Managing Corporate Social Responsibility in a Changing Legal Environment

MANAGING CORPORATE SOCIAL RESPONSIBILITY I N A CHANGING LEGAL ENVIRONMENT

*DAVID SILVERSTEIN

INTRODUCTION “Fear of litigation is shaking America’s business structure,” begins

a recent issue of an executive advisory publication.’ Indeed, during the past several years, two major American businesses, Johns-Manville Sales CorporationZ and A.H. Robins Corporation? have been driven into bankruptcy proceedings by an avalanche of law suits. Many other firms

* Associate Professor, Business Law, Suffolk University. RESEARCH INSTITUTE RECOMMENDATIONS (June 14,1985) a t 1. See generaUy Note, The Asbestos Bankruptcy: Johns-Manvilb’s Petition for Reorganiza-

tion Under Chapter 11 of the Bankruptcy Code-A Good Faith Filing m aSham?, 19 SUFFOLK U. L. REV. 55 (19851; and, Lempert, Business May be IllSe+-ved by Gladiators, 8 LEG. TIMES 2, a t col.1 (Aug. 26, 1985).

Seegenerally Couric, The A.H. Robins Saga, 72 A.B.A.J. 56 (19851; Youdelman, Strategic Bankruptcies: Class Actions, Classification and the DaWcon Shield Cases, 7 CARDOZO L. REV. 817 (1986); and, M. MINTZ, AT ANY COST: CORPORATE GREED, WOMEN, AND THE DALKON SHIELD (1985). In what is certain to stand as a unique monument to the thousands of women who suffered miscarriages, sterility and death from using Robins’ intrauterine contracep- tive devices, US. District Judge Miles W. Lord publicly lambasted three senior Robins’ executives for their greed and irresponsibility in putting profits ahead of human life. Judge Lord observed in part:

You have taken the bottom line as your guiding beacon and the low road as your route. That is corporate irresponsibility at its meanest. Rehabilitation involves an admission of guilt, a certain contrition, an acknowledgement of wrongdoing, and a resolution to take a new course toward a better life. I find none of this in you or your corporation.

See Lord, T k Dallwn Shield Litigation: Rmrised, Annotated Reprimand by Chief Judge Miles W. Lord, 9 HAMLIN L. REV. 7 (19%). See also Ranii, A Judge’s Public Battles, 6 Nat’l L.J., July 23, 1984, 1, a t col. 3. and Judge Blasts Dalkon Maker, 6 Nat’l L.J., Mar. 19, 1984, 3, a t col. 1.

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are battling for survival amidst damages claims totaling billions of dollars. These include products liability actions by consumer^,^ pollution and toxic waste disposal actions by individuals and local communities,j and hazardous workplace and employment discrimination claims by employees.6

Specific examples of the litigation crisis abound. In recent years, business journals, trade publications and newspapers have carried front page stories about each of the following diverse legal attacks on established American business:

American tobacco companies a re besieged by lawsuits brought on behalf of cigarette smokers or their families seeking millions of dollars in damages for the illnesses and deaths which they assert were caused by smoking.? So far, tobacco companies have won every case,’ but

Cigarettes

‘ See, e.g.. Product Liability: TheNew Morass, N.Y. Times, Mar. 10,1985, § 3, at 1; and Product Liability: A Cori.t%nuin,g Process (if Change, 68 A.B.A.J. 576 (1982).

LIABILITY AND LITIGATION (1987): Angelo & Bergeson, The Expanding Scope o.fLiahilityfhr Environmental Damage and i t s Impact on Business Transactions, 81 CORP. L. REV. 101 (1985); Coodley, Risk in the 1980’s: N e w Perspeclioes on Munuging Chemiral Hazards, 21 S A N DIEGO L. REV. 1015 (1984); Note, Liability ofparent Cor;oorations forHazarduu.s Wmtc Cleanup and Damages, 99 HARV. L. REV. 986 (1986); Note, Belly Up Down in the Dumps: Bankruptcy and Hazardous Waste Cleanup, 38 VAND. L. REV. 1037 (1985); Bruno, The D w e l o p m t of. Strict Liability Cause ofilction for Personal Injuries Resulting f rom Hazurd- OZLS Wastes, 16 NEW ENG. L. REV. 543 (1980-81); Stanley, Establishing Liability for thP I)ornt~ges f rom Hazardous Wastes: An Alternative Route jkr Love Canal Plaintijjfi, 31 CATH. U.L. REV. 273 (1982); and, Trauberman, Compensating Victims OfToxic Substances, 5 HAW. ENVTL. L. REV. 1 (1981).

See, e .g . , Note, Occupational Health Risks and the Worker’s Right to Know, 90 YALE L.J. 1792 (1981); Righi to Know Legislation: Labor vs. Business, Boston Globe, Ju ly 19,1983, a t 48; and Silkwood v. Kerr McGee Corp., 464 U S . 238, 78 L. Ed. 2d 443 (1983). See also, H.H. PERRITT, JR., EMPLOYEE DISMISSAL LAW A N D PRACTICE (1985).

-Can i t Kick th,e Smoking Habit?, 19 AKRON L. REV. 269 (1985). Employers have also been subjected to lawsuits by disgruntled non smoking employees asserting the right to a smoke- free work environment. See Walsh and Wool, Nonsmokers’Rights: Shifmp v. Neu, Jersey Bell Telephone, 26 WASH. U. J. URR. & Cox TEMP. L. 211 (1984); and, Note, Nonsmokers’Rights: The Employer’s D i h ~ m c r , 28 ST. LOUIS U.L.J. 993 (1984).

’ See. e.g., Note, F‘hintifis’ Conduct as a Defense to Cla,ims Against Cignrette Illnnuju,c- furers, 99 HARV. L. REV. 909 (1986); Reskin, Cigarettes A,ren’t Urweasonubly Dangerous: Roysdon 7;. R.J. Reynolds Tobacco Co., 72 A.B.A.J. 92 (1986); and, Campion, Third Circuit Keuerses Key Tobacco Ruling, 117 N.J.L.J. 3 (1986). The latter Third Circuit decision i n the case of Cipollone v. Ligett Group, Inc., 789 F.2d 181,187 (3rd Cir. 1986). cert. d m . , 107 Sup. Ct. 907 (1987). overruled a key district court holding that the federally-mandated warnings which appear on cigarette packages and advertising do not protect tobacco companies by preempting state negligence law. Plaintiffs’ lawyers regarded this appeals court ruling as a major setback in their efforts to hold tobacco companies legally liable because the Cipollon*? case was touted as both strong on the facts and well prepared for trial. See Cigarette-Pack Warnings Protect Fimru in Liability Suits. Appeals Court Rules, Wall St. J., Apr. 10, 1986, a t 2, col 3.

‘I See, C.Q., S.M. COOKE, THE LAW OF HAZARDOUS WASTE: MANAGEMENT, CLEANIJP,

See generally Kepko, Products Liah.

1987 I Managing Corporde Social Responsibility I 525

the number of these suits continues to mu~hroorn .~ Three former managers, including the president,

of a now-defunct Illinois chemical plant, were sentenced to 25-year prison terms af ter being convicted of homocide in connection with the death of an employee who inhaled a lethal dose of toxic fumes while working in the plant.1°

Corporations are finding it difficult to retain outside directors on their boards because directors and officers liability coverage has become either unavailable or prohibitively costly." Firms have become desperate enough to ask their shareholders to approve resolutions limiting directors' personal liability in future shareholders' derivative actions as an alternative to insurance."

Bars, package goods stores, and restaurants are being sued with increasing frequency by patrons, as well a s by injured third parties, when motor vehicle accidents a re linked to alcohol consumption.'s

In a recent Maryland Court of Appeals decision that stunned even veteran observers, a handgun manufacturer was held legally liable to a shooting victim for selling a so-called "Saturday night special" that subsequently was used during a robbery attempt.14

Workplace Safety

Outside Directors

Alcohol

Handguns

See Tobacco F i r 7 ~ Defend Smoker Liability Suits with H e w y Artillery, Wall St. J., Apr. 29,1987, at 1; and, R J R Nohisco Might E,ncounterBig Obstacles i f it Seeks to Repackage its Tobmeo Business, Wall St. J., Mar. 2, 1987, at 45.

lo See Boston Globe, July 2.1985, at 3; and, id., June 15,1985, at 1. See.pwrally Bachrach, Application of the OSHA Hazard Communication S tmdard to the Manufacture of Drugs and Cosmetics, 41 FOOD DRUG & COSM. L.J. 215 (1986); and, Note, Employee Right to Know: Should the Federal Governmnt or the States Regulate the Dissemination of Hazardous Substance Information to Protect Employee Health and Sufety?, 19 SUFFOLK U.L. REV. 633 (1985 1.

" See, e.g., Wall St. J., July 10.1985, at 1; Rock, Will the Liability Crisis Undo the Board?, 10 DIRECTORS & BOARDS 2 (1986); Olson, The D & 0 Insurance Gap: Strategiesfor Coping, LEG. TIMES, Mar. 3,1986, at 25, col. 1; and, Block & Barton, Indenanificution and Insurance ofCorporate OfSicials, 13 SEC. REG. L.J. 239 (1985).

l2 See Van Horn, Directors Enjoy Liability Protection by Virtue of"Hold-Hczmkss"Ruk, 196 N.Y.L.J. 23 (1986); and, Richards, DelairiareSharehol~rs May Limit Directors'LiubiEity Under New Luw, 195 N.Y.L.J. 35 (1986).

l3 See generally Comment, Imposition ofliability on S o d Hosts in Drunk Driving Cases: A Judicial Response Mandated by Principles of Common Law and Common Sense, 69 MARQ. L. REV. 251 (1986); Tacium, Liquor and Liability: The Social Host, 15 MANITOBA L.J. 105 (1985); PRACTITIONERS HANDBOOK TO LIQUOR LIABILITY LITIGATION (R.S. Beitman ed. 19871; and, J.F. MOSHER, LIQUOR LIABILITY LAW (1987).

' I Kelley v. R.G. Industries, Inc., 304 Md. 124, 497 A.2d 1143 (Md. Ct. App. 19851, 44 A.L.R. 4th 563. See generally Dana, Tort Law: Handgun Manufacturer Lia.bility, 9 HAW. J.L. & PUB. POL. 764 (1986); Jett, Do Vic t i~ns ofL'nlau&l Handguy1 Violence Have a Remedy Against H a d g u n Manufacturers: An OvemGui and Analysis, 1985 U. ILL. L. REV. 967 (1985); and, Saturday Night Fever: Dad The Mmrylwnd Court of Appeals go too Far When it Held Ma.nufucturers Strictly Liable for the Criminal Use of Their Products?, Dorr & Burch, Yes: Dangerous Decision, 15 BRIEF 10 (1986), Siegel, No: Courageous Decision, id. at 11.

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Many business and political leaders claim that our legal system has lost touch with modern commercial realities and therefore should be changed.I5 A growing number of executives and management scholars, however, now perceive that business horizons must expand to encompass a wider array of social, moral and ethical concerns.16 Under the rubric of “corporate social responsibility,” or “social a s s e s ~ m e n t , ” ~ ~ numerous journal articles and entire business school courses are now devoted to refuting the popular gospel tha t “the business of business is to earn profits.”” Instead of too quickly making whipping boys of supposedly greedy and insensitive managers, or condemning an allegedly archaic legal system, we should consider the possibility that the real problem lies not so much on either side but rather in the center-specifically in a lack of understanding and the absence of workable channels of communication between our lawmakers and our managers. If America’s managers have misunderstood the nature of the American legal system and its historical interaction with our commercial system, they have also failed to timely recognize the signposts that might otherwise have alerted them to important future legal changes.

The imperative for managers t o better understand the changing legal environment of business and to anticipate the future direction of the business-government interface has never been greater. The barriers to achieving this understanding, however, are formidable. To anticipate and plan for changes in the business-government relationship requires three skills that few American managers have had the patience or the incentive to cultivate: (1) an understanding of how the business-government relationship has been altered historically in response to environmental forces; (2) a recognition of the environmental forces a t work today shaping the business-government interface of tomorrow: and, (3) a strategic planning

l5 See, e.y., Holmes, Executive Perception,s of Corporate Socia.l Responsibility, Bus. HORIZONS (1976): Malott. Let’s Restore Balance to Product Liability L a w , HAW. Bus. REV., May-June 1983, a t 67; and Product Safety: A New Hot Potato,for Congress, U.S. News & World Report, June 14, 1982, at 62.

l6 See, e.g., Gilrnore, A Framework for Responsible Business Behavior, 58 Bus. & SOC. REV. 31 (1986); Bernstein, Capitalism’s Elusive Constituency, B~Js. HORIZONS 2 (1986); Filios, Corporate Social Respon.sibility and Public Accountability, 3 J. Bus. ETHICS 305 (1984); Frederick, Corporate Social Responsibility in the Reagan E r a and Beyond, 25 CALIF. MGMT. REV. 145 (1983); Corporate Social Responsibility Symposium, 30 HASTINGS L.J. 1247- 1435 (1979); Hay & Gray, Social Rsspvrwibility of Business Managers, ACAD. MGMT. J. (1974); and, Krishnan, Business Philosophy and Executive Responsibility, ACAD. MGMT. J . (1973).

“ Id. See generally F.D. STURDIVANT, BUSINESS AND SOCIETY: A MANAGERIAL APPROACI~ a t chs. 2 & 3 (3d ed. 1985).

See note 16, supra. See also Davis, The Case for and Against Business Assumption of Social Responsibilities, ACAD. MGMT J. (1973).

1987 I Managing Corporate Social Responsibility 1 527

timeframe that is considerably longer than the short-term, quarterly bottom line approach to which many modern managers ~ubscr ibe . '~

This article argues that managing corporate social responsibility in a changing legal environment requires managers to engage in enlightened, long-range strategic forecasting with respect to legal environment issues. In part one, this article presents a classic case study of short-sighted mismanagement and suggests how a common management misperception about the nature of the legal system may have contributed to the problem. In part two, this article reviews the foundations of two traditional approaches to corporate social responsibility. The potential in some situations for conflicting management strategies under these models is then described. In the third part , this article examines how management forecasting of future legal regulation could help to bridge the gap between the traditional approaches. This article argues that by viewing the dominant environmental forces a t work in the marketplace today from a dynamic perspective, astute managers can make reliable predictions about the changing legal environment and thereby better position their firms to meet future legal challenges.

THE JOHNS-MANVILLE BANKRUPTCY AND THE MYTH OF STATIC LAW

The Asbestos Lawsuits

The Manville Bankruptcy

On August 26, 1982, Johns-Manville Sales Corporation (Manville), a multibillion dollar conglomerate, and its principal American and Canadian affiliates, voluntarily filed for reorganization under Chapter 11 of the Federal Bankruptcy Act.20 Manville's management cited the crushing financial burden of defending more than 15,000 lawsuits filed by former employees, or their next-of-kin, for injuries or death caused by exposure to asbestos while working for the company.21

Although the company had disposed of almost 1900 such claims in 1981 a t an average cost of $15,000, more recently costs had risen to almost $21,000 per claim, and approximately $40,000 if legal expenses were included. Moreover, new lawsuits were being filed a t the rate of 500 a month; a study forecast further that a t least 32,000 new asbestos lawsuits were likely in the future. James F. Beasley, Treasurer of Manville, predicted

See, e 9 , Hayes & Abernathy, Mnnagzng Our Way to Economic Drehnr, 4 HARV. Bus. REV. 67 (1980).

2o See note 2, supra. For a comprehensive summary of the facts of the Manvtlle case, see R. BUCHHOLZ, MANAGEMENT RESPONSES TO PULIC ISSUES 322-335 (1985). See also Boston Globe, Aug. 27.1982, at 19; and, Reisig, Thcili'an Who Took onManwlle, Amer. Law., Jan. 1983, at 65.

l' Id.

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that the total cost of the asbestos litigation over the next 20 years could range from $2 billion upwards.= The filing under Chapter 11 automatically suspended further proceedings in the pending lawsuits and temporarily halted the filing of new suits against Manville.

The Asbestos Hazard

There is still considerable medical and legal controversy over how much Manville’s management knew about the dangers of exposure to asbestos prior to a 1964 report by Dr. Irving J. Selikoff a t Mt. Sinai School of Medicine in New Y ~ r k . ~ ~ Selikoff‘s report later became accepted by most of the industry. But there is evidence that as early a s 1929, and certainly during the 1930’s, Manville’s management was aware of a potential health hazard associated with asbestos. Indeed, there is strong evidence that Sumner Simpson, president of Manville from 1929 until 1948, took steps to keep information about the danger of asbestos from Manville employees and the general

At the same time, in exposing its employees to asbestos without special protective measures, ManvilIe was not acting in violation of any existing federal or s ta te laws or reg~lat ions.’~ In fact, a t the time, no special safety standards had been promulgated with respect to asbestos exposure. Only in 1970 did Congress enact the Occupational Safety and Health Act (OSHA).”

I d . See also Asbestos Legal ‘Tidol Wuwe’ i s Closing In, 68 A.B.A.J. 397 (1982). ’’ See Selikoff e t al., The Occurrence ofnsbestosis A n w q Insulation Workers, 132 ANN.

N.P. ACAD. SC. 139 (1965). See also Boston Globe, Jan. 16, 1983 (Magazine), a t 9: and, .Asbestos: Who Knew What When?, Boston Globe, Oct. 26. 1982, a t 49.

Following Dr. Selikoffs study, Manville began to put a warning on its asbestos products that read:

Ca d o ? ? : This product contains asbestos fiber. Inhalation of asbestos in excessive quantities over long periods of time may be harmful. If dust is created when this product is handled, avoid breathing the dust. If adequate ventilation control is not possible, wear respirators approved by the U S . Bureau of Mines for pneumoconosis-producing dust.

But in Bore1 v. Fiberboard Paper Prods. Corp., 493 F.2d 1076 (6th Cir. 19731, the 1J.S. Court of Appeals held that this notice was legally insufficient to warn workers of the dangers of exposure to asbestos. Beginning on July 1, 1976, the Occupational Safety and Health Administration (OSHA) required the use of the following warning label: “Caution: Con- tains asbestos fibers. Avoid creating dust. Breathing asbestos dust may cause serious bodily harm.” See OCCUPATIONAL SAFETY AND HEALTH ADMINISTRATION, U.S. DEP‘T OF LABOR, ASBESTOS: WORKER HE:AI,TH ALERT, No. 3069 at 5 (1980).

c4 Id . ’’ Id. See also B. CASTLEMAN, ASBESTOS: M R n I C A I , A N D LEGAL ASPECTS (2d ed. 1987). 56 See, e .9 . . Anderson & Buchholz, Regulation of Worker Sa&y Through Stn,ndard-setting:

&fJectiveness. Ins$Lts. and Altrmmtiiies, LAB. L.J., Oct. 1986, at 731; and Note, Occui)trlio.rr~,nl H d t h Risks and lhe Worker’s Right to Know, 90 YALE L.J. 1792 (1981).

1987 I Managing Corporate Social Responsibility I 529

The Impact of the Wilson Case

Manville’s management may well have regarded July 30, 1982 as a critical turning point in Manville’s defense of the asbestos litigations. On that date, less than a month before Manville filed for reorganization under Chapter 11, the United States Court of Appeals for the District of Columbia Circuit ruled against Manville on a key legal issue.

In the case of Wilson 8. Johns-Munville Sales C0rporution,2~ the Federal Court of Appeals reversed an order by the District Court dismissing a survival and wrongful death action brought by Henry Wilson’s widow on the grounds that the suit was not timely filed. In so doing, the Court of Appeals adopted the so-called “discovery” rule under which a “cause of action accrues when the plaintiff knows or through the exercise of due diligence should have known of the injury.”28 Although the Wilson court was not the first to depart from the traditional tort doctrine that “the cause of action accrues a t the time of invasion of [plaintiff‘s] body,” this decision squarely confirmed a growing trend in American jurisprudence “away from traditional . . . rules that operate harshly or are not suited to changed conditions.””

How is i t possible, Manville’s management might well have asked, to do business in a rational manner when, more than forty years after a situation arises, the legal rules governing that situation are abruptly altered? In this case, Henry J. Wilson, beginning in 1941, was employed by Manville as an insulation worker a t various construction sites in the metropolitan

684 F.2d 111 (D.C. Cir. 1982). Id. a t 115-16. See generally Covello, U’ilson v. Johns-Manville Sales COT. and Statutes

of Limitations in Latent I n ~ q Litigation,: An Equita,ble Expansion ofthe Discovery Rule, 32 CATH. U.L. REV. 471 (1983); and, Note, Statutes ofLimitations irL Occuputionul Disease Cases: Is Locke v. Johns-Murridle a Via,hle Alternative to the Discovery Rub? , 39 WASH. & LEE L. REV. 263 (1982).

TJ Wilson v. Johns-Manville Sales Corp., id. a t 115-16. Two important changes in legal precedent se t the stage for the Wilson decision. In the case of Borel v. Fiberboard Paper Prods. Corp., 493 F.2d 1076 (5th Cir. 1973), the Court of Appeals ruled that injured asbestos workers could sue asbestos suppliers in tor t actions. Prior to Borel, workers had been limited to pursuing wrongful injury claims through state worker compensation systems where awards were generally much lower. Then, in Beshada v. Johns-Manville Prods. Corp., 90 N.J. 191,447 A.2d 539 (Sup. Ct. N.J. 1982), the New Jersey Supreme Court ex- tended strict liability principles to the asbestos cases. The court in Beshadaheld that proof of intentional or knowing negligence or irresponsible conduct on the part of Manville was n,ot a prerequisite to plaintiffs recovery. Instead, it held that Manville could be IegaIly liable for asbestos injury even ifit were able to establish that scientific knowledge about asbestos hazards was not sufficiently conclusive prior to the 1960’s to require manufacturers to warn workers. See, e. y., Note, Reyuifring Omniscience: The h t y to W a r n ofScien- tifieally Undiscoverable Product Defects, 71 GEO. L.J. 1635 (1983). Thus, the Borel, Beshada and Wilson decisions stripped Manville of its three principal defenses to these lawsuits.

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Washington, D.C. area. As a regular and integral part of his employment, Wilson handled asbestos. On February 14, 1973, x-rays revealed that Wilson was suffering from a mild case of asbestosis, a noncancerous irrita- tion of the lungs caused by inhalation of asbestos dust. Although Wilson’s health rapidly deteriorated from this point on, not until February of 1978 was Wilson diagnosed as having mesothelioma, a rare form of cancer associated almost exclusively with exposure to particulate asbestos. Henry Wilson died on May 17, 1978.

The Myth That Law i s Static

Whether i t is proper to impose liability in a case like Johns-ManviLle raises sensitive questions which go to the heart of the delicate balance between business and society in a market economy. Unfortunately, the answers to these questions are generally misunderstood by a large seg- ment of American managers who seem t o regard this case as an anomaly. They see Manville as a victim t o be pitied rather than a s an example to be heeded. The Manville experience, however, contains important lessons about managing corporate social responsibility.

The primary lesson of the ManvilLe case is that , a t least in the United States, law is both dynamic and one of the principal linkages between business and society. Unless some type of “preemptive” action is taken by business managers out of enlightened self-interest, important issues of corporate social responsibility will, sooner or later, be translated into demands by society on the legal Initially the legal system may reject societal demands which markedly depart from established legal doctrines; but, eventually, as the demands multiply, the system is likely to respond either through the promulgation of new legislation or by action of the courts, or both.31

” See Bredemeier. h 7 i 1 as an, In , tegmtiw Mech,anism, in LAW ANr) Sncmocu 73 (W.M. Evan ed. 1962). Bredemeier calls the filing of a law suit a ”signal . . . that there has been a clash of interests” in society, id. a t 75. The law, however, does not respond immediately to every demand placed on it. To the contrary, a t the beginning a t least, it is more likely that, new demands will be rejected. Bredemeier notes, for instance, that “[one] aspect of .store decisis also contributes to the law’s lack of receptivity to new claims. This is the persistence, to some extent, of the doctrine tha t only those interests will be recognized that were previously recognized. That is to say, new needs for which court protection is sought may be dismissed by the court with the deadly sentence, ‘Plaintiff has failed to state a cause of action,’ which means tha t he has failed to demonstrate that any court in the past has even been willing to listen to evidence on such a violation of an expectation,” id. a t 84. See generally R. POUND, SOCIAL CONTROL THROUGH LAW 68-81 (1968 ed.) (1942).

31 One of the earliest discourses on the nature of legal change in a modern, democratic political order was H.S. MAINE, ANCIENT LAW (Beacon Press ed. 1970) (1861). Maine argued that the law is fundamentally stable and relatively slow to change. As a result of continuous social change, however, new demands a re constantly being placed on the legal system;


New legislation cannot have retroactive application.32 It can, however, force affected businesses to alter established patterns of conduct in the future, for example by requiring the installation of expensive pollution control equipment or by mandating complex new procedures for address- ing employee grievances. In many of these cases, business might have avoided costly and burdensome legal regulation by voluntarily adopting less onerous self-regulation in time to stem the legal response.

The common law courts generally have been hesitant to assume a law- making role33 and deferred instead to the legislative branch the problems

and, the law is constantly under pressure to “catch up” to those social demands. Maine observes, for example, that in progressive societies, “social necessities and social opinion are always more or less in advance of Law. We may come indefinitely near to the closing of the gap between them, but it has a perpetual tendency to reopen. Law is stable: the societies we are speaking of are progressive.” Id. a t 23. But, Maine continues, “[tlhe greater or less happiness of a people depends on the degree of promptitude with which the gulf is narrowed,” id.

32 U S . CONST. art. I, § 9, el. 3, provides: “No . . . ex post facto law shall be passed.” 33 An example of the lengths to which the courts will sometimes go to avoid a law-

making role is the U S . Supreme Court decision in Flood v. Kuhn, 407 U S . 258,32 L. Ed. 2d 728 (1972!, which, for a third time in fifty years, reaffirmed the antitrust exemption for the so-called “reserve clause” in professional baseball contracts. When this issue was first raised in Federal Baseball Club v. National League, 259 U.S. 200,66 L.Ed. 898 (1922!, the Court, in a unanimous opinion by Justice Oliver Wendell Holmes, held that baseball did not involve “interstate commerce” and, therefore, was not covered by the antitrust laws. When this issue was next raised in Toolson v. New York Yankees, Inc., 346 U S . 356.98 L.Ed. 64 (1953!, the advent of radio and television and the proliferation of professional baseball clubs made it clear that baseball was no longer just a friendly game played on neighborhood sandlots, but rather was a multimillion dollar a year business. Such arguments notwithstanding, the Court in Toolson. stubbornly stuck to its precedent in Federal Baseball observing, 346 U.S. a t 357:

Congress has had the ruling under consideration but has not seen fit to bring such business under these laws by legislation having prospective effect . . . . The present cases ask us to overrule the prior decision and, with retrospective efSect, hold the legislation applicable. We think that if there are evils in this field which now warrant application to it of the antitrust laws it should be by legislation. (Emphasis added.)

By the time the Flood case came before the Supreme Court, many observers believed that the Court could no longer ignore this glaring legal anomaly. In every other professional sport in which the “reserve clause” issue had arisen, the Court had ruled that it was a violation of the antitrust laws, 407 U.S. a t 278-80. But, to the chagrin of major league ball players across the country, the Court held firm observing in Flood that a precedent of such long standing as Federal Baseball, if it is going to be changed, should be changed by Congress (even though it was the Supreme Court that carved out this exemption in the first place!). Flood 21. Kuhn, 407 U.S. at 276. In concluding his majority opinion, Justice Blackmun observed, i d . a t 284:

If there is any inconsistency or illogic in all this, it is an inconsistency and illogic of long standing that is to be remedied by the Congress and not by this Court. . . . Under these circumstances, there is merit in consistency even though some might claim that beneath that consistency is a layer of inconsistency.

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of handling difficult o r novel issues of law.34 Where the legislatures have been slow to respond t o new social demands, however, the courts have frequently overcome their reluctance and attempted to fashion novel judicial solutions to the Under the separation of powers doc-

34 See, e.g., Evan, Law as a n Instrument of Sociul Change, in READINGS IN APPLIED SOCIOLOGY (A.W. Gouldner & S.M. Miller eds. 1975) a t 285-93. The reluctance of judges to take the lead in fashioning solutions to controversial legal issues can he explained, at least in part, in terms of the effectiveness of law emanatingfrom various sources. In general, Evan observes, id. a t 287-88, the legislative and executive branches of government carry the most prestige as law-making institutions. These a re the branches which have principal authority for making and executing the laws. The legislative and executive branches are also held directly responsible t o their respective constituencies through the election process. Before enacting a law, the legislature can engage in extensive fact -finding, including appointing special committees, hiring experts, and conducting public hearings. The end result of the legislative process is often a carefully constructed compromise which strikes a balance among many competing social interests.

By contrast, the courts do not have a broad law-making mandate. Judges usually a re appointed, rather than elected, to office, and often hold life terms tha t insulate them from public opinion. Fact-findings in judicial decisions must he based on the limited field of information presented by biased advocates in adversarial proceedings even though the outcome of, say, an environmental or product liability case, may have far-reaching social ramifications. As a result, controversial legal issues a re best left to legislatures for resolution. According to this philosophy, a dramatic and wrenching social change, such as bussing school children to achieve racial balance, would have been far more effective had it emanated from the legislative or executive branches. Of course, the difficulty is that the same accountability to their elective constituencies that gives legislators, governors and presidents their credibility also renders them vulnerable and, as a result, sometimes leads to paralysis on controversial social issues. It is this inaction by legislatures on pressing social issues that often forces the courts to step into the breech.

35 See, e.g., L. M. FRIEDMAN, LAW AND SOCIETY: AN INTRODUCTION 164-65 (1977); and W. FRIEDMANN, LAW IN A CHANGING SOCIETY 45-90 (1972). A good example is the case of Sindell v. Abbott Laboratories, 26 Cal. 3d 588.607 P.2d 924 (Sup. Ct. Cal. 1980). ccrt. d c ~ ? . , 449 U S . 912, in which the court fashioned a controversial legal remedy called “market share” liability because existing legal remedies were not suited to the facts of this case. The notion that judges, in varying degrees, make law rather than find it, is associated with the “legal realism” school of jurisprudence best represented in the United States by Karl Llewellyn and Jerome Frank. See E.M. SCHUR, LAW A N D SOCIETY: A SOCIOLOGICAL VIEW 43-50 (1968); and J. FRANK, COURTSON TRIAL 209-21 (1950). See also Rumble, The T,eyr/ I’ositi~riihn .f Joka Austin un.d th.e Realist Movement in American Jurisprudence, 66 COK- NELL L. REV. 986 (1981); Glennon, Portrail oft.hr ,Jud!ge as U,IL Acli%&: .Jerome F.ranli on,d the Supremp Court, 61 CORNELL L. REV. 950 (1976); and, Fuller, American Legal Realism, 82 U. PA. L. REV. 429 (1934).

Commenting on the Maryland Court of Appeals decision holding a handgun manufacturer liable to a shooting victim, note 14 supra and accompanying text, one newspaper columnist observed:

I have qualms about the role of the Maryland high court in this case. It’s an example of full-throated judicial activism. I would prefer that these handguns were controlled by legislatures rather than by lawsuits . . . .The NRA- perhaps the most powerful lobby in the country- will t ry to stop the spread of this prece

1987 I Managing Corporate Social Resporaibility I 533

trine, American courts should not, at least in theory, “make” law.” Fashioning judicial remedies to novel legal problems, therefore, typically involves redefining existing legal standards. The judicial process thus can result in law having retrospective as well as prospective effects?? It is through this process of judicial interpretation and redefinition of the law that a company like Manville may suddenly find itself legalIy liable for millions of dollars in damages for activities that were not, a t the time they occurred, in violation of any legal standards then existing.

Very few managers who lack formal legal training comprehend this important feature of our Iegal system. Business is accustomed to thinking of the law as relatively static and therefore predi~table.~‘But the success of our legal system is accounted for by its ability to accommodate new demands through carefully balancing the attributes of predictability and f l e~ ib i l i t y .~~ The law is continuously changing in response to new social pressures; and, today, a successful manager must be sensitive to the

dent. But a t least the decision should embarrass legislators. Why must we leave the legislative lobby and go into the judicial chambers to get rid of guns that serve no legitimate purpose? . . . The Maryland court said that common law is ‘constantly searching for just and fair solutions to pressing societal problems.’ So, presumably, do legislators.

Court Acts Where Legaslators Should, Boston Globe, Oct. 10, 1985, a t 21. See generally A.E.D. HOWARD ET AL., THE COLIRTS: SEPARATION OF POWERS (1983);

Banks, Efficiency in Govmmmt: Separation qfl‘owers Reconsidered, 35 SYRACUSE L. REV. 715 (1984); and, Hazard, TheSupreme C w r t as a Legislature, 64 CORNEI.I. I,. REV. 1 (1978). In Muskrat v. United States, 219 US. 346, 55 L. Ed. 246 (1911), in the course of holding that the judicial power of the Supreme Court does not encompass the rendering of “advisory opinions,” the Court. quoting from an earlier case, observed, 219 U S . at 355.55 L.Ed. a t 249 “The Supreme Court . . . is created by the Constitution, and represents one of the three great divisions of power in the government of the United States, to each of which the Constitution has assigned its appropriate duties and powers . . .The power conferred on this court is exclusively judicial . . . .” Speaking about the English courts, Henry Maine, note 31 supra a t 32, observed: ”We do not admit that our tribunals legislate; we imply that they have never legislated.. . .”

3’ See, e.g. , Flood v. Kuhn, discussed at note 33 supra. See generally Edatoraal Note . The Problem of the Retroactive Efsecl of the Overruliay uf Pmor Decascons, in C.A. AUERBACH ETAL., THE LEGAL PROCESS 172-81 (1961). The foregoing includes a discussion of the Federal Baseball and Tookon cases, note 33 supra, in relation to the impact on business of retroactive court decisions.

38 See, e.g., R. NEELY, JUDICIAL JEOPARDY: WHEN BUSINESS COI.I.IDFS WITH THE COURTS (1987).

39 See generally LAW IN A CHANGING SOCIETY. note 35 supra; S.F. MOORE, LAW AS P R O CESS: AN ANTHROPOLOGICAL APPROACH (1978); R.M. UNGER, LAW IN MODERN SOCIETY (1976); and, S.P. SIMPSON & J. STONE, LAW AND SOCIETY (19481. Although now dated in some respects, the latter work, consisting of three volumes. is probably the most ambitious and comprehensive study of law and society ever compiIed. A s Roscoe Pound observed: “Law must be stable, and ye t it cannot stand still.” See R. POUND, LAW FINDING THROUGH EX PERIENCE AND REASON 23 (1960).

534 / Vol. 25 / American Business Law Journal

myriad signs and nuances which may signal future redefinition of the legal standards applicable to a particular industry. Based on those signs and nuances, the manager must be capable of making reliable predictions about the nature and timing of legal changes and adapting his firm’s policies accordingly. The Manville case is not an anomaly. Manville is simply one of the early victims in what is certain to be a long line of expensive lessons in corporate social responsibility during the remainder of this century.

CORPORATE SOCIAL RESPONSIBILITY

With hindsight, it is easy to criticize Manville’s management for not adopting a more proactive stance a t the first hints of a potential asbestos hazard. But given the limitations of the traditional approaches to corpora te social responsibility, the response by Manville t o the early warning signals should not be surprising.

Under traditional social responsibility models, managers often must choose between a short-term (and, possibly, shortsighted) profit- maximization response or, alternatively, a more costly, long-term, social welfare strategy.40 The outcome of the more expensive, long-term strategy, however, is often speculative and can be justified to shareholders only by reference to seemingly vague notions of ethics and community welfare. A manager who desires to act in a socially responsible manner may encounter enormous financial pressures from impatient stockholders looking for quick returns on their investments. Management scholar Peter Drucker recently observed that this long-standing problem has been ex- acerbated by the growing concentration of publicly held stock in the hands of a few large, and demanding, institutional investor^.^'

This section examines how, under the constraints of modern financial markets, the dichotomy between the traditional approaches to corporate social responsibility can become a barrier to managers pursuing more enlightened social policies.

THE LIMITATIONS OF TRADITIONAL APPROACHES TO

Traditional social responsibility models run the gamut from those that t rea t it solely as a matter of corporate compliance with social and legal norms to those that require “volun- tarism” or behavior that goes beyond any self-interested motivation. Compare Stone, The Place of Enterprise Liability in. the Control of Corporate Conduct, 90 YALE L.J. 1 (1980) u,it/L Engle, An Approach to Corporate Social Responsibility, 32 S T A N . L. REV. 1, 5-11 11979). Stripped of their varied theoretical underpinnings and rhetorical refinements, all of these models can be reduced to a fundamental choice between short-term profits and long- term social welfare.& Stroup e t al., Doing Good, Doing Better: T U ~ Views nfSocin.l Respon- sibility, Bus. HORIZONS, Mar.-Apr. 1987, a t 22-24; and, Anderson, C,‘an Social Responsibility Re Ha.ndled as a Corporate Investment?, BUS. HORIZONS, Mar.-Apr. 1987, at 24-25.

‘’ See Drucker, A Crisis ofCapitalism, Wall St. J., Sept. 30,1986, a t editorial page, and a set of replies, Wall St. J., Oct. 22, 1986, Letters to the Editor.


The Tradi t ional Approaches to Corporate Social Responsibility

The “Profit Maximization” Approach

Today, the “profit maximization” approach to social responsibility in business is most commonly associated with noted University of Chicago economist Milton Friedrnax~.~~ Corporations, according to Friedman, possess neither the authority nor the moral right to divert shareholders’ profits for the general public welfare. Managers are merely agents of the stockholders, and thus have no right to spend or give away corporate monies except in the interest of increasing shareholder wealth.43 Any stockholder is free to use his dividends to support any worthy causes he may choose, but the choice should not be made for him by a company president who may not share either his values or p r i ~ r i t i e s . ~ ~ Friedman therefore concludes that “there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits . . . .”45

In part, this philosophy is related to Adam Smith’s renowned “invisible hand” doctrine.46 One interpretation of the “invisible hand” doctrine holds that individuals and, by implication, businesses and governments, cannot be “do-gooders” even if they t ry because no one has access to complete and perfect knowledge about the universe. What may initially seem like a good thing can ultimately produce disastrous consequences. The history of importing new strains of plants and animals, such as the gypsy moth, provides a familiar and bitter example of this process a t

Instead of trying to do good, the argument goes, individuals should simply seek to maximize profits. Profit-seeking frees us from having to make controversial value judgments. The “invisible hand” doctrine assures us that profit-seeking will invariably lead to the most economical- ly efficient allocation of scarce resources which, in turn, will produce the greatest utility for the world taken as a whole.“ Any deviation from or

“ See Friedman, TheSocial Responszbility ofBusims i s to Increme its Profits, N.Y. Times, Sept. 13,1970 (Magazine). at 33. See also M. FREIDMAN, CAPITALISM AND FREEDOM 133-36 (1962); and, M. FRIEDMAN, AN ECOXOMISTS PROTEST 177 (1972).

See The Social Responsibility of Business . . . , id. at 33. ’‘ Id. 45 Id. at 126. ‘’ See A. SMITH, THE WEALTH OF NATIONS (1776). See also Stein, Adam Smith’s

Jurisprudence-Between Morality and Econowrics, 64 CORNELL L. REV. 621 (1979). ” See, e.g., Kudzu: The Government Gifi tha.t Keeps on Growing, Wall St. J., Sept. 30,

1985, at 20. The author of this editorial likens United States farm programs to the disastrous consequences of the decision to permit imports of the climbing perennial legume kudzu. According to the author, the moral of the kudzu story is that “[tlhere are always unintended and unpredictable consequences when government intervenes . . . .” Id . ‘’ The “utility” doctrine as derived from Adam Smith’s seminal work became closely

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interference with this utilitarian “invisible hand” process, even if well- intentioned, can only lead to market distortions which reduce the world’s net Such interference with free-market operations may succeed in improving the lot of certain individuals or groups or businesses, but this form of wealth transfer is inefficient. The net gain realized by those who are made better off by these market distortions will be smaller than the net loss realized by those who, as a result, a re hurt. Accordingly, social welfare is best served through the invisible hand of the market.

The Social Welfare Approach

Advocates of the social welfare approach t o corporate social responsibility pose the fundamental question of why, in modern society, should the corporate manager be “the legitimate arbiter of the competing claims of stockholders, workers, consumers, the managers themselves and generations as yet unborn.”j0 Why should the awesome responsibility for dividing up the social pie among the many competing groups of stakeholders, including those who cannot even speak for themselves, be en- trusted to private enterprise managers whose principal concern is to earn profit^?^'

Some champions of the capitalist system, like the late Adolph Berle,52 were “optimistic that we can rely on the growing social conscience of the industrial manager to perform this function e q ~ i t a b l y . ” ~ ~ But the general public, and even many managers experienced in the intense pressures of the modern business world t o maximize short-term profits, may not share this optimism. The social welfare approach is an alternative to the specter of ever-growing government regulation of business t o protect, all groups of stakeholders.

The social welfare approach holds that a business should act in an

associated with 18th century English philosopher and lawyer Jeremy Bentham. See J. BENTHAM, AN INTRODUCTION TO THE PRINCIPLES OF MORALS AND LEGISLATION (1789). A some- what different view of the utility doctrine was later espoused by 19th century English political economist John Stuart Mill. See J.S. MILL, UTILITARIANISM (1863).

1y Some proponents of this philosophy have carried their arguments even further. In his famous essay, THE ROADTO SERFEON (1944). Friedrich Hayek argued that the relentless and snowballing process of government meddling, begetting still more government interven tion, would lead inexorably to the destruction of liberty and the market economy to be replaced by an all-encompassing totalitarian state. See also F. A. HAYEK, LAW, LEGISLA~ION A N D LIRERTY (1973). Of similar import on the dangers to freedom inherent in social planning a re the many books and other writings of Ayn Rand. See, e .g . , A. RAND, THE VIRTUE

j” See Auerbach, Lnui n d Social Change in the United Sta.tes, 6 UCLA L. REV. 516 (19591. ’’, I d . it See A. BERLE & G. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY (1932). ’’ Auerbach, note 50 s71,pm, a t 530-31.

O F SELFISHNESS (1964).

1987 I Managing Corporate Social Respons ib i l i t y I 537

ethical, responsible manner even if there is no existing law requiring such conduct and even if there is no immediate, quantifiable benefit t o the business which balances out the cost of taking the action.% Although advocates of this approach broadly appeal t o generally accepted standards of ethics and almost invariably there is also an implicit or ex- plicit attempt to justify such behavior in terms of the long-term economic interests of the firm and the business community generally.%

Justification of the social welfare approach by reference to business’ long-run economic interests not only bolsters the ethical arguments but, in addition, may be necessitated by legal doctrines which hold a corporate officer accountable to the company’s shareholder^.^^ To the extent that this approach relies on such economic justification, however, it differs from the profit -maximization approach more in terms of the relevant timeframe than in matters of substance. This article does not add to the large and growing literature on the ethical basis for the social welfare approach.= Instead, it focuses on the key legal and economic arguments that are mustered in support of the social welfare approach.

Social responsibility proponents focus a particularly critical eye on so-

% Under one definition, “[t]o qualify as socially responsible corporate action, a business expenditure or activity must be one for which the marginal returns to the corporation a re less than the returns available from some alternative expenditure, must be purely voluntary, and must be an actual corporate expenditure rather than a conduit for individual largess.” See H.G. MANNE & H.C. WALLICH, THE MODERN CORPORATION AND SOCIAL RESPON- SIBILITY (1972). For a similar view, see Mashaw, Corporate Social Respomibality: C m m t s on the Legal and Economic Context of a Continuing Debate, 3 YALE L. & POL. REV. 114,115 (1984). C$ Conard, Response: The Meaning of Corporate Social Responsibility-Variations on a Theme of Edwin M. Epstein, 30 HASTINCS L.J. 1321 (1979).

55 Id. See also note 16 supra. See, e.g., Buehler & Shetty, Mmaging Corporate Social Responsibility, MGMT. REV.

(Aug. 1975) a t 5,lO-11; and, Eisenberg, Corporate Le.gitimacy, Conduct, and Governance- Two Models of the Corporation, 17 CREIGHTON L. REV. 1 (1983). In the cases of Shlensky v. Wrigley, 95 111. App. 2d 173,237 N.E.2d 776 (1968) and Kelly v. Bell, 226 A.2d 878 (Del. 1970), for example, the courts accepted management’s arguments that socially or ethically motivated conduct should be upheld as “good for business.”

57 Id. See also Mangrum, I n Search of a Paradigm of Corporate Social Respon.sihility, 17 CREICHTON L. REV. 21,27-30. 50-57 (1983). Mangrum presents and analyzes five approaches to corporate social responsibility: the contract model, the public interest modet, the political model, the economic model, and the rights model. It is in connection with the “contract model” that the agency obligations of a corporate officer are discussed.

58 See note 16, supra. See also R.C. CHEWNING, BUSINESS ETHICS IN A CHANGING CULTURE (1984). In addition, a t least two broad bibliographies on the subjects of business ethics and corporate social responsibility have been published. The first, entitled BIBLIOGRAPHY OF BUSINESS ETHICS AND BUSINESS MURAL VALUES was published in a third edition in 1986 by the Creighton University College of Business Administration. A second entitled PURLIC POLICY AND CORPORATE MANAGEMENT: A PRELIMINARY BIBLIOGRAPHY was published in January 1983 by the John F. Kennedy School of Government a t Harvard University.

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called "big business" - the giant multinational conglomerates and Fortune 500 companies. "Big business," i t is argued, controls a disproportionate amount of wealth and wields a degree of political power today which is unprecedented. Some of these companies have been accused of literally buying the elections of friendly political leaders and the passage of favorable legislation in certain Even in the United States, we recognize the enormous impact of highly paid lobbyists, political action committees, campaign contributions, and media advertising by large corporations. Furthermore, ownership of these giant corporations is so dis- persed that the shareholders, in reality, exercise little real control over managernenL6" Therefore, social responsibility proponents urge that big business owes an obligation to society to act in a socially responsive manner even if such action is not legally mandated. Furthermore, over the long term, the argument goes, social responsibility will lead to a more favorable business climate that will benefit all businesses.

Even with all of its wealth and power, observe some social responsibility advocates, big business is still critically dependent on maintaining the continued goodwill and cooperation of society. First, without the cooperation of employees, consumers, and the general public, business would have neither products to sell nor anyone to sell them to.61 Second, big business as we know it today exists only by virtue of i ts ability to organize and carry on business in the special legal form of the corporation.62 Corpora- tions enjoy three unique and critical attributes: limited legal liability, perpetual life, and the ability to multiply by establishing s u b ~ i d i a r i e s . ~ ~ Under common law, these three attributes were unavailable to alternative forms of business organizations, such as sole proprietorships and partnerships.

59 See, e.9.. R. VERNON, SOVEREICNTYAT BAY (1971); and L. TURNER, MILTINATIONAL C O ~ PANIES ANDTHE THIRD WORLD (1973). See also The F a r - l i k n g W a r s ofMighty I.B.!M.. N.Y. Times, Sept. 19,1982, $3. a t 1; and,I.B.M. TakesIssw, N.Y. Times, Sept. 26,1982, editorial Page. '" See A. BERLE AND G. MEANS, note 52 supra. See also Fama and Jensen, Separation

o f Owv,erah%p nn,d Control, 26 J. L. & ECON. 301 (1983); and Fama, A!/ the Theory of the Fi7-m, 88 J. POL. ECON. 288 (1980). But see Leavell, Corporahe Soriu- Reform, the Business Judgment Rule and Other Considmm%.ms, 20 GA. L. REV. 565 (1986). Leavell argues that modern socially-conscious shareholders a re in a position to exercise significant control over management to promote the good of society.

'' See, e.g. , Dodd, For Whom are CorporateManagers Trustees?, 45 IIARV. L. RE\;. 1145 (1932): and, R. NADEK ET AL., TAMING THE GAINT CORPORATIOX (1976).

'* See P. DRUCKER, CONCEPT OF THE CORPORATION (rev. ed. 1972). See also J.D. GLO~EIX. THE REVOLUTIONARY CORPORATIONS (1980); A. BERLE & G. MEANS, note 52 .swpra; C. STONE, WHERE THE LAW ENDS (1975); and R. NADER ET AL., id.

'3 Id . See also Williamson, The Modern Corporation: Origins, Eiiolution~ A ttributm. 19 J. ECON. LIT. 1537 (1981). For a discussion of the importance t o modern multinational cop-


It should be sobering for managers to realize, therefore, that there is no natural right endowing big business with the natural ability to organize in the corporate form. If corporations should become too heavy- handed, too uncaring, too detached from social priorities, and too selfishly wrapped up in their profit-making, society has not only the ability to further regulate these businesses but also possesses the ultimate power to cripple or destroy them.64 For these reasons, argue the social responsibility advocates, big business must view social responsibility in terms of long-range survival, not just short- term profi t -maximi~at ion.~~ The problem is that, in some situations, the profit-maxirnizution and social welfare approaches lend to diflerent und con$icting management strutegies.

The Potential f o r Conflicting Munmgernent Strategies

Economist John Maynard Keynes observed that “[iln the long run we are all dead.”66 Indeed, Sumner Simpson, Manville’s president from 1929 until 1948, and most, if not all, of Manville’s stockholders during this period died well before the asbestos bubble burst in 1982. In view of the long latency period for the development of asbestosis and mesothelioma, it is conceivable, perhaps even likely, that with the benefit of fifty years’ foresight Manville’s management (with the stockholders’ blessings) would have responded no differently to the asbestos problem.

Many common social responsibility issues have long latency periods. Some might argue that it is this very characteristic that distinguishes the “social welfare” and profit-maximization viewpoints. If “long” is considered to be anything beyond current management’s anticipated tenure, then a wide range of everyday management actions are long-run decisions. Certainly i t will be decades, or longer, before management decisions on air and water pollution, disposal of toxic chemicals and nuclear wastes, safety of new drugs and food additives, and exposure to toxic chemicals in the workplace will be proven to be adequate or lacking.

porations of the ability to multiply, see S.M. ROBBINS & R.R. STORAUGH, MONEY IN THE MULTINATIONAL ENTERPRISE (1973).

“ See, e-g . , R. J . BARNET & R. E. MULLEK, GLOBAL REACH: THE POWER OF THE MULTINA- TIONAL CORPORATIONS 363-88 (1974); R. NADER ET AL., note 61 supra; and, Buxbaum, Cor-

See THE BUSINESS ROUNDTABLE, STATEMENT ON CORPORATE RESPONSIBILITY (Oct. 1981 1. The introduction to this statement, which represents the sentiments of a group of 200 leaders of the largest American corporations, begins as follows:

The Business Roundtable issues this statement out of a strong conviction that the future of this nation depends upon the existence of strong and responsive business enterprises and that, in turn, the long-term viability of the business sector is linked to its responsibility to the society of which it is a part.

pOVUte Leg’it’iWLUcy, ECOnOWLiC Theory, Unn! Legal Doctrine, 45 OHIO ST. 1,. REV. 515 (1984).

See a.lso P.F. DRUCKER. MANAGEMENT chs. 24-28 (1974). 66 See J.M. KEYNES, A TRACT ON MONETARY REFORM 11923) at 80.

540 Vol. 25 1 American Busiizess Law Journal

In the meantime, the two traditional approaches to social responsibility afford neither a sufficient economic incentive nor a sound legal justification for managers to exceed existing legal standards. In the modern financial market, management’s performance is judged not only annually a t shareholder’s meetings, not just by quarterly earnings and dividends reports, but daily by anxious investors who watch the rise or fall in the price of the company’s stock. No matter how earnestly a manager embraces the concept of social welfare, the manager can never afford to lose sight of the responsibility owed to current stockholder^.^^ Partly a s a result of managerial subservience t o investor sentiments, there is a potential for different and conflicting management strategies under the two traditional approaches to corporate social responsibility.

Type 1 Management Responsiveness - Obeying the Law

Management strategies as dictated by the traditional approaches, however, will not always directly clash. For example, a t least in broad terms, both approaches support compliance with the existing law.68 For reference purposes, business behavior wherein the dominant motivation is obeying the law will be designated “Type 1” management responsiveness. Where an existing statute, administrative regulation or judicial decision squarely mandates certain business behaviorfi9- and establishes adequate legal sanctions in the form of criminal fines, civil damages, and threat of an injunction to insure compliance7o - there is relatively minimal conflict between the management response dictated by profit-maximization and that indicated by social elfa are.^'

‘’ See note 42 supra. A number of scholars in the field have argued, and attempted to substantiate with empirical research, that social responsibility is not only compatible with profitability but may indeed be good business. See, e.g., Moskowitz, C h o Responsible ,‘locks, BUS. & SOCY REV. 71 (19721. The Council on Economic Prior research organization, recently published a consumer’s guide entitled RATING AMERICAX CORPORATE CONSCIEKCE. The guide presents thumbnail sketches of 130 major American companies and their products so that a socially aware consumer can, for example, choose a cookie that is not made by a cigarette company.

t e 54 supra, a t 116-17; C . STONE, note 62 supra ; and The Soriol . . . , note 42 supra , a t 122-26.

6o Of course, to the extent that legislation, regulations or judicial decisions are ambiguous or incomplete, managers and lawyers may t ry to circumvent the law.

The “adequacy” of legal sanctions can best be judged by their impact in deterring certain undesirable conduct. For example, a $10 ticket for parking in a “No Parking” zone will not deter scofflaws if legal parking spots in the city cost $12. Indeed, even $15 tickets mag be inadequate when drivers make a rational cost calculation based on their perceived probability of being “caught”-i.e., they “break even” if they are ticketed on only four out of every five infractions. For these reasons, managers may be more responsive to a credible threat of imprisonment for a knowing and willful legal violation than to fines and civil penalties alone.

“ If inadequate legal penalties are coupled with ambiguities in the law, see notes 69

1987 1 Managing Corporate Social Responsibility I 541

Some familiar examples of Type 1 management behavior include: business paying minimum wage even though some employees might work for less; US. auto companies equipping new automobiles with emission control systems even though many consumers might prefer to pay less and forego emission controls; and, cigarette manufacturers putting health warnings on packaging even though many smokers would prefer not to be constantly reminded of the hazards. In each of these cases, the dominant explanation for the management decision is fear of legal sanctions for failing to comply.

Type 2 Management Responsiveness - Enlightened Self-Interest

In addition to responsiveness based simply on obeying the law, there is a second managerial motivation that generates relatively minimal conflict between the two traditional approaches. The second approach ap- plies where, even in the absence of any clearly applicable legal sanctions, the net cost to a firm of taking a socially responsive action is more than offset by the resulting net gains. This type of management responsiveness can be called “enlightened self-interest”: the firm acts not because it is required by law to do so but rather because the action is viewed as being in its own economic best interest.” For reference purposes, socially responsible behavior wherein the dominant management motivation is enlightened self-interest will be designated “Type 2” management responsiveness. Whether a manager takes action, and the nature of an action will, in large part, be dictated by assessing the costs against the anticipated benefits to the company. A prudent manager will choose a course of action such that the anticipated stream of future benefits to the company, computed over a reasonable time horizon and discounted back to

and 70 supra, the balance may tip in favor of not obeying the law. In this case, the management responses dictated by the traditional profit-maximization and social welfare approaches would clash.

The familiar dichotomy between “voluntary” and “involuntary” action is employed by many other writers in this field. For example, in Frederick, CWorateSociul Responsibzl- i t y in. the Reagan Era and Beyond, 25 CALIF. MGMT. REV. 145, 151 (1983), the author observes:

It is useful to distinguish between voluntary and coerced social responsibility. Over the years business has undertaken a great many socially responsible activities on its own initiative: making charitable contributions; lending executives to a variety of community projects; advising governments on a whole host of national and local problems. These voluntarily assumed social responsibilities stand in contrast to those mandated by government regulations: pollution controls on production processes and on products such as automobiles; equal employment opportunity guidelines; industrial safety and health requirements; consumer protection measures; trade union recognition and wage-and-hour guidelines. (Em- phasis original.)

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present value, outweighs current associated expenditures as well as looking attractive compared with alternative investment opportunities.

One of the most common examples of Type 2 management responsiveness is corporate charitable contributions. Because charitable contributions are not required by law, they are typically rationalized to shareholders on the basis of the favorable publicity and public relations generated by such contribution^.^^ There may also be a “pump-priming’’ effect, as where a computer firm contributes hardware or software to educational institutions with the expectation of cultivating a future customer base among today’s students. Moreover, the out-of-pocket cost to a business of making a Charitable contribution is reduced because of the availability of an income tax deduction. Having the government pick up one-third to one- half of the cost of a firm’s advertising and public relations makes the economics of corporate giving look especially attractive. Of course, the value of advertising and goodwill is difficult to quantify, especially over a period of time. Still, i t is relatively easy to identify the basic elements of the cost-benefit analysis in this example.

Although the quantum of social good might be identical, i t would be highly unusual for a company’s chief executive to make an anonymous charitable contribution from his firm’s coffers. In such a case, because the contribution was anonymous, the firm would receive none of the beneficial advertising and publicity ordinarily associated with charitable contributions by business. The firm might still benefit from the tax deduction, but there would be few if any direct benefits to the firm to offset the residual costs.

Such action by a corporate officer might also provoke a legal challenge. Corporate officers are agents of the firm. Under familiar agency doctrines and the “business judgment” rule, a corporate officer owes a fiduciary duty to the corporation, including the obligation t o act within the scope of his authority.’* An agent who acts “ultra vires”-Le., beyond the scope of his authority-may be held personally accountable to the firm in a

Samuelson has observed, for example, t h a t “[mlany acts of altruism and apparent generosity can be simply defended in te rms of public relations and t h e maximization of long run profits.” P. SAMUELSON, ECONOMICS 489 (6th ed. 1964).

’‘ SW, e . ~ . . Manning, The Busiwss J u d p . m t R d e and the Di rec to r ’ s Duly q f i l t t en i ion . 757fle For Reality, 39 BIJS. LAW. 1477 (1983); Weiss, .Socia,l Re.qdatiwri otfR1 I l ~ h m i n q th,e Corporate Governurm System to Resolve an Jnstitutiorral Impusse, 28 UCLA I,. REV. 343 (1981); M. EISENBERG, THE STRIJCTUREOFTHE CORPORATION 11976); and, E. RRon-

LIABILITIES (19871. The classic view tha t a corporation’s primary responsibility is to maximize t h e profits

of stockholders is t h e basis for t h e leading case of Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668 (1919). In this case, the court ruled tha t t h e benefits of higher salaries for Ford workers and of lower au to prices for consumers could not t ake priority over t,he

S K Y &- M.P. ADAMSKI, L 4 W OF CORPORATE OFFICERS B N D DIRECTORS: RIGHTS, DUTIES ANL)


“shareholder’s derivative action.” It is not uncommon, for instance, for disgruntled stockholders to assert that company officers are making excessive or inappropriate charitable contributions with funds that should rightfully either be paid out as dividends or else reinvested in the company to increase shareholder The “ultra vires” doctrine explains, at least in part, why advocates of social responsibility in business resort to long-term economic justifications in support of their ethical arguments.T6

interests of the stockholders. Dodge v. Ford remained controlling law on this issue for more than 30 years thereby curtailing activities by corporate officials to promote the public good. Finally, in the case of A. P. Smith Mfg. Co. v. Barlow, 98 A.2d. 581 (Sup. Ct. N.J. 1953), the court loosened the legal stranglehold a bit by sanctioning a modest charitable contribution t o Princeton University. In closing, the court in the A.P. Smith case observed, i d . a t 590: “Clearly then, the appellants, as individual stockholders whose private interests rest entirely upon the well-being of the plaintiff corporation, ought not be permitted to close their eyes to present-day realities and thwart the long-visioned corporate action in recognizing and voluntarily discharging its high obligations as a constituent of our modern social structure.”

More recently, the American Law Institute’s Corporate Governance Project has proposed clarifying the potential conflict between profit-maximization and ethical principles by ex- plicitly sanctioning the right of corporate managers to sacrifice profits to take account of “ethical considerations that a re reasonably regarded as appropriate to the responsible conduct of business” including devoting reasonable amounts of their resources to charitable purposes. See Weiss, Economic Analysis, Corporate Laup, and the ALI Corporate Gover- nance Project, 70 CORNELL L. REV. 1, 34-37 (1984). See also Mangrum, note 57 supra., at 27-30,50-55; and, Manne, The Limits and Rationale of Corporate Altruism, 59 VA. L. REV. 708 (1973).

75 See A.P. Smith Mfg. Co. v. Barlow, id. See generally The Role of Liability Rules and the Derivative Suit in Corporate Lnwi: A Theoretical and Empirical Analysis: A Symposium, 71 CORNELL L. REV. 261 (1986). One shareholder activist who has established a national reputation as a thorn in the side of the Boards of Directors of several Fortune 500 companies is Evelyn Y. Davis of Washington, D.C. An example of her efforts to challenge the status quo of the companies in which she owns stock is the following share owner’s proposal which appeared, a t her initiative, in the Notice of 1986 Annual Meeting and Proxy Statement of NYNEX Corporation.

RESOLVED: That the shareholders recommend that the Board take the steps necessary t o amend the Corporations’ Certificate of Incorporation by adding thereto: ‘No corporate funds of this corporation shall be given to any charitable, educational or other similar organization, except for purposes in direct furtherance of the business interests of this corporation and subject to the further provision that the aggregate amount of such contributions shall be reported to the shareholders not later than the date of the annual meeting.’ The supporting statement by the proponent is: REASONS: Your Company has given away a lot of your money to charitable and educational institutions, money which belongs t o you. Last year the total amount was [approximately $11,250,0001. Now is the time, when the Company is still young, t o implement such a policy. If you AGREE, please mark your proxy FOR this resolution.

76 For example, in responding to the share owner’s proposal by Evelyn Davis to restrict

544 I Vol. 25 / American Business Lau1 Journal

Another example of Type 2 management responsiveness is where a firm (or, in many cases, an entire industry) elects to “voluntarily” take certain action in the hope of either delaying or ameliorating legal regulation which could otherwise be far more costly and burdensome. Such “preemptive” action is widespread both inside and outside of business. Preemptive strategy typically involves trying to co-opt a significant pro- portion of one’s critics by adopting a moderate, middle-of-the-road position. This strategy may enable a firm to undercut the power of extremists who are advocating a more radical a p p r ~ a c h . ? ~ In addition, by also laun- ching a counteroffensive including an education and public awareness campaign, it may be possible to turn around public opinion on a particular issue if strong sentiments have not yet crystallized. In a similar fashion, pending legislation may be thwarted by a timely combination of self- regulation and public education.

In these examples of Type 2 management responsiveness, there is a greater potential for conflict between the management strategies dictated

its charitable contributions, see note 75 supra,, the NYNEX Board of Directors responded as follows:

Your Board of Directors recommends a vote against this proposal. The Board of Directors believes that NYNEX has a responsibility to support worthwhile charitable, educational and other community activities in the areas served by NYNEX and its subsidiaries. Our corporate contributions in 1985 were approxi mately $11,250,000 or under one percent ofour pre-tax income. Such community support is in the long-term best interests of NYNEX and is consistent with the well-accepted principle tha t businesses, like individual citizens, have a respon sibility for the general well-being of their community. The Board of Directors, therefore, cannot endorse a proposal to restrict charitable contributions to those meeting the narrow test of ‘direct furtherance of the business interests of this corporation.’ To limit contributions in this manner would replace sound management of NYNEX’s Contributions program with rigid rules which could preclude N Y N E X from responding effectively to community needs. Were immediate self-interest made the sole criterion of business contributions, many vital community activities would suffer to the long-run disadvantage of the community as a whole, including NYNEX. Your Board of Directors urges that Share Owners vote AGAINST this proposal.

” A dramatic example of this kind of preemptive action outside a business setting occurred in September 1985. The Reagan Administration’s strident opposition to any sanctions against the white, minority government of South Africa had inflamed passions to such an extent that both houses of Congress (including the then Republican-controlled Senate) were on the verge of passing an historic and sweeping sanctions bill. On the eve of a vote he was almost sure t o lose, however, President Reagan announced tha t he was immediately imposing a set of sanctions against South Africa without waiting for congres- sional legislation. To be sure, the President’s sanctions were modest and limited compared with the pending sanctions bill. but this seemingly transparent strategy succeeded. The President’s show of goodwill was enough to swing key legislators back to his side; and, the sanctions bill was defeated.

1987 1 Managing Corporate Social Responsibility I 545

by the traditional approaches to social responsibility. For social welfare proponents, the focus would be on the anticipated social benefits; for profit-maximizers, on the other hand, the focus would be on the remote or speculative nature of the firm’s benefits. The end result in cases of this type is often a compromise that goes further than some profit- maximizers might endorse, but not nearly a s far as social welfare advocates would like.

Management Responsiveness in a Johns-Manville Type of Case

The greatest potential for conflicting management strategies, however, is where a firm must decide whether to exceed existing legal standards out of fear that in the future those legal standards will be changed by judicial decision, and that those modified standards will then be applied retroactively. This, of course, is exactly the dilemma posed by cases like Johns-Manville. Type 1 management responsiveness does not address the Johns-Manvilb type of case because Type 1 only deals with obeying existing laws. But in a Johns-Mnnville type of case, existing laws may be inadequate to protect society.

The Johns-Manville case might be addressed with Type 2 management responsiveness. But, in this example, the long latency period before an injury becomes manifest probably insures that the firm’s managers and shareholders a t the time of inaction will not be the ones ultimately held accountable. Instead, it is future generations of managers and shareholders, a s in the Manville case, who will be required to pay for the mistakes of their predecessors. Under these circumstances enlightened self-interest seems to dictate doing no more than what is required by existing law. Managers with a static view of the legal system will assume that their obligations a re satisfied by complying with existing legal standards, and that there is no adequate economic justification for exceeding existing legal standards. Thus, it is in connection with a Manville-type of case that the limitations of the traditional approaches to corporate social responsibility become most apparent. Only when a manager factors into his enlightened self-interest calculations the likelihood of a case law- generated legal change, with its potentially devastating impact on the firm, does a plausible argument for exceeding existing legal standards begin to emerge.

Two significant issues become apparent when we contrast the static and dynamic views of the legal system in this context. First, the dynamic approach is inherently better managerial decisionmaking. That is because it incorporates a factor (the changing legal system) that is essential to high quality decisionmaking. Accordingly, managers who utilize the dynamic approach would be functioning in a more competent fashion.

Secondly, use of the prevailing static view would skew managerial decisions. Decisions grounded on the static view would systematically favor


the profit -maximization outcome and slight the social welfare outcome. That is because costs to the firm associated with prospective legal changes are ignored. These costs almost always justify a decision more oriented toward social welfare. Including these costs in decisionmaking based solely on the profit-maximization orientation would cause these decisions to move closer to the social welfare view. Perhaps in some specific cases, such as Johns-Mancille, they would merge into common, or at least quite similar, managerial conclusions.

THE DYNAMIC LEGAL SYSTEM-BRIDGING THE GAP B E T W E E N PROFIT-MAXIMIZATION A N D SOCIAL W E L F A R E

The preceding section argued that in certain cases, especially those involving a long latency period, the dichotomy between the traditional approaches to corporate social responsibility may create a gap in which there is neither sufficient economic incentive nor sound legal justification for managers to exceed existing legal standards. The consequence of this gap is a reactive management strategy that responds only to immediate economic and legal pressures. This section argues that a better understanding by managers of the dynamic nature of the American legal system c2n help to bridge this gap by providing both an incentive and a justification for a proactive management strategy, which may include going well beyond that which is required by existing laws.

The Litigation Audit Borrowing from the terminology of the "social audit" or "social assess-

ment system" which is commonly used in discussing corporate social r e spon~ ib i l i t y ,~~ the process described in this section might be called a "litigation audit."79 The essential elements of this process are: first, that a manager recognize an evolving legal issue which may affect his firm long before it becomes embodied in legislation or judicial decisions; second, that he determine in which direction the issue is evolving, and how rapidly; and, third, that he decide how best t o respond.

';' According t o one frequently cited definition: "Social auditing is defined . . . a s systematic a t tempt to identify, analyze, measure (if possible), evaluate, and monitor the effect of an organization's operations on society." See D.H. BLAKEET AL., SOCIAL AUDITING: EVALUATING TIIE IMPACT OF CORFORATE PKOGKAMS 3 (1976). See also J.J. CORSON R! G.A. STEINER, MEASI-RING Rusr SOCIAL PERFORMANCE: THE CORPORATE S O C I A L ALiLjIT (197.1).

A.B.A.J. 446 (1982); Dodging the L;clhility Bullet, Industry Week, Alexander R! Mat.t hews. The T~rr ('ornwmid?r~enls qfSoriaE Respon Rt:v. 62 (19843.

'* (,:/I Gonser & Wilhelm, The LitigationAudif:A ,Vfw Direction in Pwuentiw Lan~, 68

1987 1 Managing Corporate Social Responsibility / 547

Short-Term Environmental Scanning

There are many signs in the immediate legal environment to which a manager might turn for guidance in beginning a “litigation audit.”” He might look, for example, at existing legislation, regulation or judicial decisions in neighboring jurisdictions; a t failed legislative efforts in his own state or at the federal level; and at the amount of media attention a particular issue is attracting.*’ Such environmental scanning is important in

In Law as a n Instrument 0.f Social Change, note 34 supra, William Evan identifies the following seven conditions as determinative of the success or failure of evolving legal change, id. a t 291:

(1) The source of the law is perceived to be authoritative and prestigeful; (2) The rationale for the new law is articulated in terms of legal, as well as historical and cultural continuity and compatibility; (3) Pragmatic models for compliance are identified; (4) A relevant use of time is made to overcome potential resistance; (5) The enforcement agents are themselves committed to the behavior required by the law, at least to the extent of according it legitimacy if not to the extent of internalizing the values implicit in it; (6)Positive, a s well as negative, sanctions are employed to buttress the law; and (7) Effective protection is provided for the rights of those persons who would suffer from evasion or violation of the law.

According to Evan, legal change occurs along a continuum of resistance to law ranging from 0% resistance a t one end to l 0 O I resistance a t the other, id. a t 287-88. Evan’s continuum is comparable to Lawrence Friedman’s concept of a “zone of slack” and a “zone of deep defense,” see L.M. FRIEDMAN, LAW AND SOCIETY: AN INTRODUCTION (1977) a t 166-68. Friedman’s “zone of deep defense” corresponds to the 100% resistance end of Evan’s continuum because i t typically includes social issues, such as family relations, religion and politics, about which people have deeply -rooted feelings. As a result, these matters are refractory to change through the legal system. The intractable resistance of Indian society to outlawing the Hindu custom of dowry is a dramatic illustration. See, e.g.. Rise i 7 ~ Dowry Deaths AlamnsIndian Women, N.Y. Times, Sept. 12,1982, at 20. Friedman’s “zone of slack” corresponds to the 0% resistance end of Evan’s continuum because it encompasses issues about which people have no strong feelings and are not wedded to tradition. The relatively rapid and painless adoption of the Uniform Commercial Code across the United States is an example. The “litigation audit” should therefore not only seek to identify key legal issues but also help to determine where along Evan’s continuum of resistance those issues are located.

See, e.g., Littlejohn, Competition and Cooperation: New Trends in Corporate Public Issue Identification and Resolution, 29 CALIF. MGMT. REV. 109 (1986). The history of efforts during the last two decades to restore refundable deposits on beer and soft drink containers is a good illustration of the legal change process a t work. Initially, there was vehe- ment opposition to the proposal from bottlers, retailers, and even some consumer interests. Opponents argued that the benefits of the legislation were being overrated-that refuse reduction would be minimal - whereas the costs and inconvenience for bottlers, retailers and consumers would he staggering. Eventually, in spite of the heated rhetoric and millions of dollars spent on lobbying, a few courageous states succeeded in enacting “bottle bill” laws. See, e.g., Wagenbach, The Bottle Rill: Progress and Prospects, 36 SYRACUSE L. REV. 759 (1985); Note, The Return To Returnables: New Ymk Enacts a Bottle Bill, 4 PACE L. REV.

548 1 Vol. 25 1 American Rusin~ss Law Journal

highlighting areas of potential legal change.= Ry themselves, however, these signals only appear too late to be of real dse because they predict only short-term changes. Beyond specific signals about evolving problem areas, a manager must also be attuned to long-range social trends and their likely impact on the legal regulation of business.

Alternative Long-Term Prediction Techniques

Assessing the impact of long-range social trends on the legal system requires that a manager engage in a certain amount of social and legal fore~asting.’~ Modern legal forecasting techniques range from the familiar application of laws and precedents to new fact situations,M a traditional

141 (1983); and, Comment, Stale Bottle Bill Model Legislation-Lcworzs From Prior N o ~ t h Corolinfl Bills and the Potentiul Impact of Passage, 15 WAKE FOREST L. REV. 759 (1979).

It soon became apparent tha t these laws were generally effective in reducing refuse, especially broken bottles. At the same time, retailers quickly adjusted to collecting and handling the returns; and, some bottlers even reaped a windfall on deposits collected and retained on containers tha t were never returned. Contrary t o dire predictions, beer and soft drinks prices to consumers did not typically increase by substantially more than the amount of the deposits. In light of this successful demonstration, other states jumped on the bandwagon with similar legislation. A bottler or retailer in a state like New Hampshire, which currently does not have a bottle bill, might do well to look around a t neighboring st,ates that do have such laws (Massachusetts, Connecticut, Maine, Vermont and New York) and consider how long it will be before he has to adapt to comparable legislation.

“Environmental scanning” to identify relevant social issues is typically the first step i n the social auditing process, note 78 s u p m . See, e.g., Fleming, Public lssuc~s Sccrnming. in CORPORATE SOCIAJ, PERFORMANCE AND POLICY (L.E. Preston ed. 1981); L.E. PRESTO?; & J.E. POST, PRIVATE MANAGEMENT AND PUBLIC POLICY (1975); and, F.J. AGUILAH, S C A N N i N G THE BUSih’ESS ENVIRONMENT (1967). Aguilar, id. a t 66, presents a chart listing sources of organizational information for managers, including various news media and trade publica tions as well as customers, suppliers and other internal and external sources.

@ Business forecasting is a commonplace element of management responsibilities. See yer~ercr/ky S.C. WHEELWRIGHT, FORECASTING METHODS FOR MANAGEMENT (4th ed. 1985); C.D. LEWIS, INDUSTRIAL AND BUSINESS FORECASTING METHODS 11982): J.S. ARMSTRONG. LONG- RANGE FORECASTING: FROM CRYSTAL BALL TO COMPUTER (2d ed. 1985); and C.W.J. GRANGER, FORECASTING IN BrJsiNEss AND ECONOMICS (1980). Business forecasting techniques include qualitative methods based on observable social, political and economic trends as well as quantitative methods based on empirical data and elaborate mathematical models. Id. Some legal forecasting techniques a re quite similar to these familiar business forecasting approaches, but others incorporate elements of jurisprudence and legal doctrines, like stare decisis, which a r e unfamiliar to most managers. SAC: g r d l y B.A. ACKERMAN. RECONSTRUCTING AMERICAN LAW (1984). In the course of developing his own approach to legal change (which he names “Legal Constructivism”! based on microeconomics, game theory and related analytical tools, Professor Ackerman provides a useful synthesis of the scattered work in legal forecasting.

e. c.y., K. LLEWELLYN, THE BRAMBLE BUSH (19511; Oliphant, A E e t u m to Start. ,14 A.B.A.J. 71-73,159 (1928); Goodhart,Determining th*! Rmtio Decickndi ofo.Case,

40 YALE I;. J. 161 (1930); and, Stone, The Ratio of’theRatio Deeidendi, 22 MOD. L. REV. 597 (1959).

1987 1 Managing Corporate Social Respons ib i l i t y I 549

function of lawyers and judges, to the sophisticated, computer-based sociological analysis used, for example, in jury election.^^ Other legal forecasting models are based on historical analysis, on jurisprudence,86 on technological innovation^,^' and still others on fundamental economic analysis.88 All of these techniques for forecasting legal change require that a manager understand certain aspects of the change process generally and, in particular, that the manager be aware of the key linkages between law and social change in the United States.”

For a general discussion of sociologically-based legal forecasting, see M. VATRO, MAX WEBER TODAY: AN INTRODUCTION TO A LIVING LEGACY (1983); D. BLACK, THE BEHAVIOR OF LAW (1976); and, SOCIAL SCIENCE APPROACHES TO THE JUDICIAL PROCESS: A SYMPOSIUM (L.W. Levy ed. 1971). Max Weber’s principal writings on the sociology of law can be found in MAX WEBERON LAWIN ECONOMY AND SOCIETY (M. Rheinstein ed. 1954). Sociologist Amitai Etzioni has been openly critical of the growing use of sociologically- based forecasting techniques to select juries, see Etzioni, Science: Theatening the Jury, Washington Post, May 26, 1974, a t C-3.

TO JURISPRUDENCE (1984). The jurisprudence approach ranges from the rigid positivism of H.L.A. Hart where logical analysis of existing law is the basis for forecasting, see note 94 infra, to the natural law approach where ethical or religious principles predict legal change. See, e.g. , R. DWORKIN, TAKING RIGHTS SERIOUSLY (1977), and Dworkin, The Elusive Morality ojLa,w, 10 VILL. L. REV. 631 (1965).

For a discussion of the concept that many legal changes a re driven by technological innovations, see Bazelon, Coping Wi th Technology Through the Legal Process, 62 CORNELL L. REV. 817 (1977); and, Law. Science and Technozology: A Symposium, 33 GEO. WASH. L. REV. 1 (1964). See also H. KAHN, THINGS TO COME: THINKING ABOUT THE SEVENTIES A N D EIGHTIES (1972).

88 The Chicago school of economics argues that the common law reflects economic principles. Thus, economic principles might predict case law-based changes in the legal system. See, e.g., J.G. MURPHY .4ND J.L. COLEMAN, note 86 supra a t ch. 5; R.A. POSNER, ECONOMIC ANALYSISOF LAW (2d ed. 1977); and. W.Z. HIRSCH, LAW AND ECONOMICS: AN INTRODIJCTORY ANALYSIS (1979). For further background on the history of the Chicago law and economics movement, as represented by Posner’s work, see Reder, Chicago Economics: Pervnanence aid Change, 20 J. ECON. LIT. 1 (1982). For a critical comparison of the “efficiency” approach of Judge Posner and the budding “critical legal studies” movement, see Fiss, The Death sfthe Law, 72 CORNELL L. REV. 1 (1986). Fiss proclaims, id. a t 2, tha t “[bloth movements can be understood as a reaction to a jurisprudence, confidently embraced by the bar in the sixties, tha t sees adjudication as the process for interpreting and nurturing a public morality.”

89 See, e.g., Merryman, Compwative Law and Social Change: On, the Origins. Style, Decliw and Revival of the Law and Development Movement, 25 AM. J. COMP. L. 457 (1977); THE RESEARCH ADVISORY COMMITTEE ON LAW AND DEVELOPMENT OF THE INTERNATIONAL LEGAL CENTER, LAW AND DEVELOPMENT: THE FUTURE O F LAW AND DEVELOPMENT RESEARCH (New York 1974); and, Seidman, Law and Development: A General Model. 6 LAW & SOOY REV. 31 (1972). For an unusually revealing and introspective reexamination of two scholars’ fundamental assumptions about the linkages between law and social change, see Trubek & Galanter. Scholars in Self-Estrangement: Some Reflectivns on the Crisis i,n LUW and Develop- ment Studies in the United States. 1974 WE. L. REV. 1062. For an analysis of the Trubek

ea See. e.g., J.G. MrJRPIrY A N D J.L. COLEMAN, THE PHILOSOPHY OF LAW: A N INTRODUCTION


The Common Context of Legal Forecasting Techniques

In broad terms, “change” can be classified as either continuouslevolu- tionary or discontinuouslrevolutionary.gO Furthermore, “change” can be either spontaneous or planned.Y1 The legal process is usually one of continuous, evolutionary change because it normally operates within the existing social order.” More controversial is whether, and to what extent, legal change can be planned.

There is a long-standing controversy over whether law “leads” change or “follows” change, i.e., embodies change which has already Some scholars believe in the efficacy of planned legal change through the medium of rationally-construed reforming laws.94 This is commonly referred to a s a “top-down” or “instrumentalist” approach because i t involves rules from the upper echelons of government being imposed on society, typically through the intermediary of a Other scholars believe, however, that legal change can only be effective when

and Galanter article, see Burg, Law und Devrlopmmt: A Review of lhe L%f,rratrr.re w d o Critique o j ‘Scholars in Self-Estrangement’, 25 AM. J. COMP. L. 492 (1977).

’” For a general discussion of theories on change, see SOCIAL CHANGE (A. Etzioni & E. Etzioni eds. 1964); W. MOORE, SOCIAL CHANGE (1963); READINGS ON SOCIAL CHANGE (W. Moore & R. Cook eds. 1967); and, R.P. APPELBAUM, THEORIES OF SOCIAL CHANGE (1970).

’’ Spontaneous change can occur gradually through a process of day-to-day incremental adaptation to the environment. See. fig., Cohen, Cultwre as Adaptczlion, in MAN IS ADAPTA TION: THE CULTURAL PRESENT (Y.A. Cohen ed. 1968). Alternatively, more rapid spontaneous change can be occasioned by cataclysms such as floods, droughts, wars and depressions. New technologics may also lead to rapid, spontaneous social change. Planned change also may be either continuous or discontinuous depending upon whether it works within the existing social order or outside of it. Discontinuous planned change, such as the 1917 Rus- sian revolution, involves a deliberate effort to radically alter existing norms and structures.

The Cast? ( fSo7 ,Gt (7ent.d Asia, 2 LAW & SOC~Y REV. 179 (1968). y3 See, e.g., Law as an Instrument ofSocial Change, note 34 supra; Friedman, Legal Culture

and Social Development, in LAW AND THE BEHAVIORAL SCIENCES at 1000 (L.M. Friedman & S. Macaulay eds. 1969); and, Fuller, Positzuism nrkdi+debily lo IJwu:-A Reply lo Prqfewnr Hart, 71 HARV. L. REV. 630 (1958).

” See H.L.A. HART, THE CONCEPT OF LAW (1961). For a discussion and analysis of Hart’s writings and his view of jurisprudence, see N. MACCORBIICK, H.L.A. HART (1981). Historical- ly, this group of scholars has included both “formalists,” such as Austin and Kelsen, and the “utilitarians,” such as Bentham and Ihering. See E.M. SCIIIJR, LAW AND SOCIETY 23-58 (1968).

35 Compn,re Seidman, note 89 supra, with Trubek, Toumrd a, Social Theory o f l a w : An E~sn ,y on fheStudy 0 f r . a ~ and h t e l o p m m t , 82 YALE L.J. 1 (1972). An acerbic but enlighten- ing exchange of correspondence between these scholars in 1975 helped to sharpen the differences between their instrumentalist conceptions of the legal system. See R. B. Seid- man, The Lessons of Self-Estrangement: On the Methodology of Law and Development (1975) (unpublished monographk D. M. Trubek & M. Galanter, Scholars in the Funhouse: A Reply to Professor Seidman (1975) (unpublished monograph); and, R. B. Seidman, A Replication to Professors Trubek and Galanter (1975) (unpublished monograph).

e Massell, LOW 0s ci;n In,s.tmr,rwnt of Ralolutionaq (7t~0,rkge in ( I Trcditimal &.I.

1987 1 Managing C o v o r a t e Social Responsibility 1 551

it comes from the “bottom up” through the evolution of customary law.96 These scholars argue that courts and legislatures should act only when popular custom has evolved to embrace the new norms of c~nduct . ’~ Still another group of scholars has endeavored to strike a middle ground between the instrumentalist and customary law approaches by pragmatically acknowledging that, in order to be effective, an instrumentalist legal strategy must systematically take into account the culture and customary law of the society in que~t ion.~’

If legal change occurred randomly and wholly without warning in our society (as many managers mistakenly believe) as the result of instrumentalist law-making, the only feasible strategy would be a reactive one, namely to delay any response until a new statute, administrative regulation or judicial decision became law. But this kind of arbitrariness and unpre- dictability in the legal system would be seriously prejudicial t o the functioning of the commercial system. Indeed, some legal scholars have argued that it was the existence of a rational, autonomous and, therefore, predictable legal system which facilitated the rise of capitalism in England and Western Europe during the sixteenth and seventeenth centur ie~.~’

Irrespective of the theory of jurisprudence to which one subscribes, the reality is that we have a legal system in which the need for predict-

pB See, e.y., A CASEBOOK OF SOCUL CHANCE (A.H. Niehoff ed. 1966); and, C.M. ARENSBERC & A.H. NIEHOFF, INTRODUCING SOCIAL CHANGE: A MANUAL FOR AMERICANS OVERSEAS (1964). Historically, this group has included the “cultural” and “historical” schools as represented by Savigny and Maine as well as the “sociological jurisprudence” school represented by Ehrlieh and Pound.

97 Perhaps the best-known advocate of a customary law approach to legal change was Professor Lon Fuller. See, e.g., Fuller, Hwnan Interaction and the Law, 14 AM. J . COMP. L. (1969); L. FULLER, ANATOMY OF THE LAW (1968); and, L. FULLER, THE MORALITY OF LAW (1964). See also R.S. SUMMERS, LON L. FULLER (1984); and, Osgood, G o ? i ~ , V K ~ / ~ t d Functions and Constitutional Doctrine: The Historical Constitution, 72 CORNELL L. REV. 553, 588-92 (1987).

98 See, e.g. , Scholars Cn Self-Estrangement. . . , note 89 supra; Summers, Pragmatic- Instrumentalism in Twentieth Ceatury American Legal Thought-A Synthesis and Critique of Our Dominant General Theory About Law and Its Use, 66 CORNELL L. REV. 861 (1981); and, Lyons, Legal FCWTYUL~~SWL and Instrzr.mmialism-A Pathological Study, 66 CORNELL L. REV. 949. Summers observed, id. at 947, that “[nlot only is pragmatic instrumentalism a distinc- tive tradition within Western legal theory, it is also largely indigenous to the United States.” For further perspectives on Professor Summers’ “pragmatic instrumentalism” approach, see Moore, TheNeed for a Theory of Legal Thewies:Assessing Pragmatic Instrummtalism-A Review Essay of “Instrumentalism and American Legal Theory” by Robert S. Summers, 69 CORNELL L. REV. 988 (19841, and Summers, On Identifying and Recunstructing a General Legal Theory-Some Thoughts Prompted by Professor Moore’s Critique, 69 CORNELL L. REV. at 1014.

” See generally Trubek, Max Weber on L a w wid the Rise of Ca.pita,lasm, 1972 Wrs. L. REV. 720, 725-31 and 740-42.


ability must be carefully balanced against the need for flexibility.”’ Neither a rigid, inflexible rule of law nor a system which readily bends to every whim can provide long-term stability. In the United States a t least, legal change occurs in a continuous, orderly way through accepted processes and within certain parameters established by American society.’” As a result, for any situation which might arise, a t a given point in time there is a limited and, to an extent, predictable constellation of possible legal outcomes.’02 Through familiar legal doctrines such as s tare deeisis, equity and legal fiction^,'"^ the courts can, in effect, “pour new wine into old bottles” and thereby achieve modest incremental change without undermining the fundamental predictability of the legal system.lo4 Eventu-

lo” See note 39 supru. See aZso E. EIIRLICH, FUNDAMENTAL. PRINCIPLES OF THE SOCIOLOGY OF LAW (1936). Ehrlich was one of the pioneers of the concept of the “living law,” that is a legal system capable of slowly adapting to the demands placed on it by society.

I U 1 See. e . g . , Summers, Eduating nn,d Improv ing Legal Processez--A Plm fbr “Process 1’ahe.q.‘’ 60 COHNELL I,. REV. 1 (1974); and, S.F. MOORE, note 3 9 ,

‘liZ See. e .g . , Galanter, Why the “Haves” Come Out Ahead: Speculations on the Limits o/‘

‘ 0 3 Sea H.S. MAINE, ANCIENT LAW 20-41 (1861) (Beacon Press ed. 1970). As previously discussed, note 31 supra, Maine believed that relatively stable law constantly had to confront new social demands. Maine argued that the three instrumentalities “by which Law is brought into harmony with society . . . [arc] Legal Fictions, Equity and Legislation . . . .” i d . a t 24. Furthermore. Maine argued tha t the historical order of these three transition devices for facilitating legal change was exactly as he stated it. Thus, Maine believed that in appropriate cases the courts would be first to act by using fictions or equitable doctrines to skirt rigid common law rules. Eventually, he believed, legislation would ratify the de facto legal change. &c. also R. POUND, h T R O D U C T I O N TO THE PHILOSOPHY OF LAW 48-71 (rev. ed. 1954).

lo‘ The history of product liability law in the United States during the 20th century provides strong confirniation for Maine’s view of the legal change process, id. For example, in the case of Greenberg v. Lorenz, 9 N.Y.2d 195, 213 N.Y.S.2d 39, 173 N.E.2d 773 (19611 the New York Court of Appeals relied on the legal fiction tha t a father was acting as the “agenl” of his minor daughter when he purchased a defective food product in order to circumvent the “privity of contract’’ bar to the daughter’s lawsuit against the supermarket.

In a concurring opinion, however, Judge Froessel cautioned tha t the Greenberg decision should be narrowly limited to its facts and rwt given broader application. Judge Froessel was concerned not only about upsetting established business relations but also with the fact that judicial erosion of the “privity of contract” doctrine resulted in the strange outcome that liability fell on the retailer, who had no way to inspect prepackaged food products, instead of on the real culprit, namely the manufacturer. Such a significant legal change, Judge Froessel argued, should be left to the legislature, 173 N.E.2d at 776, even though “privit,y of contract” was a judge-made rule. CjI Flood v. Kuhn, s . ~ ~ p r a note 33. By contrast, in h is historic concurring opinion in the landmark case of Escola v. Coca Cola Bottling Co., 24 Cal. 2d 453,150 P.2d 436 (Sup. Ct. Cal. 1944). Judge Traynor argued tha t the time had come for courts to abandon deceptions such as legal fictions and squarely acknowledge that “[elven if there is no negligence public policy demands tha t responsibility be fixed wherever it will most effectively reduce the hazards to life and health inherent in defective products that reach the market:” 150 P.2d at 440.

LeynJ Chan.ge, 9 LAW & SOC’Y REV. 95 (1974).


ally legislation may supersede such judicial lawmaking.'05 Understanding this incremental process of law and social change is the first step for a manager trying to cope with a changing legal environment. The second step is for a manager to select one of the forecasting techniques.

Selecting Forecasting Techniques

The long-term forecasting techniques mentioned above vary significantly in their maturity and usefulness to managers. The application of precedents to new facts and the sociological analysis of jurors are probably the most mature. Historical analysis is certainly more mature than jurisprudential, technological, or economic forecasts of Iegal changes.

The techniques also have differing predictive attributes. Thus, sociological analysis may accurately predict jury decisions and perhaps legislative decisions. On the other hand, the jurisprudential approach may be most effective in predicting judge-made law. Technological and economic-based forecasts of legal change might best presage changes in business law. In contrast, the historical approach may be the broadest forecaster of legal change-able to predict changes in many legal fields and from all law -making institutions.

Technological grounded forecasting might only forecast changes in narrow areas of the law-those related to a particular technology. Jurisprudential and historicaI-based forecasts, on the other hand, these may be able to predict broad changes, changes that are most likely to have major impact on big business. Also, the time horizons might vary significantly among these relatively long-term techniques. Historical analysis might forecast farthest into the future while a technology-based forecast probably would have the shortest range.

At this early stage in this field's development, historical- based forecasting may be both the most mature and the most useful to today's managers. The following section elaborates by example some of the strengths and weaknesses of this forecasting approach.

History as an Illustrative Guide for Predicting Legal Change

Law as a Response to Public Opinion

At the turn of the century, English legal scholar A.V. Dicey argued

As Maine would have predicted, the legai fiction of Greenberg v. Lorenz, id., that a family member who purehases products for the household is acting as an "agent" for other household members was subsequently ratified as legislation with the adoption of the Uniform Commercial Code (UCC). Section 2-318 of the UCC provides in part: "A seller's warranty whether express or implied extends to any natural person who is in the family or household of his buyer . . . ." See, e.g., Miller v. Preitz, 422 Pa. 383.221 A.2d 320 (Sup. Ct. Pa. 1966).

554 1 Vol. 25 I American Business Law Journal

that , because of the nature of a modern democratic society, the law is invariably responsive to public opinion.lo6 Dicey was aghast a t the wave of social welfare legislation which had swept across England during the late lBOO’s, disrupting cherished legal doctrines like “freedom of contract” and leading to what Dicey thought was an unhealthy degree of government involvement in the commercial system.

According to Dicey, “the law of a country may fail, for a time, to repre- sent public opinion owing to the lack of any legislative [or judicial] organ which adequately responds to the sentiment of the age.”la7 But, in general, he believed the legal system would eventually be responsive to genuine and persistent social demands whether or not it was in the long-run best interests of the country. “Nowhere,” he observed, “have changes in popular convictions or wishes found anything like such rapid and immediate expression in alterations of the law as they have in Great Britain during the nineteenth century . . . . [I]t is a t bottom opinion which controls legislation .’”O’

Mendelson’s Stages-of -Growth Model

Other Iegal scholars have noted a corresponding responsiveness of the American legal system to social needs. Wallace Mendelson, for example, has presented a development model for the United States based on three distinct periods of evolution of the business-government interface: Stage 1 -the era of nationalism; Stage 2- the era of industrialization; and Stage 3 -the era of the welfare state.log

Mendelson’s Stage 1 was post- independence America of the late 18th and early 19th centuries, a time during which the strains of different cultures and commercial interests among the thirteen original states, coupled with mutual suspicion and distrust, threatened to tear apart the new nation. According to Mendelson, the overriding need and goal of the times was to achieve political integra- tion by sacrificing individual states’ r ights in the interest of federalism. All of the leading Supreme Court decisions of that era, says Mendelson, reflect “with compelling simplicity a vision of national unity and national

Staye 1-The Era of Nationalism

‘“Ii .see A.V. DICEY, LAW A N D PTIRLIC OPINION IN ENGLAND (1905). Of a similar vein is the earlier work of German legal scholar Friedrich Karl von Savigny entitled OFTHE VOCATION OF OUR AGE FOR LEGISLATION AND JURISPRUDENCE (reprint ed. 1975). A pioneer of the S O -

called Historical School of jurisprudence, Savigny was full of disdain for the 19th century European passion for codification.

lo7 A.V. DICEY, id. at 9. lo‘ Id . at 16. I”‘ Set. Mendelson, 12a7~! a.n,d the DevelopnLnnt of&-ation,s, 3’2 J. OF POI.. 2’23 (1970).


supremacy.’’”o These early Supreme Court cases, argues Mendelson, provided “cement for the Union.. . . ” I l l

By the middle of the 1800’s Mendelson says, the United States had successfully overcome the hurdle of achieving national unity and was well on its way into Stage 2, t h e era of industrialization”2 or, in the words of economist Walt Rostow, the “take-off’ into economic g r 0 ~ t h . I ’ ~ Stage 2 in Mendelson’s development model was characterized by a laissez-faire legal system designed “to increase production by promoting economic He notes that these laissez-faire policies found expression in such specific legal rules as “caveat emptor” (let the buyer beware) and “privity of contract” that “protected manufacturers of defective goods from liability to third-party consumers, and in. . . [the fellow servant rule] that all but freed employers from the cost of industrial accident^.""^

The objective of these legal rules, according to Mendelson, was to promote the accumulation of capital, without which the Industrial Revolu- tion never could have succeeded. If the legal system had immediately placed on America’s newly emerging infant industries the full burden of the social costs of industrialization, it might have squelched these businesses before they ever got off the ground. “Decisions that block the claims of labor and consumer,” says Mendelson, “promote the growth of investment capital. And if a ‘traditional’ society wants mass production, its first economic task is to accumulate capital.””6

But, Mendelson asks, how does a developing country accumulate capital? Some capital can be borrowed as indeed the United States did heavily during the 19th century. Mainly, however, a country must save which, Mendelson says, “means much more than putting money in a bank.’”17

Stage 2-The Era of Industrialization

It means.. . society must refrain from using all its current energies and materials to satisfy its current wants, no matter how urgent these may be. Saving is the act by which a . . . [nation] releases some portion of its labor and material resources from the task of providing for the present so that both can be applied to building for the future.

Id. at 224.

Id. at 224-25. C’ K. POLANYI, THE GREAT TRANSFORMATION (1944). l’’ Id.

‘ I3 See Rostow, The Take-off Into Self-Sustained Growth, THE ECON. J. (1956). See also

’I‘ Mendleson, note 109 supra, at 226. ‘I5 Id. ‘Ie Id. ’U I d . at 227.

N. ROSENBERG & L.E. BIRDZELL. How THE WEST GREW RICH (1986).

556 / Vol. 25 I American Business Lau! .Jou.m,nl

When the Supreme Court suppressed worker and consumer claims and taught us the blessings of laissez faire and the Gospel of Wealth, it fostered capital accumulation. Its decisions were part of a socialization process that glorified private enterprise and for a time a t least kept the common man in his humble place. This, with the resulting stimulation of business energy and appetite, is the crux of economic modernization. To put it crudely, the court promoted the savings and managerial effort that built our mass producing factories. The common man paid dearly in his standard of living as he has in all industrialized countries including Soviet Russia."*

Similar observations about the role of law and government in business during this period of time are also expressed by another legal scholar, Carl Auerbach. Auerbach says of this period:

The achievements of the 19th century American capitalism were great. But its social costs were very high. The law did little to curb the extrava- gant exploitation of our natural resources. Forests were despoiled. Soil was permitted to erode. Game was exterminated. Air and water supplies were polluted and fish life destroyed. Natural gas was burned to get oil, which was squandered. Unplanned railroad development left a heri- tage of problems with which we are still struggling today.

Human resources were also cruelly used. The public health was nobody's concern. The workday and work week were very long and earnings very low, though conditions of the American worker in the 19th century were probably better than the conditions of the worker any- where else. Workers and their families bore the staggering costs of industrial accidents. The business cycle which recurred throughout the 19th century, victimized farmers and worker^."^

Stage 3-The E m of the Welfare State The excesses of big business began a t last to provoke public reaction and calls for change. Auerbach no te s that the latter part of the 19th century was a period of growing social unrest in the United States.

Social unrest grew and found expression in the protest movements of the farmers; the railroad strikes of 1877 and 1894; the Haymarket bomb throwing in 1886; the Homestead strike riot of 1892 and Coxey's army of the unemployed in 1894. This unrest found political expression in the bitter Presidential campaigns of the 1890's.

Before the close of the 19th century, the law began to do something about these unintended consequences of rapid industrialization based upon private economic decisionmaking in order to allocate, in a more just and humane fashion, the material and human costs which did not show up in the accounts of any private firm.lZ0

'" Id . 'I9 See Aucrhach, note 50 supra, at 524.

I d .

1987 I Munaging Corporate Social Responsibility I 557

This marked the transition of the United States from Mendelson‘s Stage 2 into Stage 3, the era of the welfare state. By this time, the industrialization of America was well underway and the position of big business secure. According t o Mendelson:

Having achieved mass production, the United States entered stage three- the era of the welfare state. Consumer goods were so potentially plentiful and so near a t hand that there was less need to restrain consumption. We could afford Social Security, collective bargaining, minimum wages, the forty- hour week, Medicare, and similar measures. The common element in these programs is a redistribution of wealth. Income that earlier might have been channeled toward capital forma- tion was now diverted to provide goods and services for the common man. His fathers’ unwilling investment in American plant capacity began a t last to pay him dividends.”l

Summarizing the achievements of Stage 3, Mendelson observes: “The weak have inherited the judicial world just as the nationalists did in stage one, and the industrialists in stage two.’”22

Manifestations of the welfare state were by no means limited to judicial law, however. Auerbach notes that the new social priorities of the 20th century were also expressed in United States antitrust laws that prohibited monopolization and conspiracies to restrain trade; in public utility regulation; in laws designed t o insure minimum standards of decent life (public school systems, factory safety legislation, laws regulating employment of women and children, minimum wage laws, workman’s compensation and disability laws, and unemployment insurance laws); in laws to protect consumers (public health legislation, pure food and drug laws, laws pro- hibiting false labeling and advertising, laws regulating the issuance of securities and the operations of the stock exchanges, and laws requiring insurance of bank deposits); and laws for protecting the e n v i r ~ n m e n t . ’ ~ ~

According to Auerbach, in Stage 3, the era of the welfare state, market forces continue t o play an important but greatly circumscribed role in business:

Markets - the arenas of private economic decision-making- continue to play a crucial role in reflecting consumer wants, in distributing the national income, in determining the rate of economic growth and in making possible the development of private, countervailing power. But these markets are no longer self-regulating: they a re regulated by law to satisfy the claims and achieve the ends I have tried to describe. A tolerable measure of social justice and individual freedom has thereby

’*’ See Mendelson, note 109 supra, at 228. ’* Id. at 229.

See Auerbach. note 50 supra, at 522-24.

558 I Vol. 25 /American Business Law Journal

been achieved in our society a s a result not of the pursuit of a vision of an ideal economic system but of the political struggle which individuals and groups have waged, according t o the rules of democracy, to satisfy their claims.’24

Thus, as Dicey argued with respect to England, law and the legal system in the United States also play a pivotal role as a linkage between business and the public opinion. Historically, the business-government interface in this country has, with some lag time, been quite responsive to public opinion; and, there is no reason to believe that this lagged relationship will not continue to operate in the future.

The Legal Environment of the 21st Century

The preceding analysis suggests that the business -government relationship that will be characteristic of the 21st century in this country is being shaped by historical forces a t work in the United States today. Many of these forces are not yet reflected in any statutes or judicial decisions. The challenge for today’s managers is to recognize these issues and discern the relevant social trends in time to adapt their firms’ policies and to have a meaningful impact on the final results.

Mendelson’s stages -of-growth analysis of the evolution of business- government relations in the United States provides a point of departure for predicting the future legal environment of business. Mendelson’s cen- tral argument was that the growing abundance of resources and the success of American business during Stage 2, the era of industrialization, paved the way and provided the public impetus for the transition into Stage 3, the e ra of the welfare state. He observed that “centuries of development have repealed for a time a t least the iron law of p car city.''^^^ This made i t both possible and desirable for the emphasis of the legal system to shift from a stance protecting business and promoting capital accumulation to stimulating a fairer and more equitable distribution of wealth.

If the economic and social forces that provided the impetus for the transition to the welfare s ta te continue to dominate our society, we can expect the next stage of development, Stage 4 in Mendelson’s model, to resemble a “super welfare state” thereby continuing the trend toward greater legal regulation of business and greater government intervention in the commercial system. If a federally-legislated minimum wage is characteristic of Stage 3, will Stage 4 include guaranteed employment and a minimum income, for example? Many other countries around the world currently have welfare states that far exceed anything now found

I d . a t 530. See Mendelson, note 109 supra, at 236.


in the United States. Is the United States heading in this direction?”‘ Alternatively, is it possible that the pendulum has swung a s far in the

direction of the welfare state as it is going to, a t least for the current cycle? In the face of a growing scarcity of natural resources and increasingly competitive international pressures, has the United States now entered an era of retrenchment? Is the dominant need today not for more redistribution but rather for a new round of investment and capital accumulation to revitalize American industry?

If so, we can expect a very different kind of business-government interface in the 21st century. In this case, we might expect Stage 4 to look a good deal more like Stage 2 than Stage 3. We might expect, for example, a growing trend away from government intervention in business and a return to laissez-faire. We might expect to see deregulation of regulated industries, less rigorous enforcement of the antitrust laws, pull-backs in consumer and environmental protection laws, and efforts to limit the liability of manufacturers to consumers and of employers to workers. In- deed, these are the very trends which, it seems, have dominated many sectors of the American economy since the late 197O’s.lz7 Projecting into the 21st century, the deregulatory environment of the 1980’s may suggest that a new “golden age” for at least some American industries is in the offing.’28 In either case, managers clearly must be sensitive, as well as responsive, to the broad historical trends, and the legal ramifications of those trends which affect their firms.

The “Zone of Discretion” Spectru.m-A Link Between Legal Change and Business Planning

Understanding the process of legal change and forecasting its impact, however, are only two of the three steps needed for a manager to cope with a changing legal environment. The third step is to link that understanding to concrete management strategies and broad business policies.

Robert Ackerman, a scholar of management studies, has put his finger on the problem by criticizing the tendency of managers to see legal issues

For example, pending legislation on both state and federal levels would require companies to give employees advance notice of layoffs or plant closings comparable to notice requirements in many European countries. For a summary of the history of and the arguments for and against such laws, see R.A. BLJCHHOLZ ET AL.. MANAGEMENT RESPONSE

lrn See, e.g. , Frederick, Corporate Social Responsibility in the Reagan E r a and Beyond, 25 CALIF. MGMT. REV. 145, 152-53 (1983); and, Reagan’s Agenda, Dun’s Business Month, May 1984 at 42.

Iz8 Evergrowing public concern over the safety of nuclear power, toxic waste disposal, and similar contemporary problem areas suggest that a wholesale abandonment of government intervention and a return to 19th century style “laissez-faire” is not likely to occur.

TO PUBLIC ISSUES 285-87 (1985).


in black and white terms instead of as a spectrum of varying shades of gray.lZ9 Such a spectrum is illustrated in Figure 1.

I

ZONE OF DISCRETION SPECTRUM

I Zone of Discretion I I 100% Discretion 0% Discretion 0% Regulation 100% Regulation

Figure 1

Ackerman argues that managers tend to view legal issues too simplis- tically as falling either a t one end of this spectrum or the ~ t h e r . ' ~ " By treating a legal environment issue in this way, however, a manager may be forfeiting the opportunity to exercise influence during the most critical time period - that period when the legal issues are neither black nor white, which Ackerman calls the "Zone of Discretion." Here is the way Ackerman describes this middle period:

There is an argument that appears t o justify ignoring t h e administrative implications of managing corporate responsiveness. It holds t h a t social expectations for business's behavior become legitimate only when t h e government requires compliance, and t o the extent t h a t governmen- tal regulations exact penalties, a social issue is converted into an economic one and so can b e managed jus t like any other business problem. The fallacy in this reasoning lies in t h e premise tha t corporate action on social issues is e i ther voluntary or required. In fact, dur ing t h e period when responsiveness is most important, it is neither.

For every issue there is a t ime period before i t becomes a mat te r of social concern, and espousing t h e issue may even arouse economic and social sanctions. There is also a time when its acceptance is so widespread t h a t adherence is an unquestioned par t of doing business (child labor laws create little anxiety in 1973).

Sre, r . g . , Federal Regulation Arises Aneu! LrL Matters That Worry the Public, Wall St. J., Apr. 21, 1987, a t 1.

See Ackerman, How Companzes Respond to Social Demands, 51 HAKV. Bus. REV. 88 (1973). C j G.A. STEINER & J.F. STEINER, BUSINESS GOVERNMENT AND SOCIETY 244-46 (4th ed. 1985). In Exhibit 10-1, i d . a t 245, these authors present a scale comparable to that shown in Figure 1 and, in connection with their scale, discuss what they call "zones of action."

'j" Id .

1987 Managing Corporate Social Responsibility I 561

Between those two points there is a period of uncertainty as to the strength and durability of public support for the issues, standards of socially acceptable behavior, timing of desired conformity, and tech- nologies or resources available for complying. This period might be called a zone of discretion in which the signals the company receives from the environment are unclear. I t cannot avoid responding in some way, but it still has discretion in the timing and strength of the re~ponse.’~‘

Some legal environment issues, according to Ackerman, “have pro- gressed so far through the Zone of Discretion that their final dimensions a re beginning to take As examples, Ackerman cites the areas of equal employment opportunity and protection of the environment. These areas are now heavily regulated by legislation, administrative regulation, and judicial decisions leaving little room for the exercise of managerial discretion. But other areas, says Ackerman, “are much less well defined.”133 For these issues, still squarely in the middle of the zone of discretion, astute and perceptive managers have considerable leeway in either heading off future legal regulation or in helping to shape its final dimensions and in preparing their firms to deal with the consequence~.’~‘ Clearly, forecasting legal change can enrich the benefits of Ackerman’s paradigm.

Management Responses to a Changing Legal Environment

As discussed above, between the extremes of regulation and no- regulation on the scale of Figure 1 lies Ackerman’s zone of discretion. We can now link this region on Ackerman’s scale to Type 1 management responsiveness based on legal regulation and Type 2 management responsiveness based on enlightened self-interest.

The right end of Ackerman’s zone of discretion represents the region where Type 1 management responsiveness dominates because legal regu-

13‘ See Ackerman, note 129 supru, a t 91-92. ’32 Id. a t 92. Is3 Id. ‘34 See, e.g., Epstein, Societal, Managerial, an,d Legal Perspectives on Corporate Social

Responsibility-Produce and Process, 30 HASTINGS L.J. 1287 (1979). Some important insights about the nature, durability and timing of evolving legal change can be gleaned from superim- posing William Evan’s “continuum of resistance to law,” note 80 supra, on Ackerman’s “Zone of Discretion” spectrum. Evan’s analysis suggests that evolving legal change which impinges on deeply-engrained custom, tradition or habit is likely to evolve only slowly toward legal regulation. There is also a good opportunity under these circumstances for modifying, stalling or even reversing tha t evolution through preemptive management strategies and public education. The enactment and subsequent repeal of Prohibition, see U.S. CONST. amend. XVIII (1919) and amend. X X I (19331, is a good example of how the evolution of legal change can be reversed where the change does not enjoy broad-based popular support.

562 i Vol. 25 ! Americuri Business Law Journal

lation significantly restricts managerial discretion. Toward the middle and left of Ackerman’s zone of discretion, however, the various forms of Type 2 management responsiveness become increasingly important. With Type 2 management responsiveness, there is no legal regulation which mandates any specific management action. Whether a manager takes action and, if so, the nature of that response will, in large part , be dictated by assessing the costs against the anticipated benefits to the company. Correspondingly, in the middle and left parts of the zone of discretion, management responsiveness is neither wholly voluntary nor legally mandated. Managers’ hands a re not completely tied; but neither do managers enjoy unlimited discretion about when and how to respond to social demands.

In view of the preceding discussion about the dynamic legal system, it should now be clear that the cost-benefit analysis implicit in the enlightened self-interest approach cannot properly assume that the law will remain static. Instead, knowledge about the dynamic legal system, including projections about the nature and timing of possible legal changes, must be factored into the equation. When the dynamic legal system is brought into this analysis, the evaluation of alternative management strategies may change dramatically.

For example, when the management assumption of static law is dropped, “preemptive” action; one form of Type 2 management responsiveness, becomes much easier to reconcile with profit-maximization. The promulgation of “voluntary” standards or codes of conduct by many industries and trade associations can be more easily justified on this Through such preemptive action, a firm or an industry may be able to undercut and deflate, or a t least delay, snowballing public support for legal intervention.

Applying a similar analysis to the tobacco industry, for example, because of the large number of people who either cannot or will not give up smoking, it is highly unlikely that there will be a complete legislative ban on smoking or even that current efforts to restrict smoking in the workplace and public buildings will progress very rapidly. On the other hand, smokers’ freedom to smoke is not significantly impacted by legal restrictions on cigarette advertising and promotions or by requirements for increasingly conspicuous and graphic warnings about the hazards of smoking. It is in these areas that tobacco companies should anticipate the most rapid evolution of legal regulation - and the toughest battles should they t ry to stem such developments.

See, e .g . , Smith, Self-Regulation: The Constitutiorud Dimension, 49 MOD. L. REV. 141 (1986); Heidt, Industry Self-Regulation and the TJsekss Concept oj-“Group Biyeott”, 39 VAND. L. REV. 1507 (1986); Loosemore, Advertising, Property Selling and Self-Regulation, 135 NEW L.J. 482 (1985); and, Best, Conlrolling False Advertising: A Comparative S tudy of Puhlio Regulation, Industry Self-Policing, and Private Litigation, 20 GA. L. REV. 1 (1985). As noted in the preceding articles, one of the major impediments to greater industry self-regulation has been the charge that such cooperation amounts to an antitrust violation.


A specific example would be a firm that is beseiged by complaints from the local community over excessive pollution. At the same time, because the local community also comprises stakeholders who benefit from the presence of the firm, e.g., employees, suppliers and consumers, any “killer” instinct is sure to be tempered. By “voluntarily” effecting modest pollution controls, the firm may be able to placate enough of the community to head off the enactment of more stringent, and costly, local regulation. Such action is readily justified when the likelihood of legal change is expli- citly weighed in the policymaking process. Thus, in this example, a dynamic law approach makes the social welfare viewpoint more compatible with profit-maximization.

In a situation where legal intervention appears inevitable and imminent, a dynamic law approach may lead to a counter-intuitive business strategy. Instead of fighting a losing battle to prevent government regulation for instance, a firm might actually decide to support legislation in the relevant area rather than risk the less-predictable outcome of a court decision. One benefit of this approach is that legislation has only prospective effect whereas a court decision may have retroactive applicati~n.”~ Second, a firm or industry, through lobbying efforts and public education programs, can influence the final outcome of the legislative process to insure the minimum possible damage to business. Third, legislation helps to establish a level playing field by insuring that all competitors in the industry will face a comparable cost and marketing structure in which no one can compete unfairly by cutting corners.‘37 Faced with a loss of consumer confidence and added packaging costs following the contami- nated “Tylenol” crises, Johnson & Johnson first actively promoted federal regulation mandating tamper-resistant packaging for over- the-counter medication, and, after the second occurrence, urged that over-the-counter capsule medication be discontinued and replaced by a new “caplet” form.‘” The company was certainly not oblivious to the fact that such actions would compel i ts competitors to make product and packaging changes, including incurring expenditures, comparable to what it was planning to do anyway.

136 See notes 32-37 sup.ra and accompanying text. See, e.g., Mashaw, note 54 supra; and Wokutch & Spencer, CorprateSu,ints andsinners;

The Effects OfPhilanthropic and Illegal Activity on Organisational Perfomnunce, 29 CALIF. MGwr. REV. 62 (1987). Lo See, e.y., Bass & Wiesen, Tykmol’sA~e~th~:ProductLia~nlityImpLications.69 A.B.A.J.

287 (1983); Tylenol Firm Halts Capsule Production, Boston Globe, Feb. 18,1986, at 1; For Tylenol’s Manufacturer, the Dilemma i s to be Aggressive-But not Appear Pushy, Wall St. J., Feb. 20,1986, at 27; and, ExcedrinFirm Takes Capsules ojfMarket, Boston Globe, June 21, 1986, at 1.

564 1 Vol. 25 / Am,erican Business Law Journal

Another contemporary example of such preemptive action involves the growing legal crackdown on drunken driving. In response to increasing numbers of lawsuits, skyrocketing insurance premiums and growing public criticism, some innovative bars have initiated “designated driver” programs. Typically under such programs, a group of individuals travelling together t o a bar is encouraged t o designate one member as the “driver” who agrees not to consume alcoholic beverages for the evening. The designated driver may be offered free soft drinks all evening, a free admission pass for his next visit and a free drink coupon good for a future visit when someone else will be the designated driver.

How much does it cost for a bar to run such a program? Arguably, the small costs will be recouped many fold through attracting increased business, promoting return business, and encouraging greater consumption by those who are drinking. Accepting that alcohol consumption is both legal and a popular social pastime, programs like this which increase public safety must be applauded from a social welfare standpoint. But why must managers be bludgeoned by lawsuits and insurance premiums into taking measures that might have been in their best business interest from the outset? A better understanding by managers of the dynamic legal system might have led sooner to such an imaginative and compassion- a te response to this problem.

Johns-Manville Company is a final example of the potential impact of the dynamic legal system on managing corporate social responsibility. As discussed earlier, this is one of the toughest social responsibility problems to analyze because it involved a latency period of thirty to forty years. As observed, it is conceivable that even with the benefit of foresight Manville’s management would have addressed the asbestos problem no differently. But, no one knew in advance how long it would take for injuries in these kinds of cases to manifest themselves, or how long i t would then take for medical science to make the necessary linkages and for the legal system to respond. It might indeed take thirty to forty years; but, the problem might also break wide open in a matter of months, affecting current management and current shareholders. Therefore, when this kind of a problem is viewed in a dynamic law framework, a t least a modestly proactive management strategy can be reconciled with profit -maximization.

In response to the first hints of a health hazard associated with asbestos, Manville’s management elected to take no special preventive measures and, worse, even tried to cover up what little information about asbestos was then a~a i1ab le . l~~ What alternatives were available to Manville and how costly would it have been to implement them? One wonders, for example, how much i t would have cost Manville to install better ventilation

119 q w nores 23-24 supra and accompanying text.

1987 i Managing Corporate Social Responsibility 1 565

equipment in work areas and to provide employees with simple paper face masks. If Manville had made a full disclosure to its employees of what little was then known about the dangers of asbestos,14o how many would have left their jobs, especially during the depression days of the 1930’s? How many of these same employees, if asked, would have willingly signed contract disclaimers expressly waiving their rights to sue the company for future injuries resulting from working with asbestos? If such contract disclaimers had been coupled with full disclosure and some preventive measures by Manville, there is a t least a reasonable public policy argument in favor of enforcing such provisions absent conflicting reg~1at ions . l~~

The modest measures outlined above might, in time, have proven inef- fective in either protecting the employees’ health or in protecting Manville from legal liability. On the other hand, at a relatively minimal cost, many employee lives and company dollars might have been spared if only management recognition of the dynamic legal system had induced them to go beyond the existing legal standards. Thus, even in this extreme type of situation, the dynamic law approach can make social welfare more compatible with profit-maximization.

CONCLUSION

Modern business managers are walking a narrow and precarious tight-

I4O A number of states have recently enacted so-called “right-to-know” legislation that mandates disclosure to employees of toxic substances used in the workplace. See, e.g., Note, Employee Right to K m : Should tha Federal Government or the States Regulate the Dissemina- tion of Hazardous Substance Information to Protect Employee Health and Safety?, 19 SUF- FOLK U. L. REV. 633 (1985). See also Hamrdous Substances Law ESfecti?ie Today, Boston Globe, Sept. 29,1984, a t 35; and, The Battle Over Chmical Labeling. N.Y. Times, Sept. 12, 1982, at F-8. See also note 6 supra.

14’ In general, parties to contracts may control damages allocation when they can foresee that they will be liable for them. The law, to some extent, will allow the parties to exempt themselves from such liability by means of a freely-negotiated exculpatory clause. En- forcement of an exculpatory clause creates a problem, however, because there is always some amount of immorality in attempting to contract away liability for negligence. The RESTATEMENT OF CONTRACTS has attempted to resolve this problem by permitting one to contract away liability for any but gross negligence. See generally Smith, Contractual Con- trol of Damages in Commercial Transactions, 12 HASTINCS L.J. 122 (1960); and, Potamkin & Plotka, Indemnification Against Twrt Liability-The “Hold Harmless” Clause-Its Inter- pretation and EJYect Upon Insurance, 92 U. P A . L. REV. 347 (1944). Exculpatory clauses typically result from the understandable desire of the parties to define their respective obligations and to delineate accurately their respective fields of liability. In making the determination whether to enforce such a clause, the cases therefore distinguish between bilateral and unilateral hold- harmless clauses. The latter type of exculpatory clause is included in an agreement a t the insistence of the party to be indemnified and whose superior bargaining position enables him to compel compliance of the other party with an unreasonable request.

566 I Vol. 25 1 American Busin,ess Law Journal

rope between preserving the essence of a market economy, with a broad scope of discretion for private enterprise managers, and a command economy in which managerial discretion has been forfeited to government fiat. Many of the key legal environment issues tha t will impact business in the next century a re today still located well within a Zone of Discre- tion where managers may exercise considerable leeway in shaping and responding to those social demands. If management fails to fulfill its social responsibilities a t a time when action is still largely voluntary, it will almost certainly face more costly and burdensome regulation in the future.

This article argued that the dichotomy between the traditional profit- maximization and social welfare approaches t o corporate responsibility is accentuated by a static view of the law. A better understanding by managers of the dynamic nature of the American legal system, along with a conscious attempt to make sophisticated predictions about the changing legal environment, can help eliminate the gap between the social welfare and profit-maximization views. In general, incorporating predictions about legal changes in managerial decisionmaking should shift many decisions in the direction of social welfare. Specifically, this article proposed a “litigation audit” for managers consisting of identifying relevant evolving legal issues, forecasting the probable direction and speed of their evolution, and crafting appropriate management responses. Early perception of potential legal environment problems combined with imaginative and compassionate responses is the dual challenge of managing corporate social responsibility in a changing legal environment.

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Managing Corporate Social Responsibility in a Changing Legal Environment