ADR News from Jim Reiman
Happy new year, and best wishes for a healthy, joyous and profitable new year. This eMail newsletter is the first of a monthly newsletter that I will be sending to friends and colleagues. Each month I will circulate an eMail newsletter such as this one in which I will briefly (just a couple of paragraphs) describe three or four articles or news items that I’ve come across that I hope you will find of interest, and provide a link to the full article should you wish to read it. My focus (and the subject of the articles and news items to follow) will cover two subjects: i) legal and business issues concerning mediation and arbitration, and ii) corporate governance, with a focus on executive compensation.
I hope that one or more of the articles pique your interest and you find this newsletter and the articles I highlight in it worthy of your time. Don’t hesitate to send me any articles or thoughts that you may have that you’d like me to include. If an interest develops, we can create a LinkedIn group and engage in discussion/debate of issues of interest.
Below are the articles for this month. Below them, for those of you with whom I’ve been negligent in keeping up with, I’ve included a couple of paragraphs describing my activities the past few years and my path to today’s newsletter.
Looking forward to re-connecting and strengthening existing connections.
Warm regards –
Articles – Mediation and Arbitration
Conflict Resolution Policies, Reputational Risk and Enterprise Risk Management;
What Directors Need to Know and Should Be Asking Management
Shameless self-promotion: this is an article I authored and published this fall in the New York Stock Exchange’s Board Member Magazine (electronic edition), September, 2014, author James Reiman, https://welcome.corpedia.com/newsletter-article/conflict-resolution-policiesreputational-risk-enterprise-risk-management/
For attorneys: the article provides a compelling case for ADR. Highlighted is the experience of one company, The Toro Company (a manufacturer of snow blowers and turf and landscaping machinery and equipment). Toro saved $50+ million over a six year period and had these results utilizing prevention, early intervention/accident investigation, and pre-litigation mediation:
- average litigation costs and fees: reduced 77%
- average per-claim verdicts/settlements: reduced 53%
- average total cost to close a file: reduced 63%
- average lifespan of a claim: reduced 59%
For board directors: Alternative Dispute Resolution (ADR) is not only a means to reduce litigation costs, it is a means to manage and mitigate reputational risk – the number one concern of board directors in 2012 and 2013. The article explores the relationship between reputational risk and litigation, and provides directors and C-suite executives the questions to ask their in-house and outside general counsel.
In the case Ceats Inc V. Continental Airlines Inc LLC, http://caselaw.findlaw.com/us-federal-circuit/1670782.html, the United States Court of Appeals for the Federal Circuit was asked to overturn a District Court’s judgment pursuant to Federal Rule of Civil Procedure 60(b) based on an alleged relationship between the court-appointed mediator and the law firm representing most of the defendants. The decision addresses a mediator’s duty to disclose and his/her duty of neutrality. Additionally, the case discusses an arbitrator’s duty to disclose, and analyzes the differences between the two duties.
Regarding a mediator’s duty to disclose and to recuse him/herself, the Court analogized to the duty of judges to recuse themselves from cases. “Mediators are required to disclose not only financial interests, but all potential conflicts of interests as well. Furthermore, [the mediator] does not have to be ‘compelled by statute to disqualify himself’ for disclosure to be necessary’ – [A] mediator’s duty to disclose potential conflicts where impartiality might reasonably be questioned is analogous to a judge’s duty to recuse.”
Additionally, referring to the ABA Standards for Mediators, the Court held: “[the mediator] breached his duty as a mediator to disclose “all actual and potential conflicts of interest that are reasonably known to the mediator and could reasonably be seen as raising a question about the mediator’s impartiality.”
While finding that the mediator failed in his duty to disclose, the Appellate Court denied the motion to overturn the lower court’s judgment. The plaintiff thereupon filed a Petition for writ of certiorari with the U.S. Supreme Court. Stay tuned!
The New York Times’ Deal Book http://tinyurl.com/oh4d5nw and The American Lawyer http://tinyurl.com/qf88hsg each published earlier this month a copy of a retainer agreement between Wachtell and a former client. The agreement was revealed in the course of a malpractice action brought against Wachtell seeking to recover Wachtell’s $6 million fee. As The American Lawyer put it, “Over the years, we’ve heard that Wachtell doesn’t charge hourly rates for M&A deals, but the details of its billing structure weren’t widely known. Now we have an idea.”
The Alignment Gap Between Creating Value, Performance Measurement, and Long-Term Incentive Design
authored by Organizational Capital Partners and commissioned by the Investor Responsibility Research Center Institute (IRRCi)
This is one of the more thought provoking and important pieces of research and analysis on executive compensation out there. Commissioned by the Investor Responsibility Research Center Institute (IRRCi) (a nonprofit research organization that funds social and corporate governance research, as well research on the capital market context that impacts how investors and companies make decisions), IRRCi asked a simple question: “What is the relationship between company economic performance, shareholder return and executive compensation?” The S&P 1500 companies’ reported results over a five year period were studied, and the findings were both dramatic and thought-provoking. Short conclusion: dozens of companies, by using the wrong metrics, are paying executives substantial performance bonuses for supposed superior economic performance when in reality these executives have overseen dramatic reductions in shareholder value.
Jon Lukomnic, IRRCi’s executive director: “The [study’s] findings indicate there is a critical need for a fundamental re-examination of measurement and executive compensation so as to incent sustained corporate economic performance.” Continuing, he stated: “This means reducing the overwhelming dependence of large U.S. companies on total shareholder return (TSR) as a dominant performance and incentive compensation metric. TSR is not a direct measure of operating performance. It is a post hoc measure of alignment with short-term stock market price movements.”
Full disclosure: Jon is a college buddy and friend. That said, he’s one of the world’s top thought leaders in the corporate governance field. The National Association of Corporate Directors has named Jon one of the 100 most influential people in American corporate governance every year since 2011 and he was named one of the “100 Most Influential People in Business Ethics” by Ethisphere Magazine.
A summary of the report may be found at http://irrcinstitute.org/news/deep-misalignment-between-corporate-economic-performance_pr_11_17_14.php
The full report (which I urge all to read) may be downloaded at: http://irrcinstitute.org/projects.php?project=75\
To those of you whom I have not kept as close a connection as I should have (and for which I apologize), a brief update on my recent activities and career moves.
In late 2011 I stepped down from the board of EBT Mobile (www.ebtmobile.com), the Chinese retailer of cell phones that I built and listed in London, to make room for an enlarged Chinese presence on the board and to pursue a domestic opportunity. While I continue to hold a substantial financial interest in that company and remain involved as an investor, I turned my attention to building a domestic and Canadian company creating aerodynamic enhancing devices for tractor-trailer truck trailers – Aerofficient LLC (www.aerofficient.com).
Aerofficient designs, markets and sells devices that attach to the trailers of heavy duty trucks that reduce their aerodynamic drag, thereby reducing their fuel consumption. I and my partners took that company from a product concept I conceived in college while driving home from a sailing regatta and built it into a company offering multiple products, several of which won multiple industry awards and accolades, and generated millions in revenue in 2012 and 2013.
In 2013, for a variety of personal reasons, I elected to exit the day to day management of Aerofficient and along with my partners redirect the principle business of that company into a licensor of intellectual property (I and Aerofficient hold over a dozen domestic and foreign patents on our aerodynamic enhancing technologies, and anticipate receiving multiple additional patents in the coming months). That process took over a year to plan and execute, and is now mostly complete.
Not one capable of sitting back or being without a project, I needed a new focus and endeavor. I wanted to merge my business and legal careers, and through a turn of good fortune and the trust of one the arbitration industry’s leaders, I was invited to join a group from the American Arbitration Association, Fordham Law School, and the Giving to Ghana Foundation to travel to Ghana to teach arbitration, providing the businessperson’s perspective. From that experience, I drank the Kool-Aid so to speak and became a passionate advocate of alternative dispute resolution practices.
2014 was a year of exiting my day to day activities at Aerofficient and re-entering the legal profession as an ADR professional. Today I am now honored to be included in the American Arbitration Association’s roster of commercial arbitrators and FINRA’s roster of public arbitrators. I am also a Fellow of Chartered Institute of Arbitrators, a London based global organization that tests and qualifies potential arbitrators for international arbitration. In addition to becoming qualified as Fellow of the Institute, I have become qualified as a tutor of international arbitration for the Chartered Institute and indeed will be teaching a class on international arbitration for the Institute in February.
In addition to arbitration, I have become qualified as a mediator and perform mediations in the Circuit Court Of The Twelfth Judicial Circuit, Will County, Illinois and the Circuit Court Of The Nineteenth Judicial Circuit, Lake County, Illinois in addition to mediations of domestic and international commercial disputes. I have found that my lives as a business transactions attorney, public and private company CEO, and board director provide me with insights that permit me to develop negotiation or settlement strategies that others do not see. I’ve had great success in my business life utilizing these insights to strike successful deals, and have an extremely high settlement success rate in my mediations.