Monday, 31 March 2003
112 Yale L.J. 1757 (2003)
Our story is about the production and consumption of racial prototypes. The regulatory thrust of homogeneity creates both a demand for, and a supply of, specific racial prototypes--outsiders who can fit within predominantly white workplace cultures without "disturb[ing] the equilibrium of familiarity and sameness." This Review began by suggesting that part of the reason this dynamic is obscured in CRT is because CRT has not paid attention to the interpersonal contexts--the micromarkets (e.g., employer/employee identity transactions)--in which race is produced. This Conclusion returns to the macro to make two points. The first links the micro discussion of prototype production in the workplace to the broader societal context; the second suggests some other areas of interest where the CRT/L&E approach might shed new light.
First, the problem we have described is part of a larger problem that Philomena Essed and David Goldberg refer to as "cloning cultures," which they define as the "broad social(ly manifest) dispositions to reproduce sameness." They argue that "a critical account of systems of preference for sameness--from kinship to nation, from aesthetics to production and consuming--can be revealed as contributing to the reproduction of systems of social distinction and privilege." Our aim has been to provide a concrete indication of how such a system manifests itself in the context of the workplace.
But Essed and Golberg's paper suggests that there is a more problematic implication of our project: the social manufacturing of racial palatability--one body at time. Put differently, our argument suggests that racial difference is being commodified and cloned in the workplace. Articulated thus, the homogeneity incentive operates as the driving force for a kind of cloning. Outsider performances of racial palatability are the raw materials from which homogenized outsider identities are manufactured.
Yet there is an important difference between the cloning problem we identify and that upon which Essed and Goldberg focus. For the most part, Essed and Goldberg are concerned with "problematiz[ing] the systemic reproduction of white, masculine homogeneity in high status positions," a reproduction that causes "exclusion along racial, ethnic, gender, sexual, class and other structural demarcations." Their analysis does not account for the "diversity constraint"--that is, the need for institutions (and, presumably, the nation) to maintain some degree of difference. With the diversity constraint in mind, the cloning issue is no longer just about reproducing insiders. One has to think about the production and cloning of outsiders as well. Our Review focuses on the incentive for employers to create a market for, and to facilitate the cloning of, racially palatable outsiders. For institutional legitimacy and antidiscrimination reasons, the cloning market cannot produce, or transact in, only white clones.
Nor would employers want to do so. One reason why racial palatability is valued is that the racial bodies that produce it remain intelligible as nonwhite. To the extent that racial palatability takes the form of passing, it engenders white racial anxieties. To be valuable, the outsider prototype must be recognizable as a "copy." It must not pass for, but only approximate, the "real."
The second macro implication of our thesis relates to the general critique of prototypes. Here, we suggest that analysis of the microdynamics of workplace racial discrimination might be extended to analyze other problems. In this context, one can think of a prototype as a mental shortcut to categorize unfamiliar situations. We all have images in our minds as to prototypical rape victims, sexual harassers, welfare recipients, and so on. To the extent that actors in the legal system use these prototypes to decide cases--for example, prosecutors or juries deciding whether a rape occurred by looking to see whether the victim fit the prototypical image of a rape victim, as opposed to asking whether the facts satisfied the elements of the crime--this can cause systemic errors.
Consider, for example, Martha Chamallas's critique of the rape prototype. Chamallas explains that, with rape, the prototype is stranger rape, where the perpetrator is often a black male and the victim a white woman. Most rapes, however, occur between acquaintances, between people of the same race and class, and on dates. Reasoning from prototypes, therefore, presents the danger that most rapes will go unpunished because they do not fit the prototype. Further, rapes by black men of white women will be disproportionately punished, whereas rapes by black men and white men of black women will receive less punishment.
Leti Volpp makes a similar point about domestic abuse--more particularly, battered woman syndrome. She argues that this syndrome is based on a "'model' battered woman," in other words, a prototype: a woman who is "passive and helpless." Volpp demonstrates the extent to which judges refuse to give a battered women's instruction in cases in which they perceive that the domestic abuse victim is not a model battered woman. She concludes that because "battered women's syndrome exemplifies a stereotype of passive married middle-class white women, it may be especially difficult for battered women of color and gay men and lesbians to fit the model."
An L&E-oriented approach to prototypes could elaborate upon Chamallas's and Volpp's critique by asking two questions. (1) How do prototypes incentivize behavior? And (2) what are the costs of responding to the incentives that prototypes create? If the protection of rape laws accrues only when women behave in a particular manner (let us say, "modestly"), that means that women who want the protection of the rape laws have an incentive to present themselves in ways that fit the protected prototype. In this sense, the price of receiving legal protection is the cost of acting in a manner that fits the prototype. These costs may be higher for some than others. For example, if modesty is defined in terms of white upper-class behavior, it may be costly and difficult (even if not wholly impossible) for minority women to perform their identity in a manner that fits that prototype. Further, quite apart from shaping how women perform their identities in the real world of social interactions, the existence of prototypes shapes how women present themselves at trials. To access battered woman's syndrome, for example, there is an incentive for women to highlight their passivity and lack of agency. On the other side, from the usually ignored perpetrator's perspective, there is an incentive to attack women who do not fit the prototype. This is part of what explains black women's historical vulnerability to rape.
Chamallas's and Volpp's papers are part of a larger critical literature that demonstrates the problems of prototypes. What remains to be considered is the regulatory and productive effects these legal prototypes have on the identities in question. For whether the prototype in question implicates sexual harassment, hate speech, rape, or welfare law, identity is being cloned. Heretofore, critical race theorists have not seriously engaged this productive capacity of law.
Monday, 31 March 2003
112 Yale L.J. 1829 (2003)
Why do corporate governance systems differ quite substantially around the world? The American model supervises managers through a board representing a diffuse mass of external shareholders whose rights are defended by a variety of institutional rules (such as those governing insider trading, antitrust, and an open market for corporate control) and by watchdog "reputational intermediaries" (such as accountants, securities analysts, and bond-rating agencies). The claims of employers, suppliers, and buyers are subordinated to shareholder rights. The German model, in contrast, supervises managers by concentrating ownership in blockholders, permitting insider relationships, allowing substantial horizontal coordination among producers, and accepting a variety of "stakeholder" claims on the firm besides those of the shareholders. Japan, as well as Sweden, Austria, and other continental European countries, resembles the German model to varying degrees, while the United Kingdom, Canada, Australia, Ireland, and New Zealand bear closer resemblance to the American system. Just why these differences exist has been the object of vigorous debate both in the legal academy and across many other fields.
Mark Roe's new book, Political Determinants of Corporate Governance, vigorously presents the "politics school," of which he is the pioneer and an important leader. Political forces, he argues, account for the difference in choice of corporate governance models among advanced industrial countries. Researchers ask: What are the "legal and institutional preconditions for strong securities markets"? Roe adds politics to the list and puts it in first place. Corporate governance arrangements inside the firm, Roe argues, interact deeply with a nation's politics. Political forces--party systems, political institutions, political orientations of governments and coalitions, ideologies, and interest groups--are the primary determinants of the degree of shareholder diffusion and the relationships among managers, owners, workers, and other stakeholders of the firm. Whatever the formal specifications of corporate law, politics shapes daily the calculations made by all players.
Roe argues that where social democracy is strong, shareholder rights are weak, and shareholder diffusion is low. Social democracy gives voice to claims on the firm in addition to those of the shareholders: employee job security, income distribution, regional or national development, social welfare and social stability, and nationalism, to name a few. To counter these competing claims, blockholders resist diffusion of shares in order to maintain leverage in the boardroom, and investors shy away from a system in which they lack protection or dominance.
To test this theory, Roe first correlates the degree of shareholder concentration with various indicators of social democratic power, such as partisan composition of governments, employee protection in labor law, and income equality. He finds strong evidence that weak labor correlates with strong diffusion. He then provides qualitative process-tracings (country case studies of the historical evolution of governance patterns) that show how strong labor power inhibits diffusion, and examines the impact of other economic variables--the degree of economic competition and monopoly power--on the degree of shareholder diffusion.
Finally, Roe uses his political argument to confront directly a very influential alternative interpretation--the Quality of Corporate Law (QCL) argument, developed by Rafael La Porta, Florencio López-de-Silanes, Andrei Shleifer, and Robert Vishny (LLS&V). Countries with similar levels of QCL, Roe observes, differ in the degree of shareholder diffusion. Therefore, other variables must be in play. The critical one is politics. He demonstrates that for his sample of countries, the political account correlates more strongly than QCL with shareholder diffusion. Advanced industrial countries with high QCL vary considerably in the degree of shareholder diffusion; thus, something else must be at work. That something is the degree of social democratic influence. Roe tests LLS&V's impressive data collection with his own substantial data on political variables, and concludes, in my view convincingly, that politics does better than QCL. QCL can matter, Roe argues, when politics enables it to matter--that is, when property rights are assured, when enforcement and independent judges are allowed to work, and when the political balance in society gives it a place. Even then, the consequences for corporate governance of any given set of laws are driven by politics. Roe's is the only account in the law-and-economics tradition that makes politics explicitly central to an explanation of corporate governance in a comparative and international perspective. For him, political forces not only define the law--they also determine how the law actually operates.
In stressing politics, Roe directly challenges other leading interpretations that stress the primacy, and autonomy, of economics, law, and private processes of reputational bonding. Roe's book provides an important opportunity to examine the status of politics in the conflicting interpretations of corporate governance. No one really doubts that politics has something to do with corporate governance, but theorists vary considerably in the status they give to politics in a causal model. Roe is unique among major authors in seeing politics as continuous, ongoing, and primary. For other theorists, politics operates in the distant past, or indirectly, or barely at all.
Specifically, Roe's book allows us to examine a contest between his political theory and LLS&V's version of QCL. Although the essays contained in Political Determinants of Corporate Governance are not intended to confront QCL directly--Roe's concern with politics, dating back to the late 1980s, precedes the LLS&V publications that emerged in the late 1990s--they in fact do so. In LLS&V's argumentation, the difference between governance systems arises from the effects of common- versus civil-law legal traditions; politics exists only in the initial choice of legal system in a given jurisdiction. LLS&V then focus on the consequence of this initial act upon the development of corporate governance systems and shareholder diffusion. Yet what a country does with its legal tradition and system turns on politics: the rules that determine the extent of economic competition within and between countries; the laws and decrees that structure banking, corporate finance, and the securities industry; the rules that shape the markets for capital and labor; and the degree of state involvement in the economy. LLS&V make allusions to politics in their analyses of QCL, referring to rule of law, judicial efficiency, and corruption. But politics has no distinct causal status in their argument and, after the initial choice of systems, no longer plays a role in shaping the actual content or use of law.
Roe's political theory and the QCL theory are themselves criticisms of an important literature in economics that argues that the efficacy of the market makes regulation unnecessary and renders variation among governance forms unimportant or nonexistent. Competition in product and capital markets forces firms to adopt "rules, including corporate governance mechanisms," that minimize costs in the drive to efficiency. In situations of vigorous competition, the remaining details of corporate governance are irrelevant. The logic of risk diversification will lead to shareholder diffusion. Securities regulation is unnecessary and possibly harmful. An open world economy will lead to convergence. Observed variance in systems among countries would reflect differences in economic competition, shaped by objective characteristics such as size or factor endowments. The empirical critique of this approach, made by Roe and LLS&V, notes that despite increasing international competition, the Berle-Means separation of owners from managers by no means has become universal, and thus other forces must be at work.
Another interpretation of diffusion, developed by Brian Cheffins and John Coffee, argues for the private capacity of markets to develop mechanisms of reputation without state intervention, thus implicitly without politics. John Coffee groups Roe with LLS&V and Lucian Bebchuk as sharing the view that "[o]wnership and control cannot easily [be] separate[d] when managerial agency costs are high." Although they disagree "about the causes of high agency costs--i.e., weak legal standards versus political pressures that cause firms sometimes to subordinate the interests of shareholders--they implicitly concur that the emergence of deep, liquid markets requires that the agency cost problem first be adequately resolved by state action." In disagreement, Coffee quite persuasively argues that the Berle-Means model emerged from the behavior of private actors in the United States--bankers such as J.P. Morgan seeking to reassure foreign investors and the leaders of the New York Stock Exchange seeking to attract a particular kind of listing--and out of a particular situation in which state authority was absent. The legal protections came afterward, as shareholders created a constituency seeking the aid of state authority. It is not the law that causes corporate governance, but the reverse. I read Coffee as agreeing that there was a managerial agency problem--investors sought protections--but believing that state regulation was not required to solve it.
Coffee rejects Roe's version of a political account, but politics does appear in his analyses in two ways. First, the shareholders lobby for regulation after diffusion has occurred, working through politics to generate QCL. Second, politics is central to Coffee's key variable--the presence or absence of state involvement in economic life--in shaping whether the private mechanisms of investor assurance develop.
Arguments using norms and culture generally discount politics. Amir Licht makes an argument stressing culture, path dependence, and norms, while Coffee and Roe have both explored the role of norms in shaping behavior, holding law constant. It is not clear what these arguments make of politics: Does politics shape norms by altering the law and its enforcement in what is acceptable convention, or do norms shape politics and the law? Analyses of social movements and of corporate networks by sociologists and legal scholars explore linkages to politics and public policy.
Another important body of literature on corporate governance examines competition among securities regulation and markets. The disagreement between Roberta Romano and Bebchuk on convergence for or against shareholders turns substantially on assumptions about the utility function of politicians: Do they actually seek to attract incorporation, or are they responding to other political calculi, pressures, and interests? That literature recognizes that politics matters, but does not appear to have a substantive theory of politics. The issues about the consequences of U.S. federalism reappear in analyses of the potential for "functional convergence" in international competition among securities markets.
Roe's political theory of corporate governance directly confronts these alternative explanations. Whereas his first book explores the U.S. case, the new book combines, integrates, and extends into a comprehensive statement a series of articles, stretching back a decade, that sets the American experience in a comparative framework with other advanced industrial democracies.
Roe's argument has become the foundation of the "political theory" of corporate law. Articles that refer to political explanations generally refer to Roe. His particular account is quite powerful, and he has advanced our understanding in developing it. The chapter on what constitutes a political interpretation, however, is by no means closed: There is not one political interpretation, but several. In this regard, Roe opens wider the door for exploration of political influences on corporate law and behavior.
A careful reading of Roe's book helps us to evaluate the status of politics in interpretations of corporate governance and to examine the different meanings that can be given to political explanations. There are, thus, two steps to such a discussion. First, how does politics compare to other arguments? Second, which among several political arguments is the most convincing? Roe's admirable account is, in my view, very powerful, indeed superior, in taking the first step: Politics dominates explanations about corporate governance. In taking the second step, however, Roe's position, while still strong, is neither completely convincing nor exhaustive of the political forces at work.
Roe's political account is incomplete. He does not consider two significant alternative political analyses. The first is an alternative political preferences and interest group model. Roe stresses the relative power of left versus right, and labor versus capital. But he does not consider issues and interest groups--stressed by Raghuram Rajan and Luigi Zingales --that cut across the class divide, such as industrial sectors, agriculture, religion, and constitutional disputes. The second alternative political model looks at political institutions: Divergence in outcomes reflects differences not in preferences but in the mechanisms of preference aggregation, such as electoral laws, federalism, legislative-executive relations, and party systems. Corporate governance outcomes may reflect, as Marco Pagano and Paolo Volpin argue, the degree to which institutions favor specific coalition formation.
Roe simplifies for the purpose of research. His argument is parsimonious. His account of specific country cases, as opposed to the statistical tests, is quite nuanced, subtle, complex, and astute. In fact, in his work I can find passages that demonstrate his complete awareness of most of my objections. He does not, however, consider how these nuances could be integrated into alternative political variables that need examination on their own terms.
As a political scientist, my criticisms focus on the political account. This seems appropriate, as politics is the center of his argument. A law professor or economist might pay more attention to Roe's presentation of those arguments. I choose only to summarize his interpretations of the legal and economic issues, and instead focus my comments on his particular version of the political argument.
Part I of this Review lays out Roe's political argument and his empirical test of it. Part II explores the contest between Roe's political argument and LLS&V's QCL. Part III situates Roe's political argument in relationship to other political interpretations. Part IV probes the implications of Roe's argument for public policy issues. Part V categorizes the various meanings given to politics in arguments about corporate governance.