My previous blogposts (one, two, three, four, five, and six) discussed why conspiracy prosecutions should be used to reach coordinated wrongdoing by agents within an organization. The intracorporate conspiracy doctrine has distorted agency law and inappropriately handicaps the ability of tort and criminal law to regulate the behavior of organizations and their agents.
My Intracorporate Conspiracy Trap article argues that the intracorporate conspiracy doctrine is not properly based in agency law, and that it should most certainly not be applied throughout tort law and criminal law. As a result of the immunity granted by the doctrine, harmful behavior is ordered and performed without consequences, and the victims of the behavior suffer without appropriate remedy. My Corporate Conspiracy Vacuum article argues that public and judicial frustration with the lack of accountability for corporate conspiracy has now warped the doctrines around it.
Courts have used a wide variety of doctrines to hold agents of enterprises responsible for their actions that should have prosecuted as intracorporate conspiracy. Some of these doctrines include:
But the new applications of these alternative doctrines are producing distortions that make the doctrines less stable, less predictable, and less able to signal proper incentives to individuals within organizations.
An example of how piercing the corporate veil has been used to defeat intracorporate conspiracy immunity can be seen in the Morelia case. A previous blogpost discussed how the intracorporate conspiracy doctrine has defanged RICO prosecutions of agents and business entities. In Morelia, which was a civil RICO case, the federal district court, obviously outraged by defendants’ behavior in the case, explicitly permitted plaintiffs to pierce the corporate veil to avoid application of the intracorporate conspiracy doctrine. In a creative twist invented from whole cloth to link the two doctrines, the Morelia court overruled its magistrate judge’s recommendation to announce:
"Since the court has determined that plaintiffs have properly alleged that the corporate veil should be pierced, the individual defendants may be liable for corporate actions and any distinction created by the intra-corporate doctrine does not exist."
Regarding its test for piercing the corporate veil, the Morelia court further overruled its magistrate’s recommendation by focusing on plaintiffs’ arguments regarding undercapitalization, and its decision included only a single footnote about the disregard of corporate formalities.
The Morelia court is not alone in its frustration with the intracorporate conspiracy doctrine and in its attempt to link analysis under the intracorporate conspiracy doctrine with the stronger equitable tenets of piercing the corporate veil. More subtly, courts across the country have started to entangle the two doctrines’ requirements as intracorporate conspiracy immunity has become stronger and courts have increasingly had to rely on piercing the corporate veil as an ill-fitting alternative to permit conspiracy claims to proceed. Even large public companies should take note. No public company has ever been pierced, but a bankruptcy court recently reverse-pierced corporate veils of the Roman Catholic Church, which is far from a single-person “sham” corporation. My Corporate Conspiracy Vacuum article discusses additional examples and repercussions for incentives under each of these alternative doctrines.
My next blogpost will examine how frustration with intracorporate conspiracy immunity has led to volatility in responsible corporate officer doctrine and related control person liability. Ironically, executive immunity from conspiracy charges fuels counterproductive CEO turnover.
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My previous blogposts (one, two, three, four, and five) introduced why conspiracy prosecutions should be used to reach wrongdoing by agents within an organization. The 2012 prosecution of Monsignor Lynn for twelve years of transferring predator priests from parish to parish at the command and for the benefit of the Archdiocese of Philadelphia was defeated by the intracorporate conspiracy doctrine. Moreover, this was not the first time that the Roman Catholic Church had used the doctrine to help its bureaucrats escape liability for suppressing sex abuse cases.
In 1997, employees of the Roman Catholic Church in Connecticut were alleged—very much like Lynn—to have covered up the sexual misconduct of a priest, enabling him to continue to abuse children entrusted to the Church’s care by virtue of his office. When sued for civil conspiracy by the victims, the employees’ defense was that they were acting in the best interest of the corporation.
The Connecticut court found that the test for whether an agent is acting within the scope of his duties “is not the wrongful nature of the conspirators’ action but whether the wrongful conduct was performed within the scope of the conspirators’ official duties.” If the wrongful conduct was performed within the scope of the conspirators’ official duties, the effect of applying the intracorporate conspiracy doctrine is to find that there was no conspiracy. Because covering up the priest’s sex abuse was in the best interest of the corporate organization, the court found that the employees were all acting on behalf of the corporation. The court never reached the issue of whether the employees’ actions rose to the level of a civil conspiracy. Under the intracorporate conspiracy doctrine, it was a tautology that no conspiracy could be possible.
This case is interesting not only because it documents the way that the intracorporate conspiracy doctrine protects enterprises from inquiry into conspiracies, but also because of the subsequent history of its allegations. The full extent of the Bridgeport Diocese’s wrongdoings—if current public knowledge is indeed complete—only came to light in December 2009, twelve years after the 1997 case. It took twelve years, the combined resources of four major newspapers, an act displaying public condemnation of the Roman Catholic Church by members of the state legislature, and finally a decision by the U.S. Supreme Court to release the documents that could have become the basis of the intracorporate conspiracy claim in 1997. There is still no conspiracy suit or any criminal charge against the Diocese. Additional details about the case are available in my article The Intracorporate Conspiracy Trap. The article will be published soon in the Cardozo Law Review, and it is available in draft form here.
Astonishingly, none of the extensive news coverage about the sexual abuse cases in Bridgeport over those additional twelve years has connected these facts to the original 1997 case defeated by application of the intracorporate conspiracy doctrine. If the intracorporate conspiracy doctrine had not provided immunity, the case might have revealed the Diocese’s pattern of wrongdoing long beforehand and in a much more efficient way.
My next blogpost reveals additional dangers from the spread of the intracorporate conspiracy doctrine: frustration with the intracorporate conspiracy doctrine has started to distort other areas of law.
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My previous blogposts (one, two, three, and four) introduced why conspiracy prosecutions should be used to reach wrongdoing by agents within a business organization. The same legal analysis applies to religious organizations.
We should have been able to charge Monsignor Lynn and the Archdiocese of Philadelphia that directed his actions to hide the sexual abuse by priests with criminal conspiracy. Instead, Pennsylvania charged Lynn with two things: child endangerment and conspiracy with the priests.
As international news outlets later reported, Lynn could not be guilty of child endangerment because the state’s statute could not apply to an administrative church official who did not directly supervise children.
Lynn could not be guilty of conspiracy with the priests because he did not share their “particular criminal intent.” As the jury understood, Lynn was not trying to help a predator priest get from parish to parish so that “he can continue to enjoy what he likes to do.” Lynn was trying to protect the reputation of his employer, the Archdiocese—if the priests benefitted, that was a side issue.
So why didn’t the prosecution charge Lynn and the Archdiocese with conspiracy? It was the Archdiocese that directly coordinated and profited from Lynn’s actions. The intracorporate conspiracy doctrine, as discussed before, would bar that prosecution. In Pennsylvania, it is “well-settled that a corporation cannot conspire with its subsidiary, its agents, or its employees.”
Finally, considering other options, Lynn could not have been charged with possible crimes such as obstruction of justice. Lynn was too good: Lynn and the Archdiocese were so successful at covering up the sexual abuse and silencing victims, there was no ongoing investigation to obstruct. “Aiding and abetting” the Archdiocese’s cover-up of the sex abuse would have been difficult to pursue (see more here) and is not allowed under RICO in the Third Circuit.
My next blogpost will demonstrate that the Monsignor Lynn case was also part of a pattern by the Roman Catholic Church in America to use the intracorporate conspiracy doctrine to hide the coordinated wrongdoing of its agents to cover-up sexual abuse by priests. Fifteen years before prosecutors attempted to try Monsignor Lynn, the silenced Connecticut sex-abuse case showed the Church how effective this defense could be.
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My previous blogposts (one, two, and three) introduced the topic of how the intracorporate conspiracy doctrine prevents the prosecution of coordinated wrongdoing by individuals within organizations. This post illustrates the doctrine’s effect in the context of a specific organization—here a religious one: the Roman Catholic Archdiocese of Philadelphia and the systematic transfer of predator priests. This post is based on my article The Intracorporate Conspiracy Trap to be published soon in the Cardozo Law Review. The article is available in draft form here.
For twelve years, from 1992 to 2004, as Secretary for Clergy, Monsignor William Lynn’s job within the Philadelphia Archdiocese was to supervise priests, including the investigation of sex-abuse claims. In 1994, Monsignor Lynn compiled a list of thirty-five “predator” priests within the archdiocese. He compiled the list from secret church files containing hundreds of child sex-abuse complaints. On the stand, Lynn testified that he hoped that the list would help his superiors to address the growing sex-abuse crisis within the Archdiocese. But for twelve years Lynn merely re-assigned suspected priests, and he hid the abuse within the church. His superiors never acted on the list that Lynn gave them—in fact, they ordered all copies of the list destroyed—and Lynn never contacted outside authorities. As late as 2012, one of the “predator” priests on Lynn’s list was still serving in a parish.
All parties agree that Lynn’s actions in transferring priests who molested children allowed those priests to continue to abuse children, sheltered the priests from potential prosecution, and directly protected the Philadelphia Archdiocese’s reputation.
In fact, Lynn’s actions had been ordered by the archbishop on behalf of the Archdiocese. Lynn reported what he was doing to his superiors, who rewarded Lynn with twelve years of employment and a prominent position within the Archdiocese for doing his job as they saw it. Moreover, the archbishop himself inadvertently revealed the existence of the number thirty-five “predator” priests to the media, and he was the one who ordered all copies of the list to be shredded to keep it from being discovered in legal proceedings.
The instinct here is that this behavior—the transferring of predator priests to cover-up the sexual abuse of children—should have been illegal for Monsignor Lynn to pursue. But the Commonwealth could not prosecute Monsignor Lynn and the Archdiocese for conspiracy. Furthermore, immunity for Lynn’s behavior is now the rule in most state and federal jurisdictions around the country. As described in an earlier blogpost, the intracorporate conspiracy doctrine provides immunity to an enterprise and its agents from conspiracy prosecution, based on the legal fiction that an enterprise and its agents are a single actor incapable of the meeting of two minds to form a conspiracy.
My next blogpost will further investigate why this behavior was not illegal under our current system, and how we should have tried Monsignor Lynn.
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My first and second blogposts introduced why conspiracy prosecutions are particularly important for reaching the coordinated actions of individuals when the elements of wrong-doing may be delegated among members of the group.
So where are the prosecutions for corporate conspiracy??? The Racketeer Influenced and Corrupt Organizations Act of 1970 (“RICO”, 18 U.S.C.A. §§ 1961 et seq.), no longer applies to most business organizations and their employees. In fact, business organizations working together with outside agents can form new protected “enterprises.”
What’s going on here? In this area and many other parts of the law, we are witnessing the power of the intracorporate conspiracy doctrine. This doctrine provides immunity to an enterprise and its agents from conspiracy prosecution, based on the legal fiction that an enterprise and its agents are a single actor incapable of the meeting of two minds to form a conspiracy. According to the most recent American Law Reports survey, the doctrine “applies to corporations generally, including religious corporations and municipal corporations and other governmental bodies. The doctrine applies to all levels of corporate employees, including a corporation’s officers and directors and owners who are individuals.” Moreover, it now extends from antitrust throughout tort and criminal law.
What is the practical effect of this doctrine? The intracorporate conspiracy doctrine has distorted agency law and inappropriately handicaps the ability of tort and criminal law to regulate the behavior of organizations and their agents. Obedience to a principal (up to a point) should be rewarded in agency law. But the law should not immunize an agent who acts in the best interest of her employer to commit wrongdoing. Not only does the intracorporate conspiracy doctrine immunize such wrongdoing, but the more closely that an employer orders and supervises the employee’s illegal acts, the more the employer is protected from prosecution as well.
My next blogpost illustrates how the intracorporate conspiracy doctrine operates to defeat prosecutions for coordinated wrongdoing by agents within an organization. Let’s examine the case of Monsignor Lynn.
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In my previous blogpost, I granted the merit of defense counsel’s argument that the actions of discrete individual defendants—when the law is not permitted to consider the coordination of those actions—may not satisfy the elements of a prosecutable crime.
But what is the coordination of individuals for a wrongful common purpose? That’s a conspiracy. And, for exactly the reasons that defense counsel articulates, these types of crimes cannot be reached by other forms of prosecution. The U.S. Supreme Court has recognized that conspiracy is its own animal. “[C]ollective criminal agreement—partnership in crime—presents a greater potential threat to the public than individual delicts.” When we consider the degree of coordination necessary to create the financial crisis, we are not talking about a single-defendant mugging in a back alley—we are talking about at least the multi-defendant sophistication of a bank robbery.
Conspiracy prosecutions for the financial crisis have some other important features. First, the statute of limitations would run from the last action of a member of the group, not the first action as would be typical of other prosecutions. This means that many crimes from the financial crisis could still be prosecuted (answering Judge Rakoff’s concern). Second, until whistle-blower protections are improved to the point that employees with conscientious objections to processes can be heard, traditional conspiracy law provides an affirmative defense to individuals who renounce the group conspiracy. By contrast, the lesson Wall Street seems to have learned from the J.P. Morgan case is not to allow employees to put objections into writing. Third, counter to objections that conspiracy prosecutions may be too similar to vicarious liability, prosecutors would have to prove that each member of the conspiracy did share the same common intent to commit wrongdoing. The employee shaking his head “no” while saying yes would not be a willing participant, but many other bankers were freely motivated by profit at the expense of client interest to cooperate with a bank’s program.
My next blogpost will ask: where are the prosecutions for corporate conspiracy?
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It is a pleasure to be guest-blogging here at The Glom for the next two weeks. My name is Josephine Nelson, and I am an advisor for the Center for Entrepreneurial Studies at Stanford’s business school. Coming from a business school, I focus on practical applications at the intersection of corporate law and criminal law. I am interested in how legal rules affect ethical decisions within business organizations. Many thanks to Dave Zaring, Gordon Smith, and the other members of The Glom for allowing me to share some work that I have been doing. For easy reading, my posts will deliberately be short and cumulative.
In this blogpost, I raise the question of what is broken in our system of rules and enforcement that allows employees within business organizations to escape prosecution for ethical misconduct.
Public frustration with the ability of white-collar criminals to escape prosecution has been boiling over. Judge Rakoff of the S.D.N.Y. penned an unusual public op-ed in which he objected that “not a single high-level executive has been successfully prosecuted in connection with the recent financial crisis.” Professor Garett’s new book documents that, between 2001 and 2012, the U.S. Department of Justice (DOJ) failed to charge any individuals at all for crimes in sixty-five percent of the 255 cases it prosecuted.
Meanwhile, the typical debate over why white-collar criminals are treated so differently than other criminal suspects misses an important dimension to this problem. Yes, the law should provide more support for whistle-blowers. Yes, we should put more resources towards regulation. But also, white-collar defense counsel makes an excellent point that there were no convictions of bankers in the financial crisis for good reason: Prosecutors have been under public pressure to bring cases against executives, but those executives must have individually committed crimes that rise to the level of a triable case.
And why don’t the actions of executives at Bank of America, Citigroup, and J.P. Morgan meet the definition of triable crimes? Let’s look at Alayne Fleischmann’s experience at J.P. Morgan. Fleischmann is the so-called “$9 Billion Witness,” the woman whose testimony was so incriminating that J.P. Morgan paid one of the largest fines in U.S. history to keep her from talking. Fleischmann, a former quality-control officer, describes a process of intimidation to approve poor-quality loans within the bank that included an “edict against e-mails, the sabotaging of the diligence process,… bullying, [and] written warnings that were ignored.” At one point, the pressure from superiors became so ridiculous that a diligence officer caved to a sales executive to approve a batch of loans while shaking his head “no” even while saying yes.
None of those actions in the workplace sounds good, but are they triable crimes??? The selling of mislabeled securities is a crime, but notice how many steps a single person would have to take to reach that standard. Could a prosecutor prove that a single manager had mislabeled those securities, bundled them together, and resold them? Management at the bank delegated onto other people elements of what would have to be proven for a crime to have taken place. So, although cumulatively a crime took place, it may be true that no single executive at the bank committed a triable crime.
How should the incentives have been different? My next blogpost will suggest the return of a traditional solution to penalizing coordinated crimes: conspiracy prosecutions for the financial crisis.
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It is time to wind up the affairs of our Roundtable on Teaching Corporations/Business Associations. Gordon, Lisa, and I would like to thank our guests Afra Afsharipour (UC Davis), Kent Greenfield (Boston College), and David Millon (Washington & Lee).
You can read all the posts in this Roundtable here.
Please rejoin us on Thursday and Friday as we host a large number of our Conglomerate Masters and the Masters alumni from the previous years as we mark the one year anniversary of the Dodd-Frank Act with a forum taking a hard look at the statute and the regulatory process in the wake of the statute.
I really appreciate the robust discussion on ways to teach corporate social responsibility, especially as this is something that I struggle with in my BA class. I tend to take the approach that Lisa and Kent outline. I try to introduce basic corporate law theory concepts and then teach Wrigley and Dodge back-to-back. These cases do a terrific job in setting up some fundamental questions about the nature of the corporation, the role of the Board and shareholders, the question of to whom directors owe fiduciary duties, the Board's responsibility to other stakeholders, is shareholder-wealth maximization really mandated by corporate law (I agree with David’s analysis that it is not), the rationales for the business judgment rule, etc.
I try to animate these questions and the cases by incorporating the stories and characters involved in the cases. I suspect that many others do the same. The use of stories helps students have a more robust discussion of the legal issues involved in the case, how these cases have shaped the law, and whether these cases really stand for the propositions that we now assume they stand for. Incorporating these corporate law stories can also help us teach students about how personality, motive, and social/political/historical context affect judicial opinions and outcomes of cases. For example, Henry Ford was a much more controversial figure than a basic reading of Dodge v. Ford (as presented in most casebooks) makes him out to be. The background story of the case illuminates the fraught relationship between Henry Ford (the controlling shareholder) and the Dodge Brothers (minority investors) whose business plans would place them in competition with Ford.
For anyone who is not already aware, you can get a better sense of the background of many of the cases we teach in books like Corporate Law Stories and The Iconic Cases in Corporate Law. If you are aware of other books/articles with good corporate law stories, please submit a comment with a link or reference.
My apologies for arriving late to the party. I am currently teaching Corporations in London as part of the Georgetown Summer Law Program, and finding the time to blog has been a challenge.
In reading the posts in this Roundtable, I was struck by the fact that all of them deal with coverage! While teachers of other courses face the issue of what to leave in and what to leave out, I can't think of another course in the curriculum where this issue is so prominent. (As an associate dean in charge of curriculum, I have some standing to make this claim, though I assume others would take a different view.)
The problem with business organizations is not just that there is so much law, but rather that we rely on this course to provide a general introduction to business for students who have no past experiences with business. Some schools offer a separate "business principles" course (accounting + finance) to get at this problem, but the problem persists for the business organizations course because most students don't take the business principles course. As a result, we spend time on these basic business concepts, time that could otherwise be spent on myriad doctrinal puzzles.
One way to get at the problem, described by David Millon, is to devote more time to business organizations generally. The W&L solution is to divide business organizations into two courses, one relating to closely held businesses and one relating to public corporations. While this has long been my preferred solution (it's the structure we used at Wisconsin), as David noted, only about half of the students who take the first course enroll in the second. That seems like a big miss to me, since the course on public corporations is the place where students engage many of the big policy questions relating to the role of corporations in society.
At BYU we teach Business Associations as a three-credit course, and we treat this as an overview course. Almost all of the students in the law school take the course, which is offered both semesters. When I first started teaching in this system, I argued that three credits was wholly inadequate to cover the field, and that is undoubtedly true. But this overview course is starting to grow on me. Strangely, being constrained in this way is liberating in that I don't feel any pressure to cover every doctrinal twist and turn. Instead, I feel pressure to focus on foundational concepts, which the students can use in Corporate Finance, Mergers and Aquisitions, Securities Regulation, and other advanced courses if they choose to deepen their training in business organizations.
The advantage of our system, then, is that almost all students get some grounding in the whole field, from agency law through hostile takeovers. Although some superficiality is inevitable when striving to cover that much territory, I have the sense that my students now are more fluent in the role of limited liability, the essence of fiduciary obligation, and the varied conflicts inherent in business organizations than they were when I taught more of the particulars of the doctrine. To invoke that old saw, they are seeing more of the forest by focusing less on the trees. Is it possible that less is actually more in this instance?
David, Kent and Erik all offer some very nice insights about the best way to teach corporate social responsibility. So I could not help but to add my own.
First, I tend to focus on CSR by teaching Dodge and Wrigley Fields back-to-back. Then I have a broader discussion about both the aims of the corporation, and corporate actors ability to pursue those aims, in light of both cases.
Second, the question about how, and to what extent, you focus on CSR also could be viewed as a question about whether and to what extent you teach corporate law theory in the basic Corporations/B.A. course. As Kent points out, some students get turned-off by theory, and hence you risk losing them if you decide to focus on theory. Then too, it is often difficult to find the right balance between teaching theory and doctrine, particularly if you are also seeking to introduce students to some basic economic and financial principles. However, the question of whether or not to teach theory is probably one we should all think more seriously about, especially because it is possible that if we fail to focus on theory, we could be implicitly endorsing one theory over another. Indeed, when I introduce CSR concepts towards the middle of the class I get the sense that I am pushing against an established norm, even though it is often the case that we have not really discussed other theories.
Reading through the various posts on CSR, it strikes me that teaching students CSR in the context of a broader discussion involving the benefits and drawbacks of various corporate law theories has benefits. Indeed, as Erik's post suggests, if you teach CSR at the end of the course you run the risk of appearing to marginalize the discussion. But if you introduce CSR early in the course without any context or intent to return to it, it is possible that students will not be equipped to have a robust discussion about its merits. However, if you are so inclined, it is possible to teach the basic Corporations/BA course in a manner that also engages students on the theoretical debates animating corporate law. Thus, as Kent suggests, you can introduce various theories early in the course, informing students that your aim is to provide them with a lens through which they can test the strength of each theory. Then, theories can be tested as you work your way through the doctrine by discussing whether and to what extent the relevant case law supports or undermines a given theory. In this way, you encourage students to look critically at each theory.
To be sure, I think we all agree that there are any number of ways that one can approach teaching in this area, including teaching CSR in this area. And they all involve trade-offs. However, regardless of which approach you take, I think it is good that we are at least having a discussion about taking CSR seriously.
I wanted to add a few thoughts about teaching CSR in the basic course, to build on what Erik and David have said in their posts from yesterday.
It strikes me that the question of the role of corporations in society and politics is one that is pivotal to cover in the basic course. For those who will never take another business course, highlighting such issues may be one of the most important parts of the course. For those students who plan on focusing on business law, it would be truly unfortunate if they went on to more specific and sophisticated classes without being asked to think seriously about the social and political role of business.
Having said that, there are myriad issues to address and just as many ways to address them. My main goal is to legitimize the basic, fundamental questions and to identify a range of possible answers. I also readily admit that I have a point of view on these questions (how, really, could I hide that fact?) but that I understand that there are a diversity of views.
As to method, as with so many topics in the course, I have changed over the years. Now, I don't teach the charitable cases at all, mostly because I think they are largely a distraction from the principal questions of (1) to whom should the managers owe their duties, and (2) who should have a hand in making important corporate decisions.
To get to these core questions, I actually start my class talking about the basic conceptions of the firm. I talk about the traditional property theory, with shareholders as owners and managers as agents. I then introduce the contractarian theory, showing how the firm works as a nexus of contracts. Finally, I discuss the board-centered team production model. I do this very early in the semester, sometimes in the first week. The benefit of this pedagogy is that it gives students some theory that they can use to evaluate the doctrine as we go through it later. Also, as we discuss the various theoretical formulations, I can talk easily about where the responsibilities flow and their sources (background norm, contract, corporate governance rules). Of course the downside of this method is that the students who hate theory are left behind right out of the gate.
One thing that has been a constant over the course of my career is my teaching of Dodge v Ford. It needs caveats, of course (does it really current law? etc.), but it provides a great way to ask the question of to whom fiduciary duties are owed. And it also provides a good example -- often needed for those students who are too trusting of management for CSR reasons -- to teach about the dangers of giving managers too much power to manage the firm for what they believe are socially beneficial reasons. Just when a contingent of students is eagerly arguing to protect Henry Ford's discretion, you can point out his horrible antisemitism.
One technique I have started using over the past couple of years is to circle back to this discussion at the very end of the course. I sometimes spend a day talking about the implications of Citizens United, asking whether because the Court assumes corporations are "associations of citizens" we should change corporate governance law to make that more likely. It is at this point where I can bring in reference to business law in Europe, whether it be the practice in some countries of co-determination or the new(ish) law in the U.K. calling on company directors to take into account (inter alia) "the interests of ... employees, ... the impact of the company’s operations on the community and the environment, ... and the desirability of the company maintaining a reputation for high standards of business conduct."
Again, my ultimate goal is simply to highlight the fact that the mainstream American view is not necessarily the only way to organize corporate governance or to define the role of business in society. The nature of the implicit contract between business and society is very different elsewhere, and students should know that. They should also be able to articulate why they think we should or should not move in that direction.
I agree with his legal analysis that shareholder wealth maximization is not dictated by corporate law (with a few exceptions) to the extent many law students believe. Managers do have quite a bit of flexibility in choosing the ends and means of corporate operations.
When teaching at New Mexico, though, I found students generally came to this conclusion a little too easily and were perhaps a little too uncritical of what corporate social responsibility means and how to foster it. I usually ask some of the questions at the end of this post to try to flesh out both what is the problem that CSR is meant to address and what is the solution. Is the solution about substantive changes in corporate activities, or is more about process (changing who has a seat at the table)?
I ask many of these questions because I am genuinely curious about this topic (even though I don't write about this area of law -- unlike many of our panelists). I am also not so sure that many legal scholars are on the same page as to what is CSR. My students tend to focus on issues like pollution and child labor. I then ask whether these issues should be deal with by corporate law or with environmental or labor law. Moreover, some of those issues – like pollution – might pit different “stakeholder” groups against one another. This raises the very thorny issue of “how would we identify socially responsible behavior?” In some classes, I lay out a hypothetical of two different shareholder groups pushing a corporation for and against a policy of granting benefits to the same sex domestic partners of the corporation’s employees.
I worry that by teaching this way I am discouraging students who have a real passion to change corporate law. Indeed, this class (which I normally teach at the end of the semester – more on that in a minute) tends to generate the liveliest discussion. Some students tend to see many of my questions as trying to discourage social activism, which I am not. My view is that we should take this idea seriously – and taking it seriously means examining it very closely.
At the same time, I don’t want critics of CSR to get too comfortable either. Some of the optional readings I have assigned in some semesters are critiques of CSR which argue for the division of the political world of government and the private world of corporations into separate spheres. As I have blogged about before, does that distinction make much sense after Citizens United?
I tend to focus on CSR in the last class of the semester. The downside of this is that some students misinterpret this as marginalizing the topic. But I want to ensure students have a sense of the structure of corporate law first, before we talk about what they would change.
Here are some of the questions I ask:
- Which rules or doctrines that we studies in this course, if any, would you change to make a corporation (or other form of business entity) more “socially responsible”?
- What is meant by “corporate social responsibility”? When is a corporation acting in a socially responsible manner?
- Which, if any, of the following strands of corporate law reform do you think is more important?
- Agency Cost Version of Corporate Law Reform: should corporate law focus more on making sure that management – directors and officers – actually acts in the best interest of shareholders?
- For example, if you believe that there is a problem with exorbitant executive compensation, is the problem that executives are taking too much value from shareholders and that shareholders do not have adequate means to discipline management? Or is there a larger problem?
- CSR Version of Corporate Law Reform: is the idea of shareholder primacy and the norm of shareholder wealth maximization too narrow? Does a corporation owe duties to constituents (“stakeholders”) other than shareholders? If so, who are these constituents? Employees? Communities in which the company is physically located? Communities in which the company sells or conducts operations? Consumers? The public? Who defines these constituencies? Who speaks for them? How should these constituencies be represented in corporate decision-making?
- Agency Cost Version of Corporate Law Reform: should corporate law focus more on making sure that management – directors and officers – actually acts in the best interest of shareholders?
- Should corporate law attempt to change corporate behavior on particular social issues? If so which issues? Employee rights? The environment?
- How should corporate social responsibility or progress on certain social issues be measured?
- Is corporate law the right tool to encourage corporate social responsibility? Or should other laws – e.g. labor laws and environmental laws – be employed instead to meet the desired social goals?
- If corporate law is the right tool, what mechanisms in corporate law should be used? Proxy access?
- How should law encourage corporate social responsibility? To what extent should laws or codes on “responsibility” be voluntary or permissive? To what extent should it be mandatory? How would any mandatory law be enforced and who could enforce it?
- What do you think of state “shareholder” constituency statutes?
- To what extent do these statutes, which allow management to take into account other stakeholders besides shareholders in making decisions, only insulate management from takeovers?
- What do you think of state “shareholder” constituency statutes?
- To what extent does corporate social responsibility undermine efforts in the agency cost strand of corporate law reform, i.e. making management more accountable to shareholders? To what extent do these two strands of corporate law reform conflict?
- To what extent do these two strands of corporate law reform mesh? Would efforts to give shareholders more access to the proxy ballot enable more radical reformers to submit other items – environmental responsibility, labor rights – to a shareholder vote?
- To what extent is the market already making corporations more socially responsible?
- What do you think of “corporate codes of conduct” voluntarily enacted by corporations or industry groups?
- What do you think of corporations that market themselves as being good corporate citizens?
- How do you evaluate the claims of corporations of corporate citizenry?
- Should all corporations (and other business entities) of whatever size be subject to corporate social responsibility standards? Or only big, publicly held corporations? Is it equitable or efficient to hold smaller business entities to the same or different standards as big corporations? Where do you draw the line?
- What can the U.S. learn from corporations and laws in other countries?
- Are the different corporate governance laws in Europe a good model for the U.S.? For example, many European countries have two board of director entities, with labor groups having a seat on one of the boards.
- Alternatively, would corporate responsibility standards undermine U.S. competitiveness?
- Should the participation of corporations in the political process – e.g. by making political contributions – be limited by law? (If the students have already read Bellotti or Citizens United, we discuss those cases). Should shareholders be able to limit (or vote on) the political activities of corporations?
As I explained in my earlier post, at Washington and Lee we divide the basic course into two, Close Business Arrangements (CBA) and Publicly Held Businesses (PHB). We don't deal much with CSR in the CBA course because privately owned firms, typically small in size, are much less likely to generate significant externalities (e.g, environmental or human rights costs) than are larger ones. Or at least the magnitude of any such effects is generally far smaller. Further, because there is usually a unity of ownership and control, those in charge of closely held firms are much less likely to possess the discretion or the inclination to deviate from profit maximization and, if they do, they do it with the consent of their fellow investors so there is typically no one to complain about it.
So CSR is really a problem for publicly held corporations and therefore needs to be addressed in the PHB course, which I teach. I don't spend a lot of time with the political or moral question of whether large corporations have an obligation to temper profit maximization with pursuit of conflicting objectives. I do, though, want the students to see that their size and the scope of their operations necessarily mean that there are substantial and potentially negative effects on the wider society in which our largest corporations operate. And I think they also need to know that there is significant disagreement here and abroad about the appropriate social responsibilities of large businesses. So I start the course by explaining the shareholder primacy conception of corporate purpose and management responsibility and then contrast it with CSR as a competing alternative that is taken seriously in most quarters (even if not by many of the most prominent corporate law academics in this country). No effort is made to resolve what is essentially a dispute about social policy or moral obligation.
In my view, the students need to understand that corporate law – this is supposed to a course about law, after all – is ambivalent on the question of shareholder primary, at times conflicted or agnostic or even hostile. (My colleague Christopher Bruner's articles on this subject are important.) So, for example, state statues authorize corporate philanthropy. Federal Rule 14a-8 allows shareholders to communicate with each other about the social, political, or ethical implications of what their firms are doing. The business judgment rule insulates from shareholder scrutiny policies aimed at promoting nonshareholder interests. Corporations confronted by hostile takeovers can take effects on nonshareholders into account in formulating defensive responses (except in the narrowly-defined and readily avoidable Revlon situation). At the same time, even if the law does not require it, it does allow corporate management to disregard nonshareholder interests (as long as it honors contracts and complies with applicable regulations) and pursue profit maximization if it chooses to do so.
So corporate law ends up being irrelevant to the crucial question of corporate purpose and management's responsibility. The students therefore need to understand the non-legal incentives – including compensation arrangements, pressure from institutional shareholders, social norms – that nowadays lead management to prioritize current share price maximization over long-term strategic considerations or costly (as opposed to public relations) CSR policies.
Thank you to Erik and the team at the Conglomerate for organizing this roundtable and the prior roundtables. As the relatively “newbie” person participating in this roundtable, I know that I will learn much from my esteemed co-participants.
Teaching Business Associations (BA) is a privilege. I am quite thankful that I get to teach a class that is informed by and informs my scholarship. I love the fact that I am often the first person to expose my students to business law. I appreciate teaching a class where I can bring in a transactional perspective for students whose minds have been shaped by thinking through a litigation-lens in their first year.
But . . . teaching BA is much more challenging than any of my other courses. I teach a 4 unit BA course that covers agency (just a small bit), partnerships, LLCs, closely-held corporations and big public corporations. Frankly, it is often too much material to cover in one course. My first year, I made the typical rookie mistake of trying to cram too much into the course. By the end of the semester the students (and I) were exhausted. So, over the past two years I have tried to figure out how to intelligently cut some of the material. Nevertheless, I often find myself wishing that I could teach BA as a 5 or 6 credit course. Part of this desire is driven by my need to ensure that there is enough coverage of unincorporated entities versus corporations. Part of it is driven by the background and goals of my students. At the beginning of each semester, I distribute note cards asking students why they are taking the course. In a class of about 80, there is a small group who were economics or business majors as undergrads, or LLMs interested in business law. Many of these students hope to practice transactional law or business-related litigation at big law firms. Another handful hopes to own a business or advise small businesses. A few are taking the course to have a better understanding of their own small family business. Unsurprisingly, the vast majority take the class because “it’s on the bar.”
Given this diversity in student backgrounds and goals, I find that teaching both incorporated and unincorporated entities is critical.
- First, this helps prepare those students who take the course in order to pass the bar. This is not the only reason to take a BA class, but it is an important one for many of my students. One of my goals is to ensure that I at least cover the basic concepts on the bar in a clear way.
- Second, it helps all of the students understand the economic and legal significance of both incorporated and unincorporated entities. Many of my students hope to do anything other than business law. Some have not thought very deeply about the role and importance of business, whether large or small, in our society. Some have a relatively negative view of all businesses. One of my favorite stories is from my first semester of teaching BA when a student came into office hours the first week and said “I just want you to know that I am taking this class because it is on the bar. I have never dealt with corporations, but I hate them and think that they are absolutely awful for our country.” I asked, “So where did you buy your sweater?” She replied “At The Gap.” I smiled and said, “Let’s talk again in a few weeks.” At the end of the semester, she came up to me again and said “Professor Afsharipour, I still hate corporations, but now I think I know why.” When I teach BA (versus when I teach M&A), I often think of her as the type of student that I am trying to reach. It’s not necessarily that I want her to love corporations, but I want her to understand their importance, the various legal rules that apply to them, and why we have developed the corporate form vis a vis partnerships or other unincorporated entities. I hope that understanding partnerships and corporations can also help students appreciate the increasing importance of LLCs and what motivates business people to want to organize their firms as one form or another.
- Third, through coverage of both incorporated and unincorporated entities, I can try to introduce basic business concepts in the course at different junctures. For example, throughout the partnership material, we talk a lot about money capital and human capital, the relationship between risk and return, and transaction cost factors. We return to these concepts again in the corporations material. We begin our study of corporations using a hypothetical fact pattern about three recent college graduates planning to start a new internet-related entertainment venture that they hope to sell or take public one day. For those of you who use the O’Kelley/Thompson casebook, you should be familiar with this terrific hypothetical problem. We talk about why forming a partnership may not help the founders achieve their business goals, especially as they plan to bring in additional investors fairly quickly. By working through the problem at the early stages of the corporations material and returning to it throughout the rest of the course (including when discussing closely-held corporations), we address the types of capital being contributed to this firm, the risks and potential rewards of the business model, the risks associated with the relationship among the founders and other investors, and the transaction costs that the lawyers for the firm need to address. We can then think about the way business decisions affect the choices a lawyer may be asked to make at the formation stage and the way the choices that a lawyer may make at the formation stage affects business decisions down the line.
Anyway, I will sign off now, and will save some more of my thoughts for later posts.