This is another in what I hope to be a month long series of aphoristic (ἀφορισμός) essays, meant to provoke thought rather than explain it. The hope is that, built up on each other, the series will provide a matrix of thoughts that together might lead the reader in new directions. Though each can be read independently of the others, they are intended to be read together and against each other.
One of the great markers of modern governance has been the rise of institutions of public and private power, and the evisceration of power in individuals to protect themselves against these institutions. Nowhere is this more evident than in the ways in which great institutional actors--public, private and civil society--have moved to monopolize both public and private power. This monopolization has been bureaucratized through a complex web of laws and regulations that have essentially stripped individuals of power over their own affairs, and their own economic interests, in favor of oversight by business, state and civil society institutional actors. In effect, the early part of this century is witnessing the continued infantilization of the individual. Increasingly, the individuals is deemed incapable of protecting their own interests, or are viewed as too unruly for that purpose, and too dangerous for uncontrolled participation in the regulation of large and bureaucratized aggregate public and private actors (in the form of government, business and civil society organizations). Individuals are the new political infants who must be increasingly controlled and on whose behalf institutions must be empowered to act.
Nowhere is this more evident than in the construction of the the monitoring and enforcement apparatus ostensibly erected to protect investors from the misbehavior of corporate agents. In the United States, this has resulted in a curious usurpation of power to institutionalized public and private actors and the division of power among them at the expense of individual rights to participate in their respective governance. On the one hand, the political institutions (and principally the federal government) has claimed a virtual monopoly of authority to act for and in lieu of shareholders and other investors in protecting shareholder and investor rights. On the other hand, business actors have been increasingly charged with their own self enforcement, through regimes of monitoring and reporting on the activities of its agents--to the government. Shareholders essentially become passive, less and less capable in law, of protecting their own interests, and relying on business to report themselves and the state to enforce. See Larry Catá Backer, Surveillance and Control: Privatizing and Nationalizing Corporate Monitoring after Sarbanes-Oxley. Law Review of Michigan State University-Detroit College of Law, (2004); Larry Catá Backer, The Duty to Monitor: Emerging Obligations of Outside Lawyers and Auditors to Detect and Report Corporate Wrongdoing Beyond the Securities Laws. St. John's Law Review, Vol. 77, No. 4, p. 919, 2003.
In the transnational realm, corporate social responsibility regimes, like those of the Organization for Economic Cooperation and Development, have begun to elaborate a regulatory framework in which civil society actors, large non-governmental organizations, play a key role in the monitoring and enforcement of soft law codes of conduct. See, for example, the regulatory regimes under the OECD's Guidelines for Multinational Enterprises (2000). There, increasingly, important non-governmental actors have been using the enforcement mechanisms to bring actions against multinational corporations before OECD National Contact Point panels. A NCP is "a government office responsible for encouraging observance of the Guidelines in a national context and for ensuring that the Guidelines are well known and understood by the national business community and by other interested parties." (OECD, National Contact Points). In some cases, those decisions are then published by the home government, that may choose to act on the determination in the context of their own municipal law.
A recent article by Jayne Bryant Quinn (Madoff's Investors Face Dim Prospects in Court, The Washington Post, Feb. 22, 2009) nicely illustrates the consequences of these trends.
Investors are suing the feeder funds that channeled their money to Bernard Madoff, accusing the feeders of fraud, negligence or breach of fiduciary duty. On the surface, the cases sound like slam dunks.They're not. Congress and the courts have spent more than a decade writing and affirming laws that protect companies from irate investors. Those laws may turn out to be feeder fund protection acts.Quinn, supra. The Private Securities Litigation Reform Act of 1995, (a Clinton era milestone) raised significant barriers to private suits seeking recovery for violation of the American (federal) securities laws. The the Sarbanes Oxley Act of 2002 created a regime of reporting and enforcement that imposed surveillance obligations on entities and enforcement power on the instrumentalities of the federal government. Backer, supra. Then the power of investors to sue under state law was significantly curtailed, first by the power of defendant entities to remove cases to the federal courts and then by rules that make it easier for entities to have such investor actions dismissed if disinterested elements of the organization can show commercially sound reasons for that action. And then by rules that transferred power to enforce rules of behavior that affected an investor's interest in their property from the investor to the state. Quinn describes, for example, the situation in New York:
A state law called the Martin Act prevents individuals from filing claims under New York securities laws. Only the attorney general can pursue an action. You can't even pursue a breach-of-fiduciary-duty claim in New York's courts if the breach involves a securities case. It has to go to the federal courts -- a finding affirmed as recently as July 2007.Quinn, supra. Moreover, in the case of multi-tiered financial instruments structures, other judicial decisions also tend to restrict avenues for private actions. On the one hand, aiders and abettors are not directly liable to investors ("In 1994, the Supreme Court ruled that investors can't sue advisers -- investment banks, lawyers, accountants -- that aid and abet a securities fraud (the case was Central Bank of Denver v. First Interstate Bank of Denver. Quinn, supra.). Abettors have get-out-of-jail-free cards."). On the other hand, to the extent that loss occurs on account of the misbehavior of custodians, liability would be grounded in a failure to monitor effectively a claim that is hard to substantiate, and in some cases can only be made by the federal government. Quinn offers only the ope of private arbitration--an abandonment of the state system of protection for one grounded in private arrangements. And that is telling.
The point, though, isn't that these entities are safe from suit, just that enforcement will not come form individuals, but rather the state. The basis premise--the growing scope of the incapacity of citizens to participate in the enforcement of rules to the extent those rules affect their direct well being, is likely to permeate conceptions of lawmaking and te construction of regulatory states and other regulatory communities well into this century. For the individual, the answer might be a greater willingness to work through aggregations, whether public, private or economic. Even in the land of the "rugged individual" the era of mass politics and mass activities has arrived.