David Weidner is not at all happy with Mary Shapiro, new Chair of the SEC, and he is trying to rekindle the fire of reform:

But now that the worst of the crisis appears to have passed, Americans are feeling less angry and more optimistic about their investments. Barring another collapse that sends banks tumbling, unemployment skyrocketing and 401(k) values even lower, the window for reform is closing fast.

As a result, the drumbeat for change at the SEC is growing fainter. The House Financial Services Committee is more occupied with credit card rates, Internet gambling and executive compensation than with remaking Wall Street's rules. Once promised radical structural changes, we are instead getting the kind of reform normally enacted by career bureaucrats such as Ms. Schapiro: None.

Weidner's right about the SEC's failings and the perceived inevitability of reform a few months ago, but he is wrong in asserting that the window for reform is closing. Even if he were right about that, he fingers the wrong culprit. It's silly to blame the failure to pursue the radical reforms that Weidner was expecting -- eliminating the SEC or making it an arm of a stronger institution -- on Mary Shapiro. Why would she campaign to eliminate her own agency? If anyone were to blame here, it would be Congress, which was making all sorts of noises last fall about the need for a revamped financial services regulator. But Weidner knows that this story is far from over. He simply doesn't want us to lose sight of the idea that substantial reforms of the SEC are in order.

Reform is coming, but Congress is right to hold off for a while. For the first two months of the Obama Administration, capital markets were tumbling, in no small part because of the profound uncertainty surrounding Treasury Secretary Timothy Geithner's next moves. Then, on March 10, the markets seemed to turn. (On that day, I wrote, "it's time to get bullish again," and since that day the DJIA has risen almost 25%.) Reforms of the sort that Weidner is imagining would be intensely destabilizing right now, and Congress should wait until the market has recovered its footing. I suspect we will see some action on this front in the fall of this year, after we have a clearer sense of where the automobile industry and banking are headed.

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I really appreciate Gordon's comment to my second post. I think the faith/corporate law link matters to corporate law for at least two reasons. First, descriptively, many on this blog may agree that shareholder primacy is not mandated by law, but that remains a contested point, rather remarkably. I doubt Steve Bainbridge, to cite one respected commentator, would yield reaily to my assertion on the corporate goal issue but I think the authority he would rely on is thin and largely a matter of custom and other factors, as I noted before.  Many corporate law professors/casebooks seem to assume shareholder primacy and I can't tell you the number of business people and economists, among others, who I have encountered who think such a goal is the 11th commandment, apparently based on the gospel according to Milton Friedman, vintage 1970.  Yes, markets constrain as Elizabeth notes, but markets work at a pretty crude level and shareholders themselves are not always the narrow, stereotyped money-maximizers we sometimes portray them as being, as Einer Elhauge argued in his 2005 NYU piece. Thus, corporate law as taught, written about, and practiced, requires candid attention to the question of what does the law really does require/permit. This is true both in law schools and in B schools.

Second, there remains a normative debate about what the goal(s) of corporate law should be. Here, professors should deal openly with this issue in a democratic society that entrusts production to the (still) private sector. Again, this is true in legal education where future legal counsellors with vast influence are trained and, even more importantly, in B schools and other venues where business people hone business skills and absorb core beliefs.   

Without meaning to sound like a "crit," I think this is an example of how we need to expose some latent assumptions and lay them bare for examination, both for students and for ourselves.  What is not said and assumed can be more influential than what is said openly.

Finally, needless to say, all this makes a real difference in corporate life too, where what decision-makers do is often shaped by the horizons of how they conceive and frame what is permitted and possible. One of my legal mentors once told me how liberated he was as a young associate to discover that his senior partner felt free to talk to clients about what they should consider doing from a moral perspective;he found it remarkably emancipating to realize that his cramped sense of role had unduly bound him as to what was possible. Of course, we will not consider something possible unless we first believe it is permitted. So, how religion might shape corporate law and life remains open to discussion as we are doing here, but there is much prior work remaining to convince folks in the teaching and professional worlds that the precondition of discretion necessary for meaningful choice genuinely does, and should, exist.

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The results of the bank stress tests are being leaked today (poor BofA!), but will be announced formally tomorrow, when I will be en route to leafy New Haven for this.  The joint statement just issued by the bank supervisors, setting the groundwork for said announcement, though, tells you where we're headed.  The tone is tough on banks, and I expect that the project will go over well; I'm impressed, though I'm just a lawyer.  (For the "is this whole project legal?" question, I point you to another lawyer, John Carney, who has doubts - I think he is onto something, though I suspect that working through the bank supervisors, as is happening here, helps the legality of everything more than would Treasury acting alone, as said supervisors must be "consulted" on TARP repayment, have wide authority to ensure "safety and soundness," which may be interpreted to include the most recent novel powers.)  Four observations:

• The supervisors returned to the dumb old Basel I way of measuring capital adequacy - "x% of risk-weighted assets" - rather than trusting the international models of banks (which was Basel II).  Moreover, the way they did so will require most of the 19 large banks, I expect, to raise capital.  This shrinks and delevers banks, as some critics have been calling for (though it doesn't do so as much as they might like).  Here's the stress test capital buffer: "The SCAP capital buffer for each BHC is sized to achieve a Tier 1 [ed note: this means less risky or cash-like capital] risk-based ratio of at least 6% and a Tier 1 Common risk-based ratio of at least 4% at the end of 2010, under a more adverse macroeconomic scenario than is currently anticipated."
• There is language that clears the way to get rid of beleaguered CEOs Ken Lewis and Vikram Pandit, though I still think the government might think that it owes Lewis for buying Merrill for top dollar: "firms will need to review their existing management and Board in order to assure that the leadership of the firm has sufficient expertise and ability to manage the risks presented by the current economic environment." 
• Moreover, there's a stop-your-backtalk instruction: "Supervisors expect that the board of directors and the senior management of each BHC will give the design and implementation of the capital plan their full and immediate attention and strong support. Capital plans will be submitted and approved by supervisors by June 8th, 2009."
• On the other hand, there's more of a handout.  To meet their new requirements, banks can obtain (or exchange their current TARP funds) preferred stock from Treasury that they can convert to common whenever they fall below that 4% common stock risk-based ratio: "Mandatory Convertible Preferred (MCP) in an amount up to 2% of risk-weighted assets (or higher upon request). MCP can serve as a source of contingent common capital for the firm, convertible into common equity when and if needed to meet supervisory expectations regarding the amount and composition of capital."  There is only 125ish billion left in the TARP, so the banks had better not all come for convertible preferred.
• There's a bright line rule for even asking to get out of TARP, and it's obtaining enough capital to the with the worst case scenario above: "The 19 [banks] that were subject to the [stress test] process must have a post-repayment capital base at least consistent with the SCAP buffer, and must be able to demonstrate its financial strength by issuing senior unsecured debt for a term greater than five years not backed by FDIC guarantees, in amounts sufficient to demonstrate a capacity to meet funding needs independent of government guarantees."

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Following up on Usha's post, I'd like to advance an argument here that I've explored more fully in some of my writing.  Namely, that the "shareholder wealth maximization norm" is a perverted application of the principle from which it has been derived:  that directors effectively serve as the shareholders' agents, and as such are to operate the corporation with the best interests of the shareholders in mind.

I have posited that to act with the best interest of the shareholder in mind is not the same thing as to act in order to maximize shareholder wealth.  Indeed, for 2,000 years Christians have been warned "what doth it profit a man, if he gain the whole world, and suffer the loss of his own soul?" (Matthew 16:26).  And similar sentiments can be found in some shape or form in pretty much all other religions.

So, viewing corporate law under the light of faith calls into question this very fundamental assumption.  It suggests a rejection of the de-humanizing assumption that human beings equate their best interests with their pocket-books and wallets.  In its place, it suggests an understanding of "shareholder best interests" that would take into account the moral interests and obligations of shareholders as well.

The risk of such an approach, however, is how it affects the very serious challenge of protecting  shareholders from management . . . .

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I'll echo Christine's sentiments: I am thoroughly enjoying this symposium on Religious Faith and Corporate Law.  While it's sparked a lot of questions for me, I'd like to focus on a point that Lyman made: different organizations have different goals.  Lyman observes that the “monistic view that all companies all the time must have the same and singular goal, i.e., to maximize profits or the share price” is “not mandated by law but it is a custom, constrained by markets to be sure, and it grows out of business lore and business norms and business education.”

That is, belonging to a corporation does not mean one must value share price above all else, any more than belonging to a religion requires one to ignore traditional corporate goals.  The two sets of values can co-exist along a "continuum of companies on the profit side." But this concept is not merely aspirational.  I suspect, as Lyman posits, that real-world companies currently pursue all sorts of different goals—even despite corporate scholars telling them for the past two decades that all they should do is maximize shareholder value. 

My current work involves some of the how and why these diverse goals exist, and their effect on the form of entity.  That is, to what extent do Google shareholders purchase shares based upon their desire to “belong to” or “express” the values adopted by Google? How does this relate to the feeling one gets by donating to NPR or buying coupon books you don’t really want from local schoolchildren? 

If one starts from the premise (which I’ll expand on in a future post) that, practically speaking, the line dividing for-profits and non-profits is wafer thin, then the situations might be more closely related than one might think.  At some point on the continuum towards non-wealth-maximization goals, most entities opt for non-profit status.  But I’m working towards an argument that that choice, the organizational form choice, fulfills a largely expressive and not substantive function. 

Thoughts are welcome, on-line or off. 

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I'm in the midst of grading Administrative Law exams this morning so don't have time for an extended post.  But just a brief observation that I don't think Lyman and I are as far off as his post suggests in his comment about what vs. how.  The thrust of my Wake Forest piece is to suggest a different way of thinking about corporations and their actors and I speak only briefly about what role the law might play at the end of hte piece.   

The point I made in the article (which I still stand by) with respect to the role of law is that one can justify using law to achieve certain societal aims regarding the corporation.  The fact that corproations are creaturs of the law and can not exist without state permission means there is nothing philosophically wrong with the state setting the parameters under which they can operate.  Moreover, the law gives corporations a lot of benefits via tax breaks, limited liability and the like, making the use of law to achieve some social aim merely a quid pro quo for the benefits corproations reap through the law. 

Whether one decides some type of mandate or a legal incentive or some other legal approach is a good idea in a paricular circumstance is a different question.  I tend, like Lyman, to have some nervousness about legal mandates...and probably have more nervousness about them than I did 5 years ago when I wrote the Wake piece. 

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Thanks to everyone who has posted and commented so far. Many interesting and provocative ideas and questions have been noted. I want to raise a matter that cuts across many posts, that of custom in how we think about religious ideas generally(and therefore how we think about those ideas in the workplace) and custom in how we conceive corporate goals, and then I will make a pitch for a more pluralistic approach to corporate life and discourse about the corporation.

Ron notes that his students seem to embody a norm of restraint when it comes to linking the corporation and faith.  That is a deep and widespread norm in our culture, a practice that probably has many causes, one of which is a rather faulty understanding of the First Amendment. The proscription against state action on religion somehow gets wrongly transmuted into a proscription on religious discourse in the public but non-governmental sector, i.e., in those mediating institutions--including churches, schools, clubs, and even the corporation-- that stand between the state and the individual that we call "civil society." Thus, as a culture we are skittish about religion talk. That norm/custom carries over to the corporation. One result, among many, is that noted by Mike Naughton, that people suffer a sense of being inwardly divided in that they cannot connect their most deeply-held beliefs to their work lives. Another effect is a certain dishonesty in that one is expected to "translate" religious ideas into secular discourse to make those idea more palatable, at the cost of being sincere and transparent as to one's real thinking. What, for example, is wrong with openly opposing layoffs on the gound that one believes that employees should be treated with great consideration(not legally mandated, mind you, but one view).[I am not saying one cannot hold the oppsite view;I am simply  saying one basis for my own views on why I resist layoffs unless necessary is the ground of religious belief about the vulnerable].

And this takes me to Christine's post, which rightly asks "top down or bottom up?" I favor the latter and that is why I disagree with Susan's Wake Forest piece which seems a bit impositional to me. I know she advocates very palatable goals  but I do not want to achieve a desirable WHAT via an undesirable HOW(government mandate). I favor entity pluralism not legal mandates. I think there are many companies(Chick Fil A being just one) that seek to express religious beliefs in the marketplace. We should get over the monistic view that all companies all the time must have the same and singular goal, i.e., to maximize profits or the share price. That practice as we all know is not mandated by law but it is a custom, constrained by markets to be sure, and it grows out of business lore and business norms and business education(See Rakesh Khurana's fascinating indictment of agency theory in B schools in his new book, "From Higher Aims to Hired Hands..."). 

Shareholder primacy, in other words, is one goal of many. Companies could, to varying degrees, and consistent with raising capital(shareholders have choice too and can stay away from comapanies they think are "too" socially responsible), pursue profits but not only profits. Thus, rather than the current organizational dichotomy of profit/nonprofit, we would have a continuum of companies on the profit side(hedge funds being maximizers of wealth and others more diverse). That would give investors choice along with managers and employees and customers, etc. I think the decided turn toward "green" companies and the local food movement are examples of this growing diversity. (Alternatively, maybe there are more such companies out there than we know about--here we need some empirical work-- and it is we law and business teachers who parody this by our reductionism).

I also think we need to ask who within companies we are talking about. I tend to think about this at the director-officer level. I think they should be free(not required) to ground their thoughts about business practices on religious belief and to say so openly. But a lower level employee also should be given some consideration to honor his or her belioefs where possible. Thus, as to Robin's post, she makes the case for an exemption for certain business but I would also hope that senior managers within companies that must comply with various laws would permit employees who object to be excused from certain practices that trouble them on religious grounds. This again relates to Christine's point about whether we are talking about the entity or the individual. I think both, but again, by choice not mandate.

Thus, our ingrained custom of self-censorship on religious matters and our custom of shareholder primacy impede a more pluralistic discourse about this subject and hinder a more diverse business culture. But that can change and talking about it is one way to start.

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I am interrupting the great discussion of faith and corporate law to note this news item:

A couple of weeks ago, I blogged about car shopping during the financial crisis, and we haven't purchased a car, yet. The problem isn't just that we couldn't come to terms on price, but also the fact that we were so disappointed in gas mileage of the mid-size sedans we evaluated. Most of them get something in the teens in city driving, according to the EPA. (We were looking at 6-cylinder vehicles because the 4-cylinder engine is pretty gutless in most mid-size sedans.) So if we sold our Suburban (an 8-cylinder!) and purchased a new car, we would make almost no progress at all for the environment or our wallet.

The problem here is pretty simple: engine technology has improved immensely over the past few decades, but modern cars are much, much heavier than older models. As a result, those engine improvements have essentially allowed us to run in place with regard to fuel economy. And, of course, the worst offenders are cars from Detroit.

We have now decided to start shopping for the next size down. We can live with a four-cylinder in a smaller car. Maybe even a hybrid. If my tax dollars are going to fund a cash-for-clunkers program, we may have a couple of deals in our future. (Under the current proposal, each person could obtain no more than one voucher in any three-year period ... so one for me and one for my wife, right?)

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Christine's question, "what is a Christian Entrepreneur" sparked a memory from this past semester that I thought worth sharing.

I had the joy of teaching a seminar entitled "Controversies in Corporate Law" while a Visiting Associate Professor at Brooklyn Law School this past Spring (2009) semester. 

We had a very good mix of students, ideologically speaking.  Pretty much every viewpoint, from right to left, was well and ably represented in the class.

One of the issues we covered in the seminar was "Religion and the Corporation."  Surprisingly, this was the only issue that the students reached a consensus on:  they pretty much all agreed that corporations should generally not adopt religious missions, and that those which did adopt such missions should certainly not enjoy anything analogous to the "free exercise rights" that individuals enjoy under the U.S. Constitution.

Driving this perspective on their part was the concern that a religiously motivated corporation, especially if endowed with constitutional rights to act upon such motivations, would trample employee freedoms and restrict consumer choice.  "Where would we get our contraceptives if the only pharmacy in town was run by a Catholic corporation?" was a repeatedly expressed concern.

Interestingly, the students also agreed that it would be quite all right for an unincorporated business -- such as a partnership or sole proprietorship -- to pursue a religious agenda.  Corporations were seen as simply different -- too powerful, too large, and too privileged under the law to permit a religious mission on their part.

I think there's a lot of grist for the mill here.  Getting back to David's original four questions, however, I think this implicates his fourth one:  what is the audience of "Christian Corporate Law"?  For there is certainly a fair bit of antipathy towards all things associated with religion these days.  I think there is a very real reason to be concerned that even some tremendously helpful insights brought to bear upon corporate law from a Christian or religious perspective might be rejected, or viewed askance, simply because of their religiously inspired origins -- despite whatever underlying merit they might contain.

PS:  As another follow-up to Christina's post, I refer all interested parties to Chick-fil-A, the corporate mission statement of which is: "To glorify God by being a faithful steward of all that is entrusted to us."

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Gordon left the door open for us regular Glommers to, as they say, glom on to the Religious Faith and Corporate Law symposium here.  I've found the posts very interesting so far and am happy for the chance to jump in here in our own backyard.

While a lot of questions remain unanswered as to what a religious perspective for corporate law would mean, I want to separate out some thoughts based on the divide between the corporate entity and the individual.  Much of religion focuses on the individual:  what the duties and obligations are for an individual in serving her faith; the relationship between the faithful person and God; and the relationship between the faithful person and God's other creations.  Here, we can use the lens of faith to remind us that individuals make decisions based on other considerations besides rational choice; homo economicus is not as one-dimensional as he might seem.  Many make decisions based on other principles, whether they ascribe those principles to a particular religion or philosophy or not.

However, much of the corporate social responsibility dialogue focuses on the corporation (or other business entity) as a super-individual.  One theory might be that the corporation as entity should reflect certain values and make choices based on certain principles, just as a collection of individuals should.  However, we live in a land of heterogenous principles.  One CEO might think that the corporation she controls should strive to bolster fair trade, even if the end results are less profits.  Another CEO might think the corporation she controls should use retained earnings to fight proposed legislation legalizing behaviors her religion tells her are immoral.  Sorting becomes difficult for like-minded shareholders.  Sorting based on profits was much easier!

A third perspective would be to analyze the capital market as a whole from a religious perspective.  Let's leave that for another time.

This week I heard of a unique combination of the first two perspectives.  I am always on the look out for good BA case histories, and heard the story of Stanley Tam and U.S. Plastic.  (Here is a video from the Generosity Book website about him.)  This may be an old story, but it's the first I've heard of it.  When Stanley began the company decades ago, he decided to "make God his senior partner."  He finally convinced an attorney he was serious, and so he transferred 51% of the corporation to a religious foundation.  Therefore, 51% of the profits went to the foundation each year.  Literally tens of millions of dollars were used in this way.  A decade or so go by, and Stanley feels God urging him to become an employee of God.  So, he transfers the remaining 49% of the profits to the foundation, and he took only a modest salary.  The foundation has an old-line mission:  converting souls around the world to Christianity.  Anyway, according to the website,  U.S. Plastic does not seem like a tiny operation.

Of course, U.S. Plastic is not a publicly-held corporation and in fact seems to have only had two shareholders, Stanley and the foundation, in its history.  As an investor, would you purchase shares (publicly-held or privately-held) in a corporation owned 51% by a charitable foundation?  Would the purpose of the foundation matter to you?  Would you feel differently owing publicly-traded shares in a corporation owned 51% by a charitable foundation with values you disagreed with than owing shares in a company owned 51% by a person you disagreed with?  If the return on your investment were good, would you care either way?

I saw a writer describe Stanley Tam as a "Christian entrepreneur."  What is a Christian entrepreneur?

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