ADR and Governance News from Jim Reiman

May 2022

Friends –

Spring has arrived in Chicago and while its brought warmer weather we’ve had little sunshine.  Hopefully that will change in the coming days and weeks, along with renewed travel as the US moves into a new COVID response era.  Speaking personally, I’ve begun to travel again and will be in Atlanta for the Academy of Court Appointed Masters conference and the ICC Conference in Toronto in the coming days.  I look forward to seeing many of you at one of these or other events soon.

With this issue of the Newsletter, as in the past, I’ll focus on two areas:  corporate governance and alternative dispute resolution (“ADR”).  Additionally, I’ll also include an article or two concerning matters of general interest in my “Interesting Cases/Articles of the Month” section.  I provide a brief summary of each article and a link for you to access and read the article in its entirety if you wish. My hope is that you’ll find one or more of the articles I’ve selected of interest and this Newsletter worthy of your time and in-box.

This month, I present the results of a study reported in the Kellogg School of Management’s Kellogg Insight magazine which relates whether positive environmental, social and governance news affects a company’s stock price, and what news drives stock prices and what news does not.  I also present a study conducted by researchers at Columbia University and Duke University that seeks to answer the questions “What exactly is corporate culture and how does a company improve theirs?”.  For the lawyers among you, I present a recent Ninth Circuit decision in which the Court addressed the question:  “Under what circumstances can the use of a website bind a consumer to a set of hyperlinked “terms and conditions” that the consumer never saw or read?” and affirmed the district court’s order denying defendants’ motion to compel arbitration.  Finally for my articles of general interest, I present two:  one addressing sleep and how much sleep you should get each night, and one exploring how the brain deals with stress by examining what separates a great baseball player from a good one.

On a personal note, I’d like to relate that the audio version of my book, Negotiation Simplified, is now available for download or streaming on Amazon.comAudible and iTunes.  Narrator Dean T. Moody does a terrific job narrating the text, striking that difficult to find balance between a too dramatic, energetic reading and one that is a flat monotone and just plain boring.  Its great for commuting or road trips, or those who prefer audio books to reading.  I’m also proud to relate that I was recently interviewed by Jake Carlson for his podcast Modern Leadership.  During the interview (now available for download or streaming) we discuss my time building and operating a chain of retail cell phone stores in China, and some of the skills and themes explored in Negotiation Simplified.

This Month’s Articles

Corporate Governance

  • Does Positive ESG News Help a Company’s Stock Price?   The article’s two authors examined this question by analyzing data on more than 3,000 companies. They found that stock value did tend to rise after positive environmental, social and governance (ESG) news about a firm emerged, but only if the news was financially material-that is, related directly to the company’s sector.
  • Corporate Culture: Evidence from the Field.  This article reports the results of a survey of 1,348 North American executives regarding their thoughts about corporate culture and the extent to which culture influences value creation (productivity, mergers), ethical choices (compliance, short-termism), and innovation (creativity, risk-taking); and what works against a value-enhancing culture (incentive compensation, investors).

Alternative Dispute Resolution

  • Berman V. Freedom Financial Network, LLC.  This April, 2002 decision of the Ninth Circuit Court of Appeals addresses the enforceability of an arbitration clause within hyperlinked “terms and conditions” of a website’s consumer contract.  The Court held that unless the web operator can show that a consumer has actual knowledge of an arbitration agreement, an enforceable contract will be found based on an inquiry notice theory only under specified circumstances.

Articles of General Interest

  • Brain Games: How the Mind Performs Under Pressure:  What neuroscience and psychology can tell us about baseball – and ourselves.  Its spring, the baseball season has opened, and what better than an article describing brain function and stress in the context of baseball.
  • The Rhythm of Sleep.  This article opens with the statement:  “The effects of insufficient or poor-quality sleep go far deeper than our energy level the next morning.”  The article explains how sleep is a key component of our cardiovascular, metabolic and cognitive health. In short, improving sleep can help us live longer, healthier lives.

I hope you find one or more these articles of interest and this Newsletter worthy of your in-box.


Jim Reiman

Articles / Corporate Governance

Does Positive ESG News Help a Company’s Stock Price?   George Serafeim, Aaron Yoon, KelloggInsight, August 2, 2021

Historically, companies have centered their decision-making processes around shareholder primacy.  Under this theory, decisions were made with a focus on maximizing shareholder value, and actions that were thought to have no effect or negative effect on value were not taken.  Recently, companies have begun to consider whether they make take actions that are not directly related to maximizing shareholder value, and many companies now consider ESG (environmental, social, and governance) issues.

ESG is a relatively recent phenomenon. One side-effect of its recency is that companies are not yet sure how ESG impacts their bottom line. Just because ESG decisions are not made with maximizing shareholder value front of mind does not mean that they cannot be good for business. Aaron Yoon, of Northwestern University’s Kellogg School of Management, and George Serafeim, of the Harvard Business School, recently set out to determine the impact of ESG news on company stock prices by analyzing data from 3,126 companies.

To determine the effect of ESG news, Yoon and Serafeim partnered with Truevalue Labs, an artificial intelligence firm. In the data set, they included news stories only if they had been covered in three or more articles, and then categorized the ESG news as positive or negative, and material or not (i.e., related to the firm’s purpose or not).  For each event in the data set, they noted the company’s stock price from five days before the announcement of the event to five days after.

“When the news was material and positive, the company’s stock price outperformed the market by an average of 0.6 percent, or 60 basis points, on the day the news emerged.

But when positive ESG news was not material, the stock price didn’t seem affected at all.

The more articles people had written about the topic, the larger the response. For instance, if at least five articles about a positive material ESG development had been identified, the company’s stock price rose by an average of 2.2 percent, or 217 basis points, relative to the market that day.

Investors also seemed to penalize companies for negative material news, but only when these developments were widely covered.  Bad news reported in three or four articles didn’t elicit a significant reaction.  But events covered by at least five articles were linked to a drop in value of 0.7 percent.

Given the breadth of ESG, Yoon and Serafeim placed the analyzed news into five categories to see what type of positive and material ESG news produced the strongest results. They found that social-capital news (news related to the effect of the product on customers) produced the strongest results, while companies were also rewarded for good news in the business-model and social-innovation (news about making more environmentally friendly products) and human-capital (news about labor practices and employee safety) categories.

Yoon and Serafeim’s research shows that news reporting of ESG events that are both positive and material leads to increases in value.  Companies considering ESG issues are not only making decisions that are good for the community, but those decisions also maximize shareholder value.

The above link is to the study’s summary report in KelloggInsight.  Those wishing a deeper dive and to read the entire study may download it here.

Corporate Culture:  Evidence from the Field,  John Graham, Jillian Grennan, Campbell R. Harvey, August 2, 2021

This is an update of a study first published in 2016.  The authors explore just what exactly is corporate culture, and how companies improve theirs.  Academics at Duke University and Columbia University seek to answer these questions by turning directly to the insiders:  corporate executives and other prominent business leaders.  1,348 North American corporate executives were included in the survey, which asked the executives to describe their company’s culture, their understanding of the concept of corporate culture, whether culture influences business decisions, how to create a value-enhancing culture, and what prevents culture from being effective, among other more detailed items. In addition to the survey of corporate executives, 18 prominent business leaders participated in detailed interviews.

The survey included some written answers corresponding to open-ended questions which were hand-coded by a group of five independent researchers who analyzed answers for the presence of certain corporate culture values in order to ascertain what the corporate executives think culture is so that the further responses can be properly understood. Other questions in the survey used multiple-choice format. In addition to the survey responses, demographic information was collected on topics including firm size, firm characteristics, and executive characteristics.

The survey found that the corporate executives, by and large, feel that corporate culture is important to their company and drives the company’s value in a significant way. However, the corporate executives were split on whether poor cultural fit would turn them away from a potential acquisition target, though many who would not walk away entirely would require a discount in order to proceed with the acquisition, signaling some level of discomfort across the board in acquiring a poor culture fit. The corporate executives were also in near total agreement that ineffective culture can lead to unethical employee behavior.

The study’s conclusion:

Corporate culture is arguably the most under-researched value driver among the important contributors to firm performance. Our survey of executives provides detailed information about how they view culture, the elements that comprise culture (values and norms), the financial value of culture, how culture influences employees’ decisions, and what forces work for and against a value-enhancing culture.  In summary, 91% of executives believe culture is important to their firms and 79% place culture among the top value drivers of their company.  54% of executives would just walk away from an acquisition target that is a poor cultural fit, while another 33% would require discounts between 10%-30% of the purchase price of the target.  Culture influences a range of financial decisions such as investment and risk-taking.  For example, 41% of executives do not choose to maximize NPV when the NPV-superior investment requires short-term challenges (negative cash flows) and 80% indicate that culture is a factor linked to short-termism.  Similarly, 61% believe culture is an important force behind their firm’s chosen level of investment risk.  Culture influences actions that are hard to contract on, such as ethical decisions.  An overwhelming 85% of executives believe an ineffective culture increases the chances that an employee might act unethically or even illegally.

Our study also helps to expand our understanding of how culture relates to business outcomes by separating culture into values (big principles) and norms (day-to-day practices).  While this theoretical distinction is not new, our empirical documentation that executives believe cultural norms are an important part of establishing a value-enhancing culture is new.

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Given the many findings from our study, we conclude by summarizing the desired characteristics of a potential theory of corporate culture that is consistent with our key facts.  A theory of corporate culture would have several key ingredients:  (i) executives who believe culture has large and persistent effects in magnitude, both on the upside and downside, for firm value, (ii) power to influence many corporate policies rather than a select few, (iii) greater efficacy when the cultural norms embodied by the day-to-day actions of employees support the cultural values, and (iv) effective culture requires investment, and acknowledgement of how people (leaders, investors) and formal systems (governance, incentive compensation) may be working for or against such optimal investment. In conclusion, we believe corporate culture deserves substantial research going forward and we hope our paper helps build a bridge to enable such future work.

Articles / Alternative Dispute Resolution

Berman et. al. v. Freedom Financial Network, LLC et. al., United States Court of Appeals, Ninth Circuit, No. 20-16900 (2002)

“Under what circumstances can the use of a website bind a consumer to a set of hyperlinked “terms and conditions” that the consumer never saw or read?”  In the 9th Circuit, the answer (for now) is that a website should “explicitly inform” a consumer that a certain action, such as clicking a button, will bind them to the terms and conditions.

The Federal Arbitration Act requires courts to compel arbitration “of claims covered by an enforceable arbitration agreement.”  At issue in Berman was whether the plaintiff had agreed to arbitrate his dispute.  Freedom Financial argued that Berman had agreed – by using their website, which contained a notice stating  “I understand and agree to the Terms & Conditions which includes mandatory arbitration.”  Freedom Network argued that plaintiffs use of the websites signified their agreement to the mandatory arbitration provision found in the hyperlinked terms and conditions.  The district court rejected that argument and the appellate court agreed, affirming the decision.

The court analyzed the issue under the online contract formation test found in Nguyen v. Barnes & Noble Inc., 763 F.3d 1171 (9th Cir. 2014) and found that the website failed to tell consumers precisely what action would bind them to these Terms & Conditions. The continue button and the text referencing the terms & conditions had no explicit connection. This issue drove the court’s decision.  Significantly, the court was less concerned with the consumer’s awareness of the contents of the terms & conditions than the consumer’s awareness that they had taken an action that purported to bind them to the terms & conditions.

The question before us is not whether [plaintiffs] may have been aware of the mandatory arbitration provision in particular, but rather whether they can be deemed to have manifested assent to any of the terms and conditions in the first place. Because the textual notice was not conspicuous and did not explicitly inform [plaintiffs] that by clicking on the “continue” button they would be bound by the terms and conditions, the presence of the words “which includes mandatory arbitration” in the notice is of no relevance to the outcome of this appeal.

We conclude that the design and content of the webpages [plaintiffs] visited did not adequately call to their attention either the existence of the terms and conditions or the fact that, by clicking on the “continue” button, they were agreeing to be bound by those terms.

Articles / General Interest

Brain Games: How the Mind Performs Under Pressure:  What neuroscience and psychology can tell us about baseball – and ourselves.), Paul Hond, Columbia Magazine, April 12, 2022

What separates a great baseball player from a good one? The great ones may possess certain physical advantages or undergo intense training regimes (even by professional athlete standards), but if you look at the great players you will notice that they don’t all have the same physical makeup and they come from a wide variety of backgrounds that likely means different approaches to training and routines.  They all have one unmistakable trait in common, however:  when they show up to play the game, they know how to deliver.

Psychologists, biomedical engineers, and therapists at Columbia University’s Zuckerman Institute have been “probing the secrets of athletic excellence, the integration of mind and body that allowed [great athletes] to succeed.  And today, . . . neuroscientists are revealing the mechanics of movement itself, from basic voluntary actions to tasks requiring quick decisions, elaborate coordination, and memory.”

The ability to perform requires the coordination of movement, precision, and prediction.  Medical studies have shown how the brain of a baseball player at bat processes a pitch (it registers in the fusiform face area, an area that responds to objects that are important to the observer) and what it takes for a baseball player to not swing at a pitch (it engages the pre-supplementary motor area, which is involved in inhibiting response).  These studies, among others, show the impressive amount of control baseball players have over their body. But body control isn’t the thing that makes one great. Self-awareness and confidence operate with control in an interrelated way to help players learn and grow, until they can perform at the highest level.

The article’s author, Paul Hond, explains the science and research by describing Gene Larkin’s 10th inning pinch hit in the seventh game of what many consider the greatest World Series ever played – the 1991 series between the Minnesota Twins and the Atlanta Braves. Punctuating descriptions of science, Hond interjects interview quotes of Larken and other great players.

But when [Larken] stepped into the batter’s box and looked out at the pitcher, Alejandro Peña, something strange happened:  Larkin entered a tunnel of calm. “It was just so weird,” he says. “I went from the most nervous person ever to ‘I’ve been in this batter’s box thousands of times.’” The Braves outfielders were playing shallow to cut off the winning run, and Larkin was looking for a first-pitch fastball to send over their heads. . . .

Hond next pivots to the science:

“To understand the brain is to understand action,” says Daniel Wolpert, a neuroscientist at the Zuckerman Institute and a leading authority on motor control.  “We tend to think our brain is there for us to perceive the world, but the brain’s most basic function is to move our bodies, whether to evade a threat or to interact with others through speech or gestures. The only way to affect the world is through the control of movement.”

For an athlete trying to hit a ball or shoot a basket, action is complicated by the potential range of our movements: “It’s hard to control things precisely,” Wolpert says. “With two hundred joints and six hundred muscles, we have many degrees of freedom. Every time we try to use our muscles there’s variability.” Wolpert calls this variability “noise” — the inherent inconsistency that prevents us from generating the same exact motion each time we swing a bat or chop a carrot. “Motor noise increases the faster you move. If you do something very slowly, you can do it precisely. If you try to do something quickly — like swing a bat — it adds more variability to the movement.”

*     *     *

So what really separates the great players from the good ones? Daniel Wolpert, the motor-control expert, believes that part of the answer lies in nature. “I expect that great players have less variability in their motions and better learning algorithms than people like me, and are probably born that way,” he says. “I’ve tried to learn sports, and however much I try, I can’t improve in the way that others do.”

For [Gene] Larkin, who was the first Columbian to make the majors since Lou Gehrig, there’s an X factor in performance that can’t be easily quantified using electrodes or vision tests. “You have to have an inner bravado at home plate and really believe that you can compete with the guy on the mound, no matter how good he is,” he says. “If you don’t, your chance of success is almost zero.”

*     *     *

Research has shown that during the flow state, the prefrontal cortex — the part of the brain associated with complex planning and decision-making — shuts down. “That’s why Larkin, when he got to the plate, entered a flow state,” Colangelo says.  “He was prepared: he knew what was being asked of him and what was needed.  Once the flow state was triggered, his prefrontal cortex shut off, and when that happens you no longer have self-doubt, inhibition, or fear. You can perform at your highest level without being self-conscious or worried. You radically trust yourself.  You can train your brain to do this with repetition and preparation.”

Per the article’s author:

This research into the orchestration of neurons and muscles, the poetry of motion, could not only help us improve our performance at work and at play but also lead to treatments for motor impairments caused by injuries, stroke, and diseases such as Parkinson’s. Unlocking athletic success, and controlled movement generally, is both a brain game and a mind game, a cerebral double-header, and it all begins with that three-pound ball of nerve cells in our skulls.

For lovers of the game of baseball, this article is a must read.  And for the truly addicted, there’s also a fun video about the “brain science of baseball.”  You can see the video here:  Video – the Science of Baseball

The Rhythm of Sleep, Claire Milliken, Northwestern Magazine, Winter, 2022

How much sleep should you get every night? The conventional wisdom is that eight hours should do the trick. But in the past few decades, we’ve learned a lot about the amount and kind of rest the body needs to function at the highest level. Eight hours is a good start, but there’s more to the story here.

Circadian biology is the study of the human body’s multiple internal clocks. These clocks regulate processes and functions in different parts of the body on a 24-hour cycle, including the pancreas, liver, and, most notably, the brain. The central circadian clock, located in the hypothalamus region of the brain, regulates the sleep-wake cycle.  However, sleep science and circadian biology were largely separate fields as recently as the mid-1990’s. As the fields became more intertwined, our understanding of the effects of sleep loss and circadian disruption has grown.  One strong example: pulling an all-nighter is harmful not only because of sleep deprivation, but because it misaligns your body with your circadian clock.

It is common knowledge that quantity of sleep is important, but quantity of sleep is far less effective if it is not combined with quality of sleep.  For instance, waking up in the middle of the night, is associated with later diagnosis of Alzheimer’s disease (with no consideration for quantity of sleep). Other issues, such as high blood pressure, ability to cope with psychological stress, and fight-or-flight response can be exacerbated by a combination of short and poor-quality sleep.

Recent sleep research is revealing the relationship between sleep (both the quality and amount of sleep) and a host of medical conditions.

“There’s a lot of experimental work that has shown that even a week of sleeping only four or five hours a night changes your autonomic nervous system,” [research Kristen] Knutson says. 

In a national four-site research project called Coronary Artery Risk Development in Young Adults (CARDIA), Knutson and [another researcher, Mercedes] Carnethon linked short sleep and poor-quality sleep to higher blood pressure and a greater increase in blood pressure over five years among non-Hispanic Black and white adults.  Being a short sleeper was associated with a buildup of calcium in the coronary arteries and, in men, a thickening of some arteries. All of these, Knutson says, are risk factors for cardiovascular disease.

Carnethon acknowledges, though, that sleep and stress have a bidirectional relationship. “Nonrestful sleep is both a cause of stress and a consequence of stress,” she says. “It’s a total feedback loop.”

So too is the connection between poor sleep and our behaviors in response to our stress and our sleep loss: moving less throughout the day, eating less nutritious food, increasing caffeine intake — all of which may affect our risk for disease. “Short and poor-quality sleep can influence the risk of chronic diseases directly, through changes in biological pathways and mechanisms, and indirectly, through changes in the behaviors that you use to cope with nonrestful sleep,” Carnethon says.

Getting a perfect’s night rest every single night isn’t easy or practical for everyone, but there are some new habits one can implement as early as tonight to begin on the path towards ideal rest. First, try to go to bed close to the same time every night. One should also do what they can—whether it be installing black-out curtains or wearing an eye mask—to make their sleeping environment as dark as possible. And together with darkness, the sleeping environment should be quiet.  Any excess noise can be drowned out with earplugs, a white-noise machine, or even a fan.  Additionally, people who exercise more tend to sleep better.  But above all else, just make sure that you are doing what you can to get a good amount of high-quality sleep. Perfection won’t be attainable for every, but even small changes can have significant impacts on long-term health.