Conglomerate Blog: Business, Law, Economics & Society

January 29, 2015

The Intracorporate Conspiracy Doctrine and D&O Litigation Incentives

Posted by Josephine Sandler Nelson

My previous blogposts (one, two, three, four, five, six, seven, and eight) discussed the dangers of granting intracorporate conspiracy immunity to agents who commit coordinated wrongdoing within an organization. The last two blogposts (here and here) highlighted the harm that public and judicial frustration with this immunity inflicts on alternative doctrines.

In addition to exacerbating blind CEO turnover, substituting alternative doctrines for prosecuting intracorporate conspiracy affects an executive’s incentives under Director’s and Officer’s (D&O) liability insurance. This post builds on arguments that I have made about D&O insurance in articles here and here.

In traditional conspiracy prosecutions, the Model Penal Code (MPC) provides an affirmative defense for renunciation. The MPC’s standard protects the actor, who “after conspiring to commit a crime, thwarted the success of the conspiracy, under circumstances manifesting a complete and voluntary renunciation of his criminal purpose.” This means that the executive who renounces an intracorporate conspiracy faces no charges.

In contrast with conspiracy prosecutions, responsible corporate officer doctrine and its correlates fail to reward the executive who changes course to mitigate damages or to abandon further destructive behavior. Although the size of the damages may be smaller with lesser harm if the executive renounces an organization’s course of conduct, the executive’s personal career and reputation may still be destroyed by entry of a judgment. Modest whistle-blower protections are ineffectual.

Specifically, because of the way that indemnification and D&O insurance function, the entry of judgment has become an all-or-nothing standard: an employee’s right to indemnification hinges on whether the employee is found guilty of a crime or not. To receive indemnification under Delaware law, for example, an individual must have been “successful on the merits or otherwise in defense of any action, suit or proceeding.” Indemnification is repayment to the employee from the company; D&O insurance is a method that companies use to pass on the cost of indemnification and may contain different terms than indemnification itself.

Indemnification and D&O insurance are not a minor issues for executives. In fact, under many circumstances, employees have a right to indemnification from an organization even when the alleged conduct is criminal. Courts have acknowleged that “[i]ndemnification encourages corporate service by capable individuals by protecting their personal financial resources from depletion by the expenses they incur during an investigation or litigation that results by reason of that service.” And when hiring for an executive board, “Quality directors will not serve without D&O coverage.” Because of this pressure from executives, as many as ninety-nine percent of public U.S. companies carry D&O insurance.

So what does this standard mean for executives prosecuted under responsible corporate officer doctrine instead of for traditional conspiracy? Executives are incentivized either not to get caught, or to perpetrate a crime large enough that the monetary value of the wrongdoing outweighs the potential damage to the executive’s career. Because an executive’s right to indemnification hinges on whether he is found guilty of a crime or not, he has an enormous incentive to fight charges to the end instead of pleading to a lesser count. Thus, unless the executive has an affirmative defense to charges, like renunciation in traditional conspiracy law, there is no safety valve. Litigating responsible corporate officer doctrine cases creates a new volatile high-wire strategy. Moreover, as discussed in my last blogpost, responsible corporate officer doctrine imposes actual blind “respondeat superior” liability. Regardless of the merits, the executive may be penalized. So you can see the take-home message for executives: go ahead and help yourself to the largest possible slice pie on your way out the door.

I argue that in sending this message, and in many other ways, our current law on corporate crime is badly broken. My last blogpost for the Glom will introduce the book that Lynn Stout and I propose writing to give better direction to business people in search of ethical outcomes.

January 28, 2015

The Intracorporate Conspiracy Doctrine and CEO Turnover

Posted by Josephine Sandler Nelson

My previous blogposts (one, two, three, four, five, six, and seven) discussed why conspiracy prosecutions were the best method to penalize coordinated wrongdoing by agents within an organization. Using alternative doctrines to impose liability on behavior that would otherwise be recognized as an intracorporate conspiracy results in flawed incentives and disproportionate awards.

The fundamental problem with substituting responsible corporate officer doctrine and control person liability for reforming the intracorporate conspiracy doctrine is that these alternative doctrines represent exactly what Professor Martin objects to: actual imposition of blind “respondeat superior” liability. For example, under these doctrines, “in most federal courts, it is not necessary to show that the corporate official being charged had a culpable state of mind.” Instead, the issue before the court is merely whether the officer had control and responsibility for the alleged actions. Accordingly, it is not a defense to control person liability that the officer did not “knowingly participate in or independently commit a violation of the Act.”

But simply penalizing the officer who is in the wrong place at the wrong time does little to define and encourage best practices. Moreover, with these and other explosive hazards for corporate service, it should be no surprise that top executives are demanding and receiving ever-increasing compensation for often short-term positions. Since 2009, the year that the NSP case establishing “control person” liability was settled, the discrepancy in pay between top management and the average worker has been growing dramatically. In 2013, the CEO of J.C. Penny Co., for example, was exposed for making 1,795 times what the average U.S. department store employee made. From 2009 to 2013, as measured across Standard & Poor’s 500 Index (S&P 500) of companies, “the average multiple of CEO compensation to that of rank-and-file workers” has risen to 204, an increase of twenty percent.

It is true that the financial crisis did reduce executive compensation packages before 2009, and that there has been a historical trend towards the growth of executives’ salaries as a multiple of average workers’ salaries. For example, “[es]timates by academics and trade-union groups put the number at 20-to-1 in the 1950s, rising to 42-to-1 in 1980 and 120-to-1 by 2000.” But the jump in executives’ salaries from 2009 has been extraordinary. The new emphasis on vicarious liability for individuals under the responsible corporate officer doctrine since that date must be considered part of executives’ demands for such high compensation in exchange for their risky positions.

The average duration of a CEO’s time in office has diminished as well. In 2000, the average tenure of a departing S&P 500 CEO in the U.S. was ten years. By 2010, it was down to eight years. In 2011, merely a year later, the average tenure of a Fortune 500 CEO was barely 4.6 years. In 2013, that former CEO of J.C. Penny Co. served for only eighteen months.

With an eighteen-month tenure, how much can the chief executive of a large company discover about the wrongdoing that his or her new company is committing? Furthermore, how much can that person design and institute good preventative measures to guide his or her subordinates to avoid that harm? A blindly revolving door for CEOs does not help those interested in effectively reducing the wrongdoing of agents within the corporation. Incentives without intracorporate conspiracy immunity would be different because they would reward the agent who abandons a conspiracy. (More about this argument here, here, here, and here.)

My next blogpost will examine how substituting alternative doctrines for prosecuting intracorporate conspiracy affects incentives under Director’s and Officer’s (D&O) liability insurance.

January 27, 2015

Frustration with the Intracorporate Conspiracy Doctrine Distorts Other Areas of Law

Posted by Josephine Sandler Nelson

My previous blogposts (one, two, three, four, five, and six) discussed why conspiracy prosecutions should be used to reach coordinated wrongdoing by agents within an organization. The intracorporate conspiracy doctrine has distorted agency law and inappropriately handicaps the ability of tort and criminal law to regulate the behavior of organizations and their agents.

My Intracorporate Conspiracy Trap article argues that the intracorporate conspiracy doctrine is not properly based in agency law, and that it should most certainly not be applied throughout tort law and criminal law. As a result of the immunity granted by the doctrine, harmful behavior is ordered and performed without consequences, and the victims of the behavior suffer without appropriate remedy. My Corporate Conspiracy Vacuum article argues that public and judicial frustration with the lack of accountability for corporate conspiracy has now warped the doctrines around it.

Courts have used a wide variety of doctrines to hold agents of enterprises responsible for their actions that should have prosecuted as intracorporate conspiracy. Some of these doctrines include:

• piercing the corporate veil,

• responsible corporate officer doctrine, and related control person liability,

• denying the retroactive imposition of the corporate veil, and

• reverse piercing of the corporate veil.

But the new applications of these alternative doctrines are producing distortions that make the doctrines less stable, less predictable, and less able to signal proper incentives to individuals within organizations.

An example of how piercing the corporate veil has been used to defeat intracorporate conspiracy immunity can be seen in the Morelia case. A previous blogpost discussed how the intracorporate conspiracy doctrine has defanged RICO prosecutions of agents and business entities. In Morelia, which was a civil RICO case, the federal district court, obviously outraged by defendants’ behavior in the case, explicitly permitted plaintiffs to pierce the corporate veil to avoid application of the intracorporate conspiracy doctrine. In a creative twist invented from whole cloth to link the two doctrines, the Morelia court overruled its magistrate judge’s recommendation to announce:

"Since the court has determined that plaintiffs have properly alleged that the corporate veil should be pierced, the individual defendants may be liable for corporate actions and any distinction created by the intra-corporate doctrine does not exist."

Regarding its test for piercing the corporate veil, the Morelia court further overruled its magistrate’s recommendation by focusing on plaintiffs’ arguments regarding undercapitalization, and its decision included only a single footnote about the disregard of corporate formalities.

The Morelia court is not alone in its frustration with the intracorporate conspiracy doctrine and in its attempt to link analysis under the intracorporate conspiracy doctrine with the stronger equitable tenets of piercing the corporate veil. More subtly, courts across the country have started to entangle the two doctrines’ requirements as intracorporate conspiracy immunity has become stronger and courts have increasingly had to rely on piercing the corporate veil as an ill-fitting alternative to permit conspiracy claims to proceed. Even large public companies should take note. No public company has ever been pierced, but a bankruptcy court recently reverse-pierced corporate veils of the Roman Catholic Church, which is far from a single-person “sham” corporation. My Corporate Conspiracy Vacuum article discusses additional examples and repercussions for incentives under each of these alternative doctrines.

My next blogpost will examine how frustration with intracorporate conspiracy immunity has led to volatility in responsible corporate officer doctrine and related control person liability. Ironically, executive immunity from conspiracy charges fuels counterproductive CEO turnover.

January 26, 2015

The Silenced Connecticut Sex-Abuse Case

Posted by Josephine Sandler Nelson

My previous blogposts (one, two, three, four, and five) introduced why conspiracy prosecutions should be used to reach wrongdoing by agents within an organization. The 2012 prosecution of Monsignor Lynn for twelve years of transferring predator priests from parish to parish at the command and for the benefit of the Archdiocese of Philadelphia was defeated by the intracorporate conspiracy doctrine. Moreover, this was not the first time that the Roman Catholic Church had used the doctrine to help its bureaucrats escape liability for suppressing sex abuse cases.

In 1997, employees of the Roman Catholic Church in Connecticut were alleged—very much like Lynn—to have covered up the sexual misconduct of a priest, enabling him to continue to abuse children entrusted to the Church’s care by virtue of his office. When sued for civil conspiracy by the victims, the employees’ defense was that they were acting in the best interest of the corporation.

The Connecticut court found that the test for whether an agent is acting within the scope of his duties “is not the wrongful nature of the conspirators’ action but whether the wrongful conduct was performed within the scope of the conspirators’ official duties.” If the wrongful conduct was performed within the scope of the conspirators’ official duties, the effect of applying the intracorporate conspiracy doctrine is to find that there was no conspiracy. Because covering up the priest’s sex abuse was in the best interest of the corporate organization, the court found that the employees were all acting on behalf of the corporation. The court never reached the issue of whether the employees’ actions rose to the level of a civil conspiracy. Under the intracorporate conspiracy doctrine, it was a tautology that no conspiracy could be possible.

This case is interesting not only because it documents the way that the intracorporate conspiracy doctrine protects enterprises from inquiry into conspiracies, but also because of the subsequent history of its allegations. The full extent of the Bridgeport Diocese’s wrongdoings—if current public knowledge is indeed complete—only came to light in December 2009, twelve years after the 1997 case. It took twelve years, the combined resources of four major newspapers, an act displaying public condemnation of the Roman Catholic Church by members of the state legislature, and finally a decision by the U.S. Supreme Court to release the documents that could have become the basis of the intracorporate conspiracy claim in 1997. There is still no conspiracy suit or any criminal charge against the Diocese. Additional details about the case are available in my article The Intracorporate Conspiracy Trap. The article will be published soon in the Cardozo Law Review, and it is available in draft form here.

Astonishingly, none of the extensive news coverage about the sexual abuse cases in Bridgeport over those additional twelve years has connected these facts to the original 1997 case defeated by application of the intracorporate conspiracy doctrine. If the intracorporate conspiracy doctrine had not provided immunity, the case might have revealed the Diocese’s pattern of wrongdoing long beforehand and in a much more efficient way.

My next blogpost reveals additional dangers from the spread of the intracorporate conspiracy doctrine: frustration with the intracorporate conspiracy doctrine has started to distort other areas of law.

January 23, 2015

How We Should Have Tried Monsignor Lynn

Posted by Josephine Sandler Nelson

My previous blogposts (one, two, three, and four) introduced why conspiracy prosecutions should be used to reach wrongdoing by agents within a business organization. The same legal analysis applies to religious organizations.

We should have been able to charge Monsignor Lynn and the Archdiocese of Philadelphia that directed his actions to hide the sexual abuse by priests with criminal conspiracy. Instead, Pennsylvania charged Lynn with two things: child endangerment and conspiracy with the priests.

As international news outlets later reported, Lynn could not be guilty of child endangerment because the state’s statute could not apply to an administrative church official who did not directly supervise children.

Lynn could not be guilty of conspiracy with the priests because he did not share their “particular criminal intent.” As the jury understood, Lynn was not trying to help a predator priest get from parish to parish so that “he can continue to enjoy what he likes to do.” Lynn was trying to protect the reputation of his employer, the Archdiocese—if the priests benefitted, that was a side issue.

So why didn’t the prosecution charge Lynn and the Archdiocese with conspiracy? It was the Archdiocese that directly coordinated and profited from Lynn’s actions. The intracorporate conspiracy doctrine, as discussed before, would bar that prosecution. In Pennsylvania, it is “well-settled that a corporation cannot conspire with its subsidiary, its agents, or its employees.”

Finally, considering other options, Lynn could not have been charged with possible crimes such as obstruction of justice. Lynn was too good: Lynn and the Archdiocese were so successful at covering up the sexual abuse and silencing victims, there was no ongoing investigation to obstruct. “Aiding and abetting” the Archdiocese’s cover-up of the sex abuse would have been difficult to pursue (see more here) and is not allowed under RICO in the Third Circuit.

My next blogpost will demonstrate that the Monsignor Lynn case was also part of a pattern by the Roman Catholic Church in America to use the intracorporate conspiracy doctrine to hide the coordinated wrongdoing of its agents to cover-up sexual abuse by priests. Fifteen years before prosecutors attempted to try Monsignor Lynn, the silenced Connecticut sex-abuse case showed the Church how effective this defense could be.

January 22, 2015

Sex Abuse, Priests, and Corporate Conspiracy

Posted by Josephine Sandler Nelson

My previous blogposts (one, two, and three) introduced the topic of how the intracorporate conspiracy doctrine prevents the prosecution of coordinated wrongdoing by individuals within organizations. This post illustrates the doctrine’s effect in the context of a specific organization—here a religious one: the Roman Catholic Archdiocese of Philadelphia and the systematic transfer of predator priests. This post is based on my article The Intracorporate Conspiracy Trap to be published soon in the Cardozo Law Review. The article is available in draft form here.

For twelve years, from 1992 to 2004, as Secretary for Clergy, Monsignor William Lynn’s job within the Philadelphia Archdiocese was to supervise priests, including the investigation of sex-abuse claims. In 1994, Monsignor Lynn compiled a list of thirty-five “predator” priests within the archdiocese. He compiled the list from secret church files containing hundreds of child sex-abuse complaints. On the stand, Lynn testified that he hoped that the list would help his superiors to address the growing sex-abuse crisis within the Archdiocese. But for twelve years Lynn merely re-assigned suspected priests, and he hid the abuse within the church. His superiors never acted on the list that Lynn gave them—in fact, they ordered all copies of the list destroyed—and Lynn never contacted outside authorities. As late as 2012, one of the “predator” priests on Lynn’s list was still serving in a parish.

All parties agree that Lynn’s actions in transferring priests who molested children allowed those priests to continue to abuse children, sheltered the priests from potential prosecution, and directly protected the Philadelphia Archdiocese’s reputation.

In fact, Lynn’s actions had been ordered by the archbishop on behalf of the Archdiocese. Lynn reported what he was doing to his superiors, who rewarded Lynn with twelve years of employment and a prominent position within the Archdiocese for doing his job as they saw it. Moreover, the archbishop himself inadvertently revealed the existence of the number thirty-five “predator” priests to the media, and he was the one who ordered all copies of the list to be shredded to keep it from being discovered in legal proceedings.

The instinct here is that this behavior—the transferring of predator priests to cover-up the sexual abuse of children—should have been illegal for Monsignor Lynn to pursue. But the Commonwealth could not prosecute Monsignor Lynn and the Archdiocese for conspiracy. Furthermore, immunity for Lynn’s behavior is now the rule in most state and federal jurisdictions around the country. As described in an earlier blogpost, the intracorporate conspiracy doctrine provides immunity to an enterprise and its agents from conspiracy prosecution, based on the legal fiction that an enterprise and its agents are a single actor incapable of the meeting of two minds to form a conspiracy.

My next blogpost will further investigate why this behavior was not illegal under our current system, and how we should have tried Monsignor Lynn.

January 21, 2015

Where are the Prosecutions for Corporate Conspiracy?

Posted by Josephine Sandler Nelson

My first and second blogposts introduced why conspiracy prosecutions are particularly important for reaching the coordinated actions of individuals when the elements of wrong-doing may be delegated among members of the group.

So where are the prosecutions for corporate conspiracy??? The Racketeer Influenced and Corrupt Organizations Act of 1970 (“RICO”, 18 U.S.C.A. §§ 1961 et seq.), no longer applies to most business organizations and their employees. In fact, business organizations working together with outside agents can form new protected “enterprises.”

What’s going on here? In this area and many other parts of the law, we are witnessing the power of the intracorporate conspiracy doctrine. This doctrine provides immunity to an enterprise and its agents from conspiracy prosecution, based on the legal fiction that an enterprise and its agents are a single actor incapable of the meeting of two minds to form a conspiracy. According to the most recent American Law Reports survey, the doctrine “applies to corporations generally, including religious corporations and municipal corporations and other governmental bodies. The doctrine applies to all levels of corporate employees, including a corporation’s officers and directors and owners who are individuals.” Moreover, it now extends from antitrust throughout tort and criminal law.

What is the practical effect of this doctrine? The intracorporate conspiracy doctrine has distorted agency law and inappropriately handicaps the ability of tort and criminal law to regulate the behavior of organizations and their agents. Obedience to a principal (up to a point) should be rewarded in agency law. But the law should not immunize an agent who acts in the best interest of her employer to commit wrongdoing. Not only does the intracorporate conspiracy doctrine immunize such wrongdoing, but the more closely that an employer orders and supervises the employee’s illegal acts, the more the employer is protected from prosecution as well.

My next blogpost illustrates how the intracorporate conspiracy doctrine operates to defeat prosecutions for coordinated wrongdoing by agents within an organization. Let’s examine the case of Monsignor Lynn.

January 20, 2015

Corporate Conspiracy Charges for the Financial Crisis

Posted by Josephine Sandler Nelson

In my previous blogpost, I granted the merit of defense counsel’s argument that the actions of discrete individual defendants—when the law is not permitted to consider the coordination of those actions—may not satisfy the elements of a prosecutable crime.

But what is the coordination of individuals for a wrongful common purpose? That’s a conspiracy. And, for exactly the reasons that defense counsel articulates, these types of crimes cannot be reached by other forms of prosecution. The U.S. Supreme Court has recognized that conspiracy is its own animal. “[C]ollective criminal agreement—partnership in crime—presents a greater potential threat to the public than individual delicts.” When we consider the degree of coordination necessary to create the financial crisis, we are not talking about a single-defendant mugging in a back alley—we are talking about at least the multi-defendant sophistication of a bank robbery.

Conspiracy prosecutions for the financial crisis have some other important features. First, the statute of limitations would run from the last action of a member of the group, not the first action as would be typical of other prosecutions. This means that many crimes from the financial crisis could still be prosecuted (answering Judge Rakoff’s concern). Second, until whistle-blower protections are improved to the point that employees with conscientious objections to processes can be heard, traditional conspiracy law provides an affirmative defense to individuals who renounce the group conspiracy. By contrast, the lesson Wall Street seems to have learned from the J.P. Morgan case is not to allow employees to put objections into writing. Third, counter to objections that conspiracy prosecutions may be too similar to vicarious liability, prosecutors would have to prove that each member of the conspiracy did share the same common intent to commit wrongdoing. The employee shaking his head “no” while saying yes would not be a willing participant, but many other bankers were freely motivated by profit at the expense of client interest to cooperate with a bank’s program.

My next blogpost will ask: where are the prosecutions for corporate conspiracy?

J.P. Morgan’s Witness and the Holes in Corporate Criminal Law

Posted by Josephine Sandler Nelson

It is a pleasure to be guest-blogging here at The Glom for the next two weeks. My name is Josephine Nelson, and I am an advisor for the Center for Entrepreneurial Studies at Stanford’s business school. Coming from a business school, I focus on practical applications at the intersection of corporate law and criminal law. I am interested in how legal rules affect ethical decisions within business organizations. Many thanks to Dave Zaring, Gordon Smith, and the other members of The Glom for allowing me to share some work that I have been doing. For easy reading, my posts will deliberately be short and cumulative.

In this blogpost, I raise the question of what is broken in our system of rules and enforcement that allows employees within business organizations to escape prosecution for ethical misconduct.

Public frustration with the ability of white-collar criminals to escape prosecution has been boiling over. Judge Rakoff of the S.D.N.Y. penned an unusual public op-ed in which he objected that “not a single high-level executive has been successfully prosecuted in connection with the recent financial crisis.” Professor Garett’s new book documents that, between 2001 and 2012, the U.S. Department of Justice (DOJ) failed to charge any individuals at all for crimes in sixty-five percent of the 255 cases it prosecuted.

Meanwhile, the typical debate over why white-collar criminals are treated so differently than other criminal suspects misses an important dimension to this problem. Yes, the law should provide more support for whistle-blowers. Yes, we should put more resources towards regulation. But also, white-collar defense counsel makes an excellent point that there were no convictions of bankers in the financial crisis for good reason: Prosecutors have been under public pressure to bring cases against executives, but those executives must have individually committed crimes that rise to the level of a triable case.

And why don’t the actions of executives at Bank of America, Citigroup, and J.P. Morgan meet the definition of triable crimes? Let’s look at Alayne Fleischmann’s experience at J.P. Morgan. Fleischmann is the so-called “$9 Billion Witness,” the woman whose testimony was so incriminating that J.P. Morgan paid one of the largest fines in U.S. history to keep her from talking. Fleischmann, a former quality-control officer, describes a process of intimidation to approve poor-quality loans within the bank that included an “edict against e-mails, the sabotaging of the diligence process,… bullying, [and] written warnings that were ignored.” At one point, the pressure from superiors became so ridiculous that a diligence officer caved to a sales executive to approve a batch of loans while shaking his head “no” even while saying yes.

None of those actions in the workplace sounds good, but are they triable crimes??? The selling of mislabeled securities is a crime, but notice how many steps a single person would have to take to reach that standard. Could a prosecutor prove that a single manager had mislabeled those securities, bundled them together, and resold them? Management at the bank delegated onto other people elements of what would have to be proven for a crime to have taken place. So, although cumulatively a crime took place, it may be true that no single executive at the bank committed a triable crime.

How should the incentives have been different? My next blogpost will suggest the return of a traditional solution to penalizing coordinated crimes: conspiracy prosecutions for the financial crisis.

July 19, 2011

Corporations/B.A. Roundtable: Winding Up

Posted by Erik Gerding

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.

Corporations/B.A. Roundtable: The Use of Stories in the Business Associations Course

Posted by Afra Afsharipour

I really appreciate the robust discussion on ways to teach corporate social responsibility, especially as this is something that I struggle with in my BA class. I tend to take the approach that Lisa and Kent outline. I try to introduce basic corporate law theory concepts and then teach Wrigley and Dodge back-to-back. These cases do a terrific job in setting up some fundamental questions about the nature of the corporation, the role of the Board and shareholders, the question of to whom directors owe fiduciary duties, the Board's responsibility to other stakeholders, is shareholder-wealth maximization really mandated by corporate law (I agree with David’s analysis that it is not), the rationales for the business judgment rule, etc.

I try to animate these questions and the cases by incorporating the stories and characters involved in the cases. I suspect that many others do the same. The use of stories helps students have a more robust discussion of the legal issues involved in the case, how these cases have shaped the law, and whether these cases really stand for the propositions that we now assume they stand for. Incorporating these corporate law stories can also help us teach students about how personality, motive, and social/political/historical context affect judicial opinions and outcomes of cases. For example, Henry Ford was a much more controversial figure than a basic reading of Dodge v. Ford (as presented in most casebooks) makes him out to be. The background story of the case illuminates the fraught relationship between Henry Ford (the controlling shareholder) and the Dodge Brothers (minority investors) whose business plans would place them in competition with Ford.

For anyone who is not already aware, you can get a better sense of the background of many of the cases we teach in books like Corporate Law Stories and The Iconic Cases in Corporate Law. If you are aware of other books/articles with good corporate law stories, please submit a comment with a link or reference.

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Corporations/B.A. Roundtable: The Coverage Problem and Its Solutions

Posted by Gordon Smith

My apologies for arriving late to the party. I am currently teaching Corporations in London as part of the Georgetown Summer Law Program, and finding the time to blog has been a challenge.

In reading the posts in this Roundtable, I was struck by the fact that all of them deal with coverage! While teachers of other courses face the issue of what to leave in and what to leave out, I can't think of another course in the curriculum where this issue is so prominent. (As an associate dean in charge of curriculum, I have some standing to make this claim, though I assume others would take a different view.)

The problem with business organizations is not just that there is so much law, but rather that we rely on this course to provide a general introduction to business for students who have no past experiences with business. Some schools offer a separate "business principles" course (accounting + finance) to get at this problem, but the problem persists for the business organizations course because most students don't take the business principles course. As a result, we spend time on these basic business concepts, time that could otherwise be spent on myriad doctrinal puzzles.

One way to get at the problem, described by David Millon, is to devote more time to business organizations generally. The W&L solution is to divide business organizations into two courses, one relating to closely held businesses and one relating to public corporations. While this has long been my preferred solution (it's the structure we used at Wisconsin), as David noted, only about half of the students who take the first course enroll in the second. That seems like a big miss to me, since the course on public corporations is the place where students engage many of the big policy questions relating to the role of corporations in society.

At BYU we teach Business Associations as a three-credit course, and we treat this as an overview course. Almost all of the students in the law school take the course, which is offered both semesters. When I first started teaching in this system, I argued that three credits was wholly inadequate to cover the field, and that is undoubtedly true. But this overview course is starting to grow on me. Strangely, being constrained in this way is liberating in that I don't feel any pressure to cover every doctrinal twist and turn. Instead, I feel pressure to focus on foundational concepts, which the students can use in Corporate Finance, Mergers and Aquisitions, Securities Regulation, and other advanced courses if they choose to deepen their training in business organizations.

The advantage of our system, then, is that almost all students get some grounding in the whole field, from agency law through hostile takeovers. Although some superficiality is inevitable when striving to cover that much territory, I have the sense that my students now are more fluent in the role of limited liability, the essence of fiduciary obligation, and the varied conflicts inherent in business organizations than they were when I taught more of the particulars of the doctrine. To invoke that old saw, they are seeing more of the forest by focusing less on the trees. Is it possible that less is actually more in this instance?

Corporations/B.A. Roundtable: On Teaching CSR and other Corporate Law Theory

Posted by Lisa Fairfax

David, Kent and Erik all offer some very nice insights about the best way to teach corporate social responsibility. So I could not help but to add my own.

First, I tend to focus on CSR by teaching Dodge and Wrigley Fields back-to-back. Then I have a broader discussion about both the aims of the corporation, and corporate actors ability to pursue those aims, in light of both cases.

Second, the question about how, and to what extent, you focus on CSR also could be viewed as a question about whether and to what extent you teach corporate law theory in the basic Corporations/B.A. course. As Kent points out, some students get turned-off by theory, and hence you risk losing them if you decide to focus on theory. Then too, it is often difficult to find the right balance between teaching theory and doctrine, particularly if you are also seeking to introduce students to some basic economic and financial principles. However, the question of whether or not to teach theory is probably one we should all think more seriously about, especially because it is possible that if we fail to focus on theory, we could be implicitly endorsing one theory over another. Indeed, when I introduce CSR concepts towards the middle of the class I get the sense that I am pushing against an established norm, even though it is often the case that we have not really discussed other theories.

Reading through the various posts on CSR, it strikes me that teaching students CSR in the context of a broader discussion involving the benefits and drawbacks of various corporate law theories has benefits. Indeed, as Erik's post suggests, if you teach CSR at the end of the course you run the risk of appearing to marginalize the discussion. But if you introduce CSR early in the course without any context or intent to return to it, it is possible that students will not be equipped to have a robust discussion about its merits. However, if you are so inclined, it is possible to teach the basic Corporations/BA course in a manner that also engages students on the theoretical debates animating corporate law. Thus, as Kent suggests, you can introduce various theories early in the course, informing students that your aim is to provide them with a lens through which they can test the strength of each theory. Then, theories can be tested as you work your way through the doctrine by discussing whether and to what extent the relevant case law supports or undermines a given theory. In this way, you encourage students to look critically at each theory.

To be sure, I think we all agree that there are any number of ways that one can approach teaching in this area, including teaching CSR in this area. And they all involve trade-offs. However, regardless of which approach you take, I think it is good that we are at least having a discussion about taking CSR seriously.

Corporations/B.A. Roundtable: Taking Corporate Social Responsibility Seriously

Posted by Kent Greenfield

I wanted to add a few thoughts about teaching CSR in the basic course, to build on what Erik and David have said in their posts from yesterday.

It strikes me that the question of the role of corporations in society and politics is one that is pivotal to cover in the basic course. For those who will never take another business course, highlighting such issues may be one of the most important parts of the course. For those students who plan on focusing on business law, it would be truly unfortunate if they went on to more specific and sophisticated classes without being asked to think seriously about the social and political role of business.

Having said that, there are myriad issues to address and just as many ways to address them. My main goal is to legitimize the basic, fundamental questions and to identify a range of possible answers. I also readily admit that I have a point of view on these questions (how, really, could I hide that fact?) but that I understand that there are a diversity of views.

As to method, as with so many topics in the course, I have changed over the years. Now, I don't teach the charitable cases at all, mostly because I think they are largely a distraction from the principal questions of (1) to whom should the managers owe their duties, and (2) who should have a hand in making important corporate decisions.

To get to these core questions, I actually start my class talking about the basic conceptions of the firm. I talk about the traditional property theory, with shareholders as owners and managers as agents. I then introduce the contractarian theory, showing how the firm works as a nexus of contracts. Finally, I discuss the board-centered team production model. I do this very early in the semester, sometimes in the first week. The benefit of this pedagogy is that it gives students some theory that they can use to evaluate the doctrine as we go through it later. Also, as we discuss the various theoretical formulations, I can talk easily about where the responsibilities flow and their sources (background norm, contract, corporate governance rules). Of course the downside of this method is that the students who hate theory are left behind right out of the gate.

One thing that has been a constant over the course of my career is my teaching of Dodge v Ford. It needs caveats, of course (does it really current law? etc.), but it provides a great way to ask the question of to whom fiduciary duties are owed. And it also provides a good example -- often needed for those students who are too trusting of management for CSR reasons -- to teach about the dangers of giving managers too much power to manage the firm for what they believe are socially beneficial reasons. Just when a contingent of students is eagerly arguing to protect Henry Ford's discretion, you can point out his horrible antisemitism.

One technique I have started using over the past couple of years is to circle back to this discussion at the very end of the course. I sometimes spend a day talking about the implications of Citizens United, asking whether because the Court assumes corporations are "associations of citizens" we should change corporate governance law to make that more likely. It is at this point where I can bring in reference to business law in Europe, whether it be the practice in some countries of co-determination or the new(ish) law in the U.K. calling on company directors to take into account (inter alia) "the interests of ... employees, ... the impact of the company’s operations on the community and the environment, ... and the desirability of the company maintaining a reputation for high standards of business conduct."

Again, my ultimate goal is simply to highlight the fact that the mainstream American view is not necessarily the only way to organize corporate governance or to define the role of business in society. The nature of the implicit contract between business and society is very different elsewhere, and students should know that. They should also be able to articulate why they think we should or should not move in that direction.

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July 18, 2011

Corporations/B.A. Roundtable: Taking Corporate Social Responsibility Seriously

Posted by Erik Gerding

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

I agree with his legal analysis that shareholder wealth maximization is not dictated by corporate law (with a few exceptions) to the extent many law students believe. Managers do have quite a bit of flexibility in choosing the ends and means of corporate operations.

When teaching at New Mexico, though, I found students generally came to this conclusion a little too easily and were perhaps a little too uncritical of what corporate social responsibility means and how to foster it. I usually ask some of the questions at the end of this post to try to flesh out both what is the problem that CSR is meant to address and what is the solution. Is the solution about substantive changes in corporate activities, or is more about process (changing who has a seat at the table)?

I ask many of these questions because I am genuinely curious about this topic (even though I don't write about this area of law -- unlike many of our panelists). I am also not so sure that many legal scholars are on the same page as to what is CSR. My students tend to focus on issues like pollution and child labor. I then ask whether these issues should be deal with by corporate law or with environmental or labor law. Moreover, some of those issues – like pollution – might pit different “stakeholder” groups against one another. This raises the very thorny issue of “how would we identify socially responsible behavior?” In some classes, I lay out a hypothetical of two different shareholder groups pushing a corporation for and against a policy of granting benefits to the same sex domestic partners of the corporation’s employees.

I worry that by teaching this way I am discouraging students who have a real passion to change corporate law. Indeed, this class (which I normally teach at the end of the semester – more on that in a minute) tends to generate the liveliest discussion. Some students tend to see many of my questions as trying to discourage social activism, which I am not. My view is that we should take this idea seriously – and taking it seriously means examining it very closely.

At the same time, I don’t want critics of CSR to get too comfortable either. Some of the optional readings I have assigned in some semesters are critiques of CSR which argue for the division of the political world of government and the private world of corporations into separate spheres. As I have blogged about before, does that distinction make much sense after Citizens United?

I tend to focus on CSR in the last class of the semester. The downside of this is that some students misinterpret this as marginalizing the topic. But I want to ensure students have a sense of the structure of corporate law first, before we talk about what they would change.

Here are some of the questions I ask:

Which rules or doctrines that we studies in this course, if any, would you change to make a corporation (or other form of business entity) more “socially responsible”?
What is meant by “corporate social responsibility”? When is a corporation acting in a socially responsible manner?
Which, if any, of the following strands of corporate law reform do you think is more important?
- Agency Cost Version of Corporate Law Reform: should corporate law focus more on making sure that management – directors and officers – actually acts in the best interest of shareholders?
  - For example, if you believe that there is a problem with exorbitant executive compensation, is the problem that executives are taking too much value from shareholders and that shareholders do not have adequate means to discipline management? Or is there a larger problem?
- CSR Version of Corporate Law Reform: is the idea of shareholder primacy and the norm of shareholder wealth maximization too narrow? Does a corporation owe duties to constituents (“stakeholders”) other than shareholders? If so, who are these constituents? Employees? Communities in which the company is physically located? Communities in which the company sells or conducts operations? Consumers? The public? Who defines these constituencies? Who speaks for them? How should these constituencies be represented in corporate decision-making?
Should corporate law attempt to change corporate behavior on particular social issues? If so which issues? Employee rights? The environment?
How should corporate social responsibility or progress on certain social issues be measured?
Is corporate law the right tool to encourage corporate social responsibility? Or should other laws – e.g. labor laws and environmental laws – be employed instead to meet the desired social goals?
If corporate law is the right tool, what mechanisms in corporate law should be used? Proxy access?
How should law encourage corporate social responsibility? To what extent should laws or codes on “responsibility” be voluntary or permissive? To what extent should it be mandatory? How would any mandatory law be enforced and who could enforce it?
- What do you think of state “shareholder” constituency statutes?
  - To what extent do these statutes, which allow management to take into account other stakeholders besides shareholders in making decisions, only insulate management from takeovers?
To what extent does corporate social responsibility undermine efforts in the agency cost strand of corporate law reform, i.e. making management more accountable to shareholders? To what extent do these two strands of corporate law reform conflict?
To what extent do these two strands of corporate law reform mesh? Would efforts to give shareholders more access to the proxy ballot enable more radical reformers to submit other items – environmental responsibility, labor rights – to a shareholder vote?
To what extent is the market already making corporations more socially responsible?
- What do you think of “corporate codes of conduct” voluntarily enacted by corporations or industry groups?
- What do you think of corporations that market themselves as being good corporate citizens?
- How do you evaluate the claims of corporations of corporate citizenry?
Should all corporations (and other business entities) of whatever size be subject to corporate social responsibility standards? Or only big, publicly held corporations? Is it equitable or efficient to hold smaller business entities to the same or different standards as big corporations? Where do you draw the line?
What can the U.S. learn from corporations and laws in other countries?
- Are the different corporate governance laws in Europe a good model for the U.S.? For example, many European countries have two board of director entities, with labor groups having a seat on one of the boards.
- Alternatively, would corporate responsibility standards undermine U.S. competitiveness?
Should the participation of corporations in the political process – e.g. by making political contributions – be limited by law? (If the students have already read Bellotti or Citizens United, we discuss those cases). Should shareholders be able to limit (or vote on) the political activities of corporations?