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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I must admit I have been a bit surprised (though happily so) by the seeming strength of the endorsement and support for Breast Cancer Awareness Month by some sports programs. I have seen this support not only at the professional level, but also with respect to college and even high school sports. Certainly the NFL has done a lot in this regard, from coaches and players' hats, players' cleats, and arm bands to pink symbols on the football field and padding on goal posts. The NFL has provided visible signs of its support and endorsement of the fight against breast cancer. The NFL also has a website pinpointing critical issues related to breast cancer, indicating ways in which people can support the fight, and highlighting personal stories from NFL players and others connected to the NFL. Given the impact and influence of sports in this country, this kind of partnership sends a strong message (with some equally strong resources behind it). Recently, as I was riding in a cab, I noticed a pink cab, and my cab driver told me that the owner of the cab dedicated her all of her fares to the fight against breast cancer. Intrigued, I decided to dig a bit deeper. While I did not find information about that particular pink cab, I did discover that many cab companies across the nation had agreed to paint at least one of their cabs pink and engage in a variety of endeavors aimed at support the fight against breast cancer from donating a portion of their cab fares, to providing free cab rides to those in need of transportation for breast cancer treatment. Like the companies here and here. I think one of the key goals of the CSR movement should be to promote partnerships between the nonprofit and for-profit sectors pursuant to which the for-profit entity helps raise awareness regarding important issues and responsibly uses its particular business resources, expertise, and influence to address those issues. Pink cabs appear to reflect this goal, which is why I found myself trying to hail one when I next needed a cab ride. . .
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 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.
We all know that the mark-up on many products is probably more than 100%. So, if you really like that $50 sweater, in a few weeks it may be "buy one, get one 50% off," and if you can hold out until the end of the season, it may be "buy one, get one free." (I remember this scene from The Jeffersons where Florence the housekeeper hands Louise a hat, explaining that the store was having a "BOGO free" sale. Then Florence says Louise owes her the price of the hat because Florence kept "the free one.")
But "Buy One, Give One," has become a socially responsible marketing gimmick as well, expanding on the familiar "we give a percentage of the profits from the sale of "X" to "Y" charity" campaign. For most businesses, these are just gimmicks. If the business wants to give a percentage of profits to its favorite charity, then it can do that without involving consumers in any way. But the Toms Shoes BOGiveOne campaign has seemed more integral to the business plan of the popular shoe store. From its inception, the company has donated one pair of Toms shoes to children around the world, citing shoelessness as contributing to disease and not attending school. People seem to love this business model and love wearing the same shoes that are distributed. Now, a cynic might also say that people get a sense of "Prius Piety" from wearing the distinctive shoes, signalling that they made a socially responsible footwear choice. The shoes are pared-down enough that they may not have been popular without the "I'm basically wearing rags wrapped around my feet with no arch support because I care about shoeless children" dimension. (Of course, people buy Crocs, so who knows.)
So now other entrepreneurs want to capitalize on this willingness of U.S. consumers to choose goods that make them feel good. Most are not bold enough to sell a product at 2X its market value to fund the BOGiveOne model, though, so the models aren't usually one-for-one.
I guess I feel the same way with these goods as I do with school fundraisers. If I want a pair of espadrilles, then sure, I'll buy a pair at the store that will ship a matching pair to someone who needs it, particularly if that pair isn't substantially more than the marked-up pair at the department store. But I'm not going to let it make me buy something I don't want. So, I'm the parent who says, "Instead of my buying $50 worth of overpriced wrapping paper so that the school gets $25 worth of supplies, why can't I just write you a check for $25?"
But Toms isn't just selling a good sale, it's selling a mindset, almost a lifestyle. For many years, we would go eat at Chili's on St. Jude day, when the profits go to St. Jude's Children's Hospital. The wait is amazingly long, which speaks well of how much people like the charity. But, standing in line with three restless children, I often wonder why we aren't eating somewhere else and just writing a check to St. Jude's. What keeps us in line is (1) For $50 we can eat and give to St. Jude's, but if we went somewhere, that amount would be more and (2) it's sort of meaningful to be at Chili's on St. Jude day, talking to your kids about how fortunate we are and remembering the ones that aren't.