Criminal law and markets

As a corporate law academic, my interest in criminal law mostly comes from criminal liability in the context of financial markets. But I’ve come across a fascinating article (from the other side of the meeting point between corporate law and criminal law) by Prof. Lindsay Farmer.

He writes that ‘the primary way in which criminal law theory has engaged with the question of markets is that of the boundaries between legitimate and illegitimate markets’. The second way he says, is in discussions on market integrity – something very familiar to us corporate lawyers. The third way is theoretical i.e. economic theories of crime. Here, Farmer provides a very insightful analysis of Gary Becker’s and Darryl Brown’s ideas on cost-benefit analysis of criminal law and enforcement and private-ordering of criminal justice, respectively. In later discussion, there is also reference to Posner’s idea of ‘criminal law as ‘market-bypassing’ conduct’.

I really like that this paper surveys both pro-market arguments and those critical of markets and the logic of markets. This allows for some balanced arguments like:

A key part of the argument of this paper is that if we are to go beyond positions which simply see an opposition between markets and moral order or markets and criminal law it is necessary to look at the specific ways in which criminal law can moralise markets – and that markets can reshape our understanding of what might be properly criminalised.

Apart from the substance of the paper, I think we can take away that objective analysis of different views on any topic is invaluable.

Guest post: Impact of AI on Corporate Board Diversity Policies and Regulations

Muzaffer Eroğlu and Meltem Karatepe Kaya

Can Artificial Intelligence (AI), one of today’s most significant conveniences, help to ensure gender diversity in companies? In our article, we explore whether AI can be utilised as a director or as a management assistant in companies in order to provide the same gains as gender diversity on the board of directors.

We believe that improving corporate board quality both by using technology and AI and diversifying boards are two of the most important current corporate governance issues. Thus, our article examines interactions between the use of AI in corporate decision making and board gender diversity. We analysed the effects of the inevitable use of AI in the corporate decision-making process on corporate board gender diversity discussions and regulations under three possibilities: AI as a board member, AI as an enabler to assist the decision-maker or AI being used to help decision making such as selecting board members.

Seeking answers to these questions, a recent development related to this situation should not be overlooked. As a matter of fact, while noting that AI’s decisions are not so independent from those who designed it and are only as good as its inputs and programming, we should also add that as long as humans develop the software of AI, it is vulnerable to our internal biases. This development is one of the examples where the issue of whether the use of artificial intelligence can provide diversity of views in companies’ boards of directors is controversial.

Considering the outcomes of studies which have proved bias and discrimination, our article supports the position that even if AI takes the decisions (as board members or enablers to assist board members), this will not reduce the need for board gender diversity. Thus, given the fact that artificial intelligence may make biased judgments, although we acknowledge that AI interference in board decisions is inevitable, this should not exclude or alter gender diversity policies and the incentives for more diverse boards should continue. It is reasonable to conclude that board diversity will be even more critical in situations where the company employs AI.

Although AI will benefit companies in many areas, in our opinion, AI, whether utilised as a director, in the election of directors or in the decision-making process, will not guarantee efficient company management. We believe that we have not reached the level where AI can take all decisions in companies. Human decision-makers are still indispensable on corporate boards. When there are human decision-makers a female perspective is essential for the quality of the decisions and social inclusivity. As a result, even if artificial intelligence is used effectively in selecting managers in companies, the gender quota should be preserved.

Muzaffer Eroğlu is Assistant Professor, Faculty of Law, Commercial Law Department, Boğaziçi University, Istanbul, Turkey and can be reached at

Meltem Karatepe Kaya is Assistant Professor, Faculty of Law, Commercial Law Department, Istanbul Medeniyet University, Istanbul, Turkey and can be reached at

The corporation in literature – hero or anti-hero?

I ran into this little sentence when I was reading a Murakami story:

Moreover, he felt satisfaction at belonging to an important organization, even as one of its lowest-ranking members. His performance and attitude were so outstanding that, after a year as a commissioned collector, he was taken directly into the ranks of the full-fledged employees, an almost unheard-of achievement at NHK. Soon, he was able to move into a corporation-owned apartment and join the company’s health-care plan. It was the greatest stroke of good fortune he had ever had in his life.

This reminds me of books by Tyler Cowen and Evan Osborne. Cowen talks about corporations giving us jobs and Osborne says:

…one of the least appreciated virtues of a world driven by commerce, and of global corporations in particular, is the push it gives people who are trying to make something of their life an incentive to do so across racial, religious, and gender lines. (p. 89)

Considering that corporations are almost always depicted in bad light in literature and in popular culture, I was pleased to see this little passage in the Murakami story.

Board diversity à la Quebec

A diversity related news story from Canada begins as follows:

Canadian National Railway Co. … is coming under fire from shareholders and governance experts for failing to nominate any executives whose first language is French to its board of directors despite the fact the company’s headquarters is in Montreal.

After reading this much, I thought there will be more about how the company will benefit from having a French speaking director in the rest of the article but it looks like the issue is mostly about representation. Apparently a pension fund (Caisse de dépôt et placement du Québec) is one of the big shareholders of the company. No surprises there.

I have argued in the past that boards can find various types of diversity useful depending on each companies circumstances and if a French speaker is useful in this instance, then this is a valid concern. The language of “representation” was what bothered me. As we keep asking for representation for different categories of people, where does it end? Also, what of governance?

Linking exec pay to ESG – looks good, feels good, and maybe that’s about it.

Everyone wants more ESG from companies. No one is very clear what ESG is or how to measure it. Now investors have started asking companies to link executive pay to ESG and companies are following through. A recent article in the FT reports:

Many more companies are now linking environmental, social or corporate governance criteria to variable pay policies. PwC’s analysis found that 86 per cent of companies are using ESG measures for 2022 plans, up from 64 per cent in 2021.

Will this help? I have to agree with Tom Gosling’s assessment as quoted in a Greenbiz article from earlier this year:

“One of my big fears about this sort of stampede towards including ESG targets in executive pay is that it’s likely just to lead to more pay and not more ESG. And we need to recognize that as a potentially big unintended consequence.” 

Of course all regulation has unintended consequences right? So why allow linking financial performance to executive pay by not ESG? Well, ESG is less measurable. Alex Edmans explains this well:

For a financial target such as earnings-per-share, there’s consensus on how to measure it. But that isn’t the case for an ESG metric. Should ethnic diversity be captured by the number of minorities on the board, in senior management, or in the workforce—or other factors such as the ethnic pay gap, or the proportion of minorities who get promoted from each level? Even ESG-rating agencies disagree significantly on how to measure ESG performance, so any measure might be perceived as unfair or ignore important dimensions.

So of course there is room to game the requirements and get more pay while not actually engaging in genuine ESG.

Town square

While I’m as excited as the next corporate law enthusiast about the Twitter poison pill etc., I’m also quite interested in the “town square” value of twitter. After acquiring a large stake in Twitter, Musk said, “I think it’s very important for there to be an inclusive arena for free speech,” and added that Twitter was the “de facto town square.” Many have angrily resisted this idea. I’ll quote Cathy Wood’s tweet (which I agree with) on this:

Going back to those who resist the idea, I think that the most upsetting thing seems to be that the “town square” is run by a corporation. But like it or not, social media is indeed the town square and has been used to mobilise public opinion and social movements even against corporations!

If you want to know if this issue of Twitter’s town square value and consequent effect of any takeover on democracy should be a factor for the board of Twitter, see this excellent twitter thread by Prof Ann Lipton.

Do you think I’m quoting/ citing too much from Twitter? Well, it does have some very useful conversations in all areas including corporate law! So of course I agree with Cathy Wood that Twitter’s product is useful as a town square and for more reasons that she lists in that tweet.

Anyway, all this is to make a fairly obvious point about corporations – they give us valuable products. I still need to make the point despite it being so obvious because we only see talk of corporations as the bad guys in most contexts. We should not forget their value.

California’s board diversity quota in the court

Wise opening lines:

When faced with a problem, the immediate temptation is to employ the most obvious and
direct solution. In most cases, it is ‘t even fair to call this impulse a “temptation.” It’s just a
normal and sound approach to life But sometimes there are constraints which call for additional care. This is one of those times.

I’m quoting from Crest v Padilla (Prof Bainbridge shared the text of the decision at his blog) where a summary judgement ruling that the California board quota law was unconstitutional, was made. As readers of this blog will know, I’m not as concerned about constitutional law issues. Still, the opening lines I have quoted above really drive home the fact that legislation will have unintended consequences and it is important to think about those consequences. As I have argued elsewhere, a mandatory quota comes with costs even for the diverse candidates we are supposedly helping with the law.

Here’s another paragraph from the decision explaining the constitutional law aspects:

If demographically homogenous boards are a problem, then heterogenous boards are the
immediate and obvious solution. It that doesn’t mean the Legislature can skip directly to
mandating heterogenous boards. The difficulty is that the Legislature is thinking in group terms. But the California Constitution protects the right of individuals to equal treatment. Before the Legislature may require that members of one group be given certain board seats, it must first try to create neutral conditions under which qualified individuals from any group may succeed. That attempt was not made in this case.

While on the topic of legislating to “solve” the lack of diversity, it might have been helpful to have diverse perspectives about the costs and benefits of the law while it was being considered.

Saving the safe harbour

Australia’s (relatively) newly minted safe harbour to directors’ liability under s 588G (insolvent trading liability) has come under much criticism and for good reason. Still, I had been enthusiastic about a provision that can possibly change the incentives that s 588G seemed to create for directors. So, the government’s response to the independent panel’s review and recommendations to improve the safe harbour is welcome. Some of the recommendations are aimed at clarifying aspects of the safe harbour provisions.

I’m most interested in Recommendation 4 to which the government has agreed. It says:

The Review recommends that a plain English ‘best practice guide’ to safe harbour be developed by Treasury in consultation with key industry groups. The Review recommends that this guide set out general eligibility criteria for appropriately qualified advisers.

I think this does two things. First, it attempts to do away with spurious advisors becoming involved in advice re safe harbour. While this is good in theory, the devil will be in the detail and in the implementation. Second, the ‘plain English’ best practice guide to safe harbour will be useful because it might help small business owners understand and use the safe harbour effectively. Also, if key industry groups provide input as recommended, it might help flesh out how the safe harbour works in practice.

There is also an supplemental suggestion (although not a formal recommendation to the government) to updating ASIC’s Regulatory Guide 217 ‘to refer to the insolvent trading prohibition, and the safe harbour provisions, together with general guidance on the operation of the relevant provisions.

Recommendation 14 is also worth mentioning because it says that Treasury should ‘commission a holistic in-depth review of Australia’s insolvency laws’. It does not seem like this is on the government’s agenda, going by the fact that the response simply details the insolvency law reforms undertaken or in the pipeline. Here it is:

The Government notes this recommendation.
The Government has an extensive agenda regarding measures to improve Australia’s insolvency framework for both small and large businesses. On 1 January 2021, the Government introduced new insolvency processes suitable for small businesses, which are the most significant reforms to Australia’s insolvency framework in 30 years. The Government also announced reforms to creditors’ schemes of arrangement and conducted consultation on clarifying the treatment of corporate trusts in insolvency over the course of 2021.

Should companies be leaving Russia now?

The Russian invasion of Ukraine has brought an important issue for corporations into focus. Is it the role of corporations to speak up and act on social and political issues? I think the Russian invasion is so serious that companies cannot simply ignore it and continue with a ‘business as usual’ mindset. At the same time, companies with operations in Russia should also be concerned about the welfare of their staff there. An executive whom I will not name (but it could be anyone) said in a conference that their company was concerned about their people everywhere including in Russia. But a few days after that, I saw that the company in question had decided to exit Russia. There are no easy answers but as I say in a recent paper about social media activism (in a different context), companies should make decisions deliberatively and with a long term view, rather than under pressure. Here’s a quote about Nestle from FT’s report which tells us how considered these decisions should be.

On Russia, investors said they trusted Schneider [Nestle’s CEO] to navigate a difficult line between responding to the invasion and taking responsibility for the company’s 7,000 staff in Russia and its provision of essential goods. Nestlé’s Ukrainian business, meanwhile, continues to operate at 60 per cent of normal capacity.

#RaceMeToo – can a hashtag about academia offer lessons for corporations?

As someone who writes about diversity in corporations, I was interested to listen to Dean Mindy Chen-Wishart’s talk on racism in universities and Zoom made that possible. She had been actively tweeting with this hashtag on twitter in recent times and other academics had shared their experiences as well but I was interested to see what solutions Chen-Wishart proposes. She did have some suggestions but the things that struck me most, and that I agree with and propose in the corporate context are:

  1. Diversity training is ineffective because it has too many costs.
  2. The intangible aspects of inclusion cannot be forced. People should have the will to actively befriend and include those unlike themselves in various activities. No amount of policies and rules can force that. (I agree. This is one of the many reasons I don’t like quotas.)
  3. Recognize the informal mentoring and counselling that diverse people (women, people from minority groups/ races) do to help others, rather than treat it with suspicion. I broadly agree and think that this can be baked into mentoring programs which many corporations already have.
  4. Universities (like corporations) say they care about diversity, but if they really do, they should listen to their employees. Then, act on it. Yes, I write about this in my most recent paper.