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As Vice Chancellor, Chancellor, Chief Justice, and recidivist law review author, Leo Strine has had much to say about the often-frustrating effort at corporate behavior modification. One point he makes very insistently is that pursuant to their state-granted charters, corporations are authorized to take part only in lawful business, not any profitable business. Respect for life-giving law is thus a necessary corollary of good corporate citizenship. But good citizenship is so hard to instill, which irks him. An angry display of this is Strine’s Delaware Supreme Court dissenting opinion in City of Birmingham Retirement System v. Good, involving Duke Energy’s shameless toxic chemical dumping, which led to large penalties. In contrast to the usual Caremark claim that the board unwittingly facilitated legal wrongdoing by not putting into place a monitoring system to stop it, here plaintiff charged knowing complicity by the board with efforts to conceal and continue the wrong, in cahoots with allegedly corrupt state regulators. Defendants sought dismissal for failure of the plaintiff to make demand on the board, which as the case law had developed, required particularized facts giving rise to a doubt that most of the board members had reason to fear unexculpated liability. The majority read the factual allegations as falling short of bad faith or willing acquiescence and dismissed the case under the demand-required rubric. Believing instead that there was enough evidence for this stage of the proceeding, Chief Justice Strine made his feelings amply known:

It may be that after the daylight of discovery shines for some time, the rancid whiff that arises from the pled facts dissipates and turns into the bracing freshness of a new Carolina day. But, without that, the off-putting odor will linger and so too will rational suspicions that the defendants caused the smell.

My contribution to this festschrift focuses on the cultural dimension to both the commission and prevention of corporate crime and the judicial response in Caremarktype cases, inspired by some of Strine’s recent post- judicial writings. Corporate case law in Delaware exhibits something of an acoustic separation between holding and dicta, so that judicial opinions frequently chastise the officers and directors charged with wrongdoing even as they make amply clear that no punishment will be handed out. Mel Eisenberg offered up this observation long ago, and Ed Rock famously elaborated on how the shaming function of this judicial rhetoric works, via morality tales in the cases before it that call out the greedy and the disloyal. The assumption is that lawyers gather, interpret, and then impart these narratives to their clients, which generates normative improvement in corporate governance. This is a form of “soft law.”

I have never been quite convinced that soft law works as neatly or as frequently as just described. But I do believe that judges who take advantage of this separation want to be in a cultural conversation with the lawyers reading the cases as to their own spheres of influence, taking advantage of the distinctive norms of the legal profession and (crucially) lawyers’ realization that the indeterminate nature of Delaware corporate law found in both holdings and dicta is an immense and profitable privilege. They listen, carefully, even to dissents. Judges with the right reputational capital can stay settled in this role even after retirement. This is one source from which soft corporate law emerges—aspirational demands not legally enforceable (or above and beyond the legally enforced).

My essay takes as a start Strine’s insistent attitude toward law- abidingness in corporate law and corporate governance as expressed in two recent law review articles. The first (written with two junior co-authors) is Caremark and ESG, Perfect Together, which sends a very clear-sounding message on the connections among law, ethics, and social responsibility. In the second, Strine has collaborated with my colleague Chris Brummer on Duty and Diversity, to address the fraught subjects of diversity, equity and inclusion in corporations. Both articles draw from a mutually reinforcing mix of hard and soft law. Both also invoke “culture” as playing a key explanatory role but stop well short of explaining how or when. So, my contribution here is to move the study of corporate culture a few steps forward by showing its ability to frustrate messages of law-abidingness in many corporate settings.

The expressive power of soft law is open to question for many possible reasons. Judges, scholars, and others interested in corporate crime have offered many explanations, most tending toward conventional agency costs, which implies some kind of in personam greed or corruption that sneers at voluntary compliance. An alternative of increasing academic and practical interest is a cultural explanation: the presence of a deeply-rooted belief system that somehow deflects or distorts compliance messages to weaken internal legal controls and restraints. While that seems to be a difference of opinion between economists and sociologists, that methodological distinction has all but collapsed. As put in a recent paper on corporate cultures by economists Gary Gorton, Jillian Grennan, and Alexander Zentefis, the agency cost paradigm “ignore[s] the possibility that managers are essentially well-intentioned people operating in a complex and uncertain environment.” While cultural accounts are notoriously hard to test rigorously, economists like Gorton et al. have made fascinating progress in that direction. To focus in, this essay addresses what we are learning about the nature and source of so-called “risk cultures,” i.e., those with norms celebrating aggressive risk-taking and denigrating the appearance of excessive caution. Shifting from greed to risk perception as a way of understanding some kinds of corporate cultures require different ways of structuring and communicating legal messages, which will bring us right back to Strine and his soft law messaging.

Publication Citation

University of Pennsylvania Journal of Business Law, Vol. 24, No. 4, Pp. 819.