Reframing Corporate Governance: Company Law Beyond Law and Economics 178536104X, 9781785361043

Table of contents :
Front Matter
Copyright
Contents
Figures
Foreword
Acknowledgements
Introduction
1. The disnature of the firm: how did we end up here?
2. Do not trust anyone who tells you it is the end of history
3. The firm and its discontents
4. Agency and the emperor’s new clothes
5. Notes on an alternative corporate law theory
Epilogue
Index

Citation preview

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Reframing Corporate Governance

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CORPORATIONS, GLOBALISATION AND THE LAW Series Editor: Janet Dine, Director, Centre for Commercial Law Studies, Queen Mary, University of London, UK This uniquely positioned monograph series aims to draw together high quality research work from established and younger scholars on what is an intriguing and under-researched area of the law. The books will offer insights into a variety of legal issues that concern corporations operating on the global stage, including interaction with the World Trade Organization (WTO), international financial institutions and nation states, in both developing and developed countries. While the underlying foundation of the series will be that of company law, broadly-defined, authors are encouraged to take an approach that draws on the work of other social sciences, such as politics, economics and development studies and to offer an international or comparative perspective where appropriate. Specific topics to be considered will include corporate governance, corporate responsibility, taxation and criminal liability, amongst others. The series will undoubtedly offer an important contribution to legal thinking and to the wider globalisation debate. Titles in the series include: Directors’ Duties and Shareholder Litigation in the Wake of the Financial Crisis Edited by Joan Loughrey Governance of Distressed Firms David Milman The Nature of Corporate Governance The Significance of National Cultural Identity Janet Dine and Marios Koutsias Corporate Social Responsibility in Contemporary China Jingchen Zhao Corporate Social Responsibility, Private Law and Global Supply Chains Andreas Rühmkorf Enhancing Firm Sustainability Through Governance The Relational Corporate Governance Approach Francesco de Zwart Human Rights and Corporate Wrongs Closing the Governance Gap Simon Baughen Changing Sustainability Norms through Communication Processes The Emergence of the Business and Human Rights Regime as Transnational Law Karin Buhmann The Company Share Legal Regulation and Public Policy David Milman Reframing Corporate Governance Company Law Beyond Law and Economics Javier Reyes

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Reframing Corporate Governance Company Law Beyond Law and Economics

Javier Reyes Faculty of Law, University of Helsinki, Finland

CORPORATIONS, GLOBALISATION AND THE LAW

Cheltenham, UK + Northampton, MA, USA

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© Javier Reyes 2018 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2018945828 This book is available electronically in the Law subject collection DOI 10.4337/9781785361050

ISBN 978 1 78536 104 3 (cased) ISBN 978 1 78536 105 0 (eBook)

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Contents List of figures Foreword by Janet Dine Acknowledgements

vi vii ix

Introduction

1

1

The disnature of the firm: how did we end up here?

8

2

Do not trust anyone who tells you it is the end of history

44

3

The firm and its discontents

93

4

Agency and the emperor’s new clothes

149

5

Notes on an alternative corporate law theory

190

Epilogue

219

Index

223

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Figures 1.1 1.2 2.1 2.2 3.1 3.2 3.3 4.1 4.2 4.3 5.1

Economic schools Agency theory Veblen’s institutionalism Language, games, and norms Advantages of entity and owner shielding Company group structuring Veil piercing doctrines Fiduciary duties Employee participation in the company The Finnis and Kolakowski model Apostel’s worldview

21 38 50 76 128 129 135 155 170 176 211

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Foreword Janet Dine I am so happy to include this monograph in my Edward Elgar series’ Corporations, Globalisation and the Law. I was humbled when the author said that my work had been an encouragement. I was very happy about these kind words, but I wish I could have written so lucidly on this topic myself! This book is a fine of work of scholarship. It is erudite, challenging, and humorous. In a serious academic work the humour is perhaps surprising but very welcome. Javier Reyes has given us a thorough shake-up of corporate governance, interrogating its roots, the layers of myths, and dominant discourses around the topic. At the same time, he does not lecture or preach, rather he wants the reader to understand why so many fables have been perpetrated in this subject. The idea of the book is to open a free-ranging debate on the topic. It seems that the corporate governance debate has become a contest rather than a deliberation. As the author puts it in the Introduction: ‘With the gargantuan amount of power harnessed by corporations, paired with an unquestioned primacy of shareholder value – both in academia and policy – it is unsurprising that abuses committed through corporations only get more strident with time’. The book also argues that the power relationship between States and powerful corporations comes with a polarisation of discourse in this subject. It is time to reframe the topic with humour rather than vitriol; Reyes recognises many ironies in corporate governance, not least that both sides of this argument are becoming ‘theologically driven’, and the proponents have become adherents of a ‘true faith’. Harvey Cox has written on ‘the market as God’1 and the Pope has denounced ‘unbridled capitalism as the dung of the devil’,2 while Milton Freidman’s adherents are equally determined. Taking three tenets to reframe the discussion, the author contends ‘first, that economics is political philosophy, at best, and not a science in 1

Harvey Cox, The Market as God (Harvard University Press 2016). Reuters, ‘Unbridled Capitalism is the “Dung of the Devil”, Says Pope Francis’, The Guardian, July 9, 2015. 2

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the way that natural science proper is; second, that company law is about how to make good society and is thus political; and, third, that corporate governance without philosophical and historical inquiry is vacuous and deceitful’. To consider history, economics, law, morality and philosophy together is a more fruitful endeavour than pursuing sterile arguments. To do this is an immense task but Reyes has managed to do it and has done it with irony and a light touch. Using Pogge’s ‘moral deflection devices’ Reyes unpacks much of the prevailing corporate governance doctrines through irony: the modern corporation is the shared space where both the left and the right – economically speaking – coincide in order to equally contradict themselves, i.e. the true elephant’s graveyard of political coherence, both for ferocious free market advocates and convinced socialists. Blind to the irony of it all, the latter passionately protest corporations in the fanciest capitals of the West while enjoying the benefits they facilitate; while the former tenaciously defend economic freedom as embodied by a legal vehicle that enjoys the most blatant state subsidy, i.e. limited liability, the very definition of a hands-on, protectionist State. The irony!

Why is this book so important? The book shows the increasing power of corporations and specifically the encroaching democratic deficit; corporations have been ‘a tool for toying with democratic processes that are fundamental in the self-determination of entire communities, countries, and regions’. The author cites examples but we know now that this process is on-going and accelerating with the Facebook and Cambridge Analytic scandal. This book is therefore very pertinent and crucial for analysing the state of the world. The book flows from the beginning, where the author debunks the myth of economics as a science and ‘the end of history’ discourse, showing rather the rich complexity of corporate governance, the historical and philosophical roots of the subject, fascinating insights of Roman limited liability, and a new perception of the agency problem, challenging the mainstream doctrine of agency theory rather interrogating the internal coherence of the discourse of ‘shareholders as owners’. Finally, the conclusion offers a tool box of mechanisms, processes and relationships in corporate governance which can be considered after the book has been absorbed. The author leaves the readers with a warning; you cannot use cognisance dissidence to build a corporate governance structure; having one’s cake and eating it is not an option! The monograph is both satisfying and exciting, and will be vital in debunking many myths and stopping the polarised debate.

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Acknowledgements This book would not have been possible without the support, encouragement, and patience of colleagues, friends, and family. Professionally, I am extremely fortunate to have sharp legal and financial minds as colleagues. Their insights about the real, day-to-day work of a corporate governance professional were invaluable. Academically, it is humbling to have studied under the guidance of Professors Mähönen and Villa, delightful people and formidable intellects. Moreover, teaching at one of the finest Masters programs in Europe is a delight thanks to the leadership of Ville Pönkä. Whenever my mind wandered, the mere thought of letting my students down – or not to live up to the trust of Ben, Iram, and Amber at Edward Elgar Publishing – dragged me back into the saddle. Most importantly, much gratitude is due to my friends and family for putting up with me. Dad, mom, my brothers, and Sanna were the main inspiration all along. Whatever errors exist in these pages are entirely my responsibility.

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Introduction Caveat emptor: This book is normative and it rests upon certain pillars which may be unsettling to some, particularly those brought up intellectually within the confines of the mainstream. I intend, nonetheless, to argue in favor of those pillars and to build upon them a kind invitation to see our subject matter not as a finished, undisputable product but, instead, as an opportunity for open debate. Those intertwined pillars are, first, that economics is political philosophy, at best, and not a science in the way that natural science proper is; second, that company law is about how to make good society and is thus political; and, third, that corporate governance without philosophical and historical inquiry is vacuous and deceitful. Few ideas have had an impact on the state of corporate governance study and practice as profound as Jeremy Bentham’s. His utilitarian ethics have served as a sound basis for a neoclassical economic doctrine which rests upon methodological individualism and positive empiricism.1 Its most notorious offspring, law and economics,2 is the dominant school in corporate governance, and, due to its parentage, it benefits from the halo of scientific neutrality despite its heavy ideological bent. It takes as given that the primary goal of company law is to boost efficiency and to address agency problems involving a firm’s shareholders and managers, among shareholders, or the firm vis-à-vis third parties3 – a debatable reductionism which rests upon a value judgement, i.e. that the purpose of a firm, without caveats, is first and foremost to maximize shareholder 1 See David Colander, Hans Föllmer, et al., ‘The Financial Crisis and the Systemic Failure of Academic Economics’ (2009) University of Copenhagen, Department of Economics, Discussion Paper No. 09-03 accessed 9 January 2016. 2 See Eli Salzberger, ‘The Economic Analysis of Law – The Dominant Methodology for Legal Research?!’ (2007) University of Haifa Faculty of Law Legal Studies Research Paper No. 1044382 accessed 29 January 2016. 3 See Jan Tirole, ‘Corporate Governance’ (1999) Centre for Economic Policy and Research, London, Discussion Paper No. 2086, 1.

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value.4 The latter is a legitimate worldview, specifically regarding how to make a good society, although it essentially paints company law as it is, i.e. political at its core.5 Making such value judgments requires assumptions to be made, such as conceptions of ‘progress’ and ‘development’, which are deeply embedded in the dominant discourse.6 And because corporations are the vehicle of choice for wealth creation and accumulation,7 bringing material wealth parallel to negative consequences, they also function as a moral deflection device8 that requires us to take a step back and study corporate governance from a wider, multidisciplinary perspective. In 2011, systems theorists from the Swiss Federal Institute of Technology in Zurich used a database of 37 million companies worldwide and cross-checked it against all 43,060 transnational corporations and share ownerships, linking them into what can be called a blueprint for the structure of economic ‘muscle’. The results were revealing: 80% of the wealth in the network is controlled by 737 corporations, of which 40% rests placidly in the balance sheet of 147 firms. A considerable part of the revenue of various firms did not even come from operations but was speculative, i.e. financialized arrangements mounted on top of complex, multijurisdictional special purpose vehicles (SPVs). The names of these corporations are well known, for example Barclays, Capital Group, Fidelity, AXA, JP Morgan Chase, Vanguard, UBS, Merrill Lynch, Deutsche Bank, Credit Suisse, Wal-Mart, Goldman Sachs, etc.9 If companies were countries (and they are simultaneously powerful wealth producers and capable of immense destructive potential10) and we compared a country’s GDP with corporate revenues, we would find that, for example, Yahoo is bigger than Mongolia, Visa is bigger than 4 See Mitchell Polinsky and Steven Shavell, ‘Economic Analysis of Law’ (2005) Harvard Law and Economics Discussion Paper No. 536 accessed 24 January 2016. 5 See Jukka Mähönen, ‘Do We Need Law and Economics in Company Law?’ Nordisk Tidsskrift For Selskabsret, Nr. 1/2, 2009, pp. 146–157. 6 See Gilbert Rist, The History of Development: From Western Origins to Global Myth (1st edn, Zed Books 1997) 28–37. 7 See Janet Dine, Companies, International Trade and Human Rights (1st edn, Cambridge University Press 2005) 52. 8 Ibid. 9 See Stefania Vitali, James B. Glattfelder, and Stefano Battiston, ‘The Network of Global Corporate Control’ (2011) PLoS ONE 6(10): e25995 accessed 22 January 2016. 10 Dine, Companies, op. cit., 94.

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Zimbabwe, eBay is bigger than Madagascar, Nike is bigger than Paraguay, McDonald’s is bigger than Latvia, Amazon is bigger than Kenya, Apple is bigger than Ecuador, Microsoft is bigger than Croatia, Ford is bigger than Morocco, Bank of America is bigger than Vietnam, Berkshire Hathaway is bigger than Hungary, General Electric is bigger than New Zealand, Chevron is bigger than the Czech Republic, and Walmart is bigger than Norway.11 And this is a leverage that has been used time and again. For all the material prosperity that has been brought about through the corporation,12 it has also been a tool for toying with democratic processes that are fundamental in the self-determination of entire communities, countries, and regions. Think of the United Fruit Company in cahoots with repressive regimes in Central America,13 or, more recent times and closer to home, BlackRock Inc., the world’s biggest fund manager with over five trillion dollars in assets under administration, using its muscle to influence the gun debate in the United States in a specific political direction.14 With the gargantuan amount of power harnessed by corporations, paired with an unquestioned primacy of shareholder value – both in academia and policy – it is unsurprising that abuses committed through corporations only get more strident with time. As we enter a highly polarized age, in which some claim everything is subject to interpretation and others ritually sacrifice morality to the deities of hyper rationalism, the human capacity both for good and for evil is magnified through the unchained leviathan that is the corporation. In such a landscape, it seems like a disservice to the social disciplines (a.k.a. social sciences) to be 11

See Vicent Trivett, ‘25 US Mega Corporations: Where They Rank If They Were Countries’, Business Insider, 27 June 2011 accessed 8 January 2016. 12 Marian L. Tupy, ‘Julian Simon Was Right: A Half-Century of Population Growth, Increasing Prosperity, and Falling Commodity Prices’, Cato Institute, Economic Development Bulletin No. 29, 16 February 2018 accessed 5 March 2018. 13 Marcelo Bucheli, ‘Multinational Corporations, Totalitarian Regimes and Economic Nationalism: United Fruit Company in Central America, 1899–1975’ [2008] Journal of Business History 50(4): 433–454. 14 BlackRock Inc. Press Release, ‘BlackRock’s Approach to Companies that Manufacture and Distribute Civilian Firearms’, 2 March 2018 accessed 3 March 2018.

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ruled by a thirst for singular causes, i.e. to encroach normative research with a monomaniac, cult-like attempt to explain complex phenomena by causally linking them to a simple motivation – and to disguise such sleight of hand as an exact science. Freud tried it with sex, Marx with class struggle, Foucault with power, and neoclassical economics is doing it with a hyper-rational, selfish being whose sole concern is to maximize pleasure and avoid pain. It is quite ironic, in these circumstances, that the presumption of absolute knowledge – the cardinal sin of the rational spirit – negates creative exploration.15 What legal scholars and their students can do about this state of affairs is the same that some within the field of economics are working hard to achieve from the fringes, i.e. to break the shackles of dogma and look at things from different angles, all in the service not of efficiency but of heterodoxy in the pursuit of knowledge. Political philosophy, the field of study in which both economics and law firmly rest, can be either descriptive or normative. The former is occupied by efforts to point out how things ‘are’ while the latter attempts to speak about how they ‘ought to be’. However, none can be an exact or a natural science (as mainstream economics tries to sell itself) for the simple reason that they deal in morality. Newton’s law of universal gravitation, the molecular weight of sodium, or Bernoulli’s principle concerning the increase in the speed of a fluid vis-à-vis a decrease in pressure, are not matters of opinion and morality. They are tested theories that can be used for accurate prediction, and opinions are irrelevant to them; they stay put until proven incorrect by systematic observation, measurement, and experiment – in which case a new, testable hypothesis is formulated and then life goes on under the new paradigm. Neither economics nor law are sculpted out of that clay, and, therefore, corporate governance based on law and economics isn’t either. As an eminently political field, our discipline is all about debate within the confines of history and society, not about a single, mechanical truth with universal applicability. Most importantly, the modern corporation is the shared space where both the left and the right – economically speaking – coincide in order to equally contradict themselves, i.e. the true elephant’s graveyard of political coherence, both for ferocious free market advocates and convinced socialists. Blind to the irony of it all, the latter passionately protest corporations in the fanciest capitals of the West while enjoying the benefits that those same corporations facilitate; while the former tenaciously defend economic freedom as embodied by a legal 15

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See Jordan B. Peterson, Maps of Meaning (Routledge 1999) 250.

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vehicle that enjoys the most blatant state subsidy, i.e. limited liability, the very definition of a hands-on, protectionist State. The irony! For all of the above, it is paramount to dig up the ideological underbelly of mainstream law and economics in corporate governance. If some claim (relying on the shtick of economics-as-a-science) that we are witnessing the end of history for corporate law,16 we ought to debunk that from the root, i.e. historically and philosophically. Therefore, Chapter 1 talks about the invention of economics from a historical and methodological perspective, highlighting both its diversity and its rightful place within political philosophy. The chapter then analyzes the pyrrhic victory of the neoclassical over other economic schools and how the former’s constitutive elements glue together to its advantage. This, in turn, allows for an analysis of the concept of economics imperialism and, with it, how law and economics came into existence as a discipline. The corollary of Chapter 1 is a mapping of agency theory, the touchstone of corporate governance for law and economics and also the blueprint that the reader is encouraged to use in order to build their own ideas. Chapter 2 uses the contributions of Hart, Wittgenstein, et al., in order to tackle what should be the first problem addressed by corporate governance theory, i.e. the definition of a corporation. This serves to later unpack the nexus of contracts view as insufficient, then compares it to other approaches by weighing their pros and cons. By disentangling the idea of an enterprise from a company, the chapter closes by offering an alternative view of the definitional problem. Chapter 3 is an exposition of how the current asset partitioning regime came to be, from ancient Rome to the Middle Ages and from chartered entities until today. The chapter discusses the context in which the medieval church solidified the fiction theory of corporations and how the phenomenon of a race to the bottom may have played a key role in shifting the rationale behind limited liability as inherited from Rome. Then, by analyzing the veil-piercing doctrine, the chapter suggests that the dilemma and tradeoffs presented by the current state of the asset partitioning regime may be symptomatic of the divorce from the political, economic, and moral reasoning behind corporations in the prior centuries.

16 See Henry Hansmann and Reinier Kraakman, ‘The End of History for Corporate Law’ (January 2000) Yale Law School Working Paper No. 235 or accessed 13 February 2017.

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Once the reader is acquainted with the ideological framework of current mainstream corporate governance and has the historical background preceding the modern corporations, Chapter 4 looks at the agency problems both in a theoretical and historical context. Because agency relationships are at the core of the principal-agent theory, separating the elements of the stakeholder relationships identified in corporate governance doctrine clears the way for testing the latter both as a descriptive and normative framework. This approach leads to a questioning of the internal coherence underlying the mainstream theory, e.g. the idea of shareholders as owners, of managers as agents, and the cohesion between these assumptions and concepts such as the nexus of contracts and residual claimants. Finally, Chapter 5 offers some thoughts on how to go from here. It analyzes the dominant concepts of progress and development, advancing a suggestion that the main school of thought in corporate governance is where it is due to its strengths. However, in the spirit of heterodoxy, upon which the book rests, this chapter also looks at corporate governance’s negative consequences and contradictions. Then, using the latter, it theorizes about why it is necessary to approach corporate governance from as many useful views as possible. All in all, this book neither focuses on efficient mechanisms to align shareholder and manager interests nor quantifies monitoring costs in the crafting of default regulations of contracts within the firm, for example. Instead, it is all about taking a step back and reflecting. By challenging the orthodoxy, its proposal is to reframe how we think about corporate governance and, thus, it aspires to offer various alternative tools to ask deeper, more crucial questions before taking a stand on the mechanisms, processes and relations by which corporations are controlled and directed. One of its core premises is that having one’s cake and eating it too is not an option. The reader may end up concluding that heterodoxy is not her cup of tea, of course, and that is a perfectly legitimate conclusion for any reader – as long as, first, he or she goes through a serious analysis and asks the difficult questions about the distribution of rights and responsibilities among all stakeholders. As a final note, it is proper to warn the reader that throughout this book the terms company law, corporate law and corporate governance are used interchangeably, and the same goes for company and corporation, with the only distinction being enterprise, a notion which occurs spontaneously in society and does not require the fulfillment of any bureaucratic formalities in order to exist. Moreover, whenever reference is made

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to economics, it is meant to refer to mainstream (neoclassical) economics, while any other school is referred to or preceded by its name, for example Austrian, institutional, behavioral, developmental, etc.

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1. The disnature of the firm: how did we end up here? 1. THE INVENTION OF ECONOMICS In the beginning European Christianity’s seeds of self-scrutiny and individual liberty blossomed into the Enlightenment.1 The spirit of inquiry hovered over the waters, and thinkers from all walks of life sat at a table overflowing with different theories and methodologies. Sadly, such an idyllic state of intellectual inquiry was not meant to last. And it was mainly because some decided, as did the devil in Milton’s Paradise Lost, that it was preferable to reign in hell than to serve in heaven. Enter Adam Smith. Adam Smith’s name is reverentially used to support political programs and he is perceived as an economist of a particular ideology – facts which surely make him turn in his grave because (a) he had moral reservations about the free market running amok and, above all, (b) he was a moral philosopher well versed in jurisprudence, rhetoric, languages, religion, literature, and history.2 That said, he also lived in convulsive times and his thoughts were (at least partially) occupied by immediate matters such as the contemporary grain laws, both in England and France.3 Moreover, his normative thinking occurred against the backdrop of fierce infighting between George III and the aristocracy of the time, the former strengthened by the downfall of the Jacobite cause 1

David A. Hollinger, ‘The Accommodation of Protestant Christianity with the Enlightenment: An Old Drama Still Being Enacted’ Dædalus, the Journal of the American Academy of Arts and Sciences [Winter 2012] 141(1): 11; William Bristow, ‘Enlightenment’ in Edward N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (2011) accessed 17 April 2017. 2 Charles L. Griswold Jr, Adam Smith and the Virtues of Enlightenment (Cambridge University Press 1999) 8–10. 3 I. Hont and M. Ignatieff, Wealth and Virtue: The Shaping of Political Economy in the Scottish Enlightenment (Cambridge University Press 1983) 15–19. 8

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and the latter emboldened by Gustav III’s 1772 coup.4 What is most striking about Smith, however, is that, in many respects, the gulf between his eclectic approach to thinking and the current state of economics could not be wider. To begin with, and unlike, say, Ricardo, the Scotsman used both the inductive and the deductive methods, demonstrating the richness of his liberal education; second, he did not frown upon using history in his writings, something which was relegated to a different discipline after the marginalist revolution; and, third, at least in his Theory of Moral Sentiments, his homo economicus is not a Benthamite single-minded and selfish utility maximizer through and through but an agent forming part of a wider social context.5 Perhaps if Smith had remained steadfast in his Enlightenment ideals6 history would be a bit different now. Ironically, from the three grand ideas plucked from Smith’s garden for the sake of posterity – the invisible hand, the division of labor, and the propensity to barter – one is heavily decontextualized and the remaining two are false, turning into Jell-O™ the foundation of economics itself. The irony resides in that Smith’s intellectual strength is based on the ability to sustain a dual macro-dynamic theory of economic development and a micro-theory of market exchange, i.e. he argues that the growing division of labor is the basic cause of the growth of the wealth of nations, and this, in turn, is the result of ‘a certain propensity in human nature … to truck, barter, and exchange one thing for another’.7 Adam Smith was so eager to overturn the conventional wisdom of his day, objecting to the notion that money was a creation of government (which in Lockean fashion was to be limited to protect private property), that he invented a fantasy world of primitive people who bartered all the way until it became burdensome and they invented money – even though all available ethnography, from the Americas to the Pacific and to Africa, indicates that such a place never existed and thus money did not come from it.8 The fact that the foundational myth of economics is false is of the utmost importance. It follows from the make-believe land of barter that property, money and markets precede political institutions, constituting 4 John Cannon, Aristocratic Century: The Peerage of Eighteenth-Century England (Cambridge University Press 1984) 3–5. 5 D. Milonakis and B. Fine, From Political Economy to Economics: Method, the Social and the Historical in the Evolution of Economic Theory (Routledge 2009) 16–20. 6 Karl Polanyi, The Great Transformation (2nd edn, Beacon 2001) 45–50. 7 Milonakis and Fine, op. cit., 16–17. 8 Caroline Humphrey, ‘Barter and Economic Disintegration’ (Mar., 1985) Man, New Series, 20(1): 48–72.

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the foundation of human society, and even that there is a thing called ‘the economy’ operating by its own rules, separate from moral or political life, that economists could take as their subject matter.9 It is no wonder that most if not all basic textbooks in economics still imply that barter preceded money, dehistoricizing the subject matter in order to continue peddling the idea that there is a discipline called economics which is independent from the social sciences.10 There is an answer to such a racket, though, and it can be found in economic history – a discipline which, ironically, economists kicked out of their ‘cool boys treehouse club’ a long time ago. Many identify the breaking moment when political economy started to properly morph into economics with the ‘Methodenstreit’ – an acrid debate between the German Historical School and the Austrian School of economics, or Gustav von Schmoller versus Carl Menger, and which circled around what the proper method of economic analysis should be.11 The orthodoxy of our time paints this clash as a no-holds-barred brawl between two polar opposites, but that is not accurate. They were discussing the nature of their ‘science’, its tasks and its limits, with Schmoller calling for the inclusion of social phenomena into economic axiomatic analysis via empirical-historic studies, while Menger pushed for abstraction and deduction – and, in reality, the latter wanted to turn political economy into a ‘science of the laws of the economy’ while the former went even further by stating that the practical purpose ought to be prediction and with it the practical domination of reality.12 Henceforth, Schmoller wanted to keep economics in the realm of the social sciences and, unlike Menger, use induction and deduction, though at the end both envisioned a morphing of political economy into a science. Therefore, the real schism did not start here but originated way before. 9

David Graeber, Debt: The First 5,000 Years (Melville House 2012)

21–28. 10 Carl Menger, The Origins of Money (Ludwig von Mises Institute 2009) 19–21; Friedrich von Wieser, Social Economics (Greenberg 1927) 5; Paul Samuelson, Economics (19th edn, McGraw-Hill 2000) 40; Gregory Mankiw, Principles of Economics (South-Western 2012) 620; Richard Lipsey and Colin Harbury, First Principles of Economics (2nd edn, Oxford University Press 2004) 18; Roberto Medina, Principles of Economics (Rex 2003) 227; Alfred Marshall, Principles of Economics (unabridged 8th edn, Cosimo 2009) 276. 11 Marek Louzek, ‘The Battle of Methods in Economics: The Classical Methodenstreit – Menger vs. Schmoller’ (2011) American Journal of Economics and Sociology 70: 439–463. 12 Karl Häuser, ‘Historical School and “Methodenstreit”’ (1988) Journal of Institutional and Theoretical Economics 144(3): 532–542.

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Despite Smith’s shortcomings he seemed to be well aware of the pitfalls of pure deduction,13 and, accordingly, his method, ‘though combining throughout a vein of unsound a prior speculation, was in a large measure inductive’14 – sometimes even in a chaotic manner.15 It is then said that with David Ricardo (coincidentally the only classical economist devoid of training in moral sciences) political economy stripped itself of historical or empirical references and absolutely championed the abstract/deductive method.16 Ricardo is, however, also a strange specimen on the long road towards the neoclassical orthodoxy – despite his search for ‘laws’ as in natural sciences and through the use of logic in order to reach abstractions and simplifying assumptions.17 For example, in opposition to Bentham, he frowned upon individualism and employed a more collectivist type of reasoning (even using social class!) when focusing on the quantity of labor as the essence of value – which is perhaps the reason why Marx sided with Ricardo and also why conservatives felt uncomfortable with the conflict of capital and labor inference made by socialists from his theory of income distribution.18 Ricardo then is the one who caused the first major shakedown in political economy and gave the world (and economics) something as hilarious as it is stereotypical of economists, i.e. what Schumpeter called the ‘Ricardian vice’, or, in layman terms, the construction of abstract, highly restrictive models which are then applied directly to the complexities of the real world.19 However, there were attempts at rescuing Ricardianism, and not just from small thinkers but intellectual behemoths such as John Stuart Mill. For Mill, economics was fully hypothetical and it could not do anything 13 Arthur W. Brian, ‘Inductive Reasoning and Bounded Rationality’ (1994) The American Economic Review, 84(2): 406–411. 14 T.E. Cliffe Leslie, ‘The Political Economy of Adam Smith’ Fortnightly Review, 1 November 1870 accessed 21 April 2017. 15 H.J. Bitterman, ‘Adam Smith’s Empiricism and the Law of Nature, Parts I–II’ in John Cunningham Wood (ed.), Adam Smith: Critical Assessments (Routledge 1993) 195–199. 16 Milonakis and Fine, op. cit., 20–21. 17 Ibid 22. 18 Phyllis Deane, ‘The Scope and Method of Economic Science’ (1983) The Economic Journal 93(369): 1–12. 19 Esben Sloth Andersen, Schumpeter’s Evolutionary Economics: A Theoretical, Historical and Statistical Analysis of the Engine of Capitalism (Anthem 2009) 354.

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other than to abstract.20 Therefore, he qualified ethically the caricature of the Benthamite hedonist and then called for economics – if it wished to be practically relevant – to consider a broader range of social and ethical matters beyond what ‘economists are accustomed to examine’.21 In the case of Marx, his furtherance of a ‘real positive science’ in opposition to a mere echoing of the Moralität – other than the ethical living akin to class commonality, of course22 – goes hand in hand with a systematic construction of a materialist edifice, i.e. quantitative and qualitative assessment of how surplus value is extracted, a framework of interpretation based on class relations derived from the latter, the inherent dichotomy that follows, and the dynamics by which, according to Marx, such structures are reproduced.23 Quite revealing is that both Mill and Marx (as so many others before and after) sincerely thought they were ‘doing science’, i.e. stating ‘laws’ – though, at the same time, their value judgements diverged, for example regarding the gradual fall in the general rate of profit.24 The most ironic part of this whole story, up to this point, is that the only economic school that called for historically concrete and nationally specific analysis, rejecting both laissez-faire capitalism and Marxist socialism, ended up being pushed aside as a distinct discipline altogether, i.e. the historical school.25 How was it possible for a respectable empirical research school to be defeated by deduction-loving, Benthamite utilitarian marginalists, i.e. the forefathers of the neoclassical school? Such a surprising turn of events may be explained by the following factors: (a) at the end of the nineteenth century the natural sciences were making great progress with the aid of mathematical tools; (b) the marginal technique of analysis helped not to disturb the belief in a self-regulating economic system, giving economists a sense of theoretical progress; and (c) Walras, Jevons, and Menger, the figureheads of ‘scientific economics’, resided in different countries and that gave economists a sense of international consensus.26 Conjectures aside, what is explicitly found in writings and debates 20 John Stuart Mill, Principles of Political Economy with Some of their Applications to Social Philosophy (London 1871) 147. 21 Milonakis and Fine, op. cit., 30–33. 22 Michael Rosen, ‘The Marxist Critique of Morality and the Theory of Ideology’ (2000) Morality, Reflection and Ideology 21–43. 23 Milonakis and Fine, op. cit., 60–70. 24 William H. Shaw, Marx’s Theory of History (Stanford University Press 1978) 91–93. 25 Milonakis and Fine, op. cit., 73–82. 26 Deane, op. cit.

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is that marginalists sought to transform economics from an art to a pure science,27 and their lives reflected such an aspiration. Take Jevons, for example. The Englishman’s innovation was to relocate the basis of economy from psychology to physiology – during a time when Thomas Huxley’s hypothesis of ‘animals as automata’ suggested to Jevons that mental phenomena could be measured and objectively accessible, and so, henceforth, human wants could be reframed in terms of mechanics.28 The crude hostility of Jevons towards Mill is well documented, and no wonder, as Mill had committed the great sin of reinterpreting utilitarianism, and it was precisely Jevons’ reliance on Bentham’s sketchy pain/ pleasure equation that allowed him to introduce the mathematical model of constrained maximization.29 Walras, in turn, was so convinced that pure science was natural science that he, unpretentiously and subtly, gave his book the title Elements of Pure Economics30 – the same book in which he categorically defines his art (or science) as ‘the theory of the determination of prices under a hypothetical régime of perfectly free competition’ and goes on to assert that ‘the sum total of all things, material or immaterial, on which a price can be set because they are scarce (i.e. both useful and limited in quantity), constitutes social wealth’, concluding ‘hence pure economics is also the theory of social wealth’.31 And, finally, Menger, who, as we saw, was Schmoller’s nemesis, added the other characteristic which neoclassical economics had faithfully inherited from marginalists, i.e. atomism, better known as methodological individualism; in his own words ‘the nation as such is not a large subject that has needs, that works, practices economy, and consumes’ and then continued by denying that the phenomena of the national economy are an expression of the life of a nation as such, saying that ‘they are, rather, the results of all the innumerable individual economic efforts in the nation, and they therefore are not to be brought within the scope of our theoretical understanding from the point of view of the above fiction’.32 They, together, can be attributed with the 27

Milonakis and Fine, op. cit., 94. Harro Maas, William Stanley Jevons and the Making of Modern Economics (Cambridge University Press 2005) 153–154. 29 R.D. Collison Black, ‘Jevons, Marshall and the Utilitarian Tradition’ in Ackerman et.al. (eds), Human Well-Being and Economic Goals (Island Press 1997) 75. 30 Milonakis and Fine, op. cit., 95. 31 Léon Walras, Elements of Pure Economics (Routledge 2003) 40. 32 Carl Menger, Investigations into the Method of the Social Sciences with Special Reference to Economics (Mises Institute 2009) 93. 28

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transformation of political economy into economics (a general theory with universal applicability, valid in all social systems33), which was explicitly articulated later by Alfred Marshall. However, this is not the end of the story. As with any field of knowledge that aspires to objective value while its material is subjective in nature, economics is bound to be plagued with tensions. Marshall himself was never capable of moving from the partial equilibrium of micro to macroeconomics, not only due to how the analytics crumbled when aggregated but also because of the need to incorporate noneconomic factors into the mix when attempting to do so.34 Moreover, he warned against widening the scope of economics for fear of losing precision – in his own words: there is a large debateable ground in which economic considerations are of considerable but not dominant importance; and each economist may reasonably decide for himself how far he will extend his labours over that ground … He will be able to speak with less and less confidence the further he gets away from his central stronghold, and the more he concerns himself with conditions of life and with motives of action which cannot be brought to some extent at least within the grasp of scientific method.35

The attempts to break from the orthodoxy ever since have been, while laudable, constrained to debate within the materialistic realm and without abandoning the scientific aspirations observed since Adam Smith. The case in hand is institutionalism and, particularly, the work of Thorstein Veblen. The distinctive features of the institutionalists are: institutions as the basic template for all economy activity, of course; interdisciplinarity; historical specificity; breaking away from methodological individualism; critique of the neoclassical assumption of rational economic men; emphasis on dynamism in lieu of static equilibrium analysis; and, its most distinctive feature, the substitution of the mechanistic analogy for Darwinian evolutionary biology.36 Veblen, the paradigmatic institutionalist, used this intellectual edifice to offer an explanation of modern civilization, when saying ‘now, business enterprise and the machine process are the two prime movers in modern culture; and the only recourse that holds a promise of being effective, therefore, is a recourse to the workings of 33

Milonakis and Fine, op. cit., 99. Ibid, 130–131. 35 Alfred Marshall, Principles of Economics (unabridged 8th edn, Cosimo 2009) 643. 36 Milonakis and Fine, op. cit., 159–162. 34

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business traffic’37 – where business enterprise is the leisure class driven by pecuniary gain through investment for profit, while the machine process refers to efficiency engineers making goods, driven by mechanical efficiency and workmanship. Once he had the ‘big bang’ moment figured out, he rejected biological determinism and the idea that social phenomena could be explained in terms of either the individual or society alone,38 and built his evolutionary scheme on the concept of habits of thought (in opposition to the hedonistic rationality of marginalism and the conscious class conflict of Marxism), where the part not settled by the society and each individual’s employment consisted of the drive to turn things to human use (workmanship), the propensity for explaining the external world using imagination (idle curiosity), and the instinct to care for the welfare of others (parental bent).39 Armed with the conflict of business enterprise and machine process classes as ethos of the modern world and a human behavior structure, Veblen then attempts a historical account of how the leisure class originated with the invention of ownership and how, as an institution, it can be analyzed using the dichotomy of conspicuous consumption (defined as culturally determined and predatory) vs. subsistence consumption – which, in turn, denotes negative instincts in relation to positive drives, i.e. antipathy to useful effort and emulation (love of praise40). For Veblen, all these instincts, plus their defining role upon the class they represent, are culturally defined and become fluid as technological advances unfold.41 By the twentieth century economics had fully established its highly mathematized technical toolbox and transitioned from the study of how to create wealth to the ‘science of choice’, at which point it was ready to start attempting the colonization of other social sciences.42 However, because the economic edifice was built on sand rather than rock, with the orthodoxy aberrantly reduced to its own echo chamber of assumptions, the infighting continued – though every day, more and more, taking place within the confines of the orthodoxy’s invented language and tools. 37

Thorstein Veblen, The Theory of Business Enterprise (Blackmask 1999)

127. 38

Geoffrey M. Hodgson, The Evolution of Institutional Economics: Agency, Structure and Darwinism in American Institutionalism (Routledge 2004) 134. 39 Warren Samuels, The Founding of Institutional Economics (Routledge 1998) 23. 40 John P. Diggins, Thorstein Veblen: Theorist of the Leisure Class (Princeton University Press 1999) 122–123. 41 See Figure 2.1 in Chapter 2 for a graphic explanation of Veblen’s theories. 42 Milonakis and Fine, op. cit., 219.

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Weber, for example, tried to keep a broader notion of economics alive and to show that economic phenomena did not occur in a social vacuum. To do so, he came up with a taxonomy for a more systematic study of economic phenomena, economically relevant phenomena, and economically conditioned phenomena – and then developed a thorough account of economic action, its types (instrumentally rational, value rational, affectual, and traditional), and subjective interplay under the mechanism of the law.43 Such a drive is commendable yet it is fair to note that Weber, too, was invested in making sociology like economics, i.e. ethically neutral, value-free and strictly separated, something which still causes problems as the creation of concepts in social sciences necessarily imply the use of values.44 Weber’s conundrum was shared by Schumpeter, the other figure associated with Sozialökonomik. For Schumpeter (perhaps in a drive to add further layers to economic orthodoxy), the process of economic analysis had to be: first, for the statistician to arbitrarily create models intending to portray certain aspects of reality while taking others for granted; second, to place the schemata against the backdrop of historical facts which provide the institutional framework, even going back to what anthropology has to offer; and, third, to incorporate ‘Wirtschaftssoziologie’, i.e. to describe and interpret social facts because if ‘economic analysis deals with the questions how people behave at any time and what the economic effects are they produce by behaving … economic sociology deals with the question how they came to behave as they do’.45 Another contribution from Schumpeter, and quite a relevant one, is his dynamic analysis of economic development. Unlike Walras’, Schumpeter’s theory is dynamic as it incorporates change from within, much like Marx; although, unlike Marx, Schumpeter’s methodological individualism makes him identify economic change as initiated by the individual, whether via the introduction of a new good, a new method of production, a new market, new source of supply of raw materials, or a new organization of an industry – or what Schumpeter calls enterprise, i.e. setting up a concern around a new idea, which he sees as different to management or the mere administration of it.46 This approach by 43 Max Weber, Economy and Society: An Outline of Interpretive Sociology (University of California Press 1978) 63–67. 44 Douglas Vickers, Economics and Ethics: An Introduction to Theory, Institutions and Policy (Praeger 1997) 64–65. 45 Joseph A. Schumpeter, History of Economic Analysis (Routledge 1997) 12–21. 46 Milonakis and Fine, op. cit., 210–212.

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Schumpeter is perhaps one of the most interesting ones when paired with Veblen’s model of the management and the engineer classes.47 Economics was still to be narrowed down even further by the addition of positivism. Competing schools aside, what unites positivists is the ironclad belief that only what our senses perceive is real and, henceforth, science ought to be cleared from any metaphysical considerations and its methodological premises ought to span throughout both the physical and the social fields. Behind this is the old discussion about the ‘unity of science’, which is perniciously crucial for economists because, first, if they can consider themselves scientists then there is a respectability they can share with physicists, chemists, biologists, etc., and, second, because unifying the sciences provides methodological guidance and hypothetical justifications, plus an upper hand in matters of policy by cutting through any deliberative process involving complex matters of high social impact.48 Enter Milton Friedman. In what is said to be the most cited paper in the history of economic methodology,49 Friedman stated that positive economics is an objective science in the same sense as any physical science and, as it is independent of any particular ethical position or normative judgment, its sole task is to produce generalizations used to make predictions – which, in turn, shall only be judged by their accuracy, not their realism or their underlying assumptions.50 Needless to say, Friedman’s reputation hasn’t been dented one bit since then – despite being questioned by methodologists and philosophers alike, for example for confusing theories made solely for prediction purposes and those which are made to provide an explanation,51 or for having been proven outright to have made a fallacious statement regarding prediction as the sole testability of a hypothesis, which also, to add insult to injury, does not follow from the premise that a good hypothesis provides valid predictions within the phenomena it intends to explain.52 It is not hard to see why an instrumentalist view, shedding light on the realism of 47

Veblen, op. cit. Jordi Cat, ‘The Unity of Science’ in Edward N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (2017) accessed 1 May 2017. 49 Milonakis and Fine, op. cit., 235. 50 Milton Friedman, ‘The Methodology of Positive Economics’ in Essays in Positive Economics (University of Chicago Press 1966) 3–16, 30–43. 51 Bruce Caldwell, Beyond Positivism (Routledge 1994). 52 Daniel Hausman, The Inexact and Separate Science of Economics (Cambridge University Press 1992) 162–167. 48

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assumptions, was so palatable to economists.53 Think about that for a second: if one is told that tomorrow will be a good day, and it happens that, indeed, the day turns out to be good, the predictor is considered a sage, even though the underlying premise was that Saturn aligned with Mars according to the Tarot cards. The last three great names in economics within our brief account, Mises, Hayek, and Keynes, reinforce with their appearance what has been quite clear so far: on one side, they all provided heavy blows to mainstream economics which were either ignored or chased away by a pitchfork-carrying mob, while, at the same time, they perpetuated their discipline’s misgivings. Austrians, for example, made a pretty good case for how equilibrium is impossible, while at the same time balancing this with the positive role of the market in coordinating inventiveness and discovery;54 what Mises is mostly remembered for in the mainstream is his methodological individualism and the belief in economic subjectivism as its source of objectivism, for example: because it is subjectivistic and takes the value judgments of acting man as ultimate data not open to any further critical examination, it is itself above all strife of parties and factions, it is indifferent to the conflicts of all schools of dogmatism and ethical doctrines, it is free from valuations and preconceived ideas and judgments, it is universally valid and absolutely and plainly human.55

As for Hayek, he bravely left us with two pearls of wisdom: first, that a good economist is never only an economist, as there are no problems which can be adequately answered by a single discipline, and, second, his scathing critique of ‘scientism’ or the attempt to apply the methods of the natural science in the social ones.56 Good things in life are fleeting, though. Hayek is remembered today for his defense of methodological individualism, for he wrote that ‘there is no other way towards an understanding of social phenomena but through our understanding of individual actions directed towards other people and their expected behaviour’;57 and, also, for his coining of the idea of the spontaneous 53

Christopher Mackie, Canonizing Economic Theory: How Theories and Ideas are Selected in Economics (Routledge 2015). 54 Milonakis and Fine, op. cit., 246. 55 Ludwig von Mises, Human Action: A Treatise in Economics (The Scholar’s edn, Ludwig von Mises Institute 1998) 21. 56 Milonakis and Fine, op. cit., 260. 57 Friedrich Hayek, Individualism and Economic Order (University of Chicago Press 1958) 6.

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order of markets, which follows from his assertion that ‘many of the institutions on which human achievements rest have arisen and are functioning without a designing and directing mind … and the spontaneous collaboration of free men often creates things which are greater than their individual minds can ever fully comprehend’.58 In the case of Keynes, it can be said that he saved face for economics by divorcing microeconomics from macroeconomics, helping thus to facilitate answers to issues which the former was incapable of addressing, i.e. the business cycle, the financial system and massive unemployment.59 Sadly, in his attempt to broaden the discipline, Keynes committed a heresy and, with it, the fate of his legacy was sealed: he trashed the individualistic leaning of neoclassical economics by building an aggregate model of the economy as a whole, as an attempt to respond to the question of the determinants of supply and demand for aggregate output, and, in the process, he stated that there was no such thing as an invisible hand concocting social value out of private self-interest.60 This was not taken lightly by his detractors. Once the post-war boom was over and Keynesianism started to decline, general equilibrium proponents and monetarists started to creep out of their caves,61 leaving behind shameful episodes, for example Lorie Tarshis, a Canadian economist who brought the first proper Keynesian textbook to the U.S., and who suffered boycotts and disrepute because McCarthyists labeled him as too sympathetic to communism (with a book inspired by Keynes of all things!).62 Today, the predominance of the neoclassical dogma continues despite its blind spots, i.e. stability, the mere existence of equilibrium, and the absence (still!) of a rationale for money, not to mention the known vices of sci-fi assumptions, hyper-abstract analysis, and empirical emptiness. Worst of all, as the definition of what constitutes the economy has shifted, by treating the non-economic as if it were reducible to market activity, anything that can be said to involve scarcity and, henceforth, choice, has been colonized by economics, infecting entire fields of study with its deductivism, determinism and conceptual impoverishment.63 Not even the corners where there is no market per se are safe, as Richard 58

Ibid 7–8. Milonakis and Fine, op. cit., 273. 60 Phyllis Deane, The Evolution of Economic Ideas (Cambridge University Press 1993) 182. 61 Milonakis and Fine, op. cit., 275. 62 Philip Arestis and Malcolm Sawyer (ed.), A Biographical Dictionary of Dissenting Economists (Edward Elgar Publishing 2000) 657. 63 Milonakis and Fine, op. cit., 243, 296, 298. 59

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Posner, one of the new religion’s priests, candidly puts it: ‘The expanded range of economic analysis of law was facilitated by the expanding application of the economist’s model of rational choice to nonmarket behavior’.64 Even best-selling economists claim in their pop culture books that their discipline is the science of life and could potentially explain everything short of the universe!65 The reasons behind this modesty are as complex as virology, i.e. on one hand, the outright mathematical approach of the neoclassicals and their claim of precision add to the aesthetic qualities of the discipline and its tools work analytically well within the restricted, heavily assumed, and mechanical sexiness of its models.66 On the other hand, ‘the more specialized a thought community is and the more restricted in its content, the stronger will be the particular thought nexus among the members’.67 Translated, this refers to an esoteric circle with its own consciousness, inextricable language and self-evident truths, a fenced club armed with a unique overarching directional narrative. Based on this abridged methodological history of economics we can confidently affirm that, even though the ‘crème de la crème’ of neoclassical economists claims that, unlike macro, microeconomics is a unified and uncontroversial field,68 this is not true. Suffice it to look at the splinter of schools which have taken shape since the time Smith invented economics. Figure 1.1 leaves Keynesian, developmentalist and Schumpeterian schools out, mostly to serve the purpose of illustrating equidistant economic schools in their variation.69 They all share, though, some general assumptions, chief among them being some degree of rationalism of the units conforming an artificially isolated subject matter. While neoclassicals see the economy as atomized, with consumption as its paramount element, and economic change as based on individual choices within a free market, classics talk about change through capital accumulation, focus on production and tend to see classes. Marxists are in the 64 Richard Posner, Frontiers of Legal Theory (Harvard University Press 2004) 34. 65 Tim Harford, The Logic of Life (Abacus 2009) x–xxii. 66 Deane, The Evolution of Economic Ideas, op. cit., 108–109. 67 Ludwik Fleck, Genesis and Development of a Scientific Fact (University of Chicago Press 1979) 106–108. 68 G. Chris Rodrigo, ‘Micro and Macro: The Economic Divide’ (2012) International Monetary Fund, Finance and Development, 31 January accessed 6 May 2017. 69 Ha-Joon Chang, Economics: A User’s Guide (Penguin 2014) 166–169.

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Figure 1.1 Economic schools same quadrant as classics, with the difference of change through class struggle, though also perceiving the world as certain, made of iron laws or laws of motion. On the opposite side of the spectrum, the uncertain world, institutionalists and behavioralists do not rely on a hyperrational individual, yet Austrians see individuals as rational in terms of tradition while instinct, habits and beliefs dominate the rationality view of institutionalists, who also perceive production rather than exchange as the crucial part of the economy. For the institutionalists, moreover, change takes place precisely through the interaction between individuals and institutions rather than class struggle, capital accumulation, or individual choices.

2. THE 120 DAYS OF NEOCLASSICAL ECONOMICS The implication of economics not being a science is that it is about politics. And, as such, it is in constant internal strife, governed by different ideologies throughout the various stages of its history. This, in turn, makes economics, as with any other political philosophical discipline, susceptible to valid criticism based on competing ideologies, and whichever school is dominant at any given moment can claim predominance over the others in matters of policy, though not by virtue of some

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sort of final, undisputable ‘scientific eschatology’. Neoclassical economics is the best example, for its reign is current and, thus, easier to grasp. The putative father of economic democracy, Karl Polanyi, elegantly summarized in his magnum opus The Great Transformation the myth of rational choice, profit-maximizing individuals, as follows: ‘The outstanding discovery of recent historical and anthropological research is that man’s economy, as a rule, is submerged in his social relationships’, then goes on to say that he does not act so as to safeguard his individual interest in the possession of material goods; he acts so as to safeguard his social standing, his social claims, his social assets. He values material goods only in so far as they serve this end. Neither the process of production nor that of distribution is linked to specific economic interests attached to the possession of goods; but every single step in that process is geared to a number of social interests which eventually ensure that the required step be taken. These interests will be very different in a small hunting or fishing community from those in a vast despotic society, but in either case the economic system will be run on non-economic motives.70

As authors like Rist point out, people have produced, consumed, saved, distributed and exchanged since the dawn of times (hence the ‘economy’ has always existed, in the same way that climate exists regardless of meteorologists) though economic ‘science’, at some point, instead of observing that people have not regarded economic phenomena distinctively from social life, political power, religion, myths and social obligations, chose to view such a complex and vast web of relations chiefly from the perspective of division of labor, market exchange, individual rationality and the pursuit of utility, mechanizing the richness of human relations into a reductionist set of calculable operations triggered by self-interest.71 True, economics, with its seeds of what was to become the neoclassical dogma, is a product of a specific historical time and, in hindsight, can be hailed as good, i.e. Smith, Bentham, Condorcet, and others were Enlightenment thinkers whose political philosophy was a response to an imperialism deemed unworkable, dangerous and immoral based on reasons such as free trade, self-determination, cultural integrity, or, 70 Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Beacon Press 2002) 49. 71 Gilbert Rist, The Delusion of Economics: The Misguided Certainties of a Hazardous Science (Zed Books 2001) 20–21.

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simply, due to the irony of civilized nations engaging abroad in uncivilized practices of despotism, corruption, and lawlessness.72 It is thus explicable that in order to philosophically displace authority away from the figure of the king or prince, the Enlightenment thinkers, as in the case of Herder, for example, based their ethical claims on laws of nature both as a social fact and a moral norm,73 to the extent that freeing human nature from the artificial constraints of religion and society was perceived as a way to promote ‘the science of man’.74 In such a drive, progressive thinkers embraced the fruits of the new scientific discoveries, for example mechanistic physics and, with it, concepts such as equilibrium, balance, mass, elasticity, forces, atomization, circuit, flows, friction, leverage, boost, etc.75 Economics was envisioned, thus, to be some sort of social physics; however, it fails precisely in that same respect because nature exists independently from human activity, while the economic life does not, no matter how much economists, in their parlance and assumptions, seem to pretend otherwise. Taking this analogy even further, it is interesting to note that when there are paradigm shifts in science,76 not only do scientific beliefs about nature change but also the standards and criteria of scientific judgment,77 though when the turn came for economics to follow suit and behave like a science it failed to do so. The classical mechanistic theory on which economics was founded saw time as reversible since a given system subject to change can be restored to the initial state with a reverse change, reproducing the phenomenon back and forth for the purpose of prediction (something which still has applicability in terms of celestial bodies moving in the void without friction). However, thermodynamics ended with the reversibility of classical mechanics by discovering transformative matter and entropy, and in order to ‘remain’ a science economics should have had to incorporate the discoveries of the new physics, but it did not.78 Even though economists did alter their view on value, the fundamentals remained glued together 72

Sankar Muthu, Enlightenment against Empire (Princeton University Press 2003) 3–5. 73 Ibid 247. 74 Thomas L. Hankins, Science and the Enlightenment (Cambridge University Press 1985) 179. 75 Rist, op. cit., 26. 76 Thomas S. Kuhn, The Structure of Scientific Revolutions (University of Chicago Press 2012) 44–51. 77 Hugh G. Gauch, Scientific Method in Practice (Cambridge University Press 2003) 85. 78 Rist, op. cit., 28–29.

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by their mechanistic ideal. This is one of the many fundamental reasons why even some economists call their discipline a pre-science79 at best. After reviewing the frontrunner economic journals, it is fair to say that there are some economic researchers who accept that their discipline requires revisions, mostly (a) the canonical model of the self-interested material-payoff-maximizing actor, and (b) the belief that preferences over economic choices are exogenous rather than shaped by everyday social interactions – although they (wrongly) tend to emphasize that such revisions should not imply that economists abandon the rational-actor framework.80 Speaking about the rational homo economicus used for the economists’ descriptive and normative models, this is yet another good example of both the danger of creating theories which neither explain nor predict reality and of being seduced by the esoteric circles of knowledge, as Fleck pointed out. The standard economic theory of consumer behavior is, of course, based on a rational maximizing model, and in the late 1970s Kahneman and Tversky demonstrated with prospect theory that humans make choices involving risk in violation of the axioms of expected utility theory,81 i.e. not in a rational manner but as quite susceptible to losses, gains, perception of ownership, etc. Borrowing from this research, Thaler correctly stated that the orthodox economic model of consumer behavior is essentially one of ‘robot-like experts’ which, needless to say, fumbles at predicting behavior – with the added danger that economists rarely distinguish between normative and descriptive models.82 In other circumstances, as Kuhn would say, this happy breakthrough would have caused a rewriting of the discipline’s textbooks.83 Not so in economics. Instead of producing the torches and pitchforks, Kahneman got a Nobel Prize and, in an appalling twist, went on to say that the oversimplified and unrealistic assumptions in basic economics texts must be kept there because prospect theory could be confusing and demoralizing to young economics students – which is, basically, a way of perpetuating the 79 Steve Keen, Debunking Economics: The Naked Emperor Dethroned? (Zed Books 2011) 158. 80 Joseph Henrich, Robert Boyd, et al., ‘In Search of Homo Economics: Behavioral Experiments in Fifteen Small-Scale Societies’ (May 2011) The American Economic Review 91(2): 73–78. 81 Daniel Kahneman and Amos Tversky, ‘Prospect Theory: An Analysis of Decision Under Risk’ (1979) Econometrica 47(2): 263. 82 Richard Thaler, ‘Toward a Positive Theory of Consumer Choice’ (1980) Journal of Economic Behavior and Organization 39–60. 83 Kuhn, op. cit., 136.

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theory-induced blindness which he himself criticizes.84 This baffling turn of events – or lack thereof – which otherwise marked the foundation on which Thaler built behavioral economics,85 is evidence of the cognitive inertia dominating the mainstream. Even pop culture sources of behavioral economic thought speak of Kahneman and Tversky as redefining the way humans think,86 and, yet, the rational homo economicus keeps lurking in the background. Let’s look at the cornerstone of the principle of utility, i.e. Benthamite philosophy, lambasted with gusto by several thinkers as we have seen earlier. For Bentham, nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do, as well as to determine what we shall do. On the one hand the standard of right and wrong, on the other the chain of causes and effects, are fastened to their throne. They govern us in all we do, in all we say, in all we think: every effort we can make to throw off our subjection, will serve but to demonstrate and confirm it.87

The fact remains, though, that there is no unit of accounting for either ‘pain’ or ‘pleasure’ – there is not even a common way of measuring pleasures within the same individual! And, still, in order to be able to establish constant and uniform laws, economics had to anchor economic value in utility in an artificial way, i.e. define utility in a non-moral way, so it would not depend upon value judgments, and account for rational choice, which, according to Jean-Baptiste Say, was done by the tautology of utility as desirability plus scarcity equals price, yet with price also being defined as the measure of utility.88 In any case, economists went through with it and came up with the concept of ‘utils’, which is the unit of satisfaction derived from consuming a commodity and which is always positive, although it drops gradually as more units are consumed, in what 84

Daniel Kahneman, Thinking, Fast and Slow (Penguin 2011) 278–288. Daniel Kahneman, ‘Biographical’ (Nobel Media, 2014) accessed 11 July 2017. 86 Freakonomics Radio, ‘The Men Who Started a Thinking Revolution’ (4 January 2017) 3:47–3:55, comments by Stephen J. Dubner, podcast host accessed 11 July 2017. 87 Mitchell Cohen et al. (ed.) Princeton Readings in Political Thought (Princeton University Press 1996) 371. 88 Rist, op. cit., 97–101. 85

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is called the law of diminished marginal utility.89 This core assumption by economists not only attempts to achieve an objective, precise measure of something as intrinsically subjective as personal satisfaction, but also, more worryingly: (i) the model’s output keeps on ascending, plus it takes a maximum of two commodities, and going above whatever combination of two commodities equal in utils is considered irrational; and (ii) the law of demand derived from this one-person scenario behaves differently when extrapolated to a two-or-more-persons scenario, but is still used, by virtue of methodological individualism, to market demand provided certain conditions are met, and those conditions are, in essence, oneconsumer/one-commodity – which is rather strange since the goal of the law of demand is to explain how relative prices are set, though there is no ‘relative price’ at all if there is only one consumer and one commodity.90 Freedom is one of the most praiseworthy human ideals and using it to engage others through a market system has proven to be more fair and advantageous than its opposite. However, it is worringly narrow to study and depict human nature solely through the prism of rational choice imperialism.91 Society is not a collection of individuals with nothing in common except the maximization of utility – there is a social bond that ought to be integrated into the analysis.92 Even the most recent game theory experiments show what is, basically, commonsense, i.e. that in the animal world, selfishness, as opposed to a cooperative disposition, can provide a short-term advantage though in the long run it means extinction.93 And although this collection of criticisms about the pillars sustaining neoclassical economics may seem theoretical at first, several authors have argued convincingly that there are real life implications in treating political philosophy as an exact science. Cases in point are the recent financial crisis and the existential threat.

89

Fred M. Gottheil, Principles of Economics (Cengage Learning 2012) 109–113. 90 Keen, op. cit., 43–55. 91 Joseph Heath, ‘Methodological Individualism’ in The Stanford Encyclopedia of Philosophy (2011) accessed 6 May 2017. 92 Rist, op. cit., 47–51. 93 Christoph Adami and Arend Hintze, ‘Evolutionary Instability of Zerodeterminant Strategies Demonstrates that Winning is Not Everything’ (2011) Nature Communications 4, Nature Publishing Group accessed 8 May 2017.

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In the former case, Keen makes a succinct yet powerful case when saying that, first, among the logical conclusions of neoclassical economics is the correct pricing of financial assets by finance markets and the goodness of debt, both of which stimulated reckless behavior around what is now known as the subprime crisis; second, the bombastic mathematization of economics nurtured the creation of exotic and complex synthetic financial products (a.k.a. ‘weapons of financial mass destruction’94); and, third, the upper echelons of financial regulation authorities are populated by neoclassical, and hence permissive, economists.95 As for the existential threat, most macro-economic models assume that growth can, and will, continue indefinitely, while the same logic applies at microeconomic level, with corporations faced with a grow-or-die scenario. Governments encourage this by debt-financed growth through taxing profits and treating interest payments on debt as tax deductible, which, in turn, feeds consumerism with an overload of advertising, cost-cutting rewards, raiding of pension funds, etc.96 Although it is difficult to assess if there is any other option that would not cause a social catastrophe, the pace of exploitation draws upon non-renewable resources and endangers the ecosystem through pollution by industrial production.97 An example of the world’s dependence on material growth is the Gross Domestic Product (GDP), the standard tool which aggregates the total value produced in a country and which is the gold standard for measurement of growth, even though: (a) it does not record non-market transactions; (b) it excludes real human suffering by treating it as a mere externality; (c) it does not account for the destruction of goods freely provided by nature; (d) it is oblivious as to how the wealth is distributed; and (e) it does not evaluate the social desirability of market activities, effectively treating as equivalent the production of, for example, vegetables and nuclear bombs.98 It is for these reasons that when the GDP is

94 Edward Jay Epstein, ‘Warren Buffet’s Hidden Stake in Financial Weapons of Mass Destruction’ (February 2009) Vanity Fair accessed 6 May 2017. 95 Keen, op. cit., 22. 96 Robert Ayres, Turning Point: An End to the Growth Paradigm (Earthscan 1998) 101–103. 97 Rist, op. cit., 129. 98 Ibid 120–122.

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put to the test against other measurements, such as, for example, the Genuine Progress Indicator (GPI),99 the results do not track each other.100

3. LAW AND ECONOMICS SITTING IN A TREE So, how did law fall prey to neoclassical economics? As ventured earlier, economics imperialism is facilitated by the shifting definition of what the field of study is, and, second, its overuse of calculus and statistics (the only real mathematics economics uses) lends it an air of respectability, which, in turn, fosters an esoteric circle – what is now commonly known as an ‘echo chamber’. It is understood that law and economics, as seen today, was born in the United States in the late 1950s, and, thanks to the influence of Richard A. Posner, it became an accepted and buoyant school of thought within the legal community from the 1970s onwards.101 However, if we subscribe to the definition of law and economics as the application of economic theory and econometric methods to an examination of the law and legal institutions, it is no surprise to find a dissent throughout law and economics historians regarding its origins. While Richard Posner is seen as the scholar who brought law and economics into the academic spotlight, there are well-identified precursors such as Coase, while some authors even identify a well-structured attempt to apply economic tools to legal questions dating back to Commons,102 who, similar to the Staatswissenschaft (the German school mixing political economy and law), systematically inquired into how property and other rights were determined, historically and functionally, across different societies, attempting what could be called an explanatory science of rights based on economic 99

GPI: . Other alternatives are the Human Development Index (HDI), Ecological Footprint, Biocapacity Gini coefficient, and Life Satisfaction scores, all of which can be found online. 100 Ida Kubiszewski, ‘Beyond GDP: Measuring and Achieving Global Genuine Progress’ (April 2013) Ecological Economics 93: 57–68 accessed 2 May 2017. 101 Ejan MacKaay, ‘History of Law and Economics’ in B Bouckaert and G De Geest (eds), Encyclopedia of Law and Economics (Edward Elgar Publishing and University of Ghent 1996–2000) accessed 3 November 2012. 102 Lewis Kornhauser, ‘The Economic Analysis of Law’ in Edward N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (Fall 2011 Edition) accessed 3 November 2012.

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conditions.103 All in all, we subscribe to the idea that the economic analysis of law proper started with Bentham – who thought about how actors react to legal incentives and evaluate outcomes based on social welfare – and was then developed by Coase and his study of externalities and liability, until it reached its peak with Posner and his general textbook on law and economics.104 The theoretical approach championed by Bentham started from the premise of law as an instrument to serve the social good. This is in opposition to law as imbued by an immanent order of natural principle and by what is morally right. Instrumentalism is not a new development and it has a long lineage in the Judeo-Christian tradition, for example the Rabbinic analysis of Jesus’ position regarding the law, when, according to Mark 2:27, tells the Pharisees who criticize the Apostles for plucking grain on the day of rest: ‘the Sabbath was made for man, not man for the Sabbath’.105 This approach gained in strength in the course of the 20th century, when a culturally heterogeneous and class-differentiated population, increasingly secularized and swayed by the horrors of the two world wars and the crumbling of faith in the authorities enacting and enforcing the laws, started to hesitate about the mere existence of objective moral principles, holding itself to the Enlightenment ideals as neutral sources of all-solving principles.106 Of course, instrumentalism is not an exclusive analytical tool, as even Aquinas and other advocates of positions opposed to utilitarianism have made use of some variants of it.107 Even more, in the recognition of the different realms of the real world and the legal world itself a symbiotic instrumentality is implied.108 103

Mackaay, op. cit. Louis Kaplow and Steven Shavell, ‘Economic Analysis of Law’ (1999) Harvard Law School John M. Olin Center for Law, Economics and Business Discussion Paper Series, Paper 251. 105 Chaim N. Saiman , ‘Jesus’ Legal Theory – A Rabbinic Interpretation’ Villanova Law/Public Policy Research Paper No. 2007-15; (2007–2008) Journal of Law and Religion 23: 97 accessed 10 May 2017. 106 Brian Z. Tamahana, ‘How an Instrumental View of Law Corrodes the Rule of Law’ (2007) DePaul Law Review 56; St. John’s Legal Studies Research Paper No. 06-0061 accessed 11 May 2017. 107 Leslie Green, ‘Law as a Means’ HART-FULLER AT 50, Peter Cane, ed., Oxford: Hart Publishing; Oxford Legal Studies Research Paper No. 8/2009 accessed 13 May 2017. 108 Nicholas H.D. Foster ‘The Theoretical Background: The Nature of the Actors in Corporate Social Responsibility’ in Stephen Tully (ed.), Research Handbook in Corporate Legal Responsibility (Edward Elgar Publishing 2005). 104

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The worrying aspect of instrumentalism as experienced nowadays, though, is that the epistemological skepticism leading to the absence of objective moral foundations, paired with the idea that the public good is advanced as if by an invisible hand when individuals pursue their own good, undermines the existence of legal limits on law itself.109 As long as it is claimed that law can consist of anything and serve any end (once the formalities of its enactment are fulfilled), and its goal is reduced to satisfaction of mere materialistic needs,110 there is no balancing of competing interests but merely a zero-sum game where individuals or groups seek to influence law in their favor and wield its coercive force against opposing groups.111 If we accept that the citizenry obeys the law either because of fear of punishment or the belief that it serves the public good, the instrumentalist view of the law leaves the former reason as the only one standing – and that is a sad state of affairs. A clear example of this is Richard Posner himself, who not only is the champion of the mainstream law and economics school but also a judge. When presented with a case he claims to first ask himself what would be a reasonable result in the eyes of a lay person and then, having found the answer, check for legal obstacles for deciding in such a way.112 This pragmatic approach is, plain and simple, an individual (the judge) imposing opinions instead of the law, i.e. value decisions based on an individual’s biases, hatreds, tendencies, ideology, phobias, interests, etc. which threatens the certainty required in a fair and functioning legal system.113 It is of crucial importance to analyze Posner’s position, as he is not only key to this story but also his thought evidences law and economics’ direct connection with Friedman’s convenient ‘as if’ instrumentalism.114 According to Posner, economics is not reductionist but it builds models 109

Tamahana ‘How an Instrumental View of Law Corrodes the Rule of Law’,

op. cit. 110 Brian Z. Tamahana, ‘The Dark Side of the Relationship between the Rule of Law and Liberalism’ St. John’s Legal Studies Research Paper No. 08-0096 accessed 9 May 2017. 111 Tamahana, ‘How an Instrumental View of Law Corrodes the Rule of Law’, op. cit. 112 ‘Tap Dancing: The New Republic Online Debate between Richard A. Posner and Philip B. Heyman’ (01.31.2006), available on the Harvard Law School International Center for Criminal Justice website accessed 11 May 2017. 113 Tamahana, ‘How an Instrumental View of Law Corrodes the Rule of Law’, op. cit. 114 Friedman, op. cit., 3–16, 30–43.

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for predicting and controlling behavior, i.e. ‘economics imagines the individual not as “economic man,” but as – a pragmatist. As one who bases decisions not on sunk costs … but on the costs to be incurred and the benefits to be reaped from alternative courses of action that remain open’, and he then adds, ‘nothing in economics prescribes an individual’s goals … but whatever his goal or goals, some or for that matter all of which may be altruistic, he is assumed to pursue them in forward-looking fashion by comparing the opportunities open to him at the moment when he must choose’.115 The only problem being that, as demonstrated by behavioralists, this is simply not true. This does not deter Posner, though, who literally calls for an instrumental, ethics-free law devoted to milking the benefits of the free market,116 and, coherently with this position, he doubles down elsewhere with a staunch defense of moral relativism, stating that the only measure of morality is its contribution to survival or other synthetic, temporary or sectarian goals, and that what he calls ‘academic moralism’ is helpless when contradicted by self-interest.117 Again, this is solid argumentation by Posner, except for the fact that a great deal of research shows that moral judgments and at least one of their preconditions, to distinguish between intentionality and outcome, is present in humans by the age of eight months,118 hence it is part of our ‘pre-installed software’. Still, Posner is coherent with these ideas of his when speaking about the corporation, which he convincingly deems neither an experiment in democracy or solidarity nor a natural entity but an artifact, recognized and protected by the state, granted many of the same rights as persons, for the sole instrumental end of raising capital.119 And this is, in turn, consistent with the value of efficiency (or wealth maximization), the normative perspective upheld by Becker and Posner himself,120 which is, furthermore, as we have seen, the ideological matter of which economics is made of.

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15–16. 116

Ibid 403–404. Richard Posner, The Problematics of Moral and Legal Theory (Harvard University Press 2009) 6–7. 118 J. Kiley Hamlin, ‘Failed Attempts to Help and Harm: Intention Versus Outcome in Preverbal Infants’ Social Evaluations’ (September 2013) Cognition 128(3): 451–474 accessed 14 May 2017. 119 Posner, Overcoming Law, op. cit., 285–286. 120 Steven G. Medema, ‘From Dismal to Dominance? Law and Economics and the Values of Imperial Science, Historically Contemplated’ in Aristides 117

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All of the above brings us to Coase, the British-born American economist whose seminal essay ‘The Problem of Social Cost’ is one of the most cited articles in our field and is credited with the birth of the Coase Theorem, i.e. a centerpiece of the modern law and economics movement.121 What Coase says is that the legal system affects transaction costs and the goal of such a system is to minimize harm or costs, broadly conceived.122 From the latter it follows that in a world without transaction costs (where parties can bargain and make contracts without trouble) rights naturally flow into the hands of whoever will pay the most for them, and in the case of a legal dispute the highest bidder will be assigned rights by the law and will simply keep them, or will buy rights from whoever else they are assigned to.123 Law and economics as conceived nowadays is founded precisely on that idea, i.e. that the purpose of law is to serve as a substitute for the agreements people would reach with each other if they could, being concerned more about the cheapest solution rather than whoever has caused the problem, and this, in turn, is based on the assumption that people can bargain their way to waste-free results. Although there is ambiguity regarding what exactly transaction cost means,124 and, moreover, bargaining is not exactly easy in the real world,125 Coase recognizes such situations, and, accordingly, concludes that in such cases the authority handing out rights should aim at making a winner out of whoever values the rights more. It follows then that the Coasean view leans towards letting markets take care of bigger problems than lawsuits. Coase’s impact on law and economics as a school of thought would not be complete without considering ‘The Nature of the Firm’, which argues that all of a firm’s production decisions are a result of comparing

Hatzis and Nicholas Mercuro (eds), Law and Economics: Philosophical Issues and Fundamental Questions (Routledge 2015) 69. 121 Steven Medema and Richard Zerbe, ‘The Coase Theorem’ in B Bouckaert and G De Geest (eds), Encyclopedia of Law and Economics (Edward Elgar Publishing and University of Ghent 1996–2000) 836–892. 122 Ronald Coase, ‘The Problem of Social Cost’ (1960) Journal of Law and Economics 3: 1–44. 123 Ward Farnsworth, The Legal Analyst: A Toolkit for Thinking about the Law (Kindle Locations 1273–1274). University of Chicago Press Kindle Edition. 124 Douglas Allen, ‘Transaction Costs’ in B Bouckaert and G De Geest (eds), Encyclopedia of Law and Economics (Edward Elgar Publishing and University of Ghent 1996–2000) 893–926. 125 Farnsworth, op. cit.

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the marginal value of internal production against market transactions.126 The basic premise of Coase in ‘The Nature of the Firm’ is that the production of goods can be done by an entrepreneur without any organization around him or her, and that whenever more complex arrangements are necessary, following traditional economic theory, the market is efficient, and therefore it should always be cheaper to contract out with other entrepreneurs rather than hiring employees; nevertheless, Coase continues, there is a cost in doing transactions in the open market (search and information, bargaining, trade secrets, policing and enforcement, etc.) so a firm is originated whenever doing things internally avoids such costs.127 It follows, then, that management merely reacts to price changes by rearranging the factors of production under its control.128 From these foundations it can be inferred that a firm is no more than a web of private contracts, as externalizing production on the market is the alternative to internalizing it within a firm, a mere method of economic organization. This gives way to the nexus of contracts or contractual theory of the firm, which, in turn, is in stark contrast to the historical legal concept of the corporation as an entity created by the state, and, henceforth, stands opposed to state intervention.129 Furthermore, another expected ramification of this view is the separation of ownership and control, a concept first popularized by Berle and Means in their famous work The Modern Corporation and Private Property. Berle and Means argue that the dispersed owners of the modern corporation, who pool their resources into a firm precisely to produce goods and services at a bigger scale compared to simply contracting in the open market, do not have the incentive to control managers, who, in turn, act in their own interests.130 This is where the view that company law is all about aligning the interests of agents and principals within a firm comes from. Following up on the historical review of economics imperialism, the most revealing issue about Coase and his elegant theory is that they were not embraced by the mainstream until sufficiently reduced to the myth of 126 Herbert Hovenkamp, ‘Neoclassicism and the Separation of Ownership and Control’ (2009) Virginia Law and Business Review 4: 373; U Iowa Legal Studies Research Paper No. 08-52. 127 Ronald Coase, ‘The Nature of the Firm’ (2007, orig. 1937) Economica 4(16). 128 Ibid. 129 Henry Butler, ‘The Contractual Theory of the Corporation’ (1989) George Mason Law Review 11(4): 99–123; George Mason Law and Economics Research Paper No. 12-19. 130 Ibid.

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the optimizing individual – and Coase himself was vocal about inductivism as a better alternative to ‘blackboard economics’.131 It is not hard to see what Coase himself feared. The apparent triumph of the economic analysis of law grants hegemony to a profit-maximizing view which simplistically reduces the individual to how it organizes production, distribution, and consumption, i.e. the person as a self-aggrandizing profit and preference maximizer.132 And this commodification is in sharp contrast to law, which is at the core of the process of humanizing while civilizing the human being. When Parisi quotes Coase saying that the cohesiveness of economic techniques allows economics to move into another field, such as law, and intellectually dominate it,133 it is forgotten that the approach of economics is built on testable models derived by means of logical deduction and then tested empirically, while legal analysis, at least in the Anglo-American tradition, is inductive. This clash seems to completely escape the minds of a cheerleading group of lawyers (surely anxious to belong to the esoteric circle of ‘economic experts’) who have even gone so far as to claim that corporate law has reached its end and is basically dead, for the primacy of the shareholder model has triumphed and the convergence of corporate governance regimes is irreversible – which means, basically, that there is no point discussing it anymore.134 In a best case scenario, this is evidently silly, and, in a worst case scenario, it is anti-intellectual and the stuff of an Orwellian thoughtcrime-like totalitarianism. As Berle and Means acknowledge: The rise of the modern corporation has brought a concentration of economic power which can compete on equal terms with the modern state – economic power versus political power, each strong in its own field. The state seeks in some aspects to regulate the corporation, while the corporation, steadily 131

Milonakis and Fine, op. cit., 305. Jane Radin and Madhavi Sunder, ‘The Subject and Object of Commodification’, in Martha Ertman and Joan Williams (eds), Rethinking Commodification: Cases and Readings in Law and Culture (New York University Press 2005) accessed 14 May 2017. 133 Francesco Parisi, ‘Positive, Normative and Functional Schools in Law and Economics’ (2004) European Journal of Law and Economics 1(3): 259–272; George Mason Law and Economics Research Paper No. 04-22. 134 Henry Hansmann and Reinier Kraakman, ‘The End of History for Corporate Law’ Yale Law School Working Paper No. 235; NYU Working Paper No. 013; Harvard Law School Discussion Paper No. 280; Yale SOM Working Paper No. ICF-00-09, January 2000 accessed 16 May 2017. 132

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becoming more powerful, makes every effort to avoid such regulation. Where its own interests are concerned, it even attempts to dominate the state. The future may see the economic organism, now typified by the corporation, not only on an equal plane with the state, but possibly even superseding it as the dominant form of social organization.135

Therefore, if not out of intellectual honesty then at least based on sheer pragmatic reasons it is urgent to recognize the highly political nature of company law, to study and debate it, for ‘to make good company law is a question of how to make good society’.136 There is little or nothing of a ‘value free science’ in economics, from theory choice and the assumptions of economics about individual behavior to equilibria and efficiency,137 hence it is fair game to meet it in the arena of value judgments.

4. THE REFRAMING GOALPOSTS Why do businesspeople transact through a firm instead of doing it in the open market? Before Ronald Coase’s paper ‘The Nature of the Firm’, economists considered that ownership and institutions neither affected the objective of the firm nor its knowledge base, technology or cost efficiency, mostly because ‘market-contracting perfectly solves all incentive and coordination issues’.138 The Coasian view is that there are high costs in contracting repeatedly in the open market and that it incentivizes unrelated parties to behave opportunistically against each other. Henceforth, the orthodoxy says that in a firm participants have less leeway to be opportunistic, enabling transacting parties to find an equilibrium since the legal entity holds the firm’s assets while diversifying the risks of the shareholders and delegating control rights to management as a means of incentivizing risk taking.139 Moreover, the firm relative to the market 135 Adolf Berle and Gardiner Means, The Modern Corporation and Private Property (reprint edn, Transaction Publishers 1991) 44. 136 Jukka Mähönen, ‘Do We Need Law and Economics in Company Law?’ (2009) Nordisk Tidsskrift For Selskabsret, Nr. 1/2: 146–157. 137 Medema, ‘From Dismal to Dominance?’, op. cit. 138 Nicolai J. Foss and Peter G. Klein, ‘The Emergence of the Modern Theory of the Firm’ (January 2006) Center for Strategic Management and Globalization, Copenhagen Business School, 12 accessed 17 May 2017. 139 Erik Vermeulen, ‘The Role of the Law in Developing Efficient Corporate Governance Frameworks’ in Corporate Governance of Non-Listed Companies in Emerging Markets (OECD Publishing 2006) 96.

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provides the certainty through continuous transacting, i.e. the continuity of association among input owners.140 This particular raison d’être for firms has two dimensions, i.e. the principal-agent divide and the aspect of the incomplete contracts. The separation between ownership and control in terms of a principal on one side (investors/outsiders) and an agent on the other (manager/insider)141 triggers the issue of information asymmetries, opportunistic behavior (again!), strategic bargaining, and transaction costs vis-à-vis incomplete contracts142 – because, after all, with perfect and costless contracting firms would be unnecessary,143 or so the theory goes. Furthermore, this view is nested in the conception that a firm is nothing other than a nexus of contracts.144 Besides bringing to the fore the debate on the economic rationale of contract regulation and claiming to be descriptive, this theoretical approach narrows down company law to the governance of corporations, i.e. looking through the lens of agency relationships among contractual parties and the related problems of agency costs among them.145 There are important implications to such a framework, not the least that it monopolizes most of the liters of ink spent on writing about corporate governance. The most notorious one is the dichotomy of shareholder primacy (contractarian view or property model)146 as opposed to stakeholder primacy (communitarian view or entity model).147 Agency theory is, actually, cemented on such a split, with its variations,

140

Foss and Klein, op. cit. Jean Tirole, ‘Corporate Governance’ Centre for Economic Policy and Research, London. Discussion Paper No. 2086. February, 1999, 1. 142 Oliver D. Hart ‘Norms and the Theory of the Firm’ (May 2001 Harvard Institute of Economic Research Paper No. 1923; Harvard Law and Economics Discussion Paper No. 326. page 2) accessed 19 May 2017. 143 Foss and Klein, op. cit. 144 Hovenkamp, op. cit. 145 Stefano Lombardo and Piero Pasotti, ‘Disintegrating the Regulation of the Business Corporation as a Nexus of Contracts: Regulatory Competition vs. Unification of Law’ (March 2008) European Corporate Governance Institute – Law Working Paper No. 102/2008 accessed 21 May 2017. 146 Tirole, op. cit., 3. 147 Mähönen, op. cit. 141

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for example: is the key agency problem between financiers and management or between financiers, between minority shareholder and controlling shareholders, or between firm insiders and outsiders?148 This is a reflection of how the firm has impacted classical economic theory, as Berle affirms when saying that the firm shifted the management function from entrepreneurial capitalist owners into administrators.149 The way corporate governance is studied, the framing of the problem offers its own conclusions, i.e. ‘the contemporary corporate governance debate is concerned primarily with the design of a legal, institutional and regulatory framework that helps protect weak and widely dispersed shareholders against self-interested managers’.150 Some outliers place both managers and controlling shareholders within the classification of ‘insiders’ as opposed to creditors and outside investors, as in the case of La Porta, Lopez-de-Silanes, Shleifer and Vishny, who define corporate governance as ‘a set of mechanisms through which outside investors protect themselves against expropriation by the insiders’.151 Figure 1.2 shows the skeleton of agent theory, the assumptions on which it rests, and its implications. This is the level of analysis which, at the core, will be found in all corporate governance books, particularly those churned out in legal academia. Henceforth, it shall be the structure that we will hold against the light of other approaches in order to demonstrate that, as obvious as it may sound, there is no such thing as settled science in the realm of political philosophy.

148 Enrique Rueda-Sabaer, ‘Corporate Governance: And the Bargaining Power of Developing Countries to Attract Foreign Investment’ (2000) Corporate Governance: An International Review 8(2): 117–124. Blackwell Publishers Ltd. 121. 149 Adolf A. Berle, ‘The Impact of the Corporation on Classical Economic Theory’ in Thomas Clarke (ed.), Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance (Routledge 2007) 44. 150 Vermeulen, op. cit., 92. 151 Rafael La Porta, Florencio Lopez-de-Silanes, et al., ‘Investor Protection: Origins, Consequences, Reform’ (October 1999 Harvard Institute for Economic Research, Harvard University. Discussion Paper Number 188) accessed 24 May 2017.

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Figure 1.2 Agency theory

BIBLIOGRAPHY Books Allen, Douglas, ‘Transaction Costs’ in B. Bouckaert and G. De Geest (eds), Encyclopedia of Law and Economics (Edward Elgar Publishing and University of Ghent 1996–2000) Arestis, Philip and Malcolm Sawyer (ed.), A Biographical Dictionary of Dissenting Economists (Edward Elgar Publishing 2000) Ayres, Robert, Turning Point: An End to the Growth Paradigm (Earthscan 1998) Berle, Adolf A., ‘The Impact of the Corporation on Classical Economic Theory’ in Thomas Clarke (ed.), Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance (Routledge 2007) Berle, Adolf and Gardiner Means, The Modern Corporation and Private Property (reprint edn, Transaction Publishers 1991) Bitterman, H.J. ‘Adam Smith’s Empiricism and the Law of Nature, Parts I–II’ in John Cunningham Wood (ed.), Adam Smith: Critical Assessments (Routledge 1993) Caldwell, Bruce, Beyond Positivism (Routledge 1994) Cannon, John, Aristocratic Century: The Peerage of Eighteenth-Century England (Cambridge University Press 1984) Chang, Ha-Joon, Economics: A User’s Guide (Penguin 2014) Cohen, Mitchell et al. (ed.) Princeton Readings in Political Thought (Princeton University Press 1996)

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Collison Black, R.D., ‘Jevons, Marshall and the Utilitarian Tradition’ in Frank Ackerman et al. (eds), Human Well-Being and Economic Goals (Island Press 1997) Deane, Phyllis, The Evolution of Economic Ideas (Cambridge University Press 1993) Diggins, John P., Thorstein Veblen: Theorist of the Leisure Class (Princeton University Press 1999) Fleck, Ludwik, Genesis and Development of a Scientific Fact (University of Chicago Press 1979) Foster, Nicholas H.D., ‘The Theoretical Background: The Nature of the Actors in Corporate Social Responsibility’ in Stephen Tully (ed.), Research Handbook in Corporate Legal Responsibility (Edward Elgar Publishing 2005) Friedman, Milton, ‘The Methodology of Positive Economics’ in Essays in Positive Economics (University of Chicago Press 1966) Gauch, Hugh G., Scientific Method in Practice (Cambridge University Press 2003) Gottheil, Fred M., Principles of Economics (Cengage Learning 2012) Graeber, David, Debt: The First 5,000 Years (Melville House 2012) Griswold Jr., Charles L., Adam Smith and the Virtues of Enlightenment (Cambridge University Press 1999) Hankins, Thomas L., Science and the Enlightenment (Cambridge University Press 1985) Harford, Tim, The Logic of Life (Abacus 2009) Hausman, Daniel, The Inexact and Separate Science of Economics (Cambridge University Press 1992) Hayek, Friedrich, Individualism and Economic Order (University of Chicago Press 1958) Hodgson, Geoffrey M., The Evolution of Institutional Economics: Agency, Structure and Darwinism in American Institutionalism (Routledge 2004) Hont, I. and Ignatieff, M., Wealth and Virtue: The Shaping of Political Economy in the Scottish Enlightenment (Cambridge University Press 1983) Kahneman, Daniel, Thinking, Fast and Slow (Penguin, 2011) Keen, Steve, Debunking Economics: The Naked Emperor Dethroned? (Zed Books 2011) Kuhn, Thomas S., ‘The Structure of Scientific Revolutions’ (University of Chicago Press 2012) Lipsey, Richard and Harbury, Colin, First Principles of Economics (2nd edn, Oxford University Press 2004) Maas, Harro, William Stanley Jevons and the Making of Modern Economics (Cambridge University Press 2005) MacKaay, Ejan, ‘History of Law and Economics’ in B Bouckaert and G De Geest (eds), Encyclopedia of Law and Economics (Edward Elgar Publishing and University of Ghent 1996–2000) Mackie, Christopher, Canonizing Economic Theory: How Theories and Ideas are Selected in Economics (Routledge 2015) Mankiw, Gregory, Principles of Economics (South-Western 2012) Marshall, Alfred, Principles of Economics (unabridged 8th edn, Cosimo 2009)

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Medema, Steven and Richard Zerbe, ‘The Coase Theorem’ in B. Bouckaert and G. De Geest (eds), Encyclopedia of Law and Economics (Edward Elgar Publishing and University of Ghent 1996–2000) Medema, Steven G., ‘From Dismal to Dominance? Law and Economics and the Values of Imperial Science, Historically Contemplated’ in Aristides Hatzis and Nicholas Mercuro (eds), Law and Economics: Philosophical Issues and Fundamental Questions (Routledge 2015) Medina, Roberto, Principles of Economics (Rex 2003) Menger, Carl, Investigations into the Method of the Social Sciences with Special Reference to Economics (Mises Institute 2009) Menger, Carl, The Origins of Money (Ludwig von Mises Institute 2009) Mill, John Stuart, Principles of Political Economy with Some of their Applications to Social Philosophy (London 1871) Milonakis, D. and B. Fine, From Political Economy to Economics: Method, the Social and the Historical in the Evolution of Economic Theory (Routledge 2009) Milton, John, Paradise Lost [Kastan edition] (first published 1667, Hackett 2005) Muthu, Sankar, Enlightenment against Empire (Princeton University Press 2003) Polanyi, Karl, The Great Transformation: The Political and Economic Origins of Our Time (Beacon Press 2002) Posner, Richard A., Overcoming Law (Harvard University Press 1995) Posner, Richard A., Frontiers of Legal Theory (Harvard University Press 2004) Posner, Richard A., The Problematics of Moral and Legal Theory (Harvard University Press 2009) Radin, Jane and Sunder, Madhavi, ‘The Subject and Object of Commodification’, in Martha Ertman and Joan Williams (eds), Rethinking Commodification: Cases and Readings in Law and Culture (New York University Press 2005) Rist, Gilbert, The Delusion of Economics: The Misguided Certainties of a Hazardous Science (Zed Books 2001) Rosen, Michael, ‘The Marxist Critique of Morality and the Theory of Ideology’ in Edward Harcourt (ed.), Morality, Reflection and Ideology (Oxford University Press 2000) 21–43 Samuels, Warren, The Founding of Institutional Economics (Routledge 1998) Samuelson, Paul, Economics (19th edn, McGraw-Hill 2000) Schumpeter, Joseph A., History of Economic Analysis (Routledge 1997) Shaw, William H., Marx’s Theory of History (Stanford University Press 1978) Sloth Andersen, Esben, Schumpeter’s Evolutionary Economics: A Theoretical, Historical and Statistical Analysis of the Engine of Capitalism (Anthem 2009) Veblen, Thorstein, The Theory of Business Enterprise (Blackmask 1999) Vermeulen, Erik, ‘The Role of the Law in Developing Efficient Corporate Governance Frameworks’ in Corporate Governance of Non-Listed Companies in Emerging Markets (OECD Publishing 2006) Vickers, Douglas, Economics and Ethics: An Introduction to Theory, Institutions and Policy (Praeger 1997) von Mises, Ludwig, Human Action: A Treatise in Economics (The Scholar’s edn, Ludwig von Mises Institute 1998) von Wieser, Friedrich, Social Economics (Greenberg 1927) Walras, Léon, Elements of Pure Economics (Routledge 2003)

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Weber, Max, Economy and Society: An Outline of Interpretive Sociology (University of California Press 1978)

Papers Adami, Christoph and Arend Hintze, ‘Evolutionary Instability of Zerodeterminant Strategies Demonstrates that Winning is Not Everything’ (2011) Nature Communications 4, Nature Publishing Group accessed 8 May 2017 Brian, Arthur W., ‘Inductive Reasoning and Bounded Rationality’ (1994) The American Economic Review 84(2): 406–411 Bristow, William, ‘Enlightenment’ in Edward N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (2011) https://plato.stanford.edu/archives/sum 2011/entries/enlightenment/> accessed 17 April 2017 Butler, Henry, ‘The Contractual Theory of the Corporation’ (1989) George Mason Law Review 11(4): 99–123; George Mason Law and Economics Research Paper No. 12-19. Cat, Jordi, ‘The Unity of Science’ in Edward N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (2017) accessed 1 May 2017 Cliffe Leslie, T.E., ‘The Political Economy of Adam Smith’ Fortnightly Review, 1 November 1870 accessed 21 April 2017 Coase, Ronald, ‘The Nature of the Firm’ (2007, orig. 1937) Economica 4(16) Coase, Ronald, ‘The Problem of Social Cost’ (1960) Journal of Law and Economics 3: 1–44 Deane, Phyllis, ‘The Scope and Method of Economic Science’ (1983) The Economic Journal 93(369): 1–12 Foss, Nicolai J. and Peter G. Klein, ‘The Emergence of the Modern Theory of the Firm’ (January 2006) Center for Strategic Management and Globalization, Copenhagen Business School, p. 12 accessed 17 May 2017 Green, Leslie, ‘Law as a Means’ HART-FULLER AT 50, Peter Cane, ed., Oxford: Hart Publishing; Oxford Legal Studies Research Paper No. 8/2009 accessed 13 May 2017 Hamlin, J. Kiley, ‘Failed Attempts to Help and Harm: Intention Versus Outcome in Preverbal Infants’ Social Evaluations’ (2013) Cognition 128(3): 451–474 accessed 14 May 2017 Hansmann, Henry and Reinier Kraakman, ‘The End of History for Corporate Law’ (2000) Yale Law School Working Paper No. 235; NYU Working Paper No. 013; Harvard Law School Discussion Paper No. 280; Yale SOM Working Paper No. ICF-00-09, January 2000 accessed 16 May 2017 Hart, Oliver D., ‘Norms and the Theory of the Firm’ (May 2001) Harvard Institute of Economic Research Paper No. 1923; Harvard Law and Economics Discussion Paper No. 326, p. 2 accessed 19 May 2017

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Häuser, Karl, ‘Historical School and “Methodenstreit”’ (1988) Journal of Institutional and Theoretical Economics 144(3): 532–542 Heath, Joseph, ‘Methodological Individualism’ in The Stanford Encyclopedia of Philosophy (2011) accessed 6 May 2017 Henrich, Joseph, Robert Boyd, et al., ‘In Search of Homo Economics: Behavioral Experiments in Fifteen Small-Scale Societies’ (May 2011) The American Economic Review 91(2): 73–78 Hollinger, David A., ‘The Accommodation of Protestant Christianity with the Enlightenment: An Old Drama Still Being Enacted’ [Winter 2012] Dædalus, the Journal of the American Academy of Arts and Sciences 141(1): 11 Hovenkamp, Herbert, ‘Neoclassicism and the Separation of Ownership and Control’ (2009) Virginia Law and Business Review 4: 373; U Iowa Legal Studies Research Paper No. 08-52 Humphrey, Caroline, ‘Barter and Economic Disintegration’ (Mar., 1985) Man, New Series, 20(1): 48–72 Jay Epstein, Edward, ‘Warren Buffet’s Hidden Stake in Financial Weapons of Mass Destruction’ (February 2009) Vanity Fair accessed 6 May 2017 Kahneman, Daniel ‘Biographical’ (Nobel Media, 2014) accessed 11 July 2017 Kahneman, Daniel and Amos Tversky, ‘Prospect Theory: An Analysis of Decision Under Risk’ (1979) Econometrica 47(2): 263 Kornhauser, Lewis, ‘The Economic Analysis of Law’ in Edward N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (Fall 2011 Edition) accessed 3 November 2012 Kubiszewski, Ida, ‘Beyond GDP: Measuring and Achieving Global Genuine Progress’ (April 2013) Ecological Economics 93: 57–68 accessed 2 May 2017 La Porta, Rafael, Florencio Lopez-de-Silanes, et al., ‘Investor Protection: Origins, Consequences, Reforms’ (October 1999) Harvard Institute for Economic Research, Harvard University. Discussion Paper Number 188 accessed 24 May 2017 Lombardo, Stefano and Piero Pasotti, ‘Disintegrating the Regulation of the Business Corporation as a Nexus of Contracts: Regulatory Competition vs. Unification of Law’ (March 2008) European Corporate Governance Institute – Law Working Paper No. 102/2008 accessed 21 May 2017 Louzek, Marek, ‘The Battle of Methods in Economics. The Classical Methodenstreit – Menger vs. Schmoller’ (2011) American Journal of Economics and Sociology 70: 439–463 Mähönen, Jukka, ‘Do We Need Law and Economics in Company Law?’ (2009) Nordisk Tidsskrift For Selskabsret, Nr. 1/2: 146–157

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Parisi, Francesco, ‘Positive, Normative and Functional Schools in Law and Economics’ (2004) European Journal of Law and Economics 1(3): 259–272; George Mason Law and Economics Research Paper No. 04-22 Rodrigo, G. Chris, ‘Micro and Macro: The Economic Divide’ (2012) International Monetary Fund, Finance and Development, 31 January accessed 6 May 2017 Rueda-Sabaer, Enrique, ‘Corporate Governance: And the Bargaining Power of Developing Countries to Attract Foreign Investment’ (2000) Corporate Governance: An International Review 8(2): 117–124. Blackwell Publishers Ltd.

Saiman, Chaim N., ‘Jesus’ Legal Theory – A Rabbinic Interpretation’ Villanova Law/Public Policy Research Paper No. 2007-15; (2007–2008) Journal of Law and Religion, 23: 97 accessed 10 May 2017 Tamahana, Brian Z., ‘How an Instrumental View of Law Corrodes the Rule of Law’ (2007) DePaul Law Review 56; St. John’s Legal Studies Research Paper No. 06-0061 accessed 11 May 2017 Tamahana, Brian Z., ‘The Dark Side of the Relationship between the Rule of Law and Liberalism’ St. John’s Legal Studies Research Paper No. 08-0096 accessed 9 May 2017 ‘Tap Dancing: The New Republic Online Debate between Richard A. Posner and Philip B. Heyman’ (01.31.2006), available on the Harvard Law School International Center for Criminal Justice website accessed 11 May 2017 Thaler, Richard, ‘Toward a Positive Theory of Consumer Choice’ (1980) Journal of Economic Behavior and Organization 39–60 Tirole, Jean, ‘Corporate Governance’ Centre for Economic Policy and Research, London. Discussion Paper No. 2086. February, 1999, 1

Electronic Sources Farnsworth, Ward, The Legal Analyst: A Toolkit for Thinking about the Law (Kindle Locations 1273–1274). University of Chicago Press Kindle Edition Freakonomics Radio, ‘The Men Who Started a Thinking Revolution’ (4 January 2017) 3:47–3:55, comments by Stephen J. Dubner, podcast host accessed 11 July 2017

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2. Do not trust anyone who tells you it is the end of history 1. THE PROBLEM OF DEFINITION AND PURPOSE … AT THE MARGIN The whole edifice of corporate governance as a field of study is built around the network of concepts circling agency theory, as illustrated in Figure 1.2 in the previous chapter. This second chapter will take head-on the rationale of one of the pillars on which it rests, i.e. the nexus of contracts. Or, better understood, it will attempt to show that, if the Coasian explanation of firms may be useful at some level, it is just one single tool of analysis among many possible ones – and, moreover, stubbornly using it to spin the whole universe of company law is reductionist and thus dangerous, for it shapes policies that rely solely on one theoretical framework. So, what is a corporation? The problem starts with the fact that to define is to affirm with certain precision the properties contained in the phenomenon that is to be defined – and jurisprudence, as any other honest field, has more questions than answers.1 After all, that is one, if not the primordial, focus of jurists – to discover the meaning of law and the preconditions for its validity2 – and a corporation is a legal beast that requires definition in order to have meaning and purpose. A first attempt at defining is denotation, or making a referential relation between words and things, although this represents a problem when we are dealing with fictional concepts like a company. Doing so would leave us with Riley’s caricature of the Fido-Fido theory, i.e. the meaning of the term Fido is the dog Fido.3 Let’s discard, then, that attempt at denoting a corporation. 1

L.B. Curzon, Jurisprudence (Cavendish 1995) 2–3. Anthony D’Amato, A Descriptive and Normative Analysis of Law (Nijhoff 1984) 181. 3 Lawrence D. Roberts, How Reference Works: Explanatory Models for Indexicals, Descriptions, and Opacity (State University of New York Press 1993) 2. 2

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As H.L.A. Hart put it, the problem with concepts like corporation is that there is simply no straightforward counterpart in the world of fact, and trying to denote it causes one to err by, for example, saying a corporation is a series or aggregate of persons.4 That is why in jurisprudence, at least of the positivist type, there is an inclination towards shunning denotation in exchange for usage, following Wittgenstein and his analogy between the meaning of a word and the power of a chess piece, i.e. just as a chess piece has significance only within the confines of a move and under certain rules,5 so does a word have meaning. However, by discussing legal objects and deciding that there aren’t any,6 we are left without a reference point and bound to just list uses ad nauseam – which is absurd, at best, and useless, at worst. It is more sensible to subscribe to a further evolved notion of positivism, one that recognizes that ideal entities (birthed by norms) have a connection with material existence, i.e. first, they blossom from real, tangible acts (psychic, of understanding, and of will), and, second, they have temporal and spatial coordinates.7 This positivist concession ironically places us right in front of a third option for defining the corporation, i.e. Aristotelian essentialism. However, since the character of the essential properties in the Aristotelian theory are difficult to pin down,8 for the moment it is easier to brush aside metaphysics9 and, keeping the Wittgensteinian approach of usage as a useful corollary, analyze the different views on the corporation under the structure Definiendum = genus + differentia

4

H.L.A. Hart, Essays in Jurisprudence and Philosophy (Oxford University Press 1983) 23. 5 G. Baker and P. Hacker, Wittgenstein: Understanding and Meaning: Volume 1 of an Analytical Commentary on the Philosophical Investigations. Part I – Essays (2nd edn, Blackwell 2005) 52–53. 6 Robert Birmingham, ‘Hart’s Definition and Theory in Jurisprudence Again’ (1984) Faculty and Papers, 67 accessed 28 May 2017. 7 Neil MacCormick and Ota Weinberger, An Institutional Theory of Law: New Approaches to Legal Positivism (Springer 1986) 37–38. 8 James Fetzer, ‘Aspects of the Theory of Definition’ in J.H. Fetzer, D. Shatz et al. (eds), Definitions and Definability: Philosophical Perspectives (Springer 1991). 9 Robin Smith, ‘Aristotle’s Logic’ in Edward N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (Spring 2017) accessed 27 May 2017.

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where definiendum is the concept to be defined, the genus is the category of which the definiendum is a part, and the differentia is the group of characteristics that set the definiendum apart from other members of the genus. Armed with such a framework, let’s examine the question of definition through various approaches. The obliged first is Coase’s ‘The Nature of the Firm’, which says that a corporation is a bundle (nexus) of contracts within which the direction of resources does not obey the price mechanism, and its purpose is to reduce transaction costs and the uncertainty found in the open market10 – a position that, as we have seen, is also found in Jensen and Meckling as well as other authors, which even reduces a corporation to a mere aggregation of people banded together for a longer period and the characteristics as no more than abbreviations to better organize production.11 Others, like Monks and Minow, define the corporation as ‘a structure established by law to allow different parties to contribute capital, expertise, and labor for the maximum benefit of all of them’,12 while some secondary texts echo Posner in emphasizing the key role of pooling capital geared towards for-profit activities.13 One paradigmatic offshoot of agency theory and the whole law and economics approach, however, is The Anatomy of Corporate Law by Kraakman, Armour, Hansmann, et al., which defines the corporation as a legal form possessing five core attributes (legal personality, limited liability, transferable shares, centralized management under a board structure, and share ownership by contributors of capital), and the prime role of corporate law as providing businesses with such legal form.14 This is an interesting enrichment of the merely economic approach taken by Jensen, Meckling, Coase & Co., as it summarizes the efficiency enhancement role presupposed by law and economics and adds a coat of functionalism in the form of legalese. This is, by far, the most mature law and economics analytical framework of the corporation. 10

Ronald Coase, ‘The Nature of the Firm’ (2007, orig. 1937) Economica

4(16). 11 Frank Easterbrook and Daniel Fischel, ‘The Corporate Contract’ (1989) Columbia Law Review 1416. 12 Robert Monks and Nell Minow, Corporate Governance (Wiley & Sons 2011) 6–12. 13 A.C. Fernando, Corporate Governance: Principles, Policies and Practices (Pearson 2006) 43. 14 Reinier Kraakman, John Armour, et al., The Anatomy of Corporate Law: A Comparative and Functional Approach (2nd edn, Oxford University Press 2009) 2–6.

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When speaking of the legal form in the genus, as it is a functionalist definition, Kraakman, et al. tie it up to the first component of their differentia, i.e. legal personality. When tweaking the definition of the corporation from a nexus ‘of’ contracts into a nexus ‘for’ contracts, legal personality emerges as a paramount feature, as the state-sanctioned birth of a new person (the corporation), with its own patrimony, allows it to be a single counterparty to the many contracts which ‘make’ the corporation, and, furthermore, when added to the second characteristic (limited liability), spawns what they term an asset partitioning regime.15 Under this regime, the shareholders cannot withdraw their assets from the new person’s patrimony at will, and the assets of the corporation are protected from the creditors of the owner and vice versa. Moreover, it follows from the premise that the corporation is a nexus for contracts, that the function of legal personality must be completed by rules on who has the authority to bind the corporation (as it is not a person with its own will) and what is the procedure to sue and be sued. The last three characteristics are a logical continuation of the foundational rationale, i.e. if the corporation is owned by those who have contributed capital, property is by definition transferable, and if such transferability causes (as it tends to do) atomization of ownership then control is diffuse, so the latter ought to be delegated to management – all of which, in turn, guarantees the perpetuity of the corporation regardless of the limited lifespan of the physical persons involved with it from time to time. Coherent with the ethos of agency theory, then, the instrumental raison d’être contained in the definition is to lower the cost of conducting business.16 So far, for the definiendum at hand we have three types of genus, i.e. a legal form, an aggregate of people, and a bundle of agreements. The differentia, on the other hand, has shown a narrower range, on one side enumerating pooling of resources for doing business and on the other the enumeration of legal characteristics. All of it, then, contained within the instrumental view of cost reduction (mainly of transacting and monitoring) and better allocation of risk. In all fairness, this framework of analysis for the corporation works very well and clearly at this level, and it is the outline which many of us use as starting point when lecturing in the classroom. What it lacks, of course, is the richness of other levels of analysis, a variety of assumptions under other ideological platforms, and the ethical dimension as to the desirability of many of the features contained therein. Thus, we shall try to build other extended definitions 15 16

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by other approaches, starting with Veblen’s institutionalism. The reason for using Veblen’s approach is that it provides a more contrasting view, particularly in terms of his rejection of methodological individualism,17 one of the many features in which the so-called ‘new institutionalism’ has capitulated.18

2. VEBLEN, MARX, AND THE MINISTRY OF SILLY WALKS Between Marx and the currently dominant theory of the firm there was Thorstein Veblen, who saw the firm as an arena of sorts where the friction between evolutionary material forces influences and shapes the social determinants of value – rather than as a producer of value per se.19 As someone bent on building a theory of the development of human nature on the lines of Darwinian evolutionary biology, Veblen aims at describing a cumulative sequence of economic institutions stated in terms of the process itself.20 As shown in Figure 2.1, the first institutions defined by Veblen are habits of thought common to all persons. They are determined by a myriad of circumstances such as genes, tradition, occupation, etc. This is where Veblen breaks with the hedonistic rationality of marginalists as well as the rationality of Marx’s conscious class struggle,21 connecting institutions with preferences and tastes. However, since Veblen’s theory aims to be dynamic rather than static, it adds an innate proclivity to further the life of the species by means of purposeful action,22 and, based 17

Dimitris Milonakis and Ben Fine, From Political Economy to Economics: Method, the Social and the Historical in the Evolution of Economic Theory (Routledge 2009) 159–162. 18 Eirik Furubotn and Rudolf Richter (eds), The New Institutional Economics (J.C.B. Mohr 1991) 4; or Victor Nee and Richard Swedberg, ‘Economic Sociology and New Institutional Economics’ in Claude Menard and Mary Shirley (eds), Handbook of New Institutional Economics (Springer 2005) 799. 19 Marc-André Gagnon, ‘Shaping the Social Determinants of Value Through Economic Ghost Management’ in Tae-Hee Jo and Fredric Lee (eds), Marx, Veblen, and the Foundations of Heterodox Economics: Essays in Honor of John F. Henry (Routledge 2016). 20 Thorstein Veblen, ‘Why is Economics not an Evolutionary Science?’ (July 1898) The Quarterly Journal of Economics 12(4): 373–397 accessed 4 June 2017. 21 Milonakis and Fine, op. cit., 164. 22 Thorstein Veblen, The Instinct of Workmanship (Routledge 1994) 5–6.

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on that, identifies three drives in human behavior: (a) to turn things to human use, or workmanship; (b) to try to explain the world through imagination, or idle curiosity; and (c) to be interested in the welfare of others, or parental bent.23 These, and particularly workmanship, are what is behind the transition from myths into scientific spirit, and what ultimately determines technological advances and modern industry, and, with it, social change. These products of the interplay between habits of thought and instinctive drives have other consequences as well, for they give rise to the concept of ownership and, with it, the birth of predatory culture and the leisure class, with its distinctive (negative) instincts, i.e.: (a) conspicuous consumption, or the purchase of goods not to subsist but to retain self-esteem among peers; (b) pecuniary emulation, or wasteful accumulation with the aim of living up to the accepted canons of decency in the kind, amount and grade of goods consumed;24 and (c) antipathy for useful effort. In this respect, Veblen echoes Rousseau by identifying the passage from barbarism to civilization as the ruin of mankind.25 Also, it is how Veblen explains self-interest as culturally driven,26 for instincts interplay with each other against the backdrop of dynamic habits of thought and throughout an evolving landscape. The latter is the foundation on which Veblen describes the basis of modern civilization, i.e. the institutions of industrial process and business enterprise, constantly in friction, and, through it, moving modern culture. Again, referring to Figure 2.1, the heritage of the business enterprise is the leisure class and the negative instincts based on the idea of ownership, hence it is driven by pecuniary gain via purchase and sale, and its outcome is wealth accumulation.27 By contrast, the industrial process is formed by what Veblen calls ‘efficiency engineers’, driven by workmanship via the method of standardization, precision and explaining facts through cause and effect, with the outcome of technological advance. It is this rationale that animates Veblen to yet another term of his coinage, absentee ownership, or continuous receipt of income without work; moreover, it puts into motion evolving habits of thought for both material forces – the business enterprise leaning towards tradition, natural rights 23

Ibid. Thorstein Veblen, The Theory of the Leisure Class (Renaissance Classics 2012) 87. 25 Jean-Jacques Rousseau, A Discourse on the Origin of Inequality (Dover 2004) 34. 26 Milonakis and Fine, op. cit. 27 Thorstein Veblen, The Theory of the Business Enterprise (Cosimo 2005) 16. 24

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Figure 2.1 Veblen’s institutionalism and custom, hence conservativism, and the industrial classes moving in an iconoclastic, materialist direction. And this is where Veblen’s main contribution to the theory of the firm resides, i.e. the concept of goodwill and the characteristics which are today assigned to the corporation. For Veblen, goodwill is a product of his cumulative and evolutionary economic theory, based on the interplay of material forces and the peculiarities of the leisure class, comprising such things as business relations, reputation, public contracts, exploitation rights and privileges, and intellectual property – all of them factors that provide their owners with a competitive advantage but have no aggregate value to the community.28 The increase of such goodwill is then the trigger which moves the business enterprise from older forms into the modern corporation, based on its method of capitalization and freer use of credit. Like the modern characteristics of the agency theory of the firm, Veblen foresaw ownership by capital investors, although he linked that ownership more deeply to the goodwill deposited and handled by the corporation itself, and, presciently, he spoke of the separation between management and the ownership of industrial equipment.29 Furthermore, by emphasizing the role of groups as repositories of knowledge and

28 29

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linking such repositories to habits of thought,30 Veblen’s thinking is perhaps as close as it gets to a Darwinian economic theory. There are indeed, several points of contact but also divergences between Marx and Veblen. For starters, Marxist materialism is, in Veblen’s conception, distorted by the hyper rationalism of a conscious class struggle as the fundamental mover of social change – which in turn is an heir of Benthamite hedonism and drives Marx in a teleological, conscious, and goal-oriented direction that contrasts with the open-ended, cause and effect Darwinian conception of evolution.31 This also sets Veblen’s institutionalism apart by providing a rationale for how institutions affect tastes and preferences, while his institution of class, based on occupation, also diverges from Marx’s, based on the possession (or not) of the means of production and wealth.32 As Veblen himself puts it: It is a question not so much of possessions as of employments; not of relative wealth, but of work. It is a question of work because it is a question of habits of thought, and work shapes the habits of thought. The socialists themselves construe the distinction to be a distinction in respect of habits of thought; and habits of thought are made by habits of life rather than by a legal relation to accumulated goods.33

This is right behind the tripartite class distinction of Veblen between: (a) upper predatory, or an aristocracy whose wealth is not a product of work; (b) middle business, whose wealth comes from commerce; and (c) lower industrial, whose wealth comes from workmanship. Although both Veblen and Marx blurred the lines between the social sciences, and Veblen’s dichotomy between business enterprise and the industrial process resembles Marx’s base and superstructure materialist conception of history, the (apparently) descriptive rationale by Veblen contrasts with the normative underbelly of Marxist thought. Marx saw the firm as a crucial artifact where exploitation and alienation of the labor force took place under the division of labor mechanism, yet he called for the extension of the deliberate order of the firm to society as a whole,

30

Geoffrey M. Hodgson, ‘Veblen, Commons and the Theory of the Firm’ in Michael Dietrich and Jackie Krafft (eds), Handbook on the Economics and Theory of the Firm (Edward Elgar Publishing 2012) 56–57. 31 Milonakis and Fine, op. cit., 162–164. 32 Ibid 170. 33 Veblen, The Theory of the Business Enterprise, op. cit., 165.

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based on his comparison with the anarchy of the market.34 Furthermore, Marx neglected legal incorporation and plainly regarded law as a mere by-product of economic relations,35 chalking it up as simply ideological36 and, henceforth, legitimizing the values of the dominant class. This position, paired with the individual dimension and open-ended nature of Veblen’s theory, is one of the reasons why the latter can still be useful as an analytical tool in attempting to build a framework for the understanding of more than just the economic functions of the firm – something which the agency theory of law and economics does quite efficiently thanks to its reductionist character. Classical Marxism, on the other hand, by betting on a teleological position, is to be perennially judged by the efficacy of its predictions. Werner Sombart, an ardent Marxist37 who earned praise from Engels himself,38 ended up recognizing the mistakes of Marxism in crucial points, concluding that ‘the faithful Marxist was then placed in the same position as the believing Christian when natural science undermined some of the conceptions of the universe taught in the Bible’.39 Indeed, though Marxist methods remain popular in analyzing capitalism, the fact of the matter is that the revolution never took place and, except for certain parts like the aforementioned third ‘law of motion’, its core

34 Ugo Pagano, ‘Marx’ in Michael Dietrich and Jackie Krafft (eds), Handbook on the Economics and Theory of the Firm (Edward Elgar Publishing 2012) 42–44. 35 Hodgson, op. cit., 58. 36 Egveny B. Pashukanis, The General Theory of Law and Marxism (Transaction 2007) 73. 37 How close the far left and the far right are to each other, connected as they are by the umbilical cord of collectivism, is too divergent a subject for this book. Nevertheless, German interwar literature by far right socialists is abundant. Suffice to cite Moeller: ‘When we now talk of a German socialism, we do not of course mean the socialism of the Social Democrat in which the party took refuge after our collapse; neither do we mean the logical Marxist socialism which refuses to abandon the class war of the Internationals. We mean rather a corporative conception of state and economics, which must perhaps have a revolutionary foundation, but will then seek conservative stability’ (Arthur Moeller van den Bruck, Germany’s Third Empire (Arktos 2012) 69). 38 Nico Stehr and Reiner Grundmann (eds), Economic Life in the Modern Age: Werner Sombart (Transaction 2001) xv. 39 Werner Sombart, Socialism and the Social Movement (Dent & Co. 1909) 87–88.

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predictions failed.40 Moreover, the embodiment of Marxism in Russia through the ‘revolution from above’, as hinted by Lenin and carried out by Stalin through wielding the coercive instruments of state power against the revolution’s class enemies,41 ended up shocking the world when the realities of the Gulag became known to the West and still, to this day, the millions of victims are hard to calculate with precision.42 Understanding this fiasco is paramount for jurisprudence, in general, and, particularly, for introducing other theories of the firm, because of the continuum between Marxism and the postmodernism which animates critical legal theory – though we could very well talk about an actual reinvention rather than outright resuscitation. For postmodernists, law has no universal foundation on reason but merely reflects political and economic power, and, since all claims to truth are questionable, no particular interpretation of a text is authoritative but is just one among an infinite number. As Lyotard himself puts it, postmodernism is defined as incredulity toward metanarratives – and claims to be beyond Marxism as it does not expect to resolve the inconsistencies of the Enlightenment.43 Though Marxism it is. Derrida’s deconstruction, in his own words, had no meaning other than that of radicalization in the same spirit as Marxism,44 while Foucault explicitly saw everything in terms of class struggle.45 This thought edifice begs three fundamental questions then: Why did Marxism metamorphose into postmodernism? How did postmodernism navigate its relativism through the positivism of Marx? And, what implications does this have for legal theory and the theory of the firm? Regarding the first question, the hypothesis by Stephen Hicks is chief among the best ones to be found, i.e. postmodernism is the academic far left’s epistemological response to the crisis originated by the theoretical 40 R.L. Meek, ‘Marx’s “Doctrine of Increasing Misery”’ in John Cunningham Wood (ed.), Karl Marx’s Economics: Critical Assessments. Volume II (Routledge 1988) 58–60. 41 Robert C. Tucker, ‘Stalinism as Revolution from Above’ in Robert C. Tucker (ed.), Stalinism: Essays in Historical Interpretation (Transaction 1999) 90. 42 Geoffrey A. Hosking, Russia and the Russians: A History (Harvard University Press 2001) 469. 43 Jean-François Lyotard, The Postmodern Condition: A Report on Knowledge (Manchester University Press 1984) xxiv. 44 Jacques Derrida, Moscou aller-retour (Éditions de l’Aube 2005) 76. 45 Sylvère Lotringer (ed.), ‘Foucault Live: Interviews 1961–1984’ (1996) Semiotext(e) 104.

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and practical failures of Marxism during the 1950s and 1960s.46 As seen earlier, Marxist predictions weren’t coming true and the post-war era saw capitalist societies flourish. Although it is impossible to frame this realpolitik confrontation in Manichaean terms, for atrocities were carried out by all sides,47, 48, 49 Khrushchev’s ‘secret speech’ acknowledging the crimes of the Stalin era50 (as later confirmed by, e.g. Solzhenitsyn51) and the Soviet armed intervention in Hungary52 sent shockwaves throughout the world’s left and inflicted a heavy blow to the moral and intellectual authority of communism.53 Card-carrying communists like Foucault and strong sympathizers like Derrida themselves were not the exception. Moreover, the symptoms started to appear, as in the case of the German social democrats (SPD) – the Western social democrat party most subservient to Marxism and its 1959 Godesberg Program – which renounced socialization and a planned economy replacement of capitalistic relations of productions, instead espousing values of freedom, justice, and solidarity.54 Accordingly, and seeing that capitalism had shown a greater capacity for generating material wealth, the left moved 46 Stephen Hicks, Explaining Postmodernism: Skepticism and Socialism from Rousseau to Foucault (Scholargy 2004) 89. 47 For a well-argued case on how slavery helped to cement capitalism, see: Edward E. Baptist, The Half Has Never Been Told (Basic Books 2014). 48 For a first-hand account of the use of proceeds of Iran arms sales to finance the counterrevolution in Nicaragua, see: ‘Report of the Congressional Committees Investigating the Iran-Contra Affair with Supplemental, Minority, and Additional Views’ H. Rept. No. 100-433, S. Rept. No. 100-2016 (1987). 49 For declassified documents from the CIA, FBI, U.S. National Security Council et al., detailing the promotion of a military coup against Allende’s socialist government in Chile, see: Peter Kornbluh, ‘Chile and the United States: Declassified Documents Relating to the Military Coup, September 11, 1973’ (National Security Archive Electronic Briefing Book No. 8, George Washington University) accessed 15 June 2017. 50 Thomas Henry Rigby (ed.), The Stalin Dictatorship: Khrushchev’s ‘Secret Speech’ and Other Documents (Sydney University Press 1968). 51 Aleksandr Solzhenitsyn, The Gulag Archipelago: 1918–56 (abridged edition, The Harvill Press 1986). 52 Jeno Gyorkei and Miklos Horvath, Soviet Military Intervention in Hungary, 1956 (Central European University Press 1998). 53 Michael Charlton, Footsteps from the Finland Station: Five Landmarks in the Collapse of Communism (Transaction 1992) 7. 54 Vit Hlousek and Lubomir Kopecek, Origin, Ideology and Transformation of Political Parties: East-Central and Western Europe Compared (Routledge 2016) 16.

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away from the Marxist dictum of ‘to each according to its need’, started speaking of relative rather than absolute poverty, and focused on equality while framing it in terms of conflict and oppression of the weaker by the stronger, for example smaller enterprises asphyxiated by bigger ones; gender, ethnic and racial minority rather than working-class consciousness; the capitalist destruction of the environment and radical moral equality among species; and even, as Marcuse posited, the abundance of wealth oppressing the proletariat by making it comfortably numb.55 This account of the historical unraveling of Marxism already begins to answer the second question we formulated above, though it is not the whole story, as, for example, Marxism was too rationalist, deterministic and universalist for the postmodernist taste. Although already by the early 1930s the Frankfurt School theorists were warning against the heavily rationalistic bent of Marxism and its failure to do justice to psychology,56 it wasn’t until the 1960s that the notion of the scientific conception of the world as the only one that mattered started to wither.57 The loss of faith in rationality, then, coupled with the realization that the internationalism espoused by Marx was way too big of a concept to be embraced by the masses, led the left to agree with the collectivist right (or fascism as a shorthand) in the sense that cosmopolitanism had to be abandoned and the focus had to be on smaller groups glued together by ethnic or other identities.58 Rorty, another postmodernist sweetheart, made an explicit case out of calling Christianity deplorable due to its conception of universal unity, and concluded that solidarity is a matter in which similarities and dissimilarities strike one as salient, i.e. solidarity expressed in terms of ‘one of us’ where ‘us’ is smaller and more local than entire humanity.59 Postmodernism, then, comes full circle to be defined in opposition to modernism, i.e. anti-realism vis-à-vis the Enlightenment emphasis on reality through the methods of natural sciences, social subjectivism, and deconstruction, as opposed to reason and the empirical method, and atomized egalitarianism as a response to the liberal individualism of the modernists.60 55

Hicks, op. cit., 150–156. John Abromeit, Max Horkheimer and the Foundations of the Frankfurt School (Cambridge University Press 2011) 254. 57 Martin Woessner, Heidegger in America (Cambridge University Press 2011) 207. 58 Hicks, op. cit., 159. 59 Richard Rorty, ‘Contingency, Irony, and Solidarity’ (Cambridge University Press 1989) 191–192. 60 Hicks, op. cit. 14–15. 56

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And this brings us to the third question regarding what implications this critical stance has for legal theory. Once disenchantment with the world is too evident, there is nothing preventing free roaming interpretation and discourse.61 By arguing that the rule of law and liberal political morality lead to incoherence,62 what is left for postmodernist legal criticism is, in the words of one of their own, ‘liberating fiction’, which, in turn, relieves the theorist of the obligation to be right and demands only that he is interesting.63 And ‘interesting’ it is. But at what cost? Legal theory deals in language, written and spoken, and the result of a philosophical ‘anything goes’ animated by Balkanized power struggles is, for the lack of a better metaphor, akin to either releasing wolves among the sheep or rule by the Ministry of Silly Walks. Don’t take anyone’s word for it, though. Let’s look at an example. Taking a cue from Fish himself, the so-called cultural study of law sees legal texts as mere works of fiction, and it recognizes itself as lowering the stakes by means of self-marginalization.64 And this, in turn, allows for a serious analysis of why the modern corporation is a secular god and corporate law a secular religion.65 In ‘The Corporation as God’ Litowitz borrows from Barthes to typify the corporation as a myth (hence a localized power struggle and a bourgeois tool to harmonize conflict), calling it an empty signifier à la Zizek66 in which the corporation absorbs the contradictions between profit seeking and fairness, and concludes that corporate law serves as a legitimation tool to serve those with a stake in perpetuating the corporate system – hence serving the same social function as a god within a religion.67 Another example is a stakeholder 61 Frank B. Farrell, Subjectivity, Realism, and Postmodernism: The Recovery of the World in Recent Philosophy (Cambridge University Press 1996) 148. 62 Andrew Altman, Critical Legal Studies: A Liberal Critique (Princeton University Press 1990) 57. 63 Stanley E. Fish, Is There a Text in this Class? The Authority of Interpretive Communities (Harvard University Press 1980) 180. 64 Paul W. Kahn, The Cultural Study of Law: Reconstructing Legal Scholarship (University of Chicago Press 1999) 139. 65 Douglas Litowitz, ‘The Corporation as God’ (2005) J. Corp. L. 30 accessed 11 June 2017. 66 In semiotics, a signifier is a sign which communicates meaning to its interpreter; based on the postmodernist idea that there are no universals and on Laclau’s related concept of empty signifiers, Zizek writes of the necessity of (a) asking through what violent gesture the empty signifier arises, and (b) filling the voids of all universals so a particular coincides with itself. See: Slavoj Zizek, The Parallax View (MIT Press 2006) 41. 67 Ibid.

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theory based on recasting masculine metaphors of the stakeholder concept by means of feminist ethics of care and connected knowing theories – the first of which is to change the masculine metaphor of the management of non-owner stakeholders as an external cost of doing business for an all-participants nexus of contracts scheme, in which everybody has a chance for self-creation to the best of their abilities.68 A final example is a treatise blending silent cinema, literary and medicolegal analysis – generously peppered with Foucault and Butler references (who else?) – to wrap themes of possession and control around the reciprocal exchange among portrayals of hypnotic and corporate agency in cultural production.69 All in all, whether openly Marxist or of a feminist, ethnic or racial bent, these approaches have in common a dissatisfaction with hierarchical schemes and, thus, existence under liberalism, while attempting to show how the experience of power, arbitrary consensus, and the negation of greater narratives can be dealt with and provide an alternative to the ideal of legality towards a community bound by shared experience and with its own customs and principles.70 It is a chaotic world, not one of certainty and aspirations but of constant strife, oppression, and resentment. As there are no rules, or at least those rules aren’t part of a (despised) Western canon, and nothing exists out of the text, postmodernism’s aspirations are radicalization (Derrida dixit71) and to be interesting (Fish dixit72). So, what definitions and purposes can we obtain from these approaches in terms of an alternative theory of the firm? Veblen, as we saw earlier, paid attention to the legal form of the firm and contributed the concept of goodwill while nesting his theories in a dynamic evolutionary context. Henceforth, we can venture that in an earlier institutionalist conception, the genus of our definiendum of interest is definitely the legal form – i.e., insofar as it aids the pooling of capital and the obtainment of credit. As for the differentia, doing justice to Veblen’s thought would require 68 Nancy Kurland and Jerry Calton, ‘A Theory of Stakeholder Enabling: Giving Voice to an Emerging Postmodern Praxis of Organizational Discourse’ in David Boje, Robert Gephart and Tojo Joseph Thatchenkery (eds), Postmodern Management and Organization Theory (Sage 1996) 12. 69 Stefan Andriopoulos, Possessed: Hypnotic Crimes, Corporate Fiction, and the Invention of Cinema (University of Chicago Press 2008) 1–18. 70 Roberto Mangabeira Unger, Law in Modern Society: Toward a Criticism of Social Theory (The Free Press 1976) 202–203. 71 Derrida, op. cit. 72 Fish, op. cit.

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encompassing the habits of thought and the instinctive drives involved (both positive and negative), as well as the transition from ownershipbirthed predatory culture into modern culture. And the same goes for its functional component, which ought to recognize the evolutionary conception of social determinants of value. Thus, for Veblen, the firm is a legally sanctioned repository of goodwill which allows the efficient leverage of the latter by the leisure class with the purpose of accumulating wealth to the extent that it serves pecuniary emulation vis-à-vis the opposing material force of the industrial process. As for the Marxist view of the firm, Phillips’ thesis is adequate for encouraging debate and for trying to elucidate a definiendum: (1) in the Coasian view the firm is a privately owned market while the market is communally owned information; (2) as a response to the communally owned market the privately owned market develops economic planning; and (3) by adding class struggle to the equation, Marx’s historical analysis of capitalism is one where the communally owned market (capitalism) is replaced by a single privately owned market (socialism).73 However, two elements are blurry in this thesis to the extent that it draws a parallel with the mainstream view of the firm, and those are the abandonment of the price mechanism based on transaction costs and the voluntary arrangement element of the contracts contained within the firm. Without those elements, a Marxist theory of the firm offers a merely historical stage genus in the form of a capitalist way of organizing production with the differentia of private planning vis-à-vis communal markets and worker alienation. Last but not least, the postmodernist theory of the firm is an even more complex definitional endeavor as it is not a monolithic school, but, rather, its ‘anything goes’ philosophical framework facilitates a plethora of different readings, i.e. as many as interpretations of a text can exist. We could try to have a go at it through the Critical Legal Studies (CLS) movement, its older cousin and a more self-contained, thoughtful manifestation. However, there is little we can construct from there in terms of a theory of the firm. First, CLS denies that law is a system, as it claims that its institutions operate other political agencies of the state, and that the same goes for its methods, which splinter the reality of the legal order and what the doctrines it is based on could say about it.74 Second, it follows from this that there is no neutral and autonomous mode of legal 73 R.J. Phillips, ‘Marx, the Classical Firm, and Economic Planning’ in John Cunningham Wood (ed.), Karl Marx’s Economics: Critical Assessments (Routledge 1993) 305–314. 74 Unger, op. cit., 56.

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reasoning but, instead, a large number of doctrinal formulations and a lack of consensus, which render the prediction of outcomes impossible.75 Third, foreshadowing full-blown postmodernist legal theory, CLS denies the existence of a coherent, single view of human relations – which echoes the dictum that since the rational vision of law functions as a text, it can be deconstructed to conclude that legal meaning is not based on human nature but on an interpretation of it.76 And, fourth, it denies that law is a decisive factor in social behavior, giving social consciousness a more important role in that respect.77 We have, then, a definiendum, indeed. However, there is no genus because if the genus can be everything then it is nothing. The genus can be whatever can be thought of, as there is no logic governing the meaning of interpretation insofar as logic is itself an interpretation.78 As with the differentia, the nothing that is the genus for postmodern legal theory can also be everything – as long as, of course, it unmasks the binaries which the West has “tried to pass” as common sense,79 and it is based on power because power, mind you, is always already there, encompassing everything and everyone.80

3. SO SIMPLE YET SO COMPLICATED What motivates human beings to gather in groups? Ultimately, why do we create societies? The word society comes from the noun Latin root socius, which means ‘comrade’ or ‘ally’, thus implying that society is a group of individuals who are akin or at least civil to each other.81 Thomas Hobbes, when attempting to discover rational principles for the construction of a civil polity, considered that any government would be better than a civil war. To argue his point, Hobbes affirmed that the pre-social state of humans is one of permanent war, for people possess a strong 75 Richard W. Bauman, Ideology and Community in the First Wave of Critical Legal Studies (University of Toronto Press 2002) 115. 76 Gary Minda, Postmodern Legal Movement: Law and Jurisprudence at Century’s End (New York University’s Press 1995) 121. 77 Wayne Morrison, Jurisprudence: From the Greeks to Post-Modernity (Routledge 1997) 472–473. 78 Jacques Derrida, Writing and Difference (The University of Chicago Press 1978) 260. 79 Richard Rorty, Truth and Progress: Philosophical Papers, Volume 3 (Cambridge University Press 1998) 77. 80 Colin Gordon (ed.), Power/Knowledge: Selected Interviews and Other Writings 1972–1977 (Pantheon Books 1980) 141. 81 William Young, A New Latin-English Dictionary (A. Wilson 1810).

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desire to preserve their own lives, over others’.82 John Locke disagreed with Hobbes. In his ‘Second Treatise of Government’, Locke said that the state of nature was preferred to subjection to the random power of an absolute sovereign.83 Fundamentally, he defined the state of nature as that in which there are humans in a group but there is no legitimate political authority to judge disputes and, hence, people live according to the law of reason as free, equal and independent individuals.84 In the middle of the road between Hobbes’ pessimism and Locke’s optimism regarding the pre-social state of humans, Adam Ferguson’s commonsensical view is that there are no records of a pre-social human condition and, since the available evidence shows humankind always living in society, then living in society comes naturally to us.85 Moreover, as we’re still here despite all the slaughter throughout millennia, there must also be a harmonious balancing element to living together. Coincidentally, Ferguson succeeded David Hume as librarian of the Advocates’ Library in Edinburgh,86 and it was Hume who said that there are two facts about mankind, being, first, that men always seek society, and, second, that men regard other people as objects of praise or blame.87 Fundamentally, then, the issue of the origin of social groups is at least partly a biological question.88 Despite the ‘blank slate’ and social constructivism dogmas of postmodernism, humans are the only species to live in multi-male groups within a web of complex hierarchical coalitions and far-reaching paternal care, with the presence of undeveloped infants

82

Sharon Lloyd and Susanne Sreedhar, ‘Hobbes’s Moral and Political Philosophy’ in The Stanford Encyclopedia of Philosophy (2011) accessed 16 June 2017. 83 Ibid. 84 Alex Tuckness, ‘Locke’s Political Philosophy’ in The Stanford Encyclopedia of Philosophy (2010) accessed 16 June 2017. 85 Alexander Broadie, ‘Scottish Philosophy in the 18th Century’ in The Stanford Encyclopedia of Philosophy (2009) accessed 17 June 2017. 86 Ibid. 87 Paul Russell, ‘Hume on Free Will’ in The Stanford Encyclopedia of Philosophy (2008) accessed 17 June 2017. 88 Charles Ellwood, ‘The Origin of Society’ (1909) American Journal of Sociology 15, 394–404.

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pointing towards a protective environment through group caring.89 Furthermore, empirical studies throughout several disciplines point to higher success rates in education, urban poverty, unemployment, crime, and even health when a community is civically engaged.90 All in all, these ideas reinforce Ferguson’s view that there is no competing view of humans other than social. Muzafer Sherif, considered one of the historical founders of social psychology,91 formulated a technical definition of a group as a social unit consisting of various individuals interacting with each other with respect to: (a) common motives and goals; (b) accepted roles; (c) established status relationships, i.e. social rank, dominance; (d) accepted norms and values in subjects related to the group’s interest; and (e) the development of accepted rewards and punishments whenever the group’s norms are respected or violated.92 This definition is then one way of understanding how a group of persons is formed, how it functions, and how the social interactions within the group occur. Authors derive the proper knowledge of an enterprise (and consequently a company) from social psychology research. Nicholas H.D. Foster makes a distinction between corporations and enterprises in terms of interactions and outcomes, giving an example of a group of random passengers in a bus given the task of building a house and the same request made to a group of people who know how to purchase materials, assemble houses, install electric wires and plumbing systems, etc. While the passengers in the bus achieve nothing, the house builders end up building the house – producing an outcome in the real world arising from the internal outcomes, i.e. internal interactions and the structure shown by members’ activity.93 Thus, according to Foster, the external and internal outcomes shown by organized groups give an impression of unity and similarity to real-world things (i.e. humans) and by the process of reification we anthropomorphize enterprises, the perfect example 89 Robin Dunbarr and Louise Barrett (eds), The Oxford Handbook of Evolutionary Psychology (Oxford University Press 2007) 277. 90 Robert D. Putnam, ‘Bowling Alone: America’s Declining Social Capital’ [1995] Journal of Democracy 65–78. 91 Scott Plous, ‘Historical Figures in Social Psychology’ Social Psychology Network accessed 11 April 2011. 92 Muzafer Sherif and Carolyn Sherif, An Outline of Social Psychology (Harper & Brothers 1948) 143–180. 93 Nicholas H.D. Foster ‘The Theoretical Background: The Nature of the Actors in Corporate Social Responsibility’ in Stephen Tully (ed.), Research Handbook in Corporate Legal Responsibility (Edward Elgar Publishing 2005).

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being the word corporation itself, which comes from corpus, or body.94 This reification phenomenon is, at least in the civil law tradition, heavily qualified by the intervening will of the individual (hominum causa omne ius constitutum est95), hence the material and moral reality of the corporation is to be neither equated nor confused with the reality of its creator, as this would be outright anthropomorphism.96 When Kelsen adjudicates such phenomena in terms of the primitive mythological thinking called animism, the explanation he provides is that every object of the perceptual world is believed to be the abode of an invisible spirit who is the matter of the object, who ‘has’ the object in the same way as the substance has its qualities, the grammatical subject it predicates; and, in similar fashion, the legal person is seen as ‘having’ legal duties and rights (i.e. substance and quality), when in reality the legal person is not a separate entity alongside its duties and rights, but only the personified unity of a set of legal norms – which are the origin of rights and duties.97 All of the above, particularly the discussion on reification, is linked strongly to Christian Social Thought, since this sees society as personal for it pursues the common good by way of necessity, and, as an extension, the corporation is also a human group with a common good, of which the good of the members is a part of but not equal to it.98 John Finnis has a very useful framework to offer in this respect when he speaks of a group not being embodied when it is a mere aggregation, for there is a lack of coordination of action towards a common enterprise.99 Based on Aquinas, though with some inaccuracies

94 For an insight into the idea of a multi-individual body and reification, it is worth analyzing, at least in the Judeo-Christian tradition, 1 Corinthians 12:26–28 (Bible, New International Version), i.e. ‘(26) If one part suffers, every part suffers with it; if one part is honored, every part rejoices with it. (27) Now you are the body of Christ, and each one of you is a part of it. (28) And God has placed in the church first of all apostles, second prophets, third teachers, then miracles, then gifts of healing, of helping, of guidance, and of different kinds of tongues’. 95 Codex Hermogenianus, as collected in the Digest 1.5.2. 96 Jorge Barrera Graf, Instituciones de Derecho Mercantil (Porrúa 2005). 97 Hans Kelsen, General Theory of Law and State (Lawbook Exchange 2007). 98 Michael Lower, Employee Participation in Governance (Cambridge University Press 2010) 45–46. 99 John Finnis, Natural Law and Natural Rights (Oxford University Press 2011) 150–156.

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on the interpretation of distinctiveness,100 Finnis searches for the existence of groups (and hence the personhood of corporate bodies) in the four orders in which human existence is lived, i.e.: the order of nature; the order in which we bring concepts into our own understanding; the order in which matter is subject to our transformative powers; and, lastly, the order by which unity is brought into our own actions by deliberating and choosing. And it is in this fourth order where groups exist, not in the first one where reductive empiricism will never see them – and it is through this framework that Finnis responds to the ‘why’ that, according to him, Hart leaves unanswered regarding the ascription of rights and responsibilities to a particular group, i.e. the existence of a group.101 This is precisely the level at which the distinctive existence of the enterprise, as opposed to the company, arises. Dworkin also rejects pragmatism and opts for integrity above choice as the source of the ‘personification’ of the corporation – vis-à-vis ‘discovery’, when he states that a group has no metaphysical existence but it is merely a creature of thought and language practices.102 Continuing with Foster’s example of the group of people building the house, once they decide to create House Builders Limited, all they do in the tangible world is to fill some forms, pay a fee and file documents in the company register. By doing this, nothing in the real world has dramatically changed, though in the legal world different legal conclusions will apply from now on to the members inside the group, as well as third parties interacting with the group, and those legal conclusions will alter the real world. After all, the legal mind delights in subtleties and often resorts to circumlocutions to accomplish results which would seem to be equally attainable by direct methods.103 So, the difference between ‘real-world’ outcomes and ‘legal-world’ outcomes could be said to be what constitutes the company and its embodiment, still an abstraction on a level which is not that of nature, but one based on a structured, premeditated system – neither as an arbitrary sense nor as a procedural

100

Kevin L. Flannery SJ, ‘John Finnis on Thomas Aquinas on Human Action’ in John Keown and Robert P. George (eds), Reason, Morality, and Law: The Philosophy of John Finnis (Oxford University Press 2013) 125–127. 101 John Finnis, Intention and Identity: Collected Essays, Volume II (Oxford University Press 2011) 83–84. 102 Ronald Dworkin, Law’s Empire (Fontana Press 1986) 168–175. 103 George Wickersham, ‘Government Control of Corporations’ (1918) Columbia Law Review 18(3): 187–207.

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presumption.104 Those are the outcomes which, even in the agency theory of the firm, mechanize moral hazard mitigations which shape the interests of managers and shareholders vis-à-vis a receptacle holding the firm’s assets – one which may diversify the risk but also incentivize taking it.105 That may be the reason why this regimented persona ‘has increased in girth and height, and has maintained its ghostly existence, in the face of the anathema of the philosopher and the fiat of the judicial decree’.106 Based on all of the above, it is correct to say that enterprises have existed as long as social groups have, and social groups, by definition, are tied to collaboration geared towards achieving a common goal. A view of corporate personhood as an extension of the aligned moral agency of its individual members would be, in a sense, a plausible framework with which to analyze the divide between enterprise as a biologically derived social group and the corporation – were it not for how far away the latter has ended up from the former. One example is single-member companies and their role in the operational landscape of special purpose vehicles (SPVs). In the hands of the common individual, single-member companies make absolute sense under an economic rationale. On one hand, they allow the entrepreneur to isolate personal assets and liabilities from that of the business, placing the specialized creditors of each side of the so-called asset partitioning divide in a better situation to monitor the transactions pertaining to their claims. On the other, though, the reality is very different, and it is a matter of sheer financial muscle and the leverage of goodwill – in the sense Veblen used the term. For the common entrepreneur, few creditors will accept having receivables against a company without the entrepreneur securing them unlimitedly through the entrepreneur’s personal patrimony, rendering the asset partitioning mechanism useless except for exit purposes. However, in the hands of companies of a certain size SPVs present a golden opportunity for both legitimate and illegitimate uses. As a legal entity created for a single purpose, an SPV is used by a sponsoring (initiator) company to transfer part of its assets out of its balance sheet and 104

George F. Canfield, ‘The Scope and Limits of the Corporate Entity Theory’ (1917) Columbia Law Review 17(2): 128–143. 105 Erik Vermeulen, ‘The Role of the Law in Developing Efficient Corporate Governance Frameworks’ in Corporate Governance of Non-Listed Companies in Emerging Markets (OECD Publishing 2006) 96. 106 George Deiser, ‘The Juristic Person’ [1908] University of Pennsylvania Law Review and American Law Register Vol. 57(3), Vol. 48 New Series, 131–142.

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incentivize investors, enhance creditworthiness, or reduce its corporate tax bill.107 And while there are legitimate uses for SPVs, such as leasing, borrowing, and research and development vehicles, they are also, in the hands of hardened managers, bankers, and consultants, the type of financial engineering behind Merck erroneously recognizing US$12.4 billion108 (the fraudulent accounting practices accusation by the U.S. Securities and Exchange Commission which led Xerox Corp to post a US$6.4 billion restatement)109 and, in general, financial catastrophes of the Enron type110 and the subprime mortgage crisis.111 A legal corporation is, then, not a natural phenomenon but an invention. All this prompts the question, then: when and how did legal entities originate? In Chapter 3 we will delve deeper into historical intricacies, so a bird’s-eye view will do for now. According to Deiser, ‘the conception of persona ficta is an inheritance from the Roman Law, developed and expanded by the ecclesiastical lawyers of the Middle Ages, and brought into modern legal thought by Friedrich Carl von Savigny’,112 who not only organized the history of Roman Law in his famous Geschichte des römischen Rechts in Mittelalter, but also showed that it was alive in local customs, ecclesiastical doctrines, and school teachings. One idea of entities in ancient Rome arose from the municipalities, which were regulated and functioned depending on the terms of the armistice between Rome and the communities they conquered. They were organized into the collegium, sodalitas, societas and universitas.113 107

Dmitry Gololobov and Joseph Tanega, ‘Sham SPEs: Part I – The Legal Issues of International Accounting Standards on the Consolidation of Special Purpose Entities’ [2006] International Company and Commercial Law Review 17(11): 304–317. 108 Merck & Co Inc Securities Litigation [2005] 432 F.3d 261 U.S. App. accessed 19 June 2017. 109 Securities and Exchange Commission v KPMG, Boyle, Conway, Dolanski, Safran and Yoho [2006] 412 F.Supp.2d 349 U.S. Dist. accessed 16 June 2017. 110 Krishna Palepu and Paul M. Healy, ‘The Fall of Enron’ [2003] Journal of Economic Perspectives 17(2), Spring. 111 Richard Christopher Whalen, ‘The Subprime Crisis: Cause, Effect and Consequences’ [2008] Networks Financial Institute Policy Brief, No. 2008PB.04. 112 Deiser, op. cit. 113 María Antonieta Guiñazú Mariani, ‘Las Personas Jurídicas en el Derecho Romano’ [2005] XVII Encuentro Nacional de Profesores de Derecho Romano, Universidad Nacional del Comahue.

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The collegium was a guild or trade association setting standards for its members (such as the collegium pistorum for bakers or the collegium nautae for boatmen), but also there were collegia for non-commercial matters, as was the case of the collegium pontificum for priests.114 The sodalitas was more of a club for feasting and fellowship,115 while the societas was a union of funds, skill, or labor, or a combination of them, for a common purpose, which often had, but need not have, profit for its aim – though it is necessary to mention that Roman Law dealt with these enterprises in terms of the relations between the socii and not in relation to third parties, because in Roman Law one man could not, in principle, contract so as to affect another.116 Lastly, the universitas was a group of people seen more as a collective juristic person in Ancient Rome, and which inspired Ulpian’s famous phrase, marking the Roman thought on legal personality, ‘si quid universitati debetur, singulis non debetur; nec quod debet universitas singuli debent’117 (‘if anything is owed to the universitas, it is not owed to the members; nor do the members owe that which the universitas owes’), although it must be said that there is dispute amongst scholars as to the ‘bodies’ to which the Roman Law referred, for example guilds, towns, some sort of private law corporations, etc. As for similarities, we can say that these entities had certain characteristics which we still identify today, for example: the express agreement between persons to formalize an enterprise; the transcendence of such an enterprise over time despite the replacement of its members; a statute governing the functioning of the entity; the representation of the entity through appointed officers; the possibility of being dissolved; the susceptibility of acquiring rights and carrying obligations; and, most important of all, the sanctioning of the state.118 Up to the point of the appearance of single-member companies, then, Foster’s previous affirmation that the difference between ‘real-world’ outcomes and ‘legal-world’ outcomes is the company119 holds water vis-à-vis Roman Law when fleshing out what constitutes a person – the ethos of the discussion about the legal personality and, it follows, Finnis’ 114

Norman Bancroft-Hunt, Living in Ancient Rome (Thalamus Publishing

2009). 115

Chester Johnson, Ancient Roman Statutes (The Law Book Exchange

2003). 116 William W. Buckland, A Text-Book of Roman Law: From Augustus to Justinian (Cambridge University Press 2007). 117 Patrick W. Duff, Personality in Roman Private Law (A.M. Kelley 1938). 118 Guiñazú, op. cit. 119 Foster, op. cit.

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view on Aquinas and Aristotle as analyzed above. The origin of the concept of persona is in the mask, as in those worn by Greek and Roman actors on stage, and the metaphor evolves philosophically and legally to mean that we link ourselves to the outside world through our personification of certain roles, which, in turn, gives a footing to the possibility of a person playing the role of an individual or a personified abstract.120 Not in vain do jurists speak of legal personality as essentially something which is manifested exteriorly, towards the society around it, in terms of the capacity to acquire rights and to exercise them,121 i.e. the ‘real-world’ outcomes that are reflected in the ‘legal world’. Henceforth, Deiser’s opinion that ‘the conception of persona ficta is an inheritance from the Roman Law, developed and expanded by the ecclesiastical lawyers of the Middle Ages’,122 is coherent to the extent that Roman Law already speaks of legal personality and conceives enterprises as susceptible to holding rights and obligations distinct to its members. However, the concept of corporate personhood took a lot more time before it matured.123 Bartolo da Sassoferrato, a postglossator, wrote that the Pope had reserved for himself the territory of the Church and transferred the rest of the world, ruled by him as God’s vicar, to the Emperor – who, in turn, supported the Church in its acquisition and exercise of rights. For Sassoferrato, the right to create statutes was not an act of sovereign power but a right belonging to corporations, political and non-political alike.124 Not coincidentally, one of the explanations for the philosophical and practical development of corporations is ecclesiastical, i.e. the Church heavily promoted a widely and highly organized social structure during the Dark Ages, after the fall of the Roman Empire and its institutions, in order to keep Europe afloat in a sea of anarchy.125 The latter stage in legal thought is what sets the stage for Savigny, when the current conception of the legal person finally takes shape, i.e. the idea that the legal entities are persons because the legislator wills it. As we have seen, in Ancient Rome the person was such by virtue of its ability to personify a role, and so a group of persons could personify a whole, which then was taken as a doctrinal fiction by Sassoferrato when 120

Duff, op. cit. Barrera, op. cit. 122 Deiser, op. cit. 123 Guiñazú, op. cit. 124 Cecil N.S. Woolf, Bartolus of Sassoferrato: His Position in the History of Medieval Political Thought (Cambridge University Press 1913). 125 John P. Davis, Corporations: A Study of the Origin and Development of Great Business, Volume I (Beard Books, 2000) 35–36. 121

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he said ‘universitas proprie non est persona; tamen hoc est fictum pro vero, sicut ponimus nos iuristae’, that is to say that an artificial person is not really a person yet they stands as truth insofar as jurists establish it.126 Finally Savigny took such an idea and converted it into a legal fiction, instead of a doctrinal one, i.e. entities were persons because they were artificially created as such by the law.127 Of course, this position is not without opposition, embodied mainly in the figure of Otto von Gierke, for whom legal persons are natural organisms endowed, just like human beings, with their own will and interest, different from the human beings forming them.128 That way, the main opposing approaches see, on one side, the law as merely recognizing ‘living social beings’ and, on the other side, the law as the creator of such entities. As Gierke’s criticism goes, Savigny reasoned that all law exists for the sake of the moral freedom inherent in every human being, so the concept of person or legal subject must coincide with the concept of the human being – extending legal capacity to artificial subjects admitted by means of a pure fiction.129 The doctrine of fictitious legal persons has an inherent problem, called the duality problem, which is self-inflicted: if the legal person is fictitious then it cannot be attributed with human will or human acts; so, for example, with property rights the legal person can hold property rights but it is unable to act in order to acquire them, and thus, in order to acquire them, a representative (a human being) performs the act, giving grounds for another anomaly – which is a legal person’s will by means of a human being’s will, i.e. an artificial will.130 Under this line of reasoning, and following Foster’s sound affirmations analyzed earlier, there is objectionable material in these doctrinal positions because the enterprise (as real entity, opposed to legal entity) exists independently from a legal system recognizing it. The problem with all the theories of the company is that either they are merely descriptive or operational, they anthropomorphize a phenomenon, or they fail by confusing enterprise with legal entity or vice versa.131 Take autopoietic 126 Ugo Pagallo, The Laws of Robots: Crimes, Contracts, and Torts (Springer 2013) 156. 127 Francesco Galgano, ‘El Concepto de Persona Jurídica’ [2004] Revista Derecho del Estado, Universidad Externado de Colombia 1(16): 13–28. 128 John Lewis, The Genossenschaft-Theory of Otto Von Gierke: A Study in Political Thought (University of Wisconsin 1935). 129 Stanley L. Paulson, ‘Hans Kelsen’s Doctrine of Imputation’ [2001] Ratio Juris 14(1): 47–63. 130 Ibid. 131 Foster, op. cit.

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analysis, for example. Autopoiesis is a concept in the field of biology which portrays a system in which its elements interact in such a way as to produce and re-produce itself, as for example a living cell, where its elements, like proteins and lipids, reproduce themselves to perpetuate the system, constituting an autonomous, dynamic, living whole.132 It was Niklas Luhmann who took the original biological concept of autopoiesis and applied it to the social sciences, perceiving organizations as operatively closed social systems that reproduce themselves on the basis of decision communications.133 Such an approach is beyond risky, for example Beer’s claim and choice of words when affirming that the enterprise’s ‘pathology is to turn self-production into an end-in-itself’.134 This effort to portray a legal concept as a living thing (if referring to a corporation), or a heterogeneous and complex phenomenon as an isolated cell (if referring to an enterprise) is outright animistic, as it embodies a promise of self-organization of all parts into a living whole within an organic, natural context free of all contradiction. It is evidently risky to mix enterprises and companies, and then assign them the qualification of living things.135 Another example is Gestalt theory. Gestalt is the German word for ‘whole’ and it is a school of psychology commonly identified as having been born with Wertheimer’s article on the phi phenomenon, which indicates that conscious experience cannot be reduced to sensory experience.136 There is a law in Gestalt theory called the ‘law of common movement’, according to which the elements are grouped together when they move simultaneously and in a similar manner,137 making scattered elements into a whole (greater than the sum of its parts) perceptively speaking. So, according to the Gestalt theorists, a corporation is an 132 John Mingers, Self-Producing Systems: Implications and Applications of Autopoiesis (Plenum Press 1995). 133 David Seidl and Dennis Schoeneborn, ‘Niklas Luhmann’s Autopoietic Theory of Organisations: Contributions, Limitations, and Future Prospects’ [2010] University of Zurich, Institute of Organization and Administrative Science (IOU), Working Paper No. 105 accessed 2 January 2017. 134 Stafford Beer, The Heart of the Enterprise (John Wiley & Sons 1979). 135 Hubert Rottleuthner, ‘Biological Metaphors in Legal Thought’ in Gunther Teubner (ed.), Autopoietic Law: A New Approach to Law and Society (Walter de Gruyter & Co. 1987). 136 B.R. Hergerhahn, An Introduction to the History of Psychology (Wadsworth Publishing 2009). 137 Raffaele Simone, Iconicity in Language (John Benjamins Publishing 1995).

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identifiable and structured whole embodying a real entity – with some of them arguing that the firm is held together by ontological glue.138 This, following Foster, is going too far if they refer to enterprises, for they are not life-forms, and if they refer to legal entities, it is simply incoherent.139 These examples reinforce Kelsen’s view that animism is behind the confusion between real beings with a real will, on one hand, and corporations on the other, i.e. an order regulating the behavior of individuals is personified and then the personification is regarded as a new entity, distinct from the individuals but still in some mysterious fashion formed by them – and the duties and rights of the individuals stipulated by this order are then attributed to the superhuman being, the superman consisting of men.140 Using Finnis’ thought as a framework, the aforementioned animistic attempts, such as the Gestalt theories, do not try to unveil unifying realities of the fourth order (choice) within the realm of the first order (nature), but to fully merge them. As Foster pointed out, a disorganized group and an enterprise are distinguished from each other by the outcomes of the group, both internal and external, and the legal entity is manifested in the legal outcomes that affect the real world as long as the real world is supported by a functioning legal system.141 Therefore, the (traditional) corporation is not an organized body of men but an organization of men, that is to say, an order regulating the behavior of men.142 For Kelsen, the community is nothing but its organization, so it could be said that the legal entity is the order regulating the behavior of men empowered to give themselves such order by the legal order under which they live, creating internal and external outcomes which alter the real world. Furthermore, is a company a micro-order within the entire legal order? Is it a state within a state? Can the legal outcomes be modified, then, in order to impact the real world in different ways as socially desirable? Was Hart right in avoiding the question of what is a corporation, Finnis dixit? Is the corporation a juridical tautology? After all, the process of reification, through which we equate organized groups with real-world things (i.e. humans), is deceptive, and, according to the methodological norm of the avoidance of 138 David Gindis, ‘From Fictions and Aggregates to Real Entities in the Theory of the Firm’ [2009] Journal of Institutional Economics 5(1). 139 Stephen Tully (ed.), Research Handbook in Corporate Legal Responsibility (Edward Elgar Publishing 2005). 140 Kelsen, op. cit. 141 Foster, op. cit. 142 Kelsen, op. cit.

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reification, one should be careful equating theoretical constructs with what is directly observable.143 The great importance of defining corporations is that a definition contains a set of value judgments and assumptions which determine their purpose. As we saw in Chapter 1, the tweak in the definition of economics from wealth to choice, for example, contributed to the blossoming of economics imperialism. Definitions are crucial. Penning any text on corporate governance without tackling this issue degrades legal theory to a technical, descriptive task when, instead, it is a normative endeavor. Needless to say, even if at some level of analysis viewing a legal entity as a nexus of (or for) contracts can be useful, doing so is not only reductionist ad absurdum but also perniciously slanted towards a particular view of the corporation as a solely private matter – hence, by definition, made to appear as impermeable to regulation.144 Taken to the extreme, the prescriptive and descriptive aspects of such a theory presuppose that a company-like, contractual arrangement could exist in a ‘state of nature’, which, mind you, is simply impossible insofar as there is neither personal security nor third party guarantor for such a complex set of contracts to be enforceable.145 So that’s that.

4. THE PURPOSE-DRIVEN STRIFE Dine defines elegantly the conflict at the heart of corporate governance when calling corporations ‘moral deflection devices’, i.e. the developed world counts the largest companies ever created in its ranks, and incredible wealth flows through them, providing cheap goods and services while, at the same time, it is easy and convenient to vilify them whenever the management of those corporations indulges in reckless behavior.146 This is a conundrum because companies are spawned by the state and thus the prerogatives they enjoy are a franchise from society,147 143

Jaan Valsiner and Hans-Georg Voss (ed.), The Structure of Learning Processes (Ablex Publishing 1996). 144 Ewan McGaughey, ‘Ideals of the Corporation and the Nexus of Contracts’ [2015] Modern Law Review no. 1057 accessed 6 July 2017. 145 David Rönnegard, The Fallacy of Corporate Moral Agency (Springer 2015) 145–146. 146 Janet Dine, Companies, International Trade and Human Rights (Cambridge University Press 2005) 3–10. 147 ‘Lots of It About’ The Economist accessed 17 June 2017.

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yet, at the same time, they are geared towards wealth creation148 in a way that places the methods of doing so in a secondary plane.149 On the other hand, in the same tenor as our earlier discussion in the case of SPVs, all claims of equal access to the corporate form as a democratic argument are bogus because the level playing field is heavily tipped in favor of any corporation with a certain level of firepower. Again, Veblen’s concept of goodwill resonates as a useful analytical tool. This, in general, makes it incredibly difficult to draw the line between how much leeway societies should grant to corporations and when (and how) to push for reform, as there is a case to be made on how mega-corporations disrupt the balance of power between them, the individual and the state, weakening democracy in their path as any other major concentration of power would do.150 That is the relevance of, first, generating a definition for the whole discipline and its tenets, so the purpose of the subject matter follows. Furthermore, it is of vital importance to recognize that we all are, in a way, shareholders of these immortal, soulless giants through our bank accounts, investments, pension plans, etc. and we do not have a say in how they operate – and, even if we did, the question is unavoidable: are we prepared to sacrifice revenue and comfort for a different type of society? And, is it even desirable to have such a society? Furthermore, having a say carries a cost, as some researchers have ventured in regard to insiders associated with socially irresponsible firms.151 And, more importantly, what does ‘corporate social responsibility’ mean anyway? Social responsibility cannot be imposed because being responsible and acting conscientiously both require a freedom to choose that is negated by the coercive force of law,152 and in the case of non-enforceable corporate codes of conduct their very nature condemns them to be captured by the public relations department of larger corporations and cause a great deal of energy to be spent to little effect.153 That is the 148 John Micklethwait and Adrian Wooldridge, The Company: A Short History of a Revolutionary Idea (Phoenix 2005). 149 Dine, op. cit. 150 Janet Dine and Marios Koutsias, The Nature of Corporate Governance (Edward Elgar Publishing 2013) vii. 151 Amir Rubin and Amir Barnea, ‘Corporate Social Responsibility as a Conflict between Shareholders’ [2006] EFA 2006 Zurich Meetings accessed 19 June 2017. 152 Elaine Sternberg, ‘The Stakeholder Concept: A Mistaken Doctrine. Foundation for Business Responsibilities’ [1999] Issue Paper No. 4 accessed 20 June 2017. 153 Dine, op. cit.

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reason why, more than a theoretical exercise, definition is key for it translates into purpose. Evolutionary thinkers believe that companies are mere channels through which individual nature is collectively shaped within a greater societal dynamic. For those who opt for a ‘law as culture’ approach, companies end up being something that reflects a power struggle between oppressors and oppressed. A naturalist and interpretivist view tends to toy with moral agency through the personification of the group and as a stage towards individual responsibility. And the dominant school of thought enshrines the idea that companies are mere instruments for pooling capital and reducing transaction costs. The latter, though a consistent view, is as ideological as the former, narrowing down the debate into how to minimize the moral hazard in the principal-agent problem and whether managers ought to have a shareholder or a stakeholder decision-making approach.154 Companies, as such, are nothing but a legal recognition of enterprises which occur as a consequence of the natural human desire to organize themselves into groups for the purpose of achieving practical goals. By doing so, the legal system creates consequences of law in a determined time and space, shaping existence in the real world through regulation of the internal and external outcomes. As law exists in the realm of a posteriori propositions, it is dependent on experience, though a word of caution is required in this respect. In order to illustrate the two-planar existence of law – and the personification of the corporate form’s reification of inputs and outcomes – we will borrow a bit from Wittgenstein. As we discussed earlier when speaking about definitions, Wittgenstein reshuffled his original view to conclude that in order to determine the meaning of words we ought to examine their use and do so in context, famously using the example of ‘games’ – chess in this case, specifically when someone is told ‘this is the king’ while holding the piece.155 It follows, then, that in order to play a game (use words meaningfully) it is necessary to understand and follow the rules of the game, thus making rules is central to meaning. This move by Wittgenstein has a negative interpretation in the sense that language

154 Organisation for Economic Co-operation and Development, Corporate Governance of Non-Listed Companies in Emerging Markets (OECD Publishing, January 2006), p. 11 . 155 Ludwig Wittgenstein, Philosophical Investigations (Blackwell 1958) § 31.

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cannot be based on anything outside of itself,156 hence rendering its usage for speaking meaningfully about the external world completely absurd.157 However, there is a positive interpretation as well, more useful to our purposes, and that is that there is a pre-reflective and preconscious agreement between human beings about the rules of language, hence making language an intersubjective institution.158 Furthermore, if language is not a mere tool but a form of organic representation of the world,159 there is a biological predisposition for the development of language anchored in the operating characteristics of humans,160 and, henceforth, the intersubjective world created by humans is necessarily a rule-bound mixture of biological and cultural determinants. There is a very interesting debate as to how far one can go working with philosophy of language parallel to philosophy of law, as some claim that even when the thing to which language refers is a practice (as it is the case of law), it will be a reference and not the practice itself.161 However, for the purposes of debate it is more useful to recognize that since the requirements of the law are expressed in language, clarifying such requirements goes hand in hand with a linguistic improvement.162 Thus, there is a symbiotic relation between language and the world of norms, with law not existing in a linguistic vacuum.163 Moreover, it is illustrative to equate human existence to a game which is mirrored in language, and, as language, the norms which inhabit that game are of different degrees (social, religious, technical, moral and legal) but rooted in biology and shaped by culture. The biological part is supported by the 156 Nick Crossley, Intersubjectivity: The Fabric of Social Becoming (Sage 1996) 41. 157 Hicks, op. cit., 73. 158 Crossley, op. cit. 159 Antonin Pennisi and Alessandra Falzone, Darwinian Biolinguistics: Theory and History of a Naturalistic Philosophy of Language and Pragmatics (Springer 2016) 12. 160 Eric H. Lenneberg, ‘On Explaining Language’ [1969] Science, New Series 164(3880): 635–643. 161 Michael A. Green, ‘Dworkin’s Fallacy, Or What the Philosophy of Language Can’t Teach Us About the Law’ [2003] Virginia Law Review 89: 1897–1952 accessed 26 June 2017. 162 Andrew Halpin, ‘Or. Even, What the Law Can Teach the Philosophy of Language: A Response to Green’s Dworkin’s Fallacy’ [2005] Virginia Law Review 91: 175 accessed 29 June 2017. 163 James Boyd White, ‘Establishing Relations Between Law and Other Forms of Thought and Language’ [2008] Erasmus Law Review 1(3) accessed 26 June 2017.

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biolinguistic study of the mind but also by the flesh and bone parts of our body, which serve as limits but at the same time as enablers of intelligible speech, while the cultural part is the intersubjective mechanics which make coherent communication possible and produce – paraphrasing Finnis – concepts in the realm of the fourth order, the space where objects of thought and language are birthed and frolic. This way of seeing law is a helpful framework in various respects. First, it is evolutionary and henceforth in line with the empirical knowledge about preverbal infants’ capacity to assess individuals based on their behavior towards others, i.e. a foundation for moral thought and action.164 Second, it is dynamic, as it contemplates the evolution of innate human normativity based on culture – and it echoes research on how, with the passing of time, humans refine their moral compass, for example our evaluation of fair inequality vis-à-vis unfair equality165 as well as the Jungian view that play is a preamble to working through the abstractions-expressed-as-rules that it generates.166 Third, by using the metaphor of games, necessary rules, and human development, an evolutionary arch of norms can be drawn: ‘behavior is imitated, then abstracted into play, formalized into drama and story, crystallized into myth and codified religion – and only then criticized in philosophy, and provided, post-hoc, with rational underpinnings’.167 And, fourth, most importantly, this way of seeing law provides certainty by doing away with the sophistic pyrotechnics of postmodernism, i.e. hard social constructionism, the Wittgenstein-inspired view of language as possessing a self-referential ‘nature’, and the belief in infinite (and equally valid) interpretations. Indeed, authority and power manifest themselves in all human relationships as a necessary constant,168 but centering all analysis on this element alone is self-defeating because, while human society is constraining by definition, it is also, simultaneously, enabling. Figure 2.2 shows what such a model would look like. 164 Kiley Hamlin, Karen Wynn and Paul Bloom, ‘Social Evaluation by Preverbal Infants’ [2007] Nature 450: 557–559 accessed 27 June 2017. 165 Christina Starmans, Mark Sheskin, and Paul Bloom, ‘Why People Prefer Unequal Societies’ [20017] Nature 0082 accessed 28 June 2017. 166 Joel Ryce-Menuhin, ‘An Extended Model of the Infant Self’ in Renos K. Papadopoulos (ed.), Carl Gustav Jung: Critical Assessments. Volume II: The Structure and Dynamics of the Psyche’ (Routledge 1992) 179. 167 Jordan B. Peterson, Maps of Meaning: The Architecture of Belief (Routledge 1999) 71. 168 Ibid 90.

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Figure 2.2 Language, games, and norms A case for this perspective can be made using ancient principles of law. These have not only endured the test of time in written form but are repositories of an even earlier oral tradition and, as such, evidence humanity’s preoccupations, which, in themselves, reveal a gist169 – in this case an intuitive understanding of the innate element of a norm. A proper illustration can be provided by the maxim ‘ignorantia facti excusat, ignorantia juris non excusat’, i.e. ignorance of the fact excuses, ignorance of the law does not excuse. There are two elements to this maxim: first, ignorance of fact as state of mind through which something which in truth does not exist is supposed, and, second, ignorance of the law as a willful ignorance which neglects or refuses to be informed.170 This presumption of knowledge of the law can, indeed, be analyzed as a practical solution to the naturally human excuse of ignorance when accused of breaking the law, though, also, it can be seen as failure to comprehend the community’s moral values or to openly challenge them.171 During Roman times, some fringe groups were considered 169

John Barton, Holy Writings, Sacred Text: The Canon in Early Christianity (Westminster John Knox Press 1997) 106–107. 170 George Fredrick Wharton, Legal Maxims, with Observations and Cases (Law Times 1865) 77–78. 171 Henry M. Hart Jr, ‘The Aims of the Criminal Law’ [1958] Law and Contemporary Problems 23: 401–441.

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incapable of knowing the civil law, though they were always expected to know the system of laws of natural reason, i.e. jus gentium.172 The latter interpretation can be reinforced by how this maxim has withheld the test of time up to the present day; for example, it is enshrined in article 32 of the Rome Statute of the International Criminal Court,173 based on the fact that international crimes are of such a grave nature that their unlawfulness must be obvious to everyone.174 How could norms be obvious throughout time and across cultural, socioeconomic, and geographical divides? This is by no means a recent phenomenon. Though its authenticity is contested, in the Minos dialogue Socrates states that what is just is just and what is unjust is unjust throughout all communities and times, and since law is the finding out of reality, as in farming, gardening or medicine, ignorance is the cause of amending written knowledge, hence suggesting that there is a searching towards the essential laws.175 Aristotle, in his Nicomachean Ethics, pushes the argument forward by stating that, as a rule, legislation is co-extensive with the acts that characterize virtue as a whole.176 There are certain recurring themes lurking underneath an approach such as the one we have described above. First, there is the rejection of the belief that infinite behavioral patterns can exist depending on a particular time and place’s social conditions – and, as a consequence, no major human culture has ever existed which lacked norms about certain recurring themes, e.g. dispute settling, courtship, division of labor, names, status differentiation and hierarchies, child rearing practices, exogenous hostilities, funeral rites, etc.177 This is due, in the words of Nobel Prize-winning geneticist, Jacques Monod, to the fact that behavior, even when gained through experience, enters the individual through a ‘program’, one which obeys a certain pattern embedded in the species’

172 Sharon L. Davies, ‘The Jurisprudence of Willfulness: An Evolving Theory of Excusable Ignorance’ [1998] Duke Law Journal 48(3). 173 UN General Assembly, Rome Statute of the International Criminal Court (last amended 2010), 17 July 1998, ISBN No. 92-9227-227-6 accessed 9 July 2017. 174 Annemieke van Verseveld, Mistake of Law: Excusing Perpetrators of International Crimes (Springer 2012) 83. 175 George Grote (ed.) Plato and the Other Companions of Sokrates, Volume I (John Murray 1865) 411–413. 176 Aristotle, Nicomachean Ethics (Longman Greens and Co. 1869) 145. 177 Anthony Stevens, Archetype Revisited: An Updated Natural History of the Self (Brunner-Routledge 2002) 24–26.

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genetic patrimony.178 It is precisely through that form of identifying patterns that Darwinian thought came up with the concept of survival through adaptation, in a similar way to Jung when he identified essential archetypes.179 And an afterthought for all of the above can, finally, return us to the narrower path this book discusses: in the same way that nature gives life and subsistence, it can also devastate and destroy, and, similarly, just as the social structure is oppressive to absolute freedom, it protects and allows for peaceful coexistence, becoming thus also a liberator. Such a balancing act between chaos and order, as language and games, has norms (limits) at its core – and goes against the view that there are infinite and valid interpretations, because language, games and norms cease to ‘be’ when they are not functional, wreaking havoc and causing descent into chaos. The enterprise is, then, a pattern recognized by the mind, existing in the realm of the intangible made graspable through language. However, its functionality is dependent on the complex rules emanating from the gathering of any social group, and the personhood sanctioned by the state (as well as the compliance by the subjects) is what creates outcomes which shape the real world. The question of what companies ought to be in terms of their responsibility is an intricate one, as the moral agency of each individual can be seen, in a way, as contributing to the essence of the group. However, as pointed out by Corlett, such a position would make a strong case for democratization of the collective inasmuch as moral liability spreads in proportion to participation in the collective acts,180 or otherwise maintaining the current structure and, by virtue of a well-ordered decision-making procedure, identifying the moral agent and a set of decisions that are made self-consciously on a rational (or at least purposefully) basis.181 This is an Aristotelian view in the sense that moral responsibility arises from the appropriateness of responding to an agent with praise or blame on the basis of such an agent’s actions, as long as the agent is capable of voluntary decisions, and understanding decision making as the materialization of a desire resulting from a deliberation 178

Robin Fox, Conjectures and Confrontations: Science, Evolution, Social Concern (Transaction 1997) 7. 179 Robert H. Hopcke, A Guided Tour of the Collected Works of C.G. Jung (Shambhala 1999) 15–16. 180 Angelo Corlett, Responsibility and Punishment (Springer 2009). 181 Marion Smiley, ‘Collective Responsibility’ in The Stanford Encyclopedia of Philosophy (2011) accessed 2 July 2017.

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expressing the agent’s conception of what is good.182 In the personhood debate, the personalists claim that the more nearly an individual (or even animal) approximates a life of self-consciousness, the greater the claim of that entity to maximal moral status.183 Someone who affirms that groups are natural, then, would perceive enterprises as the status quo and pinpoint their durable character184 – though, again, this sidelines singlemember companies as anomalies. In a Kantian view, on the other hand, rational beings should never be treated as mere means but always as ends in themselves, making rationality the indicator of moral agency,185 and, in turn, bringing to the fore the mechanisms through which groups make decisions, as, for Kant, who should count as a person in the extended sense is to be determined by those of us who are persons in the strict sense, doing so under good and objective reasons since we are also to bear the full responsibility for this decision.186 In the light of all these thoughts and arguments, it is interesting to see the direction taken by company law in the developed world. In the now famous Hobby Lobby case, the Supreme Court of the United States of America ruled that a corporation constitutes a person who can exercise religion under the Religious Freedom Restoration Act.187 And, in another example, Citizens United, the same court upheld the First Amendment right of corporations to spend unlimited sums of corporate money to support or oppose political candidates.188 However, the larger issue of personhood does not stop there, and the most recent case in Europe illustrates very well how related ideas function (or malfunction) in the legal world. The case in point is the European Parliament’s Draft Report 182 Andrew Eshleman, ‘Moral Responsibility’ in The Stanford Encyclopedia of Philosophy (2009) accessed 2 July 2017. 183 James William Walters, What is a Person? An Ethical Exploration (University of Illinois Press 1997). 184 Christian Smith, What is a Person? Rethinking Humanity, Social Life, and the Moral Good from the Person Up (University of Chicago Press 2010). 185 Michael Goodman, What is a Person? (The Human Press 1988). 186 Allen W. Wood, Kantian Ethics (Cambridge University Press 2008). 187 Elizabeth Pollman, ‘Corporate Law and Theory in Hobby Lobby’ in Micah Schwartzman, Chad Flanders, and Zoe Robinson (eds), The Rise of Corporate Religious Liberty (Oxford University Press 2016). 188 Susanna Kim Ripken, ‘Corporate First Amendment Rights after Citizens United: An Analysis of the Popular Movement to End the Constitutional Personhood of Corporations’ [2010] University of Pennsylvania Journal of Business Law 209 accessed 2 July 2017.

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with recommendations to the Commission on Civil Law Rules on Robotics. The report calls on the Commission to create a specific legal status for robots so as to grant them the status of electronic persons with specific rights and obligations.189 Once the expected sensationalist backlash waned, the author of the draft report commented that they considered the matter to be similar to corporate personhood, i.e. a legal fiction rather than a philosophical statement, thus a measure taken merely for instrumental purposes.190 These three cases evidence a worrying mishmash of theories of the corporation when undertaking policymaking: (a) aggregate theory, i.e. seeing the corporation as an aggregate of shareholders and inspired by a partnership perception, where the corporate rights are a mere reflection of the rights enjoyed by the underlying individuals; (b) artificial entity theory, or the corporation as a creature of the state, which is linked to the origin of corporations as chartered for the pursuit of objectives deemed of public utility, thus emphasizing the regulatory aspect of corporate law; and (c) real entity theory, which rejects the other two by shifting the focus from a regulatory to a private law initiative, asserting the corporation as a separate entity controlled by its managers.191 So, for example, while Citizens United adopts a real entity position, for it sees corporations as standing on their own, Hobby Lobby is cemented on the aggregate view linking the corporation to its shareholders.192 All of the above suffice to posit that definitions matter. Moreover, from is content, and descriptive attempts are based on and shape one’s normative position. Far from pushing a base-level, defensible position as to what social groups are and how post-biological forces may have built on top of them the language-dependent world of norms, it is more important to be aware that there are many levels of analysis. Economic, of course, is just one of them – and even within that level there are recognizable theoretical differences, all nested in the toolbox of legal 189 Draft Report with recommendations to the Commission on Civil Law Rules on Robotics, EP Committee on Legal Affairs [2015-2013(INL)]. 190 James Vincent, ‘Giving Robots “Personhood” is Actually about Making Corporations Accountable’ (19 January 2017) The Verge accessed 2 July 2017. 191 David Millon, ‘Theories of the Corporation’ [1990] Duke Law Journal 201–262 accessed 4 July 2017. 192 Reuven Avi-Yonah, ‘To Be or Not to Be? Citizens United and the Corporate Form’ [2010] University of Michigan Law and Econ, Empirical Legal Studies Center, Paper No. 10-005 accessed 4 July 2017.

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theory. If one goes down the positivist path, then either the corporate form is a social phenomenon and its validity rests upon social facts, or its legal validity is independent from moral considerations.193 If, on the other hand, one opts for the naturalist framework, then social origins must go hand in hand with the morality of corporate normativity,194 as (Aquinas dixit) they emanate from an appeal to the mind, choice, moral strength and love of those subject to it.195 Either way, the baseline is that corporate law is to a certain extent malleable, and it will continue changing based either on merely instrumental reasons, friction of social forces, or the moral freedom to choose among alternative possible legal arrangements.196 Above all, conceptualizing corporations is paramount, and in this respect it is difficult not to side at least with the intentions of Dworkin in his debate with Hart, whose position is as seductive as it is pragmatic, i.e. indeed, lawyers had invested way too much time and effort in trying to conceptualize a corporation in the hope of a definition solving the difficulties to which such a term gives rise.197 Nevertheless, the Dworkin–Hart exchange is not about solving the problems in and around the corporate form but about the very possibility of conceptual jurisprudence.198 It is, in a sense, the opportunity to affirm the usefulness of the discipline to go beyond instrumentality and disentangle from an ethical position the real, tangible dilemmas associated with tools that, on one hand, had brought tremendous wealth and progress, and, on the other hand, dramatically affected the lives of many as they have taken on a social reality by themselves.199 193

Andrei Marmor, ‘The Nature of Law’ in The Stanford Encyclopedia of Philosophy (2011) accessed 2 July 2017. 194 John Finnis, ‘Natural Law Theories’ in The Stanford Encyclopedia of Philosophy (2008) accessed 3 July 2017. 195 John Finnis, ‘Aquinas’ Moral, Political, and Legal Philosophy’ in The Stanford Encyclopedia of Philosophy (2008) accessed 4 July 2017. 196 Ibid. 197 Neil McCormick, H.L.A. Hart (Stanford University Press 2008). 198 Scott Shapiro, ‘The Hart-Dworkin Debate: A Short Guide for the Perplexed’ [2007] University of Michigan Public Law Working Paper No. 77 accessed 20 February 2017. 199 Criminal Liability in Regulatory Contexts. Consultation paper no. 195. Great Britain’s Law Commission. 2010.

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Do corporations have moral characteristics different and independent from the moral characteristics of its members?200 Moreover, is defining them a Platonic reflex in the search for some sort of nature or essence, in the hope that concepts would serve as a shorthand predictor of occurrences in the real world?201 Hart misses the point here. Pursuing a definition of corporation, as shown above, determines the normative content and, thus, attempts to solve an epistemological problem,202 throughout which there are political implications. There is no epistemic justification independent from experience for the proposition that corporations are persons, and there is no rational intuition in the way Laurence BonJour portrayed it,203 i.e. the personhood of corporations is not a priori knowledge. Therefore, debate must take place in order to unveil either their social or real dimension, as political authority to control their existence depends on it.204 As per the medieval canon: nomen iuris, corpus intellectual (the corporation is a legal entity only in name).205 As an epilogue to this exposition, it is relevant to lay down the battlefield in which it may be contested, and that is the appeal to nature. For natural law leaning theories, moral good is connected with some sort of conformity to nature,206 and, with it, a link between what is and what ought to be. The most interesting problem with the latter is that nature in itself can be viewed from different perspectives, and these are not always reconciled among themselves, for example (a) nature in the context of evolutionary theory, (b) nature in terms of emergence within complex systems, (c) nature as malleable, (d) nature as sacred, and (e) nature as culture in the context of epistemological constructivism.207 Thus, making 200 Amir Horowitz, ‘Ronald Dworkin’s Group Fetishism’ [2002] Journal of Markets and Morality 5(2): 415–423 accessed 12 January 2017. 201 Michael Bayles, Hart’s Legal Philosophy: An Examination (Kluwer 1992). 202 Anil Gupta, ‘Definitions’ in The Stanford Encyclopedia of Philosophy (2009) accessed 3 March 2017. 203 Bruce Russell, ‘A Priori Justification and Knowledge’ in The Stanford Encyclopedia of Philosophy (2011) accessed 1 April 2017. 204 Geoffrey Samuel, Epistemology and Method in Law (Ashgate Publishing 2003). 205 Ibid. 206 Howard P. Kainz, Natural Law (Open Court 2004) 78. 207 James D. Proctor, ‘Resolving Multiple Visions of Nature, Science, and Religion’ [2004] Journal of Religion and Science 39(3).

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a moral choice via picking a nature-transcending criterion is a sine qua non to empirically basing morality in nature due to the ambiguity within and among the different understandings of what natural is.208 A framework for analysis of corporate normativity acknowledging both biology and culture may flirt with the naturalistic fallacy, as G.E. Moore suggested,209 though it can also be a solid illustration of precisely what is being drawn. Let’s explain: contradictory phenomena exist in nature (e.g. competition and altruism). However, as much as it is catastrophic to ignore or attempt to subvert nature, its sculpting by the individual within the fourth order of existence, as per Finnis,210 evidences the birth of norms proper, hence culture. What norms do is attempt to sort nature out in a manner which only a conscious and self-aware being is bound to do. By means of norms, we balance the limiting and competing states of our nature and the nature surrounding us, surely animated by survival but also inquiry and the search for meaning. A metaphor in point is the myth of paradise, where Adam and Eve transition from a charmed existence subject to ‘animalistic flow’ into a conscious state, one in which the individual reaches a degree of godlikeness (knowing good and evil) but also recognizes his limitations, his nakedness.211 In Jungian terms, that loss of paradisiac oneness and blissful ignorance gives way to polarization between inner and outer, subject and object, ego and Self. And that is the moment when humans start creating and norming their existence, ‘covering themselves’, toiling, and give birth to the perennial longing for a return to paradise. So, just because social groups exist in nature does not mean that norming groups is unnatural or immoral. This is where we ameliorate the danger of falling into a naturalistic fallacy: we, as humanity, attempt to sort out the expulsion from paradise by means of norms, and such a journey is to be bound by selecting, enshrining, and celebrating the better angels of our nature. As you can see, there is so much more to corporate governance than a bunch of private contracts thrown into a blender and then packaged nicely ready to be grabbed off the shelf. 208

Andrew Lustig, ‘Appeals to Nature and the Natural in Debates about Synthetic Biology’ in Gregory E. Kaebnick and Thomas H. Murray (eds), Synthetic Biology and Morality: Artificial Life and the Bounds of Nature (MIT Press 2013) 21–22. 209 G.E. Moore, Principia Ethica (Dover 2004) 44. 210 Lower, op. cit. 211 Mario Jacoby, Shame and the Origins of Self-Esteem: A Jungian Approach (Psychology Press 1996), 17–19.

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Tucker, Robert C., ‘Stalinism as Revolution From Above’ in Robert C. Tucker (ed.), Stalinism: Essays in Historical Interpretation (Transaction 1999) Valsiner, Jaan and Hans-Georg Voss (eds), The Structure of Learning Processes (Ablex Publishing 1996) van Verseveld, Annemieke, Mistake of Law: Excusing Perpetrators of International Crimes (Springer 2012) Veblen, Thorstein, The Instinct of Workmanship (Routledge 1994) Veblen, Thorstein, The Theory of the Business Enterprise (Cosimo 2005) Veblen, Thorstein, The Theory of the Leisure Class (Renaissance Classics 2012) Vermeulen, Erik, ‘The Role of the Law in Developing Efficient Corporate Governance Frameworks’ in Corporate Governance of Non-Listed Companies in Emerging Markets (OECD Publishing 2006) Walters, James William, What is a Person? An Ethical Exploration (University of Illinois Press 1997) Wharton, George Fredrick, Legal Maxims, with Observations and Cases (Law Times, 1865) Wittgenstein, Ludwig, Philosophical Investigations (Blackwell 1958) Woessner, Martin, Heidegger in America (Cambridge University Press 2011) Wood, Allen W., Kantian Ethics (Cambridge University Press 2008) Woolf, Cecil N.S., Bartolus of Sassoferrato: His Position in the History of Medieval Political Thought (Cambridge University Press 1913) Young, William, A New Latin-English Dictionary (A. Wilson 1810)

Papers Avi-Yonah, Reuven, ‘To Be or Not to Be? Citizens United and the Corporate Form’ [2010] University of Michigan Law and Econ, Empirical Legal Studies Center, Paper No. 10-005 accessed 4 July 2017 Birmingham, Robert, ‘Hart’s Definition and Theory in Jurisprudence Again’ (1984) Faculty and Papers, 67 accessed 28 May 2017 Broadie, Alexander, ‘Scottish Philosophy in the 18th Century’ in The Stanford Encyclopedia of Philosophy (2009) accessed 17 June 2017 Canfield, George F., ‘The Scope and Limits of the Corporate Entity Theory’ (1917) Columbia Law Review 17(2): 128–143 Coase, Ronald, ‘The Nature of the Firm’ (2007, orig. 1937) Economica 4(16) Davies, Sharon L. ‘The Jurisprudence of Willfulness: An Evolving Theory of Excusable Ignorance’ [1998] Duke Law Journal 48(3): 341–427 Deiser, George, ‘The Juristic Person’ [1908] University of Pennsylvania Law Review and American Law Register Vol. 57(3), Vol. 48 New Series, 131–142 Easterbrook, Frank and Daniel Fischel, ‘The Corporate Contract’ (1989) Columbia Law Review 1416 Ellwood, Charles, ‘The Origin of Society’ (1909) American Journal of Sociology 15: 394–404

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Eshleman, Andrew, ‘Moral Responsibility’ in The Stanford Encyclopedia of Philosophy (2009) accessed 2 July 2017 Fetzer, James, ‘Aspects of the Theory of Definition’ in J.H. Fetzer, D. Shatz, et al. (eds), Definitions and Definability: Philosophical Perspectives (Springer 1991) Finnis, John, ‘Aquinas’ Moral, Political, and Legal Philosophy’ in The Stanford Encyclopedia of Philosophy (2008) accessed 4 July 2017 Finnis, John, ‘Natural Law Theories’ in The Stanford Encyclopedia of Philosophy (2008) accessed 3 July 2017 Galgano, Francesco, ‘El Concepto de Persona Jurídica’ [2004] Revista Derecho del Estado, Universidad Externado de Colombia 1(16): 13–28 Gindis, David, ‘From Fictions and Aggregates to Real Entities in the Theory of the Firm’ [2009] Journal of Institutional Economics 5(1): 25–46 Gololobov, Dmitry and Joseph Tanega, ‘Sham SPEs: Part I – The Legal Issues of International Accounting Standards on the Consolidation of Special Purpose Entities’ [2006] International Company and Commercial Law Review 17(11): 304–317 Green, Michael A., ‘Dworkin’s Fallacy, Or What the Philosophy of Language Can’t Teach Us About the Law’ [2003] Virginia Law Review 89: 1897–1952 accessed 26 June 2017 Guiñazú Mariani, María Antonieta, ‘Las Personas Jurídicas en el Derecho Romano’ [2005] XVII Encuentro Nacional de Profesores de Derecho Romano, Universidad Nacional del Comahue Gupta, Anil, ‘Definitions’ in The Stanford Encyclopedia of Philosophy (2009) accessed 3 March 2017 Halpin, Andrew, ‘Or. Even, What the Law Can Teach the Philosophy of Language: A Response to Green’s Dworkin’s Fallacy’ [2005] Virginia Law Review 91: 175 accessed 29 June 2017 Hamlin, Kiley, Karen Wynn, and Paul Bloom, ‘Social Evaluation by Preverbal Infants’ [2007] Nature 450: 557–559 accessed 27 June 2017 Hart Jr., Henry M., ‘The Aims of the Criminal Law’ [1958] Law and Contemporary Problems 23: 401–441 Horowitz, Amir, ‘Ronald Dworkin’s Group Fetishism’ [2002] Journal of Markets and Morality 5(2): 415–423 accessed 12 January 2017 Lenneberg, Eric H., ‘On Explaining Language’ [1969] Science, New Series 164(3880): 635–643 Litowitz, Douglas, ‘The Corporation as God’ (2005) J. Corp. L. 30 accessed 11 June 2017 Lloyd, Sharon and Susanne Sreedhar, ‘Hobbes’s Moral and Political Philosophy’ in The Stanford Encyclopedia of Philosophy (2011) accessed 16 June 2017

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Marmor, Andrei, ‘The Nature of Law’ in The Stanford Encyclopedia of Philosophy (2011) accessed 2 July 2017 McGaughey, Ewan, ‘Ideals of the Corporation and the Nexus of Contracts’ [2015] Modern Law Review no. 1057 accessed 6 July 2017 Merck & Co Inc Securities Litigation [2005] 432 F.3d 261 U.S. App. accessed 19 June 2017 Millon, David, ‘Theories of the Corporation’ [1990] Duke Law Journal 201–262 accessed 4 July 2017 Palepu, Krishna and Paul M. Healy, ‘The Fall of Enron’ [2003] Journal of Economic Perspectives 17(2), Spring Paulson, Stanley L., ‘Hans Kelsen’s Doctrine of Imputation’ [2001] Ratio Juris 14(1): 47–63 Plous, Scott, ‘Historical Figures in Social Psychology’ Social Psychology Network accessed 11 April 2011 Proctor, James D., ‘Resolving Multiple Visions of Nature, Science, and Religion’ [2004] Journal of Religion and Science 39(3): 637–657 Putnam, Robert D., ‘Bowling Alone: America’s Declining Social Capital’ [1995] Journal of Democracy 6(1): 65–78 Ripken, Susanna Kim, ‘Corporate First Amendment Rights after Citizens United: An Analysis of the Popular Movement to End the Constitutional Personhood of Corporations’ [2010] University of Pennsylvania Journal of Business Law 209 accessed 2 July 2017 Rubin, Amir and Amir Barnea, ‘Corporate Social Responsibility as a Conflict between Shareholders’ [2006] EFA 2006 Zurich Meetings accessed 19 June 2017 Russell, Bruce ‘A Priori Justification and Knowledge’ in The Stanford Encyclopedia of Philosophy (2011) accessed 1 April 2017 Russell, Paul, ‘Hume on Free Will’ in The Stanford Encyclopedia of Philosophy (2008) accessed 17 June 2017 Seidl, David and Dennis Schoeneborn, ‘Niklas Luhmann’s Autopoietic Theory of Organisations: Contributions, Limitations, and Future Prospects’ [2010] University of Zurich, Institute of Organization and Administrative Science, Working Paper No. 105 accessed January 2017 Shapiro, Scott, ‘The Hart-Dworkin Debate: A Short Guide for the Perplexed’ [2007] University of Michigan Public Law Working Paper No. 77 accessed 20 February 2017 Smiley, Marion, ‘Collective Responsibility’ in The Stanford Encyclopedia of Philosophy (2011) accessed 2 July 2017 Smith, Robin ‘Aristotle’s Logic’ in Edward N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (Spring 2017) accessed 27 May 2017

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Starmans, Christina, Mark Sheskin, and Paul Bloom, ‘Why People Prefer Unequal Societies’ [2017] Nature 0082 accessed 28 June 2017 Sternberg, Elaine, ‘The Stakeholder Concept: A Mistaken Doctrine. Foundation for Business Responsibilities’ [1999] Issue Paper No. 4 accessed 20 June 2017 Tuckness, Alex, ‘Locke’s Political Philosophy’ in The Stanford Encyclopedia of Philosophy (2010) accessed 16 June 2017 Veblen, Thorstein, ‘Why is Economics not an Evolutionary Science?’ (July 1898) The Quarterly Journal of Economics 12(4): 373–397 accessed 4 June 2017 Vincent, James, ‘Giving Robots “Personhood” is Actually about Making Corporations Accountable’ (19 January 2017) The Verge accessed 2 July 2017 Whalen, Richard Christopher, ‘The Subprime Crisis: Cause, Effect and Consequences’ [2008] Networks Financial Institute Policy Brief, No. 2008-PB.04 White, James Boyd, ‘Establishing Relations Between Law and Other Forms of Thought and Language’ [2008] Erasmus Law Review 1(3) accessed 26 June 2017 Wickersham, George, ‘Government Control of Corporations’ (1918) Columbia Law Review 18(3): 187–207

Other Works Codex Hermogenianus, as collected in the Digest 1.5.2 Criminal Liability in Regulatory Contexts. Consultation paper no. 195. Great Britain’s Law Commission. 2010. Draft Report with recommendations to the Commission on Civil Law Rules on Robotics, EP Committee on Legal Affairs [2015-2013(INL)] ‘Lots of It About’ The Economist accessed 17 June 2017 Kornbluh, Peter, ‘Chile and the United States: Declassified Documents Relating to the Military Coup, September 11, 1973’ (National Security Archive Electronic Briefing Book No. 8, George Washington University) accessed 15 June 2017 ‘Report of the Congressional Committees Investigating the Iran-Contra Affair with Supplemental, Minority, and Additional Views’ H. Rept. No. 100-433, S. Rept. No. 100-2016 (1987) Securities and Exchange Commission v KPMG, Boyle, Conway, Dolanski, Safran and Yoho [2006] 412 F.Supp.2d 349 U.S. Dist. accessed 16 June 2017

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UN General Assembly, Rome Statute of the International Criminal Court (last amended 2010), 17 July 1998, ISBN No. 92-9227-227-6 accessed 9 July 2017

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3. The firm and its discontents 1. ENTITY AND OWNER SHIELDING IN ROMAN TIMES For the scholars of the ‘agency theory inclination’ legal entities are standard form contracts, i.e. convenient default terms for contractual relationships among shareholders, managers, and creditors involved in an enterprise;1 pretty much like walking into a Contract-Mart™ and grabbing a box of legal entity off the shelf, ready to serve. Grudgingly, though, they recognize that there are key aspects of the company which cannot be feasibly replicated by the magic of free contracting,2 thus, at best, turning the provisions of non-contractual corporate law rules into a creative exercise in which the contractual paradigm is a handy metaphor.3 Nonetheless, it follows from such a view that the firm internalizes transactions vis-à-vis the open market to reduce their cost, and, therefore, the purpose of law is to provide a default framework to which the founders of the firm would have agreed if they had unlimited resources, foresight, and time to negotiate. Despite being a unidimensional and ideologically driven school of thought, it is commonsensical to pay attention to how law and economics adherents have mapped the firm – that is, in terms of its economic function and through the lens of transaction costs. Undoubtedly, what has transformed the modern corporation into the juggernaut it is today is what law and economics writers call asset partitioning, i.e. the sum of entity shielding and owner shielding.4 As this breed of authors claim, the principal function of corporate law is to provide business enterprises with 1 Henry Hansmann and Reinier Kraakman, ‘The Essential Role of Organizational Law’ [2000] NYU Law and Economics Working Paper No. 00-006 accessed 16 July 2017. 2 Reinier Kraakman, John Armour, et al., The Anatomy of Corporate Law: A Comparative and Functional Approach (2nd edn, Oxford University Press 2009) 8. 3 Jonathan R. Macey, Corporate Governance: Promises Kept, Promises Broken (Princeton University Press 2008) 28. 4 Kraakman, et al., op. cit., 9.

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a legal form that possesses five attributes, i.e. legal personality, limited liability, transferable shares, centralized management under a board structure, and shared ownership by contributions of capital.5 While it is true that most of these attributes can be achieved by contract among free parties, legal personality requires a special doctrine on which to ‘mount’ the limited liability (which is restrictedly achievable by contract only at great cost), shielding the assets of the firm from the creditors of the owners and vice versa.6 Furthermore, the three uncontroversial characteristics not requiring specific legal doctrines derive from the core, latter ones. It is noteworthy that companies were not always as they are today. Adam Smith, the father of economics himself, for example, saw companies as proper merely for carrying out ventures of such magnitude, with social value but high risk, that he got to the point of calling such endeavors ‘experiments’ of the State.7 He was completely wrong when he considered that they could not compete with smaller market participants, although this is explainable by his inability to foresee technological advances as well as his general beliefs on competition, self-interested behavior, and speculation.8 What is most interesting, particularly when trying to argue that businesspeople have always tried to limit risk other than with their skillset – and, henceforth, that there is something ‘natural’ about the way companies are structured nowadays – is to delve into their history. And there is nowhere better for that purpose than Roman antiquity, the precursor of our legal system and everyday customs. There are three Roman Law institutions which are commonly seen as predecessors of the modern corporation’s asset partitioning regime: the peculium, the societas, and the societas publicanorum. From the writings of the loose group of corporate governance authors who seem to monopolize all discussion spaces, there also seems to be a common spirit when discussing these institutions, i.e. on one side, they disparage the state origin of the legal forms used to do business and, on the other side, consider it a ‘failure’ of the Roman Empire not to have created one with 5

Ibid. Giacomo Rojas Elgueta, ‘Divergences and Convergences of Common Law and Civil Law Traditions on Asset Partitioning: A Functional Analysis’ [2009] University of Pennsylvania Journal of Business Law 12(2): 517–554. 7 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (MetaLibri 2007) 568. 8 Andreas Martin Fleckner, ‘Adam Smith on the Joint Stock Company’ [2016] Max Planck Institute for Tax Law and Public Finance Working Paper 2016-01, 51. 6

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the characteristics of the modern corporation.9 Putting aside asset partitioning as an analytical framework, this view is, at best, a nunc pro tunc fallacy,10 and, at worst, unnervingly patronizing. In Bainbridge and Henderson’s opus Limited Liability, which will be loosely counterpointed here because of its attentiveness and focus, besides the state-sanctioned legal forms, the peculium is given particular precedence as the precursor of the fully shielded entity, i.e. corporate personhood enhanced via limited liability.11 The peculium was used by a paterfamilias to allocate property to his subordinate, for example a child or a slave, and the latter could administer it freely though not gift it or inherit downwards without the interference of the paterfamilias, who, in turn, could dissolve it at any time and was liable in suits against the peculium only to the extent of the peculium’s value.12 Roman Law had other types of peculium for sons leaving for military duty or going into the civil service, i.e. the castrense peculium and the quasi-castrense peculium, respectively; they were less restrictive as the holder was able to dispose of them freely or by testament.13 In some of the analyses carried out by law and economics scholars it is suggested that the asset partitioning regime of the peculium somehow fell short and that this was a consequence of the Roman view of trade as demeaning,14 insofar as the paterfamilias’ liability in litigation was capped to the value of the peculium and even though the peculium was not shielded, so it could be reached in the case that the creditors of the paterfamilias had a claim against his estate. As mentioned earlier, the peculium is not a match for the modern corporation in terms of risk allocation, monitoring efficiencies, and capital pooling. However, also as mentioned earlier, analyzing it through 9 Henry Hansmann, Reinier Kraakman, and Richard Squire, ‘Incomplete Organizations: Legal Entities and Asset Partitioning in Roman Commerce’ [2014] European Corporate Governance Institute, Law Working Paper No. 271/2014. 10 Greg Goodale, The Rhetorical Invention of Man: A History of Distinguishing Humans from Other Animals (Lexington 2015) 38. Also, Robert E. Mitchell, The Language of Economics: Socially Constructed Vocabularies and Assumptions (Palgrave 2016) 27. 11 Stephen M. Bainbridge and M. Todd Henderson, Limited Liability: A Legal and Economics Analysis (Edward Elgar Publishing 2016) 22. 12 Bruce W. Frier and Thomas A.J. McGinn, A Casebook on Roman Family Law (Oxford University Press 2004) 263. 13 Thomas Collett Sanders, The Institutes of Justinian: With English Introduction, Translation and Notes (Parker and Son 1941) 238–239. 14 Hansmann, Kraakman, and Squire, op. cit.

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the lens of modern asset partitioning is deceptive to say the least. Not only was the Roman era dramatically different from today, but, as convincingly argued by Fleckner, there is not a single record suggesting that the peculium was used as a vehicle to fund larger enterprises, and the 50 books of Justinian’s Digest contain over a thousand precepts related to it.15 The peculium, thus, seems to have been a legal device which does (surprise!) what it says it does, no more no less. In the Digest, the praetor allowed actions against the peculium itself, explicitly naming the latter as being ‘like a patrimony’ or mass of assets,16 and, further, the peculium was said to resemble a man, i.e. it ‘come(s) into existence: it grows when it is added to, it lessens when underslaves die or things are destroyed: it dies when it is taken away’.17 Lacking freedom of disposition, which is a core element of ownership, and without any evidence that it was an economic battle horse, the peculium allowed people who had neither agency nor property rights the ability to prepare to take over the family’s estate, in the case of sons, or to make money and ransom themselves, in the case of slaves18 – both individuals, at the end of the day, personae alieno iuri subiectae. Modern authors remain puzzled about why the Romans did not take ‘the next developmental step’ in their organizational law, as if modern corporations were a force of nature which, in Marxist fashion, ought to follow mechanical and inextricable laws.19 Perhaps there is no next step? Granted, Rome was an agrarian economy and, indeed, as these authors claim, the aristocracy favored the role of rentier over that of merchant,20 but this is a simplistic approach when viewed against the backdrop of one of the most expansive and vibrant empires humanity has ever seen. As evidenced by the peculium – and, soon to be seen, by the societas and the societas publicanorum – Romans knew how to handle capital pooling and risk allocation, trading their way to wealth across many internal borders all across a vast empire and developing a rich body of law continuously 15

Andreas Martin Fleckner, ‘The Peculium: A Legal Device for Donations to Personae Alieno Iuri Subiectae?’ in Filippo Carlà and Maja Gori (eds), Gift Giving and the ‘Embedded’ Economy in the Ancient World (Heidelberg 2014) 223. 16 Frier and McGinn, op. cit., 265. 17 The Digest of Justinian, Volume II, Charles Henry Monro (trans.) (Cambridge 1909) 433–434. 18 Fleckner, ‘The Peculium’, op. cit. 19 Hansmann, Kraakman, and Squire, op. cit. 20 Aldo Schiavone, The End of the Past: Ancient Rome and the Modern West (Harvard University Press, 2000) 102.

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adapted to meet business needs.21 Moreover, authors like Temin have gone to great lengths in order to measure the economic output of ancient Rome, further making a strong case for how Roman institutions helped to reduce information asymmetries and transaction costs, at least to the extent that they made long-distance trade viable.22 While it is amply documented how Roman aristocrats frowned upon commerce, making a blanket judgement on a whole civilization based solely on their elite’s attitudes tells a fragmentary story and makes a feeble argument based on modern preconceptions. Cato, a defender of Senatorial values, made no mention of mercatura as disreputable and instead talked about its profitability and risks, while Cicero, the Roman politician par excellence, happily engaged in loans and issued letters of introduction to provincial governors in favor of traveling businessmen.23 Finally, it was only until the time of Constantine that commerce was taxed, while Plinius, marveling at the flourishing of the empire, claimed that so many people coming together by means of commerce made it possible that what was engendered anywhere was available everywhere.24 And this brings us to the other legal form for doing business in ancient Rome, the societas, which was used for an astonishing variety of business ventures in which two or more people combined, for example banking, maritime transport, oil, clothes, farming, etc.25 However, applying the modern law and economics framework of analysis to the societas results in another false negative, i.e. underdeveloped26 in this case. While it was an agreement between parties to share profits and losses from a joint business, the societas lacked a separate and shielded pool of assets distinct from the businesspeople creating it, forcing the creditors of the latter and of the societas to be on an equal footing and, thus, burdened by monitoring costs.27 Most importantly, in the eyes of the modern researcher there wasn’t a legal entity at all, for 21 Andreas Fleckner, ‘Corporate Law Lessons from Ancient Rome’ as posted by Scott Hirst (co-ed.) [2011] HLS Forum on Corporate Governance and Financial Regulation accessed 15 August 2017. 22 Peter Temin, The Roman Market Economy (Princeton University Press 2013) 100–102. 23 Philip Kay, Rome’s Economic Revolution (Oxford University Press 2014) 192–193. 24 W.V. Harris, Rome’s Imperial Economy: Twelve Essays (Oxford University Press 2011) 209–210. 25 Fleckner, ‘Corporate Law Lessons’, op. cit. 26 Hansmann, Kraakman, and Squire, op. cit. 27 Ibid.

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none of the members of the societas could act alone on its behalf. Again, this is a case where the analysis ought to be done leaving aside the biases and frameworks of the modern time. Roman Law lacked a comprehensive and developed legal institution of agency,28 and the societas itself, which was a pre-classical institution for the Romans, evolved from a consensual arrangement into a formal one on the intellectual foundation of what happened when the paterfamilias died and the potentially splintering families headed by the sons of the paterfamilias remained together through the principle of erctum non citum, perpetuating the family in substance and law.29 Moreover, for Romans, as with all ancient societies, there was no such a thing as ‘the economy’, but a web of social relations, some of which included exchange of goods or services. Moreover, since ancient Rome was a slave state, it derived most of its principles from dabbling in the concept of freedom, which was theoretically and factually translated into the capacity to make and maintain moral commitments to others.30 In such a world, it would have been too much to ask Romans to accept the idea that someone else could bind a third party or, even worse, that it would be honorable to allow such a thing to happen, as trust among free people was paramount. However it is a significant fact that Roman Law was heavily entangled in contemporary social norms and vision of the world. This is why Rome developed the societas publicanorum, departing from the original societas to display attributes of the modern corporation, i.e. legal personality, entity shielding, limited liability (at least for the limited partners), transferable shares, indefinite duration, and separation of management and control.31 Perhaps for the first time in history the immunity needed by the sovereign in order to govern was partially lent to a group of individuals for a specific enterprise. The catch? The catch was that the societas publicanorum was a requirement to bid for public works such as tax collection, roads, public infrastructure, army provisioning, and water works.32 And, in doing so, the partners of societas publicanorum became so wealthy and influential that, perhaps, that is the reason why there is no 28 Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition (Oxford University Press 1996) 47–56. 29 Ibid 451–452. 30 David Graeber, Debt: The First 5,000 Years (Melville 2011) 203–204. 31 Barry Hawk, Law and Commerce in Pre-Industrial Societies (Brill 2015) 232. 32 Ulrike Malmendier, ‘Roman Shares’ in William N. Goetzmann and K. Geet Rouwenhorst (eds), The Origins of Value: The Financial Innovations that Created Modern Capital Markets’ (Oxford University Press 2005) 38.

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vestige of the legal form by the time the Empire had collapsed.33 After this point, there is a wealth of speculation among academics from all walks of life about why that happened. However, one single, unavoidable fact remains, i.e. that legal forms for doing business did not dramatically change for over a thousand years34 after the Romans. And this necessarily brings us to two relevant topics: one is the link between control and liability and the other is sovereign immunity. What can be seen in the Roman societas and, particularly, in the societas publicanorum, was the recognition that some enterprises were not only of great social importance but also of a magnitude that required resource pooling. In all cases, though, an understanding prevailed in the sense that those in any form of control (e.g. the paterfamilias who transgressed the peculium by getting involved in the business of the son or slave to whom the peculium was given) were by their actions accepting that the result of the enterprise was in their hands and, thus, they had to suffer its ill fate. This ancient conception of responsibility is a far cry from our present culture of encouraged carelessness and speculation. Therefore, it is necessary to dissect and analyze the contemporary authors’ paternalistic view on Roman organizational law.35 There is a case for explaining the apparent disappearance of the societas publicanorum by the emperors not wanting another power to contend with theirs36 – and, seeing the current state of affairs in our era, it would be hard to blame the political power of the time.37 After all, the ‘immunities’ enjoyed by the societas publicanorum were borrowed temporarily from the sovereign. What is vexatious, though, is the suggestion that, somehow, the Romans ‘failed’ in not coming up with a corporate form with strong entity and owner shielding, freely tradable shares and a governance structure well suited for quenching the thirst of risk of frenzied investors, shouting buy and sell orders on the trading floor. Authors like Hansmann et al. talk about the evolution of a sophisticated, modern market economy as partially involving the creation of legal entities such as the ones we have today.38 This is beyond a mere circular 33 Adolf Berger, Encyclopedic Dictionary of Roman Law, Volume 43 (American Philosophical Society 1991) 661. 34 Bainbridge and Henderson, op. cit., 23. 35 Hansmann, Kraakman, and Squire, op. cit. 36 Daniel Friedman, Morals and Markets: An Evolutionary Account of the Modern World (Palgrave 2008) 101. 37 Stephen Wilks, The Political Power of the Business Corporation (Edward Elgar Publishing 2013) 42–45. 38 Hansmann, Kraakman, and Squire, op. cit.

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argument, for sophistication is defined as becoming more complex, developed or subtle (after all it comes from the Greek sophistes which itself derives from wisdom39), but an argument thrown in for the sake of merely stating the obvious, i.e. the world over 1,500 years ago was not what it is today, and it could not have become what it is today without having gone through the process it did. Or maybe the authors equate the idea of market economy with something different from a system where economic decisions are determined by supply and demand, which in turn determine prices? Rome, with its knack for warfare and a prosperity nested in the most extensive and enduring slave system in pre-modern history,40 is not precisely a society we would nowadays call a beacon of freedom. However, that is no obstacle to making a scholarly case, as Temin convincingly does, in the sense that the Roman empire was as advanced a market economy as can be seen in the era, adding for good measure the case of Rome having a GDP similar to that of the Netherlands of the 1600s – once variables are adjusted for comparison purposes.41 More puzzling than the aforementioned qualms, though, is the between-the-lines suggestion that such development was achievable ‘despite’ the fact that the societas publicanorum was exclusive to projects deemed to have societal value. Hansmann, Kraakman, and Squire, for example, open their paper singing the praises of the societas publicanorum inasmuch it resembles the modern limited partnership, just to immediately qualify this with ‘but use of that form was generally limited to firms providing services contracted out by the state’.42 Let’s pause here to unpack that apparent discomfort towards prosperity, on one side, and lack of modern legal entities on the other. It is entirely possible to make a compelling case for the modern company as one of the competitive advantages catapulting the West into overtaking other civilizations,43 because it evidently facilitates the pooling of capital for productive investment while spreading the risk for investors and exercising efficient management over large organizations. Nonetheless, there are two aspects of the history reviewed so far that unnecessarily collide with the 39

Francis E. Peters, Greel Philosophical Terms: A Historical Lexicon (New York University Press 1967) 179. 40 Kyle Harper, Slavery in the Late Roman World, AD 275–425 (Cambridge University Press 2011) 3–6. 41 Temin, op. cit., 243–261. 42 Hansmann, Kraakman, and Squire, op. cit. 43 John Micklethwait and Adrian Wooldridge, The Company: A Short History of a Revolutionary Idea (Phoenix 2003) 9.

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ideological stance of some authors, i.e. first, the fact that entrepreneurship and investment were capable of generating considerable benefits way before the modern corporation came to be, and, second, that the company is a creature of the State. The first assessment is a truism. Human society, as the Romans demonstrated, does not require the attributes offered by the company form to undertake enterprises which generate benefits for its members and the community at large – although, evidently, their availability maximizes both the positive and negative outcomes. The second, though, should also be incontrovertible, were company law not a receptacle of interwoven political, legal and economic considerations.44 As presented in Chapter 1, a particular dogma permeates mainstream economics,45 and understanding the modern corporation not as natural evolution but as a creature of the State is nothing short of an ideological minefield for people who are way too invested in their worldview. Perhaps, as Rist suggests, the paradigm of war upon which economics is built46 makes simple concessions look like a defeat. In particular, the paradigm concerning how the different theories on the origin of corporate personhood and the privilege of limited liability came to be has both ideological and practical significance in terms of policy.

2. ALL ROADS LEAD TO ROME: THE MIDDLE AGES For the next thousand years the corporate form – and with it limited liability – remained unchanged.47 The essence of what occurred during that time continued to be a pragmatic approach to business, one where liability was tied to responsibility. Moreover, it was crowned, as was the case with Rome, with the notion of sovereign immunity. Mainstream academia talks (briefly) about the Middle Ages, between the pre-modern and modern corporate form, in terms of mere contractual arrangements implied to be financing operations and for the purpose of 44 Jukka Mähönen, ‘Do We Need Law and Economics in Company Law?’, Nordisk Tidsskrift For Selskabsret, Nr. 1/2, 2009, pp. 146–157. 45 See Steven G. Medema, ‘From Dismal to Dominance? Law and Economics and the Values of Imperial Science, Historically Contemplated’ in Aristides Hatzis and Nicholas Mercuro (eds), Law and Economics: Philosophical Issues and Fundamental Questions (Routledge 2015) 69. 46 Inasmuch there are scarce resources over which numerous parties compete and their motivation is coldly rational; see Gilbert Rist, The Delusions of Economics (Zed Books 2011) 15. 47 Supra 34.

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limiting liability, for example the commenda, the qirâd, the isqa, etc.48 This generalization requires some analysis, though. As Postan correctly points out, the classification of partnerships in medieval sources follows the logic not of economic function but of relations between partners, and the pure finance nature is not omnipresent.49 This is an important caveat as it dilutes the narrative implying that for over a thousand years the business world instinctively knew – and strived for – the modern corporation. The commenda was not, by definition, a financial tool for the bilateral pooling of capital – and so it is the subject of much scholarly controversy;50 the economic status of each participant was what revealed the established relation, for example it was an investment tool when the commendator (limited partner) was a widow or the administrator of a dowry while the tractator (general partner) was an established merchant, though if the former was the entrepreneur then it was likely a mere labor partnership or hire of service.51 There were other forms of doing business, for example the Genoese compagna, grown out of family unions and in which all participants contributed both capital and labor and were jointly and severally liable for debts.52 While special provisions were needed in order to protect those contracting with it in case it ceased to exist,53 its characteristics resembled those seen inland in the Offene Gesellschaft, and the prototype called Wederlegginge,54 again echoing the presence of both labor and capital and, thus, placing in context the exhilaration found elsewhere when referring to these forms of doing business as purely innovative financial instruments.55 In particular, it is of great interest to look closely at Heck’s point about European forms of doing business in the Middle Ages being as much inspired by Greco-Roman models as outright dictated by Islamic prototypes.56 While it is a platitude to assert that trade between cultures 48

Ibid. M.M. Postan, Medieval Trade and Finance (Cambridge University Press 2002) 67–68. 50 Louise Buenger Robbert, ‘Venice and the Crusades’ in Kenneth M. Setton (ed.), A History of the Crusades, Volume V: The Impact of the Crusades on the Near East (The University of Wisconsin Press, 1985) 403–404. 51 Postan, op. cit., 69. 52 Ibid 70. 53 J.K. Hyde, Society and Politics in Medieval Italy: The Evolution of the Civil Life, 1000–1350 (Macmillan 1973) 96. 54 Postan, op. cit., 70–71. 55 Gene W. Heck, Charlemagne, Muhammad, and the Arab Roots of Capitalism (de Gruyter, 2006) 247–248. 56 Ibid. 49

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generates the borrowing of ideas, techniques and tools, this hypothesis ought to be placed in context. First, in the same way as in the West, markets in the Islamic world were never independent from the government, though Adam Smith’s ‘borrowing’ from Tusi regarding the division of labor was rooted in a ‘natural propensity to truck and barter’ for the Scotsman, while, for Tusi himself, it was an extension of mutual aid;57 hence there was an ethical underbelly which does not seem to have notoriously spread either way. Second, there is no standing for corporations in classical Islamic law, and it did not even develop the concept of persona ficta – or recognize it – until quite recently.58 So much for the hypothesis of the modern corporation as an inevitable discovery by the hand of adventurous innovators. Instead, it appears that the contact caused by trade did influence all sides involved, yet, understandably, from the platform of people’s own customs and beliefs – for human activities are predicated upon tradition-bound acceptance of a value hierarchy.59 Throughout this period, against the backdrop of Greco-Roman conceptions furthered by Christianity immediately thereafter, the corporate form – and with it limited liability – shaped what is the most solid – and oldest – argument for the fiction theory of the corporation: sovereign immunity. In the first chapter we illustrated how choosing a theoretical framework in company law theory is never ‘technical’ but always ideological, i.e. in the case of the contractual theory of the firm, the syllogism is that if the firm is a mere web of contracts and the State’s role is to guarantee the enforcement of contracts, nothing further than merely refereeing the stakeholders of a firm contracting with each other ought to be even considered.60 Thus it is paramount also to dismantle that part of the agency theory, as the more it remains isolated at the pinnacle of academia the more it controls the collective view about the role of the firm in society, and, through public pressure (or permissiveness), shapes policymaking.61 57

Graeber, op. cit., 278–279. Timur Kuran, ‘The Absence of the Corporation in Islamic Law: Origins and Persistence’ [2005] American Journal of Comparative Law 53: 785–834. 59 Jordan B. Peterson, Maps of Meaning: The Architecture of Belief (Routledge 1999) 361. 60 See: Henry Butler, ‘The Contractual Theory of the Corporation’ (1989) George Mason Law Review 11(4): 99–123; George Mason Law and Economics Research Paper No. 12-19. 61 David E. Schrader, The Corporation as Anomaly (Cambridge University Press 1993) 3. 58

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Indeed, to modern eyes, the Romans could have done more to incentivize investment, but the evolving abundance, complexity and sophistication of their rules for trade and commerce suggests that they did not ‘fail’ to respond to business needs.62 Instead, it simply was not part of their socio-cultural structure to view businesses as fully formed persons in the eyes of the law and to bestow upon them limited liability across the board. For Romans, every law was created for the sake of men (hominum causa omne ius constitutum est63) hence the material and moral reality of the legal form was neither to be equated nor confused with the reality of its creator, who is the beginning and end of the juridical ethos.64 Moreover, in Ancient Rome, sovereignty, a res publica as argued by Cicero, was a legitimate form of commonwealth insofar as the people held the sovereign power and simultaneously entrusted their sovereignty for the administration of society into hands of the elite.65 Furthermore, there is a case for the articulation of the idea of sovereignty showing a continuum from ancients all the way to moderns – evidenced by scholars like Bodin, Grotius, and Hobbes appealing to sovereignty as being essentially immune from review, veto or punishment, with some explicitly siding with the Greek notion of anupeuthunos, i.e. unaccountable to any authority.66 And this is the cue for the watershed moment in the history of the West – at least for legal theorists, that is – when ‘the greatest lawyer that ever sat upon the chair of St. Peter, Pope Innocent IV’67 proclaimed in his Apparatus in Quinque Libros Decretalium that the personality of the corporation was a fiction granted by the State or created by law regardless of it being a separate and distinct social 62

Andreas Martin Fleckner, ‘Roman Business Associations’ in Giuseppe Dari-Mattiacci (ed.), Roman Law and Economics (Oxford University Press forthcoming). 63 Codex Hermogenianus, as collected in the Digest 1.5.2. Available online accessed 24 September 2017. 64 Jorge Barrera Graf, ‘Instituciones de Derecho Mercantil’ (Editorial Porrúa 2005) 713. 65 Valentina Arena, ‘Popular Sovereignty in the Late Roman Republic’ in Richard Bourke and Quentin Skinner (eds), Popular Sovereignty in Historical Perspective (Cambridge University Press 2016) 74–75. 66 Kinch Hoekstra, ‘Athenian Democracy and Popular Tyranny’ in Richard Bourke and Quentin Skinner (eds), Popular Sovereignty in Historical Perspective (Cambridge University Press 2016) 16–17. 67 Fredric William Maitland, ‘Moral Personality and Legal Personality’ [1905] Journal of the Society of Comparative Legislation 6(2): 192–200.

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entity.68 Let’s unpack what a momentous thing in Western history and development that was. In Beyond Good and Evil, Nietzsche, for all his vitriol against the Catholic church, saw and recognized that the ‘long un-freedom of spirit, the mistrustful constraint in the communicability of thought, the discipline that thinkers imposed on themselves, thinking in certain guidelines imposed by the church’69 were, at the end of it all, the means through which the European spirit strengthened itself by developing a reckless curiosity and subtle agility. What Nietzsche was identifying in Beyond Good and Evil was not only the seeds of the Enlightenment but of the modern state, as the papacy under Pope Innocent IV had to create, refine, and maintain a huge, well-oiled bureaucratic machine in order to keep order over a continent fractured into several quarrelsome nobles; all the while, via plenitudo potestatis, judge all men but to be judged by none70 – other than by the principle, the idea, the abstraction of God and His word. However, in order to assess the fateful juridical step taken by Pope Innocent IV we ought to provide some historical context. In the 11th century, the issue of transubstantiation71 pitted Lanfranc, the future Archbishop of Canterbury, against Berengar of Tours. The former saw the opinion of the latter, that the bread and wine were only symbols of Jesus’ body and blood, as a denial of the realness in the Eucharistic experience.72 Kantorowicz suggests that the church reacted to this by developing an emphatic doctrine of a ‘corpus Christi’ tangibly and individually existing in the consecrated bread, while the ‘corpus mysticum’, a term formerly used for the bread, was then used to designate the institutional, self-sufficient collective forming the church’s massive legal and management machine – and, by doing so, effectively secularizing the 68 Henry S. Turner, The Corporate Commonwealth: Pluralism and Political Fictions in England: 1516–1651 (University of Chicago Press 2016) 18–19. 69 Friedrich Nietzsche, Beyond Good and Evil: Prelude to a Philosophy of the Future (Cambridge University Press 2003) 78. 70 Mary Robert Reis, ‘Pope Innocent IV and Church-State Relations, 1243–1254’ [1972] Loyola University Chicago, dissertation paper 1224 accessed 25 September 2017. 71 ‘… the eucharistic canon, that chief part of the liturgy, during which the sacrament, i.e., the change or the transubstantiation of the eucharistic gifts of bread and wine into the body and blood of Christ, is accomplished.’ See Alexander Schmemann, The Eucharist: Sacrament of the Kingdom (St. Vladimir’s Seminary Press 2003) 159; see Matthew 26:26–28, e.g. King James version. 72 John Michael Perry, Exploring the Evolution of the Lord’s Supper in the New Testament (Sheed & Ward 1994) 123.

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medieval church by placing an individual, eternal prototype on one side and, on the other, the body politic.73 It was in such a milieu that Pope Innocent IV rolled out the concept of persona ficta, and, alas, there are authors who claimed this was done without a fully developed justification.74 However, there are sufficient practical elements to disagree with the latter assertion. Moreover, Kantorowicz makes a convincing case when contextualizing Pope Innocent IV’s contemporaries such as Bernard de Parma, who already spoke of the papal predecessor and successor being the same person inasmuch the dignity of the institution itself never dies.75 When this idea of an organized collective having a persistent, allegorical essence extended to the political realm, then, it was easier for Western jurists to work out the supremacy required to advance shared principles over an identifiable, unified realm. This idea of a symbiotic relationship, in which an individual exercised supreme authority over people who themselves delegated that power, thus legitimizing it, was not a discovery but rather a continuation of Roman thought.76 The idea, born as Greco-Roman and matured as Christian, reached its apotheosis with Jean Bodin, who articulated the first systematic theory of sovereignty proper and underlined how absolute it ought to be while bound by divine and natural law. In his own words, Law depends on him who has the sovereignty and he can obligate all his subjects (by a law) but cannot obligate himself. A contract between a prince and his subjects is mutual; it obligates the two parties reciprocally and one party cannot contravene it to the prejudice of the other and without the other’s consent. In this case the prince has no advantage over the subject except that, if the justice of a law that he has sworn to keep ceases, he is no longer bound by his promise, as we have said, which is a liberty that subjects cannot exercise with respect to each other unless they are relieved [of their obligations] by the prince.77

From such a dialogue – between the people from whom sovereignty emanates and the personification upon which is then delegated – it can be said that abstractions of historically-determined, hierarchically-arranged 73 Ernst Kantorowicz, The King’s Two Bodies: A Study in Medieval Political Theology (Princeton University Press 2016) 195–199. 74 Patrick Glenn, The Cosmopolitan State (Oxford University Press 2013) 56. 75 Kantorowicz, op. cit., 386. 76 Cecil N. Sidney Woolf, Bartolus of Sassoferrato: His Position in the History of Medieval Political Thought (Cambridge University Press 2012) 35. 77 Jean Bodin, On Sovereignty: Four Chapters from the Six Books of the Commonwealth, Julian H. Franklin (ed.) (Cambridge University Press 1992) 15.

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behaviors come from, i.e. a pattern or system governing personal conduct, interpersonal interaction and semantic description.78 That is perhaps the institutional framework that the church’s greatest foes, as is the case of Nietzsche, identified and admired because of its strength to bring together the totality of the body politic, even the lowly, into a niche within a metaphysical order.79 When authors like Graeber rightly – though with a tinge of scorn – attribute to Innocent IV fathering corporate personhood proper as an angelic being80 (paraphrasing Kantorowicz no less), and then suggest property ownership and financial arrangements as possible drivers behind its application to monasteries, parishes, universities, and guilds, they may be oversimplifying a much more complex historical, political, and theological context. After all, the Catholic Church’s drive to formalize the concept of the corpus mysticum coincided with a moment in the history of Western thought when doctrines of the organic structure of society fueled numerous political theories, for example John of Salisbury’s Policraticus.81 It would be highly speculative to authoritatively attribute the entire precursor (or follower) role to the Church in this regard. In any case, understanding the political and philosophical shift that was taking place back then within the church, and, thus, throughout Europe, is paramount to understanding how Christianity not only did not oppose but furthered what, in corporate matters, had already been in motion since the time of ancient Rome. Actually, the debate about transubstantiation between Lanfranc and Berengar of Tours, to which we referred above, was fueled by the latter’s insistence that since reason was a gift of God it should be applied to matters of faith, thus making evidence more important than mere authority in theological matters.82 After all, Berengar of Tours is considered one of the first Scholastics, bringing back the Aristotelian syllogistic logic of a dialectic, centered on the pursuit of truth and methodologically expressed as question, disputation and conclusion.83 Henceforth, in part, what Pope Innocent IV and his contemporaries did when verbalizing the ‘persona ficta’ was not only to mirror 78

Peterson, op. cit., 156. Dirk R. Johnson, Nietzsche’s Anti-Darwinism (Cambridge University Press 2000) 94. 80 Graeber, op. cit., 304–305. 81 Kantorowicz, op. cit., 199. 82 Edward Grant, God and Reason in the Middle Ages (Cambridge University Press 2001) 51–52. 83 Jeffrey Burton Russell, Dissent and Reform in the Early Middle Ages (Wipf & Stock 1965) 162–166. 79

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the political shift of a dispersed Europe coming together as well as the juristic articulation of a social reality, but also to provide a methodological framework to understand a state bridging what is ‘existing in the intellect’ (esse in intellectu solo) and what is ‘existing in reality’ (esse in re), and the lack of a proper language for such a step forward left them with the metaphysical toolbox as their only weapon.84 An example of the latter is Saint Anselm of Canterbury himself, who was not regimented in his use of the verbs ‘to be’ and ‘to exist’ when writing his famous ontological argument for the existence of God, circa 1078.85 Henceforth, as Maiolo correctly asserts, we must to set aside the image of medieval civilization as static and rigid,86 for it was a period when the foundation of an independent political body was being laid down87 and where the individuals in the hierarchy started to identify whatever power they exercised not with themselves but with an ideal,88 whether that be the kingdom of God or, as it gradually came to be, sovereignty. Time had come for Europe to recreate its cosmogony, the world it had chosen to inhabit,89 and corporations were part of that rebuilding. In practical terms, immunity within the rule of law is commonsensical because it facilitates the uninterrupted functioning of the authorities insofar as they act, at least theoretically, for the benefit of the body politic upon which sovereignty rests. As evidenced by the societas publicanorum, ancient Romans understood that bestowing their immunity upon profit-seeking investors involved in enterprises considered beneficial to society was also in everyone’s interests. Furthermore, as the peculium shows, they also had clear ideas regarding the injustice of holding someone unlimitedly liable when that person was detached from the liability-triggering activity.

84 C.G. Jung, Collected Works of C.G. Jung: Volume XIV, Mysterium Coniunctionis (Routledge 1979) 691. 85 Paul E. Oppenheimer and Edward N. Zalta, ‘On the Logic of the Ontological Argument’ in James Tomberlin (ed.), Philosophical Perspectives 5: The Philosophy of Religion (Ridgeview 1991) 509–529. 86 Francesco Maiolo, Medieval Sovereignty: Marsilius of Padua and Bartolus of Saxoferrato (Eburon Delft 2007) 121. 87 Woolf, op. cit., 160. 88 Paul Tillich, A History of Christian Thought, from its Judaic and Hellenistic Origins to Existentialism (Simon and Schuster 1968) 149–150. 89 Mircea Eliade, The Sacred and the Profane: The Nature of Religion (Harcourt 1987) 51.

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3. THE CORPORATE FRANKENSTEIN COMES ALIVE The Roman Empire’s stance on legal forms endured for hundreds of years. Underneath the surface, though, a momentous shift was taking place within Christendom. If it can be said that even though the Roman conceptions of person weren’t as sophisticated as they later came to be,90 there was a seed already planted in the form of personhood by virtue of an ability to personify a role – and so a group of persons could personify a whole; this conception went through a path of doctrinal fiction via Bartolus when he wrote ‘universitas proprie non est persona; tamen hoc est fictum pro vero, sicut ponimus nos iuristae’, i.e. an artificial person is not really a person; and yet, this fiction stands in the name of truth, because we, jurists, establish it, which then touched down as legal fiction with Savigny.91 The crowning point was, as Deiser highlights, when Savigny articulated that legal entities were persons because the legislator wills it.92 This position was not without contest, though. Enter Otto von Gierke, for whom legal persons could be regarded as if they were natural organisms endowed, like human beings, with their own will and interest, different from the human beings forming them.93 As Gierke’s criticism went, Savigny reasoned that all law exists for the sake of the moral freedom inherent in every human being, so the concept of person or legal subject must coincide with the concept of the human being – extending legal capacity to artificial subjects admitted by means of a pure fiction.94 The doctrine of the fictitious legal person has the central problem of duality, though, i.e. a self-inflicted wound of sorts. If the legal person is fictitious then it cannot be attributed with human will or human acts, for example the legal person can hold property rights but is unable to act in order to acquire them, so in order to do so a human being representing it

90

Ugo Pagallo, The Laws of Robots: Crimes, Contracts, and Torts (Springer 2013) 155. 91 Francesco Galgano, ‘El Concepto de Persona Jurídica’ [2004] Revista Derecho del Estado, Universidad Externado de Colombia 1(16): 13–28. 92 George F. Deiser, ‘The Juristic Person’ [1908] University of Pennsylvania Law Review and American Law Register Vol. 57(3), Vol. 48 New Series: 131–142. 93 John D. Lewis, The Genossenschaft-Theory of Otto Von Gierke: A Study in Political Thought (University of Wisconsin 1935). 94 Stanley L. Paulson, ‘Hans Kelsen’s Doctrine of Imputation’ [2001] Ratio Juris 14(1): 47–63.

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performs the act, giving foot to another anomaly: a legal person’s will by means of a human being’s will, thus creates an artificial will.95 The aforementioned theoretical problem lacks the same vitality when the object of study is a state or ecclesiastic institution, and that is thanks to the comprehensiveness put forward (or echoed) by Innocent IV, and, not least, to the unifying concept of the everlasting dignity of an institution of authority96 within the interplay between corpus naturale and corpus mysticum. The same blueprint, via the principle of sovereignty, could be argued for regarding the State, then and now, as an abstract and impersonal receptacle for the exercise of supreme authority emanating from the collectivity.97 The reason it may also have well served private corporations back in that era – only to gradually lose its compactness – can be inferred without too much effort, i.e. as personhood and limited liability (entity and owner shielding) morphed from their clear link to the State into what they are now, the doctrinal difficulty arose from the lack of ‘higher’ unifying principle (or enduring dignity) used to maintain such an imaginative solution to the immortal and formidable soullessness of a fictional entity. Whether the private corporation is analyzed through the nexus of contracts or real entity theories, as we have discussed in Chapter 2 through Foster’s framework, the attempts end up being merely descriptive or operational, or they err by anthropomorphizing phenomena, or, finally, they fail through confusing enterprise and legal entity.98 Most of all, again, it is a matter of public, communal, or spiritual dimensions retreating from the legal form. Beyond the structural causes behind failed convergence – as it continues to be to this day99 – the fact of the matter is that for centuries after Innocent IV the status quo persisted. As late as 1807 in places like Russia, the partnerships continued to feature unlimited liability for working partners and a limited liability for ‘outsiders’, and corporate law devoted only two paragraphs to the corporation because its internal structure and the rights and responsibilities of stockholders were left to each charter, understood as it was that limited liability was a privilege 95

Ibid. Kantorowicz, op. cit., 195–199. 97 Brian Nelson, The Making of the Modern State: A Theoretical Evolution (Palgrave Macmillan 2006) 14–15. 98 Nicholas H.D. Foster ‘The Theoretical Background: The Nature of the Actors in Corporate Social Responsibility’ in Stephen Tully (ed.), Research Handbook in Corporate Legal Responsibility (Edward Elgar Publishing 2005). 99 Véronique Magnier, Comparative Corporate Governance: Legal Perspectives (Edward Elgar Publishing 2017) 6–7. 96

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and thus granted solely for projects of national economic importance through a permit by the tsar.100 Chartered in 1799 and confirmed by Alexander I in August of 1801, the Russian American Company had the exclusive right to manage Russian resources in the Empire’s American colony and it was a joint-stock company through and through, i.e. any Russian subject was able to purchase shares for 500 rubles each101 and whomever held at least ten was eligible to vote in the annual general meeting of shareholders, in which, among other things, directors were elected.102 Although this particular company was modeled after its Western European rivals (e.g. Britain’s East India Company and Hudson’s Bay Company103), the Russian experience dated back to the 16th-century Muscovy Company,104 while, throughout Europe, the idea was spreading of granting privileges to private parties in exchange for them risking their capital to tackle colonial and commercial projects considered worthy by the State.105 The London Metropolitan Archives note that the Muscovy Company’s original charter perished in the Great Fire of London of 1666,106 although it is still possible to read the transcript and doing so reveals that the elements that had been brewing for centuries are carried forward, i.e. ‘They … shall be from henceforth one body and perpetual Fellowship and commonality of themselves both in Deed and in Name’,107 and such granting of personhood, paired with the protection of limited liability, was bestowed upon the Muscovy Company by ‘… We of our further Royal favour and munificence of our mere motion certain knowledge and especial Grace for as our Heirs and

100

Thomas C. Owen, The Corporation Under Russian Law, 1800–1917: A Study in Tsarist Economic Policy (Cambridge University Press 2002) 12. 101 Lydia T. Black, Russians in Alaska, 1732–1867 (University of Alaska Press 2004) 255. 102 Ilya Vinkovetsky, ‘The Russian-American Company as a Colonial Contractor for the Russian Empire’ in Aleksei I. Miller and Alfred J. Rieber (eds), Imperial Rule (Central European University Press 2004) 161. 103 Ibid 164. 104 Micklethwait and Wooldridge, op. cit., 26. 105 Ilya Vinkovetsky, Russian America: An Overseas Colony of a Continental Empire: 1804–1867 (Oxford University Press 2011) 67. 106 London Metropolitan Archives, Collections Catalogue. Reference Code: CLC/B/195 accessed 20 October 2017. 107 Graham Stewart, Britannia: 100 Documents that Shaped a Nation (Atlantic Books 2010).

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Successors have given and granted and by these presents do Give and Grant into the same’.108 With its share capital of £6,000 divided into shares of £25 each, delegated management, and all that jazz, the wackily named ‘The Mystery and Company of Merchant Adventurers for the Discovery of Regions, Dominions, Islands and Places Unknown’109 was not an outlier. With a similar purpose – opening routes to trade and acquiring raw goods in faraway lands for the benefit of the charter-issuing monarchs who weren’t keen on footing the bill and clashing openly with their rivals110 – the phenomenon was fashionable and in full swing at this time, for example: Compagnie van Moscovia (1577), the Levant Company (1581), the Africa Company (1588), the Eastland Company (1592), the English East India Company (1600), the Dutch East India Company (1602), the Virginia Company (1606), the Danish East Indian Trading Company (1616), the Dutch West India Company (1621), the Compagnia delle Indie orientali (1647), the Royal African Company (1662), the Compagnie des Indes (1664), the Hudson’s Bay Company (1670), the South Sea Company (1711), the Swedish East Indian Trading Company (1731), etc.111 Combing through the charters of these and other corporations is illuminating. The British Library keeps, physically and online, beautifully crafted patent letters.112 The East India Company charter, for example, reads: KNOW YE THEREFORE, that we, greatly tendering the Honour of our Nation, the Wealth of our People, and the Encouragement of them, and others of our loving Subjects in their good Enterprizes, for the Increase of our Navigation, and the Advancement of lawful Traffick, to the Benefit of our Common Wealth, have of our especial Grace, certain Knowledge, and mere Motion, given and granted, and by these Presents, for us, our Heirs and Successors, do give and grant unto our said loving Subjects, before in these Presents expressly named, that they and every of them from henceforth be, and shall be one Body Corporate and Politick, in Deed and in Name, by the Name of The Governor and Company of Merchants of London, Trading into the East-Indies, and them by the Name of The Governor and Company of 108

Ibid. R. Hakluyt, S. Purchas, et al., The Origin and Early History of the Russia or Muscovy Company (Harvard 2005, digitalization of 1830 original) 4. 110 Robert Brenner, Merchants and Revolution: Commercial Change, Political Conflict, and London’s Overseas Traders, 1150–1653 (Verso 2003) 13–14. 111 Luchien Karsten, Globalization and Time (Routledge 2013) 91. 112 British Library, East India Company accessed 21 October 2017. 109

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Merchants of London, Trading into the East-Indies, one Body Corporate and Politick, in Deed and in Name, really and fully, for us, our Heirs and Successors, we do order, make, ordain, constitute, establish and declare, by these Presents, and that by the same Name of Governor and Company of Merchants of London, Trading into the East-Indies, they shall have Succession, and that they and their Successors, by the Name of The Governor and Company of Merchants of London, Trading into the East-Indies, be and shall be, at all Times hereafter, Persons able and capable in Law, and a Body Corporate and Politick, and capable in Law to have, purchase, receive, possess, enjoy and retain, Lands, Rents, Priviledges, Liberties, Jurisdictions, Franchises and Hereditaments of whatsoever Kind, Nature, and Quality so ever they be, to them and their Successors.113

It is clear that a line can be drawn from earlier times to today. Drawing from Polybius, in Cicero’s ‘De re publica’, the people, ultimate repository of sovereignty, entrust the management of their collective power to a person or a body who then has the duty of administering it in the people’s interest.114 This vocabulary passed almost intact to describe the duality of a monarch both as a person and as a public function – the essence of which was eternal and, unlike the physical body, could be entrusted to other fictitious persons.115 Therefore, on the 31st of December 1600, in the 43rd year of her reign, what Queen Elizabeth did was to articulate what came closest to the function of sovereignty,116 i.e. appointing an agent of sorts to exercise the maiestas bestowed upon the function she occupied in that particular time and place. Note how Elizabeth exercised power ‘by the Grace of God’ and in her role as ‘Defender of the Faith’;117 thus, bound by that animating principle, she delineated the purpose, namely the honor of the nation and wealth of its people through the increase of navigation and advancement of lawful traffic; and, armed with such justification, pronounced that the group of 113 Wikisource contributors, ‘Charter Granted by Queen Elizabeth to the East India Company’, Wikisource accessed 21 October 2017. 114 Valentina Arena, ‘Popular Sovereignty in the Late Roman Republic: Cicero and the Will of the People’ in Richard Bourke and Quentin Skinner (eds), Popular Sovereignty in Historical Perspective (Cambridge University Press 2016) 78. 115 Roberto Esposito, Two: The Machine of Political Theology and the Place of Thought (Fordham 2015) 54. 116 Preston King, The Ideology of Order: A Comparative Analysis of Jean Bodin and Thomas Hobbes (Routledge 2013) 305. 117 ‘Charter Granted by Queen Elizabeth to the East India Company’, op. cit.

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people shall be ‘one body corporate and politic’.118 Owner and entity shielding materialized neither out of thin air as a natural phenomenon nor as a product of entrepreneurial innovation, but, instead, as a politically and theologically well-thought-out device for bureaucratic administration. As for the pooling of risk rationale, Lawson makes a very convincing argument in the sense that the East India Company did pretty well despite its first 12 voyages consisting of committed capital for one voyage only, the investors awaiting its return to cash out and reinvest, and with the first true joint-stock voyage not taking place until 1614.119 Furthermore, it was not until 1657 that continuous, unlimited investment plus valued and traded stock became systematic, making the case that the early success of the East India Company was due to its explicit, detailed and commonsensical internal administration, and, of course, trading privileges extended by the people through their Queen.120 A translation of the Dutch East India Company’s Charter renders similar results, with a state declared ‘union’, a detailed organization, and trading privileges invoked for the sake of the ‘prosperity of the United Netherlands’, which is ‘a result of our shipping trade and commerce that has undergone praiseworthy increases from time to time’.121 And so on and so forth until the world was almost completely explored. The story was not all milk and honey though, and the state creation of golem-like creatures magnified the scams humans have been pulling on each other since time immemorial. Enter the South Sea Company. A British joint stock company founded in 1711 by Robert Harley, Earl of Oxford, together with John Blunt, Elias Turner, Jacob Sawbridge, and George Caswall, mostly as a Tory alternative to the Whig-controlled Bank of England, it received from the English government a monopoly on English trade with Spain’s South American territories, and, in exchange, the company agreed to assume approximately £9.5 million of government debt at a rate of 6% per year, a discount over then prevailing interest rates – all the while the plan being for the value of the South Sea trade to make up the difference.122 However, by 1719 the war with Spain was 118 119

Ibid. Philip Lawson, The East India Company: A History (Routledge 1993)

20–22. 120

Ibid. Peter Reynders (trans.) and Ruper Gerritsen (ed.), ‘A Translation of the Charter of the Dutch East India Company’ accessed 22 October 2017. 122 Richard W. Painter, ‘Ethics and Corruption in Business and Government: Lessons from the South Sea Bubble and the Bank of the United States’ 121

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strangling the business and so the South Sea Company directors decided to focus on the market for public debt, announcing through Parliament on 1720 that the company would take on the entire British national debt, riding the euphoria of the military success over France and working hard on exciting the markets.123 At the same time, shareholders were not informed that there was nothing of considerable value to trade, the government had no moral reservations about using public funds to hire journalists to write optimistic pamphlets promoting the fantastic prospects of the company and its commerce, and directors were happily engaged in self-dealing at the expense of the shareholders. Furthermore, the company turned to a strategy of selling stock to politicians for little or no cash down and eventually resorted even to bribery.124 Finally, speculation based on false expectations and opaque information, plus a corrupt affair between the public and private spheres, led to a great economic bubble (a.k.a. the South Sea Bubble) that, when it burst, caused public outcry, financial ruin for many, and a rescue package from the government.125 It is a story which sounds quite familiar: from governmentpraised Enrons to hyped and cash-hungry dotcoms with minimal prospects of immediate revenue, and from Sarbanes-Oxley-esque measures to collapses that come suddenly and unexpectedly – all of it re-jigging the corporate governance regime as the major focus of the 2000s, in the way that ‘ethics’ was the buzzword of the 1990s.126 The great advances and comfort achieved by the machinery of which the corporation is part have come at a cost,127 and the pattern drawn by the South Sea Bubble has persisted throughout modern history. When reading the witnesses’ depositions and the chairpersons’ statements from the hearings of the U.S. Senate Permanent Subcommittee on Investigations on the topic ‘Wall Street and the Financial Crisis’, one discovers that the performance of those involved in the subprime crisis resembles University of Minnesota Law School, Legal Studies Research Paper Series. Research Paper No. 06-32 accessed 23 October 2017. 123 Micklethwait and Wooldridge, op. cit., 39–41. 124 Painter, op. cit. 125 Micklethwait and Wooldridge, op. cit., 41. 126 Frank Clarke, Graeme Dean, et al., Corporate Collapse: Accounting, Regulatory and Ethical Failure (Cambridge University Press 2003) 6–19, 313– 314. 127 David Wessel, ‘Did “Great Recession” Live Up to the Name?’ Wall Street Journal (8 April 2010) accessed 23 October 2017.

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that of the actors of the South Sea Bubble. The opening statement by U.S. Senator Carl Levin is sobering, if not plainly chilling: Today’s hearing is the third in a series of Subcommittee hearings focusing on some of the causes and consequences of the 2008 financial crisis, a man-made economic assault on our country that is still foreclosing on homes, shuttering businesses, and driving unemployment. We saw the beginning of the assault in our first two hearings, which examined how U.S. financial institutions turned to high risk lending strategies to earn quick profits, dumping hundreds of billions of dollars in toxic mortgages into the financial system, like polluters dumping poison upstream in a river. At the second hearing, we showed how regulators saw what was going on, understood the risk, but sat on their hands or fought each other rather than stand up to the banks profiting from the pollution. Those toxic mortgages were scooped up by Wall Street firms that bottled them in complex financial instruments, and turned to the credit rating agencies to get a label declaring them to be safe, low-risk, investment grade securities. Today, we are focusing on the role played by the credit rating agencies.128

The particular problem addressed by the U.S. Senate Permanent Subcommittee on Investigations, in the words of 2008 Nobel laureate Paul Krugman, is that the rating agencies (e.g. Moody’s, Standard & Poor’s) began as market researchers making a profit from selling evaluations of corporate debt to people who were considering whether to buy that debt, but at some point, in search for higher profits, the business model morphed into selling their ‘seals of approval’ to the companies selling the debt.129 According to Levin, the figures show that from 2002 to 2007 the three top credit rating agencies doubled their revenues, from less than US$3 billion to over US$6 billion per year, and that phenomenon was due to the increase in rating complex financial instruments by credit rating executives who ‘got paid Wall Street sized salaries’.130 Leaked e-mails sent by staff of the credit rating companies show that they clearly skewed their assessments to please their clients, as Krugman writes ‘… what those emails reveal is a deeply corrupt system … and it’s a system that financial reform, as currently proposed, wouldn’t fix’.131 Furthermore, when analyzing the conflicts of interest and corporate governance failures at banks during the market boom of the 1990s, the 128

Ibid. Paul Krugman, ‘Berating the Rating Agencies’ New York Times (27 April 2010) 7. 130 U.S. Subcommittee. Opening Statement of Senator Carl Levin . 131 Krugman, op. cit. 129

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conclusion is that banks aided violations by corporate officers (namely Enron and WorldCom), disregarding their bank’s own risk management policies and demonstrating that the current regulatory framework is not adequate to control the promotional pressures, conflicts of interest and risk-taking incentives that eventually generated yet another financial crisis.132 Looking at the South Sea Bubble, the subprime crisis, and everything in between, Plautus’ dictum, ‘homo homini lupus’,133 or man is a wolf to man, comes to mind. It is hard to believe that human nature has changed so dramatically in such a short period of time; rather, the consequences of human nature, for good and bad, have been magnified by the available tools of modernity and by failed deterrents or incentives designed under the belief that we are profit-maximizing rational agents.134 Perhaps the State has failed, at least in a Spinozan view, to make irrational, selfish men as rational and virtuous as possible.135 Or maybe the propensity of firms to shape the underlying ‘rules of the game’, for example state capture,136 is the way of the world. According to Lower, corporate governance is built upon a pessimistic view of human behavior, as it presupposes shirking and cheating as its central problems.137 Looking at history, though, it is hard not to do so – and this is irrespective of the corporation. In the perennial debate between Rousseau and Hobbes, 132

Arthur E. Wilmarth, ‘Conflicts of Interest and Corporate Governance Failures at Universal Banks During the Stock Market Boom of the 1990s: The Cases of Enron and WorldCom’, George Washington University, Legal Studies Research Paper No. 234, in Benton E. Gup (ed.), Corporate Governance in Banking: A Global Perspective (Edward Elgar Publishing 2007) 133 Titus Maccius Plautus, Asinaria: The One About the Asses (University of Wisconsin Press 2006) 52. 134 Sendhil Mullainathan and Richard Thaler, ‘Behavioral Economics’ [2000] Massachusetts Institute of Technology, Department of Economics, Working Paper No. 00-27 accessed 23 October 2017. 135 Justin Steinberg, ‘Spinoza’s Political Philosophy’ in Edward N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (2009) accessed 23 October 2017. 136 Daniel Kaufmann, Joel Hellman, Geraint Jones, and Mark Schankerman, ‘Measuring Governance, Corruption, and State Capture: How Firms and Bureaucrats Shape the Business Environment in Transition Economies’ [2000] World Bank Policy Research Working Paper No. 2312 accessed 23 October 2017. 137 Michael Lower, ‘Employee Participation in Governance’ (Cambridge University Press 2010) 63–64.

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regarding the human state of nature, evidence suggests that Hobbes was right and, even though humans have lived in peace with each other for longer or shorter periods of time, fighting – and viciously damaging each other – is not a late cultural ‘invention’ but, instead, if not ‘natural’, at least not ‘unnatural’.138 What exactly happened that released the corporation from its state leash and turned it into a private behemoth? While personhood of a group of people became normalized in the collective imagery throughout the centuries, the idea of limiting liability across the board and without borrowing the sovereign immunity from the State – thus birthing ‘asset partitioning’ proper – was abhorrent to liberals, with the most common criticisms being that the risk of doing business would be unfairly transferred to suppliers, customers and lenders – an indictment pontificated mostly by economists.139 Charters, in general, were condemned as opposed to free markets,140 though, as we have suggested earlier,141 it is a matter of degree, of ‘firepower’, and not the corporation seen in isolation, for example it is not comparable to analyze a company with 12,500 euros of share capital vis-à-vis one with billions in share premiums, preferential equity certificates, goodwill, and cash reserves. That anyone can incorporate does not mean that everyone can achieve the same results with the same tool. Adam Smith himself saw as a purer state of doing business to be in a private co-partnership and be bound for the company debts to the whole extent of one’s fortune. He also decried directors as not incentivized to watch over other people’s money and honor while, instead, being naturally prone to negligence and profusion; while, on the other hand, he saw stock owners as merely pretending to understand anything about the business and prone to avoiding trouble as long as they happily received their dividend.142 Smith is seen as erring when he said that companies could not compete without exclusive privileges,143 though in fairness he was referring to the likes of the South Sea Company, the African Company, etc. Moreover, it is proper to ponder, with all that we know, if personhood plus limited liability isn’t a 138

Azar Gat, War in Human Civilization (Oxford University Press 2006)

3–35. 139

Micklethwait and Wooldridge, op. cit., 56. Warwick Funnell and Jeffrey Robertson, Accounting by the First Public Company: The Pursuit of Supremacy (Routledge 2014) 80. 141 See Chapter 2, section 4. 142 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Thomas Nelson 1843) 310–311. 143 Ibid. 140

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privilege in and by itself. Finally, another prescient concern of Smith, against which we must contextualize his thoughts, is that commercial institutions tend to gradually become autonomous loci of power inconsistent with the purposes for which men had visualized them.144 The key moment when corporations were unleashed – with the privileges of personhood and limited liability automatically bestowed on them by an increasingly hands-off state – took place in 1855–56, and what triggered it was famously verbalized in 1933. In the middle of the 19th century Great Britain was in turmoil, with unhappiness about the Crimea War bubbling via mutual recrimination and a push for withdrawal from continental engagement.145 Although there was a schism between pro-limited liability politicians and a majority toeing the traditional line that such a privilege was to be given on a case-by-case basis – solely for large-scale projects and local improvements for which investment was scarce – the political climate played a decisive role; matters came to a head in early 1855 when the government lost a vote of confidence due to the Crimean War, and that set the stage for a new government to push through the minority view.146 With Lord Aberdeen resigning as Prime Minister and Lord Palmerston appointed in February, the new government tried to appease the ‘storm of resentment against aristocratic privilege, bureaucracy and bungling’147 by arguing that limited liability was a social reform to the benefit of the working class.148 It was a legislative move that, as Saville notes, wasn’t even supported by investors or entrepreneurs and, in sum, was rushed through the lower house and aggressively forced on the members of the upper house.149 Such haste is difficult to explain other than by the existence of sudden, acute circumstances. And what can be more dire than money issues? The vice president of the Board of Trade himself, Pleydell-Bouverie, bemoaned that dozens of businesses were starting to incorporate in France and the United States due to the availability of limited liability via mere 144

J.R. Lindgren, The Social Philosophy of Adam Smith (Martinus Nijhoff 1973) 75. 145 Cathal J. Nolan, The Allure of Battle: A History of How Wars Have Been Won and Lost (Oxford University Press 2017) 265–266. 146 James Taylor, Creating Capitalism: Joint-Stock Enterprise in British Politics and Culture, 1800–1870 (The Royal Historical Society 2014) 152–153. 147 Olive Anderson, A Liberal State at War: English Politics and Economics During the Crimean War (Macmillan 1967) 171. 148 Taylor, op. cit., 155. 149 John Savile, ‘Sleeping Partnership and Limited Liability, 1850–1856’ [1956] The Economic History Review 8(3): 418–433.

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registration and despite the higher cost.150 Large sums of invested capital were flying out of the country151 and such a scenario was as bad back then as it is now, with an ongoing unpopular war that required social stability at home and, almost as important, government revenue to fund it. A few decades passed until what took place in Britain was given a distinctive name. It was in the United States, in 1933, and the term ‘race to the bottom’ was coined – a scenario in which states compete with each other by lowering taxes, regulation, etc. with the objective of increasing its attractiveness to corporations.152 In scholarly terms, the case was argued by Berle and Means when highlighting the growing incorporations in (and migrations into) Delaware, noting that ‘[a]s significant of the trend towards that corporate mechanism with the broadest powers to the management, it is interesting to note the steady trend towards the states having a loose incorporation law’.153 The climax of such a basal discovery was elegantly described in the dissent of Justice Brandeis in Louis K. Liggett Co. v. Lee when he articulated that the ‘incorporation contest’ between states to attract business was not a race of diligence but of laxity.154 This landmark case was basically about chain stores being regulated differently than independently owned firms, specifically the alleged unreasonableness of setting as criteria the location of stores in multiple counties; and while the Supreme Court overturned on the basis of a violation to the Fourteenth Amendment, Brandeis was of the opinion that the ruling of the Florida courts ought to be upheld, leaving him as the dissenting position.155 Reading Justice Brandeis’ dissent feels like entering a time machine and going back to the stone age, away from the era of corporations and inching closer to humanness;156 see for example Justice Black’s dissent in Connecticut General Life Insurance Co. v. Johnson,157 150

Micklethwait and Wooldridge, op. cit., 56. Rob McQueen, A Social History of Company Law: Great Britain and the Australian Colonies: 1854–1920 (Routledge 2016) 125. 152 Sanford Schram, After Welfare: The Culture of Postindustrial Social Policy (New York University Press 2000) 91. 153 Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (Routledge 2017) 185. 154 Louis K. Liggett Co. v. Lee, 288 U.S. 517, 53 S. Ct. 481, 77 L. Ed. 929, 1933 U.S. LEXIS 51, 85 A.L.R. 699 (dissent). 155 Ibid. 156 James William Walters, What is a Person? An Ethical Exploration (University of Illinois Press 1997). 157 303 U.S. 77, 58 S. Ct. 436, 82 L.Ed. 673 (dissent). 151

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referring to the first judicial use of ‘person’ as including corporations in Santa Clara County v. Southern Pacific Railroad Co.,158 or, more recently, Burwell v. Hobby Lobby159 and the infamous Citizens United v. FEC.160 For starters, Justice Brandeis made it clear that engaging in commerce in corporate form is a privilege and, as such, the State may confer or withhold this power as it sees fit based on matters of state policy that are out of the scope of the court and spill into public welfare, adding that the rationale of such decisions (as we argued earlier) depends on the availability of resources to individual corporations161 – thus recognizing that, as a shorthand for capital pooling, the force that can be exerted by a corporation depends upon not the legal form itself but on its economic strength. Almost 50 years later, Grossfeld and Ebke further articulated Justice Brandeis’ train of thought by affirming that it is the concentration of capital and labor that confers on corporations the strength to exert far-reaching influence in economic and political affairs.162 Justice Brandeis, then, presciently wrote: The prevalence of the corporation in America has led men of this generation to act, at times, as if the privilege of doing business in corporate form were inherent in the citizen; and has led them to accept the evils attendant upon the free and unrestricted use of the corporate mechanism as if these evils were the inescapable price of civilized life, and, hence, to be borne with resignation. Throughout the greater part of our history a different view prevailed. Although the value of this instrumentality in commerce and industry was fully recognized, incorporation for business was commonly denied long after it had been freely granted for religious, educational, and charitable purposes. It was denied because of fear. Fear of encroachment upon the liberties and opportunities of the individual. Fear of the subjection of labor to capital. Fear of monopoly. Fear that the absorption of capital by corporations, and their perpetual life, might bring evils similar to those which attended mortmain.163

Continuing the dissenting opinion, then, Justice Brandeis linked his reticence to his view of the law as a safeguard for equality of opportunity, 158

118 U.S. 394, 6 S. Ct. 1132, 30 L.Ed. 118. Burwell v. Hobby Lobby Stores, Inc., 573 U.S. 134 S.Ct. 2751, WL 2921709, 2014 U.S. LEXIS 4505, 123 Fair Empl.Prac.Cas. (BNA) 621. 160 Citizens United v. FEC, 130 S. Ct. 876. 161 Louis K. Liggett Co. v. Lee, op. cit. 162 Bernhard Grossfeld and Werner Ebke, ‘Controlling the Modern Corporation: A Comparative View of Corporate Power in the United States and Europe’ [1978] The American Journal of Comparative Law 26(3): 397–433. 163 Louis K. Liggett Co. v. Lee, op. cit. 159

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and adds, for good measure, a scholarly warning in the sense that a ‘corporate system’ can evolve into a feudal one reigned over by a plutocracy.164 Research reveals that Justice Brandeis is the first instance of a high ranking member of a first world judiciary using the term ‘Frankenstein’ for the corporation, in this particular instance resulting from the race to the bottom among states. Today, there is debate regarding whether regulatory competition incentivizes a race to the top instead of a race to the bottom. For example, one argument goes, the role of equity markets in facilitating corporate takeovers is said to restrain managers from self-dealing – though, analyzing cases like the latter would assume that states are out there tailoring their corporate rules to suit the clients’ demands, when, in reality, isolating such analyses ignores the interest groups which fiercely lobby for changes that would render considerable benefits165 as well as the infinite web of subsidiaries that can be deployed in order to fish for the best habitat for the most mobile of all factors: capital.166 Notwithstanding the latter, the question remains as to what constituted the turning point of full asset partitioning mutating from a privilege into a right. Suffice it to read the debates at the House of Commons, circa 1854, concerning the terrifying fact that capital was going out of Britain, wherever limited liability was on offer, and how important it was to keep it at home.167

4. HAVING ONE’S CAKE AND EATING IT TOO: VEIL PIERCING Here is a principle: the longer and deeper someone delves into the subject of corporate law is directly proportional to the increase in probability of stumbling upon the quote about limited liability companies by Nicholas Murray Butler, i.e. 164

Ibid. Erik M. Vermeulen, The Evolution of the Legal Business Forms in Europe and the United States: Venture Capital, Joint Venture and Partnership Structures (Kluwer Law 2003) 76–77. 166 Damien Geradin and Joseph A. McCahery, ‘Regulatory Co-operation: Transcending the Regulatory Competition Debate’ in Jacint Jordana and David Levi-Faur (eds), The Politics of Regulation: Institutions and Regulatory Reform for the Age of Governance (Edward Elgar Publishing 2004) 101–102. 167 HC Deb 27 June 1854 vol 134 cc752–800. 165

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I weigh my words, when I say that in my judgment the limited liability corporation is the greatest single discovery of modern times, whether you judge it by its social, by its ethical, by its industrial or, in the long run – after we understand it and know how to use it – by its political, effects. Even steam and electricity are far less important than the limited liability corporation, and they would be reduced to comparative impotence without it.168

This quote is ubiquitous, coating kilometers of papers, books and speeches throughout the world, either in a celebratory, triumphant mood or, instead, lambasting the side effects of the comforts that many – grudgingly – enjoy today. Such a polemic and quotable piece requires, thus, some context. Let’s start with the obvious: Nicholas Murray Butler speaks about ‘discovery’ when referring to the limited liability company and that already hints at his leanings during such a crucial time in the modern history of the United States, i.e. the transformation from industrial to financial capitalism.169 Discovery and invention are not the same thing. It was precisely what Sir Francis Bacon was referring to in Novum Organum when complaining about the artisan’s fixation on fruit-bearing rather than light-bearing experiments,170 i.e. the former being inventions geared towards utility while the latter are discoveries proper, animated by the pursuit of truth.171 Butler, a vocal critic of Roosevelt,172 was a new breed of university president, a professional administrator more inclined to run educational institutions like any large enterprise while surrounded by a bureaucracy.173 Thus, when Butler’s speech is read in context, it sheds light on both his political and philosophical views about progress but also the moral element that he hoped to infuse them with. Prior to his celebration of the limited liability company as a fact of nature, one that 168 New York Chamber of Commerce, 143rd Annual Banquet of the Chamber of Commerce of the State of New York (Press of the Chamber of Commerce 1911) 47. 169 Lawrence E. Mitchell, The Speculation Economy: How Finance Triumphed Over Industry (Berret-Koehler 2007) 172–175. 170 Sophie Weeks, ‘The Role of Mechanics in Francis Bacon’s Great Instauration’ in Claus Zittel, Gisella Engel, Romano Nanni, and Nicole C. Karafyllis (eds), Philosophies of Technology: Francis Bacon and his Contemporaries (Brill 2008) 167. 171 B.H.G. Wormald, Francis Bacon: History, Politics and Science: 1561– 1626 (Cambridge University Press 1993) 302. 172 Patricia O’Toole, When Trumpets Call: Theodore Roosevelt After the White House (Simon & Schuster 2005) 222. 173 Mary O. Furner, Advocacy and Objectivity: A Crisis in the Professionalization of American Social Science: 1865–1905 (Transaction 2011) 140 n. 24.

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valiant entrepreneurs happened to stumble upon during their safari through the jungle of business, he states: What happens in every form of organic evolution is that an old part no longer useful to the structure drops away, and its functions pass over into and are absorbed by a new development. That new development is co-operation, and co-operation as a substitute for unlimited, unrestricted, individual competition has come to stay as an economic fact, and legal institutions will have to be adjusted to it. It cannot be stopped. It ought not to be stopped. It is not in the public interest that it should be stopped.174

This is a reminder that Butler’s speech ought to be framed by his antagonism to aspects surrounding the Sherman Anti-Trust Law175 – which he then frames in his speech against the backdrop of only two type of abuses in the business world, i.e. the absolute control of prices (which Butler calls abhorrent to the nature of the Anglo-Saxon people) and the moral delinquency of dishonest business methods. Thereafter, he reads for the crowd a report from the Chronicle of Augsburg, Germany, in 1512, stating that it is impossible to limit the size of companies, for doing so would limit business and hurt the common welfare. He then continues: We must learn that economic laws, economic principles, based on everlasting human nature are fundamental and vital, and your care and mine, as citizens of this Republic, is not to interfere with these laws, not to check them; but to see to it that no moral wrong is done in their name.176

For Nicholas Murray Butler, in summary, the limited liability company reflected a fundamental economic process, a discovery of a natural phenomenon that could not be controlled by statute – and, as Adam Smith had feared, had become an autonomous locus of power inconsistent with the purposes which men had visualized for it.177 As can be inferred from these discussions dating back over a hundred years, the matters under debate are far from settled. Most important, the context around Butler’ speech presents a far-reaching moral dilemma, i.e. on one hand, corporations have indeed become the orthodox vehicle of resource harnessing and wealth creation that has catapulted the West, by 174

New York Chamber of Commerce, op. cit., 46. Theodore Marburg, ‘Amendment of the Sherman Anti-Trust Law’ [1908] The Annals of the American Academy of Political and Social Science, Vol. 32, Federal Regulation of Industry, pp. 34–42. 176 New York Chamber of Commerce, op. cit., 53–54. 177 Ibid. 175

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means of swift and gigantic leaps of technological progress, to a domination that no Roman emperor would ever have dreamed of achieving; on the other hand, however, the ‘creature of the state’ has grown in size, status, and reach to the point where governments survive on the basis of corporate approval.178 Even more crucial, though, is that the world of the Roman Empire, of Pope Innocent IV, of Germany in 1512 and even Butler in 1911, is no more. When Dine and Koutsias talk about the danger facilitated by multinationals in terms of growing inequality and threats to democracy itself, and how nearly impossible it is to do something about it when they spread throughout multiple jurisdictions by means of a complex web of subsidiaries,179 there is a base to it. According to the United Nations Conference on Trade and Development, at the end of 2015 ten tech multinationals made up about 26% of the total market capitalization of their top 100 ranking of multinationals, more than twice their share in number, assets, and operating revenues.180 These multinationals in particular control the faucet of political discourse and, thus, shape political involvement and engagement,181 actually getting to be called ‘net states’ by some since they largely exist online, count their members from all corners of the world, and further belief-driven agendas pursued independently from or above the law.182 Whether on or offline, to add context to such power, suffice it to say that just 30 companies account for two-thirds of the total $2.6 trillion held offshore by Fortune 500 companies.183 As for the ‘average Joe’ being able to 178

Wilks, op. cit., 3. Janet Dine and Marios Koutsias, The Nature of Corporate Governance: The Significance of National Cultural Identity (Edward Elgar Publishing 2013) 1–3. 180 United Nations Conference on Trade and Development, ‘World Investment Report 2017: Investment and the Digital Economy’ (United Nations, 2017) 162. 181 Jeff Fromm, ‘New Study Finds Social Media Shapes Millennial Political Involvement and Engagement’ (Forbes 22 June 2016) accessed 5 November 2017. 182 Alex Wichowski, ‘Net States Rule the World; We Need to Recognize Their Power’ Wired Magazine (4 November 2017) accessed 7 November 2017. 183 Patricia Cohen, ‘A Tax Cut That Lifts the Economy? Opinions are Split’ New York Times (2 November 2017) accessed 5 November 2017. 179

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partake of this democratic bonanza, the solid analysis by Rosenthal and Austin – once adjusting for the Fed’s approach to calling ‘household’ all stock ownership not classified into other sectors – shows that over the last 50 years the U.S. corporate stock held in taxable accounts fell by more than two-thirds, from 83.6% to 24.2%.184 Although at the end of the tunnel there are (hefty fee paying) human beings, this means that funds, banks, investment advisors and insurance companies have become the largest shareholders of common stock,185 opening the door to a complex web of SPVs distributed throughout the world’s tax havens for a maximized return. Unsurprisingly, as I write this, the International Consortium of Investigative Journalists went live with their follow-up to the Panama Papers, i.e. the Paradise Papers,186 exposing the tax engineering of more than a hundred multinationals. Perhaps the most shocking (but also revealing) part of this – at least up until now – is not that some secretive and dark character counting golden coins in a secluded mansion is hiding money offshore using a convoluted corporate web, but that more than a hundred universities from the U.S., Canada and the United Kingdom, some of which have tens of billions of dollars in endowments and are treated as charities by their respective tax offices, use corporate structures through Caribbean tax havens, allowing them to reap investment gains tax free.187 If the abuse of the corporate form were not a problem for countries’ revenue bases, estimated at up to US$240 billion per year, there would be no need for initiatives like the inclusive framework against base erosion

184

Steven M. Rosenthal and Lydia S. Austin, ‘The Dwindling Taxable Share of U.S. Corporate Stock’ (Tax Policy Center 16 May 2016) accessed 7 November 2017. 185 Johnston Osagie, Gbolahan Solomon Osho, and Cynthia Sutton, ‘The Impacts of Institutional Stock Ownership on Stock Returns and Performance: A Financial Market Perspective’ [2005] Journal of Business and Economics Research 3(3): 65–70. 186 International Consortium of Investigative Journalists, Paradise Papers (5 November 2017) accessed 5 November 2017. 187 Sasha Chavkin, Emilia Díaz-Cruz, and Cecile S. Gallego, ‘More than 100 Universities and Colleges Included in Offshore Leaks Database’ (International Consortium of Investigative Journalists, 17 November 2017) accessed 24 November 2017.

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and profit shifting (BEPS) by the Organisation for Economic Co-operation and Development (OECD).188 As unscholarly as it may appear at first glance, the foundational question of modern corporate governance literature boils down to: How do we get to have our cake and eat it too? The modern corporation was without a doubt a key element in generating massive amounts of wealth through the facilitation of risk taking, which, in turn, boosted large-scale infrastructure and technology development,189 but also huge costs not borne by the firms and their insiders. And, as stated before, from a descriptive perspective it is well understood why the modern corporation works as an economic vehicle and why its elements stick together nicely. As seen in Figure 3.1, what is called entity and owner shielding (asset partitioning) in the mainstream law and economics literature allows for anyone who has a contractual claim against the firm to monitor the firm and its managers instead of the owners, and vice versa, which in turn maximizes the value of each asset pool and reduces the cost of capital.190 Furthermore, financing, whether it is through equity or debt, is facilitated by allocating risks and pledging assets in specific subsidiaries with distinct roles, also enhancing the tradability of shares and the costs involved in monitoring delegated management.191 That is how we get to ‘have the cake’, at least in the world of contractarian theories, and it is perfectly baked, decorated and ready to be displayed for everyone’s viewing pleasure. However, this model is based on a theory that is also normative and, thus, has real policy implications mostly with regard to the extent of state regulation.192 Models, such as the agency theory one, are useful for looking under the hood of man-made artifices and describing their inner workings, but their normative side has an underbelly that, in this particular case, prevents everyone from also ‘eating the cake’ – at least not without paying a steep price, i.e. the erosion of democracy, the effect on the tax base of entire countries, the environmental and social ‘externalities’, etc.193 Of course, 188 Organisation for Economic Co-operation and Development, ‘Background Brief: Inclusive Framework on BEPS’ [2017] accessed 13 December 2017. 189 Bainbridge and Henderson, op. cit., 302. 190 Kraakman, et al., op. cit., 10–11. 191 Ibid. 192 Janet Dine, The Governance of Corporate Groups (Cambridge University Press 2004) 3 193 Wilks, op. cit.

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Figure 3.1 Advantages of entity and owner shielding the price can be paid, but most pay it while shackled by the cognitive dissonance elegantly described by Dine when calling corporations ‘moral deflection devices’, i.e. easy to malign while enjoying their fruits.194 Indeed, the ‘magic’ of asset partitioning has a dark side to it. As the International Consortium of Investigative Journalists conspicuously warned its readers right after making its findings fully searchable, there are legitimate uses to structuring labyrinth-like networks of subsidiaries offshore, and doing so is not a crime in itself.195 Nevertheless, since the focus of agency theory is on reducing costs, these scenarios are simply modeled with a couple of assumptions in mind, i.e. information asymmetry and opportunism, where the former is seen as a given between principals and agents and comprises two aspects – adverse selection and moral hazard, i.e. ex ante and ex post the ‘contracting’ – which, in turn, gives way to an extensive literature circling around the idea that

194

Janet Dine, Companies, International Trade and Human Rights (Cambridge University Press 2005) 3–10. 195 Margot Williams, ‘Users Can Now Search by Country in the ICIJ Offshore Leaks Database’ (International Consortium of Investigative Journalists, 10 October 2013) accessed 12 November 2017.

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Figure 3.2 Company group structuring individuals ‘may’ be self-interest seeking.196 Take a look at Figure 3.2, for example. Structures like the one shown in Figure 3.2 are legal and, under the narrowing view of the agency theory, the scope of research is essentially on how best to align the interest of shareholders and managers in maximizing share value, reducing transaction costs and information asymmetry, while minimizing incentives for opportunism. That is a shallow (or ideologically convenient) way of looking at corporate governance as a field of study. If the whole point is to technically quantify the least costly path to reduce transaction costs, externalizing as much risk as possible to creditors, law has been unwisely sidelined as (ideally) the prime tool for thinking about how best to balance all societal interests at play and find an enforceable compromise aimed at fairness, regardless of what is most efficient in terms of dollars and cents. To make matters even more complex, multi-jurisdictional settings add to the riddle complex and uncertain enterprise consolidation tax laws, intra-group transfers that can easily allow the massaging of balance sheets, and transfer pricing arrangements through convenient jurisdictions aimed at economizing fixed and variable costs.197 In such a situation, mainstream 196

Morten Huse, Board, Governance and Value Creation: The Human Side of Corporate Governance (Cambridge University Press 2007) 46–47. 197 Dine, Corporate Groups, op. cit., 64–65.

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corporate governance – devoid of serious philosophical and political reflection – is a fruitless game of a dog chasing its own tail, i.e. again, trying to have one’s cake and eat it too. In as candid and unembellished a way as Easterbrook and Fischel put it: emphasizing the theoretical approach that a corporation is a nexus of contracts, as is adamant to agency theory, removes the question of what goals corporations should pursue, leading them, in particular, to literally respond: ‘who cares?’.198 Enter damage control. Limited liability incentivizes the transfer of the cost of risky activities to creditors and, broadly, the methods used to deter engagement in such activities are intermingled with the universal199 veil piercing doctrine, i.e. capital requirements and formalities, mandatory insurance, managerial liability, and input regulation.200 Because externalizing risk creates social costs, normatively (but also for data analysis purposes) all of these measures, particularly veil piercing, ought to be seen in context – several layers of it, actually, i.e. whether we’re talking about voluntary creditors (employees, consumers, trade creditors and lenders) or involuntary ones,201 whether the affected party is an individual or another entity, whether the (allegedly) harming party is a closed or public corporation or if its shareholders are corporate or individual;202 not to mention, of course, the type of claim or the rationale used. Let’s unpack these elements one by one. Capital requirement could be seen in the European context, like limited liability, as part of the race to the bottom phenomenon that we looked at earlier in the historical context.203 The argument under Lord Palmerston’s government in the sense that limiting liability erga omnes was a social reform for the benefit of the working class, was geared towards appeasing the resentment against aristocratic privilege,204 and echoed the debates at the House of Commons in the sense that minimum share capital was too much protection and could even lead to an undue favoring

198 Frank H. Easterbrook and Daniel R. Fischel, The Economic Structure of Corporate Law (Harvard University Press 1991) 35–36. 199 Bainbridge and Henderson, op. cit., 303. 200 Frank H. Easterbrook and Daniel R. Fischel, ‘Limited Liability and the Corporation’ [1985] University of Chicago Law Review 52: 89–117. 201 Ibid. 202 Peter B. Oh, ‘Veil-Piercing’ [2010] Texas Law Review 89: 81. 203 Micklethwait and Wooldridge, op. cit., 56. 204 Taylor, op. cit.

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of large and wealthy companies.205 Due to the differences between public and private companies, the current situation is that, understandably, they have different rules regarding their capitalization and its handling,206 with the former having stricter rules and the latter practically ‘token’ capitalization thresholds. The rationale of legal capital rules is that they protect involuntary creditors and also voluntary ones that lack the bargaining power to protect themselves via additional security.207 It follows, then, that national legislation on companies sets forth not only minimum capital requirements but also formalities related to paid-up share thresholds, valuation standards for contributions in kind rather than in cash, equity shortfalls, solvency structures in the event of distributions to shareholders, statutory audit triggers, increases or decreases of capital,208 and publicity of any capital changes through the local commercial registers. Notwithstanding the latter, it is very interesting to note that in the European context, aside from public companies’ requirements as per the applicable Directive,209 private limited companies are left to each member state’s best judgement and interests, triggering two very interesting phenomena, i.e. one related to the race to the bottom concept and the other to the historical context of enterprises, trustworthiness, and human nature. As private limited companies are left to local legislation, Europe (and the world in general) has experienced a disparate collage of capital and regulatory changes, surely in the hope of attracting business, although the rapid information technology advances make it unclear what the implications will be, mainly if we analyze through the prism of growth theory and, thus, the diffusion of ideas.210 Let’s take Estonia as an example. Estonia experienced a fast growth after its EU accession only to suffer a 205 Fritz N. Ewang, ‘An Analysis and Critique of the European Union’s Minimum Capitalization Requirement’ [2007] Charles Sturt University, accessed 19 November 2017. 206 Directive 2012/30/EU of 25 October 2012 on coordinaton of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 54 of the Treaty on the Functioning of the European Union, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent (recast) [2012] OJ L 315/74. 207 Ewang, op. cit. 208 Ibid. 209 Directive 2012/30/EU, op. cit. 210 Chong-En Bai and Chi-Wa Yuen, Technology and the New Economy (MIT Press 2002) ix.

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major contraction in its GDP by 2009, one of the world’s most dramatic at the time.211 However, after a heavy investment in connectivity infrastructure, Estonia went from 32% of its population using the internet in 2001 to be one of the most advanced ‘e-governments’ in the world, allowing company formations in 20 minutes, and with 95% of Estonians filing their taxes online.212 This could be behind the boost in company incorporations in that country. However, when reviewing Eurostat213 one notices that, for example, Romania, with its under 100 euros share capital, surpasses Estonia in incorporations, only to fall behind Estonia when taking into account company ‘death rates’ and survival horizon. This is food for thought in terms of what drives starting businesses and about the necessary debate to be had around the idea of the race to the bottom. Moreover, setting the stage for this discussion allows us to transition into the second subject mentioned earlier, i.e. the trustworthiness transmitted by companies vis-à-vis human nature. Estonia does not have a share capital requirement lower than the 100 euro level for Romanian private limited liability companies, but, instead, a much higher one of 2,500 euros. However, if the founders of an Estonian private company are natural persons and the share capital is less than 25,000 euros, they can decide whether to pay the shares on the spot or not, and for as long as they do not pay the amount fully they are personally liable for the obligations of the company.214 We see, again, the spirit that has animated business enterprises since Roman times and for the past two thousand years, i.e. that those contracting with groups ought to be informed and careful and, whether or not they are, the State has the power (and the responsibility) of modifying the privilege of doing business through the corporate form in order for those incurring risk to respond with all their wealth towards the costs they externalize. All in all,

211 Tarmo Kalvet, ‘The Estonian Economy: Structure, Performance and Prospects’ in Lino Briguglio (ed.), Small States and the European Union: Economic Perspectives (Routledge 2016). 212 Toomas Hendrik Ilves, ‘Estonia’s Digital Dividends’ (The World Bank Blogs, 13 January 2016) accessed 19 November 2017. 213 Eurostat, Business Demography Statistics, 2016 accessed 19 November 2017. 214 Commercial Code (Äriseadustik) §140(1)(2), Parliament of the Republic of Estonia, passed 15 February 1995, as amended accessed 19 November 2017.

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capital as a ceiling for liability does play a key factor in the interplay of risk taking and incentives between managers and shareholders.215 Some authors consider that a minimum capital requirement as a countermeasure for the externalization of risk caused by limited liability is illusory at best – based on the conception that voluntary creditors are able to negotiate terms and rely on collateral or more sophisticated information and monitoring capabilities while, on the other hand, involuntary creditors are poorly served by arbitrary and insignificant minimum capital amounts.216 Other authors, though, observe that minimum capitalization decreases the incentive to engage in excessively risky activities, while mandatory insurance (though also involving administrative costs and the potential to act as barriers to entry) may go either way depending on the ability of the insurer to monitor.217 Similar calculations, always animated by assumptions of rational actors, can be read about managerial responsibility as a measure to counter the social costs of limited liability. A very good commentary about the latter is that, contrary to mandatory insurance or minimum capital requirements, managerial responsibility places the burden of risk evaluation in the hands of those with the lowest barriers to the firm’s information; however, on the downside, it is said to impose hardship precisely on the more costly risk bearers,218 pushing up competitive wages and shifting managers away from risky activities219 – something that has a detrimental effect on the potential maximization of shareholder value.220 All the measures described above, though, pale in comparison to veil piercing in terms of their polemic potential. Though Easterbrook and Fischel contest that there is a logic to it, they are comfortable echoing the complaint that this is the most confusing area of corporate law as it occurs in an unprincipled manner, freakishly, and rarely.221 In plain terms, piercing the corporate veil means that a court of law allows 215 Akos Szalai, ‘Reducing Minimum Share Capital in Limited Liability Companies: A Basic Model’ [2007] Hungarian Association for Law and Economics, Working Paper No. 6 accessed 19 November 2017. 216 Ewang, op. cit. 217 Easterbrook and Fischel, ‘Limited Liability’, op. cit. 218 Reinier Kraakman, ‘The Economic Functions of Corporate Liability’ in Klaus Hopt and Gunther Teubner (eds), Corporate Governance and Director’s Liabilities: Legal, Economic, and Sociological Analyses on Corporate Social Responsibility (De Gruyter 1984) 188–191. 219 Easterbrook and Fischel, ‘Limited Liability’, op. cit. 220 Kraakman, ‘The Economic Functions’, op. cit. 221 Easterbrook and Fischel, ‘Limited Liability’, op. cit.

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creditors to satisfy their claims with the assets of shareholders once the firm’s assets prove insufficient. It does away with limited liability through a judicial decision and for a particular case, or, as law and economics mainstream scholarship puts it, since limited liability allows corporations to externalize the cost of engaging in risky activities, it is an attempt to reduce its social cost.222 As said, though, it is chaotic and unpredictable due to the indiscriminate application of different theories to diverse factual scenarios.223 Veil piercing gets even more complex when trying to write about it theoretically – without too much reliance on one country – for within Europe and the United States, each country/state has its own particular chaos. Nevertheless, we concur with Bainbridge and Henderson that although rules vary widely within in a milieu of differently named doctrines and processes, most jurisdictions mirror the mainstream U.S. framework.224 This pretty much looks like Figure 3.3.225 U.S. courts generally acknowledge that veil piercing ought to be done reluctantly and that it is perfectly legitimate to form a corporation for the purpose of avoiding personal liability.226 The doctrines used by their courts (to the right in Figure 3.3), at least when approached solely from a bird’s-eye view, appear quite straightforward, i.e. a court will pierce the veil if a unity of interest and ownership makes the separation of the 222

Ibid. Kathryn Hespe, ‘Preserving Entity Shielding: How Corporations Should Respond to Reverse Piercing of the Corporate Veil’ [2014] Journal of Business and Securities Law 14(69). 224 Bainbridge and Henderson, op. cit., 234. 225 For non-UK European perspective, some recommended references are: Seil Demeyere, ‘Liability of a Mother Company for its Subsidiary in French, Belgian, and English Law’ [2015] European Review of Private Law 3: 385–414; Bernardo Cortese, ‘Piercing the Corporate Veil in EU Competition Law: The Parent Subsidiary Relationship and Antitrust Liability’ in Bernardo Cortese (ed.), EU Competition Law: Between Public and Private Enforcement (Kluwer 2014); European Union: European Commission, Commission Staff Working Document: Accompanying the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the European Court of Justice and the European Central Bank on EU Framework for Cross-border Crisis Management in the Banking Sector, 20 October 2009, SEC(2009) 1407 accessed 22 November 2017. 226 Jonathan Macey and Joshua Mitts, ‘Finding Order in the Morass: The Three Real Justifications for Piercing the Corporate Veil’ [2014] Cornell L. Rev. 100(1): 99 accessed 21 November 2017. 223

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Figure 3.3 Veil piercing doctrines personalities of shareholder and entity inexistent, making it so that adhering to the fiction of separate corporate existence would endorse fraud or injustice.227 However, there is considerable variation and inconsistency, and not only from state to state but also in terms of theoretical separateness. For example, it is not inconceivable to disagree with Bainbridge and Henderson when they affirm that the doctrines are not clear cut but rather a painfully erratic progression. A central case within the alter ego doctrine is Walkovszky v. Carlton, in which the New York Court of Appeals determined that an individual can be held liable for the acts of the corporation, using the respondeat superior doctrine and establishing that it must be demonstrated that the individual used his control of the corporation for personal gain.228 Respondeat superior, which in Latin means ‘let the master answer’,229 is a doctrine for imposing vicarious (not direct) liability on a principal when: (a) an agent’s tort causes personal injury, (b) the agent can be considered a servant (or employee), and (c) the conduct took place within the ‘scope 227 Sea-Land Services, Inc. v. The Pepper Source, 941 F.2d 519 (7th Cir. 1991) as cited in Richard Booth and Robert Hamilton, Black Letter Outline on Corporations (West 2006) 16. 228 Walkovszky v. Carlton, 23 N.Y.2d 714, 1968 LEXIS 987, 244 N.E.2d 55, 296 N.Y.S.2d 362 (N.Y. 1968). 229 William R. Buckley and Cathy J. Okrent, Tort and Personal Injury Law (Thomson 2004) 74.

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of employment’230 – which, concurring with the aforementioned authors, is extremely strange, as the mainstream approach is that corporations have no ends of their own other than the shareholders’ personal gain, and, moreover, this decision does not really pierce the veil to attempt a direct liability, but instead transits the path of vicariousness.231 Because mere control wouldn’t suffice, as piercing would then occur for all closed corporations – and public ones due to those large chunks of institutional ownership – there is a strange situation where some courts continue to base themselves on the alter ego doctrine while others have beefed up the standards.232 This leads us to the second ‘category’, alter ego plus, which basically says that, once the corporation is demonstrated to be the alter ego of the shareholder, it must be demonstrated that adhering to limited liability would validate a fraud or promote injustice, or that the corporation was a sham to conceal wrongdoing, or that doing so would lead to an inequitable result – the specific wording depending on the jurisdiction.233 This leads us to the third category, or what could be called the next step, the instrumentality doctrine for veil piercing. Under the latter, three factors come into play: (a) the shareholder controls the entity so intrusively that it has no separate existence of its own; (b) the corporation has been used to commit fraudulent, wrongful, inequitable, morally culpable or fundamentally unfair acts against creditors; and (c) the conduct has resulted in actual loss to creditors.234 There are two interesting features brought about by the instrumentality test that are important to highlight, i.e. first, that the addition made by this doctrine in comparison to the previous ones is that the control and the breach must proximately cause the injury or unjust loss,235 i.e. there must be a link uniting the three factors; and, second, that perhaps because Frederick J. Powell – whose name was borrowed for the christening of the veil piercing test – placed a strong emphasis on assuming domination

230

Daniel S. Kleinberger, Agency, Partnerships, and LLCs: Examples and Explanations (Aspen 2008) 90. 231 Bainbridge and Henderson, op. cit., 88–89. 232 Phillip Blumberg, Kurt Strasser, Nicholas Georgakopoulos and Eric Gouvin, The Law of Corporate Groups: Jurisdiction, Practice, and Procedure (Aspen, 2008) supplement, 26-5–26-6. 233 Bainbridge and Henderson, op. cit., 97–100. 234 Phillip Blumberg, The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality (Oxford University Press 1993) 84. 235 Michael Koebele, Corporate Responsibility under the Alien Tort Statute: Enforcement of International Law Through US Torts Law (Brill 2009) 286.

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if formal requirements weren’t followed,236 U.S. courts have attempted time and again to develop what are called ‘laundry lists’.237 When reviewing the literature about veil piercing in Anglo-American jurisprudence, what seems to unnerve everyone the most is the randomness with which it occurs and, henceforth, how difficult it is to predict when it will happen or not. Eroglu, for example, points out that the logical thing is to expect veil piercing to happen in tort cases more often than contract cases because the latter have voluntarily chosen to do business with the corporation and thus have the chance to analyze the risks involved, although Thompson’s empirical study shows the contrary.238 And the latter seems to be supported, at descriptive level, by the empirical work done by Matheson, who also concludes that piercing occurs more sparsely if the defendant is owned by an individual instead of by another entity.239 Similar troubling conclusions are reached by Oh, whose empirical study confirms the irrational prevalence of successful veil piercing in contract over tort cases, as well as the overwhelming tendency by U.S. courts to pierce only closed corporations and reach into the assets of individual shareholders over corporate parents.240 This quagmire in which veil piercing seems to take place, though, requires a fresh perspective – and, while canvassing empirical studies, there is one that merits a closer look, i.e. Boyd and Hoffman.241 Their paper turns away from studying judges’ ultimate decisions and opinions and, instead, focuses on dockets (or official summaries of proceedings), based on the observation that two-thirds of the cases they selected were settled; moreover, they look at the defendants’ size, entity choice and shareholder identity, as well as the judges’ party affiliation as proxy for his or her ideological bent. While it is reasonable to disagree with their point about settled cases – mostly because settling can easily be linked to cost of litigation vis-à-vis amount of the settlement rather than chances of success – the most provocative findings by the authors are that two 236 Frederick James Powell, Parent and Subsidiary Corporations: Liability of a Parent Corporation for the Obligations of its Subsidiary (Callaghan, 1931) 4–18. 237 Bainbridge and Henderson, op. cit., 105. 238 Muzaffer Eroglu, Multinational Enterprises and Tort Liabilities: An Interdisciplinary and Comparative Examination (Edward Elgar Publishing 2008) 145. 239 John H. Matheson, ‘Why Courts Pierce: An Empirical Study of Piercing the Corporate Veil’ [2010] Berkeley Business Law Journal 7(1). 240 Oh, op. cit. 241 Christina Boyd and David Hoffman, ‘Disputing Limited Liability’ [2009] Northwestern University Law Review 104.

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determinant factors are firm size, with the largest firms unlikely to be pierced, and a judge’s ideology, where those with a party affiliation denoting progressive views tend to pierce more.242 These findings are worthy of a long, deep reflection. Veil piercing is the attempt to balance the benefits of limited liability against its costs,243 though, as shown above, it is impossible not to get embroiled when trying to have one’s cake and eat it too. It may not necessarily be a zero sum game though it certainly involves trade-offs. Following Mähönen, earlier in this book we asserted that company law is essentially political insofar as making good company law is about making good society,244 and it is hard not to see that happening right before our very own eyes when venturing into the quandary of veil piercing theory and practice. When Judge Benjamin Cardozo said that ‘metaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it’245 he was more than prescient. Aristotle confronted the issue of metaphors in the Poetics as a resource to enliven language,246 and his treatment encompassed synecdoches (like calling older men silver beards), metonymies (as we call the EU institutions when saying Brussels), and metaphors proper (such as people calling their significant other a ray of sunshine).247 Since metaphors bring two concepts into play as if they were one, through them we approach realities in a figurative way and, by doing so, we reinterpret them, making it necessary to never lose sight of the metaphor’s focus and its frame. Following Cardozo’s dictum regarding the current state of things, we seem to have lost focus when it comes to corporations and their frame. The issue seemed to be figured out during Roman times: if someone is actively involved in a project then full liability goes with it, while a blanket limitation of liability was extended solely when hard-to-fund, socially worthy projects were required. On the other hand, the incredible progress experienced by large swaths of humanity has also created a 242

Ibid. Easterbrook and Fischel, Economic Structure, op. cit., 55. 244 Jukka Mähönen, ‘Do We Need Law and Economics in Company Law?’, Nordisk Tidsskrift For Selskabsret, Nr. 1/2, 2009, pp. 146–157. 245 Berkey v. Third Avenue Railway Co., 244 N.Y. 84, 94, 155 N.E. 58, 61 (1926). 246 Umberto Eco, Semiotics and the Philosophy of Language (Indiana University Press 1986) 91. 247 A. Al-Sharafi, Textual Metonymy: A Semiotic Approach (Springer 2004) 13. 243

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fundamental dilemma, and that is the trade-off implied in doing away with subsidies such as limited liability. Do we want a world that is fairer, while yet refusing to let go of the comforts brought in part thanks to a legally sanctioned privilege? Dine’s moral deflection device metaphor has even greater relevance when confronted with such a question. Politically speaking, the issue is also problematic for advocates of individual economic freedom because blank-check limited liability is conceptually conflicted with this enlightened view. The proposals on the table – reform veil piercing, do away with it vis-à-vis enterprise liability, focus solely on shareholder conduct, etc.248 – still frame the issue in terms of having one’s cake and eating it too, instead of, first, debating the really hard, deep questions from angles other than the merely economic, not least the different ways in which social policies can promote personal responsibility249 together with freedom. Moreover, as empirical studies indicate, the consequences vary depending on the size of the business, i.e. solving the issues for large, publicly traded corporations will expose mom and pop shops, while solutions to the latter won’t fit with the reality of the former. The interconnected, global, and financially muscular network built around the world is plagued by systemic risks that have little to do with old school, staffed and productive enterprises – and more to do with a complex web of letterbox entities with only rights and obligations in their corporate books. Not all is lost, though. Discussing these issues is, precisely, the critical part of reforming corporate governance.

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Bainbridge and Henderson, op. cit., 304. Alexander Brown, Personal Responsibility: Why It Matters (Continuum 2009) 6–7. 249

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Vermeulen, Erik M., The Evolution of the Legal Business Forms in Europe and the United States: Venture Capital, Joint Venture and Partnership Structures (Kluwer Law 2003) Vinkovetsky, Ilya, ‘The Russian-American Company as a Colonial Contractor for the Russian Empire’ in Aleksei I. Miller and Alfred J. Rieber (eds), Imperial Rule (Central European University Press 2004) Vinkovetsky, Ilya, Russian America: An Overseas Colony of a Continental Empire: 1804–1867 (Oxford University Press 2011) Walters, James William, What is a Person? An Ethical Exploration (University of Illinois Press 1997) Weeks, Sophie, ‘The Role of Mechanics in Francis Bacon’s Great Instauration’ in Claus Zittel, Gisella Engel, Romano Nanni, and Nicole C. Karafyllis (eds), Philosophies of Technology: Francis Bacon and his Contemporaries (Brill 2008) Wilks, Stephen, The Political Power of the Business Corporation (Edward Elgar Publishing 2003) Woolf, Cecil N. Sidney, Bartolus of Sassoferrato: His Position in the History of Medieval Political Thought (Cambridge University Press 2012) Wormald, B.H.G., Francis Bacon: History, Politics and Science: 1561–1626 (Cambridge University Press 1993) Zimmermann, Reinhard, The Law of Obligations: Roman Foundations of the Civilian Tradition (Oxford University Press 1996)

Papers Boyd, Christina and David Hoffman, ‘Disputing Limited Liability’ [2009] Northwestern University Law Review 104 British Library, East India Company accessed 21 October 2017 Deiser, George F., ‘The Juristic Person’ [1908] University of Pennsylvania Law Review and American Law Register Vol. 57(3), Vol. 48 New Series: 131–142 Demeyere, Seil, ‘Liability of a Mother Company for its Subsidiary in French, Belgian, and English Law’ [2015] European Review of Private Law 3: 385–414 Easterbrook, Frank H. and Daniel R. Fischel, ‘Limited Liability and the Corporation’ [1985] University of Chicago Law Review 52: 89–117 Elgueta, Giacomo Rojas, ‘Divergences and Convergences of Common Law and Civil Law Traditions on Asset Partitioning: A Functional Analysis’ [2009] University of Pennsylvania Journal of Business Law 12(2): 517–554 Ewang, Fritz N., ‘An Analysis and Critique of the European Union’s Minimum Capitalization Requirement’ [2007] Charles Sturt University accessed 19 November 2017 Fleckner, Andreas Martin, ‘Adam Smith on the Joint Stock Company’ [2016] Max Planck Institute for Tax Law and Public Finance Working Paper 2016-01

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Fleckner, Andreas, ‘Corporate Law Lessons from Ancient Rome’ as posted by Scott Hirst (co-ed.) [2011] HLS Forum on Corporate Governance and Financial Regulation. accessed 15 August 2017 Galgano, Francesco, ‘El Concepto de Persona Jurídica’ [2004] Revista Derecho del Estado, Universidad Externado de Colombia 1(16): 13–28 Grossfeld, Bernhard and Werner Ebke, ‘Controlling the Modern Corporation: A Comparative View of Corporate Power in the United States and Europe’ [1978] The American Journal of Comparative Law 26(3): 397–433 Hansmann, Henry and Reinier Kraakman, ‘The Essential Role of Organizational Law’ [2000] NYU Law and Economics Working Paper No. 00-006 accessed 16 July 2017 Hansmann, Henry, Reinier Kraakman and Richard Squire, ‘Incomplete Organizations: Legal Entities and Asset Partitioning in Roman Commerce’ [2014] European Corporate Governance Institute, Law Working Paper Nr. 2, 71/2014 Hespe, Kathryn, ‘Preserving Entity Shielding: How Corporations Should Respond to Reverse Piercing of the Corporate Veil’ [2014] Journal of Business and Securities Law 14(69) Kaufmann, Daniel, Joel Hellman, Geraint Jones, and Mark Schankerman, ‘Measuring Governance, Corruption, and State Capture: How Firms and Bureaucrats Shape the Business Environment in Transition Economies’ [2000] World Bank Policy Research Working Paper No. 2312 accessed 23 October 2017 Krugman, Paul, ‘Berating the Rating Agencies’ New York Times (27 April 2010) Kuran, Timur, ‘The Absence of the Corporation in Islamic Law: Origins and Persistence’ [2005] American Journal of Comparative Law 53: 785–834 Macey, Jonathan and Joshua Mitts, ‘Finding Order in the Morass: The Three Real Justifications for Piercing the Corporate Veil’ [2014] Cornell L. Rev. 100(1): 99 accessed 21 November 2017 Mähönen, Jukka, ‘Do We Need Law and Economics in Company Law?’, Nordisk Tidsskrift For Selskabsret, Nr. 1/2, 2009 Maitland, Fredric William, ‘Moral Personality and Legal Personality’ [1905] Journal of the Society of Comparative Legislation 6(2): 192–200 Marburg, Theodore, ‘Amendment of the Sherman Anti-Trust Law’ [1908] The Annals of the American Academy of Political and Social Science, Vol. 32, Federal Regulation of Industry Matheson, John H., ‘Why Courts Pierce: An Empirical Study of Piercing the Corporate Veil’ [2010] Berkeley Business Law Journal 7(1) Mullainathan, Sendhil and Richard Thaler, ‘Behavioral Economics’ [2000] Massachusetts Institute of Technology, Department of Economics, Working Paper No. 00-27 accessed 23 October 2017 Oh, Peter B.,‘Veil-Piercing’ [2010] Texas Law Review 89: 81 Osagie, Johnston, Gbolahan Solomon Osho and Cynthia Sutton, ‘The Impacts of Institutional Stock Ownership on Stock Returns and Performance: A Financial Market Perspective’ [2005] Journal of Business and Economics Research 3(3): 65–70

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Painter, Richard W., ‘Ethics and Corruption in Business and Government: Lessons from the South Sea Bubble and the Bank of the United States’ University of Minnesota Law School, Legal Studies Research Paper Series. Research Paper No. 06-32 accessed 23 October 2017 Paulson, Stanley L., ‘Hans Kelsen’s Doctrine of Imputation’ [2001] Ratio Juris 14(1): 47–63 Robert Reis, Mary, ‘Pope Innocent IV and Church-State Relations, 1243–1254’ [1972] Loyola University Chicago, dissertation paper 1224 accessed 25 September 2017 Savile, John, ‘Sleeping Partnership and Limited Liability, 1850–1856’ [1956] The Economic History Review 8(3): 418–433 Steinberg, Justin, ‘Spinoza’s Political Philosophy’ in Edward N. Zalta (ed.) The Stanford Encyclopedia of Philosophy (2009) accessed 23 October 2017 Szalai, Akos, ‘Reducing Minimum Share Capital in Limited Liability Companies: A Basic Model’ [2007] Hungarian Association for Law and Economics, Working Paper No. 6 accessed 19 November 2017 Wichowski, Alex, ‘Net States Rule the World; We Need to Recognize Their Power’ Wired Magazine (4 November 2017) accessed 7 November 2017 Wilmarth, Arthur E., ‘Conflicts of Interest and Corporate Governance Failures at Universal Banks During the Stock Market Boom of the 1990s: The Cases of Enron and WorldCom’, George Washington University, Legal Studies Research Paper No. 234, and in Benton E. Gup (ed.), Corporate Governance in Banking: A Global Perspective (Edward Elgar Publishing 2007)

Others Chavkin, Sasha, Emilia Díaz-Cruz, and Cecile S. Gallego, ‘More than 100 Universities and Colleges Included in Offshore Leaks Database’ (International Consortium of Investigative Journalists, 17 November 2017) accessed 24 November 2017 Cohen, Patricia, ‘A Tax Cut That Lifts the Economy? Opinions Are Split’ (New York Times, 2 November 2017) accessed 5 November 2017 Eurostat, Business Demography Statistics, 2016 accessed 19 November 2017 Fromm, Jeff, ‘New Study Finds Social Media Shapes Millennial Political Involvement and Engagement’ (Forbes 22 June 2016) accessed 5 November 2017

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Ilves, Toomas Hendrik, ‘Estonia’s Digital Dividends’ (The World Bank Blogs, 13 January 2016) accessed 19 November 2017 International Consortium of Investigative Journalists, Paradise Papers (5 November 2017) accessed 5 November 2017 London Metropolitan Archives, Collections Catalogue. Reference Code: CLC/ B/195 accessed 20 October 2017 Organisation for Economic Co-operation and Development, ‘Background Brief: Inclusive Framework on BEPS’ [2017] accessed 13 December 2017 Reynders Peter (trans.) and Ruper Gerritsen (ed.), ‘A Translation of the Charter of the Dutch East India Company’ accessed 22 October 2017 Rosenthal, Steven M. and Lydia S. Austin, ‘The Dwindling Taxable Share of U.S. Corporate Stock’ (Tax Policy Center 16 May 2016) accessed 7 November 2017 United Nations Conference on Trade and Development, ‘World Investment Report 2017: Investment and the Digital Economy’ (United Nations, 2017) Wessel, David, ‘Did “Great Recession” Live Up to the Name?’ Wall Street Journal (8 April 2010) accessed 23 October 2017 Wikisource contributors, ‘Charter Granted by Queen Elizabeth to the East India Company’, Wikisource accessed 21 October 2017 Williams, Margot, ‘Users Can Now Search by Country in the ICIJ Offshore Leaks Database’ (International Consortium of Investigative Journalists, 10 October 2013) accessed 12 November 2017

Cases and Legislation 118 U.S. 394, 6 S. Ct. 1132, 30 L.Ed. 118 303 U.S. 77, 58 S. Ct. 436, 82 L.Ed. 673 (dissent) Berkey v. Third Avenue Railway Co., 244 N.Y. 84, 94, 155 N.E. 58, 61 (1926) Burwell v. Hobby Lobby Stores, Inc., 573 U.S. 134 S.Ct. 2751, WL 2921709, 2014 U.S. LEXIS 4505, 123 Fair Empl.Prac.Cas. (BNA) 621 Citizens United v. FEC, 130 S. Ct. 876 Codex Hermogenianus, as collected in the Digest 1.5.2. accessed 24 September 2017

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Commercial Code (Äriseadustik) §140(1)(2), Parliament of the Republic of Estonia, passed 15 February 1995, as amended accessed 19 November 2017 Directive 2012/30/EU of 25 October 2012 on coordinaton of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 54 of the Treaty on the Functioning of the European Union, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent (recast) [2012] OJ L 315/74 European Union: European Commission, Commission Staff Working Document: Accompanying the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the European Court of Justice and the European Central Bank on EU Framework for Cross-border Crisis Management in the Banking Sector, 20 October 2009, SEC(2009) 1407 accessed 22 November 2017 HC Deb 27 June 1854 vol 134 cc752–800 Louis K. Liggett Co. v. Lee, 288 U.S. 517, 53 S. Ct. 481, 77 L. Ed. 929, 1933 U.S. LEXIS 51, 85 A.L.R. 699 (dissent) Sea-Land Services, Inc. v. The Pepper Source, 941 F.2d 519 (7th Cir. 1991) as cited in Richard Booth and Robert Hamilton, ‘Black Letter Outline on Corporations’ (West 2006) Walkovszky v. Carlton, 23 N.Y.2d 714, 1968 LEXIS 987, 244 N.E.2d 55, 296 N.Y.S.2d 362 (N.Y. 1968)

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4. Agency and the emperor’s new clothes 1. THE PRINCIPAL-AGENCY PROBLEM Under the prevailing orthodoxy, corporate law is solely intended to provide the skeleton of the corporate form and to control the conflicts arising from the separation of ownership and control1 – known by economists as agency problems. These conflicts come in three types, i.e. those between shareholders and managers, those between controlling and minority shareholders, and those between the firm (particularly shareholders) vis-à-vis creditors, employees, and customers – all based on the understanding that, because the agent is in possession of better information than the principal, it has an incentive to act opportunistically.2 This framework of thought, taken to its logical conclusion, means that corporate governance is all about designing appropriate incentives to align agents to shareholder interests, tackling information asymmetry, and reducing monitoring costs by the principal.3 The economic principalagent model is key in mainstream corporate governance, and although we have analyzed in depth how the nexus of contracts concept is narrow at best and ahistorical and deceptively descriptive at worst, to reframe corporate governance demands that the principal-agent model is also analyzed beyond being one type of economic rationale. Unlike the fiduciary conception in law, the agency model in economics does away with exogenous elements and does three things: (a) it focuses on the existence of a principal who designs complete contracts in order to induce the agent to work hard or report accurately enough; 1

Jean Tirole, ‘Corporate Governance’ [1999] Centre for Economic Policy and Research, Discussion Paper No. 2086. 2 Reinier Kraakman, John Armour, et al., ‘The Anatomy of Corporate Law: A Comparative and Functional Approach’ (2nd edn, Oxford University Press 2009) 35–37. 3 Michael C. Jensen and William H. Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’ [1976] Journal of Financial Economics 3(4) 305–360. 149

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(b) it emphasizes an employer-employee dynamic;4 and (c) it assumes that trust is irrational5 – thus acting opportunistically is considered rational economic behavior.6 Moreover, by relying on contracts with explicit performance incentives and the prevalence of asymmetric information, the model leads to two dead ends, i.e. first, moral hazard, based on the inability of the principal to observe the actions of the agent, who thus incurs less personal cost and higher utility by shirking, and, second, adverse selection, when the agent lies to the principal by overstating skills.7 As with apes – the widely accepted view goes – it is true that humans do resort to opportunistic behavior, mostly against non-related rivals in their struggle for resources and mating partners, although also observable are phenomena like discomfort when breaking rules, explicit systems of incentives built upon social institutions, strong reciprocity, and the calculation of long-term interest against short-term gain.8 This narrow-gauged view occurs in the dominant agency model. Agency relationships do not take place in a vacuum but, instead, are embedded in social relationships, within the frame of the legal doctrine of agency, and likely at the crossroads of several market networks – all of which constitute a framework of trust.9 This is difficult to quantify without forcing the evolving nature of individuals in society into a theoretical straitjacket, thus reinforcing the stance that, despite their utility, it is reckless to enshrine economic tools of a single ideological bent as the main rationale behind policymaking. Kornhauser makes a fair point in this respect in the sense that, insofar as efficiency or wealth maximization is instrumentally but not intrinsically valuable, legislators and judges must pursue them to the extent that they constitute a practical and reasonable proxy for individual well-being – and, even then, it is easier to endorse such a goal than to articulate and justify it.10 It is 4

Stephen A. Ross, ‘The Economic Theory of Agency: The Principal’s Problem’ [1973] The American Economic Review 63(2): 134–139. 5 Ramon Casadesus-Masanell and Daniel F. Spulber, ‘Agency Revisited’ [2010] Harvard Business School, Working Paper 10-082. 6 Eugene F. Fama, ‘Agency Problems and the Theory of the Firm’ [1980] The Journal of Political Economy 88(2): 288–307. 7 Casadesus-Masanell and Spulber, op. cit. 8 Paul Seabright, The Company of Strangers: A Natural History of Economic Life (Princeton University Press, 2010). 9 Casadesus-Masanell and Spulber, op. cit. 10 Lewis A. Kornhauser, ‘Constrained Optimization: Corporate Law and the Maximization of Social Welfare’ in Jody S. Kraus and Steven D. Walt (eds), The Jurisprudential Foundations of Corporate and Commercial Law (Cambridge University Press 2000) 113.

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evident that the complexity of real-world situations cannot be captured beforehand by general rules, and that, when courts decide on specific cases, neither is their information perfect nor do they have mechanisms to achieve optimal outcomes. Just as with the nexus of contracts view of the firm, the agency model, then, cannot be the sole tool for navigating such complexity. A fundamental level of analysis for agency is that it is a contract. The origin of contracts as a feature of social life is said to be simultaneous with the birth of trade.11 However, even before the complex theory of contracts developed – independently from proper codification after the Regal Period of ancient Rome – humanity has been interested in ways of securing the fulfillment of unilateral promises, be it via self-help or community pressure or by the gods – as observed in the Abrahamic covenant with God in Genesis 1712 or the iusiurandum, when Scipio says ‘si sciens fallo, tum me, Iuppiter optime maxime, domum familiam remque meam pessimo leto afficias’ (‘If am lying, may Jupiter bring destruction to my family and my estate’) i.e. a unilateral contract under religious sanction.13 It was not until the Institutes of Justinian that a proper definition of obligation can be found, although in the form of ‘est iuris vinculum quo necessitate adstringimur alicuius solvendae rei secundum iura nostrae civitatis iuria’ (a legal bond that compels us as of necessity to render something under the laws of our city), i.e. a vinculum or a bond tying two people together, which is a contract regardless of the fact that ‘contractus’, in the sense of a binding agreement or transaction, is a post-Augustan word.14 From this, then, it can be said that a contract is a vinculum iuris, i.e. a binding of two parties where one is compelled to do something according to law.15 And as the substance of a contract (the underlying duty) is to ‘solvere’, Roman law sees it as paying a debt through an individual doing what he has promised to do.16 Moreover, the definition includes the condition of the agreement of wills 11 W.H. Buckler, The Origin and History of Contract in Roman Law Down to the End of the Republican Period (Cambridge University Press 1895). 12 Heraak Christian Kim, ‘Jewish Law and Identity: Academic Essays’ (The Hermit Kingdom Press 2005). 13 Buckler, op. cit. 14 W.W. Buckland, A Manual of Roman Private Law (Cambridge University Press 2012). 15 Stewart Rapalje and Robert Lawrence, A Dictionary of American and English Law: With Definitions of the Technical Terms of the Canon and Civil Laws (Lawbook Exchange 1997). 16 Adolf Berger, Encyclopedic Dictionary of Roman Law (The American Philosophical Society 1991).

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to be under the law, because in Roman law an agreement did not necessarily amount to a contract but it had to be made as such by the law.17 It is difficult not to see this rationale against the backdrop of Aristotle, for whom there was a universal justice, in the realm of virtue, and then a particular justice where one could find voluntary transactions or contracts – with both types featuring a relational nature, i.e. defined in relation to another person.18 In this regard, Scanlon makes a convincing argument – going beyond Rawls’ principle of fairness based on voluntary adherence to a group – that there is a more general family of moral wrongs concerned not with social practices but with what one owes to others when leading them to expect a particular future conduct, independent of social institutions around the act of promising.19 The ethical underbelly of contract and, then, of agency as a subtype, enriches its analysis, for example the need for legitimate and capable parties, the absence of error, the form prescribed by law, and that the subject matter of the contract is possible. Moreover, in Roman law, bilateral contracts were bonae fidei, i.e. they gave rise to iudicia bonae fidei.20 And the latter triggers even more ramifications, as bonae fidei means honesty, uprightness, and good faith, and is opposed, logically, to bad faith, fraud, immorality, and willful misconduct.21 One type of contract in Roman law that came close to agency was the mandatum,22 and, according to the Romans, for someone to perform legal acts on behalf of another, the vinculum had to be based on a personal relationship of confidence between the parties.23 However, the closest Rome came to the figure of the modern manager as an agent was the institor24 – the person in charge of an industrial or commercial enterprise, appointed by its owner – and the obligations contracted by an institor and connected to the business could give rise to the principal being sued directly by an action called actio institoria.25 Nevertheless, Roman law 17

Buckland, op. cit. Aristotle, Nicomachean Ethics (translated by Robert Williams) (Longmans, Green & Co. 1869) 138–180. 19 Thomas Scanlon, What We Owe to Each Other (Belknap Press 1998) 296–317. 20 Berger, op. cit. 21 Ibid. 22 W.W. Buckland and Arnold McNair, Roman Law and Common Law: A Comparison in Outline (Cambridge University Press 1952). 23 Berger, op. cit. 24 Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition (Oxford University Press 1996) 52–53. 25 Berger, op. cit. 18

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never developed a fully formed law of agency beyond what Praetors had to innovate, under the pressure of commercial wants, through superseding the formal by non-formal elements; and Hunter has a very valuable reasoning for that, i.e. forms were very important – as we saw earlier in the case of Scipio in Roman times or Abraham in the Judaic tradition – and a freeman could not represent another because rights and duties acquired by solemn and dramatic acts and words, seen as having sacramental efficacy, made it inconceivable for someone else, who had not performed such rituals, to partake in their consequences.26 As logical as it is that fiduciary relationships generate a duty of loyalty,27 the existence of interpersonal expectations as a basis for a universal morality, as per Scanlon,28 make it unthinkable not to include good faith in the mix, as bad faith both in granting and accepting to look after someone else’s affairs wouldn’t carry with it, as it has since Roman times, the chastisement of infamy.29 The role of good faith in the classic conception of agency is perhaps the most interesting feature of how it turned out to be, particularly in the context of corporate law. In it, a shift occurs from a principal having the burden of selecting an appropriate agent – from whom honesty and decency are the main expectations – to agents having to fulfill vast and complex duties that shareholders-principals, as a class, have. This is an important shift and its repercussions are tangible, as the consequences of law vary when only loyalty and good faith are expected in comparison to more specific expectations proper of professionalization. Good faith is a state of mind reflected in actions, i.e. the attitude of a person when acting consisting of the belief that what they are doing is lawful and does not violate others’ rights, while the term ‘contractus bonae fidei’, articulated by Justinian, reflected precisely that by requiring fairness in the performance of duties. Therefore, the officer deciding about ‘actiones stricti iuris’ with no ‘ex fide bona’ clause could only take into consideration a given legal formula, while in ‘iudicia bonae fidei’ the officer had full power to decide the controversial matter according to what is fair, taking into 26

William Alexander Hunter, ‘A Systematic and Historical Exposition of Roman Law in the Order of a Code’ (4th edn, Sweet & Maxwell 1903) 609–623. 27 Andrew Gold and Paul Miller (eds), Philosophical Foundations of Fiduciary Law (Oxford University Press 2014) 1. 28 Scanlon, op. cit. 29 Michele Graziadei, ‘Virtue and Utility’ in Andrew Gold and Paul Miller (eds), Philosophical Foundations of Fiduciary Law (Oxford University Press 2014) 288.

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account implicit pacts and being able to modify their effects.30 Therefore, in modern times, it is considered that a party might be found to have violated good faith when it takes actions which, while not necessarily proscribed by the literal terms of a contract, have the intended effect of depriving the other party of its part in a mutually crafted bargain; and, in the corporate context, an action undertaken in good faith means that a fiduciary acts with honesty of purpose, i.e. according to the proper faithful reason the party presents as motivation and not some other concealed purpose.31 We find very little in Roman law, if anything at all, about designing optimal financial incentives to align the interests of the principal and the agent. The current framework is a far cry from an agency primordially embedded in the moral landscape of virtue. The vastness of the scholarly work on fiduciary duties – particularly under the influence of advanced jurisdictions (e.g. Delaware) – revolves around determining if there are two or three duties, or just one or five. This is likely a result of the fiduciary duties’ unspecified character, which is quite broad when seen ex ante and, regardless of the doctrine one subscribes to regarding their number, judicially created.32 So, are there two or three? According to the triadic conception of fiduciary duties in corporate governance literature, a manager must act under the principles of care, loyalty and good faith; however, while the general principle of care consists of elements such as diligence and rationality and the general principle of loyalty consists of elements such as fairness and disclosure, the general principle of good faith presents the problem that it is easier to judge an action as lacking good faith than to provide a general definition in positive terms. Pursuant to that logic, from the three objective elements of good faith in common law, two are expressed in negative terms: (a) not to violate generally accepted standards of decency applicable to the conduct of business; (b) not to violate generally accepted basic corporate norms; and (c) to have fidelity to the office, i.e. to execute the task as reasonably 30

Berger, op. cit. Leo E. Strine, Lawrence A. Hamermesh, et al., ‘Loyalty’s Core Demand: The Defining Role of Good Faith in Corporation Law’ [2010] Georgetown Law Journal; Widener Law School Legal Studies Research Paper No. 09-13; Harvard Law and Economics Discussion Paper No. 630 accessed 30 December 2017. 32 William T. Allen, ‘The Corporate Director’s Fiduciary Duty of Care and the Business Judgment Rule’ in Klaus J. Hopt (ed.), Comparative Corporate Governance: The State of the Art and Emerging Research (Oxford University Press 1998) 315. 31

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expected – the subjective elements being, on the other hand, honesty or sincerity.33 However, there is no unified criterion as to the division of fiduciary duties and where good faith is located, as shown by AmSouth Bancorporation v. Ritter before the Delaware Supreme Court in 2006 – which effectively rejected the triadic formulation of fiduciary duties and established that good faith was a component of the duty of loyalty, thus returning to bifurcation. In this sense, we side with the view that the debate about the exact number of duties is entirely academic, as there is only one duty but there can be as many duties as cases adjudicated by the courts. Therefore, for the purpose of clarity, it is best to stay at the level of analysis where approaches, conducts, tests, and enforcement standards can be seen all at once, and, based on this, speak about five fiduciary duties.34 Figure 4.1 is the author’s schematization of the scholarly work by Julian Velasco, whose defense of the existence of five fiduciary duties is among the best.

Figure 4.1 Fiduciary duties Reading decisions, codes of conduct, and pieces of legislation makes for a theoretical rollercoaster, the ups and downs of which squash concepts 33

Melvin A. Eisenberg, ‘The Duty of Good Faith in Corporate Law’ [2005] Delaware Journal of Corporate Law 31(1): 1–75. 34 Julian Velasco, ‘How Many Fiduciary Duties Are There in Corporate Law?’ [2009] Southern California Law Review 83(6): 1213–1318; Notre Dame Legal Studies Paper No. 09-35 accessed 31 December 2017..

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together and explain one duty by referring to another. For example, the presumption is that the directors of a corporation exercise due care by acting on an informed basis, in good faith, and in the honest belief that their actions are in the best interests of the corporations, shifting the burden of proof against that presumption to the plaintiff. On the other hand, the duty of loyalty does not focus on structured decisions, as is the case of the duty of care, but on motive, and forces the agent to act in the best interests of the principal, and if the agent participates in selfinterested dealing it must prove to a court that the transactions involved both a fair price and fair dealing.35 Hence the advantage of zooming out (or in) to the right level, beyond the dyadic vs. triadic debate, and speaking about the burdens that are imposed on agents from time to time – or, better said, the concerns that shareholders have attempted to ventilate and prove in court, with the correlative scoping performed by judges, and the conduct that is under scrutiny. Moreover, doing so allows for a clearer view of two relevant points when discussing the principalagent problem. First, and most illustrative, is how insidious the search for single causes – in relation to mainstream economics’ aspiration to be an exact science – can be. Whenever academics are debating about the one, single fiduciary duty, there seems to be agreement that it is to pursue faithfully and diligently the best interests of the corporation and its shareholders36 – a position that echoes the basal shareholder vs. stakeholder debate as well as the discussion on how accurate or fair it is to determine overall wealth maximization solely via a firm’s equity.37 The principal-agent problem, thus, is richer than just creating mechanisms to align the performance of managers to the interests of shareholders, reducing monitoring costs by the latter while curtailing the potential opportunism of the former.38 The expansive theory and practice around the topic, from the Roman era to the present day, is a reflection of the growing complexity of society and, thus, business. The latter, as an expression of society itself, makes it impossible to approach the subject from just one angle. Law, as a social tool, echoes this. Take First National Bank v. F.C. Trebein Co., for example, where the court said, 35

Robert Flannigan, ‘Fiduciary Duties of Shareholders and Directors’ [2004] Journal of Business Law, p. 277 accessed 31 December 2017. 36 Claire A. Hill and Brett H. McDonnell, ‘Stone v. Ritter and the Expanding Duty of Loyalty’ [2007] Fordham Law Review 76(3): 1769–1796. 37 Kornhauser, op. cit., 99. 38 Joseph McCahery and Erik Vermeulen, Corporate Governance of NonListed Companies (Oxford University Press 2008).

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‘Good faith in law … is not to be measured always by a man’s own standard of right, but by that which [the law] has adopted and prescribed as a standard for the observance of all men in their dealings with each other’.39 What occurs when just one framework is used to approach complex issues is mayhem, a case in point being transparency. Paragraphs II and V of the OECD Corporate Governance Principles call for facilitating shareholder participation through the annual general meeting, and for disclosure and transparency, respectively, with the OECD40 asserting that ‘a strong disclosure regime that promotes real transparency is a pivotal feature of market-based monitoring of companies and is central to shareholders’ ability to exercise their ownership rights on an informed basis’.41 Nevertheless, there is increasing concern among scholars in the sense that there is an optimal level of transparency; as attempts to mandate levels beyond such an optimum level decrease profits, both through higher managerial salaries vis-à-vis career risks related to excessive transparency and by increased managerial incentives to engage in costly efforts to distort information.42 Another case of having one’s cake and eating it too.

2. THE ‘OTHER’ AGENCY PROBLEM According to mainstream research there are three agency problems arising in business firms: first, the one involving the firm’s owners and its hired managers; second, the one involving the conflict between owners possessing a majority controlling interest in the firm and the minority or non-controlling owners; and, third, the one involving the conflict between the firm itself and the other parties with whom the firm contracts, such as creditors, employees and customers.43 However, from a juridical point of view, there is room for debate as to whether the last two constitute real agency problems. As we have seen in the preceding section, at the core of the legal nature of an owner-manager agency problem is a principal knowingly acting to trust the pursuit of a goal in the hands of a good faith agent, although it is hard to see such a direct link and bilateral 39

Eisenberg, op. cit. OECD Principles of Corporate Governance. Organisation for Economic Co-operation and Development (OECD). Paris, 2004 . 41 Ibid. 42 Benjamin E. Hermalin and Michael S. Weisbach, ‘Transparency and Corporate Governance’ [2007] . 43 Kraakman, et al., op. cit. 40

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interaction in the origination of the other two problems. Actually, from reading the law and economics literature, the owner vs. manager agency problem is a zero-sum game44 in relation to the controlling shareholder vs. non-controlling shareholder agency problem, because the presence of a controlling shareholder reduces the managerial agency problem, although at the cost of the controlling vs. non-controlling shareholder and, numerically, it is said that the non-controlling shareholders would prefer the presence of controlling shareholders so long as the benefits from reducing the managerial agency costs surpass the costs of private benefits control.45 The core question, then, is whether controlling shareholders owe a fiduciary duty to minority shareholders. In Roman law, a fiduciae causa referred to transactions creating a fiduciary relation between the contracting parties and imposing on the trustee the duty of performing, under certain conditions, a legal act entrusted to him;46 and as a contract it meant the sale of property to a person with a purchase-back agreement after the fulfillment of certain conditions, hence it was used in the case of the emancipation of children or the guardianship of a woman, or in inheritance cases.47 As the highest standard of care in common law, a fiduciary is defined in Bristol & West Building Society vs. Mothew as someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.48 However, even though the law imposes a fiduciary duty on anyone controlling another person’s duty and common law has recognized a shareholder’s voting rights as property, following Justice Walton in Northern Counties Sec. Ltd. v. Jackson & Steeple Ltd., there seems to be a historic hesitation by the English and Canadian courts regarding the imposition of fiduciary duties on controlling shareholders.49 This is not the case in U.S. legal 44

Ken Binmore, Game Theory (Oxford University Press 2007). Ronald J. Gilson and Jeffrey N. Gordon, ‘Controlling Controlling Shareholders’ [2003] Columbia Law and Economics Working Paper No. 228; Stanford Law and Economics Olin Working Paper No. 262 or accessed 1 January 2018. 46 Berger, op. cit. 47 Charles Phineas Sherman, Roman Law in the Modern World (Kessinger Publishing 2010). 48 Bristol & West Building Society v Mothew [1998] Ch 1 at 18 per Lord Millet. 49 Zipora Cohen, ‘Fiduciary Duties of Controlling Shareholders: A Comparative View’ [1991] University of Pennsylvania Journal of International Business Law 12(3) accessed 1 January 2018. 45

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practice, though, where since the Supreme Court’s Pepper v. Litton, majority or controlling shareholders clearly bear fiduciary responsibilities towards the minority.50 In Jones v. H.F. Ahmanson & Co it is clearly stated that ‘majority shareholders may not use their power to control corporate activities to benefit themselves or in a manner detrimental to the minority. Any use to which they put the corporation or their power to control the corporation must benefit all shareholders proportionately …’.51 However, it is worth noting that due to the perception of shareholders as being passive and representing largely homogeneous interests, the fiduciary duties of shareholders have been mostly projected upon controlling shareholders52 and closed corporations – since in the latter scenario, without a liquid market to provide an exit, the controlling shareholder has a strong incentive to act opportunistically to the detriment of the minority shareholder.53 In the case of Europe, from analyzing the EU directives harmonizing company law (paying up shares, major shareholdings, distribution of dividends, takeover situations, etc.), specific duties are imposed on shareholders, although they do not amount to a general duty of loyalty for shareholders; moreover, the European Court of Justice does not appear to have developed such a duty from the present body of cases, which is not to say that it does not exist in domestic law, as is the case in the well-developed shareholder duty of loyalty in Germany, or that some features resembling a duty of loyalty among shareholders can’t be developed through shareholder agreements.54 All in all, the perception is 50 Jeffrey G. Macintosh, Janet Holmes, and Steven Thompson, ‘The Puzzle of Shareholder Fiduciary Duties’ [1991] Canadian Business Law Journal 19: 86 accessed 1 January 2018. 51 Jones v. HF Ahmanson & Co., 460 P. 2d 464 – California Supreme Court, 1969. 52 Another example can be found in the OECD Principles, which state in the preamble that ‘in addition to disclosure, a key to protecting minority shareholders is a clearly articulated duty of loyalty by board members to the company and to all shareholders’ (OECD Principles, op. cit.) 53 Iman Anabtawi and Lynn A. Stout, ‘Fiduciary Duties for Activist Shareholders’ [2008] UCLA School of Law, Law-Econ Research Paper No. 08-02; Stanford Law Review, Vol. 60 or accessed 1 January 2018. 54 Karsten Engsig Sørensen, ‘Duty of Loyalty of Shareholders – A Possible Remedy for Conflicts in SMEs?’ in Mette Neville and Karsten Engsig Sørensen (eds), ‘Company Law and SMEs’, Nordic & European Company Law Working Paper No. 10-01 or accessed 1 January 2018.

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that individual continental European frameworks are less well developed to reduce the manager-shareholder agency problem while offering alternatives to mitigate conflicts between controlling and other shareholders.55 It is worth mentioning that separate legal personality allows for a very peculiar stance when speaking about the private benefits agency problem, mainly because, it is argued, the shareholders’ duty of loyalty towards the company means that a shareholder has a duty not to inflict harm on the company through their own conduct, while the shareholders’ duty of loyalty to the other shareholders means conducting oneself in good faith and in the best interests of the whole shareholding block.56 Henceforth, if a corporation is a person different from its owners and managers and its raison d’être is to maximize profits for the benefit of the shareholders,57 where is the line to be drawn between the shareholder maximizing its welfare and the source of such welfare not being harmed? Which is to say: how short is ‘short termism’? There are various topics for debate in this regard: dividend payment, treatment of information, corporate opportunities, sales of shares, dealing with the company, etc. Moreover, the rise of hedge funds has led to more concerns about this apparent contradiction, as well as spreading the private benefits agency problem beyond controlling shareholders in closed corporations and into the area of minority shareholders in public ones. As hedge funds cater to wealthy investors and are lightly regulated – for example exempt from most disclosure requirements borne by mutual funds – the stock markets are seeing a shift in hedge funds, which now control as much as $2 trillion dollars in assets, from passive stock-picking strategies to taking large positions in a few companies, which then, using the high profile of the hedge fund investors, push aggressively for payment of special dividends, launch massive stock buyback programs, sell assets, or even put themselves on the auction block to add shareholder value, mainly using ‘wolf pack’ techniques based on the 1992 proxy rule amendments.58 So, even though minority shareholders may have benefited from a duty of loyalty obligation imposed on controlling shareholders in the case of close corporations, dramatic changes in markets, business practices and institutions, as well as corporate law, have given the minority shareholders in public firms more chances to act opportunistically to the 55

Christoph Van der Elst, ‘Economic View on Corporate Law and Corporate Governance in Europe’ [2014] Tilburg Law School, Ghent University accessed 5 January 2018. 56 Sørensen, op. cit. 57 Kornhauser, op. cit. 58 Anabtawi, op. cit.

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detriment of other shareholders, and more tools to oppress management,59 increasing their wealth at the cost of the other shareholders and the company itself. Is this a new, reverse agency problem where minority shareholders are the agent and the firm, through management, the principal? One very interesting aspect from papers on this agency problem is how much they vary, particularly when the social, economic, and cultural sample pool changes. For example, in Norway, where minority shareholders are well protected and private benefits are low, studies suggest that dividend payout is higher when there’s high conflict potential between controlling and minority shareholders, triggering follow-up investments from minority shareholders, which, in turn, hints at agency conflicts being reduced and trust built via a voluntary dividend policy.60 A Hong-Kong-based author decries how contradictory empirical studies are on the subject of leveraged control, before concluding that (a) different corporations show different characteristics, (b) in terms of policy one size does not fit all, and, thus, (c) it is not optimal to prohibit certain control-enhancing mechanisms, so (d) shareholders should be left to fight it out ex ante among themselves.61 Lastly, more empirically heavy, cross-country studies using a dynamic capital structure model show that agency costs are large and vary widely across and within countries.62 Although the dissonance will turn much more strident in the next section, already in terms of this agency problem, the cracks are starting to appear. Agency theory – by now a sweetheart of the mainstream – is based on an analytical framework of a contract between seemingly self-interested and risk-averse parties with differing goals, rationally bounded, and where the objective is preset at efficiency.63 There are several hurdles to be overcome for agency theory’s ‘expansive’ use. In 59

Ibid. Janis Berzins, Øyvind Bøhren, and Bogdan Stacescu, ‘Shareholder Conflicts and Dividends’ (27 September 2017) Available at ECGI accessed 3 September 2018. 61 Yu-Hsin Lin, ‘Controlling Controlling-Minority Shareholders: Corporate Governance and Leveraged Corporate Control’ [2017] Columbia Business Law Review 2017(2): 456–510. 62 Erwan Morellec, Boris Nikolov, and Norman Schürhoff, ‘Agency Conflicts Around the World’ [2017] Swiss France Institute Research Paper, No. 15-21 accessed 7 January 2018. 63 Kathleen M. Eisenhardt, ‘Agency Theory: An Assessment and Review’ [1989] The Academy of Management Review 14(1): 57–74 accessed 7 January 2018. 60

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order to encompass the controlling-minority shareholder problem, the goalposts have to be moved from allowing instances when a person engages another person to perform a service on their behalf involving the delegation of decision-making authority,64 to encompassing any situation where the welfare of a person depends on another’s actions, including families and other social organizations.65 Doing so stretches the basic unit of analysis in agency and drags it from contract to fiduciary law, effectively pulverizing the element of good faith (contractarian) in favor of care and loyalty (fiduciary), as the contractors are in an ex ante sharing situation, while for fiduciaries it is ex post.66 This has allowed for the theory, in constitutional research for example, to do away with voluntary undertaking as a step that may trigger a fiduciary relationship and, instead, enshrines mere knowledge as the threshold for agency to be born.67 Casting the conceptual net so widely causes it to have holes in it. Furthermore, the second agency problem triggers an uncomfortable trade-off scenario, i.e. the presence of controlling shareholders reduces the risks of shareholder-manager agency costs, although the incentive to externalize risks onto creditors – part of the third and next agency problem – increases.68 And creditors, as we will see, are, if at all, only part of the third agency problem, in which, despite ongoing debate as to the parties that conform to it, all other groups are lumped together: creditors, employees, and community. If aligned managers are said to create shareholder value, it is worrisome to think that this comes at the cost of expropriated creditors, downsized workforces, or devastated communities.

64

Jensen and Meckling, op. cit. Michael C. Jensen, ‘Self-Interest, Altruism, Incentives, & Agency Theory’ [1994] Journal of Applied Corporate Finance II(2). 66 Daniel Markovits, ‘Sharing Ex Ante and Sharing Ex Post: The NonContractual Basis of Fiduciary Relations’ in Andrew Gold and Paul Miller (eds), Philosophical Foundations of Fiduciary Law (Oxford University Press 2014). 67 Evan Fox-Decent, Sovereignty’s Promise: The State as Fiduciary (Oxford University Press 2011) 95. 68 Edward B. Rock, ‘Adapting to the New Shareholder-Centric Reality’ [2013] University of Pennsylvania Law Review, Institute for Law and Economics, Research Paper no. 13-19, Vol. 161, pp. 1907–1988. 65

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3. THE ‘FORGOTTEN’ AGENCY PROBLEM Chapter IV of the OECD Principles of Corporate Governance mirror the opinion that regarding the agency problem of shareholders vis-à-vis non-shareholders, the latter consist solely of creditors and employees, i.e.: The corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. A. The rights of stakeholders that are established by law or through mutual agreements are to be respected. B. Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violation of their rights. C. Performance-enhancing mechanisms for employee participation should be permitted to develop. D. Where stakeholders participate in the corporate governance process, they should have access to relevant, sufficient and reliable information on a timely and regular basis. E. Stakeholders, including individual employees and their representative bodies, should be able to freely communicate their concerns about illegal or unethical practices to the board and their rights should not be compromised for doing this. F. The corporate governance framework should be complemented by an effective, efficient insolvency framework and by effective enforcement of creditor rights.69

There is a popular view among legal scholars that creditor protection exists in corporate law mainly through transaction-based rules and standards for solvent firms, or by shifting governance powers wholesale from shareholders to creditors in bankrupt firms.70 Employee protection, in turn, is typically dealt with through a separate chapter or research line when addressing the agency problem between shareholder and nonshareholder constituencies. This is, perhaps, the most sensitive of all agency problems in corporate governance literature, and some studies even find a positive relationship between employee rights and firms’ use of debt, for shareholders tend to use more debt obligation in order to remove cash flows so as to reduce employees’ opportunities to obtain 69 70

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more benefits from the corporation71 – which is to say, put another way, that when stakeholders gain power, shareholders reduce equity injection and prefer to operate with an indebted corporation solely to minimize the rights of employees. The analysis of this agency problem becomes more relevant under a stakeholder theory of the firm, which asserts that not only shareholders but also employees can be residual claimants of the firm since they invest in specific human capital with limited use outside of the particular firm, and, therefore, can be expropriated by the group effectively controlling the firm.72 This is not the case, of course, with shareholders and creditors, who have the opportunity to hedge their resources across different firms. Let’s start with creditors within the corporate governance framework. A plain loan, as we know it, has its legal origins in Roman times in the form of a mutuum or, more commonly, a stipulatio, i.e. a flexible and generic form of a promise73 which could resemble more of what we know now as a loan when it was over res fungibles,74 particularly of the kinds certa, conventionalis, in diem, and sortis et usurarum – translated as a promise to pay back a certain fungible good (i.e. money), as agreed by the parties (as opposed to one ordered by a judge), set to a certain date, and including interest on top of the principal.75 The action available to the creditor in the classical law when the stipulatio was defaulted and it consisted of a fixed sum of money was actio certae creditae pecuniae, which was an abstract civil action to be resolved in strictu iuris by the judge.76 In early Roman times, the way of compelling satisfaction of a judgment debt was to seize the debtor as a slave, although it later turned into execution by sale of the universal succession of a debtor and, thereafter, evolved into satisfaction through the sale of particular pieces 71

Bing Yu, ‘Agency Costs of Stakeholders and Capital Structure: International Evidence’ [2011] Meredith College, School of Business accessed 1 January 2018. 72 Martin Gelter, ‘Taming or Protecting the Modern Corporation? Shareholder-Stakeholder Debates in a Comparative Light’ [2010] Fordham Law Legal Studies Research Paper No. 1669444; ECGI – Law Working Paper No. 165/2010; NYU Journal of Law & Business 7(2), 2011 accessed 2 January 2018. 73 Martin Hogg, Promises and Contract Law: Comparative Perspectives (Cambridge University Press 2011). 74 William Livesey Burdick, The Principles of Roman Law and their Relation to Modern Law (The Lawbook Exchange 2004) 435. 75 Berger, op. cit. 76 Manuel García, Diccionario de Jurisprudencia Romana (Dykinson 2000).

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of property.77 Although Roman law saw execution not primarily as a means of satisfying the creditor but rather as a punishment for the debtor, the underlying idea was that, by defaulting, the debtor voluntarily consented to surrender his person and property to the creditor.78 In current corporate governance literature, creditors are not only banks and bond-holders but anyone who accepts a claim on corporate cash flows in exchange for goods and services. They are seen as experiencing different agency problems at different points in time, i.e. as contractual counterparts they face the potentially opportunistic behavior by the firm acting in the interest of its shareholders, yet, if the firm defaults, they are prompted into becoming holders of owner rights over the assets of the firm, although they also face the threat of expropriation by other creditors competing for the seize and sale of assets.79 Whether by means of ‘asset dilution’, ‘asset substitution’ or ‘debt dilution’, the shareholder-creditor conflict is seen as a potential cause of reduction in the value of a firm’s assets80 and places firmly under the spotlight the issue, discussed earlier, of legal personality, as such a device can be used to shield shareholder actions aimed, voluntarily or not, at expropriating creditors.81 All in all, the reigning view is that the creditor agency problem is separate from other constituencies, such as employees, as there is strong evidence that creditors in major jurisdictions rely more on contract and market institutions for their protection than they do on corporate legal strategies.82 Nevertheless, it is necessary to be aware of the balancing act between the principal-agent and the firm-creditor agency problems. In a world where relevant information about manager incentives is readily available, it can be said that managers have never thought about themselves as shareholders as intensely as in the present time, which creates a misalignment of interests with creditors, away from whom the managers transfer value.83 If, as some authors suggest, creditors ought to receive attention

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Hunter, op. cit. Rudolph Sohm, The Institutes of Roman Law (James Ledlie, trans.) (First Gorgias Press 2002). 79 Kraakman, et al., op. cit. 80 Ibid. 81 Eilis Ferran, ‘The Place for Creditor Protection on the Agenda for Modernisation of Company Law in the European Union’ [2005] ECGI – Law Working Paper No. 51/2005 accessed 2 January 2018. 82 Kraakman, et al., op. cit. 83 Ferran, op. cit. 78

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as proxies for the universe of non-shareholder interests,84 this is a dangerous benchmark compared to the nature of employment or community – for creditors, at least the providers or financial institutions, do not have one single client firm, while employees generally have only one employer at any given time, and communities do not enter and terminate ‘agreements’ with the firms linked or established within the boundaries of their existence. This is what makes the protection of employees from opportunistic behavior by corporations such an intricate question and one which, most importantly, is divergent throughout jurisdictions – at least compared to the degree of uniformity of thought and praxis in terms of shareholder protection.85 The origins of employment contracts in Rome date back to Quintus Mucius Scaeuola, author of 18 books on the Ius Civile,86 in the form of the locatio conductio operarum, which was orientated towards blue-collar workers rather than liberal professions or managers, and the locatio conductio, which was a contract concluded by consensus and governed by good faith87 Henceforth, as previously seen, the actions derived (actio locati and actio conducti) gave a basis to iudicia bonae fidei.88 The latter has important juridical consequences, as both parties in a bonae fidei relationship were bound to exercise omnis diligentia89 and to do everything required with the circumstances of the case, for example the reduction of a lessee’s rent during bad years or, whenever good years returned, the lessor would receive compensation for the previous reduction.90 Nowadays, the legal literature on the matter of corporate governance and employment is divided between a shareholder-centered approach and an employment-centered approach, although, at the core, the justification for considering the shareholder-employees relationship as one susceptible to agency problems lies within the idea that the contributions and exposures to risk of the core employees are similar to (or even greater than) those of shareholders, and that, at least in systems like 84

Ibid. John Armour, Simon F. Deakin, Priya P. Lele, and Mathias M. Siems, ‘How Do Legal Rules Evolve? Evidence from a Cross-Country Comparison of Shareholder, Creditor and Worker Protection’ [2009] European Corporate Governance Institute – Law Working Paper No. 129/2009 accessed 3 January 2018. 86 Buckler, op. cit. 87 Berger, op. cit. 88 Ibid. 89 That is, the obligation to careful, cautious conduct as another’s interest is involved. 90 Sohm, op. cit. 85

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the Japanese, employees invest a hidden contribution via the senioritybased wage and retirement allowance system.91 All in all, there are undeniably charged concepts in work for hire, both at a moral and practical level, that are absent from other firm constituencies. In Christian Social Thought, for example, work is seen as a path for a person to realize his or her humanity, hence the worker is seen as the primary efficient cause in the production process while the means of production are merely instruments.92 This sets the scene for an emotionally charged debate in corporate governance: do employees have a ‘right’ to participate in the firm’s decision making? The question ought to be narrowed down, though. When asking whether employees have the right to participate in the firm, it is a normative question referring to the involvement in strategic decisions – as shown in Figure 4.2 – and, more specifically, concerns whether there should be a positive law provision enforced by the State in such a regard. Therefore, there are two questions not belonging to this debate, i.e. firstly whether employee participation is good for business, and, secondly, whether the realization and development of the human being can be achieved through such means – for the former can be responded to with empirical data and actualized as social, economic, and political conditions change, while the latter is too vague and would be misallocated if forced into the realm of corporate law. The question remaining, thus, is about morality. We posited earlier a view of law as founded on the assessment of a game-like normativity93 of individual behavior towards others,94 enriched by conceptions of what is fair.95 That is why, when analyzing the types of norms, there is a circular feedback, within a continuum, 91

Takashi Araki, ‘A Comparative Analysis: Corporate Governance and Labor and Employment Relations in Japan’ [2009] Comparative Labor Law & Policy Journal. University of Illinois College of Law 3(4) accessed 4 January 2018. 92 Michael Lower, Employee Participation in Governance (Cambridge University Press 2010) 45–46. 93 Joel Ryce-Menuhin, ‘An Extended Model of the Infant Self’ in Renos K. Papadopoulos (ed.), Carl Gustav Jung: Critical Assessments. Volume II: The Structure and Dynamics of the Psyche (Routledge 1992) 179. 94 Kiley Hamlin, Karen Wynn, and Paul Bloom, ‘Social Evaluation by Preverbal Infants’ [2007] Nature 450: 557–559 accessed 27 June 2017. 95 Christina Starmans, Mark Sheskin, and Paul Bloom, ‘Why People Prefer Unequal Societies’ [20017] Nature 0082 accessed 28 June 2017.

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between social conventions, religious norms, etiquette, and moral and legal norms, at the end of which rational argumentation is added.96 Such interplay is hard to manage, though it can be said that the dilemma within the third agency problem, specifically when it comes to employee participation, arises from two realities, i.e. the monumental role played by corporations at the global stage due to their unmatchable efficiency as aggregators of capital,97 on one hand, and, on the other hand, the nature of corporate law as eminently political.98 The latter casts a shadow of doubt on whether creditors, consumers, and employees, as one side of the third agency problem, are relationships that are fundamentally voluntary in nature all across the board.99 However, the same line of argumentation strengthens the view that wealth creation and wealth distribution are two independent questions.100 As a consequence, the idea of the firm as a nexus of contracts may have been useful to ponder concerning the different relationships among the participants in a firm, but it is of little use when approaching the nature of the firm and, henceforth, corporate governance, for it handles the duality shareholder-manager separately from the firm-employee relationship, which is at the core of the nature of the institutional arrangements that are the essence of modern, large corporations.101 Economists have paid attention to the juridical nature of the employer-employee relationship and further research has offered alternative views of the firm which justify the view of the firm-employee relationship as an agency problem and, therefore, as a crucial component of corporate governance. For example, in the analysis of the difference between an employee and a contractor, the employment relationship typically involves lower-powered incentives (fixed base salary and lower commissions), ownership of key assets by the employer, and more restrictions on the mode of operation of 96 Jordan B. Peterson, Maps of Meaning: The Architecture of Belief (Routledge 1999) 71. 97 Susan Watson and P.M. Vasudev (eds), Innovations in Corporate Governance (Edward Elgar Publishing 2017) 3. 98 Jukka Mähönen, ‘Do We Need Law and Economics in Company Law?’ Nordisk Tidsskrift For Selskabsret, Nr. 1/2 (2009) 146–157. 99 Kraakman, et al., op. cit., 30. 100 Stephen M. Bainbridge, ‘Corporate Decisionmaking and the Moral Rights of Employees: Participatory Management and Natural Law’ (1998) Available at accessed 14 January 2018. 101 Margaret M. Blair, ‘Firm-Specific Human Capital and Theories of the Firm’ in Margaret M. Blair and Mark J. Roe (eds), Employees and Corporate Governance (Brookings Institution Press 1999).

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the employee.102 So, a similarity can be drawn between shareholders who lock their capital into the firm and employees who lock in their human-capital, since labor law structures the situation of an employee as a subordinate and controlled mechanism under recognizable direction, hence the situation in which opportunistic behavior can take place to the detriment of the employees. This entity view of the firm rationalizes the necessity of fiduciary duties and company law to deter the existing moral hazard.103 However, this approach has not evolved fully into the law in the books and depends on local laws and practices, as is exemplified by Chapter IV, paragraphs (c) and (e) of the OECD Principles of Corporate Governance, which speak of national legislation to ‘allow’ the development of employee participation (if such development is ever enacted) and of employees being free to communicate their concerns to the firm’s management and shareholders.104 Aside from the German model of employee participation, too deeply rooted in complex historical and political circumstances to be analyzed solely through the lens of pure efficiency,105 the issue of employee participation in corporate governance waned before experiencing an apparent resurgence – going hand in hand with issues of well-being, work satisfaction and self-development, for a start, and then followed by nascent opinions about its role as an efficiency and success booster for firms.106 However, enshrining mandatory employee participation via positive law is one thing, and a very different one is a random collection of customs and practices among pockets of entrepreneurship where people may be fond of their reputation as progressive. Research on resilience among European firms with actual statutory work councils and boards of directors with employees on them, around the time of the financial crash, provide contradictory findings that are heavily dependent 102

Bengt Holmstrom and Paul Milgrom, ‘Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design’ [1991] Journal of Law, Economics, & Organization, Vol. 7, Special Issue [Papers from the Conference on the New Science of Organization, January 1991], pp. 24–52. Published by Oxford University Press accessed 2 January 2018. 103 Blair, op. cit. 104 OECD Principles, op. cit. 105 Thilo Kuntz, ‘German Corporate Law in the 20th Century’ in Harwell Wells (ed.), Research Handbook on the History of Corporate and Company Law (Edward Elgar Publishing 2017). 106 Eurofound [2015] Third European Company Survey – Overview Report: Workplace Practices – Patterns, Performance and Well-being (Publications Office of the European Union, Luxembourg).

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on each firm’s business cycle.107 However, it is important to layer the concept of employee participation – as Eurofound’s survey taxonomy does, for example – as not all forms are equal (see Figure 4.2).108 The figures collected by Eurofound for its Fifth European Working Conditions Survey show a split of 27% employees in high involvement firms and 38% in low involvement ones, the remaining being distributed in one of the other high-low combinations. It notes, moreover, that type of involvement was concentrated by region,109 hinting perhaps at a cultural dimension as well as socioeconomic conditions.

Figure 4.2 Employee participation in the company Last but not least, we ought to confront the ‘agency problem’ facing the firm and the community and ask if it really is an agency problem. The OECD Principles of Corporate Governance are silent in this respect when 107

Robert H. Kleinknecht, ‘Employee Participation in Corporate Governance: Implications for Company Resilience’ [2014] European Journal of Industrial Relations 21(1): 57–72. 108 Eurofound, op. cit., summary available at accessed 12 January 2018. 109 Ibid.

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listing the principles themselves, although in the further explanation there is a mention of communities: The board is not only accountable to the company and its shareholders but also has a duty to act in their best interests. In addition, boards are expected to take due regard of, and deal fairly with, other stakeholder interests including those of employees, creditors, customers, suppliers and local communities. Observance of environmental and social standards is relevant in this context.110

The articulation of community as an agent (stakeholder) remains vague, incomplete, and, therefore, inadequate for actual corporate governance praxis.111 The problem lies mainly in the fact that there is no precise concept of what a community is and the concepts offered in scholarly debate arise from fields other than law, for example sociology. Edward Freeman, for example, known as the initiator of the stakeholder idea in the field of Business Ethics, defines a stakeholder as any group or individual who can affect or is affected by the achievement of a corporation’s objectives, and, accordingly, categorizes them into: customers, suppliers, employees, financiers, and communities.112 In the business literature, the last category means only that managers must pay attention to external groups.113 What does that mean for company law? While customers, suppliers, employees and financiers are clearly identifiable and are said to be already covered, either by company law itself or by accessory norms, such as contract or consumer protection laws, community remains a fuzzy concept vis-à-vis the firm. Dunham and Freeman attempt to tackle this problem and offered a useful typology of community, i.e.: (a) community of place, which is defined as the people who live in close physical proximity to a firm’s operations; (b) community of interest, which is the group of people who lobby for public policy issues; (c) virtual advocacy community, which is less agendadriven and more oppositional; and, finally, (d) community of practice, which is a group of people united by their professional work and which 110

OECD Principles, op. cit. Laura Dunham, R. Edward Freeman, and Jeanne Liedtka, ‘The Soft Underbelly of Stakeholder Theory: The Role of Community’ [2001] Darden Business School Working Paper No. 01-22 accessed 1 January 2018. 112 Edward R. Freeman, Strategic Management: A Stakeholder Approach (Cambridge University Press 2010). 113 Dunham, et al., op. cit. 111

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aims at issues concerning the development of their shared profession.114 When analyzing these definitions of community, is it not correct to say that the interests of the community are already covered by environmental, labor, and other types of public law? We can say that, indeed, developed countries have legislated on these matters, although this fact still does not respond to our core question as to whether there is an agency problem involving the firm and the community and, therefore, solid ground for a ‘deep’ stakeholder approach in corporate governance. It is widely accepted that the shareholder primacy approach was properly verbalized in 1919, when the Michigan Supreme Court ruled on Dodge v. Ford Motor Co., and that it was further echoed in scholarly circles by 1931 through the ‘Berle-Dodd debate’ – in which Professor Berle affirmed that a corporation is, first and foremost, an association of stockholders formed for the purpose of private gain and managed by a board of directors which ought to have that end in mind.115 However, if the goal of corporate law is to create and sustain the characteristics of corporations116 and agency problems arise whenever one party promises performance to another,117 isn’t it intellectually viable to assume that if society creates an institution with the purpose of generating wealth and provides it with the power to do so as a means of increasing the collective good, then it is reasonable to expect that its commanded performance ought to include minimizing as much as possible the negative consequences?118 Greenfield has a point in this respect. Doing so would be equivalent to society, through corporate law, mandating the corporation a specific performance, and henceforth becoming a principal of the corporation, which, as agent, would have fiduciary duties towards society – and the subsidy of limited liability, given from society to the firm in order to better generate wealth, can very well be said to be a testimony of such a mandate. This is an avenue for exploring agency problems in corporate governance if the aim is a more encompassing theory. If exploring the issue though economic thinking, this would entail solely quantifying and 114

Ibid. D. Gordon Smith, ‘The Dystopian Potential of Corporate Law’ [2007] University of Wisconsin Legal Studies Research Paper No. 1040 accessed 5 January 2018. 116 Kraakman, et al., op. cit. 117 Fama, op. cit. 118 Kent Greenfield, ‘Saving the World with Corporate Law?’ [2007] Boston College Law School Research Paper No. 130 accessed 9 January 2018. 115

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comparing wealth creation and externalities, although doing so would demand some tightrope walking in the form of audacious value judgements. Legal personality and limited liability, as socially shared constructions of the mind – taking place in the legal world instead of the real world119 – play a crucial role in such analysis. Authors like Dine emphasize this form of reasoning when affirming that the legitimacy of control over corporations lies with the state delegation of the power to operate with limited liability.120 Moreover, Talbot offers a sobering account of the ideological atmosphere around the birth of limited liability in Victorian England, when the granting of limited liability did not exactly unleash a frenzy for taking this up, since it was considered that limiting one’s liability was an indication of dubious or sharp practice, or immorality, to the point that parliament members expressed concern that limited liability companies would undermine the good reputation of British merchants.121 And the posterior track record of limited companies only granted credence to those fears, as in the period between 1856 and 1883 one third of companies never began conducting business, 28% were declared insolvent, 32% ceased operating voluntarily, and 11% just petered out.122 The ulterior consolidation of the form, as suggested in Chapter 3, may have been accelerated by a race-to-the-bottom phenomenon – when the British government realized that their investors were flocking to France for ways of shielding their dealings behind a corporate veil – thus granting validity to the claim by Talbot, as echoed by Roe, Ireland, and Greenwood, that corporate governance, from inception, materialized not purely and pristinely through the logic of the free market but through political, legal, and ideological mechanisms as well.123 This coexistence of two apparent foes may be troublesome for those ideologically wedded to either side of the debate, though it is a congenital ambivalence that survives to this day. The corporate form is both the greatest device for capital aggregation and wealth multiplication in human history, and the vehicle of choice for obfuscation or the facilitation of some of the most painful collapses and scandals in modern 119 Nicholas H.D. Foster, ‘The Theoretical Background: The Nature of the Actors in Corporate Social Responsibility’ in Stephen Tully (ed.), Research Handbook in Corporate Legal Responsibility (Edward Elgar Publishing 2005). 120 Janet Dine, The Governance of Corporate Groups (Cambridge University Press 2000) 176–179. 121 Lorraine Talbot, Critical Company Law (Routledge-Cavendish 2008) 55–61. 122 Ibid. 123 Ibid 130–137.

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history – from the shenanigans and financial wizardry of Law’s Mississippi Company124 to Madoff’s Ponzi scheme and its copycats,125 and from the inner workings of the tobacco corporations before and after the Master Settlement Agreement126 to the Bhopal gas leakage that became paradigmatic of transnational corporate negligence.127 These scandals, costing innocent people and communities their money, health, and patrimonies, coexist with no problem whatsoever – and whether either side of the debate likes it or not – with genuine marvels in which the corporation has played a key part as a financial and organizational device, from erecting the railway system of the United Kingdom practically without public aid,128 to harnessing all ‘soft’ and ‘hard’ elements needed to mass produce affordable automobiles,129 to pooling the talent, technical innovation, and capital needed to revolutionize the film industry and impact culture forever.130 To this day, the duality persists, even in ‘little’ things, such as the heavy investment made by corporations to enhance in court the concept of corporate personhood when pursuing rights and to undermine it when trying to avoid liability,131 or being the spearhead of technological innovation while at the same time stifling the open discussion of scientific facts.132

124

Richard Dale, The First Crash: Lessons from the South Sea Bubble (Princeton University Press 2004) 70–71. 125 J. Scott Colesanti, ‘Another Madoff Masquerade? Questioning “Securities Fraud” in the Crime and its Cleanup’ [2012] St. Louis University Law Journal 56. 126 N. Hirschhorn, ‘Corporate Social Responsibility and the Tobacco Industry: Hope or Hype?’ [2004] Tobacco Control 13: 447–453 accessed 17 January 2018. 127 Ingrid Eckerman, The Bhopal Saga: Causes and Consequences of the World’s Largest Industrial Disaster (Universities Press 2005) 9. 128 Frank Dobbin, Forging Industrial Policy: The United States, Britain, and France in the Railway Age (Cambridge University Press 1994) 175–176. 129 Ray Batchelor, Henry Ford, Mass Production, Modernism, and Design (Manchester University Press 1994) 124–125. 130 Steven Watts, The Magic Kingdom: Walt Disney and the American Way of Life (University of Missouri Press 1997) 41. 131 William Laufer, Corporate Bodies and Guilty Minds (The University of Chicago Press, 2006) 48–52. 132 Patrick Lee Miller, ‘The Google Memo: The Economist on Nothing’ Quillette Magazine (31 August 2017) accessed 18 January 2018.

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4. IF IT LOOKS LIKE A DUCK From the metaphors we live by, personification allows us to make sense of the world in human terms by reflecting our characteristics, acts and motivations on the phenomena around us.133 Kolakowski, evoking Kant, speaks about humans expressing their being epistemologically through synthetic a priori judgments and in the sphere of moral imperatives which cannot be reached empirically.134 Pinker, more succinctly, reminds us that an intelligent system won’t handle every object it encounters as unique but instead will place it in a category of similar objects, as trillions of facts would otherwise overload it – rendering its most essential functioning as based in a small list of core truths and then a set of rules to deduce their implications.135 Political and economic ideologies are framed in metaphorical terms,136 helping to packetize the complexity of the world for clarity purposes; however, by definition, these metaphors obfuscate as much as they help to understand. Since the peculium,137 the societas publicanorum,138 the mandatum and the institor139 in ancient Roman times, the juridical forms utilized for enterprises (and for trusting someone else with a task) have mutated in such a drastic way – based on cultural, political, and socioeconomic factors, accident and necessity – that we are entering a phase in which there is talk of a post-regulatory state, one where control processes are built on community, competition and design, one step removed from state intervention.140

133 George Lakoff and Mark Johnson, Metaphors We Live By (University of Chicago Press 1980) 33–34. 134 Leszek Kolakowski, ‘Why Do We Need Kant?’ in Modernity on Endless Trial (University of Chicago Press 1990) 44–54. 135 Steven Pinker, How The Mind Works (Penguin 1997) 12–14. 136 Lakoff and Johnson, op. cit., 236. 137 Andreas Martin Fleckner, ‘The Peculium: A Legal Device for Donations to Personae Alieno Iuri Subiectae?’ in Filippo Carlà and Maja Gori (eds), Gift Giving and the ‘Embedded’ Economy in the Ancient World (Heidelberg 2014) 223. 138 Ulrike Malmendier, ‘Roman Shares’ in William N. Goetzmann and K. Geet Rouwenhorst (eds), The Origins of Value: The Financial Innovations that Created Modern Capital Markets (Oxford University Press 2005) 38. 139 Zimmermann, op. cit. 140 Colin Scott, ‘Regulation in the Age of Governance: The Rise of the Post-Regulatory State’ in Jacint Jordana and David Levi-Faur (eds), The Politics of Regulation: Institutions and Regulatory Reforms in the Age of Governance (Edward Elgar Publishing 2004) 145–174.

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This vast, complex, and ever-changing reality has acceleration built into it. Ever since the start of what Harari calls the Cognitive Revolution – the stage in human history where behavior and its transmission do not require genetic or environmental change – the different features and abilities in each group’s storytelling,141 through which the intangible world of law and institutions and myths is created, increases the stakes and widens the divides. This fundamental interplay within each society (and individual) and among them, between the technological core – the organ in human culture bent on practical applications geared towards taming the physical world – and the mythical core – concerned with the quality of Being as a whole142 – renders a deeper understanding of how existence is shaped. See Figure 4.3 for a combination of the aforementioned concept with Finnis’ four orders of existence.143

Figure 4.3 The Finnis and Kolakowski model The order of nature is embedded in the technological core, as they are each other’s raison d’être, although the effects of such interplay exert influence beyond their joint realm and into the mythical core, where the effort to elucidate Being is constrained by the nesting of the individual in nature. A similar ‘bridging’ takes place with what Finnis calls that order 141

Yuval Noah Harari, Sapiens (Penguin 2011) 35–38. Leszek Kolakowski, The Presence of Myth (University of Chicago Press 1973) 1–8. 143 John Finnis, Intention and Identity: Collected Essays, Volume II (Oxford University Press 2011) 83–84. 142

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of lived experience in which we bring concepts into our understanding, because the mythical core aims at revealing the relativity of the world of experience, exposing an unconditioned reality, and thus making conditioned reality intelligible.144 However, when speaking about the order in which matter is manipulated and transformed, it is tempting to place it within the technological core, but because it affects nature and by doing so modifies its feedback towards our experience, it alters the mythical core as well. The greatest overlap that takes place when combining the frameworks of Finnis and Kolakowski, though, occurs in the realm of unity via deliberation and choosing. As we discussed in Chapter 2, the latter is the realm where, according to Finnis, groups come into existence and are susceptible to being understood as holders of rights and obligations – and, following Foster, the legal conclusions reached from time to time will drastically alter the real world,145 for example when a business is started an office space will be leased and a bank account will be created in a computer terminal without actual coins changing hands; a bureaucrat will issue a permit to perform certain acts exclusively or will send a man to close that same office space due to unpaid taxes; and some will make money from the activities performed through the legal entity and, in exchange, work on behalf of it, while some others will lose their livelihood by failing to live up to what the majority has agreed is due to that entity existing in the ether; and all those things may trigger lawsuits, imprisonment, and social security claims, involving lots of human drama but also wealth creation, reverence for the status of those involved with the legal person, and deep cultural, environmental, political, and economic changes. This ebb and flow seems unavoidable. And, by its dynamic, the role of the legal conclusions and their effect on the real world can only increase in girth and height, just like the corporation.146 There lies the fuel for the dramatic, rapid changes experienced in the realm of corporate governance from Rome until today, as well as the inconsistencies that theories like the principal-agent theory will necessarily fall into when trying to carve in stone a descriptive and normative reductionist view that does 144

Kolakowski, The Presence of Myth, op. cit. Nicholas H.D. Foster, ‘The Theoretical Background: The Nature of the Actors in Corporate Social Responsibility’ in Stephen Tully (ed.), Research Handbook in Corporate Legal Responsibility (Edward Elgar Publishing 2005). 146 George Deiser, ‘The Juristic Person’ [1908] University of Pennsylvania Law Review and American Law Register Vol. 57(3), Vol. 48 New Series, 131–142. 145

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away with key elements and pivots around a private nexus of contracts.147 Take lex mercatoria as an example. Perhaps the oldest form of globalization in the legal field, lex mercatoria was identifiable by the 11th century among the itinerant merchants who were faced with the inadequacy of local laws as they did business across borders, and it was a supranational order in the sense that it was formed by widely recognized principles and rules across borders.148 As trade gained in complexity and territorial extension, though, predictability and transparency became an issue added by the emerging modern states prohibiting or assimilating the merchant rules and courts into their own systems.149 Some practices died, others were forbidden, and some became generally accepted principles of commerce, for example the Incoterms, the Uniform Customs and Practices for Documentary Credits, etc.150 While widely accepted practices certainly alter the real world, the shift is only complete once such practices are absorbed into local law via a formal act of a state, turning them into national law.151 This is due to enforcement, a key element for altering the real world, as evidenced by the rise of Alternative Dispute Resolution and trust-based regulation models of e-commerce,152 for example. Therefore, if we understand lex mercatoria as known and followed business practices eventually absorbed by national legislation, it follows that by the time those practices become law their underlying factors are already changing, altering the real world through legal consequences as the process is occurring all over again. Take soft corporate governance codes for example, the ‘non-binding set of principles, standards or best practices, issued by a collective body and relating to the internal governance of corporations’153 have already been implemented in more 147

Jensen and Meckling, op. cit. Boaventura De Sousa Santos, Toward a New Legal Common Sense: Law, Globalization, and Emancipation (Butterworths 2002). 149 Ibid. 150 Petri Mäntysaari, Organising the Firm: Theories of Commercial Law, Corporate Governance and Corporate Law (Springer 2011). 151 Peter Mazzacano, ‘The Lex Mercatoria as Autonomous Law’ [2008] CLEA 2008 Meetings Paper; CLPE Research Paper No. 29/2008 accessed 21 January 2018. 152 Gralf-Peter Calliess and Moritz C. Renner, ‘From Soft Law to Hard Code: The Juridification of Global Governance’ [2009] Ratio Juris 22 accessed 22 January 2018. 153 David Seidl, ‘Regulating Organizations through Codes of Corporate Governance’ [2006] Working Paper No. 38, Centre for Business Research, University of Cambridge. 148

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than 50 countries. There is an increasing feeling that worldwide convergence in corporate governance is inevitable, and there are signs that economic pressures are behind the rapid adoption of a single model – at least in terms of the law in the books.154 Though looking only at this aspect of convergence would be insufficient. A case in point is the European Bank for Reconstruction and Development (EBRD), its activities and its very interesting survey to assess practical application of the law. The EBRD, like any other second-floor bank, is in the business of financing investment projects – although, due its peculiarities, it also has a political role, namely to influence policy, so there is an incentive in creating the conditions for its loans, guarantees, and investments to succeed.155 As part of its intelligence arm, the EBRD started a Legal Indicator Survey (LIS), an exercise to measure the implementation gap between legal norms and their actual enforcement, consisting of two hypothetical self-dealing case studies sent to law firms located in each one of the 27 EBRD countries at the time, the purpose being to measure the speed, simplicity, enforceability, and institutional environment when finding out if there was abuse by a shareholder and then obtaining redress through the courts.156 The results of these types of studies must be taken with a pinch of salt, of course, for they reflect the experience of particular law firms; each case has particular circumstances, and cultural factors have a strong role in how the courts apply the law. However, precisely for the same reasons, the results ought to shed more light than straight comparative law-in-the-books studies. In the specific case of the 2005 LIS, the results for court-ordered disclosure of transactions in order to find out if there was self-dealing varied wildly, from a few months up to three or more years, while the same variation occurs when trying to obtain redress, although in all cases it was way below what could be expected from looking at the law.157

154 Janet Dine and Marios Koutsias, ‘The Nature of Corporate Governance: The Significance of National Cultural Identity’ (Edward Elgar Publishing 2013) 63–120. 155 European Bank for Reconstruction and Development, ‘What We Do’ accessed 21 January 2018. 156 Gian Piero Cigna, ‘Corporate Governance in Action: Effectiveness of Disclosure and Redress in South-Eastern Europe’ [2006] Business Law International 7(3): 253–353. 157 Ibid.

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These findings, coupled with the last chapter’s analysis suggesting that firm size and a judge’s ideology were determinants in favorable veilpiercing cases in the United States,158 constitute a suitable corollary to a skeptical view about convergence in corporate governance as something inevitable. Furthermore, it is reasonable to ask if such a thing is even desirable, as every country’s laws and practices are part of their cultural heritage.159 As is the case of security in the international arena, for example, there are many uncontrollable variables in the interplay of what we analyzed earlier under the Kolakowski-Finnis chart, but also in hard reality, where nations have to make momentous trade-offs taking into account public finances, domestic opposition, interior and exterior alliances, etc.160 There is, simply put, no such thing as historical inevitability – contrary to Marx’s material dialectic of history, oblivious as this was regarding the inherent contradiction between calling for participation in the inevitable triumph of the proletarian revolution and, oh well, asserting its inevitability.161 In the specific case of the agency problem, the issue is that, ideological undertones aside, it is simply not a truthful model. As a descriptive attempt it does away with corporate personality in favor of a ‘nexus of contracts’ metaphor, notwithstanding that, together with limited liability, the former is the defining characteristic of the asset partitioning feature that makes the modern company such a potent tool. Then, Jensen and Meckling enshrined the idea that the most important contract in the firm is between the shareholders, who they call the owners, and the managers, who carry the business on their behalf.162 But, how can anyone own a nexus? A nexus, whether it is of contracts or comic book conventions, is not a thing susceptible to ownership in itself. Since company law arose from partnership law – for partnership precedes the company – the character of owner gradually mutated from someone directly involved in the enterprise and having dominion over the assets contained within, into an owner of intangible share capital without direct connection to the assets of the company, i.e. book entries or documents representative of a 158

Ibid. Dine and Koutsias, op. cit. 160 James D. Morrow, ‘Arms Versus Allies: Trade-offs in the Search for Security’ [2009] International Organization 47(2): 207–233 accessed 22 January 2018. 161 Murray N. Rothbard, ‘Economic Thought Before Adam Smith: An Austrian Perspective on the History of Economic Thought’ (Ludwig von Mises Institute, 1995) 336–337. 162 Jensen and Meckling, op. cit. 159

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mere right to dividends and to transfer the shares.163 Ireland makes a solid case, using Honoré’s test for affirming that a conception of ownership exists in a legal system,164 that shareholders are indeed owners of shares, although, as with other claimants vis-à-vis the company (e.g. lenders and directors), they cannot be said to be owners of the corporation itself.165 This point brings us directly to another weakness of the principal-agent theory, and that is the role of management as agent. Of course, companies vary wildly between each other, from the one-person show to the multinational behemoth with thousands of shareholders, and the dynamics vary depending on the caliber of the firm. That said, in a similar vein to shareholders not being owners, the managers are not exactly agents. As Blair and Stout observe based on Clarke, the larger the corporation the clearer it becomes that the duty of obedience agents owe to principals is absent in the firm, and while shareholders have limited scope in terms of voting and the right to sell, top management is in control and thus selects executives and employees, declares and distributes dividends, decides on salaries and rewards, and uses corporate assets for the benefit of whomever they consider proper, be it creditors, staff, or even their preferred philanthropic cause.166 Of course, as we analyzed earlier, management is subject to fiduciary duties,167 although as long as they act in such a manner – mostly being professional, behaving in an informed way and not lining their pockets – they are not under any duty to maximize shareholder value in the short term and so can set a corporate course of action without regard to a fixed investment horizon, paraphrasing the Delaware Supreme Court ruling in Paramount Communications Inc. v. Time Inc.168 Faced with such a bleak environment in the midst of which the seed of principal-agent theory was planted, law and economics authors have had to jump through hoops to make sense of it all. Easterbrook and Fischel 163 Paddy Ireland, ‘Company Law and the Myth of Shareholder Ownership’ [1999] The Modern Law Review 62(1): 32–57. 164 Anthony M. Honoré, ‘Ownership’ in Patricia Smith (ed.), The Nature and Process of Law: An Introduction to Legal Philosophy (Oxford University Press 1993) 370–375. 165 Ireland, op. cit. 166 Margaret Blair and Lynn Stout, ‘Specific Investment: Explaining Anomalies in Corporate Law’ [2005] UCLA School of Law, Law-Econ Research Paper No. 05-27 accessed 23 January 2018. 167 Velasco, op. cit. 168 Paramount Communications, Inc. v. Time, Inc., 571 A. 2d 1140, 565 A.2d 280 (Del. 1989).

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are paradigmatic in this respect. Since the shareholders are not owners in the correct legal sense, for a nexus can’t be owned, and the managers do not qualify as agents in the strict sense, it is argued that among the enduring, relational contracts that are nested in the corporation, those of suppliers, workers, and creditors can be written in detail while the ‘corporate contract’ of the equity investor is uncertain, hence they are protected by the agents’ fiduciary duties and they ought to be considered residual claimants.169 Fleshed out, what this means is that a sole residual claimant is whoever is entitled to whatever cash is left once a company has fulfilled its obligations towards its creditors, suppliers, and employees.170 The problem with this is that, again, shareholders do not have a say over dividends. There is no residue if the management doesn’t allow it to accrue and, even if there is, the shareholders cannot claim it – only the board of directors can decide if, when, and how much is paid in dividends.171 Therefore, the principal-agent model does not paint a faithful description of what a firm looks like. And this would not be a problem in any other case, for anyone can theorize as he or she pleases. The problem is that models in this field are not solely descriptive but they have a normative element embedded, i.e. what corporate law should do and what purpose it should serve. A case in point is the value judgement that wealth maximization ought to be the supreme goal in corporate law and practice, based on a model that portrays the corporation as a nexus of contracts where the greater risk is borne by the owners, making them the firm’s residual claimants and, as a consequence, those in whose sole benefit the agents ought to work. There is objectively nothing wrong with making such a value judgment. What is troublesome is to sneak it in disguised as something else.

BIBLIOGRAPHY Books Allen, William T., ‘The Corporate Director’s Fiduciary Duty of Care and the Business Judgment Rule’ in Klaus J. Hopt (ed.), Comparative Corporate 169 Frank H. Easterbrook and Daniel R. Fischel, The Economic Structure of Corporate Law (Harvard University Press 1991) 90–91. 170 Blair and Stout, op. cit. 171 Ibid.

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Governance: The State of the Art and Emerging Research (Oxford University Press 1998) Aristotle, Nicomachean Ethics (translated by Robert Williams) (Longmans, Green & Co. 1869) Batchelor, Ray, Henry Ford, Mass Production, Modernism, and Design (Manchester University Press 1994) Berger, Adolf, Encyclopedic Dictionary of Roman Law (The American Philosophical Society 1991) Binmore, Ken, Game Theory (Oxford University Press 2007) Blair, Margaret M., ‘Firm-Specific Human Capital and Theories of the Firm’ in Margaret M. Blair and Mark J. Roe (eds), Employees and Corporate Governance (Brookings Institution Press 1999) Buckland, W.W., A Manual of Roman Private Law (Cambridge University Press 2012) Buckland, W.W. and Arnold McNair, Roman Law and Common Law: A Comparison in Outline (Cambridge University Press 1952) Buckler, W.H., The Origin and History of Contract in Roman Law Down to the End of the Republican Period (Cambridge University Press 1895) Dale, Richard, The First Crash: Lessons from the South Sea Bubble (Princeton University Press 2004) De Sousa Santos, Boaventura, Toward a New Legal Common Sense: Law, Globalization, and Emancipation (Butterworths 2002) Dine, Janet, The Governance of Corporate Groups (Cambridge University Press 2000) Dine, Janet and Marios Koutsias, The Nature of Corporate Governance: The Significance of National Cultural Identity (Edward Elgar Publishing 2013) Dobbin, Frank, Forging Industrial Policy: The United States, Britain, and France in the Railway Age (Cambridge University Press 1994) Easterbrook, Frank H. and Daniel R. Fischel, The Economic Structure of Corporate Law (Harvard University Press 1991) Eckerman, Ingrid, The Bhopal Saga: Causes and Consequences of the World’s Largest Industrial Disaster (Universities Press 2005) Finnis, John, Intention and Identity: Collected Essays, Volume II (Oxford University Press 2011) Fleckner, Andreas Martin, ‘The Peculium: A Legal Device for Donations to Personae Alieno Iuri Subiectae?’ in Filippo Carlà and Maja Gori (eds), Gift Giving and the ‘Embedded’ Economy in the Ancient World (Heidelberg 2014) Foster, Nicholas H.D., ‘The Theoretical Background: The Nature of the Actors in Corporate Social Responsibility’ in Stephen Tully (ed.), Research Handbook in Corporate Legal Responsibility (Edward Elgar Publishing 2005) Fox-Decent, Evan, Sovereignty’s Promise: The State as Fiduciary (Oxford University Press 2011) Freeman, Edward R., Strategic Management: A Stakeholder Approach (Cambridge University Press 2010) García, Manuel, Diccionario de Jurisprudencia Romana (Dykinson 2000) Gold, Andrew and Paul Miller (eds), Philosophical Foundations of Fiduciary Law (Oxford University Press 2014)

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Graziadei, Michele, ‘Virtue and Utility’ in Andrew Gold and Paul Miller (eds), Philosophical Foundations of Fiduciary Law (Oxford University Press 2014) Harari, Yuval Noah, Sapiens (Penguin 2011) Hogg, Martin, Promises and Contract Law: Comparative Perspectives (Cambridge University Press 2011) Honoré, Anthony M., ‘Ownership’ in Patricia Smith (ed.), The Nature and Process of Law: An Introduction to Legal Philosophy (Oxford University Press 1993) Hunter, William Alexander, A Systematic and Historical Exposition of Roman Law in the Order of a Code (4th edn, Sweet & Maxwell 1903) Kim, Heraak Christian, Jewish Law and Identity: Academic Essays (The Hermit Kingdom Press 2005) Kolakowski, Leszek, The Presence of Myth (University of Chicago Press 1973) Kolakowski, Leszek, ‘Why Do We Need Kant?’ in Modernity on Endless Trial (University of Chicago Press 1990) Kornhauser, Lewis A., ‘Constrained Optimization: Corporate Law and the Maximization of Social Welfare’ in Jody S. Kraus and Steven D. Walt (eds), The Jurisprudential Foundations of Corporate and Commercial Law (Cambridge University Press 2000) Kraakman, Reinier and John Armour, et al., The Anatomy of Corporate Law: A Comparative and Functional Approach (2nd edn, Oxford University Press 2009) Kuntz, Thilo, ‘German Corporate Law in the 20th Century’ in Harwell Wells (ed.), Research Handbook on the History of Corporate and Company Law (Edward Elgar Publishing 2017) Lakoff, George and Mark Johnson, Metaphors We Live By (University of Chicago Press 1980) Laufer, William, Corporate Bodies and Guilty Minds (The University of Chicago Press 2006) Lower, Michael, Employee Participation in Governance (Cambridge University Press 2010) Malmendier, Ulrike, ‘Roman Shares’ in William N. Goetzmann and K. Geet Rouwenhorst (eds), The Origins of Value: The Financial Innovations that Created Modern Capital Markets (Oxford University Press 2005) Mäntysaari, Petri, Organising the Firm: Theories of Commercial Law, Corporate Governance and Corporate Law (Springer 2011) Markovits, Daniel, ‘Sharing Ex Ante and Sharing Ex Post: The Non-Contractual Basis of Fiduciary Relations’ in Andrew Gold and Paul Miller (eds), Philosophical Foundations of Fiduciary Law (Oxford University Press 2014) McCahery, Joseph and Erik Vermeulen, Corporate Governance of Non-Listed Companies (Oxford University Press 2008) Peterson, Jordan B., Maps of Meaning: The Architecture of Belief (Routledge 1999) Pinker, Steven, How the Mind Works (Penguin 1997) Rapalje, Stewart and Robert Lawrence, A Dictionary of American and English Law: With Definitions of the Technical Terms of the Canon and Civil Laws (Lawbook Exchange 1997)

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Ryce-Menuhin, Joel, ‘An Extended Model of the Infant Self’ in Renos K. Papadopoulos (ed.), Carl Gustav Jung: Critical Assessments. Volume II: The Structure and Dynamics of the Psyche (Routledge 1992) Scanlon, Thomas, What We Owe to Each Other (Belknap Press 1998) Scott, Colin, ‘Regulation in the Age of Governance: The Rise of the PostRegulatory State’ in Jacint Jordana and David Levi-Faur (eds), The Politics of Regulation: Institutions and Regulatory Reforms in the Age of Governance (Edward Elgar Publishing 2004) Seabright, Paul, The Company of Strangers: A Natural History of Economic Life (Princeton University Press 2010) Sherman, Charles Phineas, Roman Law in the Modern World (Kessinger Publishing 2010) Sohm, Rudolph, The Institutes of Roman Law (James Ledlie, trans.) (First Gorgias Press 2002) Talbot, Lorraine, Critical Company Law (Routledge-Cavendish 2008) Watson, Susan and P.M. Vasudev (eds), Innovations in Corporate Governance (Edward Elgar Publishing 2017) Watts, Steven, The Magic Kingdom: Walt Disney and the American Way of Life (University of Missouri Press 1997) Zimmermann, Reinhard, The Law of Obligations: Roman Foundations of the Civilian Tradition (Oxford University Press 1996)

Papers Anabtawi Iman and Lynn A. Stout, ‘Fiduciary Duties for Activist Shareholders’ [2008] UCLA School of Law, Law-Econ Research Paper No. 08-02; Stanford Law Review, Vol. 60 or accessed 1 January 2018 Araki, Takashi, ‘A Comparative Analysis: Corporate Governance and Labor and Employment Relations in Japan’ [2009] Comparative Labor Law & Policy Journal. University of Illinois College of Law 3(4) accessed 4 January 2018 Armour, John, Simon F. Deakin, Priya P. Lele and Mathias M. Siems, ‘How Do Legal Rules Evolve? Evidence from a Cross-Country Comparison of Shareholder, Creditor and Worker Protection’ [2009] European Corporate Governance Institute – Law Working Paper No. 129/2009 accessed 3 January 2018 Bainbridge, Stephen M., ‘Corporate Decisionmaking and the Moral Rights of Employees: Participatory Management and Natural Law’ (1998) accessed 14 January 2018 Berzins, Janis, Øyvind Bøhren, and Bogdan Stacescu, ‘Shareholder Conflicts and Dividends’ (27 September 2017) Available at ECGI accessed 3 September 2018

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Blair, M.M. and Lynn Stout, ‘Specific Investment: Explaining Anomalies in Corporate Law’ [2005] UCLA School of Law, Law-Econ Research Paper No. 05-27 accessed 23 January 2018 Calliess Gralf-Peter and Moritz C. Renner, ‘From Soft Law to Hard Code: The Juridification of Global Governance’ [2009] Ratio Juris 22 http://ssrn.com/ abstract=1030526 accessed 22 January 2018 Casadesus-Masanell, Ramon and Daniel F. Spulber, ‘Agency Revisited’ [2010] Harvard Business School, Working Paper 10-082 Cigna, Gian Piero, ‘Corporate Governance in Action: Effectiveness of Disclosure and Redress in South-Eastern Europe’ [2006] Business Law International 7(3): 253–353 Cohen, Zipora, ‘Fiduciary Duties of Controlling Shareholders: A Comparative View’ [1991] University of Pennsylvania Journal of International Business Law 12(3) accessed 1 January 2018 Colesanti, J. Scott, ‘Another Madoff Masquerade? Questioning “Securities Fraud” in the Crime and its Cleanup’ [2012] St. Louis University Law Journal 56 Deiser, George, ‘The Juristic Person’ [1908] University of Pennsylvania Law Review and American Law Register Vol. 57(3), Vol. 48 New Series Dunham, Laura, R. Edward Freeman and Jeanne Liedtka, ‘The Soft Underbelly of Stakeholder Theory: The Role of Community’ [2001] Darden Business School Working Paper No. 01-22 accessed 1 January 2018 Eisenberg, Melvin A., ‘The Duty of Good Faith in Corporate Law’ [2005] Delaware Journal of Corporate Law 31(1): 1–75 Eisenhardt, Kathleen M. ‘Agency Theory: An Assessment and Review’ [1989] The Academy of Management Review 14(1): 57–74 accessed 7 January 2018 Fama, Eugene F., ‘Agency Problems and the Theory of the Firm’ [1980] The Journal of Political Economy 88(2): 288–307 Ferran, Eilis, ‘The Place for Creditor Protection on the Agenda for Modernisation of Company Law in the European Union’ [2005] ECGI – Law Working Paper No. 51/2005 accessed 2 January 2018 Flannigan, Robert, ‘Fiduciary Duties of Shareholders and Directors’ [2004] Journal of Business Law, p. 277 accessed 31 December 2017 Gelter, Martin, ‘Taming or Protecting the Modern Corporation? ShareholderStakeholder Debates in a Comparative Light’ [2010] Fordham Law Legal Studies Research Paper No. 1669444; ECGI – Law Working Paper No. 165/2010; NYU Journal of Law & Business 7(2), 2011 accessed 2 January 2018 Gilson, Ronald J. and Jeffrey N. Gordon, ‘Controlling Controlling Shareholders’ [2003] Columbia Law and Economics Working Paper No. 228; Stanford Law and Economics Olin Working Paper No. 262 or accessed 1 January 2018

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Greenfield, Kent, ‘Saving the World with Corporate Law?’ [2007] Boston College Law School Research Paper No. 130 accessed 9 January 2018 Hamlin, Kiley, Karen Wynn, and Paul Bloom, ‘Social Evaluation by Preverbal Infants’ [2007] Nature 450: 557–559 accessed 27 June 2017 Hermalin, Benjamin E. and Michael S. Weisbach, ‘Transparency and Corporate Governance’ [2007] Hill, Claire A. and Brett H. McDonnell, ‘Stone v. Ritter and the Expanding Duty of Loyalty’ [2007] Fordham Law Review 76(3): 1769–1796 Hirschhorn, N., ‘Corporate Social Responsibility and the Tobacco Industry: Hope or Hype?’ [2004] Tobacco Control 13: 447–453 accessed 17 January 2018 Holmstrom, Bengt and Paul Milgrom, ‘Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design’ [1991] Journal of Law, Economics, & Organization, Vol. 7, Special Issue [Papers from the Conference on the New Science of Organization, January 1991], pp. 24–52. Published by Oxford University Press accessed 2 January 2018 Ireland, Paddy, ‘Company Law and the Myth of Shareholder Ownership’ [1999] The Modern Law Review 62(1): 32–57 Jensen, Michael C., ‘Self-Interest, Altruism, Incentives, & Agency Theory’ [1994] Journal of Applied Corporate Finance II(2). Jensen, Michael C. and William H. Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’ [1976] Journal of Financial Economics 3(4): 305–360 Kleinknecht, Robert H., ‘Employee Participation in Corporate Governance: Implications for Company Resilience’ [2014] European Journal of Industrial Relations 21(1): 57–72 Lin, Yu-Hsin, ‘Controlling Controlling-Minority Shareholders: Corporate Governance and Leveraged Corporate Control’ [2017] Columbia Business Law Review 2017(2): 456–510 Macintosh, Jeffrey G., Janet Holmes, and Steven Thompson, ‘The Puzzle of Shareholder Fiduciary Duties’ [1991] Canadian Business Law Journal 19: 86 accessed 1 January 2018 Mähönen, Jukka, ‘Do We Need Law and Economics in Company Law?’ Nordisk Tidsskrift For Selskabsret, Nr. 1/2 (2009) Mazzacano, Peter, ‘The Lex Mercatoria as Autonomous Law’ [2008] CLEA 2008 Meetings Paper; CLPE Research Paper No. 29/2008 accessed 21 January 2018 Morellec, Erwan, Boris Nikolov, and Norman Schürhoff, ‘Agency Conflicts Around the World’ [2017] Swiss France Institute Research Paper, No. 15-21. accessed 7 January 2018 Morrow, James D., ‘Arms Versus Allies: Trade-offs in the Search for Security’ [2009] International Organization 47(2): 207–233 accessed 22 January 2018

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Rock, Edward B., ‘Adapting to the New Shareholder-Centric Reality’ [2013] University of Pennsylvania Law Review, Institute for Law and Economics, Research Paper no. 13-19, Vol. 161 Ross, Stephen A., ‘The Economic Theory of Agency: The Principal’s Problem’ [1973] The American Economic Review 63(2): 134–139 Rothbard, Murray N., ‘Economic Thought Before Adam Smith: An Austrian Perspective on the History of Economic Thought’ (Ludwig von Mises Institute, 1995) Seidl, David, ‘Regulating Organizations through Codes of Corporate Governance’ [2006] Working Paper No. 38, Centre for Business Research, University of Cambridge Smith, D. Gordon, ‘The Dystopian Potential of Corporate Law’ [2007] University of Wisconsin Legal Studies Research Paper No. 1040 accessed 5 January 2018 Sørensen, Karsten Engsig, ‘Duty of Loyalty of Shareholders – a Possible Remedy for Conflicts in SMEs?’ in Mette Neville and Karsten Engsig Sørensen (eds), ‘Company Law and SMEs’, Nordic & European Company Law Working Paper No. 10-01 or accessed 1 January 2018 Starmans, Christina, Mark Sheskin, and Paul Bloom, ‘Why People Prefer Unequal Societies’ [20017] Nature 0082 accessed 28 June 2017 Strine, Leo E. and Lawrence A. Hamermesh, et al., ‘Loyalty’s Core Demand: The Defining Role of Good Faith in Corporation Law’ [2010] Georgetown Law Journal; Widener Law School Legal Studies Research Paper No. 09-13; Harvard Law and Economics Discussion Paper No. 630 accessed 30 December 2017 Tirole, Jean, ‘Corporate Governance’ [1999] Centre for Economic Policy and Research, Discussion Paper No. 2086 Van der Elst, Christoph, ‘Economic View on Corporate Law and Corporate Governance in Europe’ [2014] Tilburg Law School, Ghent University accessed 5 January 2018 Velasco, Julian, ‘How Many Fiduciary Duties Are There in Corporate Law?’ [2009] Southern California Law Review 83(6): 1213–1318; Notre Dame Legal Studies Paper No. 09-35 accessed 31 December 2017 Yu, Bing, ‘Agency Costs of Stakeholders and Capital Structure: International Evidence’ [2011] Meredith College, School of Business accessed 1 January 2018

Others Eurofound [2015] Third European Company Survey – Overview Report: Workplace Practices – Patterns, Performance and Well-being (Publications Office of the European Union, Luxembourg) European Bank for Reconstruction and Development, ‘What We Do’ accessed 21 January 2018

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Miller, Patrick Lee, ‘The Google Memo: The Economist on Nothing’ Quillette Magazine (31 August 2017) accessed 18 January 2018 OECD Principles of Corporate Governance. Organisation for Economic Co-operation and Development (OECD). Paris, 2004

Cases and Legislation Bristol & West Building Society v. Mothew [1998] Ch 1 at 18 per Lord Millet. Jones v. HF Ahmanson & Co., 460 P. 2d 464 – California Supreme Court, 1969. Paramount Communications, Inc. v. Time, Inc., 571 A. 2d 1140, 565 A.2d 280 (Del. 1989).

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5. Notes on an alternative corporate law theory 1. NOT ALL ROADS LEAD TO ROME The mainstream law and economics view of the corporation is appealing because it works at one level of analysis appealing to reason. It is undeniably elegant as a descriptive framework and, normatively speaking, it is part of the intellectual edifice behind the biggest leap in economic productivity in human history.1 However, it is reductionist as an illustrative framework and, due to its ideological bent, it also partakes of the global erosion of democracy, the imbalance of power between states and corporations, and growing inequality.2 It is foolish to destroy a useful tool, though. Instead, it must be brought down from its pedestal as there are no winners in a situation where corporations are moral deflection devices.3 The current game, where corporations are demonized by the same people who are unwilling to forgo the opportunities and comforts procured through them, only perpetuates a state of cognitive dissonance – no matter that, sometimes, it can be tragicomically unforgettable.4 As posited in the previous chapter, humans are said to have entered into a phase of history where changes in transmission of information and behavior occur independently of shifts in genetic or environmental circumstances.5 These rapid changes place a strain on the laws and institutions that both frame and are a result of social dynamics, which in 1 Max Roser, ‘Economic Growth’ [2018 OurWorldInData.org] accessed 8 February 2018. 2 Janet Dine and Marios Koutsias, The Nature of Corporate Governance (Edward Elgar Publishing 2013) 1–62. 3 Janet Dine, Companies International Trade and Human Rights (Cambridge University Press 2005) 3–10. 4 Philipp Löwe, ‘G20-Krawalle Die große Gewaltshow’ Spiegel Online (8 July 2017) accessed 9 February 2018. 5 Yuval Noah Harari, Sapiens (Penguin 2011) 35–38.

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turn exacerbates the friction between the technological and mythical weltanschauungen – the inclination in human culture towards taming the physical world and towards grasping Being as a whole, respectively.6 This framework by Kolakowski, when superimposed on Finnis’ four orders of existence,7 can shed light on how the interaction between these two cores – within the realm of unity through deliberation – generates varying but constant legal conclusions that affect the other orders, most importantly in the tangible world.8 Even more critically, it mirrors the framework of pragmatist philosophy, as articulated by William James, aimed at resolving the dilemma of how to see the world by reconciling the two clashing temperaments (or mental make-ups), i.e. rationalistic on one hand, or what he calls ‘tender-minded’, which goes by principles and is intellectualistic, idealistic, optimistic, religious, free-will oriented, monistic, and dogmatic, and, on the other hand, the empiricist, or ‘tough-minded’, which goes by facts, and is sensationalistic, materialistic, pessimistic, irreligious, fatalistic, pluralistic, and skeptical.9 What pragmatists attempted, then, was to reconcile scientific loyalty to facts with the human confidence in values, i.e. epistemic responsibility with moral optimism.10 They did so by means of seeing the practical consequences of theories, conceptualizing them, thus, as instruments instead of answers. This window into pragmatist philosophy is important because it allows us to ask, when theorizing about corporate legal theory, fundamental questions about truth and reality. Accordingly, after setting the scene with the tender-minded/tough-minded metaphor, James recalls Charles Peirce’s concept of belief.11 For Peirce, belief has three properties: ‘First, it is something that we are aware of; second, it appeases the irritation of doubt; and, third, it involves the establishment in our nature of a rule of 6 Leszek Kolakowski, The Presence of Myth (University of Chicago Press 1973) 1–8. 7 John Finnis, Intention and Identity: Collected Essays, Volume II (Oxford University Press 2011) 83–84. 8 Nicholas H.D. Foster, ‘The Theoretical Background: The Nature of the Actors in Corporate Social Responsibility’ in Stephen Tully (ed.), Research Handbook in Corporate Legal Responsibility (Edward Elgar Publishing 2005). 9 William James, Pragmatism: A New Name for Some Old Ways of Thinking (Longmans, Green & Co. 1922) 3–12. 10 Christopher Hookway, ‘Pragmatism’ in Edward Zalta (ed.) The Stanford Encyclopedia of Philosophy (2016) accessed 18 February 2018. 11 James, op. cit., 46.

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action, or, say for short, a habit’.12 And, based on that, Williams asserts that a theory is considered true in proportion to its success in solving a problem, claiming that doing so collapses philosophical disputes into insignificance.13 As Rorty wrote, when talking about Berthelot on Nietzsche, according to this view beliefs are to be judged to the extent that they are useful in fulfilling human needs.14 We can see this realist approach to law as normatively materializing in two ways, as Tamahana elegantly explains it, i.e. law as an instrument to achieve social ends, on one side through the utilitarian, conservative approach of law and economics – aspiring to be objective and scientific – and, on the other side, the Critical Legal Studies (CLS) approach, progressive-leaning and founded on the belief that law is only politics, and, thus, as its critics claim, (i) it can’t produce a single correct answer, (ii) it claims to be objective and neutral, while (iii) it serves the dominant class.15 We see then reproduced in legal theory something akin to the technological core or tough-minded temperament and the mythical core or tender-minded one. Despite the apparent dichotomy, however, both mindsets are contained within a pragmatic view – thus absent the ideal of pure legal rules inferred from universals and applied without regard to consequences. After a first glance, though, things get more complex. At stake are efforts to grapple with reality using either the tools of Being or of materialistic positivism – obviating that, perhaps, different systems of thought may have different purposes. While the law and economics approach can be identified with the materialism, skepticism and empiricism of the tough-minded camp as described by James, the tenderminded side can very well be said to match up with the idealistic, dogmatic, and almost religious progressivism of the CLS approach.16 And this is where James appears to go astray – at least for our purpose – for as he himself wrote, pragmatism does not stand for any special result,

12

Charles S. Peirce, ‘How to Make Our Ideas Clear’ [1878] Popular Science Monthly 12: 286–302. Text version available online at accessed 18 February 2018. 13 James, op. cit., 49–61. 14 Richard Rorty, ‘Pragmatism as Romantic Polytheism’ in Morris Dickstein (ed.), The Revival of Pragmatism: New Essays on Social Thought, Law and Culture (Duke University Press 1998) 21. 15 Brian Z. Tamahana, Law as a Means to an End: Threat to the Rule of Law (Cambridge University Press 2006) 120–122. 16 James, op. cit., 3–12.

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i.e. it is a method only.17 In the post-Nietzschean universe, once the ‘values and beliefs that were taken as the highest manifestation of the spirit of the West lost their validity’18 a disenchanted world is set for either nihilism or totalitarianism, i.e. a radicalism hostile to culture, on one side, or the perception that it is possible to order and control everything, on the other.19 An alternative to the latter was offered in Chapter 2 when suggesting a symbiotic relationship between language and law20 that takes place within a metaphorical game of abstractions expressed by rules.21 Doing so drew a simile of law as possessing both biological and cultural foundations, giving expression to innate moral thought and action, although in a dynamic, evolutionary way. Essentially, the aim was to dodge a full-blown instrumental view of law and to sidestep reductionists’ conceptions about it – as the Cain and Abel of pragmatism, law and economics and CLS (whether in its veiled or outright Marxist strains) are eminently dogmatic in their single cause focus. Also as analyzed in Chapter 2, CLS waned during the 1970s and 1980s, only to make a comeback under the guise of postmodernism, despite authors like Lyotard claiming that, in their incredulity toward metanarratives, they are beyond Marxism and have given up trying to resolve the inconsistencies of the Enlightenment.22 And yet, once past the shtick of hard social constructionism, the Wittgenstein-inspired self-referential ‘nature’ of language, and the belief in infinite (and equally valid) interpretations, Derrida himself asserted that his sole aim was radicalism in the same spirit of Marxism,23 while Foucault explicitly saw everything in terms of class struggle.24 That is the reductionist sin by the heirs of CLS, i.e. everything 17

Ibid 61. Robert Fine, ‘Hannah Arendt: Politics and Understanding after the Holocaust’ in Robert Fine and Charles Turner (eds), Social Theory After the Holocaust (Liverpool University Press 2000) 37. 19 Ibid. 20 James Boyd White, ‘Establishing Relations Between Law and Other Forms of Thought and Language’ [2008] Erasmus Law Review 1(3) accessed 26 June 2017. 21 Joel Ryce-Menuhin, ‘An Extended Model of the Infant Self’ in Renos K. Papadopoulos (ed.), Carl Gustav Jung: Critical Assessments. Volume II: The Structure and Dynamics of the Psyche (Routledge 1992) 179. 22 Jean-François Lyotard, The Postmodern Condition: A Report on Knowledge (Manchester University Press 1984) xxiv. 23 Jacques Derrida, Moscou aller-retour (Éditions de l’Aube 2005) 76. 24 Sylvère Lotringer (ed.), Foucault Live: Interviews 1961–1984 (Semiotext(e) 1996) 104. 18

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is about power,25 oppression, and group struggle – which partly rings true for evolutionary theory, at least, since natural selection works through a struggle among ‘individual organisms’ for reproductive success,26 but pursuing such an avenue to its ultimate consequences would simultaneously invalidate their social constructionist article of faith. The reductionism of the ‘opposite’ side does not fare better, though. When reviewing the history of economics in Chapter 1 a few things became apparent, for example its transit from political philosophy into an aspiring exact science, and, with it, the cocktail of methodological individualism,27 positivism,28 and utilitarianism.29 These traits intentionally mimic the reductionism of science so as to be able to produce models – in this case, the economic explanation that at the core of society there are profit-maximizing, rational beings who can be weighed and measured, perennially fighting for material resources. While accurate at one level (i.e. the economic), such an approach is blind elsewhere. Suffice it to ask, for example, what makes a resource valuable? How can the utility of each unit of consumption be measured? Are the models capable of explaining counterproductive or self-destructive behavior? The usefulness of this view of the world cannot be underestimated. However, it is risky to think that a single system can explain everything – or, which is the same, that humans function solely at the economic level. An individual’s ability to critically assess and balance the various factors of existence is said to be compromised by dogmatism, arrogance, rigidity, and monomania.30 Removing subjectivity is a precondition to pursuing knowledge at the level of objective reality, yet doing so removes plenty of crucial elements from disciplines with humans in society at their core, e.g. the language, measures, and approaches at the center of Being. It rings as partial to explain society and its elements as if dealing with causal relationships between blocks of matter. 25

Ibid 90. Stephen Jay Gould, The Structure of Evolutionary Theory (Harvard University Press 2002) 125. 27 Friedrich Hayek, Individualism and Economic Order (University of Chicago Press 1958) 6. 28 Milton Friedman, ‘The Methodology of Positive Economics’ in Essays in Positive Economics (University of Chicago Press 1966) 3–16, 30–43. 29 R.D. Collison Black, ‘Jevons, Marshall and the Utilitarian Tradition’ in Frank Ackerman et al. (eds), Human Well-Being and Economic Goals (Island Press 1997) 75. 30 Damian Cox, Marguerite La Caze, and Michael Levine, ‘Integrity’ in Edward Zalta (ed.), The Stanford Encyclopedia of Philosophy (2017) accessed 22 February 2018. 26

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2. IT MAKES SENSE TO MAKE MONEY In the view of MacIntyre, the Humean approach to morality, as opposed to Aristotle, is based on the initial assumption that it is either the work of reason or the work of passions.31 Deliberation, then, takes place between acts worth doing for their own sake or, instead, reason as the calculation of means to ends determined by desire.32 Whether individuals progress from one to the other or are parallel edifices is, of course, up for deliberation. What is apparent, though, is the pedigree of the instrumentalist view in the annals of moral philosophy as a vessel to ‘bring out of each word its practical cash-value’.33 In this spirit, it is posited that the strength and appeal of current mainstream corporate governance, in its current form, arises from coherent premises dating back to the ideal of development, i.e. a better corporate governance contributes to a good investment climate, and the latter attracts foreign direct investment, which is a component of development and development as a desirable societal goal. Let’s start with what development means. Resolution 41/128 by the General Assembly of the United Nations (UN) from its 97th plenary meeting on December 4, 1986, states that the right to development is an inalienable human right, and that development is ‘a comprehensive economic, social, cultural and political process, which aims at the constant improvement of the well-being of the entire population and of all individuals on the basis of their active, free and meaningful participation in development and in the fair distribution of benefits resulting therefrom’.34 The concept appears again in the United Nations Millennium Declaration, which states in Chapter 3, paragraph 1.1, ‘we are committed to making the right to development a reality for everyone and to freeing the entire human race from want’.35 Even though the aforementioned Declaration on the Right to Development ‘… takes the scope of duties a step further in seeking to provide a juridical 31

Alasdair MacIntyre, After Virtue (Bloomsbury 2011) 57–59. Eugene Garver, ‘The Contemporary Irrelevance of Aristotle’s Practical Reason’ in Alan G. Gross and Arthur E. Walzer (eds), Rereading Aristotle’s Rhetoric (Southern Illinois University Press 2000) 58–60. 33 James, op. cit., 53. 34 United Nations, Documentation Center. Resolutions adopted by the General Assembly at its 41st session accessed 25 February 2018. 35 United Nations Millennium Declaration (55/2). Resolution adopted by the General Assembly, 8th plenary meeting, September 8th, 2000 accessed 24 February 2018. 32

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framework for oft-repeated claims against the public international order, for the failure of our international economic arrangements to allow for an environment conducive to human-centered development for all’,36 it still does not pin down development as a concept, and it leaves open, for example, the type of wants that shall be fulfilled. According to the United Nations Development Program (UNDP) there are various goals aimed at removing the issues preventing development, i.e. extreme poverty and hunger, universal primary education, gender equality, child mortality, maternal health, diseases such as AIDS and malaria, environmental sustainability, and global partnership for development.37 From the latter comes the Human Development Index (HDI), which measures life expectancy, literacy, educational attainment, and GDP per capita for countries worldwide. As UNDP itself explains, the current understanding of human development arose in part as a result of growing criticism of the leading development approach of the 1980s, which presumed a close link between national economic growth and the expansion of individual choices. The target is, then, enlarging people’s choices and enhancing human capabilities and freedoms.38 However, talking about qualitative transformation of a whole society, a shift to new ways of thinking, new relations and new methods of production, and improvement in the quality of life of people while empowering them with more control over their destinies,39 speaks of assumptions about what are the ideal conditions of social existence.40 It is a difficult task to define development based on concepts such as ‘well-being’ or blanket statements such as ‘new ways of thinking’, and adjectives such as ‘meaningful’. At the core of the idea of development is social change and the most familiar ethical term associated with it is progress.41 For authors like 36

Margot Salomon, ‘Legal Cosmopolitanism and the Normative Contribution of the Right to Development’ [2008] London School of Economics; Law, Society and Economy Working Papers nr. 16 accessed 26 February 2018. 37 United Nations Development Program accessed 25 February 2018. 38 United Nations Development Program, Human Development Reports accessed 26 February 2018. 39 Tatyana Suobbotina, Beyond Economic Growth: An Introduction to Sustainable Development (World Bank 2004) 123. 40 Gilbert Rist, The History of Development: From Western Origins to Global Myth (Zed Books 1997) 9. 41 Peter Wallace Preston, Development Theory: An Introduction (Blackwell 1997) 22.

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Preston, the latter is an ethico-political notion and what it is depends on circumstances and specific analysis since it must be locally determined.42 Sen, in turn, sees development as a process of expanding the real freedoms that people enjoy through removal of ‘sources of unfreedom’, i.e. poverty, tyranny, lack of opportunities, social deprivation, and neglect of public facilities, intolerance, and repression.43 Faced with such complexity, it is evident that determining which countries are wealthier than others and then analyzing if economic growth is nourished by the results of human development44 is far more straightforward. This ambivalence allows critical theorists, for example Rist, to offer a definition of development as a set of practices, sometimes appearing to conflict with one another, which require – for the reproduction of society – the general transformation and destruction of the natural environment and of social relations. Its aim is to increase the production of commodities (goods and services) geared, by way of exchange, to effective demand.45

As strident as it may sound, there are elements to Rist’s scathing definition that must be taken seriously by any devotee of development. Throwing such a wide definitional net mixes contradictory things, such as border liberalization and enhancing self-determination, material growth and environmental sustainability, increased production of goods and the quality of social relations, and an increase in demand without discussing the costs.46 And, even though some authors present the liberal market concept of progress as opposed to the social market one,47 both regard income levels and economic growth as key components.48 In this respect, a very important component of the premises under analysis is globalization. Globalization refers to the growing interdependence of countries resulting from their increased economic integration via trade, foreign investment, foreign aid, and the international migration of people and ideas.49 According to Suobbotina, modern globalization has taken place in three waves. The first took place more 42

Ibid 22–24. Amartya Sen, Development as Freedom (Oxford University Press 2001). 44 Suobbotina, op. cit., 7–8. 45 Rist, op. cit., 13. 46 Ibid 13–18. 47 Ibid. 48 Samir Rihani, Complex Systems Theory and Development Practice: Understanding Non-Linear Realities (Zed Books 2002) 158, 187. 49 Ibid. 43

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than 100 years ago, between 1870 and 1914, when exports nearly doubled relative to world GDP,50 and foreign investment nearly tripled relative to the GDP of developing countries in Africa, Asia, and Latin America; a period during which, also, international migration was dramatic, with about 10 percent of the world’s population moving from Europe to the New World and from China and India to the less populated neighboring countries. The second wave lasted from the 1950s to the 1980s and involved mostly developed countries, when investment flows were growing among the countries of Europe, North America and Japan, aided by a series of multilateral agreements on trade liberalization, while developing countries were stuck in the role of primary goods exporters and were largely isolated from international capital flows.51 Finally, the third and current wave, started in the 1980s and driven by two main factors, i.e. on one hand, technological advances have radically lowered the costs of transportation, communication, and computation; and, on the other hand, increasing liberalization of trade and capital has been triggered by many governments’ choice to reduce protection of their economies from foreign competition and influence by lowering import tariffs and minimizing non-tariff barriers.52 According to Preston, the observed trend is based on a changing geographical pattern of production within the global industrial capitalist system, where industrial production has been relocated from First World to Third World countries.53 In a way, following Adam Smith’s model of the economy as a developing system, specialization in production coupled with technical innovation has allowed for increased production and economic growth, reaching a rational order where the pursuit of individual satisfaction generates optimal societal benefit.54 Unfortunately, the latter is not so clear-cut and high costs have been paid for wealth

50 Gross Domestic Product is the total market value of the goods and services produced by a nation’s economy during a specific period of time. It includes all final goods and services – that is, those that are produced by the economic resources located in that nation regardless of their ownership and that are not resold in any form. The New Encyclopedia Britannica, 15th edition, 2007. 51 The lack of international capital flows may explain the gap between developed and developing countries. See Suobbotina, op. cit., Chapter 4, Figure 4.4. 52 Suobbotina, op. cit. 53 Preston, op. cit., 281. 54 Ibid 54.

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generation, not least the erosion of democracy.55 In such an interdependent global economy with such powerful multinational players, it is expected that governments will seek to comply with the demands of investors in order to attract their capital. Financial flows to developing countries take three main forms: investment from foreign private companies (private capital flows), remittances from migrant workers, and aid from foreign governments, often called official development assistance (ODA). Unlike the two latter ones, foreign investment is said to help countries break the vicious circle of poverty without adding to their foreign debt. In addition, foreign direct investment is said to bring with it other benefits, such as advanced technologies, managerial and marketing skills, and easier access to export markets. Moreover, as a result of foreign direct investment, the added competition between foreign and domestic companies may also make national economies more efficient.56 There is statistical evidence suggesting that foreign direct investment has a significant relationship with economic growth.57 Some authors go as far as to claim, when speaking about emerging markets, that foreign direct investment and development economics are two sides of the same coin.58 However, it must be noted that scholars differ on how economic growth benefits from foreign direct investment depending on the sector. While there may be a negative effect in foreign direct investment inflows into the primary sector – and evidence on its impact in the service sector is ambiguous – foreign direct investment inflows in the manufacturing sector seem to show a quantifiable positive effect.59 Nevertheless, economic growth through foreign direct investment demands that investment is green-field rather than the mere purchase of existing assets, and that it broadens the export portfolio rather than targeting existing activities, not 55

Dine and Koutsias, op. cit., 9. Suobbotina, op. cit. 57 Nicholas Apergis, Katerina Lyroudi, and Thanasis Vamvakidis, ‘The Relationship between Foreign Direct Investment and Economic Growth: Evidence from Transitional Countries’ [2004] Atlantic Economic Association Conference, Lisbon, March accessed 25 February 2018. 58 Tamir Agmon and Avi Messica, ‘Financial Foreign Direct Investment: The Role of Private Equity Investments in the Globalization of Firms from Emerging Markets’ [2008] accessed 25 February 2018. 59 Laura Alfaro, ‘Foreign Direct Investment and Growth: Does the Sector Matter?’ [2003] Harvard Business School, Research Papers. 56

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merely aiming at benefitting from cheaper labor and utility bills.60 Unlike stock and bond purchasing, which can cripple entire economies due to their liquid nature,61 foreign direct investment is more lasting provided that earnings are reinvested and parent firms inject resources to their foreign affiliates.62 In order to attract such inflows, economic and political stability as well as liberalization are demanded by investors,63 while the risk of expropriation is countered by relatively transparent, pro-investment and enforceable legislation.64 It is impossible in the current circumstances not to cater to the needs of a favorable investment climate, including political stability, liberal and predictable government regulation, and easy convertibility of the national currency.65 And, even then, in an open and vastly competitive world, it is highly improbable that the phenomenon of a race to the bottom can be completely avoided, as the cold logic of business is, and will remain, dictated by profits, which are negatively influenced by risks and barriers.66 While some elements can be influenced by governments, such as taxes, infrastructure, labor market regulations, contract enforceability, and property rights, they cannot control the marketdetermined prices of inputs, distances from the latter to output markets, natural events, and consumer responses,67 while market size cannot be controlled, though it is said to be decreasing in importance.68

60 Manuel Agosin, ‘Latin America in Comparative Perspective: Does Foreign Investment Lay a Foundation for Economic Growth?’ [2008] Foreign Investment and Sustainable Development: Lessons from the Americas, Neinrich Böll Foundation North America, pp. 8–9. 61 Enrique Rueda-Sabater, ‘Corporate Governance: And the Bargaining Power of Developing Countries to Attract Foreign Investment’ [2000] World Bank Group, Corporate Governance: An International Review 8(2): 117–124 accessed 27 February 2018. 62 Suobbotina, op. cit. 63 Blanca Sánchez Robles and Marta Bengoa-Calvo, ‘Foreign Direct Investment, Economic Freedom and Growth: New Evidence from Latin-America’ [2002] Universidad de Cantabria, Economics Working Paper No. 4/03, p. 20 accessed 24 February 2018. 64 Agmon and Messica, op. cit., 5. 65 Suobbotina, op. cit., 98. 66 Ibid 21. 67 Ibid 22 (Table 1.1). 68 Joong-Wan Cho, ‘Foreign Direct Investment: Determinants, Trends in Flows and Promotion Policies’ [2003] Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific, nr. 1.

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In this context, corporate governance rules are considered part of the relevant factors for foreign investors because of informational disadvantages, as well as the improvements associated with higher operational performance and better management and allocation of resources.69 Moreover, enforcement is paramount since, ‘from a private sector perspective, this affects the ability of firms to enforce contracts and resolve commercial disputes, which in turn provides disincentives for firms from entering into formal transactions with unknown parties’.70 Even though investor protection and minority shareholder rights can be improved independently, doing so hardly substitutes for the absence of a good legal infrastructure.71 Institutional indexes like the World Bank Governance Indicator72 show that macro-level corporate governance is significant and positive in terms of attracting inward foreign direct investment, even above variables such as literacy rates, household consumption expenditure, telephone mainlines, inflation rates, GDP per capita, trade openness, etc.73 Other empirical research, such as the one conducted by Leus, Linz, and Warnock, examined a sample of 4,409 firms from 29 countries, using U.S. holdings as a proxy for foreign investment, and concluded that ‘information problems faced by foreign investors play an important role in the decision of foreign investors to hold less of firms with high levels of insider control …’74 hence ‘in countries with poor disclosure rules and weak investor protection, foreign investment is lower for firms that appear to engage in more earnings management’75 while ‘the holdings effects are strongest when both information flows are poor and insider 69 Stijn Claessens and Burcin Yurtoglu, ‘Corporate Governance and Development – and Update’ (International Finance Corporation, 2012) 11–12. 70 Rob Mills and Qimiao Fan, ‘The Investment Climate in Post-conflict Situations’ (2006) World Bank Policy Research Working Paper 4055. 71 Leora F. Klapper and Inessa Love, ‘Corporate Governance, Investor Protection and Performance in Emerging Markets’ [2002] World Bank Policy Research Working Paper No. 2818 accessed 26 February 2018. 72 Available online at . 73 Adewale Adeoye, ‘Macro-Economic Level Corporate Governance and FDI in Emerging Markets: Is There a Close Relationship?’ [2007] King’s College London, School of Social Science and Public Policy, Thesis accessed 24 February 2018. 74 Christian Leuz, Karl V. Lins and Francis E. Warnock, ‘Do Foreigners Invest Less in Poorly Governed Firms?’ [2008] European Corporate Governance Institute, Finance Working Paper No. 43/2004; IFDP No. 816, p. 34 accessed 26 February 2018. 75 Ibid.

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control is high’.76 The rationale by scholars such as Becht, Bolton, and Röell, then, is that ‘corporate governance rules have been promoted in part as a way of protecting and encouraging foreign investment in Eastern Europe, Asia and other emerging markets’.77

3. UNTIL IT DOESN’T When discussing if it is desirable to aspire to and work towards the values and policies that have generated unprecedented levels of wealth, it is important to start by having a balanced view of the situation, not the least to avoid turning into a meme like the #RiotHipster.78 One extreme is exemplified by The Limits to Growth, the battle horse of the Club of Rome warning that things were only going to get worse should civilization continue on the same path.79 Forty-six years later, the pessimistic mood of the doomsayers persisted, although it is fair to say that some criticism has been acknowledged, for example that they relied on a linear model that did not factor in ‘the ingenuity of man’, i.e. the ability for innovation to find solutions as challenges arise.80 What the fatalists are referring to is the optimistic attitude of their ideological opponents, who are armed with statistics such as the 1981 rate of 42% of humanity living on less than $1.90 per person per day falling to just 10% in 2015, while the same period witnessed a reduction of 56% in the mortality of children under five; moreover, from 1960 to 2015 there was a 37% increase in life expectancy, and, most shockingly, a reduction in the price of commodities relative to income, which may be interpreted as a proxy to determine that the exploitation of natural resources hasn’t translated into the soaring of prices in the face of scarcity.81 Nevertheless, 76

Ibid. Marco Becht, Patrick Bolton and Ailsa A. Röell, ‘Corporate Governance and Control’ [2002] European Corporate Governance Institute – Finance Working Paper No. 02/2002, p. 7 accessed 27 February 2018. 78 Löwe, op. cit. 79 Donella H. Meadows, Dennis L. Meadows, Jørgen Randers, and William W. Behrens III, The Limits to Growth: A Report for the Club of Rome’s Project on the Predicament of Mankind (New American Library 1974) 198. 80 Ernst Ulrich von Weizsäcker and Anders Wiljkman, Come On! Capitalism, Short-termism, Population and the Destruction of the Planet: A Report to the Club of Rome (Springer 2018) 12. 81 Marian L. Tupy, ‘Julian Simon Was Right: A Half-Century of Population Growth, Increasing Prosperity, and Falling Commodity Prices’ (Cato Institute, 77

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even on the optimistic side of the aisle there is coy recognition that not everything is rosy, for example divorce rates, teenage pregnancy, decreasing educational quality, violent crimes, and suicide, among other worrying statistics, are running counter to the increase in wealth and life improvement indicators.82 Therefore, although there is debate between optimists and pessimists, there are aspects that are out there for everyone to see. Income inequality is historically high, with the Gini coefficient recently peaking at levels not seen since the mid-1980s.83 While measuring income inequality presents the problem that it is a single year’s snapshot of earnings, the picture is no better when measuring wealth inequality – the accumulation of wealth over time, which fares badly among the 18 most developed countries in the world.84 And while people aren’t bothered by unequal societies they undoubtedly resent economic unfairness,85 which, coupled with a lack of trust, impacts self-reported happiness.86 This is backed up by behavioral studies that show that humans are disturbed not by what their income and consumption are in the abstract but relative to others, both regarding goods that are status symbols, or signals of high social standing, and those that are not.87 This phenomenon, in turn, connects to the imbalance of power between corporations and governments, with its subsequent erosion of Economic Development Bulletin No. 29, 16 February 2018) accessed 25 February 2018. 82 Stephen Moore and Julian Simon, ‘It’s Getting Better All the Time: 110 Greatest Trends of the Last 100 Years’ (Cato Institute 2000) 18–19. 83 Organisation for Economic Co-operation and Development, Income Distribution Database (IDD): Gini, Poverty, Income, Methods and Concepts accessed 25 February 2018. 84 Organisation for Economic Co-operation and Development [2015], ‘In It Together: Why Less Inequality Benefits All’ OECD Publishing, Paris accessed 26 February 2018. 85 Christina Starmans, Mark Sheskin, and Paul Bloom, ‘Why People Prefer Unequal Societies’ [2017] Nature Human Behaviour 1, No. 0082 accessed 27 February 2018. 86 Shigehiro Oishi, Selin Kesebir, and Ed Diener, ‘Income Inequality and Happiness’ [2011] Psychological Science 22(9): 1095–1110. 87 Francisco Alpizar, Fredrik Carlsson, and Olof Johansson-Stenman, ‘How Much Do We Care About Absolute Versus Relative Income and Consumption?’ [2005] Journal of Economic Behavior and Organization 56(3): 405–421 accessed 26 February 2018.

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democracy.88 It is not overreaching to observe that the widening inequality analyzed earlier mirrors what goes on in the corporate world. The earlier cited research from the Swiss Federal Institute of Technology using the worldwide database of companies showed that 80% of the wealth in the network is controlled by 737 corporations, of which 40% corresponds to 147 firms.89 When discussing inequality, it is common to refer to the 1%, meaning those people who own most of the world’s wealth. Well, that same disparity between haves and have-nots, if applied to companies, turns the 1% into the 0.002%! We saw earlier that corporate governance convergence is logically argued for because of its value to the investment climate, which leads to investment, then economic growth and – it is expected – development. In order to achieve this, governments cater to the needs of the investment community and the international economic organizations, at least in those variables that can be controlled.90 But decision makers and influencers cannot control everything. Most crucially, they can’t control idiosyncrasy and the need of communities to be heard, respected and included in the decisions about their future – or, at least, not without paying the cost of social upheaval. This is an avenue for a deeper analysis, one delving into human nature and what makes us tick. Under the reproductive investment hypothesis, it can be said that health and access to resources are sought-after traits,91 so it is expected that individuals will tolerate the constraints of a society in exchange for its advantages, namely the existence of conditions conducive to facilitating the attainment of those traits. It follows, then, that there are at least two ‘red lines’ regarding tolerance of the nuisances of living in a society, i.e. when the aforementioned conditions are blatantly not met and, if they are, when the sense of unfairness diminishes the conditions of the individual relative to others. In a competitive world, when society agrees on the principles that sustain it, the trade-offs from pursuing development are, by definition, easier to digest. But what happens when they aren’t? In democratic theory, a government is regarded as legitimate thanks to elections, for the popular will is understood to have granted legitimacy 88

Dine and Koutsias, op. cit. See Stefania Vitali, James B. Glattfelder, and Stefano Battiston, ‘The Network of Global Corporate Control’ (2011) PLoS ONE 6(10): e25995 accessed 22 January 2016. 90 Cho, op. cit. 91 David M. Buss and Michael Barnes, ‘Preferences in Human Mate Selection’ [1986] Journal of Personality and Social Psychology 50(3): 559–570. 89

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through an electoral process within a constitutionally agreed system.92 However, there is no electoral legitimacy when corporations exercise political power, and even though modern conceptions of global economic governance view policymaking as power sharing through wider networks, when the effective or perceived ultimate sovereign authority of the nation-state dissolves a society loses its sense of being in control of its destiny.93 Perhaps, the interconnectedness has brought different conceptions about development into conflict, and, thus, its success could also be its demise. It is paramount, then, to unearth why we perceive development as we do. In the West, the idea of development can be traced back to Aristotle, who thought of nature as the genesis of growing things, translated as physis, which literally means development. Moreover, for Aristotle every being has a physis, i.e. its own principle of development,94 and he thought of it in terms of a cycle where all that is born and grows finally declines and perpetually begins again.95 Saint Augustine’s theology of history took from Aristotle the cycle of birth-growth-decay, although he had to reconcile it with God’s intervention in history according to His plan; hence he rejected the eternal return of Aristotle and replaced the view of nature (development) as spontaneous with divine omnipotence,96 i.e. ‘the historical succession of cycles in Aristotle is replaced in Augustine by a history constructed as a single cycle. But this adjustment was not exactly unimportant, given that it opened the way to a linear view of history’.97 What occurred later on during the Enlightenment is a defining moment for what and how we consider development today. The Aristotelian and Augustinian idea of decay (for a cycle of birth, growth and fall imply a continuous decay) was contested by the mid to late 17th century, while keeping the sense of development (growth) as something natural and positive, no longer obstructed by the barrier of ‘a

92

Stephen Wilks, The Political Power of the Business Corporation (Edward Elgar Publishing 2013) 42. 93 Ibid. 94 Rist, op. cit., 28–30. 95 Andrea Falcon, ‘Aristotle on Causality’ in Edward N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (2008) http://plato.stanford.edu/archives/ fall2008/entries/aristotle-causality/ accessed 27 February 2018. 96 Michael Mendelson, ‘Saint Augustine’ in Edward N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (2009) accessed 28 February 2018. 97 Rist, op. cit., 34.

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kind of optimum level after which the curve necessarily moved downward to comply with the laws of nature and God’s plan’.98 Over the course of the next two centuries social evolutionism consolidated its triumph,99 one in which, according to authors like Rist: there was general agreement on three essential points: that progress has the same substance (or nature) as history; that all nations travel the same road; and that all do not advance at the same speed as Western society, which therefore has an indisputable ‘lead’ because of the greater size of its production, the dominant role that reason plays within it, and the scale of its scientific and technological discoveries.100

Under this logic, development necessarily has to be extended to the whole planet through endless growth. As a consequence, colonization, the League of Nations’ mandate system, and Truman’s Point Four101 took place, according to Rist’s view, naturally.

98

Ibid 37. Classical empiricists (Francis Bacon) and rationalists (René Descartes) of the seventeenth century urged that the use of proper methods of inquiry guarantees the discovery and justification of new truths. This cumulative view of scientific progress was an important ingredient in the optimism of the eighteenth century Enlightenment, and it was incorporated in the 1830s in Auguste Comte’s program of positivism: by accumulating empirically certified truths science also promotes progress in society. Other influential trends in the nineteenth century were the Romantic vision of organic growth in culture, Hegel’s dynamic account of historical change, and the theory of evolution. They all inspired epistemological views (e.g., among Marxists and pragmatists) which regarded human knowledge as a process (Ilkka Niniluoto, ‘Scientific Progress’ in Edward N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (2009) accessed 28 February 2018). 100 Rist, op. cit., 40. 101 Fourth, we must embark on a bold new program for making the benefits of our scientific advances and industrial progress available for the improvement and growth of underdeveloped areas. More than half the people of the world are living in conditions approaching misery. Their food is inadequate. They are victims of disease. Their economic life is primitive and stagnant. Their poverty is a handicap and a threat both to them and to more prosperous areas. For the first time in history, humanity possesses the knowledge and skill to relieve the suffering of these people. 99

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It appears, thus, as if the idea of development means that the Third World should follow in the footsteps of the West in a linear fashion, à la Rostow.102 Nevertheless, it is an overreach to believe that poor countries can achieve the same level as their wealthier peers, or, if they can, it won’t be through a similar path or without plenty of sacrifices. This is due to the fact that historical conditions change, and both the circumstances and the principles governing the international community change over time – as is the case, for example, with scientific advances, faster access to information, social unrest, and environmental awareness.103 The critical view of development is up to this point a useful counterbalance to the opposing view, as the third world cannot follow exactly the same path as the first world did. However, the solution cannot be as straightforward as weeding out consumption and resource use from development programs,104 whether because the inertia of competition cannot be reversed

The United States is pre-eminent among nations in the development of industrial and scientific techniques. The material resources which we can afford to use for assistance of other peoples are limited. But our imponderable resources in technical knowledge are constantly growing and are inexhaustible. I believe that we should make available to peace-loving peoples the benefits of our store of technical knowledge in order to help them realize their aspirations for a better life. And, in cooperation with other nations, we should foster capital investment in areas needing development. Our aim should be to help the free peoples of the world, through their own efforts, to produce more food, more clothing, more materials for housing, and more mechanical power to lighten their burdens. (Fragment. Harry S. Truman’s inaugural address, January 20, 1949. Harry S. Truman Library & Museum. Available online: ). 102 Walt Withman Rostow maintained in his famous book The Stages of Economic Growth: A Non-communist manifesto (1960), that all societies pass through five stages as they modernize, i.e. traditional society, then one in which science contributes to increased agricultural output, and then take-off, where new technology becomes predominant and growth becomes self-generating, with the last two stages being more complex, as original industries diminish to give way to a high mass consumption society. 103 Hari M. Osofsky, ‘Defining Sustainable Development After Earth Summit 2002’ [2003] Loyola of Los Angeles International and Comparative Law Review 26: 111 accessed 27 February 2018. 104 Wylie D. Bradford, ‘Global Capitalism and Sustainable Development’ [2000] Macquarie Economics Working Paper No. 10/2000 accessed 20 February 2018.

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at all or because any given society, with broad democratic support, decides to strive for it. Counterintuitively, some critical approaches to development seem to romanticize poverty or to champion non-Western societies for motives beyond mere academic research. Some authors, for example, define development as Westernization and blame it for imposing foreign values on societies robbed of the power to decide their own destiny.105 This is a binary approach quite typical of critical studies. The problem with deconstruction, their tool of choice, is that, as seen in Chapter 2, it evidences a continuum between Marxism and the postmodernism which animates critical legal theory; it is, as argued, a partial and ideologically loaded approach – precisely the sin placed on the shoulders of mainstream law and economics. In its singlemindedness, critical studies colludes in a historical blindness, a fixation on the colonial era by the nascent European bloc, purposefully obviating, for example, the systematic ‘widening of borders’ by ancient Egypt,106 the Ottoman civilizing of tribal Arabs assumedly for their own protection,107 the Asante imperialism in Africa and their taking of an annual tribute in slaves from the Fanti, Gyaman, and Gonja people,108 the cold economic logic of Aztec imperialism,109 or the Mongolian expansionism, which brought to their victims no higher culture and technology, developed no new industries, exported no capital, and engaged in little trade.110 And these are, necessarily, just a very few and recent examples, for humans have been

105 Jon H. Sylvester and Ruth E. Gordon, ‘Deconstructing Development’ [2004] Villanova Public Law and Legal Theory Working Paper Series, Vol. 22, Issue 1 accessed 27 February 2018. 106 Carola Vogel, ‘This Far and Not a Step Further! The Ideological Concept of Ancient Egyptian Boundary Stelae’ in S. Bar, D. Khan and J.J. Shirley (eds), Egypt, Canaan and Israel: History, Imperialism, Ideology and Literature. Proceedings of a Conference at the University of Haifa, 3–7 May 2009 (Brill 2011) 333. 107 Thomas Kuehn, Empire, Islam, and Politics of Difference: Ottoman Rule in Yemen, 1849–1919 (Brill 2011) 219. 108 George Ayittey, Indigenous African Institutions (Transnational 2006) 289. 109 Richard E. Blanton, ‘A Consideration of Causality in the Growth of Empire: A Comparative Perspective’ in Frances Berdan, Richard Blanton, Elizabeth Hill, Mary Hodge, Michael Smith, Emily Umberger, Aztec Imperial Strategies (Dumbarton Oaks 1996) 224. 110 Lewis Samuel Feuer, Imperialism and the Anti-Imperialist Mind (Transaction 1989) 5.

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massacring each other for tens of thousands of years,111 maybe from the dawn of time – thus making a strong case for the Hobbesian man over the idyllic picture drawn by Rousseau.112 In the second epilogue of War and Peace, Tolstoy writes: For the solution of the question of free will or inevitability, history has this advantage over other branches of knowledge in which the question is dealt with, that for history this question does not refer to the essence of man’s free will but its manifestation in the past and under certain conditions.113

Tolstoy thus rejected the idea that men can control the course of events and saw free choice as a fruit of vanity – perhaps, as Isaiah Berlin thought, because he was a ‘fox’, with a rich variety of experiences and wide-ranging ideas, all the while feeling that the right thing was to be a ‘hedgehog’, i.e. able to relate the totality to a single system of coherence.114 This is one of the reasons one ought to be suspicious of single-cause theories. There may be a degree of inevitability to things but, as demonstrated time and again, humans are amazing creatures, capable of creating extremely complex webs of correlations. Is material wealth a precondition for happiness? Hardly so. Though, a more appropriate question would be: now that humanity has seen material wealth, are we willing to collectively let it go? The consensus in the international community is that economic growth is, by itself, insufficient; however, sustained economic growth in developing countries is a critical tool for reducing poverty and improving most people’s standard of living.115 Moreover, and perhaps influenced by the backlash against purely material approaches to development, there seems to be agreement among mainstream theories in the sense that development should be a home-grown product, to an extent, one in which political freedoms are not second to, but boosted by, the intensity of economic needs.116 111

Lawrence H. Keeley, War Before Civilization (Oxford University Press 1996) 59–70. 112 Azar Gat, War in Human Civilization (Oxford University Press 2006) 133–146. 113 Leon Tolstoy, War and Peace (Planet PDF free online version) 2885

accessed 28 February 2018. 114 Isaiah Berlin, The Hedgehog and the Fox: An Essay on Tolstoy’s View of History (Princeton University Press 2013) 2–3. 115 Suobbotina, op. cit. 116 Sen, op. cit., 148.

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4. TAKING THE RISK In his eulogy to Freud, Jung wrote: For one can fall victim to possession if one does not understand betimes why one is possessed. One should ask oneself for once: Why has this idea taken possession of me? What does that mean in regard to myself? A modest doubt like this can save us from falling head first into the idea and vanishing forever.117

Paraphrased, this means that ideas possess people, not the other way around. In all walks of life and fields of knowledge – not least corporate governance – it can be seen that once a belief or opinion has been formed in a person it becomes highly resistant to change, even when faced with fair arguments to the contrary.118 However, this reaction isn’t surprising at all. The world is a very complex place and, as cognitive creatures with a wealth of beliefs about a changing world, we require continuous revisions and updates. However, unable as we are to perceive and process everything that changes – and the impact of such a maelstrom – we rely on internal shortcuts and associations in order to fill in the gaps and maintain our internal model roughly coherent vis-à-vis the world.119 In the reasoning of Apostel et al., the importance of facts is shadowed by our need to not only ‘know’ them but to ‘understand’ and explain them, which implies formulating meaningful connections – hence the human drive to build a worldview, i.e. a coherent collection of concepts that allow us to construct a global image of the world.120 The worldview approach is useful because it fleshes out the larger questions that humans have been asking forever: (a) What ‘is’? (b) Where does it come from? (c) Where are we going? (d) What is good and what is evil? (e) How should we act? (f) What is true and what is false? And, 117

Carl Jung, ‘In Memory of Sigmund Freud’ in Sir Herbert Read, Michael Fordham, and Gerhard Adler (eds), C.G. Jung: The Collected Works. Volume Fifteen: The Spirit in Man, Art, and Literature (Routledge 2014) 48–49. 118 Raymond S. Nickerson, ‘Confirmation Bias: A Ubiquitous Phenomenon in Many Guises’ [1998] Review of General Psychology 2(2): 175–220. 119 Daniel C. Dennett, ‘Artificial Intelligence as Philosophy and Psychology’ in Daniel C. Dennett, Brainstorms: Philosophical Essays on Mind and Psychology (MIT Press 2018) 119–138. 120 Diederik Aerts, Leo Apostel, Bart De Moor, Staf Hellemans, Edel Maex, Hubert Van Belle, and Jan Van der Veken, Worldviews: From Fragmentation Towards Integration (Brussels Free University 1994) 5–13.

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(g) where do we start to answer those questions?121 As shown in Figure 5.1, these questions cover the whole spectrum of human inquiry, ranging from general statements aimed at explaining phenomena to purposeful representation of reality – and then put into motion by the meta-question, the backbone of attempts to make it all cohere.

Figure 5.1 Apostel’s worldview Perhaps it is in these musings that one can find the rationale behind Jung’s assertion that ideas possess people. The stress caused by holding contradictory beliefs, ideas or values may lead to physical and psychological health issues,122 aggravated by a downward spiral of indecision and inaction.123 The prospect of being imprisoned by pre-made frameworks of thought can ease the discomfort of dissonance, allowing for a degree of coherence to kick in. However, intuition tells us that this attitude is counter to the spirit of intellectual inquiry, which is marked by curiosity and search, and which requires constant fine-tuning as errors are found. The temptation of easing the sting of uncertainty and incoherence is hard to resist. Objectively speaking, there is nothing wrong with standing on the shoulders of giants – an elemental economy of effort akin to nourishing one’s intellectual and spiritual life with ripe fruit. However, the problem is not what one believes but how it is believed. Santayana wrote: ‘An earnestness which is out of proportion to 121 Clément Vidal, ‘Metaphilosophical Criteria for Worldview Comparison’ [2012] Metaphilosophy 43(3): 306–347 accessed 13 March 2018. 122 A. Baum, ‘Stress, Intrusive Imagery, and Chronic Distress’ [1990] Health Psychology 9(6): 653–675. 123 Leon Festinger, A Theory of Cognitive Dissonance (Stanford University Press 1962) 268–269.

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any knowledge or love of real things, which is therefore dark and inward and thinks itself deeper than the earth’s foundations – such an earnestness, until culture turns it into intelligent interests, will naturally breed a new mythology’.124 Abandoning oneself to the intoxicating brew of self-affirming, knowit-all confidence in having exclusive access to absolute truths is both lethargic and hazardous. On one hand, having the final word equals not needing further evidence, i.e. it is the death of wonder, while, on the other hand, being privy to such ‘perfection’ justifies imposing it on others by any means necessary. It is not an exaggeration to draw a metaphor with how the jewel wasp acts on unsuspecting cockroaches.125 The Ampulex compressa – this particular wasp’s scientific name – stings cockroaches on the thorax and its venom paralyzes the front legs of its victim, buying it sufficient time to search for the part of the cockroach’s brain responsible for the escape reflex, which the wasp stings again after careful examination. This is where it gets creepy. After the second sting, the cockroach has lost its free will and the wasp leads it by the antennae, as one does with a puppy on a leash, back to its lair. At this stage, the wasp is keeping the cockroach alive solely for the purpose of laying its eggs inside the victim, which then hatch and feed themselves on their way out. Totalitarian ideas act in such a way. A bit like in the film, Alien, mind you. In ‘Schopenhauer as an Educator’, Nietzsche wrote: No one can construct for you the bridge upon which precisely you must cross the stream of life, no one but you yourself alone. There are, to be sure, countless paths and bridges and demi-gods which would bear you through this stream; but only at the cost of yourself: you would put yourself in pawn and lose yourself.126

There is a common theme running throughout great minds then – the suspicion of single-cause, all-encompassing theories. Those paths and bridges and demi-gods referred to by Nietzsche can very well be the 124

George Santayana, Life of Reason or the Phases of Human Progress (Scribner’s Sons 1920) 13–14. 125 T. Piek, B. Hue, A. Lind, P. Mantel, J. Van Marle, and J.H. Visser, ‘The Venom of Ampulex Compressa – Effects on Behaviour and Synaptic Transmission of Cockroaches’ [1989] Comparative Biochemistry and Physiology Part C: Comparative Pharmacology 92(2): 175–183. 126 Friedrich Nietzsche, Untimely Meditations (Cambridge University Press 1997) 129.

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‘science of everything’,127 power struggle,128 or race and class privilege129 – which will bear you through life, indeed, but only at the cost of yourself. The challenge presented by corporations in this complex world falls into the category of ‘wicked problems’, i.e. it can be framed in multiple ways, at several levels, and it is sure to trigger deeply rooted passions. Thus, viewpoint diversity is essential and it comes at the price of challenging commonly held ideas.130 Doing so would be, as Jung suggested, a modest doubt that can save us from falling head first into an idea and vanishing forever.

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Tim Harford, The Logic of Life (Abacus 2009) x–xxii. Sylvère Lotringer (ed.), Foucault Live: Interviews 1961–1984 (Semiotext(e) 1996) 104. 129 Kimberle Crenshaw, ‘Demarginalizing the Intersection of Race and Sex: A Black Feminist Critique of Antidiscrimination Doctrine, Feminist Theory and Antiracist Politics’ [1989] University of Chicago Legal Forum 1989(1), Article 8. 130 Heterodox Academy accessed 13 March 2018. 128

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Rostow, Walt Withman, The Stages of Economic Growth: A Non-communist Manifesto (Cambridge University Press 1990) Ryce-Menuhin, Joel, ‘An Extended Model of the Infant Self’ in Renos K. Papadopoulos (ed.), Carl Gustav Jung: Critical Assessments. Volume II: The Structure and Dynamics of the Psyche (Routledge 1992) Santayana, George, Life of Reason or the Phases of Human Progress (Scribner’s Sons 1920) Sen, Amartya, Development as Freedom (Oxford University Press 2001) Suobbotina, Tatyana, Beyond Economic Growth: An Introduction to Sustainable Development (World Bank 2004) Tamahana, Brian Z., Law as a Means to an End: Threat to the Rule of Law (Cambridge University Press 2006) Tolstoy, Leon, War and Peace (Planet PDF free online version) accessed 28 February 2018 Vogel, Carola, ‘This Far and Not a Step Further! The Ideological Concept of Ancient Egyptian Boundary Stelae’ in S. Bar, D. Khan and J.J. Shirley (eds), Egypt, Canaan and Israel: History, Imperialism, Ideology and Literature. Proceedings of a Conference at the University of Haifa, 3–7 May 2009 (Brill 2011) von Weizsäcke, Ernst Ulrich and Anders Wiljkman, Come On! Capitalism, Short-termism, Population and the Destruction of the Planet: A Report to the Club of Rome (Springer 2018) Wilks, Stephen, The Political Power of the Business Corporation (Edward Elgar Publishing 2013)

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Apergis, Nicholas, Katerina Lyroudi, and Thanasis Vamvakidis, ‘The Relationship between Foreign Direct Investment and Economic Growth: Evidence from Transitional Countries’ [2004] Atlantic Economic Association Conference, Lisbon, March accessed 25 February 2018 Baum, A., ‘Stress, Intrusive Imagery, and Chronic Distress’ [1990] Health Psychology 9(6): 653–675 Becht, Marco, Patrick Bolton and Ailsa A. Röell, ‘Corporate Governance and Control’ [2002] European Corporate Governance Institute – Finance Working Paper No. 02/2002 accessed 27 February 2018 Bradford, Wylie D., ‘Global Capitalism and Sustainable Development’ [2000] Macquarie Economics Working Paper No. 10/2000 accessed 20 February 2018 Buss, David M. and Michael Barnes, ‘Preferences in Human Mate Selection’ [1986] Journal of Personality and Social Psychology 50(3): 559–570. Cho, Joong-Wan, ‘Foreign Direct Investment: Determinants, Trends in Flows and Promotion Policies’ [2003] Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific, nr. 1 Cox, Damian, Marguerite La Caze, and Michael Levine, ‘Integrity’ in Edward Zalta (ed.), The Stanford Encyclopedia of Philosophy (2017) accessed 22 February 2018 Crenshaw, Kimberle, ‘Demarginalizing the Intersection of Race and Sex: A Black Feminist Critique of Antidiscrimination Doctrine, Feminist Theory and Antiracist Politics’ [1989] University of Chicago Legal Forum 1989(1), Article 8 Dennett, Daniel C., ‘Artificial Intelligence as Philosophy and Psychology’ in Daniel C. Dennett, Brainstorms: Philosophical Essays on Mind and Psychology (MIT Press 2018) 119–138 Falcon, Andrea, ‘Aristotle on Causality’ in Edward N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (2008)