Toward a Nexus of Virtue

Table of ContentsI. Introduction 4II. Virtue Ethics 8III. Virtue and the Limits of Law 18A. The Inadequacy of Regulatory Solutions 19B. Can Law Make Men Moral? 22IV. Corporations and Virtue 29A. The Corporation as a Nexus of Contracts 30B. Corporate Constituencies and Virtue 32C. Virtue and Corporate Law-A Diagnosis 43D. Virtue and Corporate Law-A Prescription 561. Expansion of the Business Judgment Rule 562. The Shareholder Primacy Norm Revisited 653. Importance of Corporate Culture 684. A Product of Society at Large 775. Structural Remedies 80V. Conclusion 82I. IntroductionCould virtue have prevented the financial crisis? Possibly.Although the predominant narrative has characterized the crisis as one of inadequate financial regulation1 (rebutted by an opposite diagnosis, which lays the blame essentially on too much regulation2), sustained attention has not been focused upon the critical roles that virtue and character (or, more aptly, the lack thereof) have played.3 Instead of framing the crisis as essentially a matter of improperly structured economic incentives, one could easily frame the crisis as largely the result of rampant nonfeasance4 and malfeasance.5 Such a framing would suggest a different set of responses due to recognition that virtuous dispositions would have countered such ethical shortcomings. (Among the many virtues implicated here would be justice, courage, and truthfulness,6 in addition to the virtue of simply doing one's duty.7) In short, and with apologies to the National Rifle Association, regulation (inadequate or otherwise) didn't kill the economy-people killed the economy.8Given the predominant narrative, it comes as no surprise that the policy prescriptions that have followed the most recent financial crises (such as the Sarbanes-Oxley Act9 in 2002 and the Dodd-Frank Act10 in 2010) focus on regulation and not people. Put differently, these prescriptions do not attempt to lead market participants to better behavior via an improvement of character- they simply require better behavior.11 As shall be discussed, it is far from clear that the imposition of mandatory rules and regulations can foster the development of virtue and bring about the kind of improvement in character that is so critically needed to forestall the next financial crisis.12 Indeed, one could fairly say that by failing to consider virtue as a part of the solution, both Sarbanes-Oxley and Dodd-Frank largely rely on the very same principles and types of solutions that "took the economy to the brink of collapse."13 As one article put it, we need remedies "different from those designed to prevent the greedy, the power obsessed, or the completely self-interested from breaking the law or acting unethically."14Finally, and particularly disturbing, an examination of the past crises suggests that the problem facing corporate America rims deeper than simply bad people doing bad things-it seems to extend to good people doing bad things as well.15 This opens the possibility that existing law and regulation not only fail to promote virtue but may actually be working to undermine it.16This Article argues that policymakers should take into account character and virtue more seriously than they do currently. It suggests further that a good place to start would be the field of corporate law.In so doing-by focusing on character and virtue, instead of economics, rules, and regulations-this Article proffers a "virtueethics" approach to corporate governance. For unlike more common ethical systems, which are ordinarily utilitarian or duty-based, virtue ethics stresses the role of character and individual morality.17In the pages that follow, I shall make the case for applying virtue ethics to corporate law. Part II of this Article will provide a background and summary of virtue-ethics philosophy. …