Minnesota Lawyer Publication
Understanding the intersection of business and legal ethics
By Neil W. Hamilton | April 26, 2004
Media coverage in both the general media and our profession?s publications has given dramatic attention to failures of corporate and legal ethics in the scandals of the last several years.
In the general media, all of us see regular updates on legal action regarding Enron, Adelphia, Credit Suisse First Boston, Health South, Martha Stewart, Tyco, WorldCom and others.
In our professional literature, corporate lawyers closely follow both the American Bar Association (ABA) changes in Model Rules 1.6 (confidentiality) and 1.13 (organizational client), and the Securities and Exchange Commission (SEC) regulations governing lawyer ethics mandated by Congress in the Sarbanes-Oxley Act because of a loss of public confidence in our profession?s ability to regulate itself in the public interest.
While coverage of these issues has been substantial, little has been published that gives historical context and perspective on the lessons from these events for both the legal and business professions.
Corporate wrongdoing necessarily implicates the ethics of both professions, and a cross-disciplinary perspective is particularly useful to help the two professions understand both what can be learned from each other as well as how to proceed together to address these problems.
The University of St. Thomas Law Review organized a March 6 symposium of seven national scholars to focus on understanding the intersection of business and legal ethics. This is an interdisciplinary field in its infancy, and Minnesota is a logical place for the two disciplines to explore common ground.
Our state has a corporate social responsibility tradition extending back over at least three generations that provides both national and international leadership. For example, the Five Percent Club (5 percent of pre-tax profits for charitable purposes) was founded here, and both the Minnesota Principles and the Caux Roundtable Principles of Business Ethics were developed here. The leadership of the bar in Minnesota for many years has strongly promoted the ideals and ethics of the legal profession.
This essay touches only on some of the points raised in the symposium. The law review issue with all seven articles will be published this fall.
Theologian Michael Novak, leading off the symposium with a talk titled ?A Philosophy of Economics,? noted that the success of democratic capitalism rests in significant measure on the culture and moral habits of the people. Democratic capitalism ?heavily depends on work habits, family patterns, and metaphysical or religious energies of particular sorts. It will time and again fail to function in cultures that lack the necessary cultural habits.?
Novak reminded us of two presently occurring debilitating features of democratic capitalism that were predicted by Alexis de Tocqueville a century and a half ago ? ?the drift downwards toward materialism and mediocrity on one hand, and on the other hand, the taste for surrendering liberty to the paternal state, in exchange for a reduction in uncertainties, in the name of equality.?
In any economic system, the human vice of greed is a catalyst for unlawful conduct and excess. The issue is always to what degree is greed restrained by the moral capital of businesspersons and those in the professions?
In democratic capitalism, we have experienced episodic waves of unlawful conduct and excess where greed is held less in check since the founding of the Republic. Unchecked by sufficient moral capital, self-interest and greed will destroy democratic capitalism.
No golden age
We recently have experienced yet another period where an increased proportion of business people and lawyers conflate what is moral into both what is lawful and what the market demands. In such periods, Florida State law professor Rob Atkinson noted, an increasing segment of business fails (1) to do less damage than the law permits and (2) to do more good than the market demands.
A number of legal scholars over recent years have commented that lawyers formerly occupied a more central role as counselors in shaping both the legal and ethical cultures of business enterprises. For example, Yale law dean Anthony Kronman in ?The Lost Lawyer? argued that the lawyer-statesman ? the counselor who served the client by exercising independent judgment ? was the model for the corporate lawyer in previous generations of lawyers.
In response to these scholars, Minneapolis lawyer William J. Wernz, of Dorsey & Whitney, has repeatedly cautioned that there was no Golden Age of ethical lawyering ? there have always been scoundrels in the profession. It really does not matter whether the moral capital of the business and legal professions was higher 20 or 40 years ago. What matters is whether both professions can do better at developing the moral capital necessary to check the natural tendency of democratic capitalism toward materialism and greed.
UCLA law professor Stephen Bainbridge was not sanguine about the prospects. Focusing on large law firms, Bainbridge argued that tournament theory is useful in analyzing the incentives for lawyers in large firms. ?Tournaments are a mechanism for reducing agency costs by providing incentives through ?comparative performance evaluation.? In a promotion tournament, the principal ranks its agents by their performance relative to one another. The best performing agents are promoted to positions with higher pay and/or status. As applied to lawyers, law firms supposedly rank associates and then promote the best performing associates to partner at the end of the evaluation period.?
Bainbridge continued, ?What skills and attitudes contribute to success in the promotion-to-partner tournament? Survey data demonstrates that the ability to develop ?good working relationships with clients and peers? is a highly ranked consideration in the promotion to partnership decision. Also highly ranked were a willingness to pursue the interests of clients aggressively and the potential for bringing in new business to the firm.?
Winning the tournament, Bainbridge argued, requires developing a set of skills and attitudes aimed squarely at keeping clients happy. The tournament thus develops lawyers with strong incentives to overlook management wrongdoing, and it is management, not the board of directors, who hires lawyers. Bainbridge argued further that Sarbanes-Oxley and the SEC regulations requiring ?up the ladder? reporting of management wrongdoing will not change this underlying reality.
Under the SEC regulations, Bainbridge noted that an attorney is only responsible for material violations of which the attorney becomes aware. Bainbridge predicted this will result in more studied ignorance by corporate lawyers.
Bainbridge concluded that the problem the legal profession faces is not really a ?rules? problem. Neither the SEC regulations nor the new ABA Rules of Professional Conduct will lead to more lawyer effort to improve business ethical conduct. The problem is the culture of the large law firms, not the need for more rules.
Reason for optimism
Minneapolis attorney John H. Stout, of Fredrikson and Byron, pointed to two recent corporate governance initiatives that give him reason for optimism.
First, the emergence from a wide number of sources of a recognized body of ?best practices? in corporate governance is leading boards to assume more responsibility for legal compliance and business ethics.
Second, corporate boards are becoming more proactive in taking responsibility for the organization?s integrity. This includes monitoring by the board whether the lawyers and law firms engaged by the corporation in fact conduct themselves to assure the corporation?s integrity.
In support of his position, Stout cited to the pressure placed on boards, starting with the Federal Sentencing Guidelines and continuing through Sarbanes-Oxley, the consequent SEC regulations, current litigation involving board misconduct and a recent Delaware decision articulating the proposition that boards must act proactively both to put systems and processes in place to prevent misconduct and to engage in active monitoring the systems.
These changes in corporate governance should create increased opportunities for the lawyer who goes beyond service as a legal technician providing simply what management wants to providing stronger preventive law/corporate compliance/business ethics counsel and support.
Borrowing from business
Atkinson?s remarks ? ?Why Business Ethics is So Rich and Legal Ethics, So Poor? ? compared education in business ethics to education in legal ethics and concluded that the grass is greener in business ethics education.
Business ethics education actually examines ethics broadly. Legal ethics education has become ?the law of lawyering,? focusing narrowly on the maximum requirements of a set of legal rules defining the lowest level of acceptable conduct. For lawyers, moral ideals collapse into the floor of the Rules of Professional Conduct. Some lawyers, seeking to lower the floor even further, use their legal skills to game the ethics rules themselves.
Atkinson recommended that ethical education for both law students and lawyers borrow from business ethics education.
Arizona State business ethics professor and lawyer Marianne Jennings addressed the disconnect between and among legal ethics, business ethics, law and virtue. She asked the question where were the professionals in the continuing series of corporate scandals dating back to the Savings and Loan crisis in the 1980s? Why didn?t any of them speak up or disassociate themselves from the transactions?
Jennings concluded that our focus on statutes, SEC regulations and code-based ethics will not improve the response of either lawyers or business people to future wrongdoing. It is not about more rules.
She argued that ethics education in both professions should focus on virtue ethics as a simpler, cleaner guide for the conduct of professionals as they execute their roles of accountability and responsibility in corporate governance. Virtue ethics is one of three major current approaches to normative ethics. It emphasizes what makes a good person, namely the virtues, particularly moral character.
In contrast, both Kantian (deontology) and utilitarian systems focus on actions. Each tries to provide guiding principles to inform a person?s decision on how to act. Education in virtue ethics would look to both the Greek idea of the virtues, as well the incorporation of Greek moral theory into Judeo-Christian moral theology.
The broad consensus among the speakers was their emphasis on building moral capital in individual professional students and practitioners. No speaker thought more ethical rules would help.
It is clear that legal ethics education can learn something from business ethics education to expand beyond narrow rules-focused courses.
In addition, ethics education in both disciplines has to develop more successful teaching strategies to foster the moral development of the student or practitioner. Even if the subject matter includes ethics more broadly defined, we know from the moral psychology literature that simply learning various schools of philosophy or ethics does not improve an individual?s moral sensitivity, moral reasoning, moral motivation or moral character.
Education in this area must develop strategies that assist individual students and practitioners to engage in personal reflection and personal appropriation of the concepts. Student-centered moral discourse is the one known teaching method that fosters this type of engagement.
Neil Hamilton is the Associate Dean for Academic Affairs at the University of St. Thomas School of Law. Hamilton is not speaking for the school in this column. To contact him, send an e-mail to firstname.lastname@example.org.