Research Korner: Force Field Analysis Examples

Managing Change - Sustainability Improvement Project for PCCW Hong Kong

Introduction Paper is one of the most energy-intensive commodities since it has large direct energy requirements, as well as substantial indirect energy use through its reliance on chemical inputs. Paper production and consumption are growing most rapidly in developing regions at nearly double the world average rate (Duchin et al., 1994). The demand for paper and the increase in its consumption have caused alarm to most countries and businesses in various regions. The raising paper consumption has led to ecological and environmental problems for the whole world. More paper being used means that there are additional wastes for every company that uses paper products. An increase in demand for paper by companies means that more trees will be cut down in various parts of the world. Companies that care and wanted to show that they have corporate responsibility started to take action regarding these issues. Various companies have decided that they want to reduce paper consumption.  One company that wants to reduce its paper consumption is PCCW Hong Kong. Being a caring company that has Corporate Social Responsibility (CSR), PCCW decided that it needs to do something and call for action & campaigns towards the cause. The reduction of paper consumption will try to solve ecological and environmental problems; it will also create actions that can benefit the company operation by cutting the usage of paper and lowering the cost of waste management.    This paper intends to design a small and sustainable improvement project for PCCW Hong Kong to reduce its paper consumption. The paper will make use of various tools and methods to introduce change in the company. Background/Drivers for change PCCW is recognized as the largest telecommunication enterprise in Hong Kong. PCCW operates in many small business units. PCCW offers products and services in fields like Telecommunications services, Television and Media Content, IT Services, PCCW Solutions and Infrastructure.  PCCW has made contributions to ICT and IT; such contributions include landline telecommunications, mobile telecommunications, broadband internet and PCCW solutions. The ICT and IT contributions provided innovation for the industries in Hong Kong and other parts of the world. There are various drivers for change; one is increasing innovation/IT knowledge. Change should be implemented because there is an increase in innovation and such innovation increases the demand for paper.   Another driver for change is the change of value, operation cost & effectiveness. PCCW is changing its values, operation costs and effectiveness; by reducing paper consumption the company can slowly achieve the changes it desires.   Moreover, the issues about waste management are another driver for change. The increasing paper consumption poses a problem for waste management. The accumulated waste can cause problems regarding the disposal of such waste.   If the company does not decrease its consumption of paper it will need to determine newer means of managing its waste. Ecology/environmental issues are also drivers for change. Paper consumption is an environmental issue for the world because the materials used in the making of paper are mostly consisted of wood. As more paper is used, more trees tend to be cut down. This causes the flooding in some countries.   Lastly, a driver for change is the corporate responsibility of the company. Like all other corporations, PCCW has a social responsibility to refrain from abusing the environment and to reduce their waste. This led the company towards thinking about determining actions to reduce paper consumption.   Stakeholder analysis The parties that will be mostly affected by the proposed change include the employees, customers, paper suppliers/printing companies.  The employees will be greatly affected because they will have to reduce their use of paper. This may be inconvenient as it requires them to change their work habits.  The employees are the ones that will have to adjust to the changes in the use of paper thus their cooperation will be required once the change process starts.   The people who will gain considerable benefits from the change are the government and the environmental groups. The change will provide an opportunity for the government to work with PCCW to build a pilot scheme in order to build a good image.  The change can help the government to become a pioneer by starting off the campaign to save their environment. This would build a better image for the government and it will help them have a successful start in creating change in their environment. The government will also receive fewer complains and criticism from the environmental groups as the reduction of paper use will solve the issues raised by environmental groups and appease their demands.  This will also allow PCCW to gain respect from certain environmental groups.  The government can create a huge impact the change process, this will only happen once the government becomes interested in the effects of the change process.   There is a small chance that the customer will be affected by the change process because the various printed documents/ information they want may not be accessible or be in limited numbers. The customers will have a hard time in accessing monthly bills/statements, promotion pamphlets, reply forms and application forms because they would all be converted to an electronic document format. Paper reduction means that PCCW will refrain from sending any hard copies to their customers.     Two similar parties that will be minimally hit by the change proposal are the paper suppliers and the printing companies.  These groups are the ones that make and sell paper products; the reduction in the demand for paper would cause a decline in the business growth.  The reduction of the demand for paper products would cause the company to implement personnel reduction or close down the printing business.   Issues Diagnosis & Overcome Strategies/Solution Finding Force field analysis is an exceptional tool developed by Kurt Lewin that provides managers with the opportunity to effect change (Gottlieb 2001). The next figure shows an analysis using force field model. One driving force for the change process is minimized environmental issues; less paper use means less damage to the environment. Another driving force for the change process is cost reduction for businesses. Less paper use could mean reduced supply expenses on paper products. Moreover, a driving force for the change is energy preservation in terms of product delivery. The lower demand for paper makes paper companies reduce their delivery schedules and helps in minimizing energy use. Reduced use of energy can be beneficial to the environment.  Lastly, a driving force for the change process is the belief that paper reduction will show that the company has social responsibility. Paper reduction will give a brand new image for the company and how it wants to provide responsible service to clients.   One restraining factor is that it causes an inconvenience to personnel and their clients as they will have only a limited use of paper products. Paper reduction will force the employees to use limited paper supplies.  Paper reduction can result to reduced quality of work. The change process may compromise the quality of work done by the employees. Some employees depend heavily on paper products and the reduction of such office supplies may lead to them downgrading their services.  Paper reduction in PCCW could result to unemployment. When delivery schedules are reduced it means that the company will have to reduce the paid work hours of the personnel. If things grow worse, the alternative for the company is to terminate some personnel. The change process may result into habit change which may be the cause of strained relationships between the firm and the personnel. The change process will require the employees to change some of the things they do to perform their tasks, the employees will not like the change and this will result to arguments within the company. The change process may also lead to a forced discovery of alternatives to paper. Examples of alternatives can be in the form of electronic documents. The alternatives will dramatically reduce the number of paper consumed without sacrificing the quality of the employees work. The alternatives may give the company higher expenses due to the cost of researching and implementing the use of alternative technologies to paper. .    Resistance and Strategies to Overcome These Most people are afraid of the unknown. They often assume that the change may be inconvenience as it requires them to change their habits. Resistance to change is an emotional/behavioral response to real or imagined threats to an established work routine (Sims 2002).  People in the organization might resist change because of psychological modes, systems models, institutionalized models and culture models. Employees feel fears and anxieties when they are informed about the change process, this is an example of the psychological mode of resistance to change. The reduction of paper usage may increase the employee’s workload because they will have to convert documents into a format accepted by electronic documents. For clients, they will worry about the security issues when they use the electronic document systems. PCCW can solve these issues through consultative and empowering activities that can help in overcoming their anxiety and fear.   Sometimes employees believe that the change system is impractical; this is an example of restraining to change through the system mode. The file system and document circulation system may tend to still use paper for keeping records of salary bills or tax documents of employees. For clients, they may not like to change their habits and to then synchronize it with the change process. PCCW can remove such resistance through redesigning systems and making sure that these systems support new changes. When employees think that the change is unnecessary that means they are practicing the institutionalized mode of resistance to change, This mode gives them a belief that the change would force them to learn new skills to replace the traditional way of paper documentation. It is vital for PCCW to demonstrate the value of the proposed change or the urgency of change for organizational success or survival.   Employees have their own beliefs and principles, once they see that the change is different from their beliefs they will resist the change. This shows that they practice the cultural mode of resistance. Organizational culture is one of the toughest resistances to change.  This type of resistance cannot be easily removed since it is embedded in every employee of PCCW. The employees should be given a clear explanation on why such change is needed and what are the proposed alternatives to paper.     Kotter Process of change In every process in life and business a procedure should be followed; Kotter’s process of change will be used to provide an organized means to initiate change within PCCW. The process of change needs to make use of a multi-step process that will create power and motivation that is sufficient to overwhelm all the sources of resistance to change.  The process of change will only be successful if it is driven by high-quality leadership, not just by excellent management. 1. Establish a sense of urgency             To establish a sense of urgency, there will be posters containing facts about the increase of paper consumption, company expenses on paper products, environmental decay due to increasing waste and what the company wants to do with such issues. These posters should be placed on various bulletin boards in the companies’ offices and subsidiaries. The intended target viewers of the posters are the PCCW personnel located in their different offices. For the clients there will be informative notes and suggestions on PCCW’s website.  The informative notes will contain the figures for the increase in paper use, the increase in waste for the company and the proposed paper reduction scheme.  The informative notes on PCCW’s website will also include the new policies about paper use and paper consumption by the company.  For the paper suppliers PCCW should send out corporate letters informing them about their reduced orders for paper products. The letters will contain the reasons for the reduced orders of paper products.   2. Form a powerful coalition Coalitions will be formed with the organization Conversation Association of Hong Kong. This association is a champion of sustainable development and is dedicated to the protection of the environment. PCCW would also involve Hong Kong’s Environmental Protection Department in the coalition.  The coalition assists each other in making sure that paper usage will be reduced. The Conversation Association of Hong Kong and the Environmental Protection Department would help PCCW in gathering data that will explain why there is a need to reduce paper use. The two organizations will help PCCW reach the intended viewers of the message.   3. Create the vision The vision is to reduce paper consumption in PCCW and its subsidiaries. By 2010 PCCW and its subsidiaries will have reduced their use of paper products by 50%. The vision is to motivate the personnel and the clients to reduce their usage of paper products. The project also aims to motivate the personnel to use electronic documents.   4. Communicate the vision The members of the coalition will first hand information regarding the vision of the company and how it will be attained. The vision will be communicated via personal correspondence during the meetings of the coalition. The employees will know the vision through posters that will be placed in the office bulletin boards. The customers will know the vision through articles and postings in PCCW’s website. The paper makers will be informed of the vision through corporate letters.   5. Empower others to act PCCW should initiate some sort of contest wherein the department which can reduce paper use after three months will be given a special commendation or a discounted price. PCCW will also install in its website a portion where clients and employees can suggest alternatives to paper products. This portion of the website would encourage the customers and the employees to determine means to reduce paper reduction without causing them much discomfort.   6. Plan for short term wins To achieve short term wins the management of PCCW needs to reduce the paper works by minimizing some of their processes and recording procedures. The management would have to determine means to reduce the steps in making records about transactions made by the company.   7. Consolidate improvements and produce further change The improvements that have transpired will be consolidated and analyzed to see whether additional change should continue. It will then be consolidated with other changes that have happened.  Recordings of the changes within PCCW will be documented through electronic documents.   8. Institutionalize the new approach In this step the coalitions have complete assurance that the personnel and the customers have minimized the use of paper. In this step a strong system is being implemented to institutionalize the use of paper.  When the people have been institutionalized they will not be tempted to make use of paper and they will rely on the use of electronic documents. Change leadership For change to be a success it needs to be run by a competent person or a person that knows how to lead. Change is not a process that automatically gains its goals; it needs proper guidance and direction for its goals to be reached. The leadership on the change process is a hard task since one needs to know how to overcome the barriers and resistance to change. Those who are assigned to lead the change process needs to know how to establish change with the use of the organization’s culture. To manage change, leaders need to have an established direction. In the case of PCCW, the focus of the management should be on making sure that paper use will be reduced by 2010. To manage change leaders need to align the people. Through the website and bulletin board postings about the need to reduce paper consumption the managers of PCCW can try to motivate the personnel to think of means to reduce paper use. The manager should give additional information about why the change is necessary for the company’s survival.  To manage change the leaders need to inspire the employees. The managers of PCCW should be the first ones to reduce their use of paper products so that the employees will follow them.   Evaluation Approaches In evaluating the change process, two approaches are used and those are formative and summative. In the formative approach the effects of the changes will be observed and taken note of while the change process transpires. In this approach the initial issues and effects of the change process will be known and actions will be taken to prevent complications.  During the change process the amount of paper used by PCCW should be recorded according to the different departments and subsidiaries. Each department would email their records of the number of papers used over the number of papers available in a department’s inventory. By doing this the company can check whether the employees followed the paper reduction scheme. After all records are collated, they will be analyzed to see if there is an increase or decrease in paper consumption. During the change process, the management should coordinate with the waste management group to determine how much paper has been put in waste bins by each division of PCCW.   In the summative process the effects of the changes will be observed and taken note of after the whole change process has expired. In this approach the change process has been completed, the evaluation serves as a concluding part of the whole process in this approach the overall effect of the change process is seen and notes will be taken on what should and should not be done on the succeeding change processes. In the summative approach the strong points of the change process will be recorded for future references. After the change process the managers should check for the total consumption of paper for the whole year; it will be compared with the paper consumption for the previous years. After the change process, the paper waste of the company before the change process will be compared with the paper waste of the company after accomplishing the change process. Conclusion To reduce the paper consumption the PCCW should make sure that its managers are willing to reduce their use of papers. The managers would then motivate the employees and the customers to change their practices regarding their use of paper.  The managers need to make sure that the change process will be followed and if any change needs to be made, they will be ready to integrate it to the process. The managers need to be wary of the risk exposure while the change process is being implemented. The managers need to be ready for the resistance by some of the employees, customers and suppliers. The best thing the managers should do is slowly reduce the paper supplies allocated for each department; by doing this each personnel would not be tempted to consume paper products.   References Bentivegna, V, Brandon, PS & Lombardi, PL (eds.) 1997, Evaluation of the built environment for sustainability, E & FN Spon, London.   Doherty, TL & Horne, T 2002, Managing public services implementing changes: A thoughtful approach to the practice of management, Routledge, London.   Duchin, F, Idenburg, A, Lange, G & Thonstad, K 1994, The future of the environment: Ecological economics and technological change, Oxford University Press, New York.   Fishbein, M, Goldberg, ME & Middlestadt, SE 1997, Social marketing: Theoretical and practical perspectives, social marketing: Theoretical and practical perspectives, Lawrence Erlbaum Associates, Mahwah, NJ   Gilley, JW & Maycunich, A 2000, Organizational learning, Performance, and change: An introduction to strategic human resource development, Perseus Books, Cambridge, MA.   Gottlieb, MR 2001, Managing group process, Praeger, Westport, CT.   PCCW Corporate Website 2008, Company background, viewed 12 August, 2008, <http://www.pccw.com/eng>.   Sims, RR 2002, Managing organizational behavior, Quorum Books, Westport, CT.     Appendix: Time line for the change process

Managing Change - Sustainability Improvement Project for PCCW Hong Kong

Introduction Paper is one of the most energy-intensive commodities since it has large direct energy requirements, as well as substantia...

Giordano International Limited :Management of Change

This analysis will discuss about the change that Giordano International Limited Co. (Giordano for brevity). The author is tasked a report to the Senior Management about a change program. The report will consist of two parts namely the prescription part, which will discuss about the vision for the renewed organization, the direction and scope of change, and the speed of change. While the second part is the proposed actions part wherein the topics to be discussed are the following: leveraging change; renewing systems and structure; tailoring culture; overcoming resistance; leadership of change and communicating change.   INTRODUCTION From the last presentation of report, it has been cited by the author that the main problem that the company will suffer in case of any plan of innovation is the fact that the employees or the people within the organization must openly accept the fact that the innovation is necessary for the growth of the company. Below is brief background information about the company.             Giordano International Limited (Giordano, for brevity) was established in 1981. It was one of the famous established apparel retailers in the Asia Pacific region. It has employees of over eleven thousand (11,000) friendly staff with over one thousand eight hundred (1,800) shops operating in thirty (30) territories worldwide. The company’s vision is to be the best and the biggest world brand in apparel retailing, with its mission to make people “feel good” and “look great”. According to the Giordano Australia website, the company’s success is measured by the company’s relentless focus on its five corporate business values of quality, knowledge, innovation, simplicity, and service. The amount of success of the company is attributed to the fact that the company has been giving focus to the fact that it caters to the public the most sincere service and the most quality that the consumer will expect in exchange to the amount it offers. In addition, the company has been widely accepted by the consumers hence making it one of the topmost sought after clothing brand in the world. Hence, it can be inferred that the company has no restraints as to any innovation that it may likely undergo; however, it is the concern of the author that the company must be able to see the impact of a change to the employees.   PRESCRIPTION FOR CHANGE   VISION FOR A RESTRUCTURED ORGANIZATION             The company motto is to make the people feel good and look great. This vision and mission sets the company apart from other retailing companies. In addition the fact that the company see their people or employees as an asset, it makes it a point that the selection of employees are thorough which will result to the best the company has ever had. This treatment of employees makes the company more appreciative of the work of the employees. However, the down side of this system is that the company is open to the mistakes, making the employees realize that mistakes are not treated as a failure but an accepted fact that they may commit it.             The values of the organization as mentioned are the following: quality, knowledge, innovation, simplicity, and service. The said values are instilled to the employees. The author cannot see any problem with that however the only factor that may be the cause in case the organization will change is the acceptance of the employees to the said change. The author highly suggest that the company must stricter to the conduct employees but still remain the fact that the employees still feel the established closeness of the company.   DIRECTION OF SCOPE AND CHANGE             As established in the abovementioned paragraphs, the change that the company must undergo is the system on how it treats its employees. The author knows that the employees are indeed important of the corporation however, what is necessary is the company must see to it that the employees will see the authority of those in the higher positions.             The scope of change that has been deliberately presented in this report is not a major change that the company must undergo because the company is already stable in term of its position in the business industry. The change that this author would want to make is one of the things that can make the company progress more effectively.             Heathfield (2008) stated that change is not difficult to structure or navigate. She said that an organization tries to bend the rules; expect the people to embrace the change because the organization likes it or pay for it.  Hence, from this it can be inferred that a change in an organization is not something unusual to happen. The direction of the change that is proposes on this paper is to enable the employees to appreciate in a manner that they work for the company hence the necessity to support and abide to company rules is vital to the success of the company.   SPEED OF CHANGE              Heathfield (2008) stated that the clarity of mission, vision, and objective for the change effort creates urgency around the need for change. She further stated the change should be clearly related to an important, strategic business objective, otherwise management attention would wane.             From the abovementioned statement, it can be concluded that the change that must be established must present clarity over the matters that are necessary within the organization. The prescribed change presented in this report does not entail an abrupt end to the status of the company. Nor the prescribed requires an immediate result. The speed of change process must continuously be adept to the necessity of giving the perspective to the employees that the company must be able to establish a great sense of dominance over them.             There is no speed required because putting a time limitation would mean that the employees might still see that the change is temporarily. The author would like to instill in the minds of the employees that the change is an ongoing process, and any deviation from the change process means that they are not interested to make the company more successful.   PROPOSED ACTIONS   LEVERAGING CHANGE             On this part, the author will illustrate leveraging change through the use Force field Analysis. The force field analysis is used by change management in order to understand the forces that will drive or resist a propose change. The table will consist of two column forms, listing the driving force n the first column and the restraining forces in the second. DRIVING FORCE RESTRAINING FORCE The vision of the company to make the consumers feel the friendly environment of the system The fact that the company has been open to its employees from the time it was founded. The need to see that the employees really contributed to the success of the company The fact that the employees may feel that the showing of authority would mean that the company see them as inferior. The necessity of the company to openly communicate to the employees with restriction, in order to create a more professional camaraderie within the company. The fear of the employees that they voice would not be anymore heard by the company and rules that have been established shall be the controlling act of the company.             From this table, it can be interpreted that the company has all the necessary positive driving to continue with the proposed change. The retraining factors are not objective per se because it involves the effect of change to the emotions of the employees. It is the view of the author that in case, the company has efficiently educated the employees; their fear will not matter anymore.   RENEWING SYSTEMS AND STRUCTURE             As stated, the change that is imputed in this paper should not be holistic in approach, which means that the company will be transformed as a whole. The change elaborated in this paper involves one the major part of the company. The author does not see any reason to make the company undergo a renewed structure. What is necessary is that the company must change the way and the system it treats its employees.             According to the case study of faculty.insead.com, the company treated employees as an asset. Giordano has the willingness to accept employees’ mistakes, which is another factor that contributed to its success. Although the aforementioned case study sees this as the reason for the success of the company, the author perceived that such might likely be one of the factors that could be a downside for any innovation plan of the company.  The system that needs to be restructured is the guidelines of the company as to its dealings with the employees. Again, the author would like to reiterate that there is no wrong in accepting the mistakes of the employees, what is necessary is that the employees must perform their duties on which they have in their mind that mistakes is acceptable.   TAILORING CULTURE             According to Marcos (2001), by building a clear, collaborative, shared image of the future, change agents and managers can engage the natural energy which change generates toward achieving shared goals and results. From this statement, the author perceived that the change necessary is that the whole of the company must appreciate the fact that two minds are better than one.             The concept of tailoring culture in this kind of change is not a heavy burden for the company and for the employees. The old culture of the company is that it openly accepts ideas, mistakes, opinions, and other comments of the employees. The culture that is sought to be implemented in the proposed change will not totally deviate to the previous culture. The culture of change that is sought to be established is the fact that the employees must not forget the fact that they are under a company, which will assert authority over them.   MANAGING PARTICIPATION Greenburg (2003,) said that norms for individual behavior are largely defined by an individual's role within a context of a network. As individuals interact with others, a network of roles and their attending behavioral expectations known as role-sets are established. From this statement, it can be inferred that the employees must directly participate to the planned not only that they are the main actors of the change but they established their role within the work. It is fact that the employees has established their role within the company, however, it is the view of the author that such roles must have a limitations in order for the company to work comprehensive to the objectives of the company. To further illustrate Markos (2001) stated that in successful change efforts, it is critical that the human side of changed is acknowledged and addressed, and that the people affected by change are involved.   LEADERSHIP OF CHANGE According to Lorenzi and Riley (2000), studies of system dynamics frequently reveal that major problems that everyone thought were external are actually the unintended consequences of internal policies. The basic dynamic behind this phenomenon is that the organization is made up of a network of circular causal processes: A influences B, which then influences C, which in turn influences A, i.e., the snake bites its own tail. Understanding these internal organizational dynamics is a prerequisite for leading effectively. In order to make the change happen effectively, it is necessary that the leaders of the subject of change must exert effort to gain the approval of the employees in order to exhibit explicitly the attitude that the whole company is presently active in the change that is sought to be established. The leaders of the company are expected to create a plan that not only a minority group of the employees will be able to understand the change. Influence within the company will be present if the leaders of change will likewise show that change is necessary to the company. With this kind of leadership, the employees will not in any way resist the planned change. The employees will not be apprehensive because they know that they are indeed taken seriously by the company.   COMMUNICATING CHANGE Kreitner and Kinicki (2001, p.421) report research which showed that co-operation is superior to competition in promoting achievement and productivity in teams. Hence, it is necessary that the employees are given the time to cooperate with the planned change. However, in order to establish the authority within the company, the cooperation that is needed must be present is the cooperation that all of them have well understood the objective of change. According to Randall (2004), in managing change, focus groups must be established across the organization, breaking down functional boundaries and working progressively on core ideas, business problems, and value change analysis. This statement is indeed necessary to the establishment of change that is presented here in this report because the employees will see that their functions inside the company is not disregarded and it is given much more credit as before. According to Lorenzi and Riley (2000), many organizational changes typically involve many different types and levels of personal loss for the people in an organization. This means a serious loss of personal and organizational significance involve changing the way people actually work. On a last note, the change that is sought to be established in the company does not entail loss but of a source of success. Communicating efficiently the desired change is necessary in order not to make the employees that the change will require an amount of great loss on their part. Furthermore, it is necessary that the company must be able to see that change is really part of the growth of the company.   REFERENCE BOOKS                                                                                                                                                              Greenburg, J., 2003, Organizational Behavior: the State of the Science, Lawrence Erlbaum Associates, Mahwah, NJ.   Lorenzi, N. and Riley, R., 2000, Managing Change: An Overview, J. Am Medical Information Association. USA.   Randall, J., 2004, Managing Change, Changing Managers, Routledge, New York.   ELECTRONIC SOURCES Giordano WEBSITE, 2008, viewed 23 July, 2008, <http://www.giordano.com.hk/web/HK/investors/finHighlights.html>.   Giordano case study, n.d, viewed 23 July, 2008, <http://faculty.insead.edu/schutte/MBA/Giordano%20Case.pdf>.   Heathfield, S. 2008, Change Management Wisdom, viewed 25 July 2008, < http://humanresources.about.com/od/changemanagement/a/change_wisdom.htm>.   Markos, L. (2001), Imaging: The Vision of Change, vieved 25 July 2008, < http://www.irmi.com/Expert/Articles/2001/Markos03.aspx>.

Giordano International Limited :Management of Change

This analysis will discuss about the change that Giordano International Limited Co. (Giordano for brevity). The author is tasked a report...

Essay Instructions : Management of Change Coursework Assignment

Management of Change Your should select one organization on which both the analysis you conduct for Coursework Assignment (50%) and End of the Module Assignment (50%) will be based. This need not be a large commercial organization, but should be one on which you can collate detailed information for your assignment. Coursework Assignment (3000 word) Due date 23 Jan 08 1)      Prepare a report for senior management of an organization of your choice acting as a consultant commenting on an organization change process. Your report should be constructed to address the following aspects: (Due date: 30 Jan-08) Diagnosis (70%) -              External Change drivers -              Internal change drivers -              Current State -              Sources of resistance -              Styles of leadership/management Prognosis (20%) Use scenario planning to envisage two alternative future states: -              A no change scenario if organization continues on current path -              A change scenario achieved through organization development Conclusion (10%) -              Identify key issue a change programme will need to address   Notes: -Read the advice in the MAP on structure to adopt in preparing management of change assignments. -Work should be no more than 3000 words (not including appendices) -In determining the correct organization state you need to select and apply appropriate concepts and models such as: l  Environmental Analysis (External Issues) l  Growth Stages (Internal Issues) l  7s framework (current state) l  Cultural Web (Current State) l  Organisational Development Diagnostic (Current States) l  Transition Curve (Sources of Resistance) l  Leadership Theories (Management Style)   -A no-change scenario should be specifically identifying risks associated with strategic drift. -A success scenario should envisage successful organizational learning and adaptation -Ensure that you provide references to acknowledge your sources, and include a bibliography at the end of your work.   MOC-Final Assignment (2500 word) due date 20 Feb 2008 2)      Prepare a report for the senior management of an organization of your choice identifying and agenda for a management of change programme. Your report should be constructed to address the following issues: (Due date: 27 Feb 08) -Prescription for change (30%)             Vision for renewed organization             Direction and Scope of change             Speed of Change -Proposed Action (70%)             Leveraging Change             Renewing System and Structure             Tailoring Culture             Overcoming Resistance             Leadership of Change             Communicating Change -Read the advice in the MAP on structure to adopt in preparing management of change assignments. -Work should be no more than 2500 words (not including appendices) -In preparing a change agenda you should select and apply appropriate models and concepts from the relevant literature, such as:             Matching Objectives and Values to business domain (renewing the vision)             Unfreezing Inertia (direction & scope)             Incremental/Transformational programmes (speed of change)             Force Field Analysis (Leveraging Change)             Organisational form (Structure/Form)             Cultural web (Tailoring Culture)             Managing Participation (Overcome Resistance)             Communication Methods (Overcome Resistance)             Leadership Styles and Methods (Overcome Resistance) -It’s possible you may select a model (e.g. culture web) used for your coursework. If you do ensure you do not duplicate work (e.g. use the web to identify a desired culture, not to map current state)   Preparation of Management of Change Assignments 1)      Both assignments are requested in a report format, which requires a clear structure, and layout and logical progression of ideas-use headings where appropriate. 2)      Your report should be prefaced with an Executive Summary in which you should state and relationship you have to your target organization. 3)      Although in a report format, your work is submitted in partial fulfillment of a degree, and should therefore contain a bibliography-all source you use also fully referenced in a consistent way. 4)      All you work will be assessed according to the following criteria: Research (30%), Analysis (30%), Evaluation (30%) and Presentation (10%) 5)      Research relates both to: l  Engagement with relevant academic literature (including beyond core essential reading and learning materials) l  Depth of information relating to chosen organization (Primary research beyond any published material) 6)      Analysis relates to your skill in selecting and applying appropriate models and concepts. NB-You will gain no marks for simply copying out materials from text without using them. 7)      Evaluation relates to the extent to which critical insights have been gained into: l  Strategic change within chosen organization l  Uses and Limitations of models and concepts l  The process of managing change development 8) Presentation refers to coherence and clarity of your report. Ensure that if you attach appendices they are relevant, and properly answered and referenced with man body of the report.

Essay Instructions : Management of Change Coursework Assignment

Management of Change Your should select one organization on which both the analysis you conduct for Coursework Assignment (50%) and End o...

Corporate Law, Social Norms and Belief

Corporate Law, Social Norms and Belief Systems Abstract Introduction Corporate law serves both to facilitate and to regulate the conduct of the corporate enterprise. Insofar as corporate law is regulatory, it provides incentives and disincentives to the major actors in the corporate enterprise -- directors, officers, and significant shareholders -- through the threat of liability. In significant part, however, these actors are motivated not by the desire to avoid liability, but by the prospect of financial gain, on the one hand, and by social norms, on the other. Much work has been done on the way in which these actors are motivated on the threat of liability and the prospect of financial gain, but relatively little work has been done on the operation of social norms. The neglect of the operation of social norms in the field of corporate law parallels the neglect of the operation of social norms in the law generally.1 In recent years, a small but important group of scholars has begun to remedy this neglect.2 However, relatively little work has been done on the interrelation of law and social norms in specific fields of law. Instead, most of this work has either concerned the operation of social norms in a general way, using random illustrations from various fields to illustrate the general points, or has concerned occupational communities whose members choose to be governed by their own social norms rather than law in their dealings with each other.3 Furthermore, much of this work has concerned only those social norms that impose obligations, and little of the work has concerned the role of belief-systems in the origin and acceptance of social norms. In this Article, I examine the interrelation of social norms and law in a given field of law -- corporations. The purpose of this examination is to illuminate both corporation law specifically, and the interrelation of social norms and law generally, by studying ways in which that interrelation operates in a specific field. I will focus on three kinds of social norms, which I call descriptive norms, conventions, and obligational norms. In the course of this Article, I will show that even social norms that do not impose obligations play important roles in the law, and that belief-systems that result from information and reasoned persuasion play a fundamental role in the origin and adoption of social norms. The organization of this Article is as follows: I begin by describing and defining the kinds of social norms that are relevant to law (Part I). I then consider, in a preliminary way, the effects and origins of social norms (Part II). Finally, I examine the role of social norms in three central areas of corporate law: fiduciary duties, corporate governance, and takeovers (Part III). In the course of that examination, I apply and elaborate the analysis in Parts I and II concerning the kinds, origins, and effects of social norms, and consider some of the kinds of interrelations between social norms and law. I. Descriptions and Definitions An analysis of the operation of social norms in the law presents severe problems of terminology. To begin with, as a matter of ordinary language the term norm encompasses both rules and regularities. Because rules and regularities are very different kinds of phenomena, a single canonical definition of the term norm is not within reach. Furthermore, rules and regularities each include various types of norms, and the typology that is employed in a given inquiry will depend in part on the purpose of the inquiry. I therefore begin by describing and defining the major types of norms that are salient to law. These descriptions and definitions, in turn, will set the stage for an inquiry into the manner in which different types of norms operate in areas that are within the scope of law. A. Social Norms, Legal Rules, and Organizational Rules To begin with, I use the term social norm to mean all rules and regularities concerning human conduct other than legal rules and organizational rules. By legal rules, I mean the principles and rules of a legal system. By organizational rules, I mean formal rules adopted by private organizations. Such rules often have the effect of legal rules, because they are directly or indirectly backed by legal sanctions.4 Even organizational rules that are not backed by legal sanctions are often backed by formal sanctions, because many private organizations have monopoly power over important parts of the lives of persons who are members or want to become members. Consider, for example, the rules of professional- and amateur-sport organizations, HMOs, and the Boy Scouts and Girl Scouts. I exclude legal rules from the definition of social norm that I use in this Article because the purpose of this Article is to investigate the effect of nonlegal rules and regularities. I exclude organizational rules because such rules tend to operate in a much different way than other nonlegal norms; in fact, they tend to operate in many ways like legal rules. Of course, organizational rules can be and often are considered to be social norms. For that matter, legal rules can be and often are considered to be social norms. I exclude those categories from the definition of social norm that I use in this Article not because doing so is required as a matter of ordinary language, but for clarity in analysis and convenience in exposition. B. Three Categories of Social Norms Social norms can be divided into three categories according to the degree of selfconsciousness and obligation that they involve. The first category consists of regularities in human conduct that neither involve a sense of obligation nor are self-consciously engaged in. One such type of norm consists of functional responses to the facts of the natural world, like putting on warm clothes when it’s cold. Another consists of average patterns in a given social population, like the distribution of wealth. Still another consists of statistical regularities, like the fact that automobile accidents peak during holidays. The second category consists of rules and regularities that are self-consciously adhered to or engaged in, but do not entail a sense of obligation. For example, it is a practice in some law schools to begin “one-hour” classes on the hour and finish at ten minutes of, and in others to begin at ten minutes after the hour and finish on the hour. These practices are self-consciously engaged in, and indeed have the look and feel of rules, but they do not involve a sense of obligation. A law school would normally not be criticized for changing from one practice to the other, or to a third practice entirely. A faculty member could normally depart from the practice -- make an exception to the rule - - without criticism, as long as he could comfortably fit the schedule of his class into the schedules of others. Another norm of this type consists of usages that attach meanings to words, symbols, or stylized conduct. Here is an example from the Restatement Second of Contracts. A contracts to sell B 1,000 feet of San Domingo mahogany. By usage of dealers in mahogany, known to A and B, good figured mahogany of a certain density is known as San Domingo mahogany, though it does not come from San Domingo. Unless otherwise agreed, the usage is part of the contract.5 A different kind of example is the posture and hand-signal used to hitchhike: As a matter of usage, standing in a certain posture by the side of a road and holding up your hand in a certain way means that you want a lift. The third category consists of social norms that take the form of rules or practices that actors not only self-consciously adhere to or engage in, but feel obliged in some sense to adhere to or engage in, although (by hypothesis) the rule or practice is neither a legal nor an organizational rule. I will call social norms in the first two categories -- norms that, whether or not self-consciously adhered to or engaged in, do not carry a sense of obligation -- nonobligational norms. I will call social norms in the third category -- norms that do carry a sense of obligation -- obligational norms. An operational test of whether a social norm is obligational is whether a departure from the norm is likely to involve either self-criticism or criticism by others. Moral norms are one extremely important type of obligational norm. However, a social norm may be obligational without being moral. For example, if it is a practice to wear formal dress to Metropolitan Opera premieres, then regular Metropolitan Opera goers will probably believe there is an obligation, although not a moral obligation, to follow along. Correspondingly, those who attend a premiere in informal dress will be criticized. Similarly, the social norms concerning what kinds of foods should be eaten with implements, rather than with one’s hands, are not moral norms, but they are obligational norms. II. The Effects and Origins of Social Norms I turn now to a preliminary consideration of the effects of social norms on human conduct, and the origins of social norms. The effects of social norms depend on two basic variables: (1) whether or not the norm is obligational and, (2) if it is obligational, whether or not it has been internalized by the relevant actor. These issues are discussed in Sections A (obligational norms) and B (nonobligational norms). Social norms may originate in a variety of ways. In this Article I will focus on one way in which social norms originate, which is particularly relevant to corporate law: the formation of belief-systems based on information, reasoned persuasion, or both.. This and related issues are discussed in Section C and D. A. Obligational Norms Legal rules provide a reason for acting in a certain way. So do obligational norms. A legal rule may provide a reason for acting in a certain way because the actor has internalized the moral norm of obedience to law; because the actor either fears legal sanctions or desires a legal benefit, or because the actor fears nonlegal sanctions, like reputational sanctions, or desires nonlegal benefits, like reputational gains. Similarly, an obligational norm may provide a reason for acting in a certain way either because the actor has internalized the norm or because the actor fears external sanctions that result from noncompliance with the norm or desires external benefits that can be obtained by compliance with the norm. 1. Internalized obligational norms. Begin with internalized obligational norms. The economist Kaushik Basu usefully describes the operation of such norms in his discussion of what he calls rationality-limiting norms: A “rationality-limiting norm” means a norm which stops us from doing certain things or choosing certain options, irrespective of how much utility that thing or option gives us. Thus most individuals would not consider picking another person’s wallet in a crowded bus. This they would do not by speculating about the amount the wallet is likely to contain, the chances of getting caught, the severity of the law and so on, but because they consider picking wallets as something that is simply not done. In traditional economics the ‘feasible set’ of alternatives facing an individual (from which the person makes his or her choice) is defined in terms of technological or budgetary feasibility. Thus a consumer’s feasible set is the collection of all the combinations of goods and services that the consumer can purchase given his or her income. From the above discussion it should be evident that a rationality-limiting norm further limits the feasible set, because now certain alternatives may be infeasible to an individual not just because they are technologically infeasible “(like walking on water) or budgetarily infeasible (like buying a Jaguar car) but because they are ruled out by the person’s norms.”6 Although Basu’s description is apt, his nomenclature might be questioned. Basu employs the term rationality-limiting norms on the ground that “a person endowed with norms may forgo options which could have enhanced his utility and thus such a person would be considered less rational in terms of mainstream economics. Basically, such norms limit the domain over which the rationality calculus is applied.”7 Here Basu, like many economists, uses rationality to mean wealth-maximization, and seems to use utility in the same way. These meanings are unduly restrictive. Rationality is not equivalent to wealth-maximization, and utility is not equivalent to wealth. It is perfectly rational to forgo an increase in wealth by adhering to an internalized social norm or, for that matter, by engaging in conduct that is intellectually, creatively, or socially gratifying. Furthermore, as Cass Sunstein has pointed out, “[i]ndividual rationality is a function of social norms. The costs and benefits of action, from the standpoint of individual agents, include the consequences of acting inconsistently with social norms.”8 Because utility is not solely a function of wealth, actors often maximize their utility by taking actions that do not maximize their wealth. So, for example, an actor may maximize his utility by keeping his promises or telling the truth, even in cases where breaking a promise or lying would maximize the actor’s wealth. Basu also doesn’t address just why some things are simply not done. It’s tempting to answer that question, even insofar as it applies to internalized norms, solely in costbenefit terms -- specifically, internal costs and benefits. In the case of moral norms, the internal cost is the pain of guilt -- what Robert Cooter refers to as the “guilt penalty.”9 The internal benefit is the satisfaction an actor obtains from doing the right thing – the pleasure of rectitude. However, an analysis in cost-benefit terms, although important, is insufficient. Moral norms, in particular, may operate by affecting an actor’s moral character, so that his action follows from sympathy and commitment, to which psychological and external costs and benefits are not relevant or only marginally relevant. Martha Nussbaum has captured this point especially well: [Under a cost-benefit analysis, altruism] tends to be reduced to a type of egoism, in which people get reputational or psychic goods for themselves. For some time it has been influentially argued within economics that this approach is inadequate, even for predictive purposes: we need to recognize sympathy and commitment as independent sources of motivation. This is hardly a surprising claim, because it is one that has been argued throughout the history of Western philosophy -- starting . . . with Aristotle, who argued that people who die for their friends or family cannot plausibly be said to do so for satisfaction, because they are risking or forfeiting, in the process, all prospect of future satisfaction. A theory that focuses on satisfaction will therefore make bad predictions about what they will do. Recently these ideas have been receiving striking empirical confirmation: it has been powerfully argued that economic theories could not have predicted that anyone would risk life, family, comfort, and reputation to rescue Jews during the Holocaust. And yet a significant number of people did.10 More generally, as Basu points out, for many or most actors in many or most situations internalized moral norms operate without a cost-benefit calculation, simply because that for those actors certain things (like picking pockets) are simply not done, while other things (like assisting the unsighted across the street) simply are done. Obligational norms that are not moral norms may also be internalized, and the effects of such norms may be comparable to those of internalized moral norms. A major effect of internalized obligational but not moral norms is the way in which they shape an actor’s social character. For regular Metropolitan Opera goers, not dressing formally for a premiere might be no more of an option than picking pockets. This doesn’t mean that cost-benefit analyses don’t figure in the effect of internalized norms. They often do. In deciding whether to adhere to an internalized moral norm, an actor may weigh the pain of guilt and the pleasure of rectitude against the gain from nonadherence. In deciding whether to adhere to an internalized nonmoral norm, an actor may weigh the pain of shame and the pleasure of conformity against the gain from nonadherence. Thus, character may explain adherence to internalized norms by some actors, while the weighing of internal and external costs and benefits may explain adherence by others. Or, internal and external costs and benefits may figure for some actors some of the time. Having said that, however, it seems likely that most actors who have internalized an obligational norm will usually apply the norm naturally, as an expression of their character, rather than calculatingly, on the basis of a cost-benefit analysis. 2. Obligational norms that are not internalized. In contrast to internalized obligational norms, non-internalized obligational norms will be adhered to, if at all, only for instrumental reasons. Thus the effect of such norms in any given case will depend on a comparison of the immediate gains from nonadherence, on the one hand, with the longterm benefits of adherence and costs of nonadherence, on the other. The long-term costs of nonadherence involve loss of reputation, diminished esteem, public shame (as opposed to feeling ashamed), and disdain. The long-term benefits of adherence involve enhanced reputation, increased esteem, public recognition, and social acceptance. As shown by  adherence and nonadherence to obligational norms have signaling effects. Adherence to norms signal that one is a cooperator. Non-adherence signal that one isn’t. An actor who develops a reputation as a cooperator may derive substantial benefits from the cooperation of others. An actor who develops a reputation as a noncooperator may not.11 3. Oneness. Often, the effect of obligational norms derives not, or not only, from an actor’s internalization of a given norm on its own merits, or from the prospects of external benefits and costs, but from the actor’s internalization of a metanorm that calls for adherence to the norms of a special group with which he feels at one. For example, an actor may derive great gratification and self-worth from membership in a special group that is working toward a shared end, or that shares a special ethos, that the actor believes to be important. In certain respects, membership in such groups simply sharpens some of the characteristic incentives to adhere to norms -- in this case, the norms of the special group. For example, the sanction of disapproval may be especially salient and effective in such a group. However, there is also a special internal benefit in adhering to the norms of such a group, just because they are the norms of the group -- the pleasures of belongingness, of acting in a special and good endeavor, and of surrendering narrow individuality to a larger cause. B. Nonobligational Norms There is a tendency in the legal and economics literature concerning social norms to focus on obligational norms.12 It’s easy to see why this should be so. In their work on legal rules, legal and economics scholars characteristically emphasize incentives and disincentives, and obligational norms, like legal rules, provide incentives and disincentives. However, obligational norms are not the only kind of social norms that can affect human conduct. Nonobligational norms can have this effect as well. In a memorable phrase,  referred to “the normative power of the actual.”13 Jellinek here used “normative” in its obligational sense. What he meant is that regularities of practice take on a certain oughtness. Partly this phenomenon results from a respect for tradition. That respect need not be irrational. Traditional practices may be ways that have worked, that have stood the test of time, even if we are not entirely sure why any given traditional practice works.14 There are other reasons for this phenomenon. Many regularities of practice give rise to expectations that they will continue to be followed. If these expectations seem justified to those who hold them, then a failure to follow the practice will be treated as a defeat of justified expectations. If a regularity of practice has been relied upon, then a failure to follow the practice will be treated as a defeat of justified reliance. Thus is easily becomes ought, and what begins as a practice may easily end as an obligation.15 Then too, many social norms have both nonobligational and obligational faces. For example, social scientists may treat the average age at marriage in a given group as a statistical regularity, while members of the group may feel obliged to marry before reaching that age. The posture and hand-signal used to hitchhike is a usage, but the usage may have an obligational effect if would-be hitchhikers find that if they try to hitch rides in other ways they won’t get rides, either because they are misunderstood or because drivers don’t want to give rides to unconventional people. Finally, a focus on obligational norms overlooks that nonobligational norms may have an important effect on conduct by permitting certain behavior. For example, the norm of racial discrimination in the might be conceived of as either an obligational norm, to the extent that it obliged even those whites who did not want to discriminate to do so, or as a nonobligational norm that (among other things) insulated those who engaged in discrimination from both outside criticism and self-criticism. Similarly, when smoking is a prevailing practice it will be socially permissible. When smoking is no longer a prevailing practice it may no longer be socially permissible. C. Belief-Systems and Social Norms Most legal and economic accounts of social norms are directed toward the dynamics that govern the adoption of social norms. Most of the models focus on external reasons for adhering to social norms, rather than on internal beliefs. Correspondingly, very little work has been done by legal and economics scholars on why particular social norms (other than rudimentary norms of cooperation, which are often in actors’ selfinterest) originate. A major exception is the work of Robert Cooter, who focuses on three processes by which social norms are internalized: a Freudian process, in which the repressed memory of parental sanctions for childhood transgressions becomes transmuted into an adult superego; a Piagetian process, in which children perfect their ability to internalize norms as they acquire a capacity for general reasoning; and a Weberian process, in which actors internalize the norms associated with occupational roles.16 Cooter’s emphasis on the processes by which norms are internalized is relatively unusual in the legal and economic literature on norms, and extremely important. However, each of these processes assumes the prior existence of the norms that are internalized through these processes, rather than explaining how and why particular social norms originate, or why adults internalize new social norms other than occupational role norms. There is no simple, or at least no single, answer to these questions. Undoubtedly, some social norms, like the prohibitions on murder, theft, and incest, originate because they are necessary for societies to become viable. Others originate because they prove to be efficient and are therefore imitated. Still other social norms originate because actors adopt a new belief-system that involves new views or new values, on the basis of new information, reasoned persuasion by other actors, or both. The process by which norms are originated and adopted through changes in actors’ belief-systems is extremely important generally -- Isaac Berlin is reported to have said that what philosophers do in the privacy of their studies can change the course of history.17 More to the point, the effect of belief-systems on social norms is of special importance in explaining the origin and adoption of many norms that are 18 See text at notes xxx-xxx, infra. 19 An exception, again, is Cooter, whose analysis includes a passage that points out that a smoker may be persuaded to quit smoking. See Cooter, supra note 2, at xxxx. 20 Thomas C. Schelling, Micromotives and Macrobehavior (1978). 21 Id. at 94 (emphasis in original). 22 Id. at 95. D’Atri-double.2599. Page -17- significant in corporate law.18 Both for that reason and because this process has been little studied by scholars who have analyzed the role of social norms in the law, in this Article I will place heavy emphasis on the role of belief-systems in the origin and adoption of social norms.19 D. Tipping-Points and Equilibria The behavior of actors often depends on their expectations of what other actors will do. In his book Micromotives and Macrobehavior,20 Thomas Schelling gives a number of examples. A faculty seminar is begun. Whether it will succeed or die depends on whether the participants expect that enough other participants will continue to come. Pedestrians gather at a busy intersection, anxious to cross against the light. Whether they do so depends on whether each believes that enough additional pedestrians will cross so that a group sufficiently large to stop traffic will be formed. “The generic name for behaviors like this,” Schelling notes, is “critical mass.”21 He continues, “What all of the critical mass models involves is some activity that is self-sustaining once the measure of that activity passes a certain minimum level.”22 D’Atri-double.2599. Page -18- A special case of the critical-mass phenomenon is known as tipping. Tipping occurs when the success of a social activity depends on the formation of a critical mass, and enough actors sign on or sign off that the activity succeeds or fails. If enough actors sign on, the activity is tipped in. If enough actors sign off, the activity is tipped out. A consequence of the critical-mass and tipping phenomena is that the behavior of a relatively small number of actors can cause an activity to succeed or fail because the addition or subtraction of a few actors results in the crossing of a tipping-point. What is true of social activities in general is often true of social norms in particular. Social norms may shift when, and because, enough actors change their behavior that a tipping-point is crossed. And because a relatively small number of crossover actors may cause a norm to tip in or out, social norms may shift relatively suddenly. The tipping-point for a social norm may be crossed for various reasons. For example, it may be crossed because some actors change their belief-systems about the desirability of adhering to a norm. Or, it may be crossed because actors who adhere to a norm increase their readiness to sanction actors who don’t, and previously some nonconforming actors change their behavior to avoid these sanctions. A phenomenon that resembles tipping-points occurs where a social norm is or can be radically changed by the defection of a very small number of actors -- perhaps even one or two. This phenomenon may occur because the norm reflects an equilibrium that depends on the fear of the consequences of departing from the norm, and a successful defection allays those fears. Or, it may occur because a successful defection shows that departure from the norm opens up valuable opportunities. More generally, it is a familiar phenomenon that actors may be willing to change their course of conduct if, but only if, others act first. This phenomenon is not limited to shifts in social norms. In the common law, for example, the first overruling of an undesirable doctrine is often followed by a wave of additional overrulings. E. Good and Bad Norms and Belief-Systems As shown by the norm of racial discrimination in the Jim Crow South, it’s crucial not to idealize social norms. There is an occasional tendency to view social norms as good, efficient, or both; in particular, to view social norms as a form of private action that does a better job of regulating conduct, just because it is private action, than governmental action. But social norms are not necessarily either good or efficient. They may be morally bad or at least insulate morally bad conduct from criticism, and they may promote inefficient behavior or at least insulate inefficient behavior from criticism.23 Bad or inefficient norms may result from a variety of causes, including self-interest, inertia, and bad or inefficient belief-systems. Bad or inefficient belief-systems, in turn, may result from bad information or from persuasion that is founded on false premises or developed by fallacious or incomplete reasoning. In short, it is important that social norms not be treated as intrinsically more desirable than legal regulation in governing conduct. Rather, the issues raised by social norms, for those interested in the law, are how social norms operate in a field that is within the scope of law; whether, in any given area, social norms potentially have advantages over legal rules in regulating conduct; and whether the actual social norms that prevail in an area are good or bad, efficient or inefficient.24 III. The Role of Social Norms in Corporate Law I now turn now to the role of social norms in corporate law. I use the term corporate law here in a broad but standard sense to mean those areas of conduct that are within the scope of corporate law, and more generally those areas of conduct that are of ongoing concern to the corporate bar and to students of corporate law, including areas that are regulated only loosely or not at all by legal rules, such as the structure of the board and the role of institutional investors in corporate governance. Often, the operation of social norms is at or near the surface of corporate law. For example, some corporate-law doctrines explicitly incorporate social norms. Thus the ALI’s Principles of Corporate Governance provides that a corporation may take into account ethical considerations that are reasonably regarded as appropriate to the conduct of business, even if corporate profit and shareholder gain are not thereby enhanced.25 My focus here, however, is on social norms that are not explicitly incorporated into legal rules. I consider three central areas of corporate law: fiduciary duties (Section A), corporate governance (Section B), and takeover bids (Section C). A. Fiduciary Duties The major fiduciary duties of corporate actors are the duty of care and the duty of loyalty. The duty of care concerns the standards that apply to the conduct of corporate actors who are free of self-interest. My theses concerning the duty of care are as follows: The level of directorial care is largely driven by social norms, rather than by the threat of liability or the prospect of gain. Within the last ten years, an inefficient norm that licensed and insulated a low level of directorial care has been replaced by a more efficient norm that requires a higher level of care. This norm-shift was in significant part the result of belief-systems. The change in belief-systems, in turn, was partly induced by the expressive effect of legal authorities, which clarified and added moral force to the social norm of care. The duty of loyalty concerns the standards that apply to the conduct of corporate actors who are not free of self-interest. My theses concerning the duty of loyalty are as follows: Adherence to the duty of loyalty is driven by both the threat of liability and moral norms. The legal rules in this area serve both regulatory and norm-supporting and -defining functions. Although the regulatory function of these legal rules is important, the moral norm of loyalty that the legal rules support and define is critical to the efficient operation of the duty of loyalty. Standards of care and loyalty potentially apply to all major types of corporate actors, although often in somewhat different ways. I will focus on the application of the duty of care to directors and the application of the duty of loyalty to directors and officers. I. The duty of care. Most observers of the corporate scene believe that the level of directorial care has risen significantly in the last ten years or so: that directors today are more attentive to their responsibilities, more ready to displace inefficient CEOs, more concerned about corporate structure, more active in setting agendas and determining corporate strategy, and so forth. What has caused this shift to a greater level of care? Pretty clearly, it’s not an increased threat of liability. It’s true that during this period the meaning of the duty of care was greatly clarified and elaborated. Smith v. Van Gorkom26 made clear that reasonable inquiry by a director was a condition to the invocation of the business judgment rule. The ALI’s Principles of Corporate Governance formulated the first clear statement of the business judgment rule, as a special standard of review – that is, a rationality standard – and the conditions that had to be satisfied, including reasonable inquiry, before the special business judgment standard of review was applied.27 Cede v. Technicolor28 made clear that if the conditions to invoking the business judgment standard of review were not satisfied, the standard of review is reasonability or some equivalent. The monitoring duty of the board was made explicit and strongly supported, first in Francis v. United Jersey Bank29 and later and more comprehensively in the Caremark case. From a liability perspective, however, the developments during this period were overshadowed, if not overwhelmed, by the adoption of director-shield statutes that permit a corporation’s certificate of incorporation to eliminate the liability of directors for violation of the duty of care. Delaware Section 102(b)(7) is typical. This section provides that the certificate of incorporation may include: A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith which involve intentional misconduct or a knowing violation of law, (iii) [for improper distributions], or (iv) for any transaction from which the director derived an improper personal benefit. It’s true that the shield statutes have important exceptions. For example, the statutes typically don’t apply to officers acting in that capacity. This exception, however, doesn’t affect directors. In addition, the statutes generally concern only liability, not the validity of directorial action. There are many important validity contexts in which liability may not be at issue, but the standard of care will be; among the most important are the validity of decisions by disinterested directors to approve interested-director transactions or to take defensive actions against a takeover bid. The validity exception, however, doesn’t reduce the statutes’ protection against liability. The statutes also typically have exceptions, like those in Delaware § 102(b)(7), for acts or omissions not “in good faith,” or which involve “intentional misconduct,” or the like. The meaning of these terms in this context will have to be developed by judicial interpretation, but a lot can be packed into the concept of good faith. In In re RJR Nabisco,31 Chancellor Allen stated that an action by a director is not in good faith if it is based on “any human emotion [that] may cause a director to place his own interests, preferences or appetites before the welfare of the corporation” including “hatred, lust, envy, revenge, . . . shame or pride.” In Gagliardi v. Trifoods International Inc.,32 Chancellor Allen stated: “I include within the category of improper motivation those cases in which particularised claims of director entrenchment are made or in which, relatedly, transfers of corporate control by the board . . . are involved.” In Caremark, Chancellor Allen stated that “a sustained or systematic failure of the board to exercise oversight – such as an utter failure to attempt to assure a reasonable information and reporting system exists – will establish the lack of good faith that is a necessary condition to liability.”33 The meaning of “intentional misconduct” is also unclear. For example, a complete failure to act might be construed as “intentional misconduct” within the meaning of the statutes. The not-in-good-faith and intentional misconduct exceptions therefore somewhat diminish the protection the shield statutes afford against directorial liability for breach of the duty of care. Even when these exceptions are taken into account, however, the result of the shield statutes is to drastically reduce the threat of such liability. Accordingly, if directorial care was based solely on the threat of liability we would expect the level of care to have gone drastically down in the last ten years, rather than significantly up. A possible incentive for care, even when there is no significant threat of liability, is the prospect of individual gain. However, directors’ fees are normally unrelated to performance. Such fees are invariably uniform for all directors on a given board (subject, sometimes, to extra compensation for committee service), and indeed are relatively uniform among all corporations of given kinds. Extra care by a particular director is therefore unlikely to lead to increased compensation. In theory, extra care might lead to a greater number of directorships, but there is little or no data to suggest that most directors want to or do hold a number of directorships, or that there is a market for directors in which directorial care is appraised. Since the increased level of directorial care in recent years cannot be accounted for either by an increase in the threat of liability or by the prospect of gain, and since, indeed, the threat of liability has been substantially reduced if not virtually eliminated, it’s difficult to avoid the conclusion that the level of directorial care is determined in significant part not by the threat of liability or the prospect of gain, but by social norms concerning the directorial role, and that the increased level of care is due to a shift in social norms concerning the directorial role. What has led to this shift? One factor may be the role of the media. The business press, like the general press, has become increasingly willing, and indeed eager, to report on the shortcomings of directors and officers. A juicy story about feckless directors on page one of the Wall Street Journal is the equivalent of a picture of  on the cover of Vanity Fair. The increased likelihood of such stories, with their consequence of shaming and the loss of esteem, may have been one factor in making directors more attentive. Another factor is that directorial performance has come under closer scrutiny from institutional investors, who may either put direct pressure on directors or present another possible source of bad publicity. But something else seems to be operating; that is, a change in the belief-system of the business community concerning the obligations associated with the directorial role. The issue then is what elements may have led to this change in the belief-system. One possible element was new information. Some of this information was provided by the rise of the takeover-bid institution. The enormous discrepancy between takeover-bid prices and market prices conveyed the information that there was a lot of managerial inefficiency, and that something in addition to takeover bids needed to be done about it. The decline of such corporate giants as GM and Sears conveyed the same information. The law may also have contributed to the change in directors’ belief-systems. Recall that at the same time the shield statutes virtually eliminated liability for the director’s breach of the duty of care, the courts were greatly clarifying the meaning of that duty. To understand the impact of this clarification, a distinction must be drawn between standards of conduct and standards of review. A standard of conduct states how an actor should conduct a given activity or play a given role. A standard of review is the test a court applies when it reviews an actor’s conduct to determine whether to impose liability or grant injunctive relief. Typically, the elements of a standard of conduct and a correlative standard of review are the same. For example, the standard of conduct for an actor in driving a car is to drive carefully, and the correlative standard of review to determine whether liability should be imposed is whether the actor has driven carefully. In corporation law, however, the standards of conduct and review pervasively diverge. For example, in the area of duty of care the standard of conduct is “act reasonably,” but the standard of review is often the much looser business judgment standard of rationality. Similarly, the elimination of liability under the shield statutes did not affect the director’s standard of conduct, but only the liability for failure to adhere to that standard. Although legal standards of conduct are characteristically accompanied by liability rules or other enforcement regimes, even a legal standard of conduct that is unaccompanied by such a regime may be effective because of its impact on social norms. While social norms differ from legal rules, there is often a symbiotic relationship between law and norms. On the one hand, legal rules are often based on social norms. On the other hand, many legal norms have an expressive effect -- that is, in addition to their regulatory effects, legal norms send messages of various kinds.34 Adoption of a legal rule that is based on a social norm sends a message that the community regards the norm as especially important. Furthermore, legal rules add, to the force of a specific obligational norm, the force of the general norm of obedience to law, which is one of the most powerful social norms of our society. Legal rules may also serve to clarify a social norm.35 This has obvious relevance to the duty of care, because one function of the cases that clarify the meaning of that duty, especially in a directorial context, is to tell directors how to play their directorial role. Thus one way of looking at the change in the social norm concerning directorial care is that directors who once believed, as a result of an earlier prevailing practice, that they could properly satisfy the demands of the directorial role with minimal care, have been instructed by the courts -- or perhaps more accurately, by their lawyers -- that this1 view is wrong. Having been so instructed, directors who wanted to perform their role properly made appropriate adjustments in their conduct -- not necessarily to avoid liability, but just because they wanted to play their roles properly. Ed Rock, in a notable article,36 shows how much of the Delaware case law on takeovers, and by extension the duty of care generally, can be understood as directed in significant part toward instructing directors on how to play their role in that context, and publicly admonishing those directors who failed to properly play that role. Legal rules may also be effective, even without an enforcement strategy, because they facilitate the effectiveness of informal sanctions by norm-compliers against normviolators. For example, points out that if smoking in public places like airports violates a social norm but not a legal norm, some norm-compliers will sanction smokers with words or looks, but others won’t. If a legal rule is adopted to ban smoking in such places, many of the norm-compliers who previously had kept silent will now speak out. This effect may be especially important where a relatively small number of additional informal norm-enforcers may tip the balance in a way that makes norm violations too uncomfortable to be worth the trouble. (Correspondingly, the adoption of a legal rule, even without formal enforcement, can cause actors to correctly believe that there will be more social enforcement of the norm.37) This aspect of the effect of legal rules on social norms is particularly salient to the duty of care, because the development of the meaning of that duty in the case law gave institutional investors, the media, and, for that matter, fellow directors a better purchase for criticism of laggard directors. The developments in the area of the duty of care illustrates both that descriptive norms can have significant consequences and that norms may be inefficient. Whether or not directors today are exercising maximum diligence, it’s clear that they are exercising significantly more diligence than they were exercising twenty years ago. The prior social norm concerning the director’s role was essentially the descriptive norm that directors don’t do much. The effect of this norm was to permit a low level of directorial diligence by insulating directors who didn’t do much from both external criticism and selfcriticism. B. The Duty of Loyalty The duty of loyalty is a shorthand expression for the duty of fair dealing by, and the trustworthiness of, directors, officers, and controlling shareholders when they are financially interested in a matter affecting the corporation. A useful entry point into the relationship between law and social norms in this area is provided by an important article by and  This article was triggered by the Supreme Court’s decision in Basic, Inc. v. Levinson,39 which held that a corporation that denies that it is in merger negotiations violates Rule 10b-5 if the denial is false and the information is material.40 Macey and Miller criticize this result. They begin by arguing, as others have, that from an economic perspective fiduciary principles are simply contractual devices: This economic perspective is important because it generates a mechanism by which courts can decide cases. In particular, when scrutinizing managerial behavior, courts should treat an allegation of a breach of fiduciary duty as they would treat any alleged breach of contract. This analytic method often is described as the “hypothetical bargain” approach. Under this approach to fiduciary duty, courts would evaluate whether the managers’ actions were consistent with the terms of a hypothetical fully specified, contingent contract that informed, value-maximizing investors would have agreed to ex ante.41 Based on this perspective, Macey and Miller argue that lies by corporate officials should be exempt from liability if they are made with the good faith intention of furthering the shareholders’ interests, and do not reduce allocative efficiency in ways that are not internalized by the corporation and create negative externalities. (An example of a lie that they say would be impermissible under this rule would be a false statement that a corporation is involved in merger negotiations, where the purpose of the statement is to make it seem that the corporation is in play, and thereby increase the likelihood of takeover bids. Here, potential bidders would waste resources in sifting through false information disseminated by the corporation.)42 Accordingly,  say, the issue that arose in Basic should have been resolved by asking whether a rational shareholder group would endorse a corporation’s strategy of publicly and falsely denying that it was involved in merger negotiations. Based on this standard, Macey and Miller conclude, a corporation should be able to falsely deny that it is in merger negotiations, because nondisclosure facilitates merger negotiations, merger negotiations facilitate mergers, and mergers increase shareholder wealth. There are important problems with the  analysis even taken on its own terms. One of these problem is that if the prevailed, then whenever a corporation made a statement investors could not know whether, if the statement was a lie, it was the kind of lie that would be permitted or prohibited under the  rule. Since the Macey and Miller rule isn’t limited to statements concerning merger negotiations, investors would have to discount all corporate statements, because they might be permissible lies. Discounting all corporate statements, however, would make the market significantly less efficient, if not positively inefficient, which would be bad for shareholders as a class. Another, related point is made by Ian Ayres. Assuming that a rule that permitted a corporation to lie was a default rule, then a corporation could vary the rule by committing itself to honesty. If a corporation didn’t commit to honesty, the market would simply assume that any statements the corporation made were dishonest. This in turn would induce all corporations to commit to honesty, which would bring us back to where we are now.43 The most fundamental problem with the analysis, however, is that it ignores the expressive function of law. If the Macey and Miller rule was adopted, the message that the law would send is that there is nothing wrong with lying; that truthtelling is valued not for its own sake, but only instrumentally. Such a message would significantly diminish the force of the social norm of truth-telling. Just as the law can add to the force of an obligational norm by throwing its support to the norm, so it can reduce the force of an obligational norm by withdrawing support. Even if the result of sanctioning lies was good for shareholders in their shareholder capacity, therefore, it would be bad for society, and shareholders are members of society. There is also a strictly economic reason why the law should not send such a message. The corporate system operates most efficiently where corporate actors act loyally -- that is, deal fairly and in a trustworthy manner -- and are perceived to do so. One way to achieve loyalty is by legal sanctions. This way is very expensive and probably has limited effectiveness, taken alone, because of the difficulty of detecting breaches of the duty of loyalty, and the cost of legal enforcement. A second way to achieve loyalty is to install intracorporate monitoring and bonding systems. This way is somewhat more effective than a legal regime alone, but it is also very expensive -- and the more effective, the more expensive. In contrast, the operation of the social norm of loyalty is very inexpensive. Of course, if the loyalty norm is adhered to only because the actor fears reputational sanctions, the problem of detection remains significant. Drawing on terminology used by  I will refer to loyalty that is based on an internalized norm -- particularly a norm that shapes character -- as authentic, and to loyalty that is based on reputational concerns as instrumental. Instrumental loyalty is good, but authentic loyalty is better. Instrumental loyalty will be forthcoming only when disloyalty is easy to observe. Authentic loyalty will be forthcoming even when disloyalty is difficulty to observe. To put the extreme case, if all corporate actors fully internalized the social norm of loyalty and gave full effect to that norm, the costs of both legal sanctions and monitoringand- bonding systems would be unnecessary, and the levels of loyalty would be much higher than those sanctions and systems can achieve. Accordingly, whatever the law does do to increase the force of the social norm of loyalty, and further its internalization, will lead to greater efficiency and will therefore benefit shareholders as a class. Whatever the law does to diminish the force of the social norm of loyalty, and lessen its internalization, will have the opposite effect. Therefore, even taking the interests of shareholders as a class, apart from their interests as members of society, a legal regime that promoted the view that the social norm of loyalty is only instrumental, and thereby diminished both the force of the norm and its internalization, would reduce the efficiency of the corporate system. What is true of the corporate system in particular is also true of the economic system in general. As stated by Casson: Overall economic performance depends on transaction costs, and these mainly reflect the level of trust in the economy. The level of trust depends in turn on culture. An effective culture has a strong moral content. Morality can overcome problems that formal procedures – based on monitoring compliance with contracts – cannot. A strong culture therefore reduces transaction costs and enhances performance – the success of an economy depends on the quality of its culture.45 An analogous objection applies to the conception, adduced by  in support of their argument, that the duty of loyalty is contractual. One problem with this conception is that it is factually incorrect. The duty of loyalty is seldom if ever imposed by a contract. Directors and officers do not agree that they will be bound by a duty of loyalty. Instead, the duty is imposed by law. As stated in Guth v. Loft, “A public policy, existing through the years, and derived from a profound knowledge of human characteristics and motives, has established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty. . . .”46 It’s true that the duty of loyalty, and the corresponding rights it creates, may be limited in certain respects by agreement. However, that a right or a duty may be limited by agreement doesn’t make the right or duty contractual. For example, the general duty to exercise reasonable care can be contracted around, within certain limits,47 but that doesn’t make the law of negligence contractual. Similarly, the right to a jury trial can be waived, but that doesn’t make the Sixth Amendment contractual. Nor is a right or a duty contractual because it is imposed on the basis of what courts or legislators believe the parties would want to do if they had addressed the issue. Even rules governing nonconsensual transactions, like the rules of tort law, could be justified on that basis. Furthermore, if the duty of loyalty was contractual, it would follow that the duty could be completely waived by agreement. Generally speaking, however, it cannot be.48 A more fundamental problem with the contractual conception of the duty of loyalty is that the critical role of trust in the success of the corporate system would be significantly undermined if the law sent a message that the duty of loyalty was merely a contractual duty, not a duty imposed by law. As  has stated: Competitive corporate contracting cannot achieve all that this [contract] view . . . promises unless it is aided by the very value that a contractual understanding of the fiduciary obligation denies, namely, the duty of loyalty and trust. Trust plays an essential role in all modern economies, and without it, or without the coordination that is provided by institutional loyalty, even efficient wealth-maximizing corporate contracting can make us all worse off. . . . Nor can the concept of trust be very easily accommodated into the contractual model of the corporation. Properly interpreted, the concepts of trust and loyalty present a deep challenge not only to that contractual model, but also to the very conventions of instrumental rationality upon which the model is based.49 In short, the duty of loyalty is almost never the result of a real contract, and the adoption by the legal system of the contractual conception of the duty of loyalty, like the adoption of an instrumental conception of truth-telling, would disserve efficiency interests. Another role of the social norm of loyalty is to up the ante for violating the legal duty of loyalty even for those corporate actors who have not internalized the duty. Generally speaking, the legal sanctions for violating legal duty-of-loyalty rules are inefficiently low. The primary legal sanctions are rescission and restitution. Normally, however, these sanctions only put the fiduciary back to where he would have been if he had not violated his duty. Because not all violations will be detected, a fiduciary whose only objective was to maximize his wealth, and who feared only legal sanctions for violating the duty of loyalty, would have an incentive to violate the duty -- for example, by taking a corporate opportunity, or dealing unfairly with the corporation in a selfinterested transaction. If the violation is undetected, the fiduciary comes out ahead. If it is detected, the fiduciary is normally no worse off, under the legal sanctions, than he would have been if he hadn’t violated his duty. Therefore, if the only reason for not violating the duty of loyalty was the prospect of a legal sanction, fiduciaries would regularly violate that duty. (Although it’s true that additional legal sanctions are sometimes granted -- for example, loss of salary or punitive damages -- these sanctions are atypical, and it’s therefore doubtful that the prospect of such sanctions, discounted by the likelihood that they will be granted, change the picture that much.) The social norm of loyalty, however, adds the sanction of loss of reputation to the legal sanction. Because the legal sanction is set at an inefficiently low level, the increase in sanctions provided by the social norm is necessary if the total sanctions for breach of the duty of loyalty are to approximate an efficient level. In the case of the duty of care, the present posture of the law is essentially to support the social norm of care with a legal standard of conduct that is unaccompanied by an enforcement strategy. In the case of the duty of loyalty, the legal rules are accompanied by an enforcement strategy. Thus the legal rules in this area achieve their ends partly by regulation and partly by the support they give to social norms. The latter, expressive function of the legal rules in the loyalty area is analogous to the expressive function provided by many other legal rules. However, the expressive function of the legal rules of loyalty has a special cast, because those rules not only support the norm but make it operational and meaningful through concretization. In this connection, McAdams draws a useful distinction between general norms, like “friends should be loyal,” and concrete norms, like the obligations “to listen attentively to a friend’s troubles, to water her plants when she is away, to drive her home when she is intoxicated, and so on.”50 “Narrow, concrete norms,” he points out, “often define the meaning of a specific behavior by defining that behavior as complying with or violating an internalized abstract norm. Thus, an antilittering norm may work because a consensus arises that littering violates the internalized norm to be a ‘good neighbor.’”51 An important kind of case to which the distinction between general and concrete norms is relevant consists of norms about how particular social roles should be played: One social role many in our society internalize is that of “parent”; many feel guilt if they believe they fail to be a “good” mother or father. Like most abstract norms, the vagueness of these obligations makes them easily internalized but provides little concrete behavioral guidance. Yet concrete . . . norms give many meanings to this obligation: in some communities, the consensus dictates that a “good parent” reads to his or her children, teaches them table manners, takes them to church, and provides them with a “safe environment.”52 Similarly, a general duty of loyalty is one thing; a web of specific duties that particularize that general duty is another. Few if any philosophers specialize in delineating the meaning of loyalty in the corporate context. Rather, it is the courts that have made the general principle of loyalty fully meaningful by spinning out the principle, through reasoned elaboration, into specific rules governing such matters as the fairness of self-interested transactions, disclosure, corporate opportunities, the use of corporate assets, and so forth. Once these rules have been developed, they serve to support the social norm of loyalty in a variety of ways -- for example, by giving clarity to the norm, by providing a focal point around which overlapping norms can cohere, and so forth. These messages, in turn, are amplified by corporate codes of conduct, in which the specific rules of loyalty are spelled out, and by stories in the business media that discuss particular transgressions. Thus in the loyalty area, the specific rules that courts develop simultaneously regulate the conduct of corporate actors and are transmuted into social norms concerning the conduct of corporate actors. The role of the law in developing specific social norms in the loyalty area is important in itself. It also bears on the role of shareholder suits. For at least fifty years, shareholder suits have come under criticism based on cost-benefit analyses that purport to show that the financial benefits of such suits are on average less than their costs.53 Most or all of these studies are technically flawed,54 but I put that to one side. The most basic problem with these studies is that in calculating benefits they count only direct financial benefits. This approach ignores two of the most important benefits of shareholder suits. The first, and most obvious, is their deterrent effect. The second, and even more important, benefit is that it is through shareholder suits that the specific legal rules of the duty of loyalty have been shaped. Those legal rules, in turn, have given specific meaning not only to the legal duty of loyalty, but to the social norm of loyalty. The social norm, in turn, provides an extremely effective and low-cost way to achieve loyalty. Thus shareholder suits, whatever their short-term purpose and result, have the long-term result of creating an extremely valuable public good. The desirability of such suits cannot be measured without counting the value of that good. B. Corporate Governance I now turn to issues of corporate governance, first at the management level and then at the ownership level. In each of these areas there has been a relatively sudden shift in the governing norms: in the former area, from a managing board to a monitoring board; in the latter, from passivity to activity on the part of institutional shareholders. Each of these shifts in norms resulted in significant part from a change in the beliefsystems of the relevant corporate actors, and each illustrates the manner in which norms can shift relatively suddenly once a tipping-point is reached. 1. The Monitoring Board. Until about twenty years ago, the dominant model of the board was that the board was responsible for managing the business of the corporation.55 This model was hopelessly unrealistic, because part-time directors cannot manage the business of, or even set business policy for, a complex enterprise.56 Today, the managerial model of the board has been supplanted by a monitoring model. The monitoring model recognizes that the business of a publicly held corporation is managed by its full-time executives. Under the monitoring model, therefore, the primary functions of the board of a publicly held corporation are, not to manage the business of the corporation, but to select, regularly evaluate, fix the compensation of, and, where appropriate, replace the senior executives, and to monitor the conduct of the corporation’s business to evaluate whether the business is being properly managed.57 This functional component of the monitoring model is complemented by a structural component. If the board has the function of monitoring the senior executives, it must be structured to effectuate that function. Effectuating that function requires that the board consist of at least a majority of directors who are independent of the senior executives, and that the board have audit, nominating, and compensation committees composed exclusively of such independent directors.58 I will refer to boards that have this structure and perform the monitoring function as monitoring boards. Today, the monitoring model of the board has been almost universally accepted and adopted in large publicly held corporations. Ultimately, the acceptance and adoption of the monitoring model of the board rests on its perceived economic advantage in providing an additional system to monitor the efficiency of management -- in particular, of the CEO. The monitoring board, taken alone, is an imperfect mechanism to achieve that end, but because all systems to monitor the efficiency of the management of publicly held corporations are imperfect, it is important to construct a web of overlapping and even redundant monitoring systems. The monitoring board is one important part of that web. However, the monitoring model would have made as much economic sense twenty years ago as it does now. The significant question then is not why the monitoring model has been widely accepted and adopted, but why has it only recently been widely accepted and adopted -- that is, why a social norm that is efficient now, and would have been efficient then, wasn’t adopted then? As in the case of the duty of care, the answer in large part is that there was a shift in the belief-systems of the relevant actors. The business community, the investment community, the bar, and the bench came to believe that the monitoring model was important, and acted accordingly. To begin with, the business community accepted the monitoring model. Thirty years ago, many prestigious corporations had few or even no independent directors, and the audit and especially the nominating committee were still in early days. Now, the situation has completely turned around. The business community’s widespread acceptance of the model is evidenced not only by actual practice, but by that community’s statements on best practice. For example, The Business Roundtable, which consists of the CEOs of 200 American corporations, including most of the largest corporations, has issued several statements on corporate governance, each of which has included a strong endorsement of the monitoring model.59 At this point, the monitoring model is not only endorsed by the business community, but virtually taken for granted. Similarly, the investment community came to believe in the economic value of monitoring boards, and began to put pressure on corporations that did not adopt it. Boards that do not adopt the monitoring model are subjected to severe criticism by institutional investors, and are publicly derided in forums like Business Week’s annual list of the twenty-five worst boards, CalPers’s annual list of underperforming companies, and a list of turkeys issued by the Council of Institutional Investors. The corporate bar also came to believe in the efficiency of the monitoring board, and transmitted that belief to the business community, partly through the ALI’s Principles of Corporate Governance60 and the ABA’s Corporate Director’s Guidebook.61 Finally, decisions of the Delaware courts over the last fifteen or twenty years provided an incentive for adopting the monitoring model, by making clear that in duty-ofcare, duty-of-loyalty, and takeover cases very heavy weight would be put on process considerations, and that the structure of the board, and the way that structure found expression in the particular case, was a very important process consideration. Indeed, many of the Delaware cases in the last fifteen or twenty years concerning the duty of care, the duty of loyalty, and takeover bids can be viewed in significant part as corporategovernance cases. It could be argued that this legal stimulus, rather than a change in belief-systems, caused the change in board norms. Certainly the regulatory aspects of these cases contributed to the adoption of the new norm, but it is not a full explanation. The criticism that institutional investors and the media level at corporations that have not adopted the monitoring model is not based on liability concerns. The promotion of the monitoring model by the Business Roundtable, the ABA, and the ALI is not based on liability concerns. Furthermore, an explanation of the new norm based solely on the regulatory effect of Delaware decisions would fail to explain what led the Delaware courts to reach these decisions. Judicial decisions don’t drop from clouds. They are, to a significant extent, the product of the same belief-systems that motivate private actors. What then caused the shift in belief-systems concerning board function and structure? One possible reason is simply that the relevant communities were persuaded by a new idea. Not too long ago, the dominant concept was that the board had the function of directing the business of the corporation, not of monitoring management. The new monitoring idea may have been taken up partly because it struck the business community, the investment community, the bar, and the courts as markedly better than the old idea. Another possibility is that the information concerning managerial efficiency that was transmitted by the spread between takeover-bid prices and market prices affected not only belief-systems concerning the individual director’s duty of care, but also beliefsystems concerning the functions and structure of the board. It might be objected that acceptance of the monitoring model did not result from a change in belief-systems, but from new efficiency considerations. However, such an objection would be hard to sustain. One possible story would be that until twenty years ago all managements were highly efficient, and a monitoring board was therefore unnecessary. Then, managers became inefficient and monitoring a board became necessary. This story seems highly unlikely. Another possible story would be that the institution of takeovers, coupled perhaps with an upsurge in foreign competition, required corporations to be managed more efficiently than they had been before. But that wouldn’t be a story showing that the monitoring board wasn’t needed twenty years ago. Instead, it would be a story that inefficiencies that were tolerated up to twenty years ago were no longer going to be tolerated. That story would leave us where we started from: A mechanism that is efficient now, and would have been equally efficient then, wasn’t adopted then. An important implication of this history is that it suggests that the governance structures in place at any given time are not necessarily the most efficient structures. This suggestion is in line with recent work by Mark Roe,63 Michael Klausner,64 Marcel Kahan,65 Jody Kraus,66 and others on elements such as path dependence, network externalities, and the theory of cultural evolution. However, the problem does not reflect only those elements. Board structure involves a significant conflict of interest, because a CEO will normally prefer not to be monitored. It took a certain amount of weight on the other side of the scale to overcome this conflict-of-interest preference. This weight needed to build up until it reached a tipping point, through the accumulation of changes in belief-structures and outside pressures that were themselves based on those changes. Once the tipping point was reached, the result was a relatively sudden widespread acceptance and adoption of the new norm. The monitoring-board model is an obligational norm, in that publicly held corporations that deviate from the model are subject to criticism. It is, however, an unusual kind of obligational norm. On its face, it seems to apply to institutions, rather than to individuals. Furthermore, most obligational norms involve interactions between actors. In contrast, on its face the obligation of the monitoring-board norm seems to concern only how the corporation should organize itself, rather than how it should interact with other actors. Federal Reserve Flow of Funds Accounts as reported by the New York Stock Exchange in its booklet Shareownership, partly because my major interest here is in historical changes, and even assuming that there are somewhat more accurate measures than the Flow of Funds Accounts (which is not at all certain), that data is presumably internally consistent in its methodology from year to year, so that the rate of change should be reliable even if the percentages reported for each year are slightly too high or too low. According to this data, institutions held approximately 50% of all corporate stock in 1987, around the time when the norm began to shift, and this figure has stayed fairly constant. But in 1974, almost 25 years earlier, institutions held only 20% less of all corporate stock -- 41% rather than 50%. And as far back as 1969, institutions held 31% of corporate stock. Moreover, these figures understate the amount of publicly held stock held by institutions, because they represent the percentage of all stock so held, not merely publicly held stock. The New York Stock Exchange estimates that this understatement is around 10%. Making that adjustment in the data, institutions held around 46% of publicly held stock as far back as 1974, which corresponds with an estimate made by the New York Stock Exchange that in that year institutions held 45% of stock listed on that Exchange. To fully explain the shift in the norm, therefore, two other factors must be added to the mix. The first -- once again-- is the rise of the takeover institution. In the face of tender offers at prices well above the market value of portfolio stocks, institutional investors who had always sided with management often found themselves opposing management. Once the passivity norm was breached in this way, it became easier to breach it in other ways. The second factor was a change in the demography of institutional investors, consisting of the dramatic rise in the relative percentage of institutional shareholdings held by public-pension funds. The passivity norm reflected both the conflicts of interests of institutional investors and the cultural attitudes of their managers. Although the public-pension funds are not completely free of conflict-of-interest problems, their conflicts of interest with managers are much less severe than the conflicts of most other institutional investors, and their cultural outlooks are not the same as managers of private entities. As a result, the public-pension funds are able to get out in front on wealthenhancing issues. Managers of more conflicted institutional investors, who might be uncomfortable getting out in front, often feel less discomfort in following behind. Thus the leadership of public-pension funds sparked what Jeff Gordon has aptly called the latent activism of other institutional investors.73 At the same time, the expressive effect of the DOL’s letters and interpretive bulletins, even in the absence of a vigorous enforcement apparatus, made the passivity norm hard to justify. Managers of many institutional investors also became persuaded that at least some actions at the shareholder level, such as the elimination of poison pills or the rejection of poorly designed mergers, could add value to portfolios. The combined weight of liability and economic changes, on the one hand, and changes in beliefstructures resulting partly from changes in demography, built to a tipping-point that moved institutional investors relatively quickly from the passivity norm to the activity norm VI. Takeover Bids Until the mid-1970s, hostile takeover bids were not of overarching significance. After that time, the institution of hostile takeover bids exploded and, in tandem with increased foreign competition and drastic changes in information technology, significantly altered the manner in which American businesses were managed. What caused the change? Hostile takeovers were far from unknown before the mid-1970s. Indeed, by that time they were regulated on the federal level by the Williams Act, which had been adopted in 1968. However, prior to the mid-1970s the social norms of the members of the business, financial, and legal establishment were strongly opposed to hostile takeovers. In general, establishment corporations would not make hostile tender offers, establishment investment bankers would not assist in hostile tender offers, establishment commercial banks would not finance hostile takeovers, and establishment law firms would not represent hostile bidders. Accordingly, until the mid-1970s hostile takeovers were normally engaged in and aided by non-establishment players, such as law firms consisting of lawyers whom establishment law firms had either cast off or would not hire because of religious discrimination. The norms of the establishment were not economically justified. Hostile takeovers could increase the wealth of shareholders, investment banks, commercial banks, and lawyers. The threat of hostile takeovers could increase the efficiency of those firms that were not targets but that were afraid they might be. There was, however, one prominent group whose wealth or at least whose position would be decreased by hostile takeovers: corporate managers. Accordingly, it was in the self-interest of corporate managers to view hostile takeovers as something that was not done, and establishment investment banks, commercial banks, and law firms adhered to the norm -- partly because they were concerned with loss of corporate business if they were perceived as norm-violators, and partly because, as members of the establishment, they internalized the norm. The equilibrium was changed, and the norm was shifted, by several linked events in the mid-1970s. In 1973, United Technologies wanted to acquire ESB, a battery company (formerly known as Electric Storage Battery) whose technologies were compatible with those of United. ESB turned United away, and United, following the then-prevailing norm, did not attempt to make a hostile bid. In 1974, however, International Nickel (Inco) did make a hostile bid for ESB. International Nickel was a member of the corporate establishment, but not completely -- it was a Canadian corporation.75 More important, a premier establishment investment bank, , decided to break ranks and assist Inco’s hostile bid. The story is told by  in his book, The House of Morgan. [In the early 1970s, corporate] restructuring was still curbed by Wall Street etiquette, which frowned on unsolicited takeovers. Afraid of conflicts with clients,  had a rule against hostile takeovers. In 1970, it nearly engaged in its first hostile bid when Warner-Lambert decided to take over part of Eversharp’s shaving business, in that case, the mere threat of a hostile takeover made the target submit. So Morgan Stanley’s taboobreaking hostile raid was postponed until 1974, when International Nickel (Inco) pursued the Philadelphia-based ESB, formerly called Electric Storage Battery. . . .[T]he auspices [of the bid] shocked Wall Street, for Inco was a conservative, blue-chip firm and Morgan Stanley was the official custodian of the Gentleman Banker’s Code.76 * * * The nearly forty Morgan Stanley partners . . . debated whether to spurn Inco or defy a code that had governed the world of high finance for almost 150 years. . . . . . . The argument of inevitability was probably the decisive one. As one partner recalls, “The debate was, if we don’t do what our clients want, somebody else will.” . . . .  [ chairman] figured out how to twist the desecration of tradition into seeming veneration: in obliging Inco, the firm would simply be honoring an old  tradition of serving faithful clients. But Petito had enough qualms about what they were doing to cast the upcoming Inco raid as an exception. A compromise was forged: the bank, in future, would engineer hostile raids only for existing clients and would fully warn them of unpleasant consequences. This, of course, didn’t rule out much business. Morgan Stanley’s large clients were just the sort that would now want to conduct raids, and they would know all about the unpleasant consequences. The compromise mostly reassured the firm’s clients that it wouldn’t be coming after them. The qualifications that Baldwin put on Stanley Morgan’s willingness to assist in tender offers serve to underline the extent to which Morgan Stanley realized that it was transgressing the social norm. So does the ensuing situation with Morgan’s traditional law firm, , as reported in book, The House of Morgan: At this juncture, Morgan Stanley made another unorthodox decision. . . . [T]he firm had long relied on the white-glove law firm of Davis, Polk, and Wardwell, which had looked on takeover work as vulgar and avoided it. With Morgan Stanley partners terrified of lawsuits onsuing from takeover work, they now wanted a tough, seasoned specialist. . . . [and hired] the experienced . . [ had] pioneered in hostile takeovers in the 1950's, when Skadden, Arps was still a humble, four-man operation. For twenty years, he thrived on the scraps from law firms that were too haughty or too dignified to conduct hostile raids. . . . When  was made a special counsel to Morgan Stanley, there were stormy scenes with  partners, who were deeply offended by the decision. Whatever its other consequences, the trend in hostile takeovers democratized the New York legal world and provided an opening in Wall Street for Jewish lawyers.77 Stanley flipped, the norm crumbled.78 Once Morgan Stanley sanctioned hostile takeovers, competitors jumped in. A year later, of First Boston paired up and to launch a separate M & A operation. In 1974, $100 million was still considered a big deal. By 1978, over eighty deals exceeded that amount, with a $500- to $600-million range already commonplace. . . . Established corporations -- including United Technologies, in 1975 -- launched hostile takeovers. Similarly, establishment corporations and establishment banks began financing hostile bidders, and establishment law firms began representing hostile commercial bidders. In one important respect, the takeover story is somewhat different than some of the stories considered up to now. In the cases of directorial care, the structure of the board, and the role of institutional shareholders, the old, inefficient norm was descriptive, and gained its power through its licensing or insulating effect. In the takeover case, however, the old, pre-takeover norm was not merely descriptive, but obligational: making or assisting in takeovers wasn’t done -- at least, not by those who conceived of themselves as blue-chip players. In other respects, however, the takeover story resembles those other cases, by illustrating both the highly significant role of social norms in corporate law, and the way in which social norms may be bad or inefficient as well as good or efficient. VII. Conclusion The role of social norms is pervasive in the law generally, and in corporate law in particular. In some cases, social norms increase efficiency. This has traditionally been true in the loyalty area, where the efficiency of social norms in achieving loyalty far exceeds the efficiency of liability rules or monitoring and bonding systems. Today, at least, this is also true in the other areas considered in this paper -- care, board structure, the role of institutional investors, and takeovers. As recently as twenty or thirty years ago, however, the social norms in those areas promoted inefficiency. Indeed, one valuable lesson that can be learned from studying the role of social norms in corporate law is to reinforce the point, made by the recent literature on the corporation from somewhat different perspectives,79 that notwithstanding modern arguments of social Darwinianism,80 the structure of corporate institutions at any one time is not necessarily the most efficient structure. At least three other important lessons can be learned from studying the role of social norms in corporate law. First, it isn’t possible to understand the field of corporate law without understanding the role of social norms in that field. Second, to fully evaluate the effect of legal rules and legal institutions in the field of corporate law, account must be taken of their impact on the formation and effect of social norms in that area. Third, the classic distinction between private action and collective action is too simplistic. Under this distinction, the term collective action is more or less a synonym for official rules of conduct backed by coercive sanctions. Social norms, however, are also a form of collective action, which often take the form of private collective rules backed by coercive sanctions. From this perspective, the operation of social norms in corporate law may be viewed as a kind of “soft” regulation.

Corporate Law, Social Norms and Belief

Corporate Law, Social Norms and Belief Systems Abstract Introduction Corporate law serves both to facilitate and to regulate the co...