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Abstract:
Cognitive scientists have described the role of metaphor as the attempt to understand one domain of knowledge (the "target") in terms of another (the "source"). Corporations law scholarship is currently dominated by a metaphor which attempts to explain corporations in terms of contracts. This "contractarian" metaphor derives from the economic model of the "firm" as a set of "contracts." The legal version of the metaphor exhibits confusion about both its target and its source. The economic concept of the "firm" is not equivalent to the legal concept of the "corporation." Nor is the economic "contract," a voluntary reciprocal relationship, equivalent to the legal "contract," a legally enforceable relationship that is partly, but not entirely, based on voluntary consent. Contractarian discourse uses the term "contract" loosely, however, and conflates voluntariness and enforceability.

The contractarian metaphor helps show that the firm is not a black box whose characteristics are immune from market forces. But it wrongly suggests that individual choice is the basis for the legitimacy of all legally enforceable corporate relationships. The metaphor masks the fact that the rules of corporate law are often based on social welfare judgments of judges, lawmakers and regulators rather than on parties' bargains in the marketplace. It misleadingly suggests that the law imposes no value judgments but merely rubber-stamps freely made individual decisions. Thus the model lulls us into thinking we can avoid the hard questions of how the law makes its value judgments. Because the concept of "property" includes rights and duties not based on assent, a property-based metaphor for corporations can help put the "law" back into this branch of "private law."

Abstract:
The U.S. Supreme Court has often faced the question of whether business corporations should enjoy the protections of the Bill of Rights. In doing so, the Court has repeatedly failed to assimilate the fundamental insight of corporations law - that a large business corporation is a complex organization and not a monolithic entity. While corporations law has struggled with the issue of corporate complexity for the past century, constitutional law as applied to corporations has relied on antiquated, simplistic models of corporations. The Court's application of the First Amendment to corporate campaign finance regulation is an example of this tendency. This Article critiques the existing jurisprudence and suggests how it may be made consistent with corporations theory.

According to the Supreme Court, spending money to support a political campaign is a form of political speech. Thus, campaign finance regulations must withstand First Amendment scrutiny. The Court's opinions on campaign finance regulations that affect corporations have been inconsistent. The two basic justifications for protection of speech under the First Amendment are the protection of speakers' right to express themselves, and society's interest in hearing diverse views. The Court has failed to grapple with the fact that election-related spending by corporations is fundamentally different from individual speech in that it does not involve the exercise of individuals' expressive rights.

A corporation does not serve as a medium for expression by its constituent individuals. A small group of professional managers controls a corporation's actions, and corporate governance norms do not require management to be responsive to shareholders' political values. Management duties are indeterminate, and shareholders' ability to challenge management too limited, to impose meaningful constraints on management behavior. The extension of the business judgment rule into areas such as charitable contributions suggests that management political spending is immune to court challenge by shareholders. It is sometimes argued that shareholders who disagree with management can simply sell their shares, but divestment only allows a shareholder to dissociate; it does not provide a remedy. Furthermore, divestment is not costless. It might be argued that management control over a corporation's political spending is a bargained-for management perquisite and, thus, corporate political spending is a legitimate form of management expression. But it is unrealistic to posit that shareholders have consented to management control of corporate resources subject to no meaningful limitations or accountability.

In the absence of legitimate expressive rights, the social interest in hearing political views is not by itself sufficient to justify constitutional protection of corporate election-related spending. Constitutional protection of management's use of corporate property to fund this social interest results in a random tax on shareholders and other corporate constituents, and gives managers unwarranted authority to control the political views the public hears.

Corporations, Corporate Governance, Constitutional Law, Law and Economics, Campaign Finance, First Amendment law, Election law

Abstract:
The U.S. Supreme Court has often faced the question of whether business corporations should enjoy the protections of the Bill of Rights. In doing so, the Court has repeatedly failed to assimilate the fundamental insight of corporations law - that a large business corporation is a complex organization and not a monolithic entity. While corporations law has struggled with the issue of corporate complexity for the past century, constitutional law as applied to corporations has relied on antiquated, simplistic models of corporations. The Court's application of the First Amendment to corporate campaign finance regulation is an example of this tendency. This article critiques the existing jurisprudence and suggests how it may be made consistent with corporations theory.

According to the Supreme Court, spending money to support a political campaign is a form of political speech. Thus, campaign finance regulations must withstand First Amendment scrutiny. The Court's opinions on campaign finance regulations that affect corporations have been inconsistent. The two basic justifications for protection of speech under the First Amendment are the protection of speakers' right to express themselves and society's interest in hearing diverse views. The Court has failed to grapple with the fact that election-related spending by corporations is fundamentally different from individual speech in that it does not involve the exercise of individuals' expressive rights.

A corporation does not serve as a medium for expression by its constituent individuals. A small group of professional managers controls a corporation's actions, and corporate governance norms do not require management to be responsive to shareholders' political values. Management duties are too indeterminate, and shareholders' ability to challenge management too limited, to impose meaningful constraints on management behavior. The extension of the business judgment rule into areas such as charitable contributions suggests that management political spending is immune to court challenge by shareholders. It is sometimes argued that shareholders who disagree with management can simply sell their shares, but divestment only allows a shareholder to dissociate; it does not provide a remedy. Furthermore, divestment is not costless. It might be argued that management control over a corporation's political spending is a bargained-for management perquisite and, thus, corporate political spending is a legitimate form of management expression. But it is unrealistic to posit that shareholders have consented to management control of corporate resources subject to no meaningful limitations or accountability.

In the absence of legitimate expressive rights, the social interest in hearing political views is not by itself sufficient to justify constitutional protection of corporate election-related spending. Constitutional protection of management's use of corporate property to fund this social interest results in a random tax on shareholders and other corporate constituents, and gives managers unwarranted authority to control the political views the public hears.

Corporations, Corporate Governance, Constitutional Law, Law and Economics, Campaign Finance, First Amendment law, Election law

Abstract:
This paper describes and analyzes the role of shareholders in determining the composition of corporate management. Prepared for a symposium on race and corporate law, the paper explores shareholder voice using the example of shareholder activists seeking to increase the racial diversity of boards and officers. Board composition must balance the collegiality and trust that accompanies homogeneity with the creative spark offered by heterogeneity.

The paper examines the use of shareholder proposals, voting in board elections, and litigation as methods of diversifying management. The paper pays particular attention to the recent flurry of post-Enron corporate governance reforms, such as the Sarbanes-Oxley Act and proposed changes in SEC proxy rules and NYSE listing requirements. A recurring theme of post-Enron reform is director independence, which may require substantial turnover on boards in coming years.

Although shareholders nominally elect directors, in fact they have very limited ability to determine board composition directly through the exercise of voting power. While shareholders can theoretically nominate alternative candidates, this option is severely limited by the daunting logistics and costs of running a proxy campaign. The SEC's recent proposal to give shareholder-nominated board candidates access to the corporate proxy is meant to address this problem. Proxy access under the proposed rule change is subject to significant limitations, however, and thus will affect board composition in only the most extreme circumstances.

The paper concludes that the current wave of corporate governance reform has produced only marginal increases in shareholders' opportunity to influence the composition of corporate management.

corporations, corporate governance, shareholders, directors, boards, director independence, elections, proxy regulation, proxy reform, Sarbanes-Oxley Act, race, diversity

Abstract:
Marriage is often compared to a "contract." The contract analogy appears to be an argument about the law of marriage based on a settled concept called "contract." But it is in fact an assertion of a contested view of "contract": that legitimate obligation must derive from consent. This focus on consent ignores another, contradictory, strand of contract law that imposes obligations without consent. The pervasiveness of the consent-centered "contract" analogy affects our understanding of "contract" as much as it affects our understanding of marriage.

Law and Economics, Contract, Marriage, Divorce

Abstract:
Orthodox corporate law-and-economics holds that American corporate and securities regulation has evolved inexorably toward economic efficiency. That position is difficult to square with the fact that regulation is the product of government actors and institutions. Indeed, the rational behavior assumptions of law-and-economics suggest that those actors and institutions would tend to place their own self-interest ahead of economic efficiency. This article provides anecdotal evidence of such self-interest at work. Based on an analysis of legislative history - primarily Congressional hearings - this article argues that Congress had little interest in the economic policy effect of insider trading legislation in the 1980s. Rather, those laws were motivated primarily by a desire to legitimate the existing political and economic order.

The policy and doctrinal grounds for prohibiting insider trading are unclear. Yet Congress devoted a great amount of attention to increasing the penalties for insider trading in the 1980s. Meanwhile, more serious economic issues went unaddressed. What explains this odd focus? Congress routinely explains corporate and securities legislation as motivated by a need to bolster investor confidence and protect the capital formation process. In the 1980s, legislators argued that insider trading scandals were undermining investor confidence. That argument is unconvincing, however, because those scandals were contemporaneous with unprecedented stock prices.

An alternative explanation for the 1980s legislation is that Congress sought political legitimacy: not investor confidence in the markets, but voter confidence in the political-economic system. Our government has a symbiotic relationship with a capitalist system under which the power of business and finance sometimes rivals that of the state. This arrangement is acceptable to most voters during prosperous times, but can undermine the legitimacy of the political-economic system in times of perceived economic crisis. Government crafts its responses to such crises to protect its legitimacy. The process of self-legitimation does not consist merely of responding to exogenous preferences of constituents. It also includes attempts to mold constituents' preferences to be more consistent with the self-interest and problem-solving abilities of Congress.

Securities regulation, insider trading, legislation, congress, politics, regulation

Abstract:
The collapse of the dot.com stock boom and the subsequent spate of corporate scandals have provoked new skepticism toward big business, corporate law and related institutions. Despite the post-Enron skepticism about corporate law, however, a key element of 1990s thinking holds sway: the near-exclusive focus on increased shareholder value as the normative criterion for evaluating corporate behavior and related public policy. Discussions of race in the corporate law context have lately tended to operate on these terms - thus, for example, racial diversity in corporate management and workforces has been justified in terms of its positive effect on shareholder value. Racial justice is becoming a taboo subject, which often has to be explained and justified in nominally race-neutral terms. In the post-Enron era, shareholder value is a particularly potent race-neutral mode of discourse.

The question is the extent to which issues of racial justice can and should be addressed in shareholder value terms. While the rhetorical strategy of linking diversity to the bottom line is potentially powerful in the current political and cultural climate, the strategy also has limitations and costs. First, it is not clear that diversity and improved corporate performance always go hand in hand. Second, even strong evidence of a correlation between the two would not necessarily constitute a legal basis to compel corporations to take any action to further racial justice. Third, there is a danger that adopting the rhetoric of shareholder value will contribute to the dominance of that discourse while allowing arguments for the intrinsic value of racial justice to atrophy.

Corporations, corporate governance, race, corporate social responsibility

Abstract:
Hurricane Katrina was not a natural disaster; rather it illustrates the role that human choices play in many arenas we tend to think of as governed by chance natural occurrence. This essay explores this theme on three different levels.

First, insights from the legal analysis of the built environment illuminate the disaster as an example of the influence of human choices on the shape of the environment, including urban planning and flood control policy.

Second, Katrina underscores the role of race-based choices in the fate of Americans. Like environmental decisions, deliberate racial segregation and neglect were as critical as chance occurrence in contributing to the disaster. While the impact on African Americans is obviously a central aspect of the disaster, a racial analysis of Katrina must go beyond a mere black-white dichotomy. Katrina raises additional issues such as the intersection of race and class and the strained relationships between African Americans and Latino immigrant laborers in the reconstruction of New Orleans.

Third and finally, the essay critiques the current trend to conflate social justice with economic efficiency. That view attempts to avoid moral responsibility for policy choices by allowing purportedly natural market forces to determine outcomes. In the wake of Katrina, some argue that New Orleans would do better without assisting the return of its poor residents displaced by Katrina. But not all social choices can be made by balancing material considerations against moral ones: sometimes we must make outright material sacrifices in the name of moral duty. Market-driven decisionmaking is not morally neutral, but constitutes a conscious choice of self-interest over compassion.

Hurricane Katrina, race, geography, built environment, environment

Abstract:
The 1886 Supreme Court case Yick Wo v. Hopkins is often viewed as a precursor of the racial civil rights era represented by Brown v. Board of Education. In fact, the case was primarily about economic rights. In a new article, Unexplainable on Grounds of Race: Doubts About Yick Wo,* forthcoming in the Illinois Law Review, Professor Gabriel Chin argues that Yick Wo "is not a race case at all." I argue that it is a "race case" because the Court's use of the Fourteenth Amendment to vindicate economic rights necessarily entangled economic rights with race - in an ultimately pernicious way. While issues of "race" in American law tend to focus on nonwhiteness, the "race" of the Chinese plaintiffs in Yick Wo was legally significant in its nonblackness. The Reconstruction Court had previously refused to apply the Amendment to whites or to economic rights in The Slaughter-House Cases. But Yick Wo both revived the literal meaning of the Amendment's phrase "all persons" and applied it to economic rights. It thus ushered in a two-pronged civil rights counter-revolution symbolized by Lochner v. New York's protection of economic "substantive due process" for white persons and corporations and Plessy v. Ferguson's denial of civil rights protection to blacks. The counter-revolution also turned against the nonblack nonwhites who had helped create it, allowing the exclusion of Asians from immigration and naturalization, state laws prohibiting Asians from owning land, and the internment of Japanese Americans during World War II.

*http://ssrn.com/abstract=1075563

Fourteenth Amendment, legal history, substantive due process, civil rights, race

Abstract:
Although traditional corporate governance theory viewed corporate directors and executives as agents accountable to shareholders, commentators today tend to agree, as a descriptive matter, that those "agents" enjoy wide discretion to govern the corporation free from shareholder input. There is normative disagreement, however, over whether the law should increase shareholder participation in corporate decisionmaking. This was illustrated recently by the debate over the SEC's failed proposal to expand shareholders' power to nominate director candidates.

The normative debate is typically framed in terms of shareholder value. This essay, prepared for a symposium on race, gender, and corporate law, applies a different normative standard: whether increased shareholder power would make corporations more responsive to issues of racial justice and social responsibility generally. I suspect it would not.

Increasing shareholder power will strengthen the voice of justice-minded shareholder activists, but it will also empower those shareholders who are concerned primarily with profits. This is even more likely to be true in the context of shareholder voting for two reasons. First, social justice concerns, particularly those involving racial minorities, typically do not enjoy majority support in the political arena. Second, most shareholders are rationally apathetic toward corporate elections. Third, shareholders, as dispersed and anonymous participants in governance, are not held accountable for corporate policy. Thus shareholders will be strongly tempted to vote in their narrow self-interest.

Directors and executives currently enjoy the discretion to consider social justice in making corporate policy. That power imposes moral obligations and makes the public view them as accountable for social effects of corporate actions. Increased shareholder power, however, may generate explicit, legally enforceable shareholder demands for higher profits rather than social justice. That would remove directors' discretion and trump their moral obligations. The point here is not that the existing, management-centered corporate governance system is an ideal method of making corporations responsive to racial justice issues. Indeed, dependence on management discretion is probably the worst possible method - except for all the others.

corporate governance, race, shareholder, voting, corporate social responsibility, directors

Abstract:
This anthology of recent scholarship on corporate governance explores the application of legal doctrine and theory to topical policy issues such as corporate social responsibility, executive compensation, corporate criminality, federalism, and ethical rules for corporate lawyers. It contains materials on current developments, including the collapse of Enron and the Sarbanes-Oxley Act, and introduces debates on matters of corporate orthodoxy, such as shareholders' ownership of the corporation, the value of director independence, and management's focus on maximizing share price.

The book is organized around policy issues rather than the doctrinal areas of the basic law school course. It presents diverse views on each issue through various approaches to analyzing corporate law and incorporating doctrine, law and economics, empirical work; history; and organizational behavior. The book is designed for use as the primary text in a course or seminar in corporate governance, but could also serve as supplemental reading in the basic law school corporations course. It includes questions for classroom discussion or self-directed study. The edited selections are generally longer than in a standard law anthology in order to provide a deeper treatment of the issues.

Abstract:
The article compares the legal response to the September 11 terrorist attacks to episodes in Asian American legal history, particularly the investigation of American nuclear scientist Wen Ho Lee and the World War II internment of Japanese Americans. In those cases, military and executive decisions raised questions about racial bias. The courts gave great deference to the executive's actions, however. The courts justified this deference by accepting racial stereotypes about Asian Americans' disloyalty as executive assessments about national security. Congress and the public concurred in the deference.

The courts, however, did not simply defer to institutional competence and the separation of powers. They also gave an official stamp of approval to the underlying racial assumptions and contributed to the general expansion of government power at the expense of civil rights and civil liberties. Since September 11, the process has been repeating itself in the "war on terrorism," with the stereotype of Arab Americans as terrorists standing in for the stereotype of Asian Americans as traitors.

While judicial and political deference in these cases begins with racial stereotyping, its significance does not end there. In the war on terrorism, for example, the executive has played upon fears of Arab terrorism to pursue larger goals of increasing police powers and silencing domestic dissent. In addition to infringing upon the rights of minorities, the executive, with judicial compliance, exploits racial fears as a justification to expand its power and reduce judicial oversight generally.

race, discrimination, constitutional law, civil rights, civil liberties, immigration, Asian Americans

Abstract:
The Securities Investor Protection Act of 1970 (SIPA) created a special scheme for the liquidation of insolvent securities brokerage firms and established the Securities Investor Protection Corporation (SIPC) to administer a fund to protect the customers of failed brokers. SIPA is primarily designed to passively reimburse customers for losses due to broker failures and to thereby boost public confidence in securities markets.

This Article argues that in order to truly operate as an "investor protection" scheme, SIPA should take an active role in the prevention of brokerage failures, rather than merely attempting to alleviate the harms caused by such failures. SIPA currently shifts much of the cost of broker failures away from the securities brokerage industry, thereby subsidizing it. SIPA should assign more of these costs to the brokerage industry. Such an arrangement is more consistent with the self-regulated nature of the industry. It is also more fair, in that the industry reaps the benefits of SIPA investor protection in the form of investor confidence, and more efficient in that assigning the costs to the best cost-avoider is a more efficient means to long-term customer protection and industry health.