Friday, April 23, 2010

Will the Plaintiffs’ Lawyers Make Goldman More Ethical?

[op-ed submission to The Wall Street Journal]

Will the Plaintiffs’ Lawyers Make Goldman More Ethical?

Part of the plaintiffs’ lawyers’ propaganda is that they make corporations more ethical.

This contention is deserving of critical evaluation in the context of a national controversy about the social utility of the litigation that the plaintiffs’ lawyers purvey.

If the contention is true, and plaintiffs' lawyers do contribute to making corporations more ethical, it is appropriate for lawmakers and judges to take that into account in their legislative and judicial actions concerning those lawyers’ litigations.

If, on the other hand, the proposition is false, lawmakers and judges most definitely need to contemplate that the lawsuits in question do not make corporations more ethical. Further, if the proposition is worse than false, and if plaintiffs’ lawyers actually undermine business ethics, that is even more important for lawmakers and judges to take cognizance of.

At first blush, one would think that class action lawsuits against corporations surely cannot undermine business ethics and surely must have a positive effect for improving corporate behavior.

How in the world could that not be so? How could class action lawsuits against corporations possibly undermine business ethics?

Deeper consideration reveals that there are reasons why plaintiffs’ lawyers might not improve corporate behavior.

These reasons start with human nature; and that, in human nature, it is a fact of life that self-seeking motivations are powerful and predominant, and altruism is weak. Also, there is a predicate that, in order to deter corporate wrongdoing, it is necessary to deter officers and employees from doing the activities that constitute the wrongdoing.

Given human nature, if punishment and other sanctions, including civil liability, are to have a deterrent effect against corporate wrongdoing, the effect will be much stronger to the extent they are imposed personally on culpable officers and other employees who conceive, design, and implement the actions and activities that constitute the corporate wrongdoing. Merely to punish or impose liability on the corporation may not be sufficient to deter the employees.

It is true that employees who participate in a corporate wrongdoing do not want their corporation to experience a punishment or liability from the wrongdoing, but this incentive to avoid a corporate wrongdoing can be ineffective for various reasons.

First, wrongdoing is not always clearly black and white. If individual officers and other employees are not exposed to possible punishment and sanctions against them personally, they can be more inclined to rationalize going ahead with the design and implementation of a questionable corporate activity where only the corporation is subject to possible adverse consequences.

Further, the object of corporate wrongdoing is to gain a financial benefit for the corporation by increasing revenues or lessening costs and expenses. The corporate time frame for doing this is short term, when compared to an uncertain, longer term time frame in which corporate wrongdoing may or may not come to light and the corporation as a result may or may not suffer adverse consequences from litigation about the wrongdoing. Employee compensation is determined in the shorter time frame in which the employee’s contribution to helping the corporation’s bottom line currently is very relevant. In these circumstances, an officer or other employee not at risk for punishment and sanctions against him or herself personally can have increased willingness to participate in wrongful corporate activities that enhance the corporate bottom line currently, thereby get recognized compensation wise currently, and as a result disregard the longer term risk for the corporation only.

If human nature makes for a greater deterrent effect if punishment and sanctions are imposed on culpable officers and other employees personally, the plaintiffs’ lawyers have a problem with that. Their financial objectives cannot be achieved by going after the wrongdoing employees, because there are too few of them and their pockets are not deep enough. The plaintiffs lawyers financial objectives can only be achieved by going after the corporation, and indirectly its many innocent shareholders and others, such as the employees who are innocent of the corporate wrongdoing and also the corporation’s customers, all of which shareholders, employees and customers are the real parties in interest and who ultimately pay the price when a corporation has to pay a judgment or settle a contested legal liability.

This focus of attention of the plaintiffs’ lawyers to extract moneys from the many who are innocent parties (because the culpable employees are too few to generate a big pot for the lawyers) plays out in various ways to undermine the business ethics of the corporation.

It gives the culpable officers and employees cover and protection and diverts resources away from punishing and holding those culpable persons accountable.

The cover and the protection derive from the propensity of society to fool itself into thinking that, since a big bad corporation has been made to pay a lot of money for alleged corporate wrongdoing, proper deterrence is being achieved. So fooling itself, society fails to give adequate attention to the harder work of holding culpable employees personally liable.

This gets helped by a large diversion in fact of economic resources to paying the plaintiffs’ lawyers for going after the corporation and innocent parties, whereas those resources would be better deployed for spending on criminal and regulatory investigations and prosecutions that hold accountable culpable employees personally.

Further, while the plaintiffs’ lawyers want to obscure their modus operandi of going for the big pot of money that can be gotten in small amounts from many innocent parties, the public has at least a vague sense that something is amiss in what the plaintiffs’ lawyers are doing, and the public vaguely senses that the law, and the deployed financial resources are, not being properly utilized to hold the culpable employees accountable in order to better achieve deterrence.

The public further senses that something is amiss when so much of the class action litigation alleging corporate wrongdoing is settled without any meaningful determination of what the wrongdoing in fact was, and the law thereby fails to give guidance to other persons about what is and is not wrongdoing.

These and other distortions in the civil liability system that are wrought by the plaintiffs’ lawyers in order for them to achieve their financial objectives breed much disrespect, if not contempt, for the law. They foster a belief that the law is not about what is right or wrong, ethical or unethical, and just or unjust; rather, it is about manipulation by lawyers to line their pockets to the detriment of society’s interest in a properly functioning civil liability system.

Cynical corporate officers and other employees who are prepared to engage in possible corporate wrongdoing can well gain justification in their minds connected to disrespect for the law. Their thoughts can be along the lines of, if society makes the law a game for lawyers to play to line their pockets, why should they as employees be deterred from a possible corporate wrongdoing if the corporation will get a financial benefit in the short term, the employees will get increased current compensation for that, the corporation may get away scot-free in the end, and, if something untoward ultimately happens for the corporation, that is no skin off the backs of the culpable employees. After all they are only doing what the plaintiffs’ lawyers do, which is profit at the expense of innocent parties.

Yes, there are good reasons for thinking that plaintiffs’ lawyers do not contribute to making corporations more ethical, and, in fact, they undermine business ethics. Yes, there are good reasons for thinking the plaintiffs’ lawyers will not make Goldman more ethical and may make Goldman less ethical.

Monday, April 19, 2010

Email to ethics professionals re Goldman

Sent: 4/18/2010 ______.M. Central Daylight Time
Subj: What do ethics professionals think about Goldman?

Goldman is hot off the weekend's headline news.

The immediate speculation is that the plaintiffs' lawyers are "foaming at the mouth".

Will the plaintiffs' lawyers make Goldman more ethical?

I think not. (See Does the Civil Liability System Undermine Business Ethics? )

What do you think?

Rob Shattuck



I'm wondering whether you might want to begin by thinking a bit about the role of bonus in all this? Indeed, you might want to step back a step further and ask whether employees of GS were taught to think too much about people in general, and themselves in particular, as merely self-interested creatures all of whose interests must come down to $$$.

The court cases, if we ever have trials, will reveal a good deal about who knew what and when. We may even find out that, at crucial stages, the left hand of client service did not know what the right hand of hedging was doing. Getting such information out is one good thing plaintiff's lawyers can do. Recovering GS's ten billion in bonus to executives and seeing the money paid to clients (with 1/3 to their lawyers may be another) seems like a fair outcome. I don't think it will make Goldman more ethical--but that's because I think GS will probably be going the way of Arthur Anderson, Enron, and all the other organizations that forgot the difference between a fair return and "wealth maximazation".

Picking on plaintiff's lawyers is like picking on the vultures. By the time a company is in danger of being made less ethical by fear of lawsuits, it is already falling well short of good business practices. The vultures do not gather over the heads of the healthy.


Hate to be flip or ignorant, but I haven’t a clue.

But then, Zhou Enlai, when asked about the impact of the French Revolution, reportedly said, “It is too soon to say." Check back with me.


legal systems are reactive and don't make anybody more is a fear based control type system...

leadership development and training make people more ethical

socialization can do that too


Remove me from the mailing list, please


No, and it will not make them taller or healthier. But it may claw back some of the money stolen from investors and restore a measure of justice. And that is ethical. Of course the rent (attorneys fees) is sky high in that hall of justice.