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The Chicago School and Corporate America

Frank Easterbrook and Daniel Fischel are University of Chicago law professors who believe that, when it comes to making profits, nothing — not even the law — should stand in the way. (For almost two decades, Easterbrook has also been a federal appeals court judge.)

Twenty years ago, writing about antitrust crimes in the Michigan Law Review, Easterbrook and Fischel, then both professors at the University of Chicago, wrote that managers not only may, but should, violate the rules when it is profitable to do so. And it is clear that they believed that this rule should apply beyond just antitrust.

In a nutshell, this is the Chicago School view of corporate law that has taken hold over the past 20 years.

Under this view, if a Fed Ex truck needs to double park to make a delivery — double park. No problem. Pay the $20 fine. Just as long as you are still making money, violate the law.

Or course, when it comes to corporate crime and violence, we aren’t talking about just double parking.

We’re talking about fraud, corruption, pollution, price-fixing, occupational disease, and bribery.

The Chicago School says these are “externalities” and related fines and penalties should simply be viewed as the “costs of doing business.”

We call these activities crimes, and we believe society imposes penalties for committing these crimes to deter and socially sanction those who would violate society’s proscription.

Lawmakers of both parties are shamelessly portraying Enron and Arthur Andersen as rotten apples, even though those same lawmakers were just until recently on the take from both corporations, and doing the dirty work of defeating laws that would have governed both.

But of course we are not talking about a couple of rotten apples here.

As Easterbrook and Fischel so clearly show, the corporate world is now governed by an ideology that is rotten to the core. After all, as the great Chicago professors teach us, it is the duty of managers to violate the law when it is profitable to do so.

Now, the stink has risen. And slowly, but surely, and hardly noticed, a counter-Chicago movement in corporate law is bubbling up from law schools around the country.

At Boston College Law School, Professor Kent Greenfield points out that it used to be that corporations were created by the state to achieve specified public goals. The corporation was created to build a canal, for example. And then it was to go out of business.

If the corporation decided to sell hot dogs instead, it was acting beyond its powers, and a shareholder or the attorney general could file an injunction under the “ultra vires” (beyond its powers) doctrine — forcing the company to drop the dogs.

Then, the states started to compete with each other for more corporate business — the infamous race to the bottom. As a part of that race, states stopped imposing strict limitations on corporate powers.

The corporate lawyers set up Delaware as the Las Vegas of corporate chartering. And as a result, virtually no corporate activity was beyond a company’s defined activity. Ultra vires was dead, was the common view.

Greenfield steps in and says — wait a minute — illegal activity is still “beyond the power” of corporations. State incorporation statutes and articles of incorporation almost invariably charter corporations only for “lawful” purposes.

He wants attorneys general and trial lawyers to look carefully at the possibility of bringing ultra vires lawsuits against officers and directors of corporate criminals.

At Washington and Lee University, law professor David Millon says that underlying the assorted debates over the nature of the corporation are differences of political opinion.

So, those who see the corporation as a creation of the state do so because we want to see strong public control.

Those who see in a corporation nexus of private contracts (the Chicago School) see it that way because they want to defeat public regulation. (The charter of incorporation is like a birth certificate, and nothing more, they argue.)

This new breed of corporate law reformers, represented by the likes of Greenfield, Millon and Lawrence Mitchell of George Washington University Law School, does not go as far as we would in sending the corporation back to the public woodshed.

But it is good to note that, after years of bowing in subservience to the giant corporatists of the Midwest, a handful of law professors are beginning to agitate against the regressive theories of their Chicago School colleagues.

Their task is simultaneously difficult and easy. Difficult, because the Chicago School has been so successful in winning the academic — and eventually legal — debate about what corporations are and how they should be governed. Easy, because the Chicago School claims are so extreme that the reformers can win the debate — or at least significantly shift the pendulum in the field — by convincingly arguing simply that corporations should follow the law.

Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime Reporter. Robert Weissman is editor of the Washington, D.C.-based Multinational Monitor. They are co-authors of Corporate Predators: The Hunt for MegaProfits and the Attack on Democracy (Monroe, Maine: Common Courage Press, 1999)

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Russell Mokhiber is the editor of the Corporate Crime Reporter..

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