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Principles, process, responsibility : exploring ethics as a meta-regulatory framework for evolving governance… Dempsey, Alison Louise 2012

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Principles, Process and Responsibility: Exploring Ethics as a Meta-Regulatory Framework for Evolving Governance Discourse  by Alison Louise Dempsey  A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY in The Faculty of Graduate Studies (Law)  THE UNIVERSITY OF BRITISH COLUMBIA (Vancouver)  April 2012  © Alison Louise Dempsey, 2012  Abstract This thesis proposes a new paradigm for understanding, developing and maintaining standards of corporate governance and conduct based on ethics as a meta-regulatory framework for governance discourse. It explores the possibility that, within such a framework, the explicit recognition of fundamental norms of ethical conduct and decision making such as honesty, fairness, consideration of others, responsibility and trustworthiness would precede and inform policy decisions relating to the objectives, structure and regulatory approaches of particular governance systems and practical considerations of how to implement and operationalize governance practices. It suggests that, despite the complex legal, institutional, normative and social dimensions of corporate governance standards and practice, these ethical norms are already implicit, and more recently explicit, in the formal systems of laws, rules and standards that seek to regulate corporate conduct. Alongside these traditional governance regulatory mechanisms, informal and soft law governance standards − codes, guidelines, international and multi-partite commitments − have emerged as an influential source of explicitly ethical, values based beliefs and expectations of what constitutes responsible business. There is an opportunity to use these ethical norms as a common point of departure for future governance discourse that is broad enough to support multiple approaches to governance yet flexible enough to accommodate complexity, diversity and change. Such discourse has the potential to alleviate some of the inherent interpretive and practical challenges to reconciling culturally diverse and pluralistic regulatory approaches in the pursuit of effective global corporate governance standards.  ii  Table of Contents Abstract ............................................................................................................................... ii Table of Contents ............................................................................................................... iii List of Figures .................................................................................................................... vi Acknowledgements ........................................................................................................... vii Dedication ........................................................................................................................ viii 1. Introduction ................................................................................................................. 1 1.1 A Framework for Understanding Governance .................................................. 1 1.2 Shared Core Values: A Foundation for Good Governance .............................. 4 1.3 Discourse and the Governance of Business ...................................................... 7 2. Approach ................................................................................................................... 17 2.1 Research Objective ......................................................................................... 17 2.2 Structure .......................................................................................................... 18 2.2 Objective ......................................................................................................... 25 2.3 Method ............................................................................................................ 27 2.4 Sample............................................................................................................. 29 2.4.1 Codes originated by public corporations ...................................................... 29 2.4.2 Codes originated by NGOs and civil society organizations ......................... 32 2.4.3 Codes originated by institutional investors and investor coalitions.............. 33 2.4.4 Codes originated by or on behalf of corporations and business coalitions ... 34 2.4.5 Codes originated by or on behalf of state or multi-state entities .................. 35 Part One − Systems Failures ............................................................................................. 36 3. Governance in the Spotlight, Again .......................................................................... 37 3.1 The Latest in a Long History of Crises ........................................................... 37 3.2 A New Ingredient in the Old Formula ............................................................ 42 3.3 Unintended Consequences .............................................................................. 48 4. The Expectations Gap ............................................................................................... 52 4.1 A Failure of Governance, Responsibility or Both? Diagnosing the Problem . 52 4.2 Prescription Without Diagnosis: Incomplete Remedies ................................. 54 4.3 Different Approaches: Alternative Perspectives on Governance ................... 59 Part Two ─ Corporate Governance Frameworks: An Overview of the United Kingdom, United States and Europe .................................................................................................. 67 5. Common Language, Distinct Paths: Corporate Governance in the United Kingdom, the United States and Europe ............................................................................................ 68 5.1 Form and Function .......................................................................................... 68 5.2 The ‘United Kingdom Approach’ ................................................................... 70 5.3 The ‘United States Approach’ ........................................................................ 86 5.4 Corporate Governance in Western Europe ..................................................... 99 5.5 Beyond the ‘Either/Or’ Paradigm of Corporate Governance ....................... 112 Part Three − The Corporate Structure: Challenging Conventional Boundaries ............. 114 6. Legal Limits and Moral Boundaries: the Corporate Challenge to Formal and Normative Conventions .................................................................................................. 115 6.1 The Root of the Problem ............................................................................... 115 6.2 Corporate Responsibility − A Misnomer? .................................................... 124 6.3 Geographically Unbounded .......................................................................... 131 Part Four − Re-framing Regulatory Discourse ............................................................... 139 iii  7.  From Debate to Innovation ..................................................................................... 140 7.1 Reconstructing the Regulatory Debate ......................................................... 140 7.2 Power Shifts .................................................................................................. 147 7.3 Achieving Regulatory Purpose in a Changing World................................... 155 7.4 The Limits of Regulatory Responsibility...................................................... 158 8. A Matter of Form and Substance ............................................................................ 164 8.1 Formal Boundaries ........................................................................................ 164 8.2 Regulating with Hindsight ............................................................................ 169 8.3 The Importance of Informal or Normative Constraints ................................ 173 Part Five − The Changing Governance Landscape ........................................................ 180 9. Re-Framing Corporate Governance ........................................................................ 181 9.1 Reconstructing the Relationship Between Business and Society ................. 181 9.2 The Significance of Stakeholders ................................................................. 189 9.3 Legitimacy and the Stakeholder Relationship .............................................. 193 9.4 Ethics and Stakeholder Engagement ............................................................. 196 10. Different Voices: Evolving Governance Discourse ............................................ 198 10.1 Multiple Regulatory Paths ............................................................................ 198 10.2 Market Forces for Change ............................................................................ 202 10.3 Enabling Change Through Governance Disclosure ...................................... 209 11. Governance: Setting New Standards .................................................................. 222 11.1 The Problem of Definition ............................................................................ 222 11.2 Values Based Standards of Conduct ............................................................. 224 12. Global Institutionalization of Meaning ............................................................... 244 12.1 Language and Transformation in Governance Discourse ............................. 244 12.2 Contest or Constructive Dialogue ................................................................. 245 12.3 The Opportunities and Risks of Interdiscursivity in a Digital World ........... 249 13. Exploring Institutional Governance Discourse ................................................... 260 13.1 Discourse and Institutions ............................................................................. 260 13.2 The Corporate Voice ..................................................................................... 263 13.2.1 Voices in the boardroom and the ‘tone at the top’ .................................. 263 13.2.2 Executive pay in the spotlight ................................................................. 271 13.2.3 Risk, responsibility and ethics ................................................................ 272 13.3 Investor/Shareholder Voice .......................................................................... 275 13.3.1 Shareholder stewardship ......................................................................... 275 13.3.2 Meeting investor expectations – more than the single bottom line ........ 278 13.3.3 Ownership and beyond ........................................................................... 282 Part Six – Closing ........................................................................................................... 291 14. Ethics as First Order Regulation: Principles, Process and Responsibility .......... 292 14.1 A First Principles Approach.......................................................................... 292 14.2 Deconstructing Governance .......................................................................... 294 14.3 Establishing the ‘Good’ in Governance ........................................................ 296 14.4 Ethics and Governance: A Question of Problematization ............................ 297 15. Conclusion .......................................................................................................... 302 15.1 Commitment and Action ............................................................................... 302 15.2 Ethics as a Meta Regulatory Framework for Governance Discourse ........... 304 Bibliography ................................................................................................................... 308  iv  Appendix One – List of Notable Scandals ...................................................................... 343  v  List of Figures Figure 1 - Frequency of Code Types in Sample ............................................................... 29 Figure 2 - Codes Originated By Public Corporations ....................................................... 30 Figure 3 - Codes Originated by NGOs and Civil Society Organizations ......................... 32 Figure 4 - Codes Originated by Investors/Investor Coalitions ......................................... 33 Figure 5 - Codes Originated by or on Behalf of Multiple Corporations/Business Coalitions .................................................................................................................. 34 Figure 6 - Codes Originated by or on Behalf of State or Multi-State Entities.................. 35 Figure 7 - Economy Coverage Over Time ........................................................................ 47 Figure 8 - CR Index Companies versus FTSE All-Share Index - TSR by Year ............. 206 Figure 9 - Percent Returns - World's Most Ethical Companies vs. S&P 500 ................. 208 Figure 10 - Voluntary Governance Mechanisms ............................................................ 232 Figure 11 - Corporate Governance Developmental Timeline......................................... 262 Figure 12 - % of Financial Post 500 Board Seats Held By Women in Canada .............. 271 Figure 13 - Historical Support for Proxy Proposals on Social and Environmental Issues ................................................................................................................................. 282  vi  Acknowledgements  I would like to thank my thesis supervisor Dr. Janis Sarra for overseeing my work and providing encouragement throughout this process. I also wish to give particular thanks to Dr. Ronald Davis and Dr. James Tansey whose thoughtful comments and suggestions made this a better document. My thanks to the Faculty of Law, Graduate Program, with a special acknowledgment to Joanne Chung, Graduate Administrator for her advice, assistance and friendship throughout my time in the Ph.D program. On a personal note, to my friend and colleague Harveen Thauli thank you for ‘being there’, and to Bruce my deepest appreciation for your help and belief in this quest. This thesis represents a milestone in a legal career of two decades, neither it nor the journey that led me to this point would have been possible without the unwavering love, support and understanding of my wonderful parents Charles and Rita Dempsey − every step of the way.  vii  Dedication  This thesis is dedicated to my parents − Charles and Rita Dempsey  viii  1.  Introduction  1.1  A Framework for Understanding Governance  Governance is a complex, dynamic process. It depends on the coordination and cooperation of multiple elements, even in its most contained application of individual self-governance. In an ever more interconnected and interdependent world, governance at every level involves countless interactions that occur in a constantly changing context amidst myriad endogenous and exogenous factors.  The principles, processes and responsibilities that determine the governance of the smallest units to the largest potentially have implications and consequences far beyond the economically, physically, socially and temporally proximate. As such, each unit of governance is connected to other units, together comprising multiple, successively larger units of governance.  The relationship between separate parts that connect or cross in the context of a larger whole is the basis of any system. To approach governance from a systems-based perspective implies a conceptual whole: that the dynamic relationships among and between separate units of governance and within multiple frameworks can be considered in aggregate, as well as in terms of the constituent parts or governance sub-systems.  In the face of a degree of complexity and a scale that exceeds the capacity and reach of existing mechanisms of control, there is a tendency for governance discourse to become specialized and located within separate governance sub-systems − those of governments, institutions, corporations, organizations and individuals – and in doing so to weaken the connection with other parts and the larger system.  The systems-based approach necessitates an appreciation of the singular as well as the collective. Analysis of a single unit provides specific, detailed information and an opportunity to observe internal function, specialization and endogenous factors that, for 1  example, influence adaptation and change within the unit. However, conclusions drawn from such observations are limited and incomplete as a basis for a general theory or for the development of principles, best practices or standards for wider application in that they fail to take account of the myriad exogenous factors that permeate and influence the unit from outside its boundaries.  This thesis therefore focuses on the business sphere as a specific governance sub-system, and corporate governance in particular, in order to identify and engage with the many dimensions of a broader notion of governance in an applied context. That is, rather than examining the conduct and governance of business in isolation, it does so with a view to acquiring specific knowledge that may provide insight into other governance sub-systems and governance as a whole. This approach also supports an analytical framework broad enough to encompass examination of the roles played by diverse actors in the construction and recalibration of corporate governance both specifically and within a wider societal context.  Furthermore, situating the study of governance in the business sphere within a wider governance context transcends a narrow focus on compliance that has been dominant in recent corporate governance scholarship. There is a tendency to concentrate on the concrete and more static components of governance in preference to the more nebulous dimensions. That is, to focus on the formal agreements, rules, policies and procedures that seek to define, recommend or prescribe specific governance related activities and functions rather than to consider the role of broader cultural norms in influencing attitudes, behaviour and conduct choices.  This thesis proposes a new paradigm for understanding, developing and maintaining standards of ethical business conduct and good corporate governance.1 The point of 1  A paradigm is defined as a pattern of thinking, a set of background assumptions taken for granted. Penguin Dictionary of Philosophy, 2d, (Penguin Books, 2005). The term’s usage in this sense is associated with the influence of Thomas Kuhn’s 1962 The Structure of Scientific Revolution. (Thomas S. Kuhn, The Structure of Scientific Revolutions, Second Edition, Enlarged, (Chicago: The University of Chicago Press, 1970 (1962)). Kuhn used the term to refer to the theoretical frameworks within which scientific thinking and practice operate and which encompass the general theoretical assumptions, and laws and techniques for  2  departure is not a position along the diverse and divergent paths of corporate governance and regulatory theory and practice. Instead, it starts with the possibility of an overarching conceptual and regulatory framework that precedes the specific, instrumentalist questions of how to construct particular governance frameworks and institute, implement, and operationalize governance practices in any given context. This ‘framework of frameworks’, or meta-framework, is a valuable concept in complex systems thinking.2 Applied in the context of governance, it is an overarching conceptual framework that offers systemic integrity, shared referents and a common foundation broad enough to support multiple governance sub-systems. It also has the benefit of being flexible enough to accommodate complexity, diversity and change within those subsystems while at the same time sufficiently robust to protect the integrity of the system as a whole.  From this starting point, the thesis explores the idea that within such a meta-framework it may be possible to locate a common source of the core values, norms and objectives that explicitly or implicitly inform the substance of governance policies and principles, the laws, rules, and standards a priori their particular form and function. In essence, it is an examination of the potential for ethics as a meta-regulatory framework for governance discourse, standards and practice.  their application that are assumed and standardized by members of a particular scientific community. The term has been generalized to refer to any intellectual perception or view that is accepted by an individual, community or society at large as a clear expression, model or pattern of how things work in the world 2 In general terms, the basis of systems thinking is the proposition that the individual components of a nework of relationships – or system − are best understood in terms of the connections, dependencies, hierarchies and interrelationships that exist with and between the separate components, rather than in isolation. Equally that a dynamic and complex system is best comprehended through the relationship and interactions of the component parts to the whole.  3  1.2  Shared Core Values: A Foundation for Good Governance  “A basic code of good business behaviour is a bit like oxygen: we take an interest in its presence only when it is absent.” Amartya Sen.3  The search for transcendent norms and standards of good governance, conduct and responsibility – to apply to the activities of business, state and non-state institutions, civil society and the individuals that animate them – is all the more important in a global economy. For the questions of whose rules and which boundaries exist to constrain and guide behaviour become immeasurably more challenging when actions and consequences occur variously outside the specific geo-political limits of the law in a marketplace that is populated by a plurality of standards, interpretations, expectations and incentives articulated by numerous diverse constituencies.  In this thesis, I examine the proposition that the shared values, behavioural norms and sustainable objectives embodied in good governance practices are derived from fundamental norms of ethical conduct and decision making such as accountability, fairness, honesty, respect for others, responsibility and trustworthiness.4 These norms constitute ‘hyper-norms’ because they transcend regulatory debate and practice and endure over time as an essential part of the larger more intricate system of norms that govern social interactions throughout society.5 3  1998 Nobel laureate in Economic Science, Amartya Sen in: Amartya Sen, Development as Freedom (New York: Anchor Books, 1999) 264. 4 There are numerous bases for identifying these specific values. For example, in 1994 The Institute of Global Ethics conducted surveys, interviews and established focus groups in 16 countries around the world with a view to identifying the existence of core values that transcend individual cultures. The list that emerged included, in addition to trust or trustworthiness: love, truthfulness, fairness, freedom, unity, tolerance, respect and responsibility. In 1996, the Institute with the Gallup Organization survey 272 participants representing 40 countries and more than 50 different faiths who were gathered at the State of the World Forum convened by Mikhail Gorbachev and other world leaders. The research found strong convergence around: truth; compassion and responsibility. In a later survey on 1,100 managers in major U.S. financial services firms the top values were: honesty, responsibility, respect and fairness. Source: Rushworth M. Kidder, “Trust: A Primer on Current Thinking”, Institute for Global Ethics, undated. www.globalethics.org. 5 Donaldson and Dunfee have described hyper-norms as “deep moral values” representing “a convergence of religious, political and philosophical thought”. Thomas Donaldson and Thomas W. Dunfee, Ties that  4  Part of this examination involves a search for expressions of shared values, behavioural norms, and sustainable objectives that inform a spectrum of established and emergent approaches to achieving good corporate governance. Such expressions may provide evidence of a shared provenance among structurally and operationally diverse regulatory models and approaches to governance. If such evidence is found, the common essential elements potentially can provide an explicit context for governance discourse that transcends the limits of law, state-based regulatory authority, and the public-private divide. It is my contention that affirming these shared core values enables the establishment – or recognition − of a common, ethically based meta-framework for governance discourse. The scope of the governance discourse conducted within this meta-framework would be broad enough to encompass the combined strengths of the different regulatory approaches that have evolved from this common origin.  Furthermore, with explicit recognition of a common origin in ethical norms, principles and values, the meta-framework would also establish a stronger basis on which to engage with diverse perspectives than the continuously evolving regulatory landscape in which those values, principles and objectives can become obscured or lost in the translation from policy into practice and process. This engagement with diverse perspectives would, in turn, increase the likelihood that future governance discourse occurs and evolves informed and enriched by the multiple governance standards emanating from a plurality of ‘regulatory’ and ‘quasi regulatory’ voices, respecting rather than obscuring historical and cultural differences and finding similarities in existing legal, institutional, and normative governance paradigms.  Bind (Boston MA: Harvard Business School Press, 1999) at 27 and 44. Later, Wempe and Donaldson describe ‘hyper-norms’ as norms so fundamental that evaluation and judgment of ordinary norms is conducted by reference to these constant higher order norms – see, Johan Wempe and Thomas Donaldson, “The Practicality of Pluralism: Redrawing the Simple Picture of Bipolarism and Compliance in Business Ethics” in George G. Brenkert, (ed.) Corporate Integrity and Accountability (London: Sage Publications, 2004) 31. See also: Linda M. Sama and Victoria Shoal, “Reconciling Rules and Principles: An Ethics Based Approach to Corporate Governance” (2005) Journal of Business Ethics Vol. 58 (May 2005).  5  The potential of this higher level framework approach based on enduring ethical norms, principles and values is a greater ability to accommodate normative and societal change and to deliver broad based benefit than narrower frames of reference that emphasize and capitalize on the deficiencies, flaws and weaknesses of other systems and approaches in a form of regulatory imperialism.6  To focus on differences and to overlook the similarities in function, if not form, is to risk obscuring fundamentally shared goals: and it is on those fundamentally shared goals −situate within an ethical framework that transcends the limits of conventional geopolitical boundaries and different regulatory and approaches and philosophies − that constructive engagement can occur on the common pursuit of effective, globally recognized standards of good corporate governance.  There are those who argue that the specific activities of business and commercial enterprise are predominantly a matter of private law focus. More often the case in the United States, where corporate law is the exclusive jurisdiction of the individual States and matters of incorporation and conduct of affairs are protected by privacy and limited in terms of financial reporting requirements and other governance mechanisms, any study of the governance and conduct of market actors inevitably encounters the public – private debate.  Yet, whatever the private interactions and transactions and despite constitutional barriers to effective governance oversight, all business takes place within a wider social, political and economic framework and relies on public goods and social licence to operate. Its primary purpose is to satisfy human and material needs by efficiently producing and supplying good and services. As such, business activities − exploration, invention, research and development, production, trade, marketing, investment and finance among others − are inherently social acts between parties that take place, have implications and  6  On democratic governance, see: Christine Parker, The Open Corporation – Effective Self-Regulation and Democracy (Cambridge University Press, 2002); Douglas K. Smith, On Value and Values (New Jersey: Pearson Education Inc, publishing as Financial Times Prentice Hall, 2004).  6  consequences for and must be considered in light of the larger societal arena.7 It is for this reason that this thesis explores the social and normative as well as legal and institutional dimensions of business conduct and seeks fresh insight by viewing them through the window of governance discourse − formal and informal, established and emergent.  1.3  Discourse and the Governance of Business  The internet’s accelerated ascendance in the last two decades has coincided with the emergence of a combination of forces for change in the nature, conduct and governance of business.  One is the sustained growth in developed economies of retail investor participation in capital markets, both directly and indirectly through mutual funds, insurance policies and pension investments. Another is the rise of the corporate social responsibility movement from mid last century, and the subsequent emergence of civil activism around corporate influence and the implications of global economic policies and trade practices. A third is the increased public attention to matters of corporate governance since the collapse of Enron and contemporaneous corporate bankruptcies and scandals through the close of the last and into this century.  7  M. Granovetter, “Economic Action and Social Structure: the Problem of Embeddedness” (1985) American Journal of Sociology 91: 481-93: a response to the under-socialization (rational economics) and over-socialization (sociological theory) of economic behaviour that markets and hierarchies should be understood as embedded in social networks. James Coleman, Foundations of Social Theory (New York: First Harvard University Press, 1994): regarding exchange relationships as derived from inherently social and cultural norms rather than purely rational calculus. Gary M. Woller, “Business Ethics, Society and Adam Smith: some observations on the liberal business ethics” (1996) Journal of Socio Economics vol. 25, issue 3: social norms underpin Adam Smith’s market. Ken Morrison, Marx, Durkheim, Weber Foundations of Modern Thought 2d (London: Sage Publications, 2006) at 388: central to Marx’s examination of the effects of the modern economy on human labour processes was the notion that labour served to connect individuals to themselves and to the community through the process of production. He identified four sources of alienation from the inherently social function of work due to changes to the labour process through industrial capitalism such as the commoditization of work, price competition and the pursuit of private gain.  7  For the traditional participants in governance discourse − businesses, investors, institutions, the wider market community and regulators − electronic information platforms have for some time served as efficient repositories, resources and outlets for information. Specifically, information about companies and capital markets, their constitution, activity and operation, performance and varied structures. Through the 1980s and 1990s, these participants had relatively exclusive access to detailed and sophisticated information through internal and proprietary information platforms, content and tools. Even web-based sites that emerged in the nineties with the growth of dotcoms were developed with a view to restricted accessibility and maintained barriers through subscription costs and the specialized presentation of information.  At this level, these proprietary and subscription based online resources operated as restricted information portals with limited contribution to make to the potential powers of communication, information and transparency as an indirect regulatory mechanism. As Bardach and Kagan have observed, “[i]nformation is potential power” provided there are available resources for its useful consumption by “the citizen, the consumer or the worker”, otherwise “the information is beside the point”.8 Absent these resources, the distribution of information is incomplete or dependent on intermediaries, giving rise to information asymmetries that limit the efficiency and transparency of capital markets and arguably impede their proper function.  However, these specialized uses facilitated the development of mechanisms for achieving the greater transparency and information disclosure necessary for greater and more independent governance oversight. Such advances include: mandatory filings on publicly accessible repositories such as EDGAR in the United States and SEDAR in Canada; the introduction of XBRL to facilitate interaction with and analysis of corporate financial data; public access to corporate information and disclosure documents through official corporate websites; online communication with shareholders and electronic voting; and 8  E. Bardach and R.A. Kagan, Going By The Book: the problem of unreasonableness. (Philadelphia, PA: Temple University Press, 1982) at 248.  8  the availability of information and resources from independent sources that range from interactive finance and investing websites to those that monitor business’ social, environmental and ethical practices, political influence and carbon footprint. In this regard, these public online functions and portals serve the potentially powerful ‘information strategy’. Whereby, according to Bardach and Kagan, individuals are empowered “to be their own ubiquitous inspectors, tailor their own standards to particular risks, and invoke their own sanctions”. In some cases this can be to powerful effect.9  The internet as a means of communication is thus distinct from previous information exchange media that facilitated communication between sophisticated capital market participants in that much of its vast information resource is potentially accessible to a much broader audience. Further, the ability to access information and verification from independent sources enables more complete monitoring of business activity than that which relies solely on corporate disclosure. As a result, the internet has enabled the growth of governance discourse beyond the elite spheres of traditional boardrooms and executive offices of corporations and institutions: serving as a platform for discussion and debate on wider issues concerning business and its economic, political and social influence within society.  In the context of governance and globalization, legal scholars such as Branson have argued that the technological and communications phenomenon of the information age will enable diversity and preserve governance styles particular to specific cultures and economies rather than facilitate the dominance and eventual formal convergence to an American style form of governance as has been suggested in United States governance convergence scholarship.10 9  Ibid. at 248. See, John C. Coffee, Jr., “The Future as History: The Prospects for Global Convergence in Corporate Governance and its Implications” (1999) 93 Nw. U. L. Rev. 641; Henry Hansmann and Reinier Kraakman, “The End of History for Corporate Law”, Social Sciences Research Network (SSRN) Electronic Paper Collection, http://papers.ssrn.com/paper.taf?/abstract_id=204528> (2000) [UPDATE]. More recently, there is increasing recognition of the fundamental incompatibility of US style corporate governance with corporate governance regulation and practice in other parts of the world. For example, Tim Bush in ‘Divided by Common Language’ Where Economics Meets the Law: US Versus Non-US Financial Reporting Models (Chartered Accountants in England and Wales, 2005). Web published at: 10  9  Certainly, a more open forum for governance discourse can help to dispel misperceptions and inaccurate assumptions that arise in comparative and competitive governance analysis dominated by particular perspectives. In Divided by Common Language, Bush writes that the common language of the United Kingdom and United States can at times create a superficial similarity in both governance and reporting matters when, beneath the surface, the law is quite different in form and substance, intent and effect.11  As such, the internet as a platform for information exchange and a communication medium offers the promise of greater access, openness and transparency.12 It signifies the potential for what a recent Arthur W. Page Society report described as “ democratized access to information production, dissemination and consumption … overturning the corporation’s traditional ability to segment audiences and messages and to manage how it wishes to be perceived.”13 Yet, the internet’s great weakness and the largest very real threat to achieving this potential is its vulnerability to anonymous transactions, hidden biases and influence, and criminal and socially disruptive activity. As much if not more than its potential for greater openness and transparency is the internet’s potential to provide a platform for the manipulation and misrepresentation of information and distortion of the truth on a mass scale. The reality is that communication technologies do not simply support a neutral platform or medium for the exchange of information and ideas and debate, but also http://www.icaew.com/index.cfm/route/115933/icaew_ga/pdf web-published June 2005. (See also notes: 36, 136, 231.) 11 “The US securities laws are trying to do something entirely different to the financial reporting regimes of other countries because of the constitutional limitations of the US federal system …. [b]ecause of anomalies within the US federal reporting system, introducing aspects of a US-style regulatory financial reporting and corporate governance regime into other countries where the laws are actually different and not constitutionally restricted, is conceptually unsound”. Ibid. at 2-3. 12 James Bohman, “Expanding Dialogue: The Internet, the public sphere and prospects for transnational democracy”, in Social Theory – Continuity and Confrontation 2nd ed, Roberta Garner (ed.) (Broadview Press, Peterborough, 2007). Thomas S. Ulen, “Democracy and the Internet: Cass R. Sunstein, Republic.Com. Princeton, NJ. Princeton University Press, Pp. 224, 2001” (2001) Journal of Law, Technology and Policy, No. 2, Fall 2001. Available at SSRN: http://ssrn.com/abstract=286293 or doi:10.2139/ssrn.286293 13 Arthur W. Page Society, The Authentic Enterprise (Arthur W. Page Society, 2007) at 6. Online at: http://www.apagesociety.com/site/resources/white_papers/.  10  operate as an instrument of commerce, and a vehicle for the exercise of power, exclusion and oppression.14 These contrasts − the democratic ideal and the reality − provide a rich canvas for examination of the evolution and formation of societal norms and standards of business and institutional conduct, and the communicative mechanisms and vocabulary used to express them within and between diverse dialogic communities.15 They also provide an opportunity to examine the evolving governance discourse after Habermas’ dialogic ideal, the influence of concealed power on the nature of that discourse following Foucault and others’ examinations of power relations in language, and the implications for an explicit ethics of engagement. Some jurisdictions – notably the United Kingdom, other Member States of the European Union and the European Commission, Australia and South Africa − have advanced contemporary discourse on the interrelationship of economics, law, public policy and the public good, corporate governance and the responsible conduct of business.16  In the United Kingdom, a Committee on Financial Aspects of Corporate Governance was struck in 1991 by the Financial Reporting Council, the London Stock Exchange, and the accountancy profession in response to business scandals that caused considerable damage to public and market confidence in the honesty, accountability and value of public  14  See for example: R.C. Holub, Jurgen Habermas: Critic, in the Public Sphere (London: Routledge,1991); L. McLaughlin, “Feminism, the Public Sphere, Media and Democracy” (1993) Media, Culture and Society 15: 599-620; N. Fraser, “Rethinking the Public Sphere: A Contribution to the Critique of Actually Existing Democracy”, in C. Calhoun (ed.) Habermas and the Public Sphere, (Massachusetts: The MIT Press,1992). 15 The concept of a dialogic community was first theorized in the work of philosopher Martin Buber. Buber states "Community is the overcoming of otherness in living unity...community is no union of the likeminded, but a genuine living together of men of similar or of complementary natures but of differing minds" (Martin Buber as cited in R.C. Arnett, Communication and community: implications of Martin Buber’s Dialogue (Carbondale, IL: Southern Illinois University Press, 1986) xi. 16 These relationships have been the subject of thought and discussion for centuries. In 1699, for example, English political economist Charles Davenent wrote that “Trade, without doubt is in its nature a pernicious thing; it brings wealth which introduces luxury; it gives rise to fraud and avarice …. Lycurgus in the most perfect model of government that was ever framed, did banish it from his commonwealth”. Charles Davenent, “Essay upon the Probable Methods of Making a People Gainers in the Balance of Trade” (1699) in Works II, 275 quoted in Jerry Z. Muller, Adam Smith in His Time and Ours: Designing the Decent Society (New York: Free Press, 993).  11  companies.17 In the opinion of the Committee Chairman Sir Adrian Cadbury, the former Chairman of Cadbury Schweppes with its storied 170 year history of conducting business according to the high ethical standards of nineteenth century ‘Quaker capitalism’,18 “[T]he proper governance of companies was becoming as crucial to the world economy as the proper governing of countries”.19 The Committee issued its findings in 199220 following extensive consultation and consideration of more than 200 written submissions during the public comment process.21 The report − which came to be known as The Cadbury Report − its findings, recommendations and Code of Best Practice based on the principles of openness,22 integrity,23 and accountability24 is generally considered to be the genesis of modern  17  In particular, the sudden financial collapses of two companies, wallpaper group Coloroll and the Polly Peck consortium. Subsequent to the Committee’s establishment, continuing controversy over director and executive compensation levels, and two further scandals that shook the financial world heightened the significance and profile of the work of the Cadbury Committee during a particularly difficult economic period: the collapse of the Bank of Credit and Commerce International (BCCI) and exposure of its widespread criminal practices, and the posthumous discovery of Robert Maxwell's appropriation of £440m from his companies' pension funds as the Maxwell Group filed for bankruptcy in 1992. Source: “The Cadbury Report”, The Cadbury Archive, University of Cambridge Judge School of Business. Online at: http://www.jbs.cam.ac.uk/cadbury/report/index.html. 18 The ‘Quaker capitalists’ of nineteenth century Britain believed that business should e conducted according to strict principles of hard work, austerity and watchful restraints, with wealth creation not as an end in itself but as a means to benefit workers, local communities and society at large as well as the entrepreneurs. The notion of personal advantage and gain as a distinct aim of business offended such principles. Cadbury, Deborah, Chocolate Wars (Vancouver, Canada: Douglas and McIntyre, 2010) at xi. 19 As quoted ibid. at 278. 20 The Cadbury Committee, The Report of the Committee on the Financial Aspects of Corporate Governance, (London: Gee, 2002) (“The Cadbury Report”). The draft report was issued in May 1992 and the final report in December 1992. Online at: http://www.jbs.cam.ac.uk/cadbury/report/index.html 21 The Committee’s draft report, issued for public comment on 27 May 1992, drew on a number of reports on different aspects of corporate governance which had either been published or were in preparation at the time the Committee convened as well as a wide range of submissions from interested parties. Reports considered included “Business Ethics and Company Codes – Current Best Practice in the United Kingdom”, (1992) from the Institute of Business Ethics, an influential non-profit organization established in 1986 to encourage high standards of business behaviour based on ethical values. The public comment process yielded over 200 written responses to the Committee’s proposals, the great majority of which broadly support the Committee’s approach. The Cadbury Report supra note 20 at par. 2.2-2.4 22 The Cadbury Report supra note 20, Introduction at par. 3.1: “An open approach to the disclosure of information contributes to the efficient working of the market economy, prompts boards to take effective action and allows shareholders and others to scrutinize companies more thoroughly.” 23 The Cadbury Report supra note 20, Introduction at par 3.3. The Committee regards integrity as encompassing “straightforward dealing and completeness” such that financial reports “should be honest … should present a balanced picture of the state of the company’s affairs … [and] depends on the integrity of those who prepare and present them”.  12  corporate governance having influenced governance in more than twenty-eight countries and in institutions such as the World Bank.25 While the Quaker values that influenced Sir Adrian’s understanding of how a company best operates, and that were evident in the governance best practices developed within Cadbury under his family’s leadership, were not mentioned explicitly in the Cadbury Code, their influence was crucial. In Sir Adrian’s view the aim of the code was to bring “greater transparency, honesty, simplicity and integrity to the process of running a company”.26  In Australia, The Bosch Committee, comprising representatives from business and the professions and chaired by Henry Bosch past Chairman of the National Companies and Securities Commission, the predecessor of the Australian Securities and Investments Committee, was established in 1990 at least partly in response to damaging publicity arising out of the malpractices of a small number of prominent companies in the 1980s.27 The formation of the committee reflected a genuine desire to restore the reputation of the business community and to prevent a repetition of past excesses.28 Its publication, Corporate Practices and Conduct, set out guidelines for directors of Australian companies with the main objective to “improve the performance and reputation of Australian business by encouraging and assisting the general adoption of the highest standards of corporate conduct”.29  24  The Cadbury Report supra note 20, Introduction at par 3.4. The Commission held that boards of directors were “accountable to their shareholders and both had to play their part in making accountability effective.” The board’s provision of quality information to the shareholders could achieve this objective. 25 Cadbury, Deborah, The Chocolate Wars, (Vancouver, Canada: Douglas and McIntyre, 2010) at 278. 26 As quoted ibid. at 278. 27 Two of the most notable, that inspired intense public backlash and provoked significant law reform activity, were the corporate collapses of HIH and One.Tel. HIH is the largest collapse in Australian corporate history, and the subject of an A$40 million Royal Commission (HIH Royal Commission). The Commissions findings were published in April 2003 HIH Royal Commission, Commonwealth of Australia, The Failure of HIH Insurance (2003), http://www.hihroyalcom.gov.au/finalreport/index.htm 28 Jean Jacques du Plessis, Anil Hargovan, Mirko Bagaric, Principles of Contemporary Corporate Governance 2d, (Cambridge University Press, 2011) at 137. 29 Henry Bosch, Corporate Practices and Conduct (3rd ed) (Woodslane Pty Ltd, 1995), Foreward.  13  The South African government in 1992 asked former South African Supreme Court Judge Mervyn King S.C. to chair a private sector committee to draft corporate governance guidelines in keeping with the country’s move toward democratic government. The King Committee on Corporate Governance issued its first report in 1994. The report − The King Report on Corporate Governance for South Africa (“King I”, as it came to be known) − incorporated a Code of Corporate Practices and Conduct, the first of its kind in the country, aimed at promoting the highest standards of corporate governance in South Africa. 30 These highest standards went beyond the financial and regulatory aspects of corporate governance, taking an integrated and inclusive approach to good governance in the interests of a wide range of stakeholders beyond shareholders that was groundbreaking and to this day regarded as ahead of its time.31 In Canada, an independent national commission – the Canadian Democracy and Accountability Commission – conducted cross-country hearings throughout 2001 as part of its year-long investigation of corporate accountability. Its report issued in January 2002, The New Balance Sheet: Corporate Profits and Responsibility in the 21st Century, contained 24 recommendations to significantly broaden the concept of corporate accountability beyond the narrow focus on profit.32 Specifically, the Commission recommended that corporate accountability include accountability to employees, customers, communities, the environment, the country and the global community. According to a national survey conducted on behalf of the Commission to supplement the hearings and separate submissions33 to the Committee, 74 percent of shareholders surveyed agreed that “business executives have a responsibility to take into account the  30  King Committee on Corporate Governance, King Report on Corporate Governance for South Africa, 1994 (South Africa: Institute of Corporate Directors, 1994) (“King I”). 31 The evolving global economic environment together with recent legislative developments, have necessitated updates to King I, The King Report on Corporate Governance for South Africa, 2002 (South Africa: Institute of Corporate Directors, 2002) (“King II”) and the King Code of Corporate Governance for South Africa, 2009 (South Africa: Institute of Corporate Directors, 2009) (“King III”). 32 Canadian Democracy and Accountability Commission, The New Balance Sheet: Corporate Profits and Responsibility in the 21st Century (Canadian Democracy and Accountability Commission, 2002). 33 In addition to the hearings, the Commission met or received submissions from 157 organizations and individuals from government, the corporate sector, organized labour, nongovernmental organizations, ibid. at Appendix B.  14  impact their decisions have on employees, local communities and the country as well as making profits [sic]”.34  A recent communication by the European Commission to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions, Towards a Single Market Act carries forward to the present these same concerns, in stating that, [I]t is of paramount importance that European businesses demonstrate the utmost responsibility not only towards their employees and shareholders but also towards society at large.35 Other jurisdictions are broadening business discourse to address wider socio-economic implications. Such shifts are evident even in the United States, where the long-established view of many academics, policy makers and market participants − that economies have a separate and superior existence to the rest of society − fundamentally differs from the majority view in the rest of the world.36 My thesis proposes that this form of governance discourse − if conducted within an explicitly ethical framework − is essential in a global economy. The need for ethicallybased and inclusive governance discourse is particularly the case where the economy is dominated by the capitalist model, where the boundaries between public and private sectors, individual and community interests are constantly challenged and where the notions of what is ‘ethical’, ‘fair’, ‘just’ and ‘right’ in a free market system elude legal definition and, consequently, formal regulation.  34  Vector Research poll conducted from September 28 to October 8, 2001 with 2006 adults across Canada, ibid. at Appendix C. 35 Communication from the Commission to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions, Towards a Single Market Act – for a highly competitive social market economy, COM(2010) 608 final/2, 27. 36 Douglas Branson in “The Very Uncertain Prospect of ‘Global’ Convergence in Corporate Governance” (2001) 34 Cornell International Law Journal 321 elaborates on how other models of capitalism such as family capitalism, bamboo capitalism, crony capitalism, guided capitalism, managed capitalism and even gangster capitalism in developing and newly industrializing economic regions, are grounded in cultural norms and social institutions that have at least equally significant existence to the economy.  15  Through this lens, I consider the limits of formal regulation and the inter-relationship between laws, norms and ethical standards in market based and public policy approaches to directing, regulating and judging the conduct and governance (broadly construed) of business institutions.  This examination, in turn, will shed some light on the role that ethical norms play in ordering society and social groups beyond the realm of formal rules. In particular, the ways in which society at large organizes as normative governance sub-cultures with distinct voices − such as communities, industry groups, and non profit organizations − that achieve cooperation in order to pursue common as well as individual goals.  In this cooperation there is an intangible, morally, socially and behaviourally complex element that goes beyond a merely rational economic calculus toward something that is suggestive of an appreciation for shared rather than narrow self interests.  16  2.  Approach  “While narrowing the focus of any enterprise is necessary in order to say anything meaningful about anything, the scope of an inquiry into a subject as sweeping as norms must be broad … The broader the starting inquiry, the greater the understanding. [T]o opt for simplicity in the hope of achieving clarity [means that] clarity is achieved at the expense of a realistic understanding of norms”. Lawrence Mitchell37  2.1  Research Objective  One of the central issues facing governments, civil society, individuals and corporations with respect to standards of business conduct and governance is whether expectations for corporations and like entities to be responsible for social, environmental and ethical issues arising from their operations are amenable to prescriptive, formal regulation and adjudication, or whether such expectations are, by their nature, more appropriately situate in the ethically and normatively regulated domain, subject to certain minimum standards prescribed in law.  One of the objectives of this research is to gain insight into the existence, or not, of observable functional or substantive as well as formal congruence between normative public discourse regarding ethical corporate conduct on the one hand and formal (legal and regulatory) and institutionalized governance rhetoric on the other. Evidence of such congruence could be found in an emergent dominant lexicon, or normalized and institutionalized expressions of governance standards, or both, relating to ethical considerations38 within and across different ‘regulatory’ dialogic communities. It could also be found in the advent of a common or shared vocabulary for explicit, formal 37  Lawrence E. Mitchell, “Understanding Norms” [1999] University of Toronto Law Journal, April 1999. Available at SSRN: http://ssrn.com/abstract=142432. 38 ‘Ethical considerations’ in this regard is a broad phrase encompassing environmental and social as well as economically responsible considerations.  17  recognition via disclosure of ethical issues as material ‘non-financial’ considerations and risks.  It is a truism that language in common does not necessarily lead to common meaning or shared understanding. In this exercise, therefore, it is necessary to confront a variety of interpretive challenges. These include: issues of source, representation and contested legitimacy; the appearance or illusion of commonality or congruence; and the dominant or hegemonic influences of authority and power embedded in institutionalized legal and normative governance discourse and the dominant governance lexicon.  The existence of formal, functional or substantive congruence, if found, leads to further exploration of the possibility that ethics − as a meta-regulatory framework − may have the potential to alleviate some of the inherent interpretive and practical challenges to reconciling culturally diverse and pluralistic regulatory approaches in the pursuit of effective global corporate governance standards.  By embarking on this project, I hope to demonstrate the application of institutional discourse and the dialogic dimension of regulatory theory and practice to emergent legal and normative regulation of corporate governance and conduct. The findings also relate institutionalization and normalization processes to emergent standards of responsibility and accountability that extend beyond those required for strictly instrumental and/or narrow rational economic purposes. 2.2  Structure  Governance generally, and corporate governance specifically, is a complex, many layered and multidimensional subject. So too is the discourse that variously creates, defines, influences, implements and shapes it.  In exploring ethics as a meta-regulatory framework for governance discourse I have chosen to explore legal, institutional, normative and social dimensions of governance standards and practice.  18  The scope of this project encompasses:   the study of traditional, formal sources of corporate governance standards and practices − state-based legal and regulatory measures − and a range of emergent, non-traditional and informal sources − voluntary codes, guidelines, standards and values-based expectations − all of which fulfill a regulatory function whether it be the so-called ‘command and control’ at one extreme to enlightened self-restraint at the other;    an exploration of the conjunction, intersection, and inter-relationship of these established and emergent sources of corporate accountability, conduct, and governance norms and standards; and    a consideration of the evolving roles and interactions of established and newer participants in the ongoing discourse of corporate governance − governments, business, investors, stakeholders, and the public.  The structure and approach in this thesis reflects a series of choices including: where to situate and how to lay the foundations; how to frame the discussion; and how to progress from one aspect to another and in what sequence so that each part advances or deepens the preceding discussion.  In this regard, Chapter Three situates the discussion within the context of a long-standing dynamic between business, government and society by providing an overview of recent and past crises in governance and successive responses. It examines the pattern of regulatory response to crisis evident from the recent history of corporate and market failures, and considers whether the fact that this cycle is played out on an increasingly public stage has any significance to the nature of response.  Chapter Four begins to lay the foundations of the central themes of this thesis by taking the variable success of policy responses to recent governance failures as an opportunity to introduce alternative perspectives on the nature, source and expectations of corporate governance and to provide examples of how consideration of alternative perspectives can serve to advance the discourse of governance and the achievement of public policy  19  objectives. The consideration of alternative perspectives as a means to broaden, enrich and legitimate governance discourse is a recurring element of this thesis and an essential ingredient of an ethical framework for governance discourse. Chapter Five develops the preceding chapter’s consideration of alternative perspectives on corporate conduct and governance by way of an overview of the formal basis of corporate governance standard-setting in the United Kingdom, United States and the European Union. Each of these systems’ approaches to corporate governance is the product of their particular historical, constitutional, legal, political, institutional and cultural influences. In the case of the United Kingdom and the United States the shared language and the central role of capital markets in their respective economies may suggest greater concordance than in fact exists, In this regard, the chapter highlights some of the foundational differences that distinguish the approach to corporate governance in the United Kingdom and the United States. By contrast, the chapter also highlights the functional similarities among member states of the European Union (including the United Kingdom) on the principles of governance notwithstanding their diversity of formal legal and political structures and different cultural and historical roots. It also invokes two central ideas on which this thesis is based. One, that similar goals can be pursued by different means and two, that there is potential for constructive engagement to take place on issues of accountable, ethical, and effective governance that transcend the limitations of conventional boundaries.  Chapter Six juxtaposes the ideas for pursuing common goals within a framework of constructive engagement advanced in the preceding chapter with the object of such efforts − the corporate entity. Modern corporations have considerable influence in developing and under-developed, as well as developed, nations and virtual omnipresence in mainstream society. As a consequence they play a powerful normative role in shaping standards and expectations of business conduct and governance alongside and in some respects well beyond the formal role of state institutions. The chapter draws attention to particular attributes of corporate entities that are the source of, or that exacerbate, contemporary challenges to ensuring that businesses conduct and govern themselves  20  responsibly with due attention to reducing or ameliorating adverse impacts and consequences of their operations wherever they may occur. While these challenges are not insurmountable, any framework for effective governance discourse must include corporate decision makers, recognizing the inherent challenges but also the opportunities for constructive engagement on − and solutions to − issues that transcend the regulatory capacity of governments.  Chapter Seven embarks on a closer examination of the limits of the law and formal regulation as a sole source of corporate conduct, governance and accountability standards in an open economy and global marketplace that has empowered businesses to operate beyond traditional geo-politically defined boundaries of control. Specifically, it considers the implications of an increasingly global marketplace for the authority and effectiveness of state-based law and regulation that only prescribes and enforces minimum legal thresholds and that have little or no formal extraterritorial effectiveness. Furthermore, while markets are increasingly interconnected and interdependent there are and arguably will remain significant cultural, economic, institutional, legal and normative barriers to formal regulatory convergence. Given this, a central consideration is whether the collective efforts of many to promote regulatory harmonization might be better aimed at the potential for achieving higher level normative consensus on the fundamental principles that shape and inform the regulation and self-regulation of corporate conduct and on the desired outcomes, both proactive and preventative.  Chapter Eight advances the discussion toward a consideration of the expressive and normative functions of formal and informal sources of governance standards based on the early insights of Emile Durkheim on the relevance of systems of normative regulation, and of others who have considered complex systems and networks based perspectives in the regulation of conduct.39 These theories provide important insight into the relationship  39  Andrew Dunsire, “Modes of Governance”, in: J. Kooiman (ed.), Modern Governance: new governmentsociety interactions (London: Sage, 1993) 21-34 at 29. J. Kirkbride and S. Letza, “Regulation, Governance and Regulatory Collibration: achieving an ‘holistic’ approach” (2004) An International Review Volume 12, No. 1, January, 2004. W. W. Powell, “Neither Market nor Hierarchy: Network Forms of Organization” (1990) Research in Organizational Behaviour ,12:295-336. Villiers and Boyle “Corporate Governance and  21  between, mutual constitution and evolving co-existence of normative, principles-based, and prescriptive approaches to regulating corporate conduct and governance standards on a transnational level.40 These themes − the synergies of ethical, normative and legal domain, the limits of traditional regulatory mechanisms, the role of socially and contextually constructed meaning, and the possibility of institutionalization and normalization of a culture of accountability, good governance and responsibility beyond instrumentalist compliance − are the common thread in the ensuing chapters.  Chapter Nine considers the changing nature of the relationship of business to society and in this regard explores the relatively recent formal recognition of stakeholders in general and civil society in particular, as a legitimate source of expectations of and normative influence on standards of corporate conduct and governance.  Chapter Ten examines some of the agents and catalysts for change in the nature of, and forum for, governance discourse and recent innovations in disclosure relating to the ethical dimensions of governance. They also manifest as the normative influences of economic and social stakeholders that are altering the nature and expectations of business. This influence is particularly evident with respect to accountability, engagement, transparency and changing contextual referents such as the recognition of social costs and ‘non-financial’ risks in the assessment of corporate value, and values.  The engagement of these different stakeholders on issues of corporate governance and conduct also provides a window into the ordering function of norms within social groups. That is, illuminating how communities and organizations construct norms and accompanying narratives based on common interests or shared ideologies that enable  the Approach to Regulation”, in L. MacGregor, T. Prosser, and C. Villiers (eds.) Regulation and Markets Beyond 2000. (London, UK: Ashgate, 2000). 40 Emile Durkheim, The Division of Labour in Society (New York: The Free Press, 1984 (1893)). Emile Durkheim, Professional Ethics and Civic Morals (London: Routledge, 1992 (1900)). Villiers and Boyle emphasize that it is the interrelationship between different parts of the whole system that are determinative of effective corporate governance. That is, the interactions, tensions and balances between internal mechanisms of control supported through self-regulatory codes of conduct and a framework of formal legal rules in “Corporate Governance and the Approach to Regulation” in L. MacGregor, T. Prosser and C. Villiers (eds.) Regulation and Markets Beyond 2000. (London, UK: Ashgate, 2000).  22  individual and collective cooperation41 in pursuit of common goals that goes beyond the narrow self interest of instrumentalist justification of cooperation. In this connection, I also explore the appearance in the last two decades of explicit ‘public good’ policy objectives relating to the ethical, environmental and social dimensions of corporate behaviour − that is, corporate governance broadly defined − in legislation and formal regulation of business conduct.  Chapter Eleven considers the advent of values and values based standards in corporate governance discourse over the last three decades and their influence in informal and institutionalized change, and in both internalized and shared notions of corporate governance, standards of conduct and responsibility. Influence that is evident, for example, in the increased incidence of corporate entities, institutions and governmental authorities employing the language of governance, ethics and accountability in an interpretation of corporate responsibility that goes beyond legal and economic duties to shareholders, to encompass ethical, social and environmental accountability. The public texts of these values based standards range from so-called ‘soft law’ codes of conduct42, best practice guidelines, statements of principles, and formal commitments related to ethical corporate conduct and good governance. Here, as in previous chapters my exploration considers the dialogic dimension of these normative sources of corporate conduct and governance standards, in this case the choice of language used by constituents of the different ‘regulatory communities’43, and the challenges inherent in 41  Influential writing on the topic of inter-organizational collaboration and cooperation include: E. Trist, “Referent Organizations and the Development of Inter-Organizational Domains” (1983) Human Relations 36.3: 269-84; Barbara Gray, “Conditions Facilitating Inter-organizational Collaboration” (1985) Human Relations 38:10: 911-36; F. Westley H. Vredenburg, “Strategic Bridging: The Collaboration between Environmentalists and Business in the Marketing of Green Products” (1991) Journal of Applied Behavioural Science 27.1: 65-90; S. Sharma, H. Vredenburg and F. Westley “Strategic Bridging: A Role for the Multinational Corporation in Third World Development” (1994) Journal of Applied Behavioural Science 30.4: 458-76; V. Lowndes and C. Skelcher “The Dynamics of Multi-Organizational Partnerships: An Analysis of Changing Modes of Governance” (1998) Public Administration 76: 313-33; H. Vredenburg and F. Westley “Sustainable Development Leadership in Three Contexts: Managing for Global Competitiveness” (2002) Journal of Business Administration Special Issues: ‘Bridging Business on Board: Sustainable Development and the B-School Curriculum’, 239-59. 42 Douglas M. Branson, “Teaching Comparative Corporate Governance: The Significance of “Soft Law” and International Institutions” (2000) 34 GA. Law Review 669, 682-84. 43 The concept and terminology of ‘regulatory community’ has been used by numerous scholars including: E. Meidinger “Regulatory Culture: A Theoretical Outline” (1987) Law and Policy 9: 355-86; Julia Black, Rules and Regulators, (Oxford: Clarendon Press, 1997); Christine Parker, “Compliance Professionals and  23  what is an essentially open and unregulated forum where the interpretation and meaning of even the most central concepts are fluid and contested.  Chapter Twelve considers the role of discourse in light of modern advances in communication technologies, and the opportunities as well as the inherent risks that these advances pose to the ideal of ethical dialogue and the socially legitimate construction of meaning in general and in relation to governance and corporate conduct specifically. It seeks insight from the work of Bourdieu, Habermas and others into whether a shared understanding can be achieved through dialogue, or if interpretation is ultimately imposed unilaterally through an exercise of power including, but not limited to, regulatory authority.  Chapter Thirteen carries the theme of governance discourse into the institutional domain. Starting with an explanation of the specific characteristics of institutional discourse, it explores the nature of governance discourse occurring within the corporate and shareholder spheres by considering the particular aspects of corporate governance in which these institutions have chosen to engage and formally articulate positions that reflect standards of governance, conduct and practice that go beyond those necessary to comply with legal minimum or threshold requirements.  Each of the preceding chapters have contributed to, and advanced, the central exploration of this thesis: ethics as a meta-regulatory framework for governance discourse. Ethical standards − their observance or their breach − have formed part of the governance narrative whether in the context of corporate transgressions, regulatory shortcomings, terms of engagement between business and their stakeholders or as one of the measures of performance used by investors in constructing their equity portfolios. Ethics comes from the Greek (he)ethike(tekhne) ‘(the science of) morals with its base in the Greek ethos meaning ‘nature, disposition’.44 Nature and disposition are the essence of conduct, Regulatory Community: The Australian Trade Practices Regime” (1999) Journal of Law and Society Vol. 26, Number 2, 215-39 (June 1999); Ian Ayers and John Braithewaite, Responsive Regulation: Transcending the Deregulation Debate, (New York: Oxford University Press, 1992). 44 The Oxford Dictionary of Word Histories (Oxford University Press, 2004).  24  and a moral nature or disposition is the foundation of good conduct that is in turn the basis of good governance.  In Chapter Fourteen I consider ethics as a constitutive, or first order, governance resource − one that ensures that those whose decisions and actions shape the governance landscape, whether by formal or informal means, conduct themselves according to fundamental norms of ethical conduct such as fairness and honesty, inclusiveness, and integrity embodied in principles that will guide processes, identify responsibilities and ultimately inform choices that take account of the implications and consequences for those affected.  Lastly, in Chapter Fifteen, I reflect on the possibility of situating governance discourse within an explicitly ethical meta-regulatory framework in light of the theoretical, practical, and conceptual challenges and opportunities considered in this thesis. The expression of overarching statements of ethical principles and the underlying norms, or values, creates an explicit, shared frame of reference. This common referent can guide and inform the nature, process, terms and standards of engagement that enable the pursuit of shared understanding and informed discourse, as well as help to achieve consistency and common standards of accountability that constitute a safeguard against dishonest and unethical behaviour. Such processes and standards are core to the establishment of the trust necessary for constructive dialogue and effective engagement that can ultimately lead to good governance.  2.2  Objective  The central issue facing governments, civil society, individuals and corporations is whether business values and standards of corporate conduct with respect to social, environmental and ethical issues are amenable to prescriptive, formal regulation and adjudication or whether they are, by their nature, more appropriately situate in the ethically and normatively regulated domain, subject to certain minimum standards prescribed in law.  25  One of the objectives of this research is to gain insight into the existence, or not, of observable functional or substantive as well as formal congruence between normative public discourse regarding ethical corporate conduct on the one hand and formal (legal and regulatory) and institutionalized governance rhetoric on the other. Evidence of such congruence could be found in an emergent dominant lexicon, or normalized and institutionalized expressions of governance standards, or both, relating to ethical considerations45 within and across different ‘regulatory’ dialogic communities. It could also be found in the advent of a common or shared vocabulary for explicit, formal recognition via disclosure of ethical issues as material ‘non-financial’ considerations and risks.  It is a truism that language in common does not necessarily lead to common meaning or shared understanding. In this exercise, therefore, it is necessary to confront a variety of interpretive challenges. These include: issues of source, representation and contested legitimacy; the appearance or illusion of commonality or congruence; and the dominant or hegemonic influences of authority and power embedded in institutionalized legal and normative governance discourse and the dominant governance lexicon.  The existence of formal, functional or substantive congruence, if found, leads to further exploration of the possibility that ethics − as a meta-regulatory framework − may have the potential to alleviate some of the inherent interpretive and practical challenges to reconciling culturally diverse and pluralistic regulatory approaches in the pursuit of effective global corporate governance standards.  By embarking on this project, I hope to demonstrate the application of institutional discourse and the dialogic dimension of regulatory theory and practice to emergent legal and normative regulation of corporate governance and conduct. The findings also relate institutionalization and normalization processes to emergent standards of responsibility 45  ‘Ethical considerations’ in this regard is a broad phrase encompassing environmental and social as well as economically responsible considerations.  26  and accountability that extend beyond those required for strictly instrumental and/or narrow rational economic purposes.  2.3  Method  This dissertation draws from three methodological approaches: primary, secondary and firsthand or quasi-primary research methods.  I conducted primary research and analysis of, and constructed a database of information from a sample of 67 codes, guidelines, and standards relating to business conduct and governance originated by corporate, institutional, government (including multi-state) and stakeholder entities. A full list of these documents and their origins is contained in section 2.5. This primary data was collected directly from the websites of the originating sources.  I conducted textual analysis of a representative body of: ethics, business, legal and sociology literature; scholarly work originating in the academic and non-profit sector; institutional and government reports, guidelines, standards and policy statements; primary legislation, rules and regulation; and business journalism addressing the legal, ethical (encompassing social and environmental), normative and practical dimension of governance generally, and corporate governance in particular. This secondary data was mainly sourced from published texts, peer reviewed studies and articles published in print, in electronic journals and online and from corporate, government and institutional websites. These materials were subjected to critical review and analysis.  This dissertation also draws on firsthand experience, knowledge and observations amassed in the private, nonprofit and public sectors that can be characterized as quasi primary research. Specifically, I have practiced law for 20 years, focusing in the areas of governance, ethics, securities regulation, corporate law, executive compensation, and comparative regulatory policy and practice for more than fifteen years. I have worked in multiple jurisdictions and have extensive international business experience providing  27  strategic, design and operational advice to boards of directors and executives of multinational, British and European companies on: executive and employee performance and values linked remuneration; corporate governance; multi-jurisdictional legal and regulatory compliance: and best practice policies and practices for sustaining positive, accountable relationships with shareholders, regulators, stakeholders and the wider community.  Additionally, I directed programs and project development for over 2 ½ years at a nonprofit foundation focused on ethics, accountability and integrity-based leadership, with particular emphasis on the relevance, value and practical application of ethical principles in fostering high standards of governance and accountability, and responsible decisionmaking. Lastly, prior to commencing this dissertation, I spent three years as senior legal counsel at a provincial government securities commission developing policy, drafting and implementing new regulatory instruments and amendments to existing rules, and applying and interpreting securities law and regulatory requirements.  28  2.4  Sample  The following chart describes the composition of the primary research sample. Figure 1 - Frequency of Code Types in Sample  2.4.1 Codes originated by public corporations The corporate sample comprises company-specific codes of ethics and conduct issued by 36 publicly listed companies. All of the companies are domiciled in democratic, ‘rule of law’ countries with developed free market economies and established legal and institutional frameworks for corporate and securities regulation. In all, thirteen different countries are represented in the sample a range of industry sectors from automobile manufacturing to technology. Their common feature is a published, general code of ethics or conduct. Regarding the latter, some but not all directly or indirectly references to ethics as a guiding principle. The codes are sorted chronologically in the following table.  29  Figure 2 - Codes Originated By Public Corporations Codes Originated by Public Corporations (n=36) Official Name  Year of Origin46  Location or Source  Unilever - Code of Business Principles  1880s  United Kingdom  Novo Nordisk - The Novo Nordisk Way  1920s  Denmark  Johnson and Johnson - Credo and Principles of Corporate Governance  1943  United States  IBM - Business Conduct Guidelines  1969  United States  Shell International - Code of Conduct  1976  Netherlands/United Kingdom  RBC – Our Code of Conduct  1980  Canada  Toyota Code of Conduct  1992  Japan  Nike Inc. – Inside the Lines’: The Nike Inc. Code of Ethics  1992  United States  Rio Tinto - 'The Way We Work': Global Code of Conduct  1997  Australia  Nokia - Code of Conduct  1997  Finland  Nestle – Code of Business Conduct  1998  Switzerland  ING Group N.V. - Business Principles  1999  Netherlands  Merck - Code of Conduct  1999  United States  BASF - Vision, Values, Principles and Code of Conduct  2000  Germany  Sony Group Code of Conduct  2003  Japan  Ackzo Nobel – Code of Conduct  2003  Netherlands  Kraft Foods - ‘Our Way of Doing Business: The Kraft Food Code of Conduct  2004  United States  Alliance Boots - Code of Conduct and Business Ethics  2006  United Kingdom/Switzerland  A.P. Moller-Maersk - Group Principles of Conduct  2007  Denmark  BHP Billiton - 'Working with Integrity': Code of Business Conduct  2008  Australia  46  The term ‘Year of Origin” in this table refers to the date provided for the first code, whether or not subsequently revised. In this respect, it is not possible in all circumstance to identify the date of origin of some corporate codes in particular those that exist in electronic form where previous version are subsumed within currently accessible versions.  30  Codes Originated by Public Corporations (n=36) Official Name  Year of Origin46  Location or Source  Imerys – ‘Ethics and Values’: Code of Business Conduct  2009  France  Henkel – ‘Vision and Values’: Code of Conduct  2009  Germany  Nexen Inc. - How we work: Our integrity guide  2010  Canada  PepsiCo - Worldwide Code of Conduct  Not stated  United States  Motorola Mobility - Code of Business Conduct  Not stated  United States  ANZ - Code of Conduct  Not stated  Australia  Barrick Gold - Code of Business Conduct and Ethics  Not stated  Canada  EnCana - Corporate Responsibility Policy and Business Conduct and Ethics Practices  Not stated  Canada  Alstom – ‘Our Code of Ethics’  Not stated  France  Statoil - Ethics Code of Conduct  Not stated  Norway  ABB - Code of Conduct  Not stated  Switzerland  Marks and Spencer - Code of Ethics and Behaviours  Not stated  United Kingdom  BT plc - A Statement of Business Practice: 'The Way We Work'  Not stated  United Kingdom  WPP - Code of Business Conduct  Not stated  United Kingdom  The Cooperative Group - Values and Principles  Not stated  United Kingdom  Coca-Cola - Code of Business Conduct  Not stated  United States  31  2.4.2 Codes originated by NGOs and civil society organizations This sample comprises a sample of the foremost internationally recognized codes addressing the conduct and governance of business, generally issued by international non-governmental (NGO) and civil society organizations. The codes are sorted chronologically in the following table.  Figure 3 - Codes Originated by NGOs and Civil Society Organizations Codes Originated by NGOs and Civil Society (n=10) Official Name  Year of Origin47  Location or Source  ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy  1977  International  Bench Marks Foundation Principles for Global Corporate Responsibility  1995  Canada, United Kingdom, South Africa  Commonwealth Association for Corporate Governance CACG Guidelines: Principles for Corporate Governance in the Commonwealth  1999  British Commonwealth  Social Venture Network Standards of Corporate Social Responsibility  1999  United States  Accountability AA 1000 Accountability Principles Standard  1999  NA  The Global Sullivan Principles  1999  South Africa  United Nations Global Compact  2000  international  ISO 2600 Social Responsibility Standard  2010  international  Clarkson Principles of Stakeholder Management  1993  Canada  ICGN - Global Corporate Governance Principles  2004  international  47  The term ‘Year of Origin” in this table refers to the date provided for the first code, whether or not subsequently revised.  32  2.4.3 Codes originated by institutional investors and investor coalitions The institutional investor sample comprises codes of ethics, conduct, or more generally governance, for business issued by prominent individual institutional investors and entities representing multiple institutional investors. The codes are sorted chronologically in the following table.  Figure 4 - Codes Originated by Investors/Investor Coalitions Codes originated by investors/investor coalitions (n=8) Official Name  Year of Origin48  Location or Source  The Hermes Responsible Ownership Principles  1999  United Kingdom  London Principles of Sustainable Finance  2002  United Kingdom  Canadian Coalition for Good Governance Building High Performance Boards  2010  Canada  UNPRI Principles for Responsible Investment  2006  N/A  Association of British Insurers Guidelines on Responsible Investment Disclosure  2007  United Kingdom  California Public Employees Retirement System (CALPERS) Global Principles of Accountable Corporate Governance  Not stated  United States  TIAA - CREF Policy Statement on Corporate Governance  Not stated  United States  Council of Institutional Investors Corporate Governance Policies  Not stated  United States  48  The term ‘Year of Origin” in this table refers to the date provided for the first code, whether or not subsequently revised. In some circumstances, the date of origin of some codes is not disclosed, particularly those that subsume previous versions.  33  2.4.4 Codes originated by or on behalf of corporations and business coalitions The multi-corporate sample comprises codes of ethics, conduct, or more generally governance, for business issued by bodies representing multiple corporate interests. The codes are sorted chronologically in the following table. Figure 5 - Codes Originated by or on Behalf of Multiple Corporations/Business Coalitions Codes originated by or on behalf of multiple corporations/business coalitions (n=7) Official Name  Year of Origin49  Location or Source  Keidanren Charter for Good Corporate Behaviour  1991  Japan  King Codes of Governance for South Africa (King I, II, III)  1994  South Africa  Commonwealth Business Council Business Principles  2007  British Commonwealth  National Association of Corporate Directors (NACD) Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies  2008  United States  Caux Round Table Principles for Responsible Business  1994  Multi-national  BITC Responsible Business and The Marketplace Responsibility Principles  2008  United Kingdom  Equator Principles  2006  Multi-national  49  The term ‘Year of Origin” in this table refers to the date provided for the first code, whether or not subsequently revised.  34  2.4.5 Codes originated by or on behalf of state or multi-state entities The government and regulatory sample comprises codes of ethics, conduct, or more generally governance, for business issued by state, multi-state and regulatory entities. The codes are sorted chronologically in the following table.  Figure 6 - Codes Originated by or on Behalf of State or Multi-State Entities Codes originated by or on behalf of State or MultiState Entities (n=6) Official Name  Year of Origin50  Location or Source  OECD Guidelines for Multinational Enterprises  1976  Multi-state  U.S. Model Business Principles  1996  United States  OECD Principles of Corporate Governance  1999  Multi-state  Australia Stock Exchange Corporate Governance Council: Corporate Governance Principles and recommendations  1999  Australia  New York Stock Exchange Commission on Corporate Governance Corporate Governance Principles)  2010  United States  UK Financial Reporting Council (FRC) - UK Corporate Governance Code 2010  2010  United Kingdom  50  The term ‘Year of Origin” in this table refers to the date provided for the first code, whether or not subsequently revised.  35  Part One − Systems Failures  36  3.  Governance in the Spotlight, Again  “Publicity is justly commended as a remedy for social and industrial disease. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”51 L. Brandeis  3.1  The Latest in a Long History of Crises  From late 2007 through 2009 the world witnessed the unfolding of arguably the most farreaching financial crisis in the history of modern markets. The impacts were felt around the globe and caused virtually incalculable economic and social damage.  Analysis of the circumstances prior to the collapse and subsequent unfolding of events has exposed failures of governance, culture and ethics in business and especially financial sector institutions. It has also identified shortcomings in the parties responsible for overseeing the governance of market actors and the instruments and methods employed to generate profit on financial markets − governments, regulatory authorities, gatekeepers and shareholders − and revealed gaps and weaknesses in the oversight architecture.52  The aftermath brought forth a maelstrom of commentary from all spheres on the lack of ethics and integrity in all aspects of economic and public life, public and private denouncement of damaging and reckless behaviours induced by distorted incentives, and  51  Louis D. Brandeis, American jurist (1856 – 1941) in Harper’s Weekly, December 20, 1913. Deficiencies in corporate governance practices have been highlighted as one of the contributing factors to the 2007-09 financial market crisis. See for example: OECD, Corporate Governance and the Financial Crisis: Key Findings and Main Messages, (OECD, 2009). Online at: www.oecd.org/dataoecd/3/10/43056196.pdf; International Corporate Governance Network (ICGN), Second Statement on the Global Financial Crisis (ICGN, March 23rd, 2009). Online at: http://www.icgn.org/files/icgn_main/pdfs/news/icgn_statement_on_the_financial_crisis_23_march_09.pdf. See also: Hector Sants, “The Crisis: the role of investors”, speech the NAPF Investment Conference 2009, March 11, 2009 (UK Financial Services Authority, March 2009). Online at: http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2009/0311_hs.shtml 52  37  an accompanying demand for more transparent decision-making, greater accountability, and more responsible leadership.53  In most advanced economies, political response took the form of fast track government interventions and broad condemnation of abusive market practices. This response fits an oft-repeated pattern, or sequence of events. In the initial phase, crisis prompts a rush to take emergency action usually in the form of hastily developed and instituted measures to contain damage and to manage, or at least appear to manage, the situation. The next phase involves a hunt to find fault − or at least lay the initial blame − and search for a credible culprit, or culprits that overlaps with, or ensues shortly after, the initial phase. This leads into a third phase, a period of closer analysis accompanying the development of detailed legislative and regulatory responses, when commentators and experts – armed with the wisdom of hindsight – put forward competing views on who and what was responsible and the measures needed to prevent recurrence. Richard Reid of the International Centre for Financial Regulation (ICFR) has applied this pattern of initial and ensuing reaction to crisis events to the regulatory response to the most recent financial crisis. 54  History has borne witness to the impotence of the repeated attempts by policy makers to end the cycle with the regulatory solutions developed to deal with the last crisis. As J.K. Galbraith presciently observed in 1954, writing about the 1929 stock market crash, “[T]here will surely be another crisis. It will be different, and whatever regulation we put in place today, it isn’t going to stop it.”55 Two decades later, Charles Kindleberger’s  53  OECD Secretary-General Angel Gurría, welcoming the decision by G7 Finance Ministers to work towards establishing a set of common principles on integrity, transparency and propriety in global financial and business transactions, said the financial crisis had exposed the need for both more effective international regulation and a greater ethical dimension to global business. OECD, “OECD’s Gurría welcomes G7 move to establish set of ethical principles on global business”, Press Release 16/02/2009. 54 Richard Reid from “The G20 and the Financial Regulatory Cycle” – speech delivered at ICFR-UCLPRMIA conference on 17 June 2010. 55 J.K. Galbraith, The Great Crash 1929 (Houghton Mifflin Company: New York, 1954)  38  comment “financial crisis – a hardy perennial” similarly counters the idea of a policy based solution to ensuring crises never happen again.56  The history of capital markets is punctuated with the damaging consequences of unchecked greed and the reckless pursuit of profit.57 One of the earliest such instances occurred in Europe with the South Sea bubble collapse of 1720. In the United States, the Mississippi Company bubble of 1719 was the first large scale instance of financial speculation leading to a financial collapse to be repeated two centuries later in the decade of corrupt finance leading to the United States stock market crash of 1929 and The Great Depression. The 1980’s and early 1990’s witnessed scandals such as those associated with the United States Savings and Loans, HIH and One.Tel in Australia, and in the United Kingdom the Maxwell Group bankruptcy and associated Mirror Group pension fund scandal and the collapses of Bank of Credit and Commerce International (BCCI) and Barings Bank.  The late 1990’s were mired by the accounting scandals leading to the Enron Corporation’s bankruptcy amid allegations of accounting fraud in 2001and the related demise of then big-five accounting firm Arthur Andersen, accounting scandals at Tyco International, Adelphia, WorldCom Inc. (now MCI) and Global Crossing in 2002, and a catalogue of other incidents along the way.58  The stock market collapse in the United States in September 1929 and the ensuing years of the Great Depression were considered to be the result of extensive market manipulation by corporate officers and investment bankers. According to the Senate Committee on Banking and Currency in its 1934 report, the ‘Fletcher Report’, it was  56  CP Kindleberger, Manias, Panics and Crashes 5th edition (Wiley, 2005 (1978)) For example: in the United Kingdom, the Maxwell pensions scandal, BCCI and Barings Bank; in the US, the Railway privatizations and stock market crash of 1873, the junk bonds of Drexel Burnham Lambert, Adelphia, Global Crossing, WorldCom, Tyco; in Canada, The Principal Group in 1980, Bre-X in 1990 and Nortel in ; In Italy, Parmalat. For a survey of corporate scandals throughout history, see Kenneth R. Gray, Larry A. Frieder, George W. Clark, Jr. Corporate Scandals - The Many Faces of Greed (Paragon House, St. Paul, 2005); Joel Seligman, The Transformation of Wall Street 3d ed. (New York: Aspen Publishers, 2003). 58 See Appendix 1 – List of Notable scandals. 57  39  “excessive and unrestrained speculation which dominated the securities markets, disrupted the flow of credit, dislocated industry and trade, impeded the flow of interstate commerce, and brought in its train social consequences inimical to the public welfare”.59 Discouragingly for those interested in stable and sustainable economies, generally, and financial markets, specifically, the circumstances of the 2007 - 2009 global financial crisis appear to reaffirm the old adage that ‘the more things change the more they stay the same’. Once again it appears the roots of the crisis are to be found in speculative finance, distorted incentives, the risks and instability associated with the focus on short term gains, and insufficient or misplaced oversight.60  The response to the 1929 market collapse was the passage by the United States Congress of The Securities Act of 1933 and the Securities Exchange Act, 1934 and the creation of the Securities Exchange Commission (SEC).61 The Acts were intended to address the social impacts of the financial malfeasance and market manipulation and to reassert social control over capital that Congress considered to have been misappropriated to the detriment of millions and the benefit of an elite few. When President Roosevelt signed The Securities Act of 1933 into law he stated, “[T]he Act is thus intended to correct some of the evils which have been so glaringly revealed in 59  United States Congress Senate Committee on Banking and Currency, Stock Exchange Practices: Report of the Committee on Banking and Currency Pursuant to S.Res. 84 and S.Res. 56 and S.Res. 97 (June 6, 1934) 1-394 at 5. 60 Note that there are those who profit from the periods prior to, during, and following financial instability, crisis and upheaval. 61 The Securities Act of 1933 (May 27, 1933, Ch. 38, title I, Sec. 1, 48 Stat. 74.) was created with two core objectives: to require that investors receive financial and other significant information concerning securities being offered for public sale; and to prohibit deceit, misrepresentations, and other fraud in the sale of securities. The Securities Exchange Act of 1934 (June 6, 1934, ch. 404, title I, Sec. 1, 48 Stat. 881.) created the Securities Exchange Commission and empowered it with broad authority over all aspects of the securities industry. This broad authority includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation's securities self regulatory organizations (SROs) such as the New York Stock Exchange, American Stock Exchange, and The National Association of Securities Dealers, which operates the NASDAQ system. The 1934 Act also identifies and prohibits certain types of conduct in the markets and provides the Commission with disciplinary powers over regulated entities and persons associated with them. The Act also empowers the SEC to require periodic reporting of information by companies with publicly traded securities. Excerpted from: “The Laws that Govern the Securities Industry”, United States Securities and Exchange Commission, http://www.sec.gov/about/laws.shtml  40  the private exploitation of the public’s money”.62 The subsequent Securities Exchange Act, 1934, empowered the SEC in the specific statutory wording of section 14(a) with public interest disclosure power alongside investor protection providing that the SEC may require anything in the proxy statement disclosure “as necessary or appropriate in the public interest or for the protection of investors”.63  In the new legislation, Congress chose disclosure as the primary method for deterring the legal, but socially unacceptable, practices of market participants. As well, the legislation contained measures to address issues of board related dysfunction, such as the conflicts arising from interlocking boards and weaknesses in the oversight function attributed to delinquent directors. It also sought to increase shareholders’ powers vis a vis management by introducing requirements to furnish shareholders with information about management policies and practices that would enable informed voting and thus effective corporate suffrage.64 More than 75 years on, Congress’ intentions for the two Acts have yet to be realized notwithstanding continued efforts and further interventions by successive legislators. Furthermore, the intervening years have added many more problems and obstacles to the fulfillment of the legislation’s original purpose, as is the case for legislative authorities around the globe as to their own responses to successive crises.  However, notwithstanding the historical backdrop, there are circumstances of this most recent crisis that suggest the possibility of different forces at work in the dynamic of crisis and response that may alter the patterns of the past.  62  The Public Papers and Addresses of Franklin D. Roosevelt, vol.2, pp.213-214, as quoted in Joel Seligman, The Transformation of Wall Street, 3d, (New York: Aspen Publishers, 2003). 63 For a discussion of the explicit public interest policy behind the creation of the SEC, see Cynthia, A. Williams, “The Securities and Exchange Commission and Corporate Social Transparency” (1999) Harvard Law Review vol. 112, no.6. 64 Cynthia, A. Williams, “The Securities and Exchange Commission and Corporate Social Transparency” (1999) Harvard Law Review vol. 112 no.6.  41  3.2  A New Ingredient in the Old Formula  The advent of television, the internet, globalization (as the term is generally understood), and the 24 hour news cycle are alternately credited and blamed for many of the societal transformations of the last three decades.65 Undeniably, all four of these 20th century changes to the way that we interact with the world around us have played a role in ensuring that each new crisis, scandal or transgression in the corporate and public sphere is subject to more media exposure, commentary and public opinion, than would have seemed possible prior to the advent of these technology enabled advances in communication.  Although some would argue that the intense media coverage and sensationalism of these repeated misdeeds and transgressions have inured the public to declining standards, there are clear indications of a shift in public mores toward expectations of greater scrutiny and lower tolerance of bad behaviour, whether by politicians, celebrities or senior executives of major corporations.66  The political and mainstream public reaction to the sequence of events that began unfolding in 2007 was extensive and swift. New communication technologies and the internet enabled access to and sharing of information without the spatial, structural and temporal boundaries that would previously have impeded such direct and open  65  Regarding the use of the term ‘globalization’, as explained by Crane and Matten (in Andy Crane and Dirk Matten, Business Ethics: A European Perspective Managing Corporate Citizenship and Sustainability in the Age of Globalization, 2d (Oxford: Oxford University Press, 2004)), “frequent misuse of this term has contributed to a lack of clarity and definition” such that the distinctions in Schlote’s classification are subsumed within a generalized use of the term. For early discussion of these technological phenomena as change agents, see: Chris Moon and Clive Bonny, Business Ethics: Facing up to the Issues (London: The Economist in Association with Profile Books Ltd., 2001) at 7. 66 As to the decline of public standards, see for example: Chris Hedges, The Empire of Illusion: The End of Literacy and the Triumph of Spectacle (Vintage Canada, 2009). Regarding high profile scandals that attracted intense public interest and considerable public debate about public and private morality, space permits only a few examples from different areas of public life. From public office: William J. Clinton, President of the United States; Elliot Spitzer, former New York District Attorney. From entertainment: Tiger Woods, professional athlete; Mel Gibson, actor. From Business: Lord John Browne, former chairman British Petroleum; Mark Hurd, former CEO of Hewlett Packard.  42  communication.67 As a consequence, it was an informed and watchful global audience that witnessed in real time the domino collapse of an arcane structure based on unethical lending practices, complex derivatives and debt securitization that wiped out almost half of stock market value and nearly the global financial system.68  While much of the direct and collateral damage is attributed to this toxic mix, the very fact of its existence is evidence of deeper systemic problems of governance. There are some who would argue that the 2007− 2009 crisis is a special case because it revolved around regulated commercial and retail banks as well financial institutions such as investment banks and hedge funds. However, whether it is abuse of off-balance sheet accounting, regulatory loopholes and special purpose vehicles to conceal billions of dollars in corporate debt, or the creation, securitization and placement of high risk debt obligations without appropriate transparency or financial safeguards, these are the symptoms and the core issues are substantially the same. That is, the culture that fostered such practices; the failures of governance that enabled such culture and allowed such activity to go unchecked; and most fundamentally the absence or disregard for ethical norms of conduct.  The Financial Crisis Inquiry Commission (FCIC) appointed by the United States government to investigate the causes of the 2007 – 2009 financial crisis released its findings in January 2011. It concluded that "the crisis was avoidable and was caused by:  67  For a discussion of the unbounded nature of internet as a communication medium, see: James Bohman, “Expanding Dialogue: The Internet, the public sphere and prospects for transnational democracy”, in Social Theory – Continuity and Confrontation 2nd ed., Roberta Garner, (ed.) (Peterborough: Broadview Press, 2007). 68 While the underpinnings of the crisis are widely acknowledged to be the extension of unsecured credit through subprime mortgages to lower-middle class America, the domino collapse that spread through the global financial markets and left few unscathed was caused by the pooling, packaging and reselling of these high risk mortgages in the form of increasingly complex bundles of debt securities (mortgage derivatives, collateralized debt obligations CDOs, synthetics CDOs ), and the rampant speculation and leveraging (through CDSs) that went along with them. For extensive and comprehensive analysis of these issues, see: United States Senate Permanent Subcommittee on Investigations - Committee on Homeland Security and Governmental Affairs Carl Levin, Chairman, Tom Coburn, Ranking Minority Member, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, Majority and Minority Staff Report Permanent Subcommittee on Investigations, United States Senate, April 13, 2011.  43  Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels”.69(emphasis added) On the corporate governance implications of the financial crisis, the OECD observed that: [I]t is important to take a wider corporate governance view since banks are not fundamentally different from other companies with respect to corporate governance, even though there are important differences of degree and failures will have economy-wide ramifications.70 In general, poor corporate governance is a major factor in almost all known cases of distress of financial institutions. Specifically in the case of the 2007 – 2009 financial crisis the problems included: failings of the primary governance mechanisms of board and shareholder monitoring and oversight, failure to fulfill fiduciary responsibility, and lack of management accountability. These shortcomings were made all the more egregious when combined with inadequate understanding and supervision of the tools and practices employed in the pursuit of short term profits, inappropriate incentives that fostered unethical conduct, and a disregard (whether willful or not) to the inherent risks and potential consequences.71  Some have argued that in exposing investors to excessive risk leading to huge losses, and in some cases the collapse, of firm equity and shareholder value, management violated  69  “Financial Crisis Inquiry Commission Releases Report on the Causes of the Financial Crisis”, Press Release, January 27, 2011; FCIC, Conclusions of the Financial Crisis Inquiry – Excerpt, http://fcic.law.stanford.edu/report/conclusions 70 OECD, Corporate Governance and the Financial Crisis: Key Findings and Main Messages (OECD, June 2009) at 13. www.oecd.com 71 For extensive and comprehensive analysis of these issues, see United States Senate Permanent Subcommittee on Investigations - Committee on Homeland Security and Governmental Affairs Carl Levin, Chairman, Tom Coburn, Ranking Minority Member, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, Majority and Minority Staff Report Permanent Subcommittee on Investigations, United States Senate, April 13, 2011. Remarks by retired Federal Reserve Chairman Alan Greenspan to  44  their fundamental duty to act in shareholders’ best interests. Former Chairman of the Federal Reserve and champion of free market theory, Alan Greenspan, admitted to the United States House of Representatives oversight committee that he "made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms”. He went on to say that “[t]hose of us who have looked to the self-interest of lending institutions to protect shareholders' equity (myself especially) are in a state of shocked disbelief."72  New and traditional media also provided platforms for the expression of widespread outrage at the violation of values integral to the proper functioning of the markets and society as a whole: ethical conduct, fair dealing, honesty, integrity, responsibility, and transparency.73 The threads of the initial response to the Bear Stearns sub-prime mortgage hedge funds collapse in late 2007 multiplied and spread across the worldwide web, allowing experts and lay person alike to make the connections with the demise of Lehman Brothers and the 2008 market crash when the full extent of the crisis became public knowledge.  It appears that this outpouring of public sentiment may have helped to mobilize and unite governments around the world in rapid and unprecedented condemnation of the market manipulation and unethical practices at the heart of the crisis. Almost certainly, the widespread public reaction that kept the inescapable social impact of the crisis74 at the United States House of Representatives oversight committee October 23, 2008 as quoted in Andrew Clark and Jill Treanor, “Greenspan: I was wrong about the economy”, The Guardian, Friday, 24 October 2008. http://www.guardian.co.uk/business/2008/oct/24/economics-creditcrunch-federal-reserve-greenspan. 73 This condemnation of the ‘Wall Street culture’ is by no means new. The collapse of the savings and loan industry, the rise of hostile takeovers and leveraged buyouts, fraud, insider trading and stock manipulation in the 1980s led to the public condemnation of Michael Milliken and Salomon Brothers CEO John Gutfreund, and the prevailing trading culture generally (likened to a ‘den of thieves’ by J. Stewart in his 1991 best-selling book of the same name). Joel Seligman, The Transformation of Wall Street 3 ed. (New York: Aspen Publishers, 2003). The impact was superficial and merely masked the growing misalignment of interests (fuelled by distorted incentives and the drive for financial innovation) between those engaged in the business of financial risk and the wider culture. Michael Lewis, The Big Short (New York: W.W. Norton & Company, 2010) 254 74 When the G-20 Leaders adopted their Global Plan for Recovery and Reform in April 2009 at the London Summit on Growth, Stability and Jobs, their announcement at paragraph 26 included the statement that “[W]e recognize the human dimension to the crisis. We commit to support those affected by the crisis…”,  45  forefront also contributed to the pressure on governments to act quickly with coordinated intervention simultaneous with their investigations into the exact nature of the legal and technical violations and the market actors that perpetrated them.75  While the politicization of the issues inevitably served partisan political agendas at a domestic level, the commitment to action at an international level bridged borders and ideological divides to affirm fundamental shared values. In the opening paragraphs of their statement the leaders of the G-20 affirmed that: We start from the belief that prosperity is indivisible; that growth, to be sustained, has to be shared; and that our global plan for recovery must have at its heart the needs and jobs of hard-working families, not just in developed countries but in emerging markets and the poorest countries of the world too; and must reflect the interests, not just of today’s population, but of future generations too. We believe that the only sure foundation for sustainable globalisation and rising prosperity for all is an open world economy based on market principles, effective regulation, and strong global institutions.76  The legacy of these events is an unprecedented level of broad–based public, as well as expert, debate on and discussion of the crisis, its causes and future implications throughout and continuing since the crisis.  For example, through 2008 the financial story in the United States (including everything from energy costs and the troubled auto industry to the Wall Street bailout), accounted for 15% of the overall ‘newshole’ − almost as much coverage as the Iraq war generated in 2007 (16%) and about six times more coverage than the economy generated in 2007.77  G20, “London Summit Leaders Statement 2 April, 2009”, www.g20.org/Documents/G20_communique_020409.pdf 75 To tackle the financial and economic crisis that spread across the globe in 2008, the G20 members were called upon to further strengthen international cooperation. G20 Summits were held in Washington in 2008, in London and Pittsburgh in 2009, and in Toronto and Seoul in 2010. Source: www.G20.org. However, the impetus for high level action has not carried forward to meaningful developments in redressing the harms caused or holding those responsible to account. 76 G20, “London Summit Leaders Statement 2 April, 2009”, www.g20.org/Documents/G20_communique_020409.pdf 77 Pew Project for Excellence in Journalism, “The State of the Media – Annual Report on American Journalism”, 2009. http://www.stateofthemedia.org/2009/narrative_newspapers_contentanalysis.php?cat=1&media=4  46  The level of discussion is reflected in statistics on the extent of economic coverage in mainstream media channels throughout 2008 that in turn represent only a portion of overall discussion taking place through alternative media and communication channels as well as in direct interpersonal communications.78 See Figure 7, below. Figure 7 - Economy Coverage Over Time Economy Coverage Over Time: Newspaper vs. Media Over All 2007 through 2008  Source: Pew Research Center’s Project for Excellence in Journalism, “The State of the Media – Annual Report on American Journalism”, 2009, www.stateofthemedia.org. By permission.  78  Mainstream media includes: Network TV News, Newspapers, Online News Sites, Cable News, and Radio News. Through 2008 the financial story in the United States (including everything from energy costs and the troubled auto industry to the Wall Street bailout), accounted for 15% of the over all newshole − almost as much coverage as the Iraq war generated in 2007 (16%) and about six times more coverage than the economy generated in 2007. http://www.stateofthemedia.org/2009/narrative_newspapers_contentanalysis.php?cat=1&media=4  47  3.3  Unintended Consequences  Through 2008 and 2009, the unprecedented level of awareness added its own momentum to the market contagion as the institutional and retail investment community and general public alike became prey to the rising anxiety and risk aversion79 that led to what eventually manifested as full-scale market panic.80  Heightened levels of engagement in the public sphere have both positive and negative dimensions as will be explored further in Chapter 12. To the extent that the discourse is informed and objective, there are many benefits to increased knowledge, greater understanding of risk − particularly those associated with high investment returns −and the recognition of the need for personal vigilance, notwithstanding the appearance of systemic and institutional controls.  However, the spread of reliable information and the influence of informed and objective discourse is often diluted or displaced in times of crisis, particularly when the issues are complex, far reaching and challenging to vested interests, and the immediate and potential implications are highly politicized.81 Such circumstances can lead to deflection, inaccurate generalizations, over-simplification and self-serving analysis, particularly in hindsight.82 79  . There are a number of studies on the vulnerabilities of investors to human attitudes and behavioural tendencies that undermine fully objective, informed rational decision making. For a comprehensive overview of the behavioural and cognitive factors that are at play in the market and have implications for regulatory strategies to prevent fraud and market abuse, see: Robert Prentice, “Whither Securities Regulation? Some Behavioural Observations Regarding Proposals for its Future” (2002) Duke Law Journal, Vol. 51 No.5, March 2002. Robert Shiller contends that the primary emotions that determine risk taking behaviour are not greed and fear, but hope and fear. Robert Shiller, Irrational Exuberance, paperback edition, (Broadway Books, 2001). 80 Associated Press article: ‘Snowballing sell off spreads worldwide’ October 10, 2008. http://www.mlive.com/business/index.ssf/2008/10/snowballing_selloff_spreads_wo.htm. In the period between October 9, 2007 and March 6, 2009 the DJIA had dropped 54% from its peak of 14164 to 6469 (before beginning to recover). Source: http://finance.yahoo.com/q/hp?s=%5EDJI+Historical+Prices 81 As Posner has observed, media attention can be arbitrary, disproportionate and unpredictable – E. A. Posner, Law and Social Norms (Harvard University Press, 2000). 82 An example of the potential distortion from media coverage: ‘Tracking the Economic Slowdown’ Journalism.org, August 18, 2008: “While public attention to economic news does not always translate into more coverage, more coverage of the economy can be correlated to deepening public worries. After press coverage of the economy jumped in the first quarter of 2008, the number of Americans who considered the  48  The perception of corporate governance is a case in point. As Kenneth Daly, National Association of Corporate Directors (NACD) President & CEO stated in his introduction to the NACD Key Agreed Principles to Strengthen Corporate Governance for US Publicly Traded Companies launched in October 2008, “[T]he current economic crisis has eroded public and investor confidence in corporate governance. American corporations must take action to restore the public trust.” It is generally held that the majority of companies − large and small, public and private − seek to willfully comply with their legal obligations, embody sound governance principles, and maintain corporate cultures of integrity and candour. Yet, the actions of the minority of companies that do not, fuel a widely held public perception that all companies value the bottom line more than the truth, and pursue short term profit regardless of medium and longer term consequence. A perception that is reinforced by a regulatory approach that, in Bush’s words, “seeks to regulate all companies as if they were all run by crooks”.83  There are many examples of the misconduct of the few tainting the reputation of the many: circumstances where an entire group is caught in a ‘reputational web’ whereby the choices of particular individuals or groups of individuals regarding conduct and decisions to cut corners, disregard or actively avoid rules, and breach ethical standards result in general condemnation.  In a survey conducted in July 2002, the month that the Sarbanes-Oxley Act became law and a year after the Enron scandal first emerged, 46 percent of the general public believed “every company does this kind of thing [i.e., fraud], but only a few more will get caught.”84 Another poll that year revealed that 79 percent of the general public said  economy to be ailing doubled. The economic picture improved slightly during that period.” (Pew Research Centre’s Project for Excellence in Journalism). 83 Tim Bush, ‘Divided by Common Language’ Where Economics Meets the Law: US Versus Non-US Financial Reporting Models (Institute of Chartered Accountants in England and Wales, June 2005) 28. Web-published http://www.icaew.com/index.cfm/route/115933/icaew_ga/pdf. 84 The American Survey, (July 2002) as quoted in Arthur W. Page Society and Business Roundtable Institute for Corporate Ethics, Special Report: The Dynamics of Public Trust in Business (Business  49  improper actions among top executives are “very” or “somewhat” widespread.85 The Business Roundtable Institute for Ethics refers to this as the ‘negative contagion effect’, whereby all businesses are associated with the scandals of a few.86  The effect is often not readily contained to any one sector or segment, as demonstrated when the entire accounting profession suffered significant industry-wide and international damage to reputation in the aftermath of the Enron scandal and the exposure of the role of then big-five accounting firm Arthur Andersen principals in the fraudulent transactions and accounting practices.  Similarly, the issue of excessive compensation to some executives in the face of mediocre or unsustainable performance and growing discrepancies between median and executive salaries through the nineties prompted regulators in Great Britain, Australia, Europe, and North America to implement extensive disclosure requirements on all corporate boards of directors in respect of executive remuneration.87  These regulatory interventions have proved limited in curbing excessive pay or reducing the distorting effect of inappropriate incentives on management behaviour such that executive ‘fat cats’ and the boards that approve the remuneration packages continue to be vilified by the public and in mainstream media.88 More recently, the issue has prompted  Roundtable Institute for Corporate Ethics, 2009) 13. http://www.darden.virginia.edu/corporateethics/pdf/public_trust_in_business.pdf 85 CNN/USA Today/Gallup Poll (July 2002) as quoted in Arthur W. Page Society and Business Roundtable Institute for Corporate Ethics, Special Report: The Dynamics of Public Trust in Business (Arthur W. Page Society and Business Roundtable Institute for Corporate Ethics, 2009), 13. http://www.darden.virginia.edu/corporate-ethics/pdf/public_trust_in_business.pdf 86 Ibid. at 13. 87 Examples of measures introduced requirements with respect to the detailed disclosure of executive compensation include: In the United Kingdom, the Companies Act 1985, The UK Listing Rules and The Combined Code; in Australia Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act, 2004 (Australia) (‘CLERP 9’); in Germany, the German Commercial Code and the Cromme Commission’s Corporate Governance Code; in the United States, Item 402, Regulation S-K; in Canada National Instrument 51-102 F6 Statement of Executive Compensation. 88 One of the earliest cases occurred in Great Britain in 1994, when shareholders of British Gas protested the pay package of then chief executive Cedric Brown starting a nearly three decade heated debate in the United Kingdom over the remuneration paid to executive directors and management executives. See for example: Nick Isles, The Risk Myth: CEOs and labour market risk (The Work Foundation, December 2006). Online at: www.theworkfoundation.com; and The High Pay Commission, More for Less: what has  50  policy makers in some jurisdictions to facilitate, and shareholders to demand, greater say on compensation levels and structures in an effort to contain an issue that is no longer isolated to particular companies or sectors but a matter considered to be symptomatic of widespread governance shortcomings.89  The challenge and the risk is that of a self-perpetuating circle of transgression and regulatory response.90 Such that failures by the corporate community and other market participants to police their own and others’ conduct and an absence of an explicit ethical standard for business behaviour will continue to fuel the demand for more laws and regulation in an inevitably failed effort to “force the missing moral choices”.91  happened to pay at the top and does it matter (Interim Report of The High Pay Commission, May 2011). Online at http://highpaycommission.co.uk. The discussion has spread to other European countries that historically have had limited transparency with respect to executive pay, Italy is the latest European country to see mandatory executive compensation disclosure under rules introduced by ConSob the Italian stock market regulator in February 2011 with immediate effect. In the last decade outrage over pay levels has even spread to the United States with its history of vastly inflated executive compensation, seeing high profile executives Chuck Price of Citigroup, Stanley O’Neil of Merrill Lynch and Angelo Mazilo of Countrywide Financial in March 2008 appearing before the United States House Oversight and Government Reform Committee in Washington accused of excessive pay packages at the time of shareholder losses. “CEO Pay and the Mortgage Crisis” Hearing before the Committee on Oversight and Government Reform House of Representatives One Hundred Tenth Congress Second Session, March 7, 2008, Serial No. 110-81. https://house.resource.org/110/org.c-span.204328-1.raw.txt 89 Say-on-Pay has been implemented in various forms in a number of different countries. The U.K. in 2003 and Australia in 2005 enacted legislation requiring that listed companies give shareholders a non-binding advisory vote on the prior year’s executive compensation. The Netherlands in 2004, Sweden in 2006 and Norway in 2007 require that shareholders have a binding vote on the future compensation policies of the company. In 2010, the United States introduced advisory say on pay votes under the Dodd Frank Act. Legislative changes introduced in February 2011 in Australia pursuant to The Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill, give shareholders in listed Australian companies new powers over executive remuneration. Shareholders will be able to remove directors if a company’s remuneration report receives a “no” vote of 25 per cent or more at two consecutive annual meetings. The Bill also provides that directors, executives and “closely related parties” are prohibited from voting on executive pay, and from hedging their incentive remuneration. 90 For a pre-Sarbanes-Oxley Act review of the last three hundred years of this pattern of corporate scandal and regulatory response, see: Stuart Banner, “What Causes New Securities Regulation? 300 Years of Evidence” (1997) 75 Wash. U. L. Q. 849. See also: Jennifer Hill, “Regulatory Responses to Global Corporate Scandals” (2001) Wisconsin International Law Journal Vol 23, No.3. For a post-Enron comparison of corporate governance regulatory reforms, see: Luca Enriques, “Bad Apples, Bad Oranges: A Comment from Old Europe on Post-Enron Corporate Governance Reforms” (2003) Wake Forest Law Review, Vol. 38. Available at SSRN: http://ssrn.com/abstract=464241 or doi:10.2139/ssrn.464241 91 R. Arnott, ‘Why poor moral ethics prove costly’, Financial Times, January 24, 2010. http://www.ft.com/intl/cms/s/0/fcc3e1fe-0785-11df-915f-00144feabdc0.html#axzz1TFX47wpv.  51  4.  The Expectations Gap  As protection against financial illusion or insanity, memory is far better than law. When the memory of the 1929 disaster failed, law and regulation no longer sufficed. For protecting people from the cupidity of others and their own, history is highly utilitarian. It sustains memory and memory serves the same purpose as the SEC and, on the record, is far more effective. John Kenneth Galbraith92  4.1  A Failure of Governance, Responsibility or Both? Diagnosing the Problem  There is every reason to be discouraged by the seeming impotence of state institutions to curb the worst excesses of greed and opportunism, particularly in the face of the 2007−2009 global financial crisis, following so soon after the corporate accounting scandals and internet debacle of the previous decade, and the revelations of stock analyst fraud, mutual fund market timing, and stock option back dating in the intervening years.  Similarly, the healthy skepticism that greets many of the traditional governmental responses to the latest financial crisis is understandable. Informed by past experience, there is a general expectation that, regardless of rhetoric, the primary focus of legislators inevitably will be on reactive measures or prescriptions to treat and prevent recurrence of the most visibly acute symptoms rather than on diagnosis and measures to address the underlying conditions that caused them.  According to the Organization for Economic Co-operation and Development (OECD) diagnosis, the crisis of 2007 – 2009 resulted from widespread failures to properly and fully implement governance mechanisms and practices. These failures ranged from purely formal observance, also known as box-ticking, and ‘creative compliance’ where compliance is with the letter not the spirit of requirements, to unclear roles and 92  J.K. Galbraith, The Great Crash, 3rd. ed. (Boston: Houghton Mifflin, 1972).  52  responsibilities. It concluded that these failures undermined the effectiveness of established principles of governance such as set out in the OECD principles of corporate governance, the Basel Committee recommendations, and national legislation that would otherwise have covered problems revealed by the financial crisis.93  What this diagnosis and characterization fails to acknowledge is the role and culpability of individual actors in the decisions and conduct that led to such failures of governance mechanisms and their implementation. Boards of Directors were ultimately responsible for the lack of effective oversight. Together with senior management they failed to provide the kind of organizational leadership that would have deterred excessive risk taking and unethical behaviour. In many instances employees were active and knowing participants, choosing to be risk takers without due regard to the consequences if not to themselves then to others.  Boards of directors, executives and senior management admitted to being ignorant of the activities of employees, and acknowledged widespread lack of understanding of the nature and implications of complex financial structures and transactions including by those working with them.94 These last being indicative of weak or compromised internal controls, and employees working to inappropriate incentives that fostered dangerously short-term perspectives, and excessively risky behaviour within and between financial institutions and other market actors.  These circumstances serve as stark reminders that a system cannot rely on mechanisms and procedures to maintain it, if there is no integrity at its core and nothing to provide stability and determine orientation. The Cadbury Report emphasized this point, stating that: “[R]aising standards of corporate governance cannot be achieved by structures and  93  OECD’s public consultation ‘Corporate Governance and the Financial Crisis’, 18 March, 2009 and ensuing report entitled Corporate Governance and the Financial Crisis: Key Findings and Main Messages (OECD, June 2009). Online at: www.oecd.org/dataoecd/3/10/43056196.pdf. 94 Grant Kirkpatrick, “The Corporate Governance Lessons from the Financial Crisis”, Financial Market Trends,Vol. 2009/1 at p.8, 11. OECD 2009 IISN 1995-2864.  53  rules alone. … compliance itself is a matter for everyone concerned with corporate governance.”95  On this basis, diagnoses that focus on failures of implementation as the source of the problems rather than as symptoms of individu