A caution on corporate irresponsibility

The Boycott, Divestment and Sanctions (BDS) movement has recently recorded two significant putative victories in its effort to harm the Jewish state.

Airbnb Vice-President Chris Lanahan on a helicopter tour of the West Bank, December 18, 2018 (photo credit: COURTESY THE ISRAELI PROJECT)
Airbnb Vice-President Chris Lanahan on a helicopter tour of the West Bank, December 18, 2018
The Boycott, Divestment and Sanctions (BDS) movement has recently recorded two significant putative victories in its effort to harm the Jewish state.
Airbnb recently announced that it would no longer list homes for rent in Jewish communities in Judea and Samaria (the West Bank). Last month, HSBC confirmed its decision to divest from Elbit, one of Israel’s largest companies.
Both Airbnb and HSBC couched their decisions as responses to human rights and not political issues, but their disparate treatment of Israeli companies and citizens leave little doubt as to motive and motivation. The truth is that these “victories” actually represent a shocking abdication of appropriate corporate governance and responsibility, exposing both companies to litigation, legal sanctions and material self-inflicted diminution in value. In case other companies are considering such precipitous and ill-advised actions, we offer the following non-political reasons why responsible companies, boards and management should not succumb to the bullying tactics of those encouraging them to boycott Israel.
First, boycotting Israel exposes a company to expensive challenges. Caving in to BDS demands means engaging in blatant discrimination on the basis of nationality and ethnicity, including anti-boycott regulations under the 1972 Export Administration Act and the Ribicoff Amendment to the 1976 Tax Reform Act. These violations involve significant administrative and criminal penalties. In the case of Airbnb, class action lawsuits against the company in Israel and unfair religious discrimination cases in the US are currently pending.
Second, these actions appear to egregiously violate the fiduciary duties of loyalty and care that directors owe to their corporations and shareholders. The duty of loyalty requires decision-makers to put the welfare and best interests of the company before their own personal interests and feelings, and the duty of care requires them to reasonably consider the impact of their decisions on the company’s business and prospects. Viewed from these perspectives, boycotting Israel on a discriminatory basis is both unjustified and bad for business. At least 26 states in the US have anti-BDS legislation in effect barring those states from doing business with companies engaging in BDS. Losing business in the service of possibly unpopular, certainly controversial, and likely criminal ideological stances is no part of good corporate governance or fiduciary responsibility. There is no conceivable shareholder interest served in this blatant acquiescence to extortion, and the apparent disregard for the consequences of the actions are so obvious and severe that it would be almost impossible for a director to justify the decision on the basis of business judgment.
Further to this point, HSBC is a heavily regulated institution. It requires licenses from multiple jurisdictions to conduct its banking and business activities; it does business with states, municipalities, pension funds, etc. Violations of anti-boycott laws put that business at risk. On the basis of what conceivable business purpose could the directors of HSBC defend such a discriminatory action? Are they planning to divest from all companies involved in munitions, homeland defense and aerospace? Is there some overriding shareholder interest in putting millions of dollars of state pension funds at risk? Do they really think that credible charges of antisemitism, or even anti-Zionism, will redound to their benefit or enhance their global profile with shareholders and investors? What cost/benefit or risk analysis could possibly have been undertaken that would warrant this apparent breach of duty? HSBC is chartered in Hong Kong. One wonders whether its board and management intend to take similar positions with respect to the Chinese occupation of Tibet, discrimination against Muslims, and other human rights violations. And if not, why not?
THIRD, IN light of the foregoing, it is quite possible that corporate directors and officers would be subject to personal liability for these violations. For reasons of public policy, the corporate statutes of many states prohibit companies from indemnifying corporate directors and officers for unlawful acts, or breaches of fiduciary duty. Similarly, many directors’ and officers’ insurance policies deny coverage for violations of law.
Finally, Airbnb is said to be contemplating an initial public offering and HSBC has public shareholders. They will be filing disclosure documents with the Securities and Exchange Commission and sending disclosure documents to shareholders and investors in which they are required to set forth material risk factors affecting the company and its prospects. Since no public company has yet attempted this disclosure, we offer the following template for anyone foolhardy enough to undertake this misguided action: “Investment in our securities involve serious risks, because we are engaging in an unlawful boycott against Israel. The activity was not undertaken in connection with any corporate or business objectives, and is limited to discrimination against Jews and Israel. We have no current plans to allow political considerations to affect our business in other jurisdictions but that may change. We may incur significant liability and cost in defending the company against litigation and enforcement actions responding to our violations. We may also incur loss of business from jurisdictions that have anti-boycott provisions in place. Our actions in this regard may subject us to material uncertainty, as well as material and adverse consequences for our business and prospects.”
We think that this word of caution is specifically timely, because the United Nations Human Rights Council (UNHRC), a body so biased that the United States withdrew from it in protest last summer, is expected to release a “blacklist” of over 200 companies around the globe, among them several American companies that have legitimate business dealings with Israel. To the extent that any of these companies feel pressured to act on the basis of their inclusion on this list, we hope that they keep the possible consequences outlined above in mind. The UNHRC has no authority whatsoever. Companies should not be outsourcing their business decisions to it, and those that do should be aware of the attendant risks. As a matter of basic principle, blatant discriminatory business practices on the basis of nationality and ethnicity are deeply offensive to American values and contrary to American public policy. But even putting those considerations aside, directors should think long and hard about liability for violation of their fiduciary obligations before they allow their companies to submit to extortion and blackmail.
Dr. Mark Goldfeder is Director of the Restoring Religious Freedom Project at Emory University. Gary Epstein recently retired as Global Chair of Greenberg Traurig’s Corporate and Securities Practice.