Thanks to Erik Gerding for the opportunity to share some of my ideas on corporate criminal liability, Dodd-Frank, corporate influences on individual behavior and educating today's law students only three months into my new academic career. I appreciate the thoughtful and encouraging emails I received from many of you. I even received a request for an interview from the Wall Street Journal after a reporter read my two blog posts on Dodd-Frank conflicts minerals governance disclosures. We had a lengthy conversation and although I only had one quote, he did link to the Conglomerate posts and for that I am very grateful. 

http://online.wsj.com/article/SB10001424052970203733304577102412994084008.html?mod=WSJ_PersonalFinance_PF17#articleTabs%3Darticle

I plan to make this site required reading for my seminar students, and look forward to continuing to learn from you all.  

Best wishes for the holiday season and new year.  

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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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I am grateful for Usha’s latest post about her ambivalence to law and emotions scholarship because it provides an opportunity to engage in extended public discussion about what are some of the legal payoffs to (business) law professors of learning and teaching about emotions in general and happiness in particular.

I concur with Usha that it’s a busy time of the academic year as the semester is coming to a close and many of us will soon be traveling for the holidays (and some of us have traveled to participate in conferences). Of course, most of us feel that we are if not always, then at least constantly busy. In their article titled Idleness Aversion and the Need for Justifiable Busyness, Christopher K. Hsee, Adelle X. Yang, and Liangyan Wang present experimental evdience that busier people self-report being happier. The following is a video short about how the days are long, but the years are short.

I am quite sympathetic to Usha’s opinion that while happiness research is “all fascinating and it shapes my daily choices and reaffirms (or causes me to question) my life choices. Happiness research goes to the core of myself as a person.  Still  I wonder: what does this have to do with law?” This is partly because her view is one that many people including myself from a couple of years ago share. As Usha pointed out, I’ve already written a number of law review articles and some peer-referred articles about law and emotions including but not limited to happiness. Rather than repeating any of those article’s themes (those interested can find all of them available here), I’ll share five concrete responses to the specific challenge that Usha issued about what are the legal implications of and payoff to emotions and happiness research.

First, much of law concerns and is about human behavior: how to discourage anti-social human behavior and encourage pro-social human behavior. In attempting to change human behavior, law is and must be predicated upon a theory of human behavior. The theory can be Oliver Wendell Holmes’ bad man or neoclassical economics’ much caricatured rational actor. Whatever that underlying theory of human behavior is that law is based upon, that theory must address human JDM (Judgment and Decision Making) because in order for the law to change human behavior the law must change the judgments and/or decisions that humans make. It just so happens there has been a recent flood of research about how emotions in general and happiness in particular influence human JDM. This research is diverse and scattered across many disciplines, including anthropology, economics, finance, neuroscience, marketing, philosophy, political science, psychology, and sociology. Of course, this plethora of non-legal interest and research does not have to mean there are legal implications of new understandings about how emotions and happiness shape human JDM. But at least some law professors can and should read this rapidly growing literature to digest it and see if any of it has legal implications or payoffs. Professor Emeritus and former Dean of Stanford Law School and current President of the William and Flora HEwlett Foundation, Paul Brest teaches a graduate course on JDM at Stanford University. He has co-authored with Professor of Law and Director of the Ulu Lehua Scholars Program at the William S. Richardson School of Law in Honolulu, Hawai'i and Senior Research Fellow at the Center for the Study of Law and Society at the University of California, Berkeley, Linda Hamilton Krieger a book titled Problem Solving, Decision Making, and Professional Judgment: A Guide for Lawyers amd Policymakers. Chapter 13 of their book analyzes complexities about decision-making including predicting future well-being and Chapter 16 is titled The Role ofAffect In Risky Decisions.

Second, much of business law is premised upon the neoclassical economics model of utility maximization or the behavioral economics challenge to that model. In either case, business law can benefit from recent work on happiness economics because happiness economics raises a more fundamental challenge to and radical critique of neoclassical economics than does behavioral economics. Some view happiness economics as being a proper subset of behavioral economics, while others view happiness economics as being an extension of behavioral economics. In any event, behavioral economics points out that people have bounded rationality, willpower, and self-interest. The theoretical core of behavioral economics is an article titled Prospect Theory: An Analysis of Decision under Risk by Daniel Kahneman and Amos Tversky. This is an article which is likely to have been cited more times than it has been read by law professors and certainly more times than it has been understood by law professors as evidenced by overly broad attempted legal applications.

Happiness economics points out how people often systematically make decisions that fail to maximize their experienced happiness ex post as opposed to their anticipated or predicted happiness ex ante. This robust empirical and experimental finding means that at least in principle there is room for some other party, public or private, to help improve (or take advantage of) people’s JDM. In a recent working paper that is a forthcoming article in the American Economic Review, titled What Do You Think Would Make You Happier? What Do You Think You Would Choose?, Daniel Benjamin, Ori Heffetz, Miles S. Kimball, and Alex Rees-Jones present survey evidence that although what people choose hypothetically and what they predict would maximize their SWB (Subjective Well-Being) typically coincide, there are systematic reversals. They identify such factors as autonomy, family happiness, predicted sense of purpose, and social status to help account for hypothetical choices while controlling for predicted SWB. Their methodology has a number of possible legal and policy applications, including the development of aggregate measures of happiness. Another example is the application of their approach to reconcile the tension between an empirical finding in the article The Paradox of Declining Female Happiness by economists Betsey Stevenson and Justin Wolfers of declining average SWB of American women since the 1970s, both in absolute terms and in relative terms compared to men, with a common intuition that expanded political and economic freedoms for American women have made American women better off.  Survey respondents who were asked to rank living in a world with or without such increased political and economic freedoms for women. Significantly more respondents choose to live in a world having expanded political and economic freedoms for women despite believing that a world without such expanded political and economic freedoms would make them happier than the opposite.  Their National Bureau of Economic Research working paper 16489 titled Do People Seek to Maximize Happiness? Evidence from New Surveys contains additional examples and more details.

Third, research into two specific emotions, namely fear and greed finds that participants in financial markets are sometimes emotional and sometimes unemotional because they engage in both emotional and unemotional types of mental processing in responding to ever-changing market circumstances. In a series of articles titled,

(1) The Adaptive Markets Hypothesis: Market Efficiency from an Evolutionary Perspective 

(2) Reconciling Efficient Markets with Behavioral Finance: The Adaptive Markets Hypothesis

(3) The Three P’s of Total Risk Management

finance professor Andrew W. Lo posits that many tenets of rational expectations and the so-called efficient markets hypothesis fail to hold always, despite serving as useful benchmarks of what might eventually happen under certain idealized conditions. He speculates that an evolutionary theory of punctuated equilibria involving rare but big environmental shocks resulting in mass extinctions and eruption of new species could apply to financial markets. As Lo points out, law and policy that is based upon assuming rationality or more precisely lack of emotionality is going to be inapt during financial crises. Similarly, law and policy that is based upon assuming emotionality is going to be inapt during financially calm times. His Adaptive Markets Hypothesis implies that effective law and policy should adapt in light of changing financial markets and their participants. Examples of such adaptive business law and policy include:

(1) Countercyclical capital requirements.

(2) Collection, communication, dissemination, publication, and transparency of information about accurate systemic risk measures.

(3) Creation of a Capital Markets Safety Board (CMSB), analogous to the National Transportation Safety Board which conducts an independent investigation of all transportation accidents, in order to perform definitive forensic analysis of past financial crises. The CMSB would be made up of “teams of experienced professionals— forensic accountants, financial engineers from industry and academia, and securities and tax attorneys—that work together on a regular basis to investigate the collapse of every major financial institution.”

As Professor Lo cogently observes,

“The fact that the 2,319-page Dodd-Frank financial reform bill was signed into law on July 21, 2010—six months before the Financial Crisis Inquiry Commission submitted its January 27, 2011 report, and well before economists have developed any consensus on the crisis—underscores the relatively minor scientific role that economics has played in responding to the crisis. Imagine the FDA approving a drug before its clinical trials are concluded, or the FAA adopting new regulations in response to an airplane crash before the NTSB has completed its accident investigation.”

Fourth, central to effective JDM is the development and practice of skills related to emotions and emotional intelligence. A number of business trade books and business school courses focus on how managers can improve their emotional intelligence and in so doing become more effective organizational leaders. Law school clinical and negotiation casebooks and courses often discuss the importance of recognizing and responding appropriately to emotions in attorneys, clients, judges, juries, and other legal actors. For example, in their chapter, If I’d Wanted to Teach About Feelings, I Wouldn’t Have Become a Law Professor, Melissa L. Nelken, Andrea Kupfer Schneider, & Jamil Mahuad present concrete tools for teaching law students about the importance of emotions in negotiation. Yet much of current American legal non-clinical education teaches students explicitly and implicitly that lawyering is just about logical analysis and not about feelings. For example, in another article titled The Discourse Beneath: Emotional Epistemology in Legal Deliberation and Negotiation, Erin Ryan writes that "[b]y acknowledging the salience of wise emotionality in individual and collective deliberation, lawyers will not only improve their own personal repertoires, but propel the practice of law, negotiation, and policymaking toward new horizons of efficacy." Similarly, a recent book titled How Leading Lawyers Think: Expert Insights into Judgment and Advocacy by Randall Kiser discusses (at pages 75-85) how important emotional intelligence is to legal practice.

Fifth and finally, law professors can and should incorporate more information about emotions into law school. Many law professors and law students share a common discomfort with and disdain for emotions in part because of what many law students and faculty believe it means to think like a lawyer. For example, see page 422 of the article titled Negotiation and Psychoanalysis: If I’d Wanted to Learn about Feelings, I Wouldn’t Have Gone to Law School by Melissa L. Nelken. In her anthropological study of first–year contracts classes at eight law schools, law professor and senior fellow of the American Bar Foundation Elizabeth Mertz found that being taught to think like a lawyer caused students to lose their sense of self as they develop analytical and emotional detachment, resulting from the discounting of personal moral reasoning and values, as they learn to substitute purely analytical and strategic types of reasoning in place of personal feelings of compassion and empathy.

In fact, empathy is an important skill that lawyers can and should learn. In his article, Thinking Like Nonlawyers: Why Empathy Is a Core Lawyering Skill and Why Legal Education Should Change to Reflect Its Importance, Ian Gallacher analyzes pedagogical implications of lawyers communicating a lot with people who are not lawyers, such as clients, jurors, and witnesses.

In conclusion, a better and more nuanced understanding of what roles emotions generally and happiness particularly can play in human JDM, economic behavior, financial markets, legal practice, and legal education can and should inform how law professors conduct academic research and teach law students. 

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A couple of weeks ago, at the instigation of some of our students, three of us business-law professors here at Hofstra held a "Teach In" on the Occupy Wall Street movement.  In a room that fits approximately 100, we had a standing room only crowd.  Although the event was scheduled to last only for the "common hour" of 12 - 1 pm, many (about half) of the students were willing to continue the conversation for a second hour (and we professors happily obliged).  In short, the event was very well received.

Now and again we schedule an event like this (a year ago on Citizens United, for example), but each time we wonder whether there will be sufficient student interest to make it worthwhile.  Each and every time, we're more than pleasantly surprised - student turnout is invariably strong, and student participation quite impressive.

Which leads me to this post.  I fear that all too often, we assume that our students are simply too busy, too practical, or too whatever to engage in events like this.  That assumption does a tremendous disservice to them.  A program that is interesting, timely, and well put together, will draw them.  And the result is a wonderfully enriching experience for all involved, to the betterment of our community and institution.  We should do such things more often.

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Our second Business Ethics Seminar meeting focused on my favorite business read: Barbarians at the Gate, by Bryan Burrough and John Helyar. It reads like a novel, and it's the best way I've found to introduce students to deals.  This class was the first time I'd read it from an ethical perspective, and I was curious as to what I'd find.

Wow.  Captive boards. Corporate jets. Leaks to the press.  Advisors with their own agendas.  Backroom deals. LBOs: good or bad? Greed, greed, greed.

We're only halfway through the book, and we've got quite a surprise planned for the next class...

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Last night I co-taught the first session of a year-long Business Ethics Seminar.  It was my first time co-teaching, my first time teaching at night (7:30-9:20!), and my first time teaching this topic. 

My partner in crime is my colleague Carol Morgan, who is a dynamo.  She teaches courses on M&A and Business Negotiations, and heads up our corporate counsel externship, which places students in-house for a semester.

Carol and I wanted to explore the ethical issues of transactional practice.  One of the themes of the course is that ethical issues arise all the time, and so we asked the students to anonymously submit a brief description of an ethical question or dilemma they had confronted in their life--but not what they did.  The issues were great, ranging from

a) how to describe clothes on eBay that had been worn for a few hours ("new without tags" or "pre-owned"?) to

b) ignoring company policies forbidding tipping when  or working as a server-- or at a retirement home to

c) whether a roofer should report his customer's insurance fraud--and thereby hurt his business. 

We told the students at the outset that this was a grand experiment, in terms of course design and content.  So far, I'm very pleased.

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Like of many law profs, I'm scrambling to get ready for the new semester.  I'm scrambling a bit more than usual because I'm following the lead of my friend Jayne Barnard and switching casebooks.  Jayne does this every 2 years (!).  I've taught Corporations from the O'Kelley & Thompson casebook ever since 2005.  I love the O'Kelley Thompson casebook, but I've had the feeling, particularly the last year or two, that things were getting kind of stale.  Maybe it was time for a change?

So I bit the bullet and this year I'm trying Klein, Ramseyer, & Bainbridge's casebook.  I feel a bit like a contortionist, having spent a few days trying to twist my syllabus in order to cover what I want in the order I'd like.  But it's been tremendously liberating to start from near scratch.  I'm covering some completely different topics because--well, why not? 

And let's face it, reading business organizations cases is fun.

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It is time to wind up the affairs of our Roundtable on Teaching Corporations/Business Associations.  Gordon, Lisa, and I would like to thank our guests Afra Afsharipour (UC Davis), Kent Greenfield (Boston College), and David Millon (Washington & Lee).

You can read all the posts in this Roundtable here.

You can also browse our previous roundtables on teaching Contracts, Banking Law, and Corporate Finance.

Please rejoin us on Thursday and Friday as we host a large number of our Conglomerate Masters and the Masters alumni from the previous years as we mark the one year anniversary of the Dodd-Frank Act with a forum taking a hard look at the statute and the regulatory process in the wake of the statute.

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

Our approach to teaching the basic Business Organization survey at Washington and Lee splits the course into two parts, a three-credit course called Close Business Arrangements (CBA) and a second three-credit course called Publicly Held Businesses (PHB). Our basic assumption is that the legal issues confronting the organization and management of privately owned, typically small businesses are different enough from those of large, publicly held firms to warrant separate courses. As a result, we have six hours to cover material that is typically taught in a four- (or even three-) credit survey. Needless to say, that is a much-appreciated luxury.

The CBA course begins with a thorough study of agency law, with an emphasis on authority issues. (We don't do much with vicarious liability for torts in this class.) We think this is important because questions of actual and apparent authority can be complicated, come up frequently in practice, and are nowadays not given the attention they deserve at most law schools. We then do an extended look at partnership law, followed by several weeks on corporate law as it relates to privately owned firms. So we don't do much with complex m&a or federal securities regulation (other than the law governing exemptions from registration). Once the students understand partnerships and corporations, the LLC is easy to grasp as a hybrid organizational form.

Having three hours to cover this material makes broader, deeper coverage of the cases and statutes possible. Importantly, it also allows more time for attention to business considerations – concepts like leverage and problems like conflict of interest or minority shareholder oppression, for example. In our experience, introducing students to basic business concepts and vocabulary is at least as important as teaching them the law; most are almost entirely ignorant about such things. We also take advantage of the extra time to introduce basic accounting concepts and terminology, with the goal of getting the students to understand the purposes of and differences between the income statement and the balance sheet.

The follow-on PHB course focuses on the legal problems related to publicly owned corporations. This is essentially a detailed study of Delaware law. (For the corporate law part of the CBA course we use the MBCA.) In addition, we cover the federal proxy rules and offer a brief overview of the mandatory disclosure system. Having three hours for this subject allows us to cover material that is more typically dealt with in a corporate finance course. So, we can devote significant attention to preferred stock and debt as well as to m&a. We cover the leading Delaware cases dealing with defenses to hostile takeovers in detail. Again, in this course a great deal of time is spent on non-legal issues – valuation, for example – because students know so little about the world of business. In our experience, students who end up in a sophisticated, big-firm corporate practice believe that they are very well prepared.

At W&L, most students take CBA, usually in their second year. Enrollment in the PHB course varies from around 40 to 60 or so percent of the class. CBA is a prerequisite for PHB, though we allow students to take both concurrently if they need to.

Because our two-course sequence is unusual, available teaching materials are limited. Most casebooks attempt to cover both the CBA and PHB material in a single volume, with varying emphases and degrees of thoroughness. For CBA we use the only casebook devoted to privately owned businesses, the Ragazzo and Moll book. For PHB, Klein, Ramseyer, and Bainbridge works well because it covers debt securities and includes the most important Delaware takeover cases. For both courses, though, it's necessary to supplement the casebooks with additional cases and materials.

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Today and tomorrow we are pleased to host another in our series of summer roundtables on teaching business law courses. We have already been fortunate to have law professors share their insights on teaching Contracts, Banking Law, and Corporate Finance. Today we kick off our Roundtable on Teaching Corporations/Business Associations.

Our own Gordon Smith (BYU) and Lisa Fairfax (George Washington) will be joined by Afra Afsharipour (UC Davis), Kent Greenfield (Boston College), and David Millon (Washington & Lee). As with the previous roundtables, we give our panelists free rein to discuss any aspect of teaching Corporations or Business Associations. Some of the topics they might discuss include:

• What are the core ideas you want students to take away from the course? What are your core objectives?
• To what extent should the course include Agency, Partnerships, LLCs, and other unincorporated entities?
• To what extent do you focus on publicly held corporations versus closely held ones?
• How do you handle the wide dispersion in students – in terms of both reasons for taking the course (ranging from “it’s on the bar” to “I want to run my own hedge fund”) and background in business or economics? What kind of practice do most of your students aim for?
• How much do you teach basic economic concepts? What are those concepts? Does this course tend to focus too much on agency costs to the exclusion of other important dynamics?
• Do you include basics of corporate finance or accounting in the course?
• To what extent do you cover securities and m&a?
• How much do you focus on problem solving, problem sets or simulations versus traditional case law analysis? Do you include any other innovations, such as business school style case studies?
• How much of a transactional versus a litigation focus do you have?
• How do you approach issues of Corporate Social Responsibility? (I’ll have another post framing some of the issues on this later) Where do you place it in the syllabus? Do you teach Citizens United? Is there any public law intersection in the course?
• How has the financial crisis changed what you teach or the way you teach?
• How important is Sarbanes Oxley and Dodd-Frank in your course?

Let’s get started!

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This post comes to us from Lawrence Baxter  (Duke University School of Law) as part of our Roundtable on Teaching Banking Law/Financial Institutions.  You can read the other posts  in the roundtable here.

Thank you, Erik, for setting up this fascinating and very helpful forum. I apologize for coming late to the conversation, situated as I now am in chilly but exuberant and splendid South Africa after languishing for a week in beautiful Croatia. I have had the benefit of being able to read the inspiring contributions to the forum; as a result, I am inspired to revise completely the order of my assigned readings before classes begin—in only four short weeks!

I should note that I come to the teaching of bank regulation with a particular set of biases. In the first place, having spent some of my earlier years consulting with the federal banking agencies and working with the staff of the Senate Banking Committee during passage of FDICIA, I am keenly aware of the importance of understanding the law within the larger framework of financial policy. Secondly, my time working with a financial institution was entirely on the strategic and business side, not within the office of general counsel. So I tend to think of legal practice as serving the long term strategic prosperity of the business, which long term prosperity necessarily involves stability and the addition of value for sharehoders and the communities in which they operate. This is not to say that I believe the role of lawyers is simply to serve the immediate ends of the businesses that are their clients; on the contrary, I take the view that some among the legal profession, whether external or in-house counsel, sometimes submit far too greatly to the will of business executives without asserting independent leadership where the long term interests of the financial institution and its shareholders and customers really demand this independence. Financial lawyers have sometimes allowed themselves to become too much of a service industry and appear to have abandoned their roles as a source of wise counsel.

So my approach is to try to inculcate in students an understanding of the whys more than the whats. My hope is that this will encourage students not only to think strategically but also to recognize and understand both public and long-term private interests. This asks a lot of such future lawyers because impatient executives are seldom willing to listen to a sermon on the virtues of constraints they are trying to avoid. But if we don’t persevere in this effort then attorneys might as well consign themselves to roles not significantly different from those of marketers and human resource personnel.

I teach domestic and international banking regulation in separate courses—the former in the fall and the latter in the spring. During the past academic year I used a diverse collection of material for the domestic course and the superb Schooner/Taylor book plus additional material for the international course. Before I left on my current trip I had worked out the syllabus and reading assignments for the fall 2011 domestic course, almost all of which are based on Lissa Broome’s and Jerry Markham’s new casebook edition.

I never felt comfortable with this approach for two main reasons. First, it is now entirely artificial to separate domestic and international bank regulation, so a good deal of the international course has to find its way into the domestic course anyway. How can one possibly teach domestic regulation without recognizing that the operations of large banks are transnational and, in most cases, global? And, of course, Basel is integral to domestic bank regulation, while the actions and recommendations of the Financial Stability Board, G20 and other international institutions have a great impact, whether acknowledged or not, on the shape of domestic regulation, be it through rules or agency decisions. The Collins Amendment provides one of many illustrations.

Second, although Lissa and Jerry performed a Herculean task in updating their excellent casebook so soon after the passage of Dodd-Frank, I have become increasingly disenchanted with the casebook method as a means of teaching financial regulation, particularly now that the field has become so dynamic when compared to how it was twenty years ago. Of course there are key historical cases (e.g., McCulloch v. Maryland, Tiffany National Bank), and well-crafted judicial opinions, albeit rather scarce, help students to understand essential principles and the way these are applied in formal disputes. Cases such as the Second Circuit’s § 20 decisions form part of the dynamic tableau of financial regulation and they help to illustrate the interaction of public policy, agency positioning, industry advocacy that produces important though evanescent inflection points. But forcing the class to understand the larger picture through the episodic vignettes and procedural contortions of cases that make their way to the federal circuits and Supreme Court seems to me to distort the overall picture in ways that are not ideal when one is trying to lay down a long-lasting framework for future counsel. It is true that future financial lawyers are going to need to know the law with great precision once they engage in practice, but they are never going to acquire such precision within the framework of a three-hour course of passing technical validity. My hope is that the learning in law school that lasts is the bigger picture that frames the continually changing detail.

Perhaps it is also true that the case method, if used too much beyond the first year (where one is teaching basic forensic skills), wrongly encourages young lawyers to the assumption that the most important service they can provide is to defend their clients’ positions at almost all costs. This teaching method might even have contributed to the more general malaise in regulatory Washington, where no sensible result can be reached because adversary gridlock is perpetually generated or encouraged by lawyers terrified of conceding ground on behalf of their clients.

The previous conversations in this blog, in which others have described such imaginative use of diverse material in a fluid environment, leaves my earlier planned approach seeming not only uncomfortable, for the reasons already outlined, but also rather pedestrian. So although the die is cast for course listings for the 2011-12 academic year and my messy domestic/international bifurcation between must continue for the time being, I am nevertheless going to impose my own framework on the class reading sequence for the casebook. Instead of following the general order of the casebook, in making the reassignments of the readings from Broome & Markham I now plan to lay out my syllabus along the outline below (readers will recognize in my terminology my fascination with complexity theory as it applies to financial regulation):

I. The Financial Regulatory Ecology

• Financial systems, agents and stability
  • Incl. brief overview of industry structure and demographics
• Central banking and regulatory supervision
  • Agency structure overview
  • Incl. some comparatives
• Exchanges and FMUs
• Regulatory forms, market failure and regulatory failure
• Why banks are (still) special and often Too Big to Fail

II. Path Dependencies

Like others in this forum, I cannot conceive teaching financial regulation without helping students to gain a basic understanding of how our regulatory framework evolved, what happened at various key moments in US and international economic history, and why legislation such as Dodd-Frank ends up being as complex and convoluted as it is. This history provides crucial elements of the initial states from which our regulatory thickets sprung, and how the financial industry has formed. Besides, the history is one of the most entertaining elements for students and a way to help them integrate their knowledge from other courses, such as constitutional and administrative law, into their understanding of financial regulation in general and banking regulation in particular.

III. “Banking” in its Modern Forms

• “Business of banking,” “incidental business,” and “closely related” financial services
• Balance sheet structure and P&L dynamics
  • Basic overview of capital/liability/asset structure
• How banks earn (and lose) money
  • Liquidity and funding management and risks
  • Incl. securitization, derivatives, etc.
  • Accounting and tax trickery
• How other financial segments fit in
  • Investment banking
  • Insurance
  • Public and private funds
  • “Shadow banking”
  • Rating agencies
  • Competition, Scale and Universal banking
• The conflicting ethics and cultures of modern finance

IV. Risk

• Fractional reserve banking
• Leverage
• Losses
• Risk management
• Capital, risk-adjustment, Collins, etc.
• Basel

V. Structure

• Traditional “walls:” Glass-Steagall, McFadden, BHC Act, McCarran-Ferguson
• M&A & competition
• Affiliation & Anti-tying
• GLB & “Deregulation”
• Dodd-Frank, esp. Volker Rule(s): the attempt to separate, once again, custodial banking from investment banking
• Size and TBTF redux

VI. Conduct

(Note: Here I lean in the direction of Adam Feibelman rather than Heidi Schooner. But I would go further: not only are consumer protection issues, presented a certain way, of macroprudential importance; they are also directly relevant to the supervision of individual institutions for safety and soundness (i.e. as a microprudential consideration). As an illustration, my own company (after I retired from it, I hasten to add!) entered the realm of adjustable ARMs when it purchased Golden West. This step eventually destroyed the company. I believe the regulators and shareholders should be asking penetrating questions about why financial institutions are making patently stupid, or at the very least imprudent, loans and why such activity will not impact the solvency of the institution. Regulators should be demanding proof that mortgage service outsourcing, for example, has been done responsibly and in a manner that can withstand a crisis like the one we are in. The debate on consumer protection has been cast as one of irresponsible lending versus irresponsible borrowing, but I think this way of framing the issues underplays the important microprudential elements that regulators failed to police. So my presentation of consumer and investor protection issues would be presented, not so much from the point of view of consumers and investors themselves but from the point of view of regulators and shareholders.)

• General consumer and investor protection
  • HMDA etc.
  • Fed and traditional agencies
  • CFPB
  • SEC
• CRA
• Cards
  • Incl. Durbin (fees), smart cards, etc.

VII. Depositor Protection

• Origins & comparisons
  • Including the financial stability and liquidity roles depositor protection plays
• Moral hazards & influence on regulation
  • Including whether depositor protection achieves its goals or perhaps makes things even worse

VIII. Supervision

• Supervisory process
• Enforcement
• SFI regulation

(This whole section could form the heart of the evaluative discussion with the class on market v. regulatory failure, our inability to take regulation seriously, whether internal constraints such as ethical and moral precepts might offer better alternatives, and whether some of the ambitions of regulatory constraints—such as preventing systemic failures—are achievable.)

IX. Liquidation

• Why banks are handed differently through the receivership rather than the bankruptcy process  Traditional FDIC receivership (incl. conservatorship)
• Living Wills
• SFIs
  •     Incl. GSFIs and cross-border resolution

X. So What Will Happen in the Next Crisis?

• I.e., an evaluation of the reforms and current approach to banking regulation

#    #    #

In the final result, some large chunks of the casebook will be left out and I will again provide substantial legal and non-legal supplementary material. Basically I need a whole new type of coursebook, but that is another story . . .

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