November 02, 2011
Fear, Greed, and the Film Margin Call: A Cognitive Neuroscience Perspective
Posted by Peter Huang

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.

Margin Call Poster

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.

Whychoosethisbook

Jason-zweig-economy-book

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.

Homer-simpson-donut-dream

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

Willpower

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.

Law and popular culture. text, notes, and questions

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October 27, 2011
Pink Cabs and CSR
Posted by Lisa Fairfax

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. . .

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July 19, 2011
Corporations/B.A. Roundtable: On Teaching CSR and other Corporate Law Theory
Posted by Lisa Fairfax

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.

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July 18, 2011
Corporations/B.A. Roundtable: Taking Corporate Social Responsibility Seriously
Posted by Erik Gerding

I had not planned on participating in this roundtable, but David Millon and I have had some offline conversations about teaching Corporate Social Responsibility after I read the text of his post.

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?
  • 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?
  • 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?

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Corporations/B.A. Roundtable: Corporate Social Responsibility in the Basic Business Organizations Course
Posted by Erik Gerding

This post comes to us from David Millon, the J.B. Stombock Professor of Law at Washington & Lee University School of Law.

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.

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September 30, 2010
Buy One, Give One As a Sales Strategy
Posted by Christine Hurt

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.

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September 23, 2010
Facebook Founder as Philanthropist
Posted by Christine Hurt

I vividly remember the beginning of an English class in college when the professor (whom we called Dr. Death for reasons I don't recall now) detailed the staying power of the novel Frankenstein -- it had been reprinted X number of times, sold X copies, been translated into X languages, inspired X plays, X movies, X works of art.  Then, Dr. Death said "Mary Shelley was 18 years old at the time.  What have you done?"

This is how I feel when I think of Mark Zuckerberg, who is 26 and the youngest billionaire in the world.  Because of this one fact, his young age, I was surprised to read today that he is giving away $100 million to the Newark public school system.  (Zuckerberg did not go to school in NJ.)  Of course, if Facebook is really worth what we are told it is worth, and Zuckerberg will someday have an IPO day that rivals Sergey Brin and Larry Page's Google post-IPO sales, $100 million may be a rounding error.  But it's a very big deal to the troubled school system and is said to be the beginning of an education foundation that Zuckerberg wants to create.  Now, I've heard development people talk about self-made wealthy individuals as having "acquisition" phases and "giving" phases.  Zuckerberg seems to have moved to the giving phase at an extremely early age.  If you remember, another Harvard dropout named Bill Gates was also at one time the youngest billionaire, and received criticism for many years for not being philanthropic enough before creating his foundation.

So, is Zuckerberg just a much nicer person than Bill Gates?  Or, could it be, that Zuckerberg is facing a PR problem?  In a few days, a movie is going to open called The Social Network, which is going to paint a slightly younger Zuckerberg in a not-quite-flattering light.  However, many people say that the facts depicted in the movie (based on the book The Accidental Billioniares) are wrong, and that the real story about the beginnings of Facebook and the motivations behind individuals spinning the story the other way are far different.  However, even this story doesn't make Zuckerberg look like someone you would want to do business with without a lot of lawyers around.  So, is it coincidental that Zuckerberg picks this week to make a super-generous gift to a cause (public education) no one can fault? 

Whatever the motivations, let's hope that wonderful things flow from this generous gift.

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September 17, 2010
Corporations and the Alien Tort Claims Act
Posted by Gordon Smith

The United States Court of Appeals for the Second Circuit just issued its opinion in Kiobel v. Royal Dutch Petroleum, a case involving claims under the Alien Tort Statute for human rights abuses in Nigeria. More specifically, the plaintiffs allege that Royal Dutch and Shell aided and abetted "Nigerian military forces [that] shot and killed Ogoni residents and attacked Ogoni villages — beating, raping, and arresting residents and destroying or looting property." The companies allegedly provided transportation, staging areas, food, and compensation to the Nigerian soldiers. The issue in the case is fundamental: "Does the jurisdiction granted by the [Alien Tort Statute] extend to civil actions brought against corporations under the law of nations?"

The court's answer: No.

The court's rationale: the subject-matter jurisdiction of the Alien Tort Statute is defined by customary international law, and "from the beginning ... the principle of individual liability for violations of international law has been limited to natural persons — not 'juridical' persons such as corporations — because the moral responsibility for a crime so heinous and unbounded as to rise to the level of an 'international crime' has rested solely with the individual men and women who have perpetrated it."

While both the majority and the concurrence in Kiobel recognize a norm of aiding and abetting liability under the Alien Tort Statute, the majority relies heavily on the notion that "no international tribunal has ever held a corporation liable for a violation of the law of nations." Judge Leval observes in a concurring opinion that no tribunal has ever held that a corporation could not be liable for a violation of the law of nations. 

The majority counters this argument in Parts II and III of the Discussion, arguing that customary international law is not established by the logical extension of existing norms, but only by actual practices. As for actual practices, the court leans heavily on the absence of cases imposing criminal liability on corporations as evidence that "corporate liability has [not] attained universal acceptance as a rule of customary international law." While the concurrence questions this approach, the majority offers substantial support for its analysis. 

In the end, the concurrence offers an impassioned argument for corporate liability and wins convincingly in the battle of quotability, but the majority's opinion is more firmly grounded in analysis of authority. Julian Ku observes, "there appears to be no serious argument left that customary international law can impose duties on private corporations."

I suspect that the majority opinion will not put an end to serious argument, but you can judge for yourself.

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May 10, 2010
BP's Image Problem
Posted by Tamara Piety

As oil continues to pour out of the BP managed rig in the Gulf of Mexico, the discussion in marketing circles is (of course) what this will mean for BP's image. See Advertising Age. About a decade ago BP launched an intensive effort to brand itself as the "responsible" and "green" oil company with its "Beyond Petroleum" campaign and a logo change to a green and yellow stylized sunburst. (This campaign apparently included some pretty weird, but entertaining, viral videos. See this  I say "apparently" because although the production values of the video are very high, it almost seems like a spoof with its inclusion of things like breast implants ["beyond pain, joy"] and a guy running out of toilet paper ["beyond fear, courage"]).

Some observers think the campaign was never anything more than greenwashing; that is, it was an attempt to manipulate public perception without any significant commitment to alternative energy exploration. For example see this criticism in 2000 and this in 2010.

But reading the article in Advertising Age, which dissects what PR observers appear to think is a less than stellar response to the accident on the part of BP, is instructive about what everyone in the business thinks is going on with these campaigns. A problem they say is that BP's campaign was so successful it underscored the disconnect between the campaign claims and the reality in the Gulf. (Ironically, BP was actually on the verge of winning an award for its safety record, an award the article implies, but does not say, may have been more attributable to the campaign than to the actual record.) This disconnect is a problem. But you'd think it is one that could have been avoided by making a commitment to these issues that was more than rhetorical. Too often though the commitment stops at the marketing.

On the blow out, management at BP has apparently been slow to control "the message" and has actually been doing things that might make a bad situation worse; like "offering $5,000 settlements to residents if they waived their rights to sue for any damages." As one PR pro put it:

"That's a profoundly disturbing message to have resonating as one of your first public messages ... When the public sees the company leading with a legal protection agenda trying to limit legal exposure, it's not a good thing. The next shoe to drop is usually the attorney general intervening to remind the company of its obligations. Perception-wise, this is out of control."

Uh, yeah.  Although perhaps it isn't just the perception. 

This is a perennial problem with PR - the temptation to believe that the response stops with managing the public perception and that changing the perception is the solution to any problem. That can work pretty well until reality collides with promotion. And then promotion may not help much. As the article notes:

"Of course, all the social media in the world won't do much if millions of gallons of oil wash ashore, crippling the fishing industry in Louisiana and Mississippi or destroying the white-sand beaches (and tourism trade) in Alabama and Florida."

It will be interesting to see if BP does manage to get its arms around a better PR strategy, in addition to actually fixing the problem.  But I'm betting it does the first before it does the second.

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May 09, 2010
More on the Philip Morris case
Posted by Tamara Piety

I mentioned last week that there were more interesting arguments raised in connection with the cert. petition in the Philip Morris case which bear on on my claim that Citizens United will be used to bolster arguments for more protection for commercial speech. As I observed, The Washington Legal Foundation and the National Association of Manufacturers asserted in an amicus brief that Citizens United supported their argument about commercial speech. Here it is:

(1) Because the health consequences of tobacco use is a matter of public concern; and

(2) Because much of the communication on which liability was predicated took place in the form of newspaper articles, op-eds, congressional testimony, press releases, and television appearances and was in response to public criticism the speech in question was speech on "a matter of public concern."

(3) Because it was speech on a matter of public concern it should have been fully protected.

[Notice that the same thing that makes something a matter of public concern is also was makes it a legitimate object of governmental regulatory efforts.  So it can't be enough to say that full protection follows from the observation that something involves a matter of public concern.]

The trial  appellate courts apparently failed to give this speech the protection to which, in the Foundation's view, it was entitled "because the speakers had an economic motive for their communications." (Brief at 6). The brief go on to say, "But economic motive is insufficient to transform fully protected speech into commercial speech. See Citizens United v. Federal Election Comm'n, 130 S.C. 876, 899 (2010) ('First Amendment protection extends to corporations.')."  (Id.)

It seems to me that the connection between the reference to economic motive and the observation about the rights of corporations is a non sequitur unless the Foundation is making the following assumptions: (1) "corporations" in this sentences = for-profit corporations; and (2) all speech by for profit-corporations has an economic motive. I make these same assumptions; so I think they are fairly reasonable and I understand why the authors believe Citizens United supports their cause. I think it does too, even though I disagree that commercial speech ought to be fully protected. However, I've often encountered objections to these same assumptions when I make them (i.e., "But not all corporations are for-profit!"; or "Not everything a for-profit corporation says is commercial speech!"). But as you can see; these arguments aren't original to me. I got them from the proponents of full First Amendment protection for commercial speech.

I've also argued that many of these proponents are essentially arguing for a constitutional right to lie. See Grounding Nike: Exposing Nike's Quest for a Constitutional Right to Lie. Some think this overstates it. But the Washington Legal Foundation's brief seems to corroborate it. In footnote 2 the Foundation argues that although the Court of Appeals did not "explicitly label" the speech in question "commercial" that must have been the standard the Court was applying because it rejected the First Amendment defenses "solely on the grounds that the speech was (in the court's view) fraudulent" and that only commercial speech could be "punish[ed]" (?!) on that ground; fully protected speech "even if false - is entitled to 'breathing space'...."

Res ipsa loquitur.

A dear former colleague used to argue with me that the First Amendment didn't protect fraud and that there was no "right to lie" even under the strict protection offered in N.Y. Times v. Sullivan. There may not be an right in the abstract to lie. But that can be the practical effect of a high evidentiary standard. As any litigator can tell you (and I have been one), there is a difference between an abstract principle and how it plays out "on the ground." I will have more on that later. Suffice it to say that the "breathing space" the Foundation argues for here would cover an awful lot of fraud.

And that brings me to the next point. How do you prove that a corporation has the specific intent necessary for fraud?

The Foundation claims that the judgment below was flawed because the government did not show sufficient evidence of specific intent to prove fraud because the government relied on a collective intent theory. (Id. at 8). It argues that the court should have looked to the state of mind of the individual officer and employees because "a company - as opposed to an individual - can never entirely know what information it possesses." Just so. Sounds awfully close to an argument that the company, qua company, can never commit a fraud because it can never have specific intent.That certainly turned out to be the Achilles heel of the prosecution of the Arthur Andersen accounting firm in the wake of the Enron scandal.

I actually think there may be something to this argument and it is part (not all) of the problem I see with imposing criminal liability on entities like corporations. Without revisiting the whole issue of corporate criminal law though it is sufficient for my purposes here to note that this argument too would increase the difficulty in restraining fraud. I'm not sure that we should be too sanguine about throwing up additional legal obstacles to prosecuting fraud.

In any event, the record, all 1700 or so pages of findings of fact and conclusions of law, offers what seems to me to be ample evidence of specific intent and plenty of false statements (including that by now notorious false testimony before Congress. See some of it in this clip from 1994 here). For a summary of some of Judge Kessler's findings in this case, as well as a summary of tobacco company marketing efforts to children and the addictive properties of nicotine from the Campaign for Tobacco Free Kids see this.

Is it really a matter of constitutional significance that tobacco companies be able to advertise in Rolling Stone or market their products in pink packages or other specific trade dress?

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April 28, 2010
Citizens United ....Something different Part II
Posted by Tamara Piety
    I promised yesterday I would prove that my concerns about how Citizens United would be used were not hypothetical. Today I will talk about where it is showing up, US v. Philip Morris USA, Inc., et.al., See DCCA opinion

    This was a civil RICO case filed by the United States in 1999 against several tobacco companies and two of their non-profit organizations, the Council for Tobacco Research and the Tobacco Institute. The lawsuit accused these entities of engaging in a conspiracy, taking place over a period of approximately 50 years, to mislead the public about a number of issues related to smoking including: the potential health consequences of smoking; the dangers of environmental smoke (second-hand smoke); whether nicotine was an addictive substance; whether the tobacco companies were manipulating nicotine content; whether the tobacco companies were intentionally targeting youth in their advertising and promotional efforts; whether they were intentionally marketing cigarettes as "light" or "low tar" to imply health benefits (or less detriment) the companies knew did not exist because of a phenomenon known as "compensation," and other claims.

The case went to trial in 2004 and lasted for about 9 months. In 2006 D.C. District Court Judge Kessler, issued an opinion with findings of fact and conclusions of law that ran about 1700 pages. The evidence buried in these pages is unequivocally damning.

Several years later, in 2009 the D.C. Circuit Court affirmed most of these findings in the per curiam opinion above. The defendants (and the government) filed petitions for cert. The petitions of the parties are available here. Whether the Supreme Court will agree to hear the case is unknown, but with the government seeking review as well it may do so. And issues of commercial speech and the First Amendment are raised through out the case. Indeed, the amicus brief filed by the Washington Legal Foundation and the National Association of Manufacturers explicitly says this case offers the Court the opportunity to answer the question that it left open in Nike v. Kasky, writing "This Court has recently reaffirmed that the speech of corporate actors may be entitled to full First Amendment Protection" (Page 19 of the brief which you can view here citing yes, Citizens United).

The 5th case down in the Table of Authorities is Citizens United and it is cited twice in the argument. The brief argues the lower court ignored that much of the misleading speech took place in the form of editorials, op-eds, press releases and the like and involved issues of "public concern" and thus was fully protected speech. Mind you these press releases, so-called informational pamphlets (some sent to school children purporting to educate them about the "debate"), came from a group of defendants who the record amply demonstrates did meet together with their public relations and law firms to come up with a strategy to manufacture a debate that really didn't exists since their problem was that there was scientific consensus on the basic facts about the health risks of smoking and that these facts would be very damaging to future business. Their strategy is succinctly captured in the phrase found in some internal documents and widely reported on since, "Doubt is our product." It is important to be clear on what they are asking for; they are asking for constitutional protection for the manufacture of a phony debate, to obfuscate rather than to clarify information about a product for which there is no safe level of use.

This seems an appropriate juncture to raise Justice Jackson's admonition that "the Constitution is not a suicide pact." It seems like the government ought to be able to regulate a potentially lethal product, and that regulation of advertising and marketing is a necessary part of such appropriate regulation in the public interest. Such a regulation has recently been passed in the form of the  Family Smoking Prevention and Tobacco Control Act, Pub. L. 111-31, 123 Stat. 1776 (2009). The Act permits the FDA to regulate tobacco products and includes very strict limitations on permissible forms of advertising and promotion.

    But a group of tobacco companies is attacking this statute in a District Court in Western Kentucky (much forum shopping there?) on the grounds (among others) that it violates the First Amendment. The companies even wanted to claim First Amendment protection for marketing practices like giving out free samples! The district court denied most these claims, but nevertheless found that some of the statute's regulation of color and trade dress did violate the First Amendment. The opinion is here It was issued before Citizens United came down. But taken together with the arguments raised by the Washington Legal Foundation in the Philip Morris RICO case, I think we can expect Citizens United may well be used in the future in this case as well. Only time will tell. I would worry about giving them ideas, but the connection between Citizens United and commercial speech protection claims is clearly already out there amongst firms litigating these issues. 

Later I will post some other aspects of the Philip Morris case which may be of interest to Glom readers, in particular whether a corporations can commit conspiracies or have specific intent.


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April 27, 2010
Citizens United ...and now for something slightly different
Posted by Tamara Piety

    Much of the outcry about Citizens United has focused on its anticipated impact on elections, see here and  here, as well it might since the decision was, after all, one about the proper interpretation of the Bipartisan Campaign Reform Act, aka McCain-Feingold. However, for my money (no pun intended), its most pernicious impact is likely to be not on elections (there was already a lot of corporate money in elections), but rather its influence on the future interpretation of the commercial speech doctrine. The commercial speech doctrine permits the regulation of commercial speech for its truth.

    What has this got to do with political speech you might say? Nothing, unless one considers why for-profit corporations get into campaign finance or lobbying in the first place. They do so for the same reasons they engage in commercial speech; to further the economic interests of the corporation (and/or the shareholders if you prefer). Even though the Supreme Court did not hold in Citizens United that a corporation enjoys the same First Amendment rights as a human being, the rhetoric in the opinion, what I call the "anti-discrimination rhetoric," is likely to be used as if the Court had said just that and in support of an argument that the Court should not "discriminate" against commercial speech and relegate it to the category of an intermediate scrutiny test but rather should apply to it a strict scrutiny test, a New York Times v. Sullivan test. Suffice it to say that this permits regulation in theory, but little in practice.

    There is evidence that Citizens United will be used this way if you look at how at how Bellotti was used. Bellotti was another corporate election law case. It was decided in 1978, only two years after  Virginia Pharmacy, the case in which the commercial speech doctrine was first announced. It has been repeatedly used to argue for expanded protection for commercial speech. Most recently in the Supreme court in 2003 in the  Nike v. Kaksy case. See here, here and here

    Theoretically Bellotti was a case that had nothing to do with commercial speech. Nevertheless, it has regularly showed up, as it did in Nike, in arguments in favor of more protection for commercial speech, supposedly for the proposition that speech is not less valuable because a corporation utters it. May be. But consider this, if we (or the Court) gets this argument tangled up with some notion that First Amendment protection is offered on the basis of some anti-discrimination principle we may be in very deep waters indeed, because for a business corporation its political expression is surely tangential to its main organizing purpose. It's core expressive activity is commercial speech. If we are protecting the speaker then it would seem that its core expressive activity ought to be protected. However, going that way would seemingly wreak havoc on any sort of regulation of commerce. How can you regulate commerce if you can't regulate commercial speech? If the Court goes the way of offering strict scrutiny protection to a lot of commercial speech it may make debate about reform of the financial sector moot. Not to mention the idea that corporations need protection against discrimination is a fairly difficult one to swallow. (It makes for some good editorial cartoons though! This month's Vanity Fair has a great one which you can only see if you buy the magazine; but you can find in the table of contents here under the Vanities section. A similar cartoon showed up earlier in the Boston Phoenix and that one you can view here .)

    This is not just a theoretical proposition. There is a case now pending before the Supreme Court which (arguably) involves commercial speech and at least one amicus brief suggests that this is the case in which the Court can resolve the status of commercial speech (in favor of more protection, natch) and answer the question raised but not answered in Nike v. Kasky. Guess which case is included in its list of authorities? Yep. Citizens United. I will save for another post which case this is and where else Citizens United is popping up. But this is one of those First Amendment cases that could have very widespread impacts on all sorts of regulation of business. That may be a happy thing if you think less is more in the regulatory arena for business. May be not so happy if you think the government should have more of a hand in the regulation of the safety of food, drugs or... financial services.

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March 08, 2010
American Express and "Taking Part" in CSR
Posted by Lisa Fairfax

If you watched the Oscars last night (and I will save the commentary for someone else!), then you probably saw the American Express commercials featuring two socially responsible entities--the Harlem Children's Zone and Patagonia.  The commercials represent part of an initiative, called Members Project, in which American Express has partnered with Take Part to provide people with opportunities to "make a difference in the communities" where they live and work.  You can "take part" in three ways.  First, you can vote once a week for your favorite charity and every three months American Express will donate $200,000 to the five charities with the most votes.  Second, you can volunteer  your time at a charity through Members Project, and in exchange, American Express cardholders can receive membership reward points, while non-cardholders can donate the points to a charity of their choice (or redeem the points if and when they become an American Express card member!).  Third, you can make a donation, either in cash or in membership points. 

The American Express Take Part website begins with this expression:  "Giving back is a core value at American Express and being a “good citizen” is a hallmark of the brand."  After pinpointing its involvement in charitable giving, and noting that the company "is often credited as being the first company to launch a cause-related marketing campaign," American Express states that the Take Part initiative reflects the company's "next step in its mission to empower positive change."  And it is a step designed to make it easier for people to get involved.  Given recent reports indicating a sharp drop in charitable contributions along with an increase in the need for services, it seems like a good next step.

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February 03, 2010
Charitable Giving, Hedge Fund Style
Posted by Lisa Fairfax

As I have noted in other post, many so-called activist hedge funds engage in charitable giving.  Interestingly, these funds also bring their own management and investment style to their charitable giving practices.  As one article notes, such funds rely on the same kind of rigorous research and strong oversight that they bring to other portfolios they manage.  Hence, the article explains that one fund "uses a private-equity strategy of placing a portfolio manager with each grantee to ensure it extracts the highest return from each programme, measuring the impact on children's health, psycho-social well-being and educational attainment, then 'calibrating' scores against other potential investments."  Is this kind of approach good for charities? 

Apparently some charities find the approach "threatening."  And others have concerns about intentions;  or perhaps they are concerned about whether aggression and charity go hand-in-hand.  And yet, charities are certainly in need of donations, even if they would rather that such donations came with no strings.  Then too, charitable organizations are not immune from charges of mismanagement and self-dealing. Thus, it is certainly not the case that such organizations have perfect management structures.  Perhaps the approach some hedge funds bring will provide, even in a small way, better or more efficient oversight to charitable organizations and projects.  Who knows if that is the case, but it is certainly something interesting to consider.  And of course it also will be important to consider if this management/investment style raises other concerns about which charities should be mindful.  Of course, as this Wall Street Journal story  indicates, the economic downturn has meant that hedge funds have had to make considerable adjustments to protect their charitable endeavors against losses.  Thus, it is likely that the real concern is not about how these organizations manage, but rather about whether they can continue their giving in this current financial environment.

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January 24, 2010
Global Corporate Citizenship - A Trend to Watch*
Posted by Rachel Anderson

Global Corporate Citizenship  ("GCC") emerged in management and business scholarship in the 1990s.  GCC posits that corporations have rights and obligations in society similar to citizens.  It addresses the ethical responsibilities of companies operating in a global market and the values that should guide corporations' engagement with society.   In effect, GCC requires that corporations engage with both financial and societal stakeholders as well as acting as stakeholders themselves. 

GCC is closely related to corporate citizenship (without the “global”).  Corporate citizenship is a business strategy, a voluntary model for business practice that is believed to incorporate core values while simultaneously supporting the pursuit of financial goals.  According to the Boston College Center for Corporate Citizenship, there are four key principles of corporate citizenship: (1) minimize harm, (2) maximize benefit, (3) accountability and responsiveness to key stakeholders, and (4) support strong financial results. 

Theories of GCC infuse the discussion of the role of corporations in society with questions of ethics, morality, and societal values, which are substantially lacking in the scholarly lineage that followed Berle’s line of argument.  (See my earlier Conglomerate post on Corporate Purpose.)  It is inherently interdisciplinary and draws from several fields such as management studies, political philosophy, international relations, sociology, and legal studies.  GCC already plays an important role in the actual business practices of transnational corporations ("TNCs"), goals and agendas of international institutions, and theoretical advancements in academic fields such as management, business, and economics.  

The underlying values of GCC are recognized by an increasing number of corporations and business leaders and many TNCs have incorporated GCC into their business goals and policies.  For example, in 2003 CEOs of numerous TNCs published a joint statement with the World Economic Forum ("WEF").  This statement set out a framework for the implementation of GCC principles in the business context.  Since that time, the integration of GCC into the policies of TNCs has moved beyond the group of companies and CEOs associated with the joint statement.  For example, TNCs have begun including GCC in the portfolios of their in-house counsel and corporations are becoming increasingly engaged in promoting GCC.  

In addition to its integration into business policy and practice, GCC is also becoming institutionalized at the international level and an increasing number of non-governmental organizations are supporting GCC.  For example, GCC is being promoted by international institutions such as the United Nations Global Compact ("Global Compact") and the WEF.   The Global Compact is a public-private initiative that seeks to promote ten principals that focus on human rights, labor standards, the environment, and anti-corruption.  The WEF is a Swiss non-profit foundation that focuses on the equality of values and rules in shaping corporate governance and ensuring that economic progress and social development go hand-in-hand.  Both organizations support the creation of a framework that incorporates values and morals into corporate governance and operations while taking the interests of both financial and societal stakeholders simultaneously into consideration – key elements of GCC.

A body of scholarship on GCC has developed in some academic fields, for example, management and business theory.   In 1997, good GCC was defined as "meeting, within reason, the expectations of all its societal stakeholders to maximize the company's positive impact and minimize the negative impact on its social and physical environment, while providing a competitive return to its financial stakeholders" in a publication funded by the Hitachi Foundation.  Over the past decade GCC has continued to be discussed in the management and business literature.  In the management literature, GCC is used at times as an umbrella to include a range of corporate social responsibility and corporate social accountability initiatives.  The stakeholder model rather than a shareholder model for corporate responsibility has played and continues to play an important role in the management literature.  Recent articles argue that corporations are citizen-stakeholders in the global society and, therefore, they should play a more direct role in the advancement of society.

However, although the question of shareholder versus stakeholder models continues to be debated by legal scholars, GCC theory has received only minimal resonance in the U.S. legal discourse.  GCC has been mentioned briefly in several international law articles in connection with descriptions or discussions of the Global Compact and the Millennium Development Goals.  While some legal articles mention GCC in discussions of Corporate Social Responsibility and human rights, others go further and contemplate the definition a good global corporate citizen or propose regulating accountability for GCC.  A few legal articles briefly mention GCC in discussing how NGOs can strengthen their international roles and the role of NGOs in building global democracy.   Still others briefly mention the role that policymakers have in promoting GCC and how the tax advice of law firms and accounting firms may undermine GCC.  Despite brief acknowledgement of GCC in a handful of legal articles since 2000, there has not yet been an attempt to develop a theoretical framework for GCC in the legal context.

I believe that GCC offers a useful theoretical framework with which to integrate and analyze the interests of both financial and societal stakeholders in this age of globalization and my current scholarship focuses on exploring ways that GCC can inform legal theory and corporate, international, and human rights law.   Voluntary measures are an important way to create and realize behavior that is influenced by societal morals and values.  However, reliance on voluntary initiatives is insufficient to assure the protection of key human rights and societal values.  Although the body of scholarship that has developed in the business and management fields is a promising starting point, I believe that developing a legal theory of GCC offers another perspective from which to approach and, hopefully, make a useful contribution to discussions about how to regulate and govern corporations.   

*The main body of this post is excerpted from my article entitled Toward Global Corporate Citizenship: Reframing Foreign Direct Investment Law, 18 Mich. St. J. Int'l L. 1 (2009), which is available on SSRN here.

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