Two recent developments in the law and practice of business include: (1) the advent of benefit corporations (and kindred organizational forms) and (2) the application of crowdfunding practices to capital-raising for start-ups. My thesis here is that these two innovations will become disruptive legal technologies. In other words, benefit corporations and capital crowdfunding will change the landscape of business organization substantially.
A disruptive technology is one that changes the foundational context of business. Think of the internet and the rise of Amazon, Google, etc. Or consider the invention of laptops and the rise of Microsoft and the fall of the old IBM. Automobiles displace horses, and telephones make the telegraph obsolete. The Harvard economist Joseph Schumpeter coined a phrase for the phenomenon: “creative destruction.”
Technologies can be further divided into two types: physical technologies (e.g., new scientific inventions or mechanical innovations) and social technologies (such as law and accounting). See Business Persons, p. 1 (citing Richard R. Nelson, Technology, Institutions, and Economic Growth (2005), pp. 153–65, 195–209). The legal innovations of benefit corporations and capital crowdfunding count as major changes in social technologies. (Perhaps the biggest legal technological invention remains the corporation itself.)
1. Benefit corporations began as a nonprofit idea, hatched in my hometown of Philadelphia (actually Berwyn, Pennsylvania, but I’ll claim it as close enough). A nonprofit organization called B Lab began to offer an independent brand to business firms (somewhat confusingly not limited to corporations) that agree to adopt a “social purpose” as well as the usual self-seeking goal of profit-making. In addition, a “Certified B Corporation” must meet a transparency requirement of regular reporting on its “social” as well as financial progress. Other similar efforts include the advent of “low-profit” limited liability companies or L3Cs, which attempt to combine nonprofit/social and profit objectives. In my theory of business, I label these kind of firms “hybrid social enterprises.” Business Persons, pp. 206-15.
A significant change occurred in the last few years with the passage of legislation that gave teeth to the benefit corporation idea. Previously, the nonprofit label for a B Corp required a firm to declare adherence to a corporate constituency statute or to adopt a similar constituency by-law or other governing provision which signaled that a firm’s sense of its business objective extended beyond shareholders or other equity-owners alone. (One of my first academic articles addressed the topic at an earlier stage. See “Beyond Shareholders: Interpreting Corporate Constituency Statutes.” I also gave a recent video interview on the topic here.) Beginning in 2010, a number of U.S. states passed formal statutes authorizing benefit corporations. One recent count finds that twenty-seven states have now passed similar statutes. California has allowed for an option of all corporations to “opt in” to a “flexible purpose corporation” statute which combines features of benefit corporations and constituency statutes. Most notably, Delaware – the center of gravity of U.S. incorporations – adopted a benefit corporation statute in the summer of 2013. According to Alicia Plerhoples, fifty-five corporations opted in to the Delaware benefit corporation form within six months. Better known companies that have chosen to operate as benefit corporations include Method Products in Delaware and Patagonia in California.
2. Crowdfunding firms. Crowdfunding along the lines of Kickstarter and Indiegogo campaigns for the creation of new products have become commonplace. And the amounts of capital raised have sometimes been eye-popping. An article in Forbes relates the recent case of a robotics company raising $1.4 million in three weeks for a new project. Nonprofit funding for the microfinance of small business ventures in developing countries seems also to be successful. Kiva is probably the best known example. (Disclosure: my family has been an investor in various Kiva projects, and I’ve been surprised and encouraged by the fact that no loans have so far defaulted!)
However, a truly disruptive change in the capital funding of enterprises – perhaps including hybrid social enterprises – may be signaled by the Jumpstart Our Business Start-ups (JOBS) Act passed in 2012. Although it is limited at the moment in terms of the range of investors that may be tapped for crowdfunding (including a $1 million capital limit and sophisticated/wealthy investors requirement), a successful initial run may result in amendments that may begin to change the face of capital fundraising for firms. Judging from some recent books at least, crowdfunding for new ventures seems to have arrived. See Kevin Lawton and Dan Marom’s The Crowdfunding Revolution (2012) and Gary Spirer’s Crowdfunding: The Next Big Thing (2013).
What if easier capital crowdfunding combined with benefit corporation structures? Is it possible to imagine the construction of new securities markets that would raise capital for benefit corporations -- outside of traditional Wall Street markets where the norm of “shareholder value maximization” rules? There are some reasons for doubt: securities regulations change slowly (with the financial status quo more than willing to lobby against disruptive changes) and hopes for “do-good” business models may run into trouble if consumer markets don’t support them strongly. But it’s at least possible to imagine a different world of business emerging with the energy and commitment of a generation of entrepreneurs who might care about more in their lives than making themselves rich. Benefit corporations fueled by capital crowdfunding might lead a revolution: or, less provocatively, may at least challenge traditional business models that for too long have assumed a narrow economic model of profit-maximizing self-interest. James Surowiecki, in his recent column in The New Yorker, captures a more modest possibility: “The rise of B corps is a reminder that the idea that corporations should be only lean, mean, profit-maximizing machines isn’t dictated by the inherent nature of capitalism, let alone by human nature. As individuals, we try to make our work not just profitable but also meaningful. It may be time for more companies to do the same.”
So a combination of hybrid social enterprises and capital crowdfunding doesn’t need to displace all of the traditional modes of doing business to change the world. If a significant number of entrepreneurs, employees, investors, and customers lock-in to these new social technologies, then they will indeed become “disruptive.”
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Corporate disclosure, especially in securities regulation, has been a standard regulatory strategy since the New Deal. Brandeisian “sunlight” has been endorsed widely as a cure for nefarious inside dealings. An impressive apparatus of regulatory disclosure has emerged, including annual and quarterly reports enshrined in Forms 10K and 10Q. Other less comprehensive disclosures are also required: for initial public offerings and various debt issuances, as well as for unexpected events that require an update of available information in the market (Form 8K).
For the most part, corporate disclosure has focused on financial information: for the good and sufficient reason that it is designed to protect investors – especially investors who are relatively small players in large public trading markets. Some doubts have been raised about the effectiveness of this kind of disclosure and, indeed, the effectiveness of mandatory disclosure in general. A recent book by Omri Ben-Shahar and Carl Scheider, More Than You Wanted to Know: The Failure of Mandated Disclosure, advances a wide-ranging attack on all mandatory disclosure. (I think that their attack goes too far: I’ll be coming out with a short review of the book for Penn Law’s RegBlog called “Defending Disclosure”). Assuming, though, that much financial disclosure makes sense, what about expanding it to include other activities of business firms?
Consider three types of nonfinancial information that might usefully be disclosed: information about a business firm’s activities with respect to politics, the natural environment, and religion.
1. Politics. One good candidate for enhanced corporate disclosure concerns business activities in politics. Lobbying laws require various disclosures, and various campaign finance laws do too. It is possible to obscure actual political spending through the complexity of corporate organization. (For a nice graphic of the Koch brothers’ labyrinth assembled by the Center for Responsive Politics, see here.) Good reporters can ferret out this information – but they need to get access to it in the first place. My colleague Bill Laufer has been an academic leader in an effort to encourage public corporations to disclose political spending voluntarily, with Wharton’s Zicklin Center for Business Ethics Research teaming up with the nonpartisan Center for Political Accountability to rank companies with respect to their transparency about corporate political spending. The rankings have been done for three years now, and there are indications of increased business participation. Recently, even this voluntary effort has been attacked by business groups such as the U.S. Chamber of Commerce for being “anti-business.” See letter from U.S. Chamber of Commerce quoted here. Jonathan Macey of Yale Law School has also objected to the rankings in an article in the Wall Street Journal, arguing that the purpose of political disclosure is somehow part of “a continuing war against corporate America.” These objections, however, seem overblown and misplaced. What is so wrong about asking for disclosure about the political spending of business firms? One can Google individuals to see their record of supporting Presidential and Congressional candidates via the Federal Election Commission’s website, yet large businesses should be exempt? Political spending by corporations and other business should be disclosed in virtue of democratic ideals of transparency in the political process. Media, non-profit groups, political parties, and other citizens may then use the resulting information in political debates and election campaigns. Also, it seems reasonable for shareholders to expect to have access to this kind of information.
In Business Persons, I’ve gone further to argue (in chapter 7) that both majority and dissenting opinions in Citizens United appear to support mandatory disclosure as a good compromise strategy for regulation. One can still debate the merits of closer control of corporate spending in politics (and I believe that though business corporations indeed have “rights” to political speech these rights do not necessarily extend to unlimited spending directed toward political campaigns). It seems to me hard to dispute that principles of political democracy – and the transparency of the process – support a law of mandatory disclosure of corporate spending in politics.
2. Natural environment. Increasingly, many large companies are also issuing voluntary reports regarding their environmental performance (and often adding in other “social impact” elements). Annual reports issued under the International Standards Organization (the ISO 14000 series), the Global Reporting Initiative, and the Carbon Disclosure Project are examples. The Environmental Protection Agency (EPA) has also established a mandatory program for greenhouse gas emissions reporting, which is tailored to different industrial sectors. One can argue about whether these kinds of disclosures are sufficiently useful to justify their expense, but my own view is that they help to encourage business firms to take environmental concerns seriously. Many firms use this reporting to enhance their internal efficiency (often leading to financial bottom-line gains). As important, however, is the engagement of firms to consider environmental issues – and encouraging them to act as “part of the solution” rather than simply as a generating part of the problem.
One caveat that is relevant to all nonfinancial disclosure regimes: The scope of firms required to disclose should be considered. I do not believe that the case is convincing that only public reporting companies under the securities laws should be included. (For one influential argument to the contrary, see Cynthia A. Williams, “The Securities and Exchange Commission and Corporate Social Transparency,” 112 Harvard Law Review 1197 (1999)). Instead, it makes to sense for different agencies appropriate to the particular issue at hand to regulate: the Federal Election Commission for political disclosures and the EPA for environmental disclosures.
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Last week, Elon Musk—CEO of Tesla Motors—announced on the company’s blog “All Our Patent Are Belong To You” (apparently an homage to a late 90s, ungrammatical internet meme--thx Brian Gividen for pointing this out). Musk claims to adopt an “open source” policy for Tesla’s patents. He elaborates, “Yesterday, there was a wall of Tesla patents in the lobby of our Palo Alto headquarters. That is no longer the case. They have been removed, in the spirit of the open source movement, for the advancement of electric vehicle technology.”
Musk’s move has been hailed widely in the blogosphere as an act of altruism (e.g., here & here). Most of this sentiment has been fairly unreflective. (However, for a certain-to-be prescient analysis that focuses more on the business implications of Musk’s move, see my colleague Orly Lobel’s comments over at Prawfsblawg and Harvard Business Review blog. While I’m quite sympathetic to most of Orly’s observations, as I explain below, I’m quite skeptical of her view that the move will be “good for faster industry innovation.”)
However, like most patent “give-aways,” legal loopholes usually spoil the party. Specifically, Musk stated that “Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology” (emphasis added). Of course, “good faith” is a legal term of art large enough to drive a diesel-spewing, 18-wheeler through, much less a zero-emissions Tesla (and this loophole has been roundly noted by a few observant journalists).
Most importantly, is Musk (or his lawyers) expecting that others that use Tesla’s patented technology also make their patents available to Tesla? In more narrow terms, is the result similar to Twitter’s supposed “give-away” that reserved to Twitter the right to sue a competitor if the competitor sued Twitter? Probably so.
Thus, like Twitter, Tesla’s giveaway appears ultimately to boil down to a generalized offer to cross-license with competitors, including potential entrants. As such, Musk’s “give away” is not terribly radical, because cross-licensing in the high-tech and auto industries is fairly commonplace (veritable “keiretsus” in Scott Kieff’s words).
In this regard, as Michael Schallop, an IP attorney recognized, Tesla “wants to encourage others to develop on a common platform, and to the extent that they’re doing so, Tesla is not going to stop that by using its patents offensively.” Indeed, as I have described elsewhere, forcing smaller competitors and potential entrants to cross-license typically provides the incumbent (here, Tesla) a strong advantage, because the incumbent often controls “complementary assets” that provide competitive advantages aside from IP, like robust sales & marketing channels, access to capital, and the like. So, at worst blush, Tesla’s putative altruism could actually keep small, innovative entrants out of the commercial marketplace by effectively forcing them to license their patents to Tesla.
Furthermore, as others have noted, much of the Tesla patent portfolio does not seem particularly strong, nor does it appear to include much of its fundamental technology (which appears to be kept largely as trade secrets). Like IBM’s giveaways of several years ago, one wonders if Tesla found that giving away its patents would yield more revenue by seeding its technology widely—benefiting not only from potential infrastructure effects, but also from the consulting and joint venture dollars that go along with actually explaining to licensees how to implement the technology (specifically by using Tesla’s trade secrets and know-how, which Musk is not divulging). So perhaps Tesla is “patent washing” to offer the proverbial “Trojan horse” (sorry, last cliché) to the larger auto manufacturers (and even lure gullible “anti-patent” engineers to Tesla—see Orly Lobel’s points on these issues).
Or maybe Musk truly thinks he’s being altruistic. Unfortunately, contrary to Musk’s proclamation, “giving away” patents (even putting aside the “good faith” loophole) usually doesn’t mean “open source.” The reality is that Musk’s act is likely to redound much more to his self-interest than society’s.
If Musk were truly concerned about society being able to use Telsa’s technology, he’d specifically agree to the following terms: a royalty-free license to all Tesla current and future patents to any comer in writing with the single exception of maintaining an enforcement right against incumbents or large entrants (but not startups or small entrants) who sue Tesla for infringement. Additionally, Tesla would disclose all of its trade secrets under similar terms and use vigorous efforts codify Tesla’s know-how in so doing.
Of course, Tesla’s “give-away” is quite a ways from this much more thoroughly “open source” approach. As such, I’m not particularly optimistic that Tesla’s current policy will ultimately promote faster innovation or the more rapid adoption of electric vehicles. Perhaps even more unfortunate is the general inability of the press even to spot these issues, much less analyze their ramifications.
Scarlett Johansson has been in the news a lot lately because of her twin roles as spokeswoman for Oxfam and SodaStream. For nine years, Johansson served as an ambassador for Oxfam. She was a major fundraiser and public face of the charity. But this January, Oxfam told her she had to choose between representing them and SodaStream, and she chose the latter. The episode suggests some important limitations of the stakeholder theory of corporate organization.
Why did Oxfam give Johansson an ultimatum? SodaStream manufactures popular home carbonation systems in 22 facilities around the world. Some are in the U.S., China, Germany, Australia, South Africa, Sweden, and Israel, and one is in the West Bank. The company has recently been targeted by the pro-Palestinian “Boycott, Divestment, Sanctions” movement (BDS), which seeks to delegitimize either certain Israeli policies or the State of Israel itself (depending on who you talk to). The BDS movement is boycotting SodaStream because, it argues, the company promotes the Israeli occupation of the West Bank by operating a factory there. Oxfam backs the BDS boycott of Israel and insisted Johansson choose between them and SodaStream.
This should not have been an intuitive response. And curiously enough, corporate law—specifically the stakeholder theory of the firm—helps illuminate the oddness of Oxfam's single-minded boycottism.
There are many strains of the stakeholder theory, but in general the idea is that management should consider the impact of its decisions not only on shareholders but on “stakeholders” of the firm—employees, suppliers, customers, community members, and other constituencies beyond its owners. (For simplicity, we'll consider the term "stakeholder" to exclude shareholders.)
The stakeholder model is often presented as an alternative to the standard shareholder model. But forget shareholders. Say you have a company that is unequivocally committed to the stakeholder model—their slogan is “people before profits,” and shareholders have no special claim on company decisions. What should the company do when the interests of employees and community members collide? Who should win out?
Ostensibly, the SodaStream boycott is being conducted on behalf of the Palestinian community and cause. The assumption is that short-term pain (i.e., probable unemployment) for the factory’s 500 Palestinian employees is the price of long-term gain (i.e., a Palestinian state) for the community.
Politics aside, the SodaStream boycott assumes a hierarchy of stakeholder interests that seems extremely tenuous. Even those sympathetic to the boycott—and this is probably obvious by now, but I am not—acknowledge that shutting SodaStream’s West Bank factory would bring hardship to a lot of Palestinian families who depend on those jobs. I would add that that sacrifice is a really bad deal for those stakeholders if the boycott does not succeed (and most don’t). Regardless, the question of the normative justness or wisdom of the boycott is beside the point—what about those stakeholder employees? They're not trying to live their politics; they want to work. What value do we place on their interests versus those of boycott advocates? In other words, how do we assess the boycott from a stakeholder perspective?
A few concerns I have with the SodaStream boycott from a stakeholder standpoint, moving from specific to general:
- The Palestinian SodaStream employees almost certainly share the same political aspirations as their community (e.g., statehood). Yet they're rejecting the boycott by working for SodaStream. Shouldn’t stakeholder-employees get a voice in whether they are forced to sacrifice their jobs in service of community goals?
- What’s the boycott’s limiting principle? Should no foreign businesses be permitted to employ Palestinians in settlements? What about a non-profit? Why limit it to settlements? If SodaStream moved its operations a few miles up the street to Palestinian-governed territory, would the BDS movement call off the boycott?
- SodaStream is headquartered in Israel. Does the boycott only apply to Israeli firms? If so, could SodaStream continue to operate in the West Bank if it sold itself to a foreign company? Stakeholder theory self-consciously promotes the observance of international law and fairness norms. Under what circumstances is per se discrimination on the basis of employer nationality okay?
- More broadly, what is the limiting principle behind privileging somewhat amorphous community interests over the clear and important interests of a defined group of stakeholders, like employees? Aren’t the sum total of global interests affecting a firm (e.g., preventing climate change) always going to be more powerful than narrow stakeholder interests (e.g., jobs on oil rigs)?
One thing I find fascinating is how quickly questions about stakeholder priority (on which the literature is pretty sparse) verge towards politics and ideology. It’s almost enough to make you miss having profit maximization as the lodestar! Snarkiness aside, I don't think advocates of the stakeholder theory would dispute that “take stakeholder interests into account” is a fuzzy objective to begin with. But as the SodaStream controversy illustrates, this is not only because a stakeholder-centric view creates conflicts between shareholders and stakeholders. It also creates confusion about how to prioritize the legitimate concerns of stakeholders as against one another.
In sum, to paraphrase ScarJo, it's hard to find a principled way to rank the competing interests of stakeholders. That observation doesn't invalidate the stakeholder theory, of course. It just shines a light on some of its limitations as a principle of organization.
This week, CVS/Caremark announced that it will slowly stop selling tobacco products at its 7600 U.S. stores. Why? The company states that "is simply the right thing to do." This may correct, particularly for a pharmacy-centric chain that it part pharmacy benefits manager (the Caremark part). It does seem weird, when you think about it, to be able to buy dangerous health products the same place you get a flu shot. One doesn't imagine that many mini-health clinics sell tobacco products, and that is what both CVS and Caremark are trying to brand themselves as. Therefore, as a CSR skeptic, I'm thinking that it might also be a profitable thing to do.
News accounts estimate the decision will decrease sales by $2 billion out of $123 billion annually (1.6%). (Funnily, some accounts think this is substantial, and others think it is insignificant.) And, if people only run into CVS to buy cigarettes, but also pick up high-margin impulse buys, the number theoretically could be more. Or, it could be that people who come in to pick up prescriptions, which might take time to fill, buy more additional goods. Therefore, if you could attract more pharmacy customers by branding yourself "tobacco-free," then the move might have even less impact. Also, CVS wants to market itself as a provider of smoking-cessation services and products.
Not to mention the free publicity CVS is getting this week.
But, CVS isn't giving up on beer, wine and liquor. Though these items aren't anywhere to be found on the CVS website, they are on the last page of the weekly ad.
A couple of years ago, I was fascinated to learn the behind-the-scenes story of Veggie Tales, as recounted in Me, Myself & Bob by Phil Fischer. Fischer started Veggie Tales with funds from friends and family, then eventually took on funding partners, creditors and a leadership team that pushed Veggie Tales away from its original Christian-based mission to one that became more secular but no more financially stable. Vischer eventually lost Veggie Tales in bankruptcy court, when it was purchased by a secular bidder. In my microfinance class, we talk a lot about the differences in for-profits and nonprofits, if there is any, and mission drift. I received an email today from Family Christian Stores, the world's largest Christian retailer, that seemed to suggest that management at FCS was fighting against mission drift, at least from now.
FCS' press release is here. FCS is a privately owned (private equity-backed) company that has stores nationwide that sell Christian bibles, books, decorations, jewelry, DVDs and music (including Veggie Tales). Now, FCS' management and three outside purchasers have joined together to buy back FCS from its private equity owners. In doing so, the new owners have pledged to recommit to their mission and give 100% of the profits to charity (instead of the 10% it was earlier). From a law professor's perspective, however, I'm interested to know whether (and why) it is maintaining its for-profit status. At first glance, it seems like being a nonprofit would serve the same purpose as giving away all profits. The nonprofit could either funnel surplus to charitable uses or reduce the cost of its religious wares (which would probably be tricky with vendors). Here, the charitable purpose is outsourced to a number of external ministries.
This article from Christianity Today links to earlier articles chronicling the mission drift of Christian bookstores and FCS in particular. This link is to an article debunking FCS's rationalization of its move to open on Sundays (presenting religious reading material as necessary in spiritual crises that may arise any day of the week).
Thank you Erik for allowing me to write a follow-on post to the Chick-fil-A/Corporate Social Responsibility Masters Forum.
As a native Georgian, I have followed the Chick-fil-A controversy closely. My former roommate works in Chick-fil-A’s tax department and Chick-fil-A has been my favorite fast food restaurant for many years. The food is incredibly good (KFC does not even come close) and Chick-fil-A is one of the few companies that still cares about providing excellent customer service. As Usha noted, Chick-fil-A has a history of giving back to the community. In addition to her list, Chick-fil-A tends to treat its retail and corporate employees very well, sponsors numerous community activities like local 5Ks, sponsors a values-based education curriculum for grades K-5 (that my wife used this year in her classrooms), and contributes to its WinShape Foundation, which does much more than donate to the organizations at the center of the controversy
The questions I want to raise in this post are: (1) could Chick-fil-A become a social enterprise after the controversy?; and (2) if Chick-fil-A were already a social enterprise, how would the controversy have impacted the company differently? These questions are tangentially related to the Masters Forum because some, including Professors Katz and Page (Indiana Law), have asked if social enterprise is the new CSR.
Currently, I am most interested in the benefit corporation form of social enterprise and the certified B corporation. I explained the differences between the two here and I have posted a draft of my symposium article on benefit corporations here.
Under the law of the 11 states that have passed a benefit corporation statute, I see no serious obstacle to Chick-fil-A converting to a benefit corporation post-controversy. Chick-fil-A would, in most states, simply need the vote of at least 2/3rds of its shareholders and an amendment to its articles of incorporation stating that the company is a benefit corporation. (For the record, I do not have any information to suggest Chick-fil-A is considering such a conversion).
Once a benefit corporation, however, Chick-fil-A would be required to pursue a “general public benefit” purpose, which is defined as:
- “[a] material positive impact on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation.”
Shareholders may bring a “benefit enforcement proceeding” for failure to pursue a “general public benefit.” You can read more about the proceeding in the model legislation, which has a number of very recent changes, some of which respond to issues raised in my draft article. I need to update my draft accordingly.
Also, the benefit corporation statutes require that the “general public benefit” be accessed against a “third party standard.” While there are various third-party standard providers, B Lab, which provides the "certified B corporation" label, is the most well known. I asked Jay Coen Gilbert, B Lab’s co-founder, my questions and he provided some interesting information:
- (1) any company that meets B Lab’s standards can become a certified B corporation; (2) B Lab’s independent Standards Advisory Council reserves the right to not certify or de-certify any company that acts inconsistently with the values of the B Corp community as expressed in their Declaration of Interdependence; (3) to date, that right has never been exercised; and (4) there are a number of faith-based companies among the 574 certified B corps.
I, for one, would be very interested to see B Lab’s reaction if Chick-fil-A actually applied to be a certified B corp. I also wonder whether being formed as a benefit corporation would make Chick-fil-A more (or less) vulnerable to shareholder lawsuits stemming from the controversy (if the company stock were more widely held).
We at Regent University School of Law, along with a distinguished list of participants that include Glom Master Joan Heminway, will be exploring emerging issues in social enterprise on October 6. Please join us at this symposium if you can make it to Virginia Beach.
We have decided to convene a late summer forum of the Conglomerate Masters -- our roster of distinguished corporate and financial law professors -- to discuss the current state of corporate social responsibility. In particular, we wanted to address the controversy over Chick-fil-A's corporate stance against same sex marriage and to use this Economist blog post as a jumping off-point.
The Economist blogger contends that Chick-fil-A's culture is in fact a prime example of a firm embracing corporate social responsibility (or "CSR") - albeit not with the politics that one traditionally associates with that movement. The blogger concludes that the Chick-fil-A example demonstrates that matters of social policy should best be left to democratic institutions. He or she writes:
Matters of moral truth aside, what's the difference between buying a little social justice with your coffee and buying a little Christian traditionalism with your chicken? There is no difference. Which speaks to my proposition that CSR, when married to norms of ethical consumption, will inevitably incite bouts of culture-war strife. CSR with honest moral content, as opposed to anodyne public-relations campaigns about "values", is a recipe for the politicisation of production and sales. But if we also promote politicised consumption, we're asking consumers to punish companies whose ideas about social responsibility clash with our own. Or, to put it another way, CSR that takes moral disagreement and diversity seriously—that really isn't a way of using corporations as instruments for the enactment of progressive social change that voters can't be convinced to support—asks companies with controversial ideas about social responsibility to screw over their owners and creditors and employees for...what?
It is a provocative argument. Although one wonders if the author would have made this same series of arguments in the 1960s: would the author have encouraged civil rights protesters to abandon lunch-counter sit-ins and lobby state legislators instead?
Still, the Chick-fil-A example raises some disquieting questions for CSR, which our Masters may address. These include:
Is corporate law the most effective or legitimate tool for social change? If we are worried about environmental degradation, is the solution to broaden the stakeholders to whom a corporation must answer? Or shouldn't we look instead to environmental law?
Is CSR viewpoint neutral? When covering CSR in a Corporations course, I ask students whether social activists who are lobbying a corporation to change what they see as immoral employment practices, should be able to put their views to a shareholder vote? Then I ask whether the answer would or should change based on whether the activists are looking to end racial or gender discrimination or whether they are lobbying a company to stop offering benefits to partners in same sex couples.
At the same time, the current state of legal affairs raises some disquieting questions for opponents of CSR too. The conclusion in the Economist blog -- leave social policy to democratic institutions and public law -- has a long lineage. It harkens back to Milton Friedman's arguments that corporations and the states do and should exist in separate spheres; if citizens want to change corporate policy, the argument goes, they should act through the political process and push through public regulation.
But, the separate spheres argument looks more and more outdated, as corporations influence and permeate the sphere of government. Do arguments to leave regulating the public dimension of corporate behavior out of corporate law and governance -- and leave it to traditional legislative and regulatory bodies -- appear naive in a post-Citizens United (and post-public choice)world?
Also, do these same questions for proponents and critics of CSR apply in equal measure to the growing field of social entrepreneurship? Can entrepreneurs do well while doing good? Should we expect them too? Is social entrepreneurship a workable, stable, and viewpoint neutral concept? If so, what does it entail? Does/should CSR apply equally to small businesses and startups as to global corporations?
We look forward to hearing from our Masters...
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Law schools are under attack. Depending upon the source, between 20-50% of corporate counsel won’t pay for junior associate work at big firms. Practicing lawyers, academics, law students and members of the general public have weighed in publicly and vehemently about the perceived failure of America’s law schools to prepare students for the real world.
Admittedly, before I joined academia a few months ago, I held some of the same views about lack of preparedness. Having worked with law students and new graduates as outside and in house counsel, I was often unimpressed with the level of skills of these well-meaning, very bright new graduates. I didn’t expect them to know the details of every law, but I did want them to know how to research effectively, write clearly, and be able to influence the clients and me. The first two requirements aren’t too much to expect, and schools have greatly improved here. But many young attorneys still leave school without the ability to balance different points of view, articulate a position in plain English, and influence others.
To be fair, unlike MBAs, most law students don’t have a lot of work experience, and generally, very little experience in a legal environment before they graduate. Assuming they know the substantive area of the law, they don’t have any context as to what may be relevant to their clients.
How can law schools help?
First, regardless of the area in which a student believes s/he wants to specialize, schools should require them to take business associations, tax, and a basic finance or accounting course. No lawyer can be effective without understanding business, whether s/he wants to focus on mom and pop clients, estate planning, family law, nonprofit, government or corporate law. More important, students have no idea where they will end up after graduation or ten years later. Trying to learn finance when they already have a job wastes the graduate’s and the employer’s time.
Of course, many law schools already require tax and business organizations courses, but how many of those schools also show students an actual proxy statement or simulate a shareholder’s meeting to provide some real world flavor? Do students really understand what it means to be a fiducuiary?
Second and on a related point, in the core courses, students may not need to draft interrogatories in a basic civil procedure course, but they should at least read a complaint and a motion for summary judgment, and perhaps spend some time making the arguments to their brethren in the classroom on a current case on a docket. No one can learn effectively by simply reading appellate cases. Why not have students redraft contract clauses? When I co-taught professional responsibility this semester, students simulated client conversations, examined do-it-yourself legal service websites for violations of state law, and wrote client letters so that the work came alive.
When possible, schools should also re-evaluate their core requirements to see if they can add more clinicals (which are admittedly expensive) or labs for negotiation, client consultation or transactional drafting (like my employer UMKC offers). I’m not convinced that law school needs to last for three years, but I am convinced that more of the time needs to be spent marrying the doctrinal and theoretical work to practical skills into the current curriculum.
Third, schools can look to their communities. In addition to using adjuncts to bring practical experience to the classroom, schools, the public and private sector should develop partnerships where students can intern more frequently and easily for school credit in the area of their choice, including nonprofit work, local government, criminal law, in house work and of course, firm work of all sizes. Current Department of Labor rules unnecessarily complicate internship processes and those rules should change.
This broader range of opportunities will provide students with practical experience, a more realistic idea of the market, and will also help address access to justice issues affecting underserved communities, for example by allowing supervised students to draft by-laws for a 501(c)(3). I’ll leave the discussion of high student loans, misleading career statistics from law schools and the oversupply of lawyers to others who have spoken on these hot topics issues recently.
Fourth, law schools should integrate the cataclysmic changes that the legal profession is undergoing into as many classes as they can. Law professors actually need to learn this as well. How are we preparing students for the commoditization of legal services through the rise of technology, the calls for de-regulation, outsourcing, and the emerging competition from global firms who can integrate legal and other professional services in ways that the US won’t currently allow?
Finally and most important, what are we teaching students about managing and appreciating risk? While this may not be relevant in every class, it can certainly be part of the discussions in many. Perhaps students will learn more from using a combination of reading law school cases and using the business school case method.
If students don’t understand how to recognize, measure, monitor and mitigate risk, how will they advise their clients? If they plan to work in house, as I did, they serve an additional gatekeeper role and increasingly face SEC investigations and jail terms. As more general counsels start hiring people directly from law schools, junior lawyers will face these complexities even earlier in their careers. Even if they counsel external clients, understanding risk appetite is essential in an increasingly complex, litigious and regulated world.
When I teach my course on corporate governance, compliance and social responsibility next spring, my students will look at SEC comment letters, critically scrutinize corporate social responsibility reports, read blogs, draft board minutes, dissect legislation, compare international developments and role play as regulators, legislators, board members, labor organizations, NGOs and executives to understand all perspectives and practice influencing each other. Learning what Sarbanes-Oxley or Dodd-Frank says without understanding what it means in practice is useless.
The good news is that more schools are starting to look at those kinds of issues. The Carnegie Model of legal education “supports courses and curricula that integrate three sets of values or ‘apprenticeships’: knowledge, practice and professionalism.” Educating Tomorrow’s Lawyers is a growing consortium of law schools which recommends “an integrated, three-part curriculum: (1) the teaching of legal doctrine and analysis, which provides the basis for professional growth; (2) introduction to the several facets of practice included under the rubric of lawyering, leading to acting with responsibility for clients; and (3) exploration and assumption of the identity, values and dispositions consonant with the fundamental purposes of the legal profession.” The University of Miami’s innovative LawWithoutWalls program brings students, academics, entrepreneurs and practitioners from around the world together to examine the fundamental shifts in legal practice and education and develop viable solutions.
The problems facing the legal profession are huge, but not insurmountable. The question is whether more law schools and professors are able to leave their comfort zones, law students are able to think more globally and long term, and the popular press and public are willing to credit those who are already moving in the right direction. I’m no expert, but as a former consumer of these legal services, I’m ready to do my part.
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As mentioned during my inaugural post, I spent the last nineteen years in the private sector, most recently as deputy GC and compliance officer for a multinational Fortune 500 company that manages supply chains for other companies. As compliance officer, I with others spent time in various countries conducting training and risk assessments, interviewing employees in warehouses, assessing our agents and looking for opportunities for bribery, which would subject our company to liability under the Foreign Corrupt Practices Act, the UK Bribery Act and the admittedly under-enforced local laws.
At the same time, I became passionately interested in the struggles in the Democratic Republic of Congo (“DRC”), a country the size of Western Europe and the fifth richest nation in the world in terms of minerals. For those following the news, you may know that the country is set to announce the winner of its hotly contested election either today or tomorrow and there is such fear of violence after the announcement that many of the wealthy are already fleeing the capital.
Notwithstanding its vast wealth, the UN recently designated this former personal colony of Belgium’s King Leopold II, the least developed country and the rape capital of the world. I first learned of these issues via a 60 Minutes piece in which Anderson Cooper described the atrocities perpetrated by Rwandan genocidaires and Ugandan and Congolese rebel forces that control many of the mines containing the minerals necessary to produce cell phones, computers, cameras, electronics and component parts. Cooper graphically described the use of mass rape as a weapon of war, and noted that 5-6 million people have died during the various wars in the Congo, making it the deadliest conflict since World War II. I co-founded a foundation to raise money to provide surgeries for rape survivors and to train midwives to reduce the rate of maternal and infant mortality (www.footprints-foundation-org). A number of Hollywood celebrities have joined the large group of activists working to improve conditions in the Congo, most notably the odd couple of actor Ben Afflek and Cindy McCain (John’s wife, who has worked on Congo issues since 1994). Both testified knowledgably and passionately on behalf of their foundation the Eastern Congo Initiative during a Congressional hearing on the Congo last March.
My seemingly unconnected and disparate background as a corporate compliance officer and nonprofit board member became relevant when I learned about Dodd-Frank’s conflict minerals disclosure provision, which has not yet been implemented due to intense lobbying by industry groups and nongovernmental organizations. The provision requires U.S. issuers to disclose their use of “conflict minerals” (tin, tungsten, tantalum and gold) and describe the measures taken to conduct audits and due diligence of their supply chains with a statement as the “DRC-conflict free” nature of their minerals (this also includes the nine countries surrounding the DRC). The provision also charges the State Department with developing a Conflict Minerals Map and strategy to “address the linkages between human rights abuses, armed groups, mining of conflict minerals and commercial products.” The Comptroller and Secretary of Commerce must provide a list of all known conflict mineral processing facilities worldwide and report on the quality of the private sector audits.
When proposing the original Congo Conflicts Minerals Act of 2009 which led to Section 1502 of Dodd-Frank, Senator Sam Brownback (R-KS) explained, "metals derived from inhumanely mined minerals go into electronic products used by millions of Americans. In the Democratic Republic of Congo, many people - especially women and children - are victimized by armed groups who are trying to make a profit from mining 'conflict minerals.' The legislation introduced today brings accountability and transparency to the supply chain of minerals used in the manufacturing of many electronic devices. I hope the legislation will help save lives."
Dubbed a “name and shame” law by a congressional staffer, the SEC provision has no criminal penalties for issuers who use conflict minerals. Instead, the provision merely seeks disclosure so that the company that uses conflict minerals can face the reputational pressures from an educated public. The public, presumably, will choose to boycott products or divest from companies deemed complicit in the conflicts minerals trade with the attendant rape, kidnapping and child slavery. Films called “Blood on the Mobile” have gone viral online. Phone apps such as Free World and Free2work --“transparency shopping aids” -- allow you to see the “slavery footprint” of certain products and send a note directly from your smartphone to the company.
In short, the activist community is doing an excellent job shining a spotlight on the estimated 6,000 affected issuers and their hundreds of thousands of suppliers. Apple and Motorola are obviously subject to the law, but Kraft, which uses tin in its packaging of cookies will have to work with its hundreds of suppliers to ensure compliance. The California Transparency in Supply Chains Act goes into effect in January, and many U.S. universities have announced that they will divest their funds from companies that are not DRC-conflict free.
The SEC will issue its regulations any day now and the State Department has introduced a public-private partnership to work on the issue. An OECD pilot is also underway, although some believe that it will not succeed either because it does not go far enough or because it goes too far. The legislation will likely be one of the next targets for litigation by the US Chamber of Commerce and other industry groups using the same theories that undermined Dodd-Frank’s proxy-access provisions. A further hurdle for the legislation- a recent independent study from Tulane University found that the SEC had vastly underestimated the proposed costs of compliance.
Although many of the Republican presidential contenders have promised to dismantle Dodd-Frank, it’s likely that if conflict minerals legislation survives court scrutiny, it will be here to stay. It would be interesting to hear what Newt Gingrich, who wrote his PhD thesis on the Congo would have to say about that.
I initially felt conflicted about this well-intentioned law because of the unimaginable suffering going on in the Congo, but I was skeptical about the viability and the logistics of actually complying with it. Having conducted audits myself in the past, you never really know if you’re hearing the whole story or seeing everything that you’re supposed to see. None of the countries I visited in my former life had such allegations of corruption, public officials who go for months without getting paid, or known perpetrators of the Rwandan genocide and other rebel groups involved directly or indirectly in the supply chain.
My foundation work in Congo and Rwanda in September, my dialogue with local Congolese including rape survivors and NGOs, US business leaders, and activists on both sides of the debate and my former experience conducting audits confirmed my skepticism, although many want the law enacted immediately. While I don’t doubt the good intentions of the law and the urgency of stopping the rape, child slavery and forced labor, in my next post, I will discuss why I believe that the legislation will likely have serious unintended consequences, may hurt the very people its designed to help, and what Congress and the SEC should have done differently.
I am honored to be a guest blogger, especially since I am brand new to the academy having worked in the private sector for nineteen years as a commercial litigator, HR executive, deputy general counsel and compliance/ethics officer for a Fortune 500 multinational corporation. I will spend the next two years as a visiting assistant professor at the University of Missouri-Kansas City learning to teach (marrying theory and practice) and focusing on scholarship and coursework related to corporate governance, compliance, social responsibility and the future of the legal profession.
Over the next two weeks I plan to write about two Dodd-Frank provisions- conflict minerals and whistleblower; my call for an affirmative defense for a redesigned “effective compliance program” under the Federal Sentencing Guidelines; the ongoing debate about the value of a law school education; in-house counsel as "gatekeepers"; and a book review of Cultivating Conscience: How Good Laws Make Good People by law professor Lynn Stout, which offers an alternative look at the homo economicus model. I look forward to receiving comments that can inform my research and thank Erik Gerding for the opportunity to share my thoughts.
Alas, this is the last post of my guest blogging stint here at the Glom. Thanks again for an informative and transformative 2-week set of experiences and memories.
I second Erik's post about law schools fostering humility. Eric poses these 2 fundamental questions:
1. Can one be both ambitious and humble?
2. Can law schools both inspire to dream large dreams -- personal and social -- while still warning about our own fallibility and the limitations of law?
I believe and hope that the answer to both of Eric's questions is yes.
1) Ambition is a great motivator for action, but unless ambition is accompanied with humility ambition often leads to arrogance, conceit, and hubris. A consequence of ambition often is great power and as is often quoted, "with great power comes great responsibility."
2) Not only law schools, but also such other professional schools as those for business, medicine, and public policy can and should "both inspire to dream large dreams -- personal and social -- while still warning about our own fallibility and the limitations of" the profession for which they are preparing their students to enter.
I will be teaching Legal Ethics and Professionalism for the first time next semester and have decided after detailed consideration of the many books and supplements from Aspen, Foundation, and Lexis to adopt these 3 books:
a) Nancy Levit and Douglas O. Linder, The Happy Lawyer: Making A Good Life in the Law (2010), ISBN: 978-0195392326. This book is just a wonderful source for law students and lawyers about recent scholarship about happiness and how to balance professional work and personal life. More generally, the book helps readers think about and find meaning in their quest for a satisfying career in the law.
b) Scott L. Rogers, Mindfulness for Law Students: Using the Power of Mindfulness to Achieve Balance and Success in Law School (2009), ISBN: 978-0977345519. This little paperback is another great resource for law students to help them integrate mindfulness into their busy and stressful lives.
Leonard Riskin, the Chesterfield Smith Professor of Law at the University of Florida, who currently is visiting at Northwestern law school, has been a long-time pioneer in championing the benefits of practicing mindfulness to law and mediation:
3) Michael C. Ross, Ethics and Integrity in Law and Business: Avoiding "Club Fed" (2011), ISBN: 978-1422479704. This paperback textbook succeeds at being a delightfully engaging, fresh, funny, and practical take on the professional responsibility course, which is often required in law school. This book contains many relevant quotes from authors, economists, humorists, judges, philosophers, and scientists. It also has wonderfully on point cartoons and comics from the Wall Street Journal and P. C. Vey, among others.
This book imparts much pragmatic wisdom about how to choose ethical behavior during tough economic times.
Not surprisingly to readers of Glom who have read my posts about business movies, I also plan to show film and television show clips in class to provoke discussion about violations of ethical rules and what sort of lawyers and values are possible and which of those possibilities are likely to lead to personal happiness and professional satisfaction. For example, three recent television programs that raise issues related to professional ethics and personal values are these:
I close this post and my guest blogging by providing the opening two paragraphs from a just completed manuscript, Tiger Cub Strikes Back: Memoirs of an Ex-Child Prodigy About Parenting and Legal Education. This working paper is related to many of the issues and themes I've raised in the 10 posts during this 2-week guest blogging opportunity. And yes, the first paragraph may seem to be immodest and ironic after discussing the importance of humility. The reason to include that paragraph in this post is that everything in that paragraph is true and verifiably so. Also, this post advocates true humility and not false humility. It would be an exercise in false humility to hide or deprecate my own past for the mere sake of appearing humble.
I believe that Amy Chua, tiger mom and Yale law professor, would see my life as exemplifying successful tiger parenting. I am an American born Chinese, who at age 14 enrolled as a freshman at Princeton University and 3 years later at age 17 after being a University Scholar there graduated Phi Beta Kappa earning an A.B. in mathematics. I also earned a Ph.D. in applied mathematics from Harvard University and a J.D. from Stanford University (after having been a 1L at the University of Chicago). My Ph.D. thesis advisor was 1972 economics Nobel Laureate and mathematical economic theorist, Kenneth Joseph Arrow. After serving as an economist in the Division of Consumer Protection in the Bureau of Economics of the Federal Trade Commission, I taught in economics departments from coast to coast, including at Stanford University, the University of California Berkeley, and the University of California Los Angeles; in the finance department of the A.B. Freeman business school at Tulane University; and in law schools at Yale University, University of Chicago, University of Pennsylvania, University of Virginia, University of Minnesota, and University of Southern California. I co-authored a law school course book about law and popular culture, while a member of the Institute for Advanced Study School of Social Science, during its psychology and economics thematic focus academic year. I am currently a professor and the inaugural DeMuth Chair at the University of Colorado School of Law after having been a professor and the inaugural Kohn Chair at Temple University law school.
This Essay reflects upon the desirability, efficacy, and motivational consequences of having a tiger mom such as Professor Chua or my own immigrant mother, who is a New York University medical school biochemistry professor. This Essay also points out many similarities between mainstream modern American legal education and tiger parenting, including their common hierarchical, top-down learning environments that entail authority, compliance, extrinsic incentives, fear, memorization, obedience, paternalism, precedent, and respect for one’s elders. The educational methodologies and philosophies of tiger parenting and the prevailing orthodoxy of United States legal instruction, especially the substantive content of the standard first year law school curriculum, explicitly and implicitly privilege a type of information processing known as system two over a type of information processing known as system one. System two reasoning is analytical, cognitive, conscious, controlled, deliberative, effortful, logical, rule-based, and slow; while system one is affective, associative, automatic, fast, habitual, heuristic-based, holistic, intuitive, and unconscious. Ironically, the Socratic method of legal instruction often places a premium on answering a professor’s questions aggressively, quickly, or superficially instead of deeply, mindfully, or thoughtfully.
An article in today's Life section of USA Today titled Movies tap into anger at Wall Street describes how 3 movies in current release mirror public angst over economic inequalities and inequities: Tower Heist, In Time, and the already mentioned in 2 Glom blogs, Margin Call.
This autumn's documentary Chasing Madoff recounts Harry Markopolos’ multi-year crusade to expose the multi-billion dollar Ponzi scheme perpetrated by Bernie Madoff. Alleged victims of this massive fraud include the celebrity couple of Kyra Sedgwick (star of The Closer on TNT) and Kevin Bacon (of the original Footloose (1984) fame). The Dodd-Frank Wall Street Reform and Consumer Protection Act included a broad set of whistleblower provisions under which the Securities and Exchange Commission adopted specific rules and procedures to incentivize potential whistleblowers by way of cash rewards and protection from retaliation.
There is also a 2009 documentary about the subprime mortgage fiasco, which is now available on DVD, American Casino. 2001 economics Nobel laureate Joseph Stigltiz described it as being "a powerful and shocking look at the subprime lending scandal. If you want to understand how the US financial system failed and how mortgage companies ripped off the poor, see this film."
This May, the HBO Films production of Too Big to Fail, based on the book of the same name with the subtitle of The Inside Story of How Wall Street and Washington Fought to Save the Financial System--and Themselves depicted the autumn 2008 U.S. financial crisis and the sequence of (less than intertemporally consistent) policy responses by the Treasury department, the Federal Reserve, and other financial regulators.
Last autumn's Inside Job made a compelling argument in five parts about how the American financial services industry systematically and systemically corrupted the United States government and in so doing brought about changes in banking practices and legal policies that led directly to the Great Recession.
Although the documentary Client 9: The Rise and Fall of Eliot Spitzer focused primarily on the interaction of ego, hubris, power, scandal, sex, and politics, it also touched upon Wall Street and efforts by Spitzer to reform its excesses.
Of course, no list of movies related to the recent financial crises would be complete without including documentary film-maker Michael Moore's 2009, Capitalism: A Love Story, which criticizes the current American economic system in particular and capitalism in general. At one point, it asks if capitalism is a sin and whether Jesus would be a capitalist, who wanted to maximize profits, deregulate banking, and have the sick pay out of pocket for pre-existing conditions via clips from Jesus of Nazareth. Moore asks if one could patent the sun and questions how the brightest American youth are drawn towards finance and not science. He proceeds to Wall Street asking for non-technical explanations of derivative securities in general and credit default swaps in particular. Both a former vice-president of Lehman Brothers and current Harvard University economics professor Kenneth Rogoff fail to clearly explain either term. Moore thus concludes that our complex economic system and its arcane terminology exist simply to confuse people and that Wall Street effectively has a crazy casino mentality.
Finally, the PBS Nova episode, Mind Over Money, which originally aired on April 26, 2010 asks whether markets can possibly be rational when people clearly are not. In other words, is there a version of the efficient markets hypothesis that can be true in a world populated by at least some boundedly rational actors? In posing this question, the show offers an entertaining, yet quite informative survey of elements of behavioral economics and finance. Its companion website provides additional resource materials concerning the role of emotions in financial decision-making. The debate which it depicts between the University of Chicago school of economics and the behavioral economics approach (including scenes of Dick Thaler playing pool) is a bit overdone and perhaps unintentionally comical, but it raises the question of whether it matters for law and policy how people make their financial judgments and decisions? Of course, the natural follow-ups of if so, then how and if not, then why not, are questions about which business law professors, Glom readers, and policy makers are likely to have perhaps quite strong and certainly divergent opinions.
A television program that has become quite popular is the USA network's original dramatic series White Collar, which is based upon the premise of an F.B.I. agent solving white collar crimes with the assistance of consultant who is a former (and current?) art thief and con man extraordinaire. Episodes have featured a black widow, baby selling, bank robbery, black market kidneys, bond theft, collusion, corporate espionage, derivatives, financial fraud by a Wall Street brokerage firm, identity theft, and political corruption.
It is reminiscent of the 1960's campy, classic, and tongue-in-cheek television series, It Takes A Thief.
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I recently saw the movie, Margin Call, which is currently playing in theaters and is available on demand at Comcast. There are curretly 34 reviews of it by viewers at imdb, where it has a rating of 7.3 out of 10.
I also just finished reading this paper, Fear, Greed, and Financial Crisis: A Cognitive Neuroscience Perspective, prepared for a forthcoming handbook on systemic risk. This chapter is by finance professor Andrew Lo, who is the director of the MIT laboratory for financal engineering. He also wrote another excellent paper which Glom readers are likely to find of interest, namely Reading About the Financial Crisis: A 21-Book Review, that was prepared for the Journal of Economic Literature.
In the interests of full disclosure, I taught at Temple law school a seminar titled Law, Emotions, and Neuroscience and co-taught at Yale law school with professor Dan Kahan a seminar titled Neuroscience and the Law. The seminars covered some basic materials about affective,cognitive, and social neuroscience before analyzing the potential and limits of applications to business law, conflict resolution, criminal law, ethics, evidence, morality, paternalism, and social policy. Media coverage of neuroscience and law has a tendency to focus almost exclusively on such controversial issues as free will and responsibility in the criminal law context. Glom readers are more likely to focus on neuroeconomics and neurofinance, two nascent fields that ask how human brains engage in JDM (Judgment and Decision Making) in general and over time and under risk in particular.
Also, as cognitive neuroscientist Michael Gazzaniga recently stated: responsibility, like generosity, love, pettiness, and suspiciousness, is a strongly emergent property, which although being derived from biological mechanisms, has fundamentally distinct properties, just like the case of ice and water. The press and the public also seem to be fascinated with very colorful fMRI brain scans because they like the idea of being as the Wall Street Journal science writer, Sharon Begley, calls them: cognitive papparazi.
My system 1 believes in synchronicity, so this post, as evidenced by its title's homage to Lo's chapter, approaches the movie Margin Call from a cognitive neuroscience perspective informed by Lo's chapter. Lo provides a brief history of what we know about brains. He then explains how fear and the amygdala can exacerbate financial crises. He also demonstrates how the reward of money appears to share the same neural system and the release of the neuortransmitter dopamine into the nucleus accumbens as these rewards do: beauty, cocaine, food, music, love, and sex.
Lo proceeds to discuss a neurophysiological explanation for Kahneman and Tversky's experiment demonstrating people's aversion to sure loss. Lo proposes a neuroscientifically informed view of rationality that differs very much from an economic rational expectations conception, with the key difference being the role that emotion plays in JDM. Lo extends his analysis from individuals to groups by explaining the neurophysiology of mirror neurons, theories of mind, social interactions, and the efficient markets hypothesis. He concludes his neuroscience survey by describing the marvels and limits of the human prefrontal cortex, also known as the "executive brain." Of particular interest to Glom readers is decision fatigue, documented recently among judges rendering favorable parole decisions around 65% of the time at the start of and close to 0% by the end of each of 3 daily sessions that were separated by 2 food breaks (a late morning snack and lunch). This empirical finding that parole rates increased after food breaks is consistent with recent experimental research finding that glucose can reverse decision fatigue and the common adage to not make important decisions when tired.
Lo provides several practical and reasonable suggesions based upon cognitive neurosciences about how policymakers can engage in financial reform to deal with systemic risk. He concludes by advocating that financial economists utilize the great recession to re-conceptualize, rethink, and revamp neoclassical economics by forging a consilience between the neurosciences and financial economic theory. Building a deeper and better understanding of economic phenomena through improved economic models and intellectual frameworks can and should lead to a more appropriate financial regulatory infrastructure.
And now onto a few comments about the movie Margin Call. Without giving away the plot for those who may want to see it without any knowledge of its ending, this movie raises ethical and moral questions about individual versus social optimality, trading on the basis of private information, panic selling, professional codes or norms of behavior, and the costs a company may impose on society and pay to others to survive. There is certainly lots of fear and greed on display in this film. Set over the course of a day and sleepless night in NYC, the movie viscerally illustrates various forms of JDM and how individuals and groups of individuals can persevere under stress and time pressures. It is a movie that can and should provoke discussion about what could have been done differently by individuals, financial firms, and regulators. It is a film that I'm going to put on the list of movies at the start of the chapter about business law in the text, Law and Popular Culture: Text, Notes, and Questions (LexisNexis Matthew Bender, 2007) by David Ray Papke, Melissa Cole Essig, Christine Alice Corcos, Lenora P. Ledwon, Diane H. Mazur, Carrie Menkel-Meadow, Philip N. Meyer, Binny Miller, and myself that we are revising for a second edition.
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