We have decided to convene a late summer forum of the Conglomerate Masters -- our roster of distinguished corporate and financial law professors -- to discuss the current state of corporate social responsibility. In particular, we wanted to address the controversy over Chick-fil-A's corporate stance against same sex marriage and to use this Economist blog post as a jumping off-point.
The Economist blogger contends that Chick-fil-A's culture is in fact a prime example of a firm embracing corporate social responsibility (or "CSR") - albeit not with the politics that one traditionally associates with that movement. The blogger concludes that the Chick-fil-A example demonstrates that matters of social policy should best be left to democratic institutions. He or she writes:
Matters of moral truth aside, what's the difference between buying a little social justice with your coffee and buying a little Christian traditionalism with your chicken? There is no difference. Which speaks to my proposition that CSR, when married to norms of ethical consumption, will inevitably incite bouts of culture-war strife. CSR with honest moral content, as opposed to anodyne public-relations campaigns about "values", is a recipe for the politicisation of production and sales. But if we also promote politicised consumption, we're asking consumers to punish companies whose ideas about social responsibility clash with our own. Or, to put it another way, CSR that takes moral disagreement and diversity seriously—that really isn't a way of using corporations as instruments for the enactment of progressive social change that voters can't be convinced to support—asks companies with controversial ideas about social responsibility to screw over their owners and creditors and employees for...what?
It is a provocative argument. Although one wonders if the author would have made this same series of arguments in the 1960s: would the author have encouraged civil rights protesters to abandon lunch-counter sit-ins and lobby state legislators instead?
Still, the Chick-fil-A example raises some disquieting questions for CSR, which our Masters may address. These include:
Is corporate law the most effective or legitimate tool for social change? If we are worried about environmental degradation, is the solution to broaden the stakeholders to whom a corporation must answer? Or shouldn't we look instead to environmental law?
Is CSR viewpoint neutral? When covering CSR in a Corporations course, I ask students whether social activists who are lobbying a corporation to change what they see as immoral employment practices, should be able to put their views to a shareholder vote? Then I ask whether the answer would or should change based on whether the activists are looking to end racial or gender discrimination or whether they are lobbying a company to stop offering benefits to partners in same sex couples.
At the same time, the current state of legal affairs raises some disquieting questions for opponents of CSR too. The conclusion in the Economist blog -- leave social policy to democratic institutions and public law -- has a long lineage. It harkens back to Milton Friedman's arguments that corporations and the states do and should exist in separate spheres; if citizens want to change corporate policy, the argument goes, they should act through the political process and push through public regulation.
But, the separate spheres argument looks more and more outdated, as corporations influence and permeate the sphere of government. Do arguments to leave regulating the public dimension of corporate behavior out of corporate law and governance -- and leave it to traditional legislative and regulatory bodies -- appear naive in a post-Citizens United (and post-public choice)world?
Also, do these same questions for proponents and critics of CSR apply in equal measure to the growing field of social entrepreneurship? Can entrepreneurs do well while doing good? Should we expect them too? Is social entrepreneurship a workable, stable, and viewpoint neutral concept? If so, what does it entail? Does/should CSR apply equally to small businesses and startups as to global corporations?
We look forward to hearing from our Masters...
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The Times has a not that newsy profile of the Mittelstand, today, Germany's vaunted SME sector, and one that counts for 60 percent of its employment. The big reveal is that the Mittelstand likes the euro, though that calculation is largely on the basis of interviews at one obscure (every Mittelstand company is obscure, that's rather the point) shut-off valve manufacturer.
If you hang out at business schools, the Mittelstand is a useful corrective to everything you think you're supposed to know about finance. German companies eschew debt, we are told, rely on banks instead of capital markets for funding, and retain their employees at all costs. Basically the opposite of the private equity playbook. And yet ... look at the awesome German economy! It has implications for corporate law, too, given that Mittelstand firms are likely to be closely held, with representation for workers and banks if it isn't just a family thing. Maybe that's what Delaware ought to be offering!
But I think this obsession with the Mittelstand may be branding more than anything else. Take that 60% employment number. In the US, though, small businesses account for half, and 65% of all new jobs. And some Mittelstand firms probably count as large businesses in the American definition (500 employees is the cutoff). Nor is Germany radically more industrialized than the US, though that's what the Mittelstand is supposed to be. 28% of the country's employees are in manufacturing. The we-just-do-service United States proportion? 22%
Wiser heads than mine accept the Mittelstand as different - the interest in SME-usable research is an excellent way to fund a project in not just German, but European universities more generally. But surely some perspective is in order. It's easy to overstate modest differences, and while I'll be happy to conclude that the German model well and truly is unique, I'd like to see a few more differences between that approach and ours before doing so.
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THE DEPARTMENT OF BUSINESS ETHICS AND LEGAL STUDIES in the Daniels College of Business at the University of Denver is seeking applications for a tenure-track faculty position at the Assistant rank. This is a 9-month faculty appointment beginning September 1, 2013. Candidates are expected to teach in business law, business ethics, and public policy. Teaching responsibilities may include both undergraduate- and graduate-level courses; the applicant must have a firm commitment to excellence in teaching. Maintenance of AACSB qualification for teaching eligibility is required. Applicants are required to have a JD and strong publication potential. Preferred qualifications include completed PhD in a related field and strong publication record. To be considered an applicant, you must submit your application, cover letter, curriculum vitae, teaching statement, research statement, and list of references online http://www.dujobs.org. For further information, contact Corey Ciocchetti @ at [email protected]. To apply for this position, please visit our website at http://www.dujobs.org.
The University of Denver is committed to enhancing the diversity of its faculty and staff and encourages applications from women, minorities, people with disabilities and veterans. DU is an EEO/
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Time Magazine’s “person of the year” is the “protestor.” Occupy Wall Street’s participants have generated discussion unprecedented in recent years about the role of corporations and their executives in society. The movement has influenced workers and unemployed alike around the world and has clearly shaped the political debate.
But how does a corporation really act? Doesn’t it act through its people? And do those people behave like the members of the homo economicus species acting rationally, selfishly for their greatest material advantage and without consideration about morality, ethics or other people? If so, can a corporation really have a conscience?
In her book Cultivating Conscience: How Good Laws Make Good People, Lynn Stout, a corporate and securities professor at UCLA School of Law argues that the homo economicus model does a poor job of predicting behavior within corporations. Stout takes aim at Oliver Wendell Holmes’ theory of the “bad man” (which forms the basis of homo economicus), Hobbes’ approach in Leviathan, John Stuart Mill’s theory of political economy, and those judges, law professors, regulators and policymakers who focus solely on the law and economics theory that material incentives are the only things that matter.
Citing hundreds of sociological studies that have been replicated around the world over the past fifty years, evolutionary biology, and experimental gaming theory, she concludes that people do not generally behave like the “rational maximizers” that ecomonic theory would predict. In fact other than the 1-3% of the population who are psychopaths, people are “prosocial, ” meaning that they sacrifice to follow ethical rules, or to help or avoid harming others (although interestingly in student studies, economics majors tended to be less prosocial than others).
She recommends a three-factor model for judges, regulators and legislators who want to shape human behavior:
“Unselfish prosocial behavior toward strangers, including unselfish compliance with legal and ethical rules, is triggered by social context, including especially:
(1) instructions from authority
(2) beliefs about others’ prosocial behavior; and
(3) the magnitude of the benefits to others.
Prosocial behavior declines, however, as the personal cost of acting prosocially increases.”
While she focuses on tort, contract and criminal law, her model and criticisms of the homo economicus model may be particularly helpful in the context of understanding corporate behavior. Corporations clearly influence how their people act. Professor Pamela Bucy, for example, argues that government should only be able to convict a corporation if it proves that the corporate ethos encouraged agents of the corporation to commit the criminal act. That corporate ethos results from individuals working together toward corporate goals.
Stout observes that an entire generation of business and political leaders has been taught that people only respond to material incentives, which leads to poor planning that can have devastating results by steering naturally prosocial people to toward unethical or illegal behavior. She warns against “rais[ing] the cost of conscience,” stating that “if we want people to be good, we must not tempt them to be bad.”
In her forthcoming article “Killing Conscience: The Unintended Behavioral Consequences of ‘Pay for Performance,’” she applies behavioral science to incentive based-pay. She points to the savings and loans crisis of the 80's, the recent teacher cheating scandals on standardized tests, Enron, Worldcom, the 2008 credit crisis, which stemmed in part from performance-based bonuses that tempted brokers to approve risky loans, and Bear Sterns and AIG executives who bet on risky derivatives. She disagrees with those who say that that those incentive plans were poorly designed, arguing instead that excessive reliance on even well designed ex-ante incentive plans can “snuff out” or suppress conscience and create “psycopathogenic” environments, and has done so as evidenced by “a disturbing outbreak of executive-driven corporate frauds, scandals and failures.” She further notes that the pay for performance movement has produced less than stellar improvement in the performance and profitability of most US companies.
She advocates instead for trust-based” compensation arrangements, which take into account the parties’ capacity for prosocial behavior rather than leading employees to believe that the employer rewards selfish behavior. This is especially true if that reward tempts employees to engage in fraudulent or opportunistic behavior if that is the only way to realistically achieve the performance metric.
Applying her three factor model looks like this: Does the company’s messaging tell employees that it doesn’t care about ethics? Is it rewarding other people to act in the same way? And is it signaling that there is nothing wrong with unethical behavior or that there are no victims? This theory fits in nicely with the Bucy corporate ethos paradigm described above.
Stout proposes modest, nonmaterial rewards such as greater job responsibilities, public recognition, and more reasonable cash awards based upon subjective, ex post evaluations on the employee’s performance, and cites studies indicating that most employees thrive and are more creative in environments that don’t focus on ex ante monetary incentives. She yearns for the pre 162(m) days when the tax code didn’t require corporations to tie executive pay over one million dollars to performance metrics.
Stout’s application of these behavioral science theories provide guidance that lawmakers and others may want to consider as they look at legislation to prevent or at least mitigate the next corporate scandal. She also provides food for thought for those in corporate America who want to change the dynamics and trust factors within their organizations, and by extension their employee base, shareholders and the general population.
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Massey Energy and Walmart made headlines last week for different reasons. Massey had the worst mining disaster in 40 years, killing 29 employees and entered into a nonprescution agreement with the Department of Justice. The DOJ has stated in the past that these agreements balance the interests of penalizing offending companies, compensating victims and stopping criminal conduct “without the loss of jobs, the loss of pensions, and other significant negative consequences to innocent parties who played no role in the criminal conduct, were unaware of it, or were unable to prevent it.”
Massey’s new owner Alpha Natural Resources, has agreed to pay $210 million dollars in fines to the government, compensation to the families of the deceased miners and for safety improvements (the latter may be tax-deductible). The government’s 972-page report concluded that the root cause was Massey’s “systematic, intentional and aggressive efforts” to conceal life threatening safety violations. The company maintained a doctored set of safety records for investigators, intimidated workers who complained of safety issues, warned miners when inspectors were coming (a crime), and had 370 violations. The mine had been shut down 48 times in the previous year and reopened once violations were fixed. 112 miners had had no basic safety training at all. Only one executive has been convicted of destroying documents and obstruction, and investigations on other executives are pending. However, the company itself has escaped prosecution for violations of the Mine Safety and Health Act, conspiracy or obstruction of justice. Perhaps new ownership swayed prosecutors and if Massey had its same owners, things would be different. But is this really justice? The miner’s families receiving the settlement certainly don’t think so.
Walmart announced in its 10-Q that based upon a compliance review and other sources (Dodd-Frank whistleblowers maybe?), it had informed both the SEC and DOJ that it was conducting a worldwide review of its practices to ensure that there were no violations of the Foreign Corrupt Practices Act (“FCPA”). Although no facts have come out in the Walmart case and I have no personal knowledge of the circumstances, let’s assume for the sake of this post that Walmart has a robust compliance program, which takes a risk based approach to training its two million employees in what they need to know (the greeter in Tulsa may not need in-depth training on bribery and corruption but the warehouse manager and office workers in Brazil and China do). Let’s also assume that Walmart can hire the best attorneys, investigators and consultants around, and based on their advice, chose to disclose to the government that they were conducting an internal investigation. Let’s further assume that the incidents are not widespread and may involve a few rogue managers around the world, who have chosen to ignore the training and the policies and a strong tone at the top.
As is common today, let’s also assume that depending on what they find, the company will do what every good “corporate citizen” does to avoid indictment --disclose all factual findings and underlying information of its internal investigation, waive the attorney client privilege and work product protection, fire employees, replace management, possibly cut off payment of legal fees for those under investigation, and actively participate in any government investigations of employees, competitors, agents and vendors.
Should this idealized version of Walmart be treated the same as Massey Energy? (For a great compilation of essays on the potential conflicts between the company and its employees, read Prosecutors in the Boardroom: Using Criminal Law to Regulate Corporate Conduct, edited by Anthony and Rachel Barkow). Should they both be charged and face trial or should they get deferred or nonprosecution agreements for cooperation? Do these NPAs and DPAs erode our sense of justice or should there be an additional alternative for companies that have done the right thing -- an affirmative defense?
A discussion of the history of corporate criminal liability would be too detailed for this post, but in its most simplistic form, ever since the 1909 case of New York Central & Hudson River Railroad Co v. United States, companies have endured strict liability for the criminal acts of employees who were acting within the scope of their employment and who were motivated in part by an intent to benefit the corporation. As case law has evolved, companies face this liability even if the employee flouted clear rules and mandates and the company has a state of the art compliance program and corporate culture. In reality, no matter how much money, time or effort a company spends to train and inculcate values into its employees, agents and vendors, there is no guarantee that their employees will neither intentionally nor unintentionally violate the law.
The DOJ has reiterated this 1909 standard in its policy documents. And because so few corporations go to trial and instead enter into DPAs or NPAs, we don’t know whether the compliance programs in place would have led to either the potential 400% increase or 95% decrease in fines and penalties under the Federal Sentencing Guidelines because judges aren’t making those determinations. The DPAs are now providing more information about corporate compliance reporting provisions, but again, even if a company already had all of those practices in place, and a rogue group of employees ignored them, the company faces the criminal liability. The Ethical Resource Center is preparing a report in celebration of the 20th Anniversary of the Sentencing Guidelines with recommendations for the U.S. Sentencing Commission, members of Congress, the DOJ and other enforcement agencies. They are excellent and timely, but they do not go far enough.
A Massey Energy should not receive the same treatment as my idealized model corporate citizen Walmart. Instead, I agree with Larry Thompson, formerly of the DOJ and now a general counsel and others who propose an affirmative defense for an effective compliance program- not simply as possible reduction in a fine or a DPA or NPA.
While the ideal standard would require prosecutors to prove that upper management was willfully blind or negligent regarding the conduct, this proposed standard may presume corporate involvement or condonation of wrongful conduct but allow the company to rebut this presumption with a defense.
In the past decade, companies drastically changed their antiharassment programs after the Supreme Court cases of Fargher and Ellerth allowed for an affirmative defense. The UK Bribery Act also allows for an affirmative defense for implementing “adequate procedures” with six principles of bribery prevention. Interestingly, they too are looking at instituting DPAs.
I would limit a proposed affirmative defense to when nonpolicymaking employees have committed misconduct contrary to law, policy or management instructions. If the company adopted or ratified the conduct and/or did not correct it, it could not avail itself of the defense. The company would have to prove by a preponderance of the evidence that: it has implemented a state of the art program approved and overseen by the board or a designated committee; clearly communicated the corporation’s intent to comply with the law and announced employee penalties for prohibited acts; met or exceeded industry standards and norms; is periodically audited and benchmarked by a third party and has made modifications if necessary; has financial incentives for lawful and penalties unlawful behavior; elevated the compliance officer to report directly to the board or a designated committee (a suggestion rejected in the 2010 amendments to the Sentencing Guidelines); has consistently applied anti-retaliation policies for whistleblowers; voluntarily reported wrongdoing to authorities when appropriate; and of course taken into account what the DOJ has required of offending companies and which is now becoming the standard. The court should have to rule on the defense pre-trial.
Instead of serving as vicarious or deputized prosecutors, under this proposed standard, a corporation’s cooperation with prosecutors will be based on factors more within the corporation's control,rather than the catch-22 they currently face where if employees are guilty, there is no defense. And if the employees are guilty, this would not preclude the government from prosecuting them, as they should.
Responsible corporations now spend significant sums on compliance programs and the reward is simply a reduction in a fine for conduct for which it is vicariously liable and which its policies strictly prohibited. A defense will promote earlier detection and remedying of the wrongdoing, reduce government expenditures, provide more assurance to investors and regulators, allow the government to focus on companies that don’t have effective compliance program, and most important provide incentives for companies to invest in more state of the art programs rather than a cosmetic, check the box initiative because the standard would be higher than what is currently Sentencing Guidelines.
Perhaps only a small number of companies may be able to prevail with this defense. Frankly, corporations won’t want to bear the risk of a trial, but they will at least have a better negotiating position with prosecutors. Moreover, companies that try in good faith to do the right thing won’t be lumped into the same categories as those who invest in the least expensive programs that may pass muster or worse, engage in clearly intentional criminal behavior. If companies have the certainty that there is a chance to use a defense, that will invariably lead to stronger programs that can truly detect and prevent criminal behavior.
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I am honored to be a guest blogger, especially since I am brand new to the academy having worked in the private sector for nineteen years as a commercial litigator, HR executive, deputy general counsel and compliance/ethics officer for a Fortune 500 multinational corporation. I will spend the next two years as a visiting assistant professor at the University of Missouri-Kansas City learning to teach (marrying theory and practice) and focusing on scholarship and coursework related to corporate governance, compliance, social responsibility and the future of the legal profession.
Over the next two weeks I plan to write about two Dodd-Frank provisions- conflict minerals and whistleblower; my call for an affirmative defense for a redesigned “effective compliance program” under the Federal Sentencing Guidelines; the ongoing debate about the value of a law school education; in-house counsel as "gatekeepers"; and a book review of Cultivating Conscience: How Good Laws Make Good People by law professor Lynn Stout, which offers an alternative look at the homo economicus model. I look forward to receiving comments that can inform my research and thank Erik Gerding for the opportunity to share my thoughts.
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Alas, this is the last post of my guest blogging stint here at the Glom. Thanks again for an informative and transformative 2-week set of experiences and memories.
I second Erik's post about law schools fostering humility. Eric poses these 2 fundamental questions:
1. Can one be both ambitious and humble?
2. Can law schools both inspire to dream large dreams -- personal and social -- while still warning about our own fallibility and the limitations of law?
I believe and hope that the answer to both of Eric's questions is yes.
1) Ambition is a great motivator for action, but unless ambition is accompanied with humility ambition often leads to arrogance, conceit, and hubris. A consequence of ambition often is great power and as is often quoted, "with great power comes great responsibility."
2) Not only law schools, but also such other professional schools as those for business, medicine, and public policy can and should "both inspire to dream large dreams -- personal and social -- while still warning about our own fallibility and the limitations of" the profession for which they are preparing their students to enter.
I will be teaching Legal Ethics and Professionalism for the first time next semester and have decided after detailed consideration of the many books and supplements from Aspen, Foundation, and Lexis to adopt these 3 books:
a) Nancy Levit and Douglas O. Linder, The Happy Lawyer: Making A Good Life in the Law (2010), ISBN: 978-0195392326. This book is just a wonderful source for law students and lawyers about recent scholarship about happiness and how to balance professional work and personal life. More generally, the book helps readers think about and find meaning in their quest for a satisfying career in the law.
b) Scott L. Rogers, Mindfulness for Law Students: Using the Power of Mindfulness to Achieve Balance and Success in Law School (2009), ISBN: 978-0977345519. This little paperback is another great resource for law students to help them integrate mindfulness into their busy and stressful lives.
Leonard Riskin, the Chesterfield Smith Professor of Law at the University of Florida, who currently is visiting at Northwestern law school, has been a long-time pioneer in championing the benefits of practicing mindfulness to law and mediation:
3) Michael C. Ross, Ethics and Integrity in Law and Business: Avoiding "Club Fed" (2011), ISBN: 978-1422479704. This paperback textbook succeeds at being a delightfully engaging, fresh, funny, and practical take on the professional responsibility course, which is often required in law school. This book contains many relevant quotes from authors, economists, humorists, judges, philosophers, and scientists. It also has wonderfully on point cartoons and comics from the Wall Street Journal and P. C. Vey, among others.
This book imparts much pragmatic wisdom about how to choose ethical behavior during tough economic times.
Not surprisingly to readers of Glom who have read my posts about business movies, I also plan to show film and television show clips in class to provoke discussion about violations of ethical rules and what sort of lawyers and values are possible and which of those possibilities are likely to lead to personal happiness and professional satisfaction. For example, three recent television programs that raise issues related to professional ethics and personal values are these:
I close this post and my guest blogging by providing the opening two paragraphs from a just completed manuscript, Tiger Cub Strikes Back: Memoirs of an Ex-Child Prodigy About Parenting and Legal Education. This working paper is related to many of the issues and themes I've raised in the 10 posts during this 2-week guest blogging opportunity. And yes, the first paragraph may seem to be immodest and ironic after discussing the importance of humility. The reason to include that paragraph in this post is that everything in that paragraph is true and verifiably so. Also, this post advocates true humility and not false humility. It would be an exercise in false humility to hide or deprecate my own past for the mere sake of appearing humble.
I believe that Amy Chua, tiger mom and Yale law professor, would see my life as exemplifying successful tiger parenting. I am an American born Chinese, who at age 14 enrolled as a freshman at Princeton University and 3 years later at age 17 after being a University Scholar there graduated Phi Beta Kappa earning an A.B. in mathematics. I also earned a Ph.D. in applied mathematics from Harvard University and a J.D. from Stanford University (after having been a 1L at the University of Chicago). My Ph.D. thesis advisor was 1972 economics Nobel Laureate and mathematical economic theorist, Kenneth Joseph Arrow. After serving as an economist in the Division of Consumer Protection in the Bureau of Economics of the Federal Trade Commission, I taught in economics departments from coast to coast, including at Stanford University, the University of California Berkeley, and the University of California Los Angeles; in the finance department of the A.B. Freeman business school at Tulane University; and in law schools at Yale University, University of Chicago, University of Pennsylvania, University of Virginia, University of Minnesota, and University of Southern California. I co-authored a law school course book about law and popular culture, while a member of the Institute for Advanced Study School of Social Science, during its psychology and economics thematic focus academic year. I am currently a professor and the inaugural DeMuth Chair at the University of Colorado School of Law after having been a professor and the inaugural Kohn Chair at Temple University law school.
This Essay reflects upon the desirability, efficacy, and motivational consequences of having a tiger mom such as Professor Chua or my own immigrant mother, who is a New York University medical school biochemistry professor. This Essay also points out many similarities between mainstream modern American legal education and tiger parenting, including their common hierarchical, top-down learning environments that entail authority, compliance, extrinsic incentives, fear, memorization, obedience, paternalism, precedent, and respect for one’s elders. The educational methodologies and philosophies of tiger parenting and the prevailing orthodoxy of United States legal instruction, especially the substantive content of the standard first year law school curriculum, explicitly and implicitly privilege a type of information processing known as system two over a type of information processing known as system one. System two reasoning is analytical, cognitive, conscious, controlled, deliberative, effortful, logical, rule-based, and slow; while system one is affective, associative, automatic, fast, habitual, heuristic-based, holistic, intuitive, and unconscious. Ironically, the Socratic method of legal instruction often places a premium on answering a professor’s questions aggressively, quickly, or superficially instead of deeply, mindfully, or thoughtfully.
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An article in today's Life section of USA Today titled Movies tap into anger at Wall Street describes how 3 movies in current release mirror public angst over economic inequalities and inequities: Tower Heist, In Time, and the already mentioned in 2 Glom blogs, Margin Call.
This autumn's documentary Chasing Madoff recounts Harry Markopolos’ multi-year crusade to expose the multi-billion dollar Ponzi scheme perpetrated by Bernie Madoff. Alleged victims of this massive fraud include the celebrity couple of Kyra Sedgwick (star of The Closer on TNT) and Kevin Bacon (of the original Footloose (1984) fame). The Dodd-Frank Wall Street Reform and Consumer Protection Act included a broad set of whistleblower provisions under which the Securities and Exchange Commission adopted specific rules and procedures to incentivize potential whistleblowers by way of cash rewards and protection from retaliation.
There is also a 2009 documentary about the subprime mortgage fiasco, which is now available on DVD, American Casino. 2001 economics Nobel laureate Joseph Stigltiz described it as being "a powerful and shocking look at the subprime lending scandal. If you want to understand how the US financial system failed and how mortgage companies ripped off the poor, see this film."
This May, the HBO Films production of Too Big to Fail, based on the book of the same name with the subtitle of The Inside Story of How Wall Street and Washington Fought to Save the Financial System--and Themselves depicted the autumn 2008 U.S. financial crisis and the sequence of (less than intertemporally consistent) policy responses by the Treasury department, the Federal Reserve, and other financial regulators.
Last autumn's Inside Job made a compelling argument in five parts about how the American financial services industry systematically and systemically corrupted the United States government and in so doing brought about changes in banking practices and legal policies that led directly to the Great Recession.
Although the documentary Client 9: The Rise and Fall of Eliot Spitzer focused primarily on the interaction of ego, hubris, power, scandal, sex, and politics, it also touched upon Wall Street and efforts by Spitzer to reform its excesses.
Of course, no list of movies related to the recent financial crises would be complete without including documentary film-maker Michael Moore's 2009, Capitalism: A Love Story, which criticizes the current American economic system in particular and capitalism in general. At one point, it asks if capitalism is a sin and whether Jesus would be a capitalist, who wanted to maximize profits, deregulate banking, and have the sick pay out of pocket for pre-existing conditions via clips from Jesus of Nazareth. Moore asks if one could patent the sun and questions how the brightest American youth are drawn towards finance and not science. He proceeds to Wall Street asking for non-technical explanations of derivative securities in general and credit default swaps in particular. Both a former vice-president of Lehman Brothers and current Harvard University economics professor Kenneth Rogoff fail to clearly explain either term. Moore thus concludes that our complex economic system and its arcane terminology exist simply to confuse people and that Wall Street effectively has a crazy casino mentality.
Finally, the PBS Nova episode, Mind Over Money, which originally aired on April 26, 2010 asks whether markets can possibly be rational when people clearly are not. In other words, is there a version of the efficient markets hypothesis that can be true in a world populated by at least some boundedly rational actors? In posing this question, the show offers an entertaining, yet quite informative survey of elements of behavioral economics and finance. Its companion website provides additional resource materials concerning the role of emotions in financial decision-making. The debate which it depicts between the University of Chicago school of economics and the behavioral economics approach (including scenes of Dick Thaler playing pool) is a bit overdone and perhaps unintentionally comical, but it raises the question of whether it matters for law and policy how people make their financial judgments and decisions? Of course, the natural follow-ups of if so, then how and if not, then why not, are questions about which business law professors, Glom readers, and policy makers are likely to have perhaps quite strong and certainly divergent opinions.
A television program that has become quite popular is the USA network's original dramatic series White Collar, which is based upon the premise of an F.B.I. agent solving white collar crimes with the assistance of consultant who is a former (and current?) art thief and con man extraordinaire. Episodes have featured a black widow, baby selling, bank robbery, black market kidneys, bond theft, collusion, corporate espionage, derivatives, financial fraud by a Wall Street brokerage firm, identity theft, and political corruption.
It is reminiscent of the 1960's campy, classic, and tongue-in-cheek television series, It Takes A Thief.
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I recently saw the movie, Margin Call, which is currently playing in theaters and is available on demand at Comcast. There are curretly 34 reviews of it by viewers at imdb, where it has a rating of 7.3 out of 10.
I also just finished reading this paper, Fear, Greed, and Financial Crisis: A Cognitive Neuroscience Perspective, prepared for a forthcoming handbook on systemic risk. This chapter is by finance professor Andrew Lo, who is the director of the MIT laboratory for financal engineering. He also wrote another excellent paper which Glom readers are likely to find of interest, namely Reading About the Financial Crisis: A 21-Book Review, that was prepared for the Journal of Economic Literature.
In the interests of full disclosure, I taught at Temple law school a seminar titled Law, Emotions, and Neuroscience and co-taught at Yale law school with professor Dan Kahan a seminar titled Neuroscience and the Law. The seminars covered some basic materials about affective,cognitive, and social neuroscience before analyzing the potential and limits of applications to business law, conflict resolution, criminal law, ethics, evidence, morality, paternalism, and social policy. Media coverage of neuroscience and law has a tendency to focus almost exclusively on such controversial issues as free will and responsibility in the criminal law context. Glom readers are more likely to focus on neuroeconomics and neurofinance, two nascent fields that ask how human brains engage in JDM (Judgment and Decision Making) in general and over time and under risk in particular.
Also, as cognitive neuroscientist Michael Gazzaniga recently stated: responsibility, like generosity, love, pettiness, and suspiciousness, is a strongly emergent property, which although being derived from biological mechanisms, has fundamentally distinct properties, just like the case of ice and water. The press and the public also seem to be fascinated with very colorful fMRI brain scans because they like the idea of being as the Wall Street Journal science writer, Sharon Begley, calls them: cognitive papparazi.
My system 1 believes in synchronicity, so this post, as evidenced by its title's homage to Lo's chapter, approaches the movie Margin Call from a cognitive neuroscience perspective informed by Lo's chapter. Lo provides a brief history of what we know about brains. He then explains how fear and the amygdala can exacerbate financial crises. He also demonstrates how the reward of money appears to share the same neural system and the release of the neuortransmitter dopamine into the nucleus accumbens as these rewards do: beauty, cocaine, food, music, love, and sex.
Lo proceeds to discuss a neurophysiological explanation for Kahneman and Tversky's experiment demonstrating people's aversion to sure loss. Lo proposes a neuroscientifically informed view of rationality that differs very much from an economic rational expectations conception, with the key difference being the role that emotion plays in JDM. Lo extends his analysis from individuals to groups by explaining the neurophysiology of mirror neurons, theories of mind, social interactions, and the efficient markets hypothesis. He concludes his neuroscience survey by describing the marvels and limits of the human prefrontal cortex, also known as the "executive brain." Of particular interest to Glom readers is decision fatigue, documented recently among judges rendering favorable parole decisions around 65% of the time at the start of and close to 0% by the end of each of 3 daily sessions that were separated by 2 food breaks (a late morning snack and lunch). This empirical finding that parole rates increased after food breaks is consistent with recent experimental research finding that glucose can reverse decision fatigue and the common adage to not make important decisions when tired.
Lo provides several practical and reasonable suggesions based upon cognitive neurosciences about how policymakers can engage in financial reform to deal with systemic risk. He concludes by advocating that financial economists utilize the great recession to re-conceptualize, rethink, and revamp neoclassical economics by forging a consilience between the neurosciences and financial economic theory. Building a deeper and better understanding of economic phenomena through improved economic models and intellectual frameworks can and should lead to a more appropriate financial regulatory infrastructure.
And now onto a few comments about the movie Margin Call. Without giving away the plot for those who may want to see it without any knowledge of its ending, this movie raises ethical and moral questions about individual versus social optimality, trading on the basis of private information, panic selling, professional codes or norms of behavior, and the costs a company may impose on society and pay to others to survive. There is certainly lots of fear and greed on display in this film. Set over the course of a day and sleepless night in NYC, the movie viscerally illustrates various forms of JDM and how individuals and groups of individuals can persevere under stress and time pressures. It is a movie that can and should provoke discussion about what could have been done differently by individuals, financial firms, and regulators. It is a film that I'm going to put on the list of movies at the start of the chapter about business law in the text, Law and Popular Culture: Text, Notes, and Questions (LexisNexis Matthew Bender, 2007) by David Ray Papke, Melissa Cole Essig, Christine Alice Corcos, Lenora P. Ledwon, Diane H. Mazur, Carrie Menkel-Meadow, Philip N. Meyer, Binny Miller, and myself that we are revising for a second edition.
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Bainbridge writes so much that it is hard to know where to start. But he seems to be boiling it down for you in advance of a corporate governance conference at UCLA. Here he is on director primacy; here he is on the misguided efforts to get corporations to act ethically, or at least less insidery.
I'm not sure that director primacy is consistent with a disregard for business ethics. If director primacy is taken seriously, then it can't prevent boards from acting in all kinds of ethical ways to the detriment of shareholders. Otherwise, it wouldn't be director primacy. And of course, boards do that all the time, particularly if they come from corporatist jurisdictions like, say, Germany of today, or pre-Depression America. But I make this probably well-known observation mildly - for internal corporate governance wisdom, the other authors of this blog are the better guides!
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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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We let those interested know about the opportunities to teach law in business school. The fall's announcements are here. I'll put recent announcements from Georgia Tech, Louisiana Lafayette, and my good neighbors at Drexel up after the jump, and encourage you to apply and spread the word.
The College of Management at the Georgia Institute of Technology is seeking applications for a faculty position in Business Law at the Assistant Professor level. A Juris Doctor is required. The successful applicant is expected to produce scholarly research and to teach the College's business law offerings, including the core course in Legal and Ethical Aspects of Business, whether at the undergraduate or graduate level. Excellence in teaching and a high level of research productivity are expected.
The College of Management, located in Atlanta, Georgia, is AACSB accredited and has over 1,300 undergraduate students, almost 500 MBA students, 50 Ph.D. students, 45 students in the Management of Technology Executive MBA degree program, and 35 students in the Global Executive MBA degree program. Georgia Tech's College of Management is ranked 26th by U.S. News & World Report and 23rd by BusinessWeek. The College of Management is housed in a state of the art $55 million facility. The College is the home of the Technology Innovation: Generating Economic Results (TI:GER), a U.S. Department of Education funded Center for International Business Education and Research (CIBER), and the Institute for Leadership and Entrepreneurship. The College hosts an annual Roundtable on Engineering Entrepreneurship Research, and an Impact Speakers Series featuring CEOs of technology companies. The College provides an intellectually stimulating research environment. Faculty members are active in research and publish in leading journals, books, monographs, and conference proceedings.
To apply, please send a vita and cover letter indicating your education, relevant experience, research publications and interests no later than February 7, 2011 to [email protected].
Another part of our process involves capturing statistical information on our applicants. If you wish to participate, please complete the form found at: http://mgt.gatech.edu/downloads/ga_tech_disclosure.doc, and e-mail it to [email protected].
Note: Packages sent by mail will not be accepted. All documents must be in Microsoft Word or Adobe .pdf format.
Georgia Tech is an equal opportunity/affirmative action employer.
University of Louisiana, Lafayette
ACADEMIC VACANCY
POSITION: Assistant Professor of Legal Studies EEO # BA 4-09
RESPONSIBLITIES: Teach undergraduate and graduate courses in Legal Studies, conduct scholarly research, and discharge duties relative to departmental, college, and university service and activities associated with a university faculty appointment. A commitment to conducting peer-reviewed published research and related scholarly endeavors is essential.
QUALIFICATIONS: The applicant must possess a Juris Doctorate degree from an accredited American Bar Association school and have a current license to practice law in any state. Applicants must have an excellent academic record and demonstrate the ability to engage in high-quality teaching and research. Preference will be given to applicants who have authored (or co-authored) an article(s) that has been accepted for publication in premier business journals, legal journals, or law reviews. Evidence of participation in professional organizations, such as the Academy of Legal Studies in Business, is encouraged. Applicants must also provide evidence of undergraduate and graduate teaching effectiveness, particularly of the Uniform Commercial Code, and preferably have some experience and/or interest in teaching hybrid or online distance learning courses. Preference will be give to applicants showing evidence of the development and implementation of executive professional development or community service legal programs.
ADMINISTRATIVE The University of Louisiana at Lafayette is one of eight publicly supported universities
UNIT: governed by the University of Louisiana System. It consists of nine degree granting units: the Colleges of the Arts; Liberal Arts; Education; Engineering; General Studies; Nursing and Allied Health Professions; the Ray P. Authement College of Sciences; the B.I. Moody III College of Business Administration; and the Graduate School. The University has an enrollment of 16,300 students with a faculty of 618. The University offers undergraduate degrees in 75 disciplines, the master’s degree in 26 disciplines, and the doctorate in 9 disciplines.
The B.I. Moody III College of Business Administration consists of five academic units in the disciplines of Accounting; Business Systems, Analysis and Technology; Economics and Finance; Management; and Marketing and Hospitality. The College has an enrollment of 2,800 students with a full-time faculty of 50. In addition, there is an MBA enrollment of 200 students. The College is accredited by AACSB International.
The Department of Marketing and Hospitality has a faculty of 13 with 485 students majoring in the degree program of Marketing and 150 students majoring in Hospitality Management. The Department participates in the MBA program and provides instruction as a service to the College and the University at the undergraduate level.
SALARY: Competitive, depending upon qualifications and experience.
STARTING DATE: January, 2011.
APPLICATIONS: The position will remain open until filled. Candidates must send a letter of application, current vita and transcript, and three letters of reference to:
Gwen Fontenot, Ph.D.
Department Head and Associate Professor
Marketing and Hospitality
The University of Louisiana at Lafayette
ULL Box 43490
Lafayette, LA 70504-3490
Website: moody.louisiana.edu
The University of Louisiana at Lafayette is an Affirmative Action/Equal Opportunity Employer. EEO # BA 4-09.
LEBOW COLLEGE OF BUSINESS
POSITION: Assistant Professor-Legal Studies Department
The Department of Legal Studies in the LeBow College of Business at Drexel University invites applications for a tenure-track Assistant Professor position beginning September 2011. The Department is especially interested in qualified candidates who can contribute to the diversity and excellence of the academic community.
QUALIFICATIONS:
Candidate must have been granted a Juris Doctor degree and must have a background in Entrepreneurship Law in order to support the College’s concentration in Entrepreneurship. Experience in International Business Law and in teaching at the undergraduate and graduate level will be beneficial. Candidates must have a commitment to working with diverse student populations and to equity in education at all levels. Candidates must also have strong collegial and collaborative skills and experience and/or commitment to the use of technology as an instructional tool.
RESPONSIBILITIES:
Full time faculty are required to teach at least 3 out of 4 quarters per year. Teaching requirements will include undergraduate and graduate level courses. Candidates must have a commitment to teaching excellence and must demonstrate an ability to perform scholarly research through prior publications and a commitment to a significant program of scholarly research leading to publications in premier journals. Candidates must participate in service activities on campus and in the community.
Candidates should provide a CV, cover letter, and a list of three references with contact information. Materials received by January 31, 2011, will be given full consideration. Applications must be submitted online at www.drexeljobs.com in order to be considered for the position. Additional documents may be attached electronically with the online application.
Drexel University is an Equal Opportunity/Affirmative Action employer. The University actively encourages applications of women, minorities, and persons with disabilities.
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The New York Times has an interesting story today about how the American Economists Association is considering creating an ethics code. Details on the exact proposal are not public, but the outline of the idea is to require that academic economists disclose financial interests and outside employment that could be seen as creating a conflict of interest with their academic or policymaking work. The proposal responds to some devastating criticism of economists and business schools in Inside Job, the documentary on the financial crisis I reviewed a few weeks ago.
Some of the movie’s biggest “gotcha” moments came towards the end when the filmmaker questioned economists about their failure to disclose financial arrangements that might be seen as compromising their objectivity. Frederic Mishkin, an economist at Columbia and a former Governor on the Federal Reserve Board, was portrayed in a particularly negative light. The movie examined a pre-crisis study he co-authored that extolled the benefits of investing in Iceland. Some Icelandic business group paid Mishkin to conduct the study. The filmmaker asked him what research he had done to come to conclusion that Iceland’s bank regulators were competent and well-equipped. His response was underwhelming, as was his response to why he did not disclose how much he was paid for the study. The movie quickly moved on to list the Wall Street board seats and consulting gigs of a number of high profile economists with prominent positions in the Clinton and George W. Bush Administrations, many of whom were active in deregulating financial markets. The movie’s verdict was not subtle: economists sold out.
This segment of the movie was disquieting if not completely convincing. It is fairly easy to use surprise questions and the editing room to make an unprepared interviewee look bad. Moreover, outside employment does not mean that academics manipulated the results of their research. What was truly surprising for me was the interview with John Y. Campbell, Chairman of Harvard’s economics department. The filmmaker asked whether the university had any policy that required its professors to disclose financial interests that might be seen as creating a conflict of interest. Campbell was not aware of one. The filmmaker then asked why economists were not held to the same standard as doctors who must disclose who is funding their studies. Again, the response underwhelmed. It is shocking if Harvard does not have any policy that requires economists and other social scientists to disclose.
A full code of ethics raises a host of thorny questions the surface of which the Times articles just skims. Yet a basic norm and policy of disclosure should not be that controversial. Although details may remain devilish – what kinds of financial interests might trigger disclosure? How detailed and prominent should disclosure be? Is disclosure on a c.v. on a web site enough? – I was surprised by the movie’s implications that Harvard did not already have some sort of policy worked out.
What about law professors? Should not legal scholars also disclose employment and other financial interests that might be seen as influencing our work? How well does our corner of the academy perform in this regard? Law professors also consult, conduct policy making studies for pay, and serve on corporate boards. Some of that work might be seen as potentially compromising objectivity in research. Perhaps legal scholarship is often seen as fitting more naturally with advocacy than pure social sciences. However, again, it is hard to argue with the wisdom of a basic norm of disclosure to maintain both integrity and the appearance of integrity in research.
About a year ago, I talked with a colleague who teaches professional responsibility about guidelines for when to disclose in research past client relationships that ended before entering academe. She was more concerned about present financial interests that might affect research and also noted that attorney rules on client confidentiality imposes its own restrictions. Even so, I was left wondering whether our own academic profession should spend a bit more time developing guidelines so that these issues receive the benefit of structured thought and disinfecting sunlight.
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I'm in newborn-baby land, living my life in 2-3 hour increments, and spent a 10-minute breakfast reading a frontpage FT article "Loophole pressure on HP brings Hurd severance pay near $40m". In case you haven't been following the story, successful HP CEO Mark Hurd was fired by the board for ethical lapses involving a sometime-actress/independent contractor. CEO accountability is a good thing! says Nell Minow, "doyenne of the U.S. corporate governance movement" (will I ever be called "doyenne" of anything?). If the only issue is $20K of expense manipulation, as some reports have it, it's a bad thing, says John Coffee, since the board is destroying a lot of shareholder value over a mere peccadillo.
How strong was the board's case for firing Hurd? The "loophole" is that Hurd's contract didn't specify what "cause" means--a pretty big oversight. But Hurd has admitted to a "close personal relationship" with a contractor that violated the code of conduct. As something of an expert (dare I say, doyenne?) in corporate codes of conduct, I was surprised to find no quotations from the actual code of conduct at issue. These codes are quite easy to find. So I went looking on the HP site. See after the jump for an exciting click-by-click account of what my sleep-deprived mind found.
The code of conduct itself was easy to find because Sarbanes-Oxley 406 allowed codes of ethics to be filed via company website rather than with the SEC. No need to check the EDGAR database, just hp.com to investor relations to corporate governance to this page. But hang on, here's something interesting: the file name for HP's Standards of Business Conduct is "SBC(Updated August 2010, PDF file, 1.61 MB)." August 2010? As in this month? Was this the code that applied to Hurd's ethical lapses? Did the company neglect to update the code until the scandal unfolded? Unclear. If you have read the paper, you know that my co-author and I have a big problem with website disclosure, which is ephemeral and highly manipulable.
OK, now let's open up the document. First page has a message from the Chief Ethics and Compliance Officer, telling HP employees "We have made minor changes to our Standards of Business Conduct (SBC) since the version released in 2008. These updates reflect recent policy, business, organizational, and legislative changes." So that answers the why-the-update-question satisfactorily! Let's move deeper.
To whom does the code of conduct apply? To all employees and board members (this is noteworthy because SOX only requires disclosure of the code of conduct that applies to CEO, CFO, and Chief Accounting Officer). Timing questions aside, Hurd is on the hook for actions that violate this code.
Next up, the "headline test." Huh, I haven't seen this in a code of conduct: "We should each ask ourselves what the impact would be if the conduct or actions became public or were reviewed by colleagues we respect. If you are uncomfortable with the answer, don’t do it!" Sounds awfully loosey-goosey, but I guess we can say that Hurd failed the "headline test." Strike one against him.
Here's the sexual harassment language (although the board found no sexual harassment occurred):
• Do not behave in a disrespectful, hostile, violent, intimidating, threatening, or harassing manner
• Encourage a harassment-free work environment.
• Refuse to accept or tolerate sexual harassment, including unwelcome sexual advances, requests for sexual favors, or other unwelcome verbal or physical conduct of a sexual nature"
OK, I'm running out of time between feedings, so I'll cut to the chase. The SBC is vague. There are other provisions Hurd could have violated, including ones governing gifts to and entertaining suppliers. Notably, there's no section on the repercussions of violation: some codes specify that failure to follow them can/will lead to sanctions, up to and including dismissal. Hang on again, I found something! This file, titled "Corporate Governance Guidelines" (also coincidentally updated August 2010) states:
The Board expects all directors, as well as officers and employees, to display the highest standard of ethics, consistent with HP’s longstanding values and standards. HP has and will continue to maintain a code of conduct, known as the "Standards of Business Conduct" that is applicable to directors, officers and employees...The Board also expects directors, officers and employees to acknowledge their adherence to the Standards of Business Conduct on an annual basis.
So, ladies and gentleman, could HP's board have fired CEO Hurd solely for failure to adhere to its code of conduct, in the absence of a detailed for-cause provision in his contract? Despite all of this mandated website disclosure, we can't say for sure. The code is vague, as they always are. Because of the transitory nature of website disclosure, it's unclear which code of conduct was in place when the unethical behavior occurred--the one currently on the HP site, or some former one now lost in the mists of the internet. It's likewise unclear whether Hurd acknowledged his adherence to this version of the code, or another version, and what it would mean if he did so and then violated it. Regardless, the fact that both documents were updated this month is some kind of fishy, no?
These uncertainties are why we ultimately conclude that ethics disclosures are mere "placebo." A whole lot of disclosure that doesn't really tell us anything.
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T. Boone Pickens: "I’ve long stated that I enjoy making money, and I enjoy giving it away. I like making money more, but giving it away is a close second."
Larry Ellison: "Many years ago, I put virtually all of my assets into a trust with the intent of giving away at least 95% of my wealth to charitable causes. I have already given hundreds of millions of dollars to medical research and education, and I will give billions more over time. Until now, I have done this giving quietly – because I have long believed that charitable giving is a personal and private matter. So why am I going public now? Warren Buffett personally asked me to write this letter because he said I would be “setting an example” and “influencing others” to give. I hope he’s right." (This one interests me especially right now because we just read theOracle case in my class, and in that case, the special committee directors were viewed by the court as potentially biased because of their interest in getting Ellison's money.)
Jon and Karen Huntsman: "My pledge to give my entire fortune to curing cancer and assisting related other charities was formalized decades ago. As my sweet mother took her last breath in my arms and succumbed to the cancer she could no longer fight, I realized that our humanitarian focus must center on cancer."
Ronald O. Perelman: "One of the most memorable moments in my life was at a charity dinner I was attending for a breast cancer cause. A woman approached me and said, 'I just wanted to say thank you—because of you my sister is alive.' I happened to be standing next to the man who was really responsible for that wonderful news—Dr. Dennis Slamon.... The result of [Dr. Salmon's] research was Herceptin, the only drug known to cure certain types of breast cancer. And it started helping women, like that woman’s sister whom I will probably never meet, a full 10 years earlier than if Dr. Slamon had not received my gift."
Pierre and Pam Omidyar: "In 2001, I publicly stated that we intend to give away the vast majority of our wealth during our lifetime. Our view is fairly simple. We have more money than our family will ever need. There’s no need to hold onto it when it can be put to use today, to help solve some of the world’s most intractable problems."
Of course, the publicity surrounding the launch of the website provided commentators with the opportunity to reflect on a society that produces so many billionaires. Steven Pearlstein offered this interesting, though wrong-headed, perspective:
In an article last year in The American Interest, Philip Auerswald and Zoltan Acs of George Mason University suggested that the defining characteristic of American capitalism is not only an entrepreneurial culture that generates great wealth but also a philanthropic infrastructure that recycles that wealth in ways that create more opportunity, more growth and more wealth. This virtuous cycle, they concluded, is the "inner dynamic of American capitalism and the source of its prosperity." They contrast that to socialist countries, where philanthropy is weak and government takes on the recycling role, or less-developed countries, where oligarchs' fortunes are not recycled at all.
Auerswald and Acs are known as institutionalists because of their focus on institutional arrangements and behavioral norms in explaining why economies work. Not surprisingly, their views have been embraced by business types and free-market conservatives who shamelessly use them to justify small government, low taxes and minimal regulation.
The problem with this approach, however, is that it focuses on only one of the institutions that have corrected for the inequalities inevitably created by a capitalist system. Yes, philanthropy has been important, but so have unions, which ensured a fair distribution of corporate profits. So have antitrust laws that prevented successful companies from snuffing out entrepreneurial competition. So have norms of corporate behavior that made it socially unacceptable for top corporate executives to pay themselves 350 times what their workers made. And so have tax-supported schools, playgrounds and hospitals that were good enough to be used by rich and poor alike.
All of these institutions accounted for the vibrancy of the American economy by ensuring that prosperity was widely shared. But with the erosion of those institutions, that is no longer the case.
...
We are approaching a tipping point in America. When economic growth led to more jobs and higher incomes for wide swaths of the population, it didn't matter much that some people were smart enough or lucky enough to pull way ahead. But in recent decades, there has been a dramatic erosion in both the ideal and the reality of shared prosperity that threatens to paralyze our political system and undermine economic growth.
With its "giving pledge," the Gang of 40 has taken an important step in revitalizing America's philanthropic institutions, but it will take much more to revive the virtuous cycle by which wealth begets opportunity which in turn begets more wealth. Whether at an individual company or in the country at large, it is the feeling that we are all in it together that creates the basis for a truly vibrant economy and just society. Trickle-down alone won't cut it.
The arguments that Pearlstein wants to make here are too complicated to examine in detail in this blog post, but I am especially interested in his assertion that "the virtuous cycle by which wealth begets opportunity which in turn begets more wealth" needs reviving. Think about that as you read the billionaires' letters, observing how many of them came from very modest origins. Then consider how many people you know who are not billionaires, but who have made a similar journey up the social ladder. Pearlstein wants to "revive the virtuous cycle," but I say that it was never dead.
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