.  The idea is that all claims should be brought before the same tribunal so that the relative rights of all aggrieved parties can be measured, and in light of the hopes in some cases of rehabilitating the bankrupt company.

A creditor can appear in bankruptcy court and argue that the stay be “lifted” so that litigation pending in another court can proceed, and the bankruptcy judges will apply principles of equity (fairness) to decide whether a stay should be lifted.  A secured creditor of a bankrupt, for example, having priority over other creditors by reason of its collateral, may successfully argue that it should be able to foreclose.

Prior to bankruptcy, clever creditors may seek a contract with a debtor which attempts to remove the risk of suffering a stay in event of default.  The creditor may obtain a pre-bankruptcy agreement from the debtor that the debtor will not file bankruptcy, or that the debtor will not object to the lifting of the stay in the event of a bankruptcy filing.  Federal bankruptcy courts historically have been loathe to enforce such private contract provisions which, after all, strip judicial power from the judge.

However, a new case in Boston’s bankruptcy court did in fact enforce a prior waiver of the stay to permit a creditor to proceed with collection during pendency of bankruptcy.  For us lawyers, this was sufficiently big news to find it reported on the front page of today’s issue of Massachusetts Lawyers Weekly.  All legal cases are of course fact-specific and there were many salient facts in this one (In Re: A. Hirsch Realty, LLC), but what interested me was the discussion that the pre-petition contractual waiver favoring the creditor was signed by a sophisticated debtor who had experienced counsel.  Judge Feeney distinguished this case as not involving a waiver which was contained in a loan agreement where an unsophisticated debtor just signed the form without really understanding the significant protection the debtor was surrendering.

Many loan documents contain pages of “boilerplate.”  Some of it (express here your shock) is highly technical and favors the creditor.  Debtors do not have much leverage in many of these situations.  And creditors extending credit in iffy situations are entitled to enhance their positions, where there is significant ongoing risk of non-payment.  But the law may be moving, ever so slightly, in favor of protecting your average debtor.  Institutional creditors with counsel may want to consider how much to rely on clauses that affect a future possible bankruptcy, such as the stay waiver, in evaluating their risk metrics.  They may for example provide specific disclosure of the meaning of the waiver, or insist that the waiving debtor have experienced counsel.

SEC Proposals for Investment Advisors

The SEC yesterday proposed significant new regulations affecting the relationship between investment advisors and retail customers.  In substance, proposed Regulation Best Interest would establish a duty for registered advisors and retail brokers to act in the best interest of the customer in recommending securities or strategies, putting the economic interests of the customer first.  This reflects the SEC position that advisors and brokers function as fiduciaries, which in turn places a high burden on the advisor.

Additionally, the SEC proposed yet another form, CRS, a short-form disclosure describing the relationship in simple terms; registered advisors and brokers would both be required to comply.

In substance, major disclosures to be required: any conflicts of interest, an obligation to understand investment products proposed and that they are believed to be in the customer’s best interest.

Details abound.  There is a ninety day comment period after which the SEC may promulgate its new regulations, amend them, or withdraw them.