From 17 Corporate Crime Reporter 18(10), May 5, 2003

INTERVIEW WITH ROBERT HINKLEY, FORMER SKADDEN ARPS LAWYER, BROOKLIN, MAINE

What is it with Robert Hinkley?

A former corporate lawyer with Skadden Arps, he has taken it upon himself to singlehandedly redo decades of state corporate law.

Each of the fifty states have a provision similar to Maine's section 716: "The directors and officers of a corporation shall exercise their powers and discharge their duties with a view to the interest of the corporation and of the shareholders."

These laws make it the legal duty of corporate directors and executives to maximize profits for shareholders.

Hinkley would add a simple amendment:

". . .but not at the expense of the environment, human rights, the public safety, the communities in which the corporation operates, or the dignity of employees."

The provision would be enforced by those who suffer at the hands of corporate wrongdoing -- and in the case of intentional wrongdoing, by criminal sanction.

He wants to spend the next few years campaigning for his amendment.

To draw attention to his idea, last month, he and a group of anti-tobacco activists incorporated a new tobacco company, Licensed to Kill, Inc. in Virginia.

Virginia's Corporation Commission said it was not pleased with the stunt, but there was nothing they could do about it.

Exactly the point, Hinkley says. He wants Virginia -- and all states -- to do something about the law's narrow focus on the bottom line.

We interviewed Hinkley on April 30, 2003.

CCR: What law school did you graduate from and what have you been doing since?
HINKLEY: I graduated from Fordham Law School in 1978. Since that time, I've worked at the Skadden Arps law firm three different times. Most recently, I was a partner from 1994 to 2000. I specialized in securities law, handling public offerings and private placements, and some mergers and acquisitions. I also worked for another small law firm, and had my own law firm for several years.

CCR: Why did you retire from the practice of law?
HINKLEY: I wanted to do something about changing the corporate system. I came to the conclusion that the corporate system naturally abuses the public interest.

CCR: What have you been doing about it?
HINKLEY: I've been advocating something I call the Code for Corporate Citizenship. And the idea behind it is to change the corporate law that dedicates the corporation solely to the pursuit of profit. Profits would no longer come at the expense of five elements of the public interest -- the environment, human rights, public health and safety, the dignity of employees, and the welfare of our communities.

CCR: How would you do that?
HINKLEY: The law in every jurisdiction where corporations are formed basically says the same thing. It says it is the duty of directors to manage the corporation in a way that maximizes profits for shareholders.

I have suggested that we add 28 words to that: "but not at the expense of the environment, human rights, the public health and safety, the dignity of employees, or the welfare of the communities in which the corporation operates."

CCR: How would that be enforced?
HINKLEY: The model bill which I have drafted includes enforcement provisions similar to the U.S. federal securities laws. Essentially, what they would do would be to allow private litigants damaged by the corporation to bring suit both against the corporation and against the corporation's directors to seek restitution for such damage.

CCR: Any states trying to pass this?
HINKLEY: It has been introduced in the California Senate -- Senate bill 917, by the majority leader there, Senator Richard Alarcon. We haven't had it introduced in any other state, but we are working on that. It is a long process.

CCR: Are there hearings in California?
HINKLEY: Hearings are scheduled for May 8th.

CCR: Will you testify?
HINKLEY: No, I'm unavailable at that time, unfortunately.

CCR: The California Chamber of Commerce has denigrated this legislation. What are the chances of it passing into law?
HINKLEY: It might be passed this year. But sometime in the next 20 years, it will be passed everywhere. You have to take with a grain of salt anything said by something like a state Chamber of Commerce. That itself is an organization of corporations. They believe their job is to speak for business. And quite often, they will have a knee-jerk reaction to something like this. But if you ask Americans, as Business Week and the Harris Poll organization have -- which do they agree with more strongly -- that corporations should simply worry about maximizing profits for shareholders, or that corporations should sacrifice profits in order to recognize the interest of employees and the communities in which the corporation operates?

Ninety-five percent of Americans say that they feel more strongly about the second statement than they do about the first.

Unfortunately, the law is the first. And what the Code for Corporate Citizenship would do would be to change it to the second. Anytime you have 95 percent of Americans who believe something, then I think the law can be changed to reflect that.

CCR: You were in Richmond, Virginia last week. You were the driving force behind the incorporation of Licensed to Kill Inc.

Licensed to Kill Inc. obtained a charter from the Commonwealth of Virginia to manufacture and market tobacco products in a way that generates profits for investors while each year killing 400,000 Americans. So the intent is to kill.

The Corporations Commission in Virginia allowed this incorporation to go through. Why?
HINKLEY: Because they had no choice. The reason we incorporated Licensed to Kill was to show three things.

First, the state's involvement in establishing and providing continuing assistance to corporations.

Second, we wanted to show is that corporations could not exist if there were not laws that said they could exist.

And third, we wanted to show that these laws are flawed.

A spokesperson for the Corporation's Commission said they weren't happy about incorporating Licensed to Kill, but there was nothing they could do about it. And that is exactly the point.

We are suggesting that corporations that are going to abuse these five elements of the public interest should not be able to incorporate.

CCR: But even if your amendment were law in Virginia, they still would be allowed to incorporate.
HINKLEY: They would be allowed to incorporate, but they wouldn't be allowed to run their business in a way that abuses the public interest.

In other words, you can only incorporate certain companies that operate in a certain way.

If you want to operate in a way that abuses the public interest, then you are going to be out of business quickly, because you are going to go bankrupt.

CCR: If your amendment were law in Virginia, the tobacco companies would be forced out of business.
HINKLEY: Largely yes. But the model bill that I have drafted has a 15-year transition period. It is not a matter of -- we are going to pass this bill on Tuesday, then on Wednesday, corporations are going to start doing these things.

The model bill will put a goal out there for corporations. And we will say to them -- within these 15-year period, you have to change your operations so that you no longer abuse the public interest, the environment, human rights, public health and safety.

So, the idea is to give the companies time to transition out of the businesses, or to transition out of the way they are conducting their businesses into a way that is more respectful of the public interest.

There is nothing that says that businesses cannot be run profitably while respecting the public interest. The problem is that we set them up and we don't demand that of them.

We are saying, from now on, profit is still the reason you incorporate, but in doing so, we the people of the state don't want you violating these five elements of the public interest in order to make money.

CCR: If your amendment were law in each of the 50 states, what percentage of the American economy would be bankrupted?
HINKLEY: The 15-year transition period is supposed to mitigate that.

Hopefully the answer would be zero percent.

I would also point out that the model bill includes an exemption for any company with less than annual sales of $15 million. In California, they may have used $50 million.

But you have to understand, most corporations are small businesses. They are run in a way that does not abuse the public interest, because if they did, they would be out of business.

CCR: But the vast majority of total sales comes from big business. So, what percentage of those companies would be put out of business by your proposed amendment?
HINKLEY: The object is not to put anybody out of business.

CCR: I'm not talking about the object. I'm talking about the effect. Let's start with tobacco companies -- they are forced out of business -- right.
HINKLEY: Not necessarily them, even.

When I was in Richmond last week, there was an op-ed piece in the Richmond Times Dispatch by the president of the Virginia Chamber of Commerce, welcoming Philip Morris back to Richmond. They had recently announced that they were moving their headquarters from New York to Richmond.

One of the things he said was that we have to find uses for tobacco that are not detrimental to the public health. We have to invest in research and development and find other things that we can do with this crop.

CCR: What about the internal combustion engine?
HINKLEY: Yes, the internal combustion engine will have to change. But there are already automobiles on the road that don't pollute. The problem is they cost too much. The reason they cost too much is because we haven't put enough R&D investment into them yet to find out how to make them cheaper. One of the beauties of capitalism is that everybody competes to reduce their costs -- to make their products more competitive. The automobile industry is famous for this. Automobile companies are spending billions of dollars trying to improve the internal combustion engine.

The Code for Corporate Citizenship would change that focus. It would say -- okay, now we have to find some automobile that isn't going to pollute in 15 years. If the same kind of R&D was put into that project for 15 years, I believe we would get there.

CCR: The language of your proposed amendment is so vague -- trial lawyers must be jumping up and down with glee.
HINKLEY: I don't agree. I'm a securities lawyer. The securities law in the United States more or less operates on the following principle -- companies shall not use a false or misleading statement or omission in connection with the sale of a security.

False or misleading statement or omission -- those are not very precise words. But there is a reason they are not precise. Their lack of precision makes companies cautious. Companies do not want to spend all of their time in court defending their prospectus or registration statement that they file with the Securities and Exchange Commission (SEC). So, they are very cautious in how those documents are prepared, in what they say to the public.

The same principle can apply with regard to the Code for Corporate Citizenship. There is no question what "not at the expense of the environment" means. The law does not deal with trivialities. But still, "not at the expense of the environment" means no discharge of a harmful chemical into the environment. And it means no unsustainable development. That's not that hard to figure out.

Now, with regard to the language of human rights, and public health and safety, there is also not that much question. But when you get to the dignity of employees, or the welfare of our communities, I will grant you there is some lack of precision, which maybe has to be refined.

But we should remember that these two elements are essentially giving to groups that today bargain with corporations, but have no power -- the law would increase their bargaining power.

If a corporation wants to avoid a lawsuit over the dignity of employees, all they have to do is reach an agreement with employees as to what that means. The same is true with regard to the communities in which they operate.

Here's an example. Paper companies here in Maine are closing down left and right. There must be some sort of glut in the pulp and paper markets that is causing the plants to close down.

People and communities are being severely damaged as a result of a decision made in a corporate headquarters in New York or North Carolina or Georgia, or some other place, without any consideration given to the lives of the people or the communities that they are ruining in Maine.

If we had the Code of Corporate Citizenship, the companies would have to take into consideration those factors. They would have to talk to the town fathers. And they would have to factor in a cost that would be associated with that closing. And that cost would be to compensate the community or the employees for that closing. That cost might sway the decision about whether to close the plant. But if it were closed, at least the people who suffered as a result would be compensated for it.

CCR: Let's say that your amendment is passed in 49 states, but Delaware refuses to pass it. Doesn't that mean that all of the big companies will continue to incorporate in Delaware and not be affected by this law?
HINKLEY: It could mean that, but I don't believe that will happen. I once sat next to a Republican Delaware legislator at dinner. He was also a corporate securities lawyer, like myself. I ran my idea by him and he said to me -- Bob that is a great idea. You get that passed in 49 states, he said, and I'll get it passed here in Delaware.

I take a great amount of comfort from that. The legislature doesn't want to lose the tax revenue that the state of Delaware earns every year from having 60 percent of the Fortune 500 corporations incorporate in Delaware.

But think about this -- let's say the code is passed in 49 states. And, except for Delaware, we can look forward to no more corporate pollution, no more corporate violations of human rights, no more endangerment of the public safety, a much better situation for communities and the workers. The only thing that is holding this up is the revenues that the state of Delaware will earn from incorporating in Delaware.

The bottom line is that it is not that much. Someone has studied this, and I believe that the total amount that the state of Delaware gets for this sort of service that it provides is less than $1 billion a year. Well, for $1 billion a year, couldn't we talk Delaware into changing? I think we could.

CCR: You are underestimating the number of corporations that would have to go out of business, or radically change their businesses.

Take Wal-Mart for example. Wal-Mart would be attacked by all of the human rights campaigners because of the way that they do business with sweatshops overseas, by the way they treat their own workers. They wouldn't be able to run their business the way they do today.
HINKLEY: That's right. They wouldn't be able to ruin downtown business districts in small towns across America. Their costs would go up.

Whether or not that would mean they could operate or not, I can't tell you right now. But the question is -- why should the public absorb these costs? Wal-Mart is generating these costs. Why shouldn't they pay for them?

CCR: You are so unlike every other corporate lawyer I have met that I want you to reveal, here today for the first time, why. What is it about you that made you change this way?
HINKLEY: Most corporate lawyers are like state Chambers of Commerce.

They believe that their livelihood depends upon representing a corporate interest. They see a corporation dedicated solely to the pursuit of profit. And they think that if they raise any suggestion that there might be a better way, they are talking anti-corporate. But I don't think that I am talking anti-corporate.

I'm talking about the evolution of the corporation. Making corporations better citizens. You would have to go back to my upbringing and everything else as to why I look at it differently.

CCR: Okay, let's do that.
HINKLEY: I was brought up in a family where we thought about making a better world.

CCR: What was the work of your parents?
HINKLEY: My father was an insurance agent, but he was a local politician as well. He was a Republican County Chairman in upstate New York. Between Binghamton and Oneonta. I went to Fordham University, got a good Jesuit education.

I was asked by a friend of mine -- who was the chair of social work at Sydney University in Australia -- to tell him why corporations could care less about human rights. He was writing a book called Human Rights and Corporate Responsibility. He said to me -- Bob, I talk to the business leaders in this community, and it is like they could care less. It is totally irrelevant to them. The whole concept of human rights is totally irrelevant. And he asked -- why is that?

And I explained to him that the corporate law dedicates the system to the pursuit of profit. And in that, the pursuit of human rights is irrelevant. He said fine -- write me a chapter on that. One thing led to another. I wrote him a chapter that was included in his book.

I'm a lawyer, an accountant and a business manager. I have run my own law firm. I ran the Australian operations of Skadden Arps. I ran the Asia Pacific region out of Hong Kong for Skadden Arps.

And in doing that, I thought that I ought to know a little bit about managing, more than I learned in business school. I read people like W. Edwards Deming. He said something that very much changed my thinking.

Deming said that in business 94 percent of all problems are systems problems and six percent are people problems. So, if a business is not performing optimally, you can threaten people, you can give people larger incentives, you can do anything you like -- but that is only going to work six percent of the time.

Ninety-four percent of the time, the system creates the problem. That started me thinking -- why do corporations abuse the public interest? And it brings you right back to the fact that the law dedicates the corporation to the pursuit of self-interest. And obviously, much of the time, that is going to come at the expense of the public interest. More often than not, actually.

And people say -- well that's the law.

Well, we can change the law.

A professor at MIT, Peter Senge, wrote The Fifth Discipline: The Art of the Learning Organization.

Senge said that if you want to change a system, the place to change it is at the place of highest leverage, the place where you can make the smallest change, where everyone in the system can understand the change, and have the greatest effect.

Again, in the corporation, that's the duty of directors to make money for shareholders.

Senge said that if you make a complicated change, people won't sign on, they won't get involved, it won't work.

He said it has to be a simple change. And this is how I came up with my 28 words of the Code for Corporate Citizenship.

CCR: Why not an even simpler change -- require corporations to pursue only the public interest -- forget about profit?
HINKLEY: That's a radical change. Instead of making the corporation dedicated to the pursuit of profit, make it dedicated to the environment, the public interest, human rights.

That is not an evolutionary change, that's a revolutionary change. If I had been suggesting that to you today, you would say -- there is no way you are going to get that done.

I wouldn't have left the position I had at Skadden Arps to pursue that, because I believe it would be folly.

CCR: Richard Grossman has a simple change -- strip corporations of the Constitutional protections now granted to them -- protections that were intended for you and I and other human beings.
HINKLEY: The problem with corporations is not the rights they have. The problem is that they have no obligations to the public interest. They are the most powerful systems, when it comes to economic and political might -- and yet they have no obligation to the public interest.

CCR: Couldn't it be a question of both rights and duties?
HINKLEY: Richard and the people at the Program on Corporations Law and Democracy have analyzed the problem and they say that this all started in 1886.

In 1886, in the Santa Clara decision, the Supreme Court essentially held that corporations are entitled to equal protection under the law and the right to due process.

Grossman says that was the mistake. I think their analysis is wrong. When you read their materials, they talk about corporations before the revolution and after the revolution. And what they tend to lose sight of is that between the revolution and the end of the Civil War, there was very little abuse of corporate abuse of the public interest. And the reason for that was, first of all, the revolution got rid of King George's corporations. The revolution got rid of those corporations.

After the revolution, right up until after the Civil War, states were very careful issuing corporate charters. And when the did issue corporate charters, they put conditions on them as to when they could be revoked, they put time limits on them, they limited a company's ability to invest in other companies, they limited what businesses they were able to engage in. Every new corporation required a separate law of a state legislature. This slowed corporations down tremendously.

It put obligations on corporations to please the state legislature. And essentially, I'm suggesting that we should go back to that model -- not exactly the way they did it, with a new state law every time a company wants a charter. That's unworkable.

But what I'm suggesting is that you ought to include in the new state law obligations to the public interest that were there between the revolution and the Civil War -- but are not now.

CCR: Why not both limit a corporation's Constitutional rights and pass your amendment?
HINKLEY: Why not? I'll go along with that. But here is what you have to do to take away the rights of corporations -- you have to change the Constitution. And you have to change the Constitution to say that we'll have two systems of laws -- one for people, which are entitled to due process and equal protection, and another for corporations, which are not.

In other words, their property can be taken from them without due process, they can be fined without due process, they don't have the same rights in court that people do, and state legislatures can pass laws in favor of one corporation against another depending on who is in power in the state legislature.

I don't think you are going to get that through. If you do, you are going to have an incredible chilling effect on the whole system of capitalism. But if you can get it through, why not?

CCR: You mean you are in favor of putting an "incredible chilling effect on the whole system of capitalism"?
HINKLEY: I'm not really in favor of it. And I'm not really pursuing it. But your hypothetical is why not have both.

CCR: Are you saying you support it?
HINKLEY: I wouldn't get involved in it. It's a long term fight. It's probably unworkable, in terms of having two systems of laws -- one for people and one for corporations. It hinges on a pretty tenuous distinction -- and that is on whether or not a business is incorporated, or whether it is held as a sole proprietorship.

CCR: What is the difference between a corporation and a sole proprietor.? Well, it comes down the grant of limited liability to corporate shareholders. Why should the state give the corporation limited liability to its shareholders?
HINKLEY: Buckminster Fuller takes the history of the corporation to King George's time, and back even further to Queen Elizabeth I. The first corporations were set up to run shipping. Without incorporation, if you own a ship, and you are shipping goods for people, and your ship goes down at sea, you are liable to those people for those goods.

Essentially what happened was that a group of investors went to the Queen and said -- we need a better system here. How about you issue a charter to us which basically says -- this business is a separate entity? The only liability it can have is liability to the extent it has assets. In other words, if it creates liability to people's whose goods it is shipping, those people cannot sue the investors, they can only sue the business. And that system worked very well. It's the foundation of the capitalist system. Without limited liability, investors in businesses would be liable for any damage the business causes.

CCR: Translation -- personal accountability -- a Republican virtue.
HINKLEY: It may have worked in the 16th century, but in today's system, where we have large publically held companies, anybody who has a 401(k) plan that is invested in asbestos -- you wouldn't want that thing wiped out because of damages done by a company that you have very little control over.

CCR: That's the point. If there were personal accountability for investors, we wouldn't have as many of these problems.
HINKLEY: But we wouldn't have the big companies that we have today. In fact, it would be very difficult to even find small companies.

Essentially, there would be an incredible risk that investors would be asked to take on anytime they invested in a company. Today, you invest in Ford at $9 a share, and Ford does damage, Ford goes out of business, you don't have to worry about the people who were hurt suing you for the difference.

CCR: Do you believe that if your amendment were to become law, it would be come the primary arena for regulation of corporate behavior, and that there would be less of a need for criminal prosecution of corporations, for SEC, EPA, and FTC civil enforcement and so on.
HINKLEY: If the model bill were to become law, corporations would become much more self-regulatory. In other words, they would change their practices so as not to violate the code. And essentially, enforcement would be more a private matter than a public matter. And that's the object of this law.

People probably don't understand this, but most securities law enforcement is not done through the SEC. It's done through private litigants. And because of the prospect of that happening, business people change their behavior to basically try to run their business so that if anybody sues them, they won't be able to survive a motion for summary judgement.

CCR: What was your take on Sarbanes/Oxley and some of the post-Enron, WorldCom reforms?
HINKLEY: Eyewash. It wasn't worth much at all.

CCR: Those reforms won't prevent another market meltdown.
HINKLEY: Definitely not.

CCR: Although your amendment doesn't really deal with financial fraud.
HINKLEY: That's right. My amendment does not deal with protecting the interests of shareholders. My amendment deals with protecting the public interest -- the non-shareholder.

CCR: Do you have any ideas on what should have been done to prevent a market meltdown?
HINKLEY: I gave it some thought. What caused it? The securities law system depends heavily on legal advisors and accounting advisors. When the accounting industry went from the Big Eight to the Big Five, with the profession went from depending on revenues for auditing to consulting revenues -- those were systems changes that made the meltdown more likely to happen than not.

So, you have auditors being subject to manipulation because of the consulting fees, you have a systems problem waiting to wreck havoc.

CCR: We interviewed last week Frank Partnoy, a professor of law at the University of San Diego Law School. He has just published a book titled Infectious Greed. It's a history of financial fraud in recent years. His conclusion is that we have a double standard of justice -- steal a pizza, go to jail. Do what these investment bankers did this week -- get a civil fine or at most a few months in prison.
HINKLEY: It is true. But it is difficult to prosecute corporate crime.

To prosecute a crime, you have to show mens rea. You have to show a proper state of mind, when the person was carrying out the act. The problem with corporate crime is that all corporate acts are collectively planned and collectively implemented, and not necessarily by the same group of people.

So, it is quite easy to say -- well, I didn't know that he was doing that. And the people who plan say -- that's not the way we told him to carry it out. And the people who implement say -- we were just following orders. That makes it very hard to criminally prosecute corporate crime.

In the SEC context, the SEC has to prove that somebody acted with knowledge that they were behaving illegally. But the private litigants have a much easier burden of proof.

CCR: How much of your life are you going to dedicate to this project? How much of your life can you?
HINKLEY: We will reach that point sometime soon.

CCR: Within a year, two years? You are a one person show, right?
HINKLEY: I don't think I necessarily want to disclose when that is going to happen, but it is going to happen. But I'd prefer not to look at myself as a one man show. I'd prefer to create tools like the Code for Corporate Citizenship, like Licensed to Kill, that anybody can take and run with. There is a group in Minnesota working on this code (www.c4cr.org). The people at Citizen Works have been very helpful (www.citizenworks.org).

The group of people who see this proposed code as a tool to reign in corporate power is going to grow.

[Contact: Robert Hinkley, P.O. Box 81, Brooklin, Maine 04616. E-mail: rchinkley@ media2.hypernet.com]