The University of Chicago Law School Faculty Blog

Brian Leiter: "Moral Skepticism and Moral Disagreement: Developing an Argument from Nietzsche"

Over at On the Human, a project sponsored by the National Humanities Center, Brian Leiter has been invited to post on the subject of "Moral Skepticism and Moral Disagreement: Developing an Argument from Nietzsche." The first few paragraphs are reproduced here, but we encourage to head over and read the entire article.

By “moral skepticism,” I shall mean the view that there are no objective moral ‘facts’ or ‘truths.’  Moral skeptics from Friedrich Nietzsche to Charles Stevenson to John Mackie have appealed to the purported fact of widespread and intractable moral disagreement to support the skeptical conclusion. Typically, such arguments invoke anthropological reports about the moral views of exotic cultures, or even garden-variety conflicting moral intuitions about concrete cases (such as abortion or the death penalty).  How, it is claimed, could such disagreements persist if there were really objective moral facts? Nietzsche, I will argue, suggests a different kind of argument from moral disagreement that deserves more attention than it has received to date.

Nietzsche calls attention not to “ordinary” or “folk” moral disagreement, but rather to what should be the single most important and embarrassing fact about the history of moral theorizing by philosophers over the last two millennia:  namely, that no rational consensus has been secured on any substantive, foundational proposition about morality. Is the criterion of right action the reasons for which it is performed or the consequences it brings about? If the former, is it a matter of the reasons being universalizable, or that they arise from respect for duty, or something else? If the latter, is it the utility it produces or the perfection it makes possible?  If the former, is utility a matter of preference-satisfaction (as the economists often believe) or preference satisfaction under idealized circumstances—or is it, rather, unconnected to the preferences of agents, actual or idealized, but instead a matter of realizing the human essence or enjoying some ‘objective’ goods?  And perhaps a criterion of right action isn’t even the issue, perhaps the issue is cultivating dispositions of character conducive to living a good life.  And here, of course, I have merely canvassed just some of the disagreements that plague Western academic moral theory, not even touching on non-Western traditions, or radical dissenters from the mainstream of academic moral theory, such as Nietzsche himself.

Notice, too, that the disagreements of moral philosophers are amazingly intractable.  Nowhere do we find lifelong Kantians suddenly (or even gradually) converting to Benthamite utilitarianism, or vice versa.   Nietzsche thus locates disagreement at the heart of the most sophisticated moral philosophies of the West, among philosophers who very often share lots of other beliefs and practices.  Yet what we find is that these philosophers remain locked in apparently intractable disagreement about the most important, foundational issues about morality. This persistent disagreement on foundational questions, of course, distinguishes moral theory from inquiry in the sciences and mathematics, not, perhaps, in kind, but certainly in degree.  In the hard sciences and mathematics, intellectual discourse regularly transcends cultural and geographic boundaries and consensus emerges about at least some central propositions.  How to explain the failure of moral theory to achieve anything like this?

Read the rest of the post at On the Human.

Federalist Society Honors Todd Henderson with Paul M. Bator Award

The Federalist Society has posted a short video on its YouTube channel of Assistant Professor of Law M. Todd Henderson accepting the 2010 Paul M. Bator Award (presented by Chicago 3L Prerak Shah). The award is given annually to "a young academic (under 40) who has demonstrated excellence in legal scholarship, a commitment to teaching, a concern for students, and who has made a significant public impact." The video is embedded below, and you may also wish to read the Law School's news item regarding the announcement of the award back in October.

Student Blogger - Adaptive Preferences and the Deliciousness of Equal Rights

A Thirsty fox once saw some fine
Ripe grapes that hung on a tall vine
“Just what I’m longing for!” cried he,
And sprang to get them eagerly.
Alas! the clusters hung so high,
He could not reach them. By and by,
Finding his efforts all in vain,
His longing turned into disdain;
“They’re only fit,” snarled he, “for Apes.
What do I want with sour grapes!”

- The Hereford Aesop

A prominent argument against a moral framework oriented around preference satisfaction is that preferences are prone to distortion due to one’s situation.  The fox, asked about his preference for grapes at the end of his efforts-all-in-vain, reports an affirmative distaste for them.  A welfarist, it is argued, who sought the best allocation of fruits among the attendees at the forest animal cocktail party, would find nothing wrong in allocating no grapes to the fox, based on this revealed distaste.  So the fox is deprived of grapes he doesn’t want, so what? 

A non-Aesop example of this phenomenon—commonly termed “adaptive preferences”—might be the case of women who have become accustomed to life in a culture that subjects them to systematic oppression.  What response is appropriate if these women report that they have no preference for greater autonomy or more equal rights? 

Professor David Weisbach, speaking with the Law & Philosophy Workshop, argued that phenomena that look like adaptive preferences can readily be explained within the welfarist framework as stable preferences under changed circumstances.  In general, this looks a lot like learning, a phenomenon for which the welfarist has developed analytical tools.

Citizens United: A defense

I’m delighted to respond to Nell Minow’s thoughtful and interesting testimony on the Citizens United case. Ms. Minow, an alumna of the Law School, is one of the nation’s leading authorities on matters of corporate governance. We at the Law School are proud of her work and to call her one of our own. But, in the spirit of the Law School, I won’t let this admiration get in the way of what I hope will be a fierce argument of ideas.

Let me say at the outset, some of my prior beliefs. First, I believe in the marketplace of ideas and think that more speech is generally better than less speech. I believe the Founders shared this belief and enshrined it in the “no law” component of the First Amendment. I believe this is especially true for speech about politics. Why else would we allow the Nazis to march in Skokie? Other countries don’t let Nazi’s march because they (rightfully) view their ideas as repugnant. But we let them march. We do so because we are more confident in our citizens’ ability to know right from wrong, to look beyond rhetoric for substance, and to be able to weigh competing claims of truth. If we didn’t trust the people to make decisions based on all available information, if we didn’t trust the people to be able to filter speech according to its source and content, if we didn’t trust the people to know what is good for them, we wouldn’t let the Nazi’s march. But we let them march.

Second, I believe that we should view extensions of government activity under a presumption of error, especially where there is no evidence of a market failure or where the case for government regulation is suspect, say because of the potential for an incumbency bias or the possibility of abuse by the forces of totalitarianism. The control we have over our government, which, after all, has a monopoly on legal physical violence, is tenuous and something that requires constant vigilance. Giving incumbent politicians the ability to write rules that will make it more likely they will be reelected is something that should be done only, if at all, in the face of overwhelming evidence of the inability of citizens to make sensible political decisions in the absence of these rules.

Third, I believe that people generally want to restrict “corporations” in the abstract from influencing politics, a belief that is born out by recent polling data showing about 70% of people disagree with the result in Citizens United. In other words, if we voted on Citizens United, I think we would have voted the other way. As I describe below, I do not think this should matter. Based on the first two priors, I think the Court got the case right, and that its countermajoritarian instincts here are a sign of strength in the decision, not weakness.

Here are some thoughts about the case and its aftermath.

First, I think it is amusing how the case is perceived on both sides of the political aisle. Political commentators on the Left have said the case has “more dire implications than Dred Scott” and that “within 10 years every politician in this country will be a prostitute.” Or take this zinger from Justice Stevens’s opinion: “The Court’s ruling threatens to undermine the integrity of elected institutions across the Nation” and “do damage to this institution” as well.

The law that was struck down was passed in 2002: The Bipartisan Campaign Reform Act. It was upheld against a facial challenge in a 2003 case called McConnell, which was based on a precedent from 1990, called Austin. So pick your time period, pre 2002, pre 1990, whichever. Were all politicians prostitutes of corporate interests, whatever that is, in 1989?

Or, looking at the issue another way, does the fact that the conduct permitted by Citizens United was legal in 26 states prior to Citizens United, suggest that politicians are hopelessly corrupt in over half our states? What about the fact that prior to the case, companies, unions, and advocacy groups and other agglomerations of individual interests that chose the corporate form could do exactly what Citizens United allows them to do if the speech was funneled through “separate segregated funds,” commonly known as Political Action Committees? The belief in disaster must be based on a claim that when corporations or unions can fund political speech directly, from so-called treasury funds, instead of indirectly, the flood gates will open and companies will spend much, much more on politics. This is a claim about how corporations act that is highly suspect, a point I will return to in a moment.

Moreover, what about all the money the so-called special interests spend on lobbying members of our legislatures? The campaign finance laws say nothing about this, and which is more likely to influence public policy creation, a drug company running an ad in New Jersey 30 days before the election telling citizens that Senator Henderson is a Marxist who wants to nationalize drug development or that same company spending millions on lobbyists to jawbone existing legislators about the virtues of our current system?

A final point about the hysteria: Do critics of more political speech have such little faith in the people to make decisions that the inevitable consequence of more information about politics will be to bias it in a socially negative direction? Was it really the case that 2 U.S.C section 441(b), the law at issue in the case, is all that was preserving our democracy? I for one have more faith in the strength of our Union and the wisdom of the people than to think that the byzantine structure of federal election law is all that distinguishes American politics from that of the Ukraine or Nigeria. Even if you believe, as many do, that the average corporation is analogous to the National Socialist party, this does not mean we must necessarily regulate their speech. Remember, we let the Nazis speak.

On the Right the fans are just as simple minded. An op-ed in the Wall Street Journal after the decision argued (lamely) that Citizens United is a key victory for business in the battle to reduce the influence of trial lawyers. The unstated suggestion is that companies will give more money and this is a good thing. This is highly suspect, and I suspect that businesses are not in favor of the decision. Every penny spent to influence law is a penny not spent to pay managers, hire workers, innovate, or make shareholders wealthy.

Campaign finance laws can be thought of as a solution to a simple collective action problem: every firm would prefer not to pay politicians not to treat them badly, but none individually have an incentive to refrain from doing so absent collective agreement of the same. An obvious solution to the collective action problem is an agreement among firms to refrain from spending on politics. But this agreement would be illegal under our antitrust laws. Campaign finance laws may be a rough substitute. (Note the irony that laws restricting speech are necessary because of other laws prohibiting firms from acting rationally in their self interest.)

The zero-sum game aspect of corporate giving can be seen by looking at the donations by businesses in the 2008-2009 election cycle. Business corporations gave $1.96 billion to political campaigns, 50.6% to Republicans, 49.4% to Democrats. They play both sides, making claims of Citizens United meaning more corporate influence or better for Republicans somewhat fanciful.

While we are on the subject of partisanship, it is interesting to compare business giving with that by the other major corporate contributors – labor unions, specifically public-employee unions. Unions donated $674 million in 2008-2009 (about 1/3rd of what businesses gave), but they gave overwhelmingly to Democrats (92% to 8%). The net contributions from “corporations” were $1.6 billion for Democrats and $1.0 billion for Republicans. The conservative majority of the Court hardly gave Republicans a gift, assuming these ratios continue when the rules are liberalized across the board, and we have no reason to believe they won’t be. (For reference, one candidate, our president, raised nearly $1 billion in donations from individuals in that year.)

So it is not at all clear that this case will make things worse or that it favors one political party or the other. It is not even clear that it favors things corporate or business over things uncorporate. After all, there are corporations on the side of almost all issues, especially when we remember that the ACLU, NRA, Sierra Club, AARP, Citizens United, and others are corporations too. Are those anti-corporate readers out there afraid of all of them or just some of them? If you like the ACLU and the Sierra Club, but not the NRA and the AARP, and as a consequence want to ban the speech of the former and not the latter, this is the road to totalitarianism. The Supreme Court is adamant that restrictions on speech cannot be based on content. Tolerating the speech of those we disagree with is one of our most sacred core values.

This case is about just this kind of toleration and the threat of unchecked political power. To see this, consider this passage from the Court in Citizens United:

“The law before us is an outright ban, backed by criminal sanctions. Section 441b makes it a felony for all corporations—including nonprofit advocacy corporations—either to expressly advocate the election or defeat of candidates or to broadcast electioneering communications within 30 days of a primary election and 60 days of a general election. Thus, the following acts would all be felonies under §441b: The Sierra Club runs an ad, within the crucial phase of 60 days before the general election, that exhorts the public to disapprove of a Congressman who favors logging in national forests; the National Rifle Association publishes a book urging the public to vote for the challenger because the incumbent U. S. Senator supports a handgun ban; and the American Civil Liberties Union creates a Web site telling the public to vote for a Presidential candidate in light of that candidate’s defense of free speech.  These prohibitions are classic examples of censorship.”

Let me reframe the Court’s holding: the government may not ban political documentaries in the 60 days before an election. This is the end of democracy? The government tried to ban speech about government! Imagine a Palin Admistration banning the Michael Moore movie “Dumb as the Average Moose,” before the 2016 presidential election? How would those on the Left react to that decision?

The Solicitor General admitted during oral argument that the logical extreme of the law would allow the government to ban book publishers, who happen to have chosen to organize their economic affairs as corporations, from publishing political books before elections. Yes, you read that right. Book banning. This goes to the heart of the First Amendment. Imagine James Madison and Thomas Jefferson traveled to our era and asked about the Bill of Rights. If Citizens United came out the other way, we would have to tell them that virtual child pornography and pole dancing are protected by the First Amendment, but books or documentaries about politicians are not. I’m not suggesting that we limit our constitutional interpretation to a what-would-the-Founders-think analysis or even to the plain text (which, by the way, says Congress shall pass no law restricting the freedom of speech), but if the First Amendment means anything, it means protecting speech about politics.

Of course, one could argue that books or documentaries about politicians are OK, so long as the speaker was you or me or all of us acting together, so long as we didn’t organize as a corporation. But why should the value of political speech be determined by whether the entity doing the speaking or enabling the speaking is a corporation or person, partnership, or sole proprietorship? Or whether the corporation speaking was a “media corporation,” a class of corporations that were exempted from the regulation. So our First Amendment, as previously interpreted, said that the New York Times or Fox News could say whatever they want about politics whenever they wanted, but that the ACLU and Apple could not. I see no basis for this in the text of the Amendment or in common sense. What is the difference between a non-media company and a media company? What if Apple started a newspaper? Could it then speak?  How about a blog? Is that media? Why should Rupert Murdoch get to spend and say what he wants on politics, but not News Corp.? And what is the reason for encouraging businesses that want to speak to choose to organize as partnerships or individuals instead or corporations? Imagine a corporation with one owner – should the corporation not be allowed to speak the same as its sole owner?

One possibility is a concern that when News Corp. spends money on politics, it is spending shareholders’ money, or, depending on your point of view, employees’ money or other stakeholders’ money. This is as true as it is irrelevant. For one, investing is voluntary, and there is no demand for any individual firm’s stock. If you own shares in Exxon Mobil, and it decides to spend $1 million to fund ads supporting Sarah Palin for president, you can convert your shares to cash and buy shares of Apple Computer, which is running ads supporting President Obama’s reelection. The only time this voting with your feet argument doesn’t work is if the conduct causing you to sell also is the cause of a loss of firm value, thus making your shares worth less than they would have been. Given the trivial amounts firms spend or could possibly spend on politics, this is in the world of law-school hypotheticals. (ExxonMobil had political expenditures of about $500,000 in 2008, on profits of nearly $50 billion, or less than 0.001%. We will, of course, have to wait and see how much they spend next year, but, for the reasons I describe below, I’d be shocked if it was orders of magnitude more. Even if they spent 1000 times more, the expenditures would be only 1 percent of profits, something unlikely to move the stock price needle significantly.)

Business corporations exist to make money, and donations to candidates will be aimed in that direction. Insofar as they are, shareholders should be happy, and if they aren’t, they can exert influence by selling their shares. If instead, the claim is just corporate influence, as opposed to this agency costs story, then we are back to puzzles about individual contributions, donations by PACs, lobbyists, and so on. Corporations spend handsomely to lobby politicians, and shareholders don’t complain. Why? Because presumably the lobbying is about increasing firm value – that is, making money for shareholders. Why do we think other forms of political spending would be different?

Moreover, firms are very jealous and protective of their reputations. Do you think Nike is going to risk its brand by spending billions to elect politicians that may offend 49% of the population? And if they do, don’t we have faith in other constraints on such attempts at manipulation? Consumer boycotts, news reports, publicity by non-profits, and so on are likely to cause firms to be quite cautious in their attempts to buy politicians outright.

Finally there is the claim that business are creatures of the state and therefore the state should be able to tell them what to do. This certainly used to be the case, when state legislatures gave businesses permission to do only certain things in return for, well, political contributions and favors. But thankfully we’ve moved past this so-called concession theory. The concession theory is plainly inconsistent with the contractarian model of the firm, which treats corporate law as nothing more than a set of standard form contract terms provided by the state to facilitate private ordering. Limited liability can be created by contract as easily as it can by state diktat, and no matter what, if we have this view of government power, it has no end. Everything exists in some way because of government action or inaction, but that is not the basis of our government. We believe our rights exist not because of the government, but rather the other way around – the government exists to protect our preexisting rights.

Let me close with three final observations.

First, I think the case is interesting in how it reveals the schism on the Court (and in all of politics) between those with faith in experts and those with faith in markets. The campaign finance laws, and the dissenters’ views of elections law, are premised on a belief that we can design rules, no matter how layered and complex, that can be implemented by well-meaning bureaucrats with the result that we can take the money/corporate influence/corruption out of politics and finally create Democracy. These people are uncomfortable with uncertainty and unknown outcomes, and believe we should plan our way to some sort of utopia. The Citizens United majority, on the other hand, seems to have a distrust in experts and regulating natural things out of existence, preferring instead to rely on markets to work toward the optimal state of affairs. Of course, there is a tradeoff between a belief in centralized versus diffuse knowledge, and the question is how much of each. In short, I think the Citizens United majority looked at the elaborate regulatory regime, the relative ineptness of the Federal Election Commission bureaucrats charged with implementing it, and decided to err on the side of the marketplace of ideas.

Second, we should not forget the history of our regulation of corporate speech, which, by the way, survives Citizens United. The first law banning corporate contributions in federal political elections was based in part about the content of corporate speech. The Tillman Act, passed in 1907 is named for Senator Benjamin Ryan "Pitchfork Ben" Tillman from South Carolina, one of the most reprehensible public servants in our history. Tillman argued that, "The negro must remain subordinated or be exterminated," and openly called for the murder of blacks in order to, "keep the white race at the top of the heap." Tillman wanted to restrict corporate speech to reduce the influence of Northern corporations, which were opposed to segregation. We should not condemn restrictions of corporate speech for this reason, but we should remember that the motives behind allegedly idealistic legislation are not always what they seem. Sometimes corporations have good things to say; sometimes they have bad things to say. Telling them they cannot speak prevents us from hearing both during a crucial period before our elections.

Finally, some critics deride the case as “activist” and inconsistent with claims about the proper judicial role made by some of the justices in the majority. Of course the claim of activism is as silly as the claim of courts as simply calling balls and strikes, as the Chief Justice has argued. Some of the Court’s job is calling balls and strikes, but most is about policy. And, some of the best court decisions are countermajoritarian. Consider Meyer v. Nebraska (1923), which dealt with a state law banning foreign language instruction for young children, passed during the anti-German hysteria of World War I. The Nebraska Supreme Court had upheld the ban, writing, “The legislature had seen the baneful effects of permitting foreigners, who had taken residence in this country, to rear and educate their children in the language of their native land.” Oliver Wendell Holmes followed his views about judicial restraint and dissented. But the Court got it right. Activism was essential to preserve our liberty.

In Citizens United, the Court decided that we cannot trust the government to tell us what we should be hearing about our political system. In the view of this corporate law professor, this is a victory for our democracy.

Nell Minow '77 on the Citizens United decision

Yesterday Nell Minow '77 gave the following testimony before Congress.  Prof. M. Todd Henderson has posted a response here.

Hearing on Corporate Governance after the Citizens United Decision
Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises
House Committee on Financial Services

Nell Minow
Editor, The Corporate Library

March 11, 2010

Mr. Chairman, Ranking Member Garrett, and members of the subcommittee, it is an honor to be invited to appear before you to discuss this critically important topic.  Indeed, most Americans would agree that the bedrock of our country’s identity and the core element of its strength and vitality over more than two centuries has been its commitment to the marketplace of ideas, the free, unabashed, unfettered conversation that encourages the expression of all points of view, no matter how outrageous, offensive, crackpot, or subversive.  We recognize that it is exactly these challenges to our notions of received wisdom that force us to be responsive to changing times and better understandings.  The best ideas flourish only when the worst ideas must be separated from them not by censorship but by argument.  The cure for bad speech is not repression but better speech.  If we let all ideas in, ultimately the best ones will survive by being more persuasive.  That can only happen if they must match themselves against the positions advocated by their opponents.

But freedom of speech does not mean that any expression of ideas is permitted.  We do not allow libel, slander, or fraud.  And we all know that, as Justice Oliver Wendell Holmes wrote in Schenk v. US almost 100 years ago, the First Amendment does not protect the right to falsely shout “Fire!” in a crowded theater.  It does not protect the right to incite violence.  We have successfully limited hate speech and pornography.  And we have been very clear that the greatest level of protections apply to political speech because it is there we most need a robust and unfettered conversation.  Commercial speech is not as protected and may be limited, as long as the limits are minimal and justified. 

Increasingly, however, political and commercial speech have been more difficult to distinguish and in the Citizens United decision the Supreme Court treated political speech by commercial enterprises as though it was political speech from people.  The court ruled that corporations and labor unions have the same First Amendment rights as individuals. Thus, any restriction of their freedom to spend unlimited amounts in support of their favored candidates violates the Constitution.  The reasoning is that corporations and non-profits and other groups are merely assemblages of individuals with First Amendment rights.  So, those rights exist whether exercised as individuals or groups. 

In his dissent, however, Justice Stevens noted that corporations "are not human beings" and "corporations have no consciences, no beliefs, no feelings, no thoughts, no desires…they are not themselves members of 'We the People' by whom and for whom our Constitution was established."[1]  He added, “Not only has the distinctive potential of corporations to corrupt the electoral process long been recognized, but within the area of campaign finance, corporate spending is also “furthest from the core of political expression, since corporations’ First Amendment speech and association interests are derived largely from those of their members and of the public in receiving information,” Beaumont , 539 U. S., at 161, n. 8 (citation omitted).”  Dalia Lithwick noted in Slate, “Even former Chief Justice William H. Rehnquist once warned that treating corporate spending as the First Amendment equivalent of individual free speech is ‘to confuse metaphor with reality.’”[2]

If our goal is to preserve the marketplace of ideas, we must make sure it is not tainted by that other marketplace, the marketplace of money. 

And if we are going to give a corporation the First Amendment right of freedom of speech, we had better make sure we understand who it speaks for.

I do not need to remind Members of Congress how virulent corporate spending has made the political process.   You all know that far better than anyone else.  But I can say that the $600 million spent by the financial services industry on lobbying in the decade before the financial meltdown led to the loosening and elimination of regulatory protections that could have mitigated that damage or prevented it entirely.  And I can also say that there is not a single shareholder in that “assemblage” of citizens that make up the corporations who spent that money who supported that result. 

The problem, as always under a capitalist system, is agency costs.  How do we give corporate managers enough authority to create sustainable, long-term returns to investors without giving them so much that they appropriate corporate funds for their own ends?  When a corporation uses general treasury funds to influence a political election, it is the shareholders who are footing the bill. However, real control of corporations rests not with shareholders, but with those who manage them. Therefore, the use of corporate treasury funds will ultimately benefit management rather than the interests of shareholders.

While the decision in Citizens United decision granted corporations a right under the First Amendment to use unlimited resources to influence political elections, it effectively silenced the voice of shareholders. For purposes of political speech, management decides what positions to take on behalf of corporations through their use of treasury funds, and the shareholders are neither informed nor consulted nor given a chance to respond.  The use of secondary entities like trade associations is even more removed from any transparency or oversight. Not only do corporations secretly funnel money for political purposes into these trade associations, they too often use them to oppose the very policies their public statements endorse.

For example, health insurance corporations publicly stated that they supported health care reform while at the same time donating millions of dollars to attack health care reform through the powerful trade group America’s Health Insurance Plans (AHIP). The AHIP then funneled those donations into the U.S. Chamber of Commerce, which used the money for negative attack ads on health care reform. Between $10 million and $20 million was donated to the AHIP by Aetna, Humana, Cigna, UnitedHealth Group and Wellpoint. The AHIP publicly stated that they “continue to strongly support reform” but meanwhile were underwriting tens of millions of dollars of television ads attacking reform. This is a clear example of the divergent interests between principal and agent.  And the fact that we do not know exactly how much money they spent or who it came from is just further proof that there is no transparency or accountability to ensure that the expenditures reflect the views and interests of the investors, those individuals who are supposed to be the ones communicating. 

So problem number one is the lack of disclosure to the current and potential investors in the company. Corporations are currently not required to disclose their political spending in a comprehensive manner. Even the political expenditures that are disclosed are not available to shareholders in any central, accessible location. The majority opinion in Citizens United states that “[w]ith the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters.” But it is not.  Indeed, often directors of the company do not know how this money is allocated.  That should be this committee’s first area of focus.  We need clear, accessible, comprehensive disclosure without loopholes and we need every member of the board to sign their names to show that they have been fully informed and have approved the expenditures.  I note that the SEC's Investor Advisory Committee, through the Investor as Owner Subcommittee chaired by Dr. Stephen Davis, will be seeking investor feedback on a formal recommendation to the SEC as to its potential response to the Citizens United decision. The subcommittee will discuss this at its meeting on March 30, and I hope that the committee staff will coordinate with them.  My top priority for this project is that they find a way to take the greatest possible advantage of current technology to make sure that all of the information about what and how much money is spent on which issues and candidates available with total drill-down and tagging.  If the cure for bad speech is better speech, this is where we make sure that better speech will happen.

Problem number two is that even if shareholders did know how their money is being spent and what positions it is being used to support, there would be no way for them to respond effectively to provide necessary direction.  Under certain limited circumstances, shareholders can be allowed to submit non-binding proposals to ask for information about political expenditures, and some of these proposals have received substantial support, especially considering that even a majority vote is precatory only.  We need clear authority for shareholders to be able to submit binding resolutions on the disclosure and direction of corporate funds used for political purposes, whether lobbying or support of – or opposition to – candidates or issues, so that a majority vote is controlling.

It is also important to emphasize that under current law, it is close to impossible for shareholders to oppose director candidates nominated by the company.  Under current law, director candidates need not receive a majority of votes cast to serve on the board.  Indeed, at this moment more than 80 directors are serving on public company boards despite election results that showed a majority of votes cast were opposed.  We need clear Congressional authority for the “proxy access” rule to permit candidates nominated by shareholders to be included on the company’s proxy – the one paid for by shareholders.  If shareholders cannot replace directors, they cannot be truly represented and cannot delegate legitimate authority for political spending.

The third problem, perhaps the knottiest, is the problem of intermediaries and the way they make it possible for corporate executives to evade even the limited disclosure requirements that currently exist.  We must make sure that corporations do not hide their political spending by use of second- and third-party entities like trade associations and “astro-turf” fake grassroots organizations with populist-sounding names like “Citizens for a Better Tomorrow.”  And non-US sources can also allocate funds to these intermediaries. 

The Chamber of Commerce, which was recently found to have overstated its membership by 900%, has been particularly susceptible to this kind of manipulation.  Now claiming only 300,000 members rather than the 3 million it had previously trumpeted, tax filings show that just 19 donors contributed one-third of its 2008 income.  But the Chamber does not disclose any of the contributors’ names.  How can corporations speak for the assembled individuals if we do not know where the money goes.  We do know, because Chamber of Commerce CEO Tom Donahue has said so publicly, that they are spending $100 million “free enterprise” campaign to defeat any meaningful financial reform.[3]

Where is that money coming from? Who does it benefit?  Just as corporate executives quietly fund positions contrary to those they publicly endorse, the Chamber adopts policy positions without consulting its own board, much less its membership.  It had several defections last year over its climate change policy, which was essentially a “climate is not affected by anything we do” policy.  The Chamber of Commerce has hijacked a once-respected organization on behalf of executives, not business.  It is the worst enabler for abuse of shareholder assets.  But it is not the only one.  In order to make the majority decision work, the assumptions that crucially underlie it must be made true.  Every penny that is spent on “speech” must be documented and disclosed, whether it is spent directly or through intermediaries.  Just as in other transactions where there is an opportunity for moral hazard and a potential for conflicts of interest, the executives should also have to disclose any potential conflicts and any possible adverse consequences so that investors can properly evaluate their decisions. 

The fourth problem is making sure that once shareholders have the information and the rights necessary to reduce possible abuses from agency costs, we also remove the obstacles to exercising those rights.  The largest category of shareholders, of course, is within the corporations themselves.  Pension funds covered by ERISA manage more than $6.3 trillion in assets, much of it invested in equities.  But they have their own conflicts of interest and no clear statement of fiduciary obligation to vote – plus the collective choice problem that they each must spend 100% of the costs of voting while receiving only a pro rata share of any benefits.  If shareholders are going to evaluate the political expenditures from Company X, we had better make sure that all of the shares held in company X, including those held by its own pension fund and other ERISA funds and their service providers, have the authority and the obligation to evaluate it appropriately.  I hope this committee will invite institutional investors and the regulatory authorities with jurisdiction over them to help create a solution to this problem. 

In his most recent letter to Berkshire Hathaway shareholders, Warren Buffett wrote:

It has not been shareholders who have botched the operations of some of our country’s largest financial institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been “bailed-out” is to make a mockery of the term.

The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.

If corporations have the rights of people, shareholders must be the mind and conscience of that “person” and the ones to decide how those rights are exercised.  They cannot do that without information and the ability to replace the board. 

Finally, there is the fifth problem. The challenge of protecting the free expression of ideas without allowing it to be skewed by diversion of corporate assets would not be so difficult or so important if running for office was not so expensive.  As you know, in the UK Members of Parliament raise as little as a few thousand pounds for their campaigns.  They have public financing and it is a different system.  But we can do better.  I urge the Members of this committee to give careful consideration to the Fair Elections Now Act (S. 752 and H.R. 1826). This measure would enact a voluntary alternative system for financing federal elections, giving candidates the option to run for office on a mixture of small contributions and limited public funds.  I also urge your attention to the other side of the equation.  The reason elections are so expensive is primarily the purchase of television time.  There are some very worthy proposals for free access to television time for political candidates as a requirement for being licensed by the FCC.  There is no way to address the problems of money in politics, even with optimal corporate governance, without looking at the reason that money is so important. 

Almost 100 years ago, Justice Louis Brandeis famously wrote in Harper’s, “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”[4] He was writing about corporate abuse.  These days, he might say that the best police officer is the Internet and tagging.  We count on you to make sure that this cop is on the beat.

Thank you again for allowing me to comment and I look forward to your questions.

Notes:

[1] From Justice Stevens’ dissent:
 
The basic premise underlying the Court’s ruling is its iteration, and constant reiteration, of the proposition that the First Amendment bars regulatory distinctions based on a speaker’s identity, including its “identity” as a corporation. While that glittering generality has rhetorical appeal, it is not a correct statement of the law. Nor does it tell us when a corporation may engage in electioneering that some of its shareholders oppose. It does not even resolve the specific question whether Citizens United may be required to finance some of its messages with the money in its PAC. The conceit that corporations must be treated identically to natural persons in the political sphere is not only inaccurate but also inadequate to justify the Court’s disposition of this case. 
 
In the context of election to public office, the distinction between corporate and human speakers is significant. Although they make enormous contributions to our society, corporations are not actually members of it. They cannot vote or run for office. Because they may be managed and controlled by nonresidents, their interests may conflict in fundamental respects with the interests of eligible voters. The financial resources, legal structure, and instrumental orientation of corporations raise legitimate concerns about their role in the electoral process. Our lawmakers have a compelling constitutional basis, if not also a democratic duty, to take measures designed to guard against the potentially deleterious effects of corporate spending in local and national races.
 
…As we have unanimously observed, legislatures are entitled to decide “that the special characteristics of the corporate structure require particularly careful regulation” in an electoral context. NRWC , 459 U. S., at 209–210….Campaign finance distinctions based on corporate identity tend to be less worrisome, in other words, because the “speakers” are not natural persons, much less members of our political community, and the governmental interests are of the highest order. Furthermore, when corporations, as a class, are distinguished from noncorporations, as a class, there is a lesser risk that regulatory distinctions will reflect invidious discrimination or political favoritism. (footnote omitted)

[2] http://www.slate.com/id/2242208/

[3] They had to change the original focus from “capitalism” after focus groups reacted negatively.  You might think they would respond by asking their members to demonstrate why “capitalism” was a good thing instead of just changing the vocabulary.

[4] http://www.law.louisville.edu/library/collections/brandeis/node/196

Student Blogger - Law and Morality in War

It is several hours into the stand-off. Two gun-toting bank robbers have barricaded themselves in a downtown bank, along with a single hostage. Visibly desperate, one robber shouts out to the police that he intends to kill his hostage, holding a gun to her head. Two police snipers report to the police commander that they have clear shots just as the second robber raises his weapon toward the hostage. The commander authorizes the shots, and both robbers are killed.

Traditionally, under the criminal law, this situation raises few issues. The police exercised a justified use of force. However, had the criminals opened fire and killed a hostage or a police officer, they would be criminally liable. For Professor Jeff McMahan, this asymmetry in treatment of police and criminals represents an important correspondence between the criminal law and morality.

McMahan finds it troubling that the modern law of war fails to reflect this correspondence with morality, particularly in the fact that combatants in war are treated symmetrically, that is without reference to the moral justification of a combatant’s cause. McMahan discussed this divergence between the law of war and the morality of war with the Law & Philosophy Workshop.

Student Blogger - Law and Economics Workshop: What Accounts for Trial by Ordeal’s Popularity?

Trial by ordeal—it evokes images of a darker time, where social outcasts drowned amidst accusations of “Witch!” or carried hot coals to clear their names. But this week’s Law and Economics brings a novel twist to an old subject with Professor Peter Leeson’s paper, Ordeals, available to read at http://www.law.uchicago.edu/files/files/Leeson.pdf.

What It’s About

To a modern secularized society, trial by ordeal may seem particularly insensible as a method of adjudication. It forces the innocent and the guilty alike to undergo the cost of an ordeal and, short of actual divine intervention, the outcomes won’t have much correlation with actual guilt or innocence. However, Professor Leeson takes the unique position that, for a highly religious or superstitious society, an ordeal system may produce more accurate results in adjudication by leveraging people’s strongly held beliefs to elicit confessions and improve factfinding. In other words, ordeals may have simply been the best option for a society where more sophisticated methods of evidence-gathering do not exist.

Here’s how it works. Suppose priests could manipulate the results of trials by ordeal. Professor Leeson notes that priests had discretion to lower the temperature of the hot iron as they prepared the ordeal, to pray a longer invocation to allow boiling water to cool, to douse an innocent suspect with cold holy water, or to decide arbitrarily when the accused had sunk far enough in the water to prove his innocence in a water-dunking ordeal. Suppose, also, that priests recognized themselves as “agents” of God and exercised this discretion to sort out people they believed were innocent from those they believed were guilty.

Student Blogger - Winter WIP: Eric Posner and Omri Ben-Shahar Discuss the "Right to Withdraw"

Most Americans, after buying a product from a store, expect that they will be able to return it -- at least within a reasonable amount of time and assuming the item is undamaged. This instinct is borne out by the policies of most retailers, who generally allow returns of most items within a set time period, for a refund, exchange, or store credit. In Europe, this is a right explicitly protected by contract law. In the US, by contrast, the rules vary from state to state, but in general there is no legally protected right to return an item. In his latest WIP talk, Professor Eric Posner presented a paper he and Professor Omri Ben-Shahar are working on regarding what they call the "right to withdraw" from these contracts (alas, there are sound prudential reasons for not titling the proposal the "right of return").

The core insight Posner and Ben-Shahar develop is the function allowing the return of an item serves in terms of letting consumers assess an item's value. For some purchases, such as home or office furniture, it is very difficult to determine whether the purchase is worth the money without some time experiencing it in your home. You need to know if the chair is comfortable, or if the futon matches your living room color scheme. Allowing consumers to return a product makes them more willing to buy, because they know they'll have the opportunity to determine with greater certainty the actual value the product holds to them.

There is, of course, a story from the seller's side as well. Sellers want buyers to feel comfortable purchasing their products, but they also have to worry about depreciation if the goods are returning after weeks of use. The speed at which depreciation occurs varies from product to product -- perishable items depreciate quickly, permanent furnishings more slowly. Some goods, due to cultural taboos, lose essentially their entire resale value upon being used once, which is why even stores which have generally lenient return policies won't let you return a casket. Other goods, such as music or electronic media, are vulnerable to copying, and thus returns are usually prohibited after the consumer opens the box.

The fact that most stores allow returns, and most consumers expect some reasonable ability to return products they buy, counsels turning some right of withdrawal into at least a default rule, to insure that outlier stores don't exploit consumer expectations. But the content of such a rule is more complicated. Ideally, it should maximize the ability of the consumer to gain information about the value of the product, while minimizing the risk posed to sellers via depreciation. In theory, consumers could just have an unlimited right of return subject to paying the value of any depreciation. But depreciation is extremely difficult to measure objectively. So, as an alternative, Posner and Ben-Shahar propose using time as a proxy -- as more time passes (with a rate that varies depending on the type of good), the item will be presumed to have depreciated in value more. This prevents consumers from externalizing the costs of excessive inspection and deliberation, while still allowing them some ability to back out of the contract if the goods don't turn out to be as valuable to them as they initially estimated.

The second part of the paper looks for traces of this sort of doctrine in American law. And they find one potential source in the famous ProCD v. Zeidenberg case, reviled by the bulk Contracts professors and students alike (albeit for different reasons). ProCD held enforceable additional contract terms contained "inside the box" of a computer that was purchased remotely (and were a black box to the buyer at the time he purchased the good). The 7th Circuit concluded that giving all the terms over the phone would have been impracticable, hence, the "acceptance" of the contract only came after the consumer opened the box and read and assented to the terms. This, Posner and Ben-Shahar argue, is essentially a form of the right to withdraw -- once the consumer receives the goods and finds out more information about them (here, certain contractual terms he may find overly onerous), he has, according to the court, the legal right to return the item as a matter of contract law.

Another parallel comes from the right to reject non-conforming goods, codified in the UCC. Though there are differences, two key assumptions overlap with the idea behind a right to withdraw. The first is the assumption that the buyer might not have important information regarding the quality or kind of the goods until they actually arrive at her doorstep. The notion that there is some information about the product that the buyer is unlikely to be able to obtain until after they are in her presence is similar to a right of withdrawal. Second, the UCC conditions rejection on it occurring within a reasonable amount of time after the buyer discovers (or should have discovered) the defect, and before the goods have had a change in condition (that isn't caused by the defect). This rule is designed to protect the rejection rule from being used to exploit sellers and put them at too much of a disadvantage vis-a-vis their customers. The rule effectively creates a trade-off similar to the one Posner and Ben-Shahar recommend for returns: the longer the good is in the possession of the buyer, the greater the defect necessary to justify returning it.

Student Blogger - Winter WIP: Dixon Presents on Partial Constitutional Amendments

The American constitution is notoriously difficult to amend. If you want the cold, hard, figures, the sobering statistic for a prospective constitutional amendment is less than a .25% success rate: 27 successes in over 10,000 attempts. This figure is far beneath the amendment rates for other countries around the world. And the result is that many amendments that command majority, or even super-majority, support, do not end up clearing all the hurdles of Article V (think of the ERA, flag burning, or school prayer amendments).

The result is a constitution that runs a perpetual risk of being out of sync with majority perspectives. To resolve this, while still maintaining the countermajoritarian ethos that motivated the difficult amendment process to begin with, Professor Rosalind Dixon proposed the idea of "partial constitutional amendments", which would be given persuasive but not controlling authority by the courts. This proposal, though novel, has some parallels in the constitutional jurisprudence of other countries (such as Canada and India), whose courts tend to see themselves in more of dialogic relationship with their respective legislatures.

A partial constitutional amendment is simply an amendment that achieves majority support, but for one reason or another does not clear all of the requirements of Article V. It might not achieve a supermajority, or it might not achieve ratification in a supermajority of states. These amendments should be seen as akin to persuasive authority -- the further along they are in the process, the more persuasive they would be. The idea is to provide a mechanism for constitutional updating that is respectful of the Article V process, has a clear democratic hook beyond personal judicial preference, and allows for more rapid synchronization between democratic preferences and constitutional doctrine.

Professor Dixon is operating within a tradition of thought holding that courts generally are relatively responsive to sustained democratic preferences, at least eventually. However, they also labor under a desire to not be seen as making a decision "under fire", that is, solely writing a decision to placate democratic outrage at a prior (presumably now-overturned) precedent. The result is that constitutional updating occurs fitfully and perpetually under a shroud of potential illegitimacy.

Consider the reaction to and eventual reversal of Hammer v. Dagenhart, which struck down a law forbidding the transport through interstate commerce of goods made with child labor. Decided in 1918, the decision met with immediate outrage and an attempt at an Article V override. The effort eventually failed, but it did get through Congress, and was ratified by 20 states within a decade of its proposal. Meanwhile, Congress issued several new laws targeting child labor, which were successively struck down by a recalcitrant court in 1919 and 1923. The court managed to maintain its resistance for 20 years beyond Hammer's decision date. The first chink in the armor came with West Coast Parrish in 1937, but Hammer wasn't formally overruled until 1941.

Adopting a policy of partial constitutional amendments could potentially shave valuable time off this process. By providing a formal avenue by which congressional responses to unpopular judicial decisions could be given weight and authority by the court, the partial constitutional amendment would help dissipate some of the perceived legitimacy concerns where courts seem like they might be too beholden to the democratic branches. In a sense, it formalizes a modernizing process in the judiciary that many scholars believe exists, but few judges are comfortable admitting to.