Thursday, March 27, 2008

Extraterritoriality and Corporate Social Responsibility: Governing Corporations, Governing Developing States.

Describing the current direction of norm making for multinational corporations, John Ruggie recently noted, “[t]he state-based system of global governance has struggled for more than a generation to adjust to the expanding reach and growing influence of transnational corporations.” (Ruggie 2007). The potential and perils of large economic enterprises, at once both property in the hands of their owners and autonomously constituted legal actors, looms large in the 21st century. Globalization—a privatizing, market-based system of increasingly freely moving capital—has provided the context in which the potential for these great enterprises has come closer to being realized. And its fundamental premises have also served as the basis for tremendous disaffection.

But assertions of great power also produce great reaction. The tone of elite global discourse in this context was driven to some extent by the political and economic “left,” which had never abandoned the Marxist-Leninist premise of the conflation of law, politics and economics. While the “right” was satisfied in elaborating the core ideal—strict separation between public and private, law and markets, and positing the essentially private nature of the firm and the markets through which it operated, the “left” was crafting an increasingly elaborate case for the notion that corporations were infused with a public purpose or had a public effect, and therefore had duties to maximize social as well as private value.

There have been many important developments that have flowed from these conversations about economics and politics in the context of global corporations beyond territorially based uniform regulation. These include everything from fiduciary duties of corporate boards and officers, reporting and surveillance obligations, ethics standards, labor policy, contract and investment policies. Among the most important has been growth of efforts to contain the power (or at least the assertions of that power) by these great economic actors. Corporate social responsibility (“CSR”) has assumed its place as among the most visible of legal fetishes of the 21st century. become something of a legal fetish object in the 21st century. “There is nothing in the rule of law, save that which has been placed there by training. . . . The rule seems to point in a certain direction. . . . But there is nothing in the rule itself . . . that points us in any direction whatsoever. . . . We move in the direction that we are trained to move and we call it the rule of law. We have been trained to see, and do in fact see, the rules as if they determine the circumstances of their own application. This is legal fetishism.” (Farley 2004, at 1233).

The taming of economic enterprises whose operations cross borders under the rubric of CSR has become a great enterprise of those who would regulate. CSR based regulatory efforts have generated a tremendous effort to bend domestic law to control the activities of multinational enterprises globally. It has given new life to the ancient debates about the identity of the stakeholders the corporation ought to serve, suggesting efforts under the rubric of CSR to hold that in “addition to shareholders' interests, corporate officers must give weight to the interests of other corporate and societal constituencies," such as "creditors, employees, customers, local communities and the environment." (Licht 2004, at 651). CSR has also generated a growing body of scholarly study, from the perspective of the multinational corporation, the (regulating) state, the objects of multinational corporate activity, stakeholders, surveillance systems as a basis for international regulation in a market environment, and the regulatory frameworks within which all of this control can be implemented (or resisted). It has been the object of discourse as domestic and international law. It has been understood as necessarily soft law or inevitably hard law, or new regulatory forms.

CSR has produced consensus that multinational corporations might be subjects of international law for certain global criminal activity. Corporate criminal liability was another of the great changes brought by the need to clean up after the defeat of the Nazi regime in Germany. Its initial targets were the great German Krupp and Farben industrial complexes. Its modern manifestation has been advanced with legislation like the Military Extraterritorial Jurisdiction Act (2000), “which was enacted precisely because U.S. military courts are not an option for private actors, specifically allows criminal charges to be brought against U.S. contractors working for the Defense Department.” (Dickinson 2005 at note 228). But global CSR has met with resistance, as well, especially where presented as global hard law. The global communities (after strong resistance by developed states) has rejected the ideology of the Norms on the Responsibilities of Transnational Corporations and Other Businesses (20003), as another thwarted expression of developing states to control the discourse of globalization and regulation. It has also resulted in the United Nation’s more developed-nations friendly Global Compact, and similar efforts.

But in a global regulatory context in which “no one is in charge” (Friedman 1999, at 112), the approaches to regulation of large multi national corporations has become as complex a subject as the regulation of states within a transnational or international framework—and as contested. Currently, among the CSR community, there are three principal approaches to the deployment of CSR in the context of corporate regulation—the extraterritorial application of the (favored) laws of certain jurisdictions (usually from out of developed states); the development of substantive rules of corporate responsibility as international law (usually reflecting the position of developing states though serving the policy objectives of portions of developing state elites); and privatization of corporate regulation beyond the traditional scope of corporate governance.

In her book, “Multinationals and Corporate Social Responsibility” (Zerk 2007), Jennifer Zerk provides a cogent examination of CSR in the early 21st century as developed especially in the United Kingdom. (Zerk 2007, at 2-3). Unfortunately, the emphasis on the development of CSR in the U.K. with a nod to the development in other developed states, leaves the discussion one sided. While the U.K. is admittedly an important site for the development of CSR, it is not the only one, and indeed, not the source of CSR values on which there is general consensus. More importantly, though, it suggests that CSR is essentially a colonialist effort—another effort by developed states to regulate for the rest of the world. This, when coupled with a taste for extraterritorial application of developed state law, all for a good cause, ignores growing CSR sensibilities in the states in which much of the development on the ground is happening, and does suggest the sort of paternalistic venture tat tends to make developing states suspicious.

She makes a strong argument for a traditionalist, state centered, approach to CSR regulation that at once privileges the legal regimes of developed states and then subordinates those regimes potentially to overarching international regulatory frameworks. Zerk’s “central argument is that, while international law has its limitations, it is also capable of supporting new regulatory opportunities that have the potential greatly to improve the welfare of people and communities affected by multinational activities, particularly in less developed countries.” (Id., at 2). That potential might be realized because certain powerful states are increasingly willing to project their law outside their territory. (Id.). Moreover, the global CSR movement appears to indicate a greater willingness to impose, through international law, “global ethical standards for business.” (Id.). Together, for Ms. Zerk, global trends suggests a capacity for great movement toward global regulatory harmonization at the public law level. “The question is: are we prepared to use them?” (Id., at 4).

To this end, Ms. Zerk, examines the current state of the legal regimes governing corporate social responsibility, both on a domestic and an international level, and makes several suggestions on how CSR standards might enforced against multinational commercial entities in the future. Ms. Zerk focuses on what she describes as three of its most important areas, namely, workers’ rights, environmental protection, and consumer protection. (Id., at 22). This is a position open to substantial disagreement. Ms. Zerk suggests that the biggest obstacles to furthering an international CSR regime is the state-based approach inherent in international law, and the lack of uniformity and efficacy that inevitably results from lack of jurisdiction, the absence of liability for parent corporate entities, and differing interests and philosophies between developing nations, and the economic powers who are currently the biggest proponents of increasing CSR standards. (Id., at 11).

A neat trick if you can manage it, but perilous depending on your politics. But the likelihood that this sort of effort produces yet another variant of developed state control of the agenda, responses and framework for dealing with conditions and actors originating among them is great. Zerk produces a well meaning and well-argued set of propositions for a regulatory scheme based on extension of extraterritorial jurisdiction and international legal regimes. She suggests subtly and effectively the ways in which the excesses of one might be used to negate that of the other. Still, for all that, it is hard to overcome a sense that these efforts might constitute yet another in the many variants of the warm of embrace of well meaning but controlling helpmates from the developed world. Yet, what Zerk might well highlight, and highlight effectively, is an important conundrum of the corporate social responsibility movement—the difficulty of devising systems of CSR that avoid the sort of neo-colonialist effects that make host states so uncomfortable. But her book also underlines how this conundrum may no longer matter much—at least among the intelligentsia of the developed world. Thus, David Becker and Richard Sklar note
“After all, for several decades it was commonplace for intellectuals to believe that transnational corporate expansion was an up-to-date form -- a higher stage -- of imperialism. But it is obvious that the idea of capitalist imperialism no longer commands the attention of political thinkers or commentators on world politics. Democracy has now eclipsed imperialism as this century's preeminent political word. In recent years, several other "isms," among them constitution alism, ethno-nationalism, fundamentalism, even alleged forms of fascism, have attracted more attention than imperialism. For whatever reason, intellectuals generally are no longer inclined to believe that economic growth under capitalist conditions will ineluctably result in the domination and exploitation of nations that are relatively poor and weak by those that are relatively rich and strong.” (Becker & Sklar 1999, at 1).

This is ironic considering the originating political sensibilities of CSR. But then again it may not be. The fact of sensibility for issues of subordination in developing states does not reduce the cultural pull of subordinating systems. Thus, it is perfectly logical, though perverse, that the most sensitive of developed world elites would tend to want to control the methods and premises of action in aid of anti-subordination efforts—and in so doing replicate subordination more artfully.

In approaching this complex issue, Ms. Zerk first provides a history of the CSR movement from its infancy, noting that, in the current environment, most multinationals at least pay lip service to the idea of CSR. (Id., at 23). The problem is, of course, that these entities regard CSR as a largely volunteer effort, rather than a set of standards that should be universal and, more importantly, legally binding. (Id., at 33). The arguments against binding international regulation are familiar; “voluntarists” argue that international CSR standards will inhibit competition and innovation, and furthermore, are unnecessary as increasing CSR is in the long term financial interest of multinational corporations. (Id.). Developing nations have also voiced opposition, claiming a sovereign right to “move at their own pace,” motivated by concerns that the CSR movement, emanating largely from the developed world, is merely veiled protectionism. (Id.). On the other side, it is argued that a concerted effort at elevated uniform CSR standards from a sufficient number of multinationals so as to influence corporate behavior on a global scale is unlikely, if not impossible. (Id., at 34). Ms. Zerk contends that the volunteer vs. mandatory model is overly simplistic and is to some extent based on the misconception that a binding legal standard will result in “higher standards of corporate behavior and transparency.” (Id., at 34-35). Ms. Zerk makes the case that the classic “command and control” model of corporate regulation is, in the modern global context, ineffective at best and counterproductive at worst, and notes that national governments have recognized this and are currently experimenting with alternative forms of regulation. “These include self-regulation, use of incentives, awards and accreditation systems, market-based initiatives, disclosure obligations . . . and education campaigns.” (Id., at 37). Even in the face of shifting conceptions of what constitutes effective corporate regulation, multinationals present a unique set of issues and challenges. (Id., at 49-50). Ms. Zerk observes that the term “multinational” is one that should be read broadly, and can apply to any number of commercial relationships no longer based on equity, but on “control.” (Id., at 51). This is problematic for, specifically, determining the extent of a state’s jurisdictional reach, and the allocation of liability. (Id., at 54-56).

Ms. Zerk then turns to an examination of international law in the context of CSR. International law can be divided into private and public spheres. (Id., at 61). Ms. Zerk argues that public international law is ‘horizontal’ inasmuch as states are both the makers and the subjects of law. (Id., at 62). Under this regime, there is often an absence of a central authority to enforce/interpret the law. (Id.). This system further frustrates efforts at the “command and control” model of multinational corporate behavior. (Id., at 73). However, Ms. Zerk contends that, as legal personalities, multinationals enjoy rights under international law and can therefore theoretically be subject to obligations under international law. (Id., at 81). However, because of the existing bulk of international human rights law is dedicated solely to state responsibility and because there is currently no enforcement mechanism for international CSR, direct law may not be an option for the furtherance of CSR on a uniform, global scale. She suggests that “[i]t should not be assumed, though, that the human rights obligations of states are readily translatable to the corporate context.” (Id., at 83). Ms. Zerk instead points to indirect regulation, which occurs largely at the national level. (Id.). While this is currently the most used method of implementing CSR initiatives, there is a lack of the power to enforce the laws beyond the borders of the home state. (Id., at 83-84). She also notes that some would argue that home states not only have the power to regulate extraterritorially, but the obligation to do so. Id., at 85). However, the general UN treaty provisions concerning human rights that place some obligations on states promote and respect human rights are most often viewed as not obligating a home state to regulate beyond its borders. (Id., at 89). More difficult still is the question the extent or even the existence of a duty owed by a home state to nationals of other countries. (Id., at 90). Ms. Zerk contends that it is unlikely that any positive obligations have been placed upon home states to regulate extraterritorially. (Id., at 91).

Non-political entities may have a role to play in the creation of greater global CSR. Currently, NGO’s have been influencing this area in two ways. First, they have created grass roots movements that ultimately influence shareholders and lawmakers; as well as disseminated information about corporate adherence to CSR standards or lack thereof. Second, many NGO’s have created partnerships and coalitions with multinationals to tackle specific human rights issues. (Id., at 100). Ms. Zerk suggests that these cooperative efforts may form the foundation of a new global CSR regime. (Id., at 102).

Jurisdictional constraints are one of the biggest obstacles for home states to increase CSR standards. Ms. Zerk devotes an entire chapter to analyzing the different extraterritorial theories and how may be employed by home states to regulate beyond their borders. (Id., at 105). Ms. Zerk argues that neither the “effects doctrine” nor the “universality principal” are sufficient under current international law to allow a home state to effectively regulate multinational behavior beyond its borders. (Id., at 112). The second jurisdictional issue involves where private parties may bring suit against multinationals. (Id., at 117). Citing jurisprudence of both the US and the UK, Ms, Zerk highlights the reluctance of courts in the developed world to hear cases against multinationals arising from events in the developing world. (Id., at 120). Forum non conveniens has provided a cushion for multinationals against litigation in more plaintiff-friendly jurisdictions. (Id.). Although the UK courts have recently softened the application of forum non conveniens, the jurisdictional hurdle for international litigants is still a high one in the US. (Id., at 125-126). Additionally, choice of law has involved a balancing of interests test in both the US and the UK, with varied results. (Id., at 129-30). Ms. Zerk suggests that the courts are best left in the role of arbitrators rather than regulators. (Id., at 133). Lastly, the duty of non-intervention has proved to be a roadblock to extraterritorial regulation by home states. (Id., at 138). Ms. Zerk contends that a broader interpretation of extraterritoriality, which examines impact of laws rather than the place “where laws are applied or enforced,” may serve to advance international CSR standards. (Id., at 140).

With chapter 4, Ms. Zerk arrives at the crux of her argument and the start of the difficulties of the well-meaning neo colonialist aspects of CSR. Both are richly displayed at the start of her consideration of the value of extraterritorial application of the law of proper states in favor of the benighted citizens of those states unwilling or unable to resist the onslaught of global multinationals.
But the rise of the CSR movement is causing home states to reassess their role in relation to the foreign activities of multinational based in their respective jurisdictions. There is now a significant degree of public and NGO support for the idea that these states should take much greater interest in the social and environmental performance of multinationals in poorer countries. (Id., at 145).

But first some preliminary questions require interrogation. The question of whether multinationals actually have a home state is largely unanswered in international law. (Id., at 149). This is of particular interest due to wealthier nation’s interest in greater CSR regulation. Ms. Zerk explains that this fact highlights the need for an international standard, as multinationals are often comprised of several entities which each may be domiciled in different countries. Id., at 150). Because the developing nations are concerned with remaining competitive and developing at their own pace, an international standard is much more difficult to establish. (Id., at 154-155). Additionally, wealthier nations are equally wary of multinationals ability to move operations overseas with relatively more ease than in the past. (Id.). Ms. Zerk suggests that although these factors work against international CSR, that wealthier nations appear to be showing more interest in sustainable growth, which has been developed in parallel with CSR generally. (Id., at 157). Although there doesn’t appear to be any international obligation for home states to regulate beyond their borders, there might be a duty to warn other nations under the international legal obligation to cause no transboundary harm. (Id., at 158-60). She then suggests a number of techniques of extraterritorial jurisdiction that might show promise in the CSR context. These include parent based extraterritorial regulation (Id., at 161-62 (referencing, for example, the US Comprehensive Anti-Apartheid Act of 1986, 22 U.S.C. § 5001), and codes of conduct with extraterritorial reach. (Id., at 163). Ms. Zerk hails a number of efforts in Australia and other places, but downplays the failure of these efforts to produce viable legislation. (Id., at 165-171). But she correctly notes the effects of disclosure and transparency efforts. (Id., at 171-182). Yet she fails to suggest the potential synergies between these disclosure efforts and market regulatory effects, synergos that have been noted elsewhere. (Backer 2008).

Recognizing that several nations and the supra national European Union, have enacted domestic corporate codes of conduct, which include disclosure and reporting requirements and tax incentives, Ms. Zerk argues that these provisions, while often lacking in placing positive obligations on multinationals, are likely to lay the groundwork for a future international standard for CSR. (Zerk 2007, at 185-86). Lastly, Ms. Zerk reminds the reader that the current moves on the part of wealthier nations toward a more comprehensive CSR policy are borne out of political or moral, rather than legal obligations. (Id., at 196-97). And here there is a return to the legitimacy issue of state CSR imposed across borders. Territoriality is recognized as a nuisance that is important. But how to manage the delicate balance between the temptations of the well meaning to extend their “good news” across state lines, and the equally well meaning international law principal of non-interference? The answer, for Ms. Zerk, lies in international law—as long as sensibilities (and domestic law) of developed states can be translated into international law standards, then the issue of extraterritorial application will be finessed—developed states will not be applying their law so much as applying international law standards! (Id., at 194-96). This is the neat trick to the argument. Ms. Zerk thus suggests:
As a general rule, however, the more ‘internationally accepted’ the standards imposed on the multinational, the less likely it is that the extraterritorial regulation will amount to a breach of the duty of non-intervention in the domestic affairs of other states. Genuine initiatives designed to give effect to established principles of human rights should not automatically be regarded as interference. Even where the initiative goes beyond that which is strictly necessary to give effect to human rights, it is arguable that the extraterritorial regulation would not usually be ‘unreasonable’ where there is a significant degree of international consensus as to the content of those obligations, the need for regulation and the form that regulation should take.”

(Id., at 195-196).

Well done. But from the perspective of developing states this solution may prove somewhat less than satisfactory. However laudatory the product, developing states, especially those that have spent the greater part of a century of more getting out from under systems of political and cultural subordination and hegemony in which they were told what was good for them, will find problematic a system of law in which they will again have what is good for them imposed from outside.

The area of private tort law may be a step toward inducing greater standards of CSR, as Ms. Zerk argues in chapter five. (Id., at 198). A number of factors in more developed countries make a proliferation of litigation based on CSR violations (environment, labor, and consumer protection) extremely likely. (Id., at 199). Ms. Zerk argues that there are two key components that will determine the future of litigation in this area: courts accepting jurisdiction and the “substantive rules of parent company liability. (Id.). As to the jurisdictional question, courts appear somewhat more willing to deny claims of forum non conveniens in favor of multinational defendants. (Id., at 214). Noting that there are several theories of liability (Id., at 216), Ms. Zerk suggests that primary liability is often ineffective in the multinational context, as the duty of care is hard to establish with a parent company as to the behavior of a subsidiary. (Id., at 218). She also argues that because vicarious liability is often founded on the employer-employee relationship, it too may not be an effective theory of liability for the purposes of multinationals. (Id., at 223). The theory of secondary liability, which looks to whether the defendant assisted, authorized, or encouraged the wrongful behavior, are largely untested, but may provide a means for determined liability in the future. (Id., at 227). Lastly, Ms. Zerk notes that enterprise liability, which would treat a multinational as a single economic entity, may provide for future liability in CSR litigation. (Id., at 229). Acknowledging that the issue of control will be paramount to any determination of non-primary liability, Ms. Zerk voices the concern that emerging theories of liability may only induce multinationals to shift corporate structure to avoid liability. (Id., at 235). Thus, private tort law is limited in its ability to broadly influence multinationals in the area of CSR.

Ms. Zerk has given a comprehensive overview of the current state of CSR from a legal perspective. Despite its complex subject matter, the book distills core issues down and makes them very clear to a reader unfamiliar with the issues facing multinational corporations and their role in fostering international human rights. Ms. Zerk ably identifies the shortcomings of current international treaties and of purely domestic regulation. While understandable given her objectives, it is lamentable that she spends almost the majority of the book dealing with the national laws of the great common law states: the UK, the USA, and Australia. There is some mention of the European Community, but only enough to whet the appetite. This is more lamentable, still, since the object of all of this activity is the regulation of the lives and welfare of citizens of states other than those of those developed states. Additionally, little attention is paid to those developing states that occupy an important middle ground in the CSR debate—those states that are both net importers and exporters of corporate activity. China, Brazil and India are no longer merely developing states dependant on the efforts of well meaning consumers from developed states to help them understand the nature of workplace standards acceptable among civilized states. Each has a growing multinational sector that is contributing to the development of those standards. The Brazilian Instituto Ethos, for example, has become an important voice in the global CSR dialog. Western governments, NGOs and academics ignore them at their own peril. Lastly, Ms. Zerk seems to suggest that an international standard for CSR should be achieved through the UN. It seems that the UN is perhaps not the best institution to deal with this issue. Little mention, however, is made of the possible utility of other international organizations as the institutional base for global governance of multinational corporations. The WTO, with a mechanism firmly in place for dispute resolution, might seems like a good alternative to develop and implement not only a universal, but an enforceable standard. (But see Zerk 2007, at 306). Or it may not. But those debates await other authors.

Moreover, the focus on the development of global substantive standards seems somewhat misplaced. Ms. Zerk places a substantial amount of hope on the development of international law standards from out of the great soft law CSR initiatives. (Id., at 262-277). Though this is high on the list of the desires of global NGOs, the current political situation is unlikely to produce consensus on corporate behavior. (Backer 2008). First, the foundational project for this end, the U.N.’s Norms has been abandoned (Backer 2006), an event sadly given short shrift by Ms, Zerk. (See Zerk 2007, at 245-48). Moreover, the discussion of supplier chain standards might as easily produce a greater movement away from public international law standards (Backer 2007), as it portends greater successes for public law. (See Zerk 2007, at 265-67).

Lastly, the work might have profited form a greater focus on the use of international law as a mechanics of disclosure and transparency. (Backer 2008). “In the meantime, the most promising avenue for the enforcement of human rights obligations of multinationals remains the national courts.” (Zerk 2007, at 305). And perhaps in the private regulatory systems emerging in which the multinational corporation stands at the center of a complex matrix of relationships. (Backer 2007). Or the most promising avenue might lie in the power of global NGOs to match the power of multinationals in the competition for the allegiance of consumers and investors through certification programs and other private contractual mechanisms. All may be right. But it is a stretch to suggest that “[u]ltimately, it is more than likely that new international institutions will emerge to promote—and enforce—the CSR standards of multinationals themselves.” For all of that, this work is a quite worthy addition to the academic literature in the field of corporate social responsibility. Whether or not one agrees with Ms, Zerk, she has produced a strongly argued work worthy of serious consideration.

The global elite is expending a tremendous energy on issues of CSR. Those issues are bond up in power relations between the public and private sectors of developing states, between developed and developing states, between economic elites, the intelligentsia and the media, and between labor, consumers and investors. It signals a contest for power as much as a drive to better the lives of people adversely affected by economic development. It suggests the change in the tenor of discussions about communal organization. Today values matter, states matter less, and economic organizations wield a substantially greater institutional and political power than they have in a long time. CSR will remain the language within which all of these dynamic struggles will be fought. The nature of victory or the identity of the victor, if such is to be had, remains unknown. But to the victor will go power, economic and regulatory, in fact if not in form.

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United Nations, ECOSOC, Sub-Comm'n on the Promotion & Prot. of Human Rights, Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights, U.N. Doc. E/CN.4/Sub.2/2003/12/Rev.2 (Aug. 13, 2003), available at (accessed March 2, 2008).

United Nations, U.N. Global Compact available at (accessed Feb. 1, 2008).

Cynthia A. Williams, Corporate Social Responsibility in an Era of Economic Globalization, 35 U.C. DAVIS L. REV. 705 (2002).



Alien Tort Claims Act (15 U.S.C. 78dd-781C (1988)) .

The Military Extraterritorial Jurisdiction Act of 2000 (MEJA), 18 U.S.C. [subsection] 3261-3267 (2000)

Torture Victim Protection Act.

US Comprehensive Anti-Apartheid Act of 1986, 22 U.S.C. § 5001).


Doe v. Unocal, 395 F.3d 932, 937-42 (9th Cir. 2005)

Wiwa v. Royal Dutch Petroleum Co., 226 F.3d 88, 92-93 (2d Cir. 2000).

Tuesday, March 25, 2008

Sex and Politics--America's "Jerry Springer" Moment

"This is my Jerry Springer moment. I don't want this moment to die." (This is My Jerry Springer Moment, Jerry Springer, The Opera, Act. 1, No. 14 ). So goes politics in the United States. The American public reveled in its political bathos recently with the sexual voyeurism among the political classes in New York. First Eliot Spitzer, the great reformer, resigned amid allegations that he was a great fan of a 2 diamond hooker from an exclusive stable of call girls with a worldwide power clientèle. "Gov. Eliot Spitzer, who gained national prominence relentlessly pursuing Wall Street wrongdoing, has been caught on a federal wiretap arranging to meet with a high-priced prostitute at a Washington hotel last month, according to a law enforcement official and a person briefed on the investigation." Danny Hakim and William K. Rashbaum, Spitzer Is Linked to Prostitution Ring, The New York Times, March 10, 2008. Mr. Spitzer was a client of The Emperor's Club. The value of the product offered included both its physical gratification services and the knowledge that hardly anyone on Earth could afford them.

The club's Web site shows a fee schedule of $1,000 per hour for a three-diamond prostitute and $3,100 per hour for a seven-diamond prostitute. Members of the exclusive Icon Club could reach restricted areas of the Web site and schedule appointments with the highest prostitutes, whose fees started at $5,500 per hour, the press release reads. The New York Sun reports that the investigation was run by U.S. attorneys who not only were probing individuals linked to the ring, but who are part of the federal public corruption unit that investigates wrongdoing by elected and unelected officials.

Sources: Spitzer to Resign Following Reports of 'Involvement' With Prostitution Ring, Fox News, March 10, 2008.

All of the legalities were observed. Spitzer resigned after his political enemies threatened to drag him through impeachment proceedings. Daniel Nasaw, Spitzer Given Two Days to Resign, The Guardian, March 11, 2008 (""He has to step down. No one will stand with him," said congressman Peter King, a Republican from Long Island. "I never try to take advantage or gloat over a personal tragedy. However, this is different. This is a guy who is so self-righteous, and so unforgiving."" Id.).

His successor, David Paterson was first hailed as a great token--the first blind African American governor of New York. For those who whom these sort of statistics provide an adequate substitute for the character of an individual, there was much to rejoice. But then, in Jerry Springer style, the new Governor decided that his new office provided a great opportunity to confess: to drug use (many years before) and infidelity (somewhat later). But mercifully no sex for money (illegal). "On the day he took office last week, David Paterson unburdened himself about his own marital infidelities, and he was at it again in a television interview on Monday, describing how he had dabbled with cocaine and marijuana some 30 years ago." Stephen Foley, Spitzer Successor Admits Drug Use, The Independent (March 26, 2008). But this story is just beginning. The Governor will have to explain the lingering effects of infidelity and the use of state funds in a context with big stakes--the American presidential election. N.Y. Gov. Paterson Spokesman Refutes He Used $$ for Travel, Fox News, March 25, 2008 ("Speaking with FOX News, Cockfield said Tuesday that while Paterson made two trips related to the Clinton campaign, neither was to South Carolina last October. Cockfield said Paterson made a trip in December to Iowa, and to South Carolina last month. Cockfield said the Clinton campaign paid for both trips.").

The most interesting lessons from these shenanigans--from the political classes, the hypocritical and manipulative press, the holier than thou electorate, and the increasing Victorian moralization that harbingers a great and somewhat lamentable change in the cultural --is the continued critical connection between sexual, moral and political corruption. I have written about this before, especially in connection with the political transitions in Zimbabwe and Malaysia. See Larry Catá Backer, Emasculated Men, Effeminate Law in the United States, Zimbabwe and Malaysia, 17 YALE JOURNAL OF LAW & FEMINISM 1 (2005) (abstract). Consider the way in which the opposition early on sought to challenge now ex-Governor Spitzer when the news of his sexual transactions were published:
"The Republican state party and a leading Republican legislator called for the governor to step down. James Tedisco, a Republican Assemblyman from Schenectady who has clashed loudly and publicly with Mr. Spitzer, called on the governor to step down if the allegations are true. “The governor who was going to bring ethics back to New York State, if he was involved insomething like this,” Mr. Tedisco said, “he’s got to leave. I don’t think there’s any question about that.”"

Danny Hakim and William K. Rashbaum, Spitzer Is Linked to Prostitution Ring, The New York Times, March 10, 2008. And, indeed, sex served as a pretext, or better put, as a proxy, for the difficulties of the governor.
Sex for hire might not be the end of every politician. Louisiana senator David Vitter, whose phone number turned up in the records of the famous D.C. Madam, is testament to that. Other politicians have survived sex scandals, too, most notably Rudy Giuliani and Idaho senator Larry Craig. But Spitzer made his career on being Mr. Clean. He used his moral authority to fix a lot of things that were wrong with corporate America. As a result, this hypocrisy will be his undoing.
Eliot Spitzer: Screwed, Mother Jones, March 25, 2008.

But more than that--and Spitzer's successor is the key. Like Anwar Ibrahim in Malaysia and Canaan Banana in Zimbabwe, Eliot Spitzer (and perhaps David Paterson) suffered from the Jerry Springer syndrome: an obsession with the most prurient aspects of sexual conduct, and the willingness of an audience to conflate the sexual with the political, economic and other aspects of life. That conflation is essentially conservative. Consider the usual pattern of a Jerry Springer show--a group of extraordinarily aberrational people are produced to confess their activities or desires. Their partners express their anger, and the audience expresses its disapproval. Sex is the coin of the realm. But the real conversation involves corruption, of one form or another, and the Divine. The authors of Jerry Springer: The Opera, Stewart Lee and Richard Thomas, got it right, I think. Sex serves as the veil in front of the real conversation. And the political class has been reduced to the guests on the political version of the Jerry Springer Show. And ultimately, the language of public sex is religion. The use of sex and religion to brew up a political corruption concoction to poison Anwar Ibrahim and Canaan Banana are well enough understood. Americans continue to delude themselves that we do not play by similar rules.

Saturday, March 15, 2008

Redefining Market Failures: Bear Stearns and the Class Element in Market Discipline

We have been told that " The Federal Reserve took the extraordinary step yesterday of providing emergency funding to one of Wall Street's venerable firms, Bear Stearns, after it ran out of cash to repay its lenders." Neil Irwin and Tomoeh Murakami Tse, Fred Comes to the Rescue as Wall Street Giant Slips, The Washington, March 15, 2008. Government intervention was both extraordinary and necessary, we were told, to prevent a collapse of the economy.
"The Fed's action, arranged in a series of pre-dawn deliberations yesterday, is one of the most significant government efforts to save a private firm in modern times. The nearest parallels are the New York Fed-engineered buyout of the hedge fund Long-Term Capital Management in 1998 and the bailout of Continental Illinois Bank in 1984."
Neil Irwin and Tomoeh Murakami Tse, Fred Comes to the Rescue as Wall Street Giant Slips, The Washington, March 15, 2008.

But while we are all breathing a sigh of relief at the heroic action of the great leaders of our public and private sector, now may be an excellent time to reflect on the lessons of this affair--one that will likely be repeated as the United States lurches toward its Presidential election in November 2008. The first lesson is the most well known--it is better to borrow enough to become a threat to the lending system than to do otherwise. Bear Stearns reminds us that swine are rewarded and nice little well behaved creatures are devoured. It is better to be a swine than not. "Critics characterized the Fed's move as a bailout that inappropriately intrudes on the free market and could lead banks to keep taking risks like those that imperiled Bear Stearns. Other analysts said the action was necessary, given the precarious state of world financial markets." Neil Irwin and Tomoeh Murakami Tse, Fred Comes to the Rescue as Wall Street Giant Slips, The Washington, March 15, 2008.

But more important, perhaps, is a lesson about the class ramifications of this market system. First, not all market participants are treated equally in the market. Markets are a long way from being the perfect vehicle for the discipline of economic activity. More importantly, as economic institutions become more powerful, their public institutional aspects become more important as well. Bear Stearns cannot be permitted to fail because, in essence, it serves a public function--maintaining state policy on finance and the framework on the market through which such public policy is effectuated. In a sense, then, the critique of developing states is vindicated to some extent here. Because Bear Stearns serves a public function, it ought to be burdened, to that extent at least, with the obligations of states--accountability, observation of human rights and other norms. There is an inconsistency here, then, between the actions of the United States in the international arena, and its actions in saving Bear Stearns. See Larry Caá Backer,

More ironic, though, are the class implications of the bailout. Markets are supposed to reward success and punish failure. The success-failure matrix is meant to provide a great incentive in a value maximizing market environment both to do well, and to replace those people or conditions that do not. Yet, in the face of the long simmering failures at Bear Stearns, there is little indication that the directors (yes, I said directors) or officers have sought or offered to resign. Incompetence is its own reward and failure is the mark of experience at the highest levels of the labor markets. Those who most sanctimoniously speak to the evils of inefficiency in labor, who with such eagerness trim the "fat" or "non-productive" elements of their workforces, who terminate those who do not meet expectations, seem immune to the same market forces. It is difficult to reconcile the mythologies of the market with the mummification of leadership at Bear Stearns long after it became clear that their operations through hedge funds in the mortgage market had essentially collapsed last summer. See Matthew Goldstein, Bear Stearn's Subprime Bath, BusinessWeek, June 12, 2007.

Yet, the investors and consumers who so welcome labor efficiency in a firm at the lower reaches ought to value that impulse more at the highest levels of the labor totem pole. Thus, as a Bear Stearns investor, I might not have sold my shares because of the federal government bailout, but might have been tempted to do the same on the news that the incompetence of management in that crisis has been rewarded with job security. And I am not alone. "Teetering on the brink of collapse from a lack of cash, Bear Stearns got emergency funding on Friday from the US Federal Reserve and JPMorgan in the largest government bailout of a US securities firm. The move failed to avert a crisis of confidence among Bear Stearns' customers and shareholders, who drove the stock down a record 47 percent." JP Morgan May Buy Bear Stearns, Taipei Times, March 16, 2008.

It seems that the socialist model of employment applies at the highest levels of labor, but a more ruthlessly efficient model applies t everyone else. This sort of labor and market cronyism almost brought down the Malaysian government. It was at the heart of the crisis of the nomenclatura based controlled economies of the Soviet era, its worthlessness was attacked even by such unlikely leaders as Deng Xioaping. That sort of dissipation in the American system produces decadence and a failure of leadership that will be felt in future generations.

The only bright news on the horizon is the workings of the market mechanism at the macro level. "Bear Stearns Cos' 85 years as an independent Wall Street firm may be coming to an end as JPMorgan Chase & Co considers buying the crippled company." JP Morgan May Buy Bear Stearns, Taipei Times, March 16, 2008. Perhaps the new owners will engage in the sort of housekeeping that is necessary. This result is more likely given the betting among members of the financial community. "Options traders increased bets that Bear Stearns will collapse. Implied volatility, a measure of contract prices, surged past 300 for the New York-based securities firm. That's a level Ambac and Thornburg Mortgage Inc. reached this year as investors sold stock on concern the companies may fail." Elizabeth Stanton, U.S. Stocks Drop for a Third Week as Bear Stearns Gets Financing,, March 15, 2008.

Sadly, the transaction costs of efficient labor markets at this level is high. Golden parachutes and other preference and contingency payments are likely to be high and able to support attacks based on breaches of a board of directors' fiduciary duty. See Larry Catá Backer, Disney/Ovitz: The Delaware Supreme Court Augments Its Complication of Fiduciary Duty, Disney, Law at the End of the Day, June 10, 2006.

Friday, March 14, 2008

Kosovo: A Threat to China and Russia; a Great Benefit to Israel

The impending independence of Kosovo has produced both elation and consternation. This event provides a window on the difficulties and opportunities of that set of great movements that had their origins in the anti-colonial and anti-imperial movements of Central Europe and Latin America in the 19th century. It also evidences the perverse consequences of the development, in international law, of the doctrine of self-determination.

The legal issues are simple. The Serbs argue that independence is impossible because it has not consent to the separation of Kosovo from Serbia. "The counter-argument by Serbia and Russia is simpler. It is that Serbia, the sovereign state, has not agreed to independence for Kosovo, that there is no Security Council resolution authorising the detachment of Kosovo from Serbia and that therefore its independence is illegal." Paul Reynolds, Legal Furore Over Kosovo Recognition, BBC News Online, Feb. 16, 2008. Some members of the European Union agree: Greece, Cyprus, Spain, Romania, Slovakia and Bulgaria. Saying No to Kosovo Independence, BBC News Online, March 5, 2008. Each has large, geographically contiguous minorities that might be interested in separation. Russia and China also object. "China Monday expressed "serious concern" over Kosovo's declaration of independence and called for "proper solution through negotiations" between Serbia and the breakaway province." China Expresses Concern Over Kosovo, China Daily Online, Feb. 19, 2008. Each is also a multi-ethnic, multi-religious state with restive minority regions.

The Americans and the European Union base their push for recognition on an acrobatic interpretation of the U.N. Resolution that allowed them to attack Serbia during the Kosovo War.
After the war over Kosovo in 1999, the UN Security Council took control. In resolution 1244 of 10 June 1999, it ordered the Federal Republic of Yugoslavia (as it then was) to withdraw all its forces from Kosovo and hand Kosovo over to the UN. The problem is that although the resolution called for a "political solution to the Kosovo crisis", it did not specify what that solution should be. . . . Many Western governments argue that because 1244 does refer to general principles that G8 foreign ministers had agreed in advance of the resolution, these should be used as the basis for the acceptance of independence now. These principles include the deployment in Kosovo of "international civil and security presences" and "facilitating a political process designed to determine Kosovo's future status".
Paul Reynolds, Legal Furore Over Kosovo Recognition, BBC News Online, Feb. 16, 2008. Many of the powerful EU Member States have taken a functionalist approach to the legal issues. "Most EU governments, certainly the British, see the move as a one-off, the final piece of the shattered jigsaw that was Yugoslavia being put into its new place." East-West Divide Over Kosovo Move, BBC News Online, Feb. 17, 2008. The E.U. will likely support independence. "The European Union has drawn up, as it is required to do by EU procedures, a document to justify its own mission to Kosovo and the arguments deployed are the same as the ones used to justify recognition." Paul Reynolds, Legal Furore Over Kosovo Recognition, BBC News Online, Feb. 16, 2008. That report is grounded in the application of U.N. Resolution 1244. Id. The Member States are divided and a unified position will be hard to maintain. "The EU is leaving actual recognition to individual governments. Diplomatic sources say that three member states - Cyprus, Romania and Slovakia - have told EU partners that they will not recognise the breakaway province." East-West Divide Over Kosovo Move, BBC News Online, Feb. 17, 2008.

But the battle is about more than the niceties of legality. On the one hand, Kosovar independence deepens the international regimes of self determination. Here is a demos, created from out of assertion of the will of a self conscious and autonomous demos, to separate from another. There are echoes of the natural law principles in the American Declaration of Independence in this struggle for freedom. See Larry Catá Backer, Some Thoughts on the American Declaration of Independence and the Irish Easter Proclamation, 8 Tulsa Journal of Comparative & International Law 1 (2000). It suggests that demos matters, that independence is a viable alternative as a consequence of global constitutional principles of democratic participation and self determination. Even if Kosovo is not exactly a viable state, in a 19th centurty sense, that ought nbot to serve as an impediment to independence. The reason is simple--independence is less meaningful in the context of European Union membership. For Kosovo to achieve independence and then membership in the E.U. means, substantially, that its independence is in a sense illusory. In important matters--economic, monetary and human rights regulation, the European Union would serve as a controlling entity. Kosovo might be allowed its language, religion, national costume and cuisine, but it would not be allowed to install a fundamentalist Islamic Republic, repress its Serbian minority (too much, at least), or assert much independence in ordering its internal economic and social affairs. Not if it wants to continue to receive its sizable dole from the E.U. And that is a powerful argument indeed in a continent that is moving to formal fracture amd functional union. The Americans have used context as a fig leaf to cover its recognition of Kosovo and limit its effects. "In supporting Kosovo's independence, Secretary of State Condoleezza Rice made it clear the U.S. regarded the situation as unique, citing the 1999 NATO war to end Serb aggression against the ethnic Albanian majority, and the U.N. supervision of the territory since then." Patrick Goodenough, Kosovo Ripples Felt in Taiwan Strait, Former Soviet Union, CNS, Feb. 21, 2008.

On the other, Kosovar independence suggests the end of the plural society. In states that are constructed of multiple ethnic, religious and racial groups, separation appears to be as important a political option as the hard world of building a single state. This is especially true where these disparate communities can be separated geographically. Of course, that is the consequences of all of the activity in Europe in the reconstruction of its borders after 1918 , and again, after 1938, and 1945. China understands this even if the United States does not. "Foreign Ministry spokesman Liu Jianchao issued a statement Monday, warning that the move could destabilize the Balkan region severely. 'Kosovo's unilateral pproach may lead to a series of consequences and create a seriously negative impact on peace and stability in the Balkans and on the efforts to build a multi-ethnic society in Kosovo, which China is deeply worried about," Liu said." China Expresses Concern Over Kosovo, China Daily Online, Feb. 19, 2008. The Taiwanese understood the implications as well--"In the aftermath of Kosovo's declaration of independence from Serbia early this week, Taiwan's government issued a statement welcoming the move. That drew a quick rebuke from the mainland government, which said that Taiwan, "as a part of China," has no right to recognize Kosovo's decision. Undeterred, the Taiwanese government then went a step further, declaring in a statement its formal recognition of the new Balkan state." Patrick Goodenough, Kosovo Ripples Felt in Taiwan Strait, Former Soviet Union, CNS, Feb. 21, 2008.

Kosovar poses a particular conundrum for the dar al Islam. On the one hand, Kosovo presents a majority Muslim state in Europe that ought to be worthy of the support of the rest of the dar al Islam. On the other hand, recognition makes it far more difficult to resist recognition of Israel--a state that presents a similar (though not identical) situation. Arab commentators have been slow rto recognixe this--they prefer to focus on the analogy between the declaration of Kosovar independence and a similar declaration of Palestinian independence. See Galal Nasser, Deferring Recognition of Kosovo, Al-Ahram, Weekly, March 6-12, 2008. But that analogy applies with equal force to the declaration of Israeli independence in 1948. The Arab states have been sensitive to issues of territorial integrity, and to the analogy to Israel in the past. Most states have been reluctant to recognize Chechnya (though that can also be understood in a realist context--no state wants to offend Russia, a valuable friend). This suggests that Ariel Sharon might have been right in suggesting that the best alternative within the former Ottoman province of Palestine is a hard separation. Kosovo presents an interesting puzzle indeed, and consequences galore. It will prove valuable to international law, the law of self determination, the incentives of nation state break ups and to the debate over the recognition of Israel and Palestine.

Sunday, March 09, 2008

Abdullah Badawi, Anwar Ibrahim and the Politics of Race , Ethnicity and Affirmative Action in Malaysia

People, especially people in the developing world, like to point to the state of race and ethnic relations in the United States as symbolic of the evils of a subordinating race or ethnic privileging culture. Those systems of subordination, of social constructions of race and ethnic hierarchy, people believe, are at the root of flawed legal systems, and through them, of flawed approached to international law and governance. The developing world might provide a place where important lessons in how to manage multi ethnic and multi religious societies might be learned. And where better than Malaysia--a model of a nation whose previous leaders might from time to time advertise to the world as a model of forward thinking and progressive innovation in matters of race and ethnic harmony.

It was with that in mind that the recent elections in Malaysia remind us that race and ethnic subordination is not solely a problem of rich states with majority European populations. Nor is it necessarily an issue of Christian or European arrogance. The techniques and imperatives of subordination, and privileging appear to bedevil many societies. In the case of Malaysia, the players are not white Christian Europeans but Malay Muslims, Indians and Chinese. Malaysian Prime Minister Sworn In, BBC News Online, March 10, 2008.
Malaysian Prime Minister Abdullah Ahmad Badawi has been sworn in, two days after his coalition suffered its worst election result in five decades. . . . The ruling National Front won more than half of all seats in parliament, but it still suffered unprecedented losses and lost its two-thirds majority. The government had expected a drop in support amid growing concern over ethnic tensions in multi-cultural Malaysia and unease over rising food prices.

Id. As a consequence, marginalized populations of Indians and Chinese also failed to vote. "But the result was worse than anticipated, with the opposition making sizeable gains. Many voters from Indian and Chinese minorities - who make up more than a third of the population - failed to turn out for the coalition." Id.

So what is going on in Malaysia? And how does it relate to law? "Modern Malaysia is built on the co-existence of three ethnic groups - Malays, Chinese and Indians." Robin Brant, Malaysia's Lingering Ethnic Divide, BBC News Online, March 4, 2008. But the reality, like that of racial and ethnic neutrality in the United States, points in a different direction. First, law serves as a technique of subordination and distinction--that is, of dividing society into its various classes and ordering them vertically. Emblematic, perhaps, is the recent legislation on the use of the word "Allah." See Malaysian Row Over Word for God, BBC News Online, Dec. 28, 2007. after passage of an act limiting the use of the word "Allah" to Muslims in in Malaysia, officials began targeting a Catholic newspaper in Malaysia. That newspaper, along with a the Sabah Evangelical Church of Borneo sued.
In the Malay language "Allah" is used to mean any god, and Christians say they have used the term for centuries. Opponents of the ban say it is unconstitutional and unreasonable. It is the latest in a series of religious rows in largely Muslim Malaysia, where minority groups claim their rights are being eroded. A spokesman for the Herald, the newspaper of the Catholic Church in Malaysia, said a legal suit was filed after they received repeated official warnings that the newspaper could have its licence revoked if it continued to use the word.

Malaysian Row Over Word for God. A victory for the Christians might inflame Muslim sentiment, especially if that inflammation is allowed to ignite at carefully orchestrated Friday sermons. A victory for the state suggests the difficulty of multiculturalism and tolerance the consequence of which is inevitably the deepening of hierarchy in fact all the while preserving the forms of equality.

But equally symptomatic are the responses to assemblies of non-Muslim peoples in Malaysia. Scores Charged Over Hindu Rally, BBC News Online, Nov. 28, 2007. In this case, the law of assembly was the touchstone for the construction of verticle hierarchy with a vigorous horizontal enforcement of law.
At least 80 ethnic Indians have been charged with illegal assembly in Malaysia, after a weekend of protests in the capital, Kuala Lumpur. Activists appeared in several courts around the country to deny the charges, and many were freed on bail. Thousands of Hindu activists took to the streets to protest at what they regard as decades of discrimination by the mainly Malay-Muslim government.
Scores Charged Over Hindu Rally. The issues here are both ethnic and linguistic The protesters used Tamil language and were targeted as South Asians. The courts freed many of the arrested on the grounds that the allegedly seditious statements had not been translated from the Tamil, andf the government sought to overturn that determination. Id. "At least 80 ethnic Indians have been charged with illegal assembly in Malaysia, after a weekend of protests in the capital, Kuala Lumpur. Activists appeared in several courts around the country to deny the charges, and many were freed on bail. Thousands of Hindu activists took to the streets to protest at what they regard as decades of discrimination by the mainly Malay-Muslim government." Id. These protests continued and produced the appearance of a response of the eve of the election. Robin Brant, Malaysia's Lingering Ethnic Divide, BBC News Online, March 4, 2008 ("Malaysia's prime minister has ordered his government to take a fresh look at recruitment levels of non-Malays, after thousands of ethnic Indians took to the streets to protest against what they say is years of discrimination." Id.). As in the United States under apartheid, and thereafter, the points of contention include the use of law to effect differences in treatment--from unequal funding of education to employment opportunities, for minority South Asians and ethnic Chinese. See Id.

"Concern about racial tension boiling over is not just because of what might happen, but because of what did happen. Hundreds died in racial riots in Malaysia in 1969, when the country was barely a decade old." Robin Brant, Malaysia's Lingering Ethnic Divide, BBC News Online, March 4, 2008. But the solution of the government has been to suppress all discussion of inequality, especially public expression that is orgainzed.

Second, it serves as the focus of political action. Political action in Malaysia takes two forms. The first is characterized by an aggressive set of actions by the dominant power to use its control of the apparatus of state to make opposition more difficult by a strict and strategic application of law (in the United States that is done through control of the polling places, vote counting structures and in determinations of who is actually eligible to vote or stand for election).
The government enjoyed many entrenched advantages: huge resources; a docile, even sycophantic, press; permission more readily granted for big rallies; a ban on the candidacy of Anwar Ibrahim, a former deputy prime minister who is now the opposition’s best-known figure. The government has denied Mr Anwar’s allegations of vote-rigging in close-fought constituencies. But sceptical opposition supporters were made even more suspicious last week when the Election Commission went back on its decision to use indelible ink to identify those who had voted.

Political Tsunami?, The Economist Online, March 10, 2008. The second is characterized by the political reaction--a willingness of sometimes distrustful opposition parties to come together. "Malaysia’s three main opposition parties, the Democratic Alliance Party, Parti Islam SeMalaysia and Parti Keadilan Rakyat have agreed to cooperate with each other in the upcoming March 8th general election. They have decided to field single candidates in most constituencies in Malaysia to avoid contesting with one another and to provide a viable alternative to the ruling Barisan Nasional coalition." Anwar Ibrahim on opposition strategies in Malaysia election, Radio Singapore International Online, Feb. 19, 2008.

Enter Anwar Ibrahim--Mahatir Mohammad's great rival, once disgraced and ruined in Malaysia on charges of personal, political and social corruption.
He traveled abroad extensively after his release from jail. In recent months he focused on the election campaign against the National Front. Anwar _ considered one of Malaysia's most charismatic speakers, second only to Mahathir _ crisscrossed the country ahead of the elections and attracted crowds of thousands to his campaign speeches. He spoke of rising prices, racial tensions, rampant corruption and crime, striking a chord with ordinary Malaysians. «Anwar's role in the campaign was very important,» said Johns Hopkins University's Bridget Welsh, a Southeast Asia expert who was in Malaysia to monitor the polls. «He was a conduit for the opposition parties and the key player in bringing their message across nationally."
Malaysia's Anwar Ibrahim Resurrects Political Career With Striking Election Success,, March 12, 2008. There are lessons here for the American polity as it heads toward its own elections. A politics of race and ethnic sorting may produce a certain strength, but ultimately working toward a politics of unity produces greater rewards.

But the journey there is perverse and ironic, at least from the perspective of American law, in its progressive manifestations. In Malaysia, affirmative action was targeted to the majority Malay Muslim population and disfavored the Chinese and Indian minorities said to control too much of the economic life of the nation. Ina sense Malaysia presented a more benign version of South Africa than the typical situation of subordination (where a majority subordinates minority populations).
The result reflected widespread disaffection among the country's ethnic Chinese and Indian minorities over social and racial inequalities, mainly stemming from the affirmative-action program known as the New Economic Policy. It was started in 1971 to help the Malays, following violent race riots in 1969 that were blamed on the wealth gap between poor Malays and wealthy Chinese. The NEP gives a host of privileges to Malays including preference in government contracts.
Parts of Malaysia Begin to Roll Back Race Based Policy, The Wall Street Journal on line, March 12, 2008. Part of the problem is corruption, the great temptation and underbelly of governmental control of the distribution of economic power among its people. "Lim Guan Eng, who was sworn in yesterday as the chief minister of the Chinese-dominated Penang, announced that state contracts will no longer be awarded based on NEP. Many state contracts are known to go to businesses with links to the ruling party." Id. It was this sort of corruption that first resulted in Anwar's downfall in the late 1990s when he began to campaign against it. It was this sort of corruption that helped bring Badawi and his party closer to defeat. "In this election, it won just 51% of the votes; and 63% of parliamentary seats. This was its worst performance ever in Malaysia’s 50 years of independence, and crucially, for the first time since 1969, the BN lost the two-thirds majority in parliament it needs to amend the constitution." Political Tsunami?, The Economist Online, March 10, 2008.
For proponents and opponents of affirmative action, the events in Malaysia provides a tantalizing morsel. Affirmative aciton programs vest a great power in states to manage the relaitonships amoing distinct ethnic, racial and religious ocmmunities. That power itself can be a source of corruption. This is a great lesson in Malaysia. It can also be a temptation to seek revenge for past oppressions and to impose new systems of hierarchy in the name of undoing prior wrongs. This is another lesson from Malaysia. It is too easy for dominant grpoups, aided by the power of the state apparatus, to use affirmative aciton programs as a fig leaf to cover the erection of new systems of subordinaiton to replace the ones the affirmative action was meant to undo. The great trap for once oppressed comminities is to avoid the replication of systems of subordination in the name of cultural, religious, ethnic or post colonial cleansing. This is the Robert Mugabe syndrome, so destructive in Zimbabwe.
At the same time, governmental power power may serve as the key factor to undoing systems of race, religious or ethnic hierarchy that is oppressive. That is the great value of affirmative action programs undertaken by states. It can serve as a means to bring an unbalanced system back into balance where the goal is the maintenance of a state in which multiple ethnic, racial and religious groups can share in public and private life in a more or less horizontally equal way. This is easier to do when a majority group designs state systems to share power. That was the case in the United States. It is harder where minority groups hold the superior position. But the United States has shown how difficult even a limited program of affirmative action van be. Over the course of the last half century it has arguably produced great sifts in housing, radical changes in education and support for educational programs, and little sustained outward progress that can stand in the absence of government supprot. On the other hand, sffirmative action has been a greater success than usually described at the cultural level. Social and ciultural norms change slowly. A sustained governmental support of affirmative action has at last seeped into the private sector--not perhaps deeply enough to satisfy everyone--but deep enough to be noticed.
But both Malaysia and the United States show both the need for and difficulty of affirmative action programs in a multi-ethnic, multi-religious democratic polity where the incentives to use the state andits power to reinstate or solidify systems of subordinaiton, or to resist its dismantling, are very strong. In these effoirts, law serves as a great tool, but one equally capable of great harm as great good.

The End of Golden Shares in the EU: The EU Commission Takes a Step in its Abolition, It Ought to Harmonize the Rules of Sovereign Investments Instead

The European Commission has at last made explicit, what the European Court of Justice has been suggesting implicitly since it began to consider the issue in 2002—the Member States of the E.U. no longer have the capacity to invest in or restrict the investment in it own domestic corporations. Such investments now constitute a breach of a Member State’s obligations under Art. 56 EC (free movement of capital), subject only to a few narrowly drawn derogations. The implications of this position will be wide ranging and affect the framework within which sovereigns are able to engage in transactions in financial markets for their own account. What follows draws heavily for its analysis on my manuscript, Larry Catá Backer, The Private Law of Public Law: Public Authorities as Shareholders, Golden Shares, Sovereign Wealth Funds, and the Public Law Element in Private Choice of Law, 82 Tulane Law Review – (forthcoming 2008).

The context for the articulation of this opinion is the recent overreactions of the French and German governments to the attempts by foreign states to invest in the European Aeronautic Defense and Space Company (EADS, the maker of the Airbus. Last year “Last year, Dubai's sovereign wealth fund bought 3.1% of EADS, while the state-controlled Russian bank VEB bought 5%.” EU Rejects EADS Golden Share Idea, BBC News Online, March 7, 2008 . This worried both the French and German governments. They worried both because these sovereign shareholders might seek to use their shareholder power for political ends. They were also particularly sensitive to the reaction of the Americans, especially since the recent award of a military contract to Airbus in the US had caused some concern there. “If Airbus were to be controlled by companies from less friendly countries, there would probably be even greater opposition to its winning contracts.” EU Rejects EADS Golden Share Idea, BBC News Online, March 7, 2008.

These governments began to think of alternatives means of reducing the threat of foreign state ownership of EADS, or at least of such entities taking a large stake in EADS. To that end the French and German governments began to consider the possibility of creating golden shares in their respective favor. Germany Says EADS Golden Share Talks Continuing, Reuters, March 7, 2008. Golden shares can be defined as a power to veto certain changes in the corporate charter. More specifically it refers either to a particular class of stock or a regulatory system that gives the state a continuing power over certain fundamental corporate decisions especially with respect to formerly state owned enterprises that have been privatized. The Reuters Financial Glossary defines “golden shares as “A share that confers sufficient voting rights in a company to maintain control and protect it from takeover. The golden share prevents potential predators from buying shares and then using them to outvote the company's existing owners.” Reuters Financial Glossary, Golden Share. In the case of EADS, “France and Germany are finalising changes to EADS's corporate-by-laws to prevent foreigners from building large stakes in the company.” Germany Says EADS Golden Share Talks Continuing, Reuters, March 7, 2008.

The reaction of the European Commission came fast.
"The general view on golden shares is clear. The European Commission doesn't think golden shares have a place in the single market," European Commission spokesman Oliver Drewes told a regular news briefing when asked about the situation at EADS. . . . Arguing that free movement of capital is at stake, Brussels has been campaigning against golden shares, which give states special rights in publicly listed companies.

EU Warns Against Golden Shares at EADS, CNBC News, March 7, 2008 (from a Reuters Report). The European Commission’s position on the legitimacy of golden share schemes to protect against sovereign investment in EADS represents both an application and extension of the current jurisprudence of the Court of Justice, now over five years and many cases in development. But is the Commission right?

The recent golden share jurisprudence of the European Court of Justice have excited much commentary with respect to these nexus issues. These cases include:
1.Commission v. Portuguese Republic, Case C-367/98, 4 June 2002 (hereafter “Portuguese Republic 2002”);
2.Commission v. Kingdom of Belgium, Case C-503/99, 4 June 2002 (hereafter “Belgium 2002”);
3.Commission v. French Republic, C-483/99, 4 June 2002 (hereafter “French Republic 2002");
4.Commission v. Kingdom of Spain, Case C-463/00, 13 May 2003 (hereafter “Spain 2003”);
5.Commission v. United Kingdom of Great Britain and Northern Ireland, Case C-98/01, 13 May 2003 (hereafter “UK 2003”);
6. Commission v. Netherlands, Case C-282/04 (hereafter "Netherlands 2004");
7.Commission v. Federal Republic of Germany (Volkswagen), Case C-112/2005, dated 23 October 2007 (hereafter “Germany 2007”);
8.Federconsumatori v. Commune di Milano, Case C-463/04 and C-464/04, 6 Dec. 2007 (hereafter "Milano 2007”).

These cases have substantially supra-nationalized the rules of Member State involvement in formerly state owned enterprises—whether such involvement was in the form of formal privileged stake in the enterprise (French Republic 2002; UK 2003; Milano 2007), or whether that involvement was the product of specifically targeted regulation (Portuguese Republic 2002; Belgium 2002; Spain 2003), or some hybrid arrangement (Germany 2007).

These cases have been examined from many perspectives. There has been writing on the political effect of these cases. (Leland Rhett Miller and Bock, Christian W.D., "Golden Shares and EU Accession: Bulgaria's Balancing Act," Journal of European Affairs, Vol. 1, No. 1, 2003 Available at SSRN. It has been suggested that the cases represent an attack on the German system of corporate governance. (Peer Zumbansen and Daniel Saam, The ECJ, Volkswagen and European Corporate Law: Reshaping the European Varieties of Capitalism, 8(11) GERMAN LAW JOURNAL 1027 (2007)). It can be viewed as a simple elaboration of long standing principles of European Law grounded in basic provisions of the Treaties—principally the non-discrimination and free movement of capital obligations—in the amplification of a harmonized company law. (Martin Rhodes, & Bastiaan van Appeldoorn, Capitalism Unbound? The Transformation of European Corporate Governance, 5 EUR. J. PUB. POL’Y 406 (1998)). From a choice of law perspective it represents a greater effort to move choice of law issues up from the Member State to the European level, and by harmonizing, eliminating the horizontal choice of law issue. Yet, it represents far more than that—it serves as a framework for the rules under which sovereigns may participate in a private capacity in the financial markets and in investing in enterprises, both domestic and foreign.

Advocate General Colomer perhaps best summarized the current state of golden share jurisprudence and its general principles:
(a) The Court examines the various national rules on intervention, essentially, in the light of the principles relating to free movement of capital: failure to observe those principles may, as an ancillary matter, give rise to an infringement of the principle of freedom of establishment.
(b) In so far as such rules are capable of impeding the acquisition of shares in the companies concerned and of deterring investors from other Member States, they amount to restrictions on the free movement of capital.
(c) Article 295 EC has no practical effect in this sphere.
(d) The free movement of capital may lawfully be restricted only by measures which, without being discriminatory on grounds of nationality, are a response to overriding requirements relating to the general interest and are suitable and proportionate to the objective which they pursue. Such measures, which must be adopted ex post facto, must be based on objective criteria which are known in advance to those concerned, to whom a legal remedy must be available. (Germany 2007; Opinion of A.G. Ruiz-Jarabo Colomer, P 30.).

The focus is on national intervention in its own economy. The object is to reduce all possible transaction costs to the free movement of capital that might be based on the “nationality” of that capital. Deterrence is a function not only of rules that discriminate on the basis of nationality, but also of rules that might otherwise deter investment, for example, by privileging state investment. The form of that privileging is immaterial. All state intervention that is accompanies by regulation. Or the threat of regulation, or indirectly supported by special regulation constitutes an impediment to free movement. Derogations in the public interest are narrowly construed. In a general sense, then, a sovereign regulates even when it appears to be participating in the market—where it participates in the market that is the subject of its regulation. It is the regulatory character of the action that is key, along with the power to implement it within its territory. In that context, the private law offers no cover.

In both Germany 2007 and Milano 2007, the Court of Justice held that the member state had violated Article 56, which guarantees the free movement of capital. These cases differed from previous golden share cases in one significant respect. In previous cases, the member states had passed legislation that privatized a particular company or companies and also special interest provisions for the state that were as varied as the states themselves and the industries that were being privatized (Netherlands 2004; UK 2003; Spain 2003; Belgium 2002; Portuguese Republic 2002). In both Germany 2007 and Milano 2007 the contested provisions were not a creature of state legislation, but were enacted through the articles of association of the companies, enabled by member state corporate law provisions. Both Germany and Italy argued that the shares (and rights emanating there from) retained by the State were alienable and that a similar arrangement could be enacted into the company for any other private shareholder (Germany 2007 at P. 32, 36; Milano 2007 at P. 18, 30). Thus, the State was not acting in a public capacity and the Treaty provisions should not be implicated. Advocate General Maduro disagreed (Federconsumatori v. Comune di Milano, Case C-463/04, Opinion of Advocate General Maduro.), as did the Court (Milano 2007, at P. 29, 54). In Volkswagen, while agreeing with the Commission that the particular measures in question were still state action rather than private measures, Advocate General Colomer indicated that the Member States could act as private investors without implicating the Treaty. The Court seemed to agree but only under the most attenuated circumstances.

Maduro’s rationale in Milano 2007 is particularly important for its elaboration of an approach to the choice of public or private law for testing the legitimacy of Member State activity. Maduro broke the analysis down in three parts: (1) whether it made a difference that the rights accorded to the public body were generally available under private law; (2) whether the fundamental freedoms in general, and the free movement of capital, applies to public bodies even when they are not acting in their sovereign capacity; and (3) whether there is sphere of conduct by a public authority acting privately that need not constitute a violation of the authority’s obligations under the free movement of capital (Milano 2007, Maduro Opinion at ¶ 18).

With respect to the first point, Maduro was of the opinion that with respect to the source of a public authority’s rights in an undertaking, “it is immaterial how those powers are granted or what legal form they take.” (Milano 2007, Maduro Opinion at ¶ 19). His rationale was to prevent abuse. “Otherwise, Member States would easily be able to avoid the application of Article 56 EC, by using their position as incumbent shareholders to achieve within the framework of their civil laws what they would otherwise have achieved by using their regulatory power.” (Milano 2007, Maduro Opinion at ¶ 19). Effectively, then, all actions of a public authority have a regulatory effect. There is no private law for public authorities—private activity is regulation by other means. He supports his argument in curious fashion—arguing that the Comune’s bad faith was evidenced by the way in which it sought to turn to private law as a legal basis for its action after the European Court of Justice had held that a direct legislative grant of a similar authority was prohibited by Article 56 EC. (Milano 2007, Maduro Opinion at ¶ 20 (citing Commission v. Italy, Case C-58/99)).

This conceptualization of the state as incapable of acting in a private capacity, because of the inherent regulatory nature of all of its actions, then served as a basis for Maduro’s conclusion on the second point. Specifically, Maduro concluded that a Member State is under a duty, ratione personae, to respect EC Treaty provisions with respect to the fundamental freedoms even when they are not exercising their public authority. (Milano 2007, Maduro Opinion at ¶ 22). “In principle, therefore, a public body such as the Comune di Milano cannot rely on the argument that its actions are essentially private in nature to avoid the application of the Treaty provisions on free movement.” Id.

However, Maduro does suggest a margin of appreciation of sorts in the way that the free movement provisions would be applied to a public authority when it sought to act in the market—that it when its actions are essentially private in nature. (Milano 2007, Maduro Opinion at ¶ 24). There is of course, a tension between Maduro’s attempt to suggest a rationae materiae limiting scope for the application of Article 56 EC and his earlier declaration that public authorities in variably act as a regulatory body when they act, in whatever capacity they act. But the limitation Maduro suggests is narrow indeed. Indeed, Maduro uses the rationae materiae basis for liability to sketch a very broad substance over form standard with respect to which the character of the state action is irrelevant:

Member States are required to take into account the effects of their actions as regards investors established in other states who wish to exercise their right to the free movement of capital. In that context, Article 56 EC prohibits not only discrimination on grounds nationality, but also discrimination which, in respect of the exercise of a transnational activity, imposes additional costs or hinders access to the national market for investors established in other Member States either because it has the effect of protecting the position of certain economic operators already established in the market or because it makes intra-Community trade more difficult than internal trade. (Milano 2007, Maduro Opinion at ¶ 24). In effect, the jurisprudence of quantitative restriction (Art. 28-30 EC), and of impediments to the provision of services (Art. 39-43 EC) applies to the movement of capital within the European Union. This makes sense in the context of the regulatory role of states—where a Member State seeks an advantage or the furthering of a policy through its regulatory powers. But it may make less sense when the Member State competes with private entities in its private capacity, that is, where it participates in the market rather than regulates it. Of course, the rule is different in the United States, where the public law limitations of the dormant Commerce Clause do not bind States acting in the market rather than as market regulators. (Hughes v. Alexandria Scrap Corp., 426 US 794 (1976); South-Central Timber v. Wunnicke, 467 U.S. 82 (1984)).

But Maduro appears to reject this distinction between the public and private activity of states—and their consequences. Even the mere ownership of shares in a company may trigger Article 56, unless “investors in other Member States can be sure that the public body concerned will, with a view to maximizing its return on investment, respect the normal rules of operation of the market.” (Milano 2007, Maduro Opinion at ¶ 25). But given Maduro’s earlier assertion that public bodies regulate merely by acting, it is hard to imagine a situation where this is possible. Well, perhaps one—where the state abandons all control of funds used to invest in shares to another entity over which it has no influence and with respect to which no privileging legislation is passed. Moreover, the limitations to action that are proven to maximize the return on investment “under the normal rules of operation of the market” might misunderstand even the basic nature of share ownership. Investors, of course, always seek to maximize the return on their investment. Corporate investors gauge that by the value of that investment to their shareholders in light of their long and short terms planning. Maximizing value, thus, to some extent, must mean maximizing the utility of the investment to the satisfaction of the owners. Where the state is the owner, maximizing of return must, of necessity, be understood in the context of the desires of the state’s ultimate shareholders—the people. As such, under Maduro’s rationale, the state can never act like a private investor because it must act to satisfy the maximization desires of its people, and that is essentially regulatory rather than “merely” financial “under the normal rules of the market.” Choice of law—public or private—thus depends on the willingness of the state to act against the will of its owners, something that would not be permitted a corporate shareholder.

From these cases, the form of a relevant jurisprudence has emerged. States are free to engage in market activities for their own account with respect to which the private law of such transactions would apply. However, because States never lose their public character, market transactions involving state actors and corporations chartered domestically appear to be presumptively regulatory in nature. Because states can or might regulate their position as shareholders, any state activity involving domestic corporations appears to be treated as direct or indirect regulation, or regulation in effect. As a consequence, such activity, to the extent it might affect the willingness or ease of transactions in those shares by nationals of other Member States, would violate the fundamental right to free movement of capital enshrined in the EC Treaty. What survived was the regulatory framework that appeared to treat all individuals equally and that touched on the regulation of a sector of the economy deemed vital to the governance of the state.

Left unanswered, however, was whether these ideas could apply when the state acted purely as a private party or engaged in private economic (investment) activity in another Member State. To that end, the essay suggested that the opinions of the Advocates General in those golden share cases might prove useful. In particular, Advocate General Colomer’s suggestion of the relevance of article 295 EC and Advocate General Maduro’s sophisticated construction of a theory of the public character of state private transactions suggested a framework for analyzing the choice of law. The implication of these approaches is that the private law of corporate investment must be divided into a private and public component. The ordinary rules of private transactions in shares might not apply when a state purchases stock, and seeks to assert the rights of a shareholder. When a state engages in that activity, it is presumptively engaging in regulatory activity indirectly and public law must apply (in the case of Member States, the overriding law of the EC Treaty). The reason advanced is both deceptively simple and troubling—because a state can never duplicate the internal construction of a private individual, it can never act to maximize its welfare. Instead, as a political body, it must necessarily act to maximize its political capital. As a consequence, it cannot participate in the market in the same way as a private individual.

Applying (and perhaps extending) the logic of Milano 2007 (and the other cases), especially as read broadly by Advocate General Maduro, it is likely that the Commission’s position of the EADS golden share efforts is correct. If challenged, the European Court of Justice will rule in the Commission’s favor. But that is only part of the calculation. Even assuming the Commission id correct, Germany and France might decide to go forward anyway. There are at least two good reasons for this course of action. First, even if their position is ultimately doomed as a matter of evolving EU law, the temporary imposition, and the uncertainty of decision until actually rendered will but EADS time. During that time, foreign sovereigns potentially subject to the golden share restrictions might hesitate to purchase a position in the company. This is a useful short-term objective. For the longer term, even a doomed golden share regime might buy France and Germany time to seek some harmonizing regulation or directive at the EU level. This would be good news indeed. The implications of the European Court’s golden share cases are troubling, especially in the rising context of private financial interventions by sovereigns in global markets. Though valuable in the dismantling of socialist economies in Europe, perhaps, the current jurisprudence is clumsy at best and problematic at worst for meeting this new reality of sovereign investing in the market, especially in the market for shares of non domestic corporations. It is time for the institutions of the EU to step in and construct a set of viable regulations for the administration of sovereign investment in Europeans enterprises.